Abstract
This Article evaluates the issues remaining open after the recent Supreme Court decision in Dura Pharmaceuticals, Inc. v. Broudo, concerning causation in Rule 10b-5 fraud-on-the-market actions. Analytically, for a positive misstatement to cause an investor to suffer a loss, (1) the misstatement must inflate the market price of a security, (2) the investor must purchase the security at the inflated price, and (3) the investor must not resell the security sufficiently quickly that the price at the time of sale is still inflated. The lower courts have been left the task of designing a comprehensive set of rules concerning what the plaintiff must plead and prove, and the acceptable forms of evidence, concerning each of these critical elements. Dura simply narrowly holds that a plaintiff cannot establish causation merely by pleading and proving that the misstatement inflated price.
One important matter on which the Court expresses no opinion is whether loss causation can ever be established where the price at the time suit is brought (or, if earlier, the time of sale) is higher than the purchase price. The Article concludes that a blanket rule against actions where the price has increased would be inappropriate because there are situations where the price has increased but each of the three critical elements can still be reasonably easily and definitively established. Where one or more of these elements cannot be reasonably easily and definitively established, however, a price increase is a negative piece of evidence and under some specified circumstances a bright line rule barring actions might be appropriate.
The other important matter on which the Court expresses no opinion is whether the plaintiff must plead and prove a price drop immediately following the unambiguous public announcement of the truth. Again, the Article concludes that a blanket rule requiring such a showing is inappropriate. Other ways of demonstrating that the misstatement inflated price are sufficiently reliable that they should be allowed under at least some circumstances. The absence of a price drop after the announcement, however, makes it less clear when the inflation dissipated, which is relevant to whether the plaintiff bought at an inflated price and did not sell at one. Some plaintiffs can show these other elements reasonably easily and definitively in other ways, for example plaintiffs who purchase the security immediately after the misstatement is made and still hold it at the time of the public announcement of its falsity. For ones who cannot, it may be appropriate to ban actions where there is no post announcement price drop. This problem is less critical for class actions because at least minimum losses to the class as a whole can be established without concern as to when the inflation dissipated.