Legal Forum: Loss Causation - Pharmaceutical Executive

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Legal Forum: Loss Causation
The Supreme Court finds that investors can't sue based on alleged price inflation alone.


Pharmaceutical Executive


The Dura Decision Effect The Supreme Court's rejection of the price inflation theory of loss causation may have the most effect in the West and Midwest, in the Ninth and Eighth Circuits, where the Dura decision closes the door to a speculative genre of "stock drop" class actions in which plaintiffs need not plead any loss in stock value due to a defendant's alleged fraud. In all jurisdictions, however, the decision's impact will depend on how courts interpret the Supreme Court's reasoning.

The Supreme Court's embrace of the logical consequences of the efficient market theory strongly supports certain defense arguments in fraud-on-the-market cases. It supports, for instance, the principle that defendants are not liable for the portion of a drop in stock price attributable to factors unrelated to an alleged corrective disclosure. The Court's reasoning also supports the defense argument that the absence of any negative market reaction to disclosure of the truth establishes that the alleged misrepresentation was not material and, therefore, not actionable.

Although courts are still wrestling with the implications of Dura, it is a victory for companies and others named as defendants in securities fraud cases.

Pamela S. Palmer is a litigation partner at Latham & Watkins. She can be reached at

Jeff G. Hammel is a litigation partner at Latham & Watkins. He can be reached at


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