In an amicus curiae brief filed in the case of Dura Pharmaceuticals, Inc., v. Michael Broudo, et.al., the trade associations argued that the Ninth Circuit’s ruling opens the door to frivolous litigation by permitting plaintiffs to move forward with securities class action lawsuits even if any alleged wrongdoing did not result in a decline in the security’s price.
The Ninth Circuit adopted a “purchase-time inflation rule,” which requires a plaintiff to plead and prove only that the price of a security was “inflated” when he or she bought the shares, usually through opinion testimony of an “expert.” Under this rule, plaintiffs would not need to demonstrate a decline in a security’s price after the release of information that was not made available to the investor when the security was purchased.
Most courts, the SIA-TBMA brief said, require plaintiffs to show that the price of a security promptly declined when the allegedly concealed information was disclosed and limit damages to the amount of the decline.
“The Ninth Circuit’s rule of loss causation will create the wrong incentives for market participants and litigants, will expose securities issuers and market professionals to potentially devastating liability and consequently will work substantial harm to the securities markets and to the economy,” the BMA-SIA brief said. “By contrast, the majority rule applied in most other circuits accords with the language of the Exchange Act and with long-established federal policy, and will provide the correct incentives for investors and other market participants.”
