How Broad Are the Implications of the Supreme Court's Ruling on Loss Causation?

April 19, 2005

On April 19, 2005, the United States Supreme Court ruled unanimously in Dura Pharmaceuticals, Inc. v. Broudo that in order to satisfy the necessary element of "loss causation," a plaintiff in a securities fraud action must allege and prove more than that the price of the security on the date of purchase was inflated because of a misrepresentation. Rather, the plaintiff must plead and prove that the price of the security later declined when the truth became known, such that the defendant's fraud (rather than other factors) caused the loss.

The decision did not purport to announce a new rule or break new legal ground, and is consistent with longstanding authority in the Second Circuit and other U.S. Courts of Appeals. The impact of Dura will probably be limited to securities fraud cases involving publicly traded securities (typically class actions), and will not likely extend to actions involving privately negotiated transactions or common law fraud, where its application arguably would be inconsistent with established state law.

To read Friedman Kaplan's memorandum on the Dura decision, click here.