The Pendulum Swings – A Primer on Caselaw II. An Interim Step: The Rejection of Aiding and Abetting In Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 114 S. Ct. 1439, 128 L. Ed. 2d 119 (1994), the Supreme Court examined the issue of whether Section 10(b) imposes aiding and abetting liability upon those who do not directly engage in a manipulative or deceptive practice in connection with the purchase or sale of securities. 511 U.S. at 167. Following a public building authority’s default on certain bonds secured by landowner assessment liens, plaintiffs sued the authority and various other participants in the bond offering, including Central Bank as indenture trustee for the bond issuance, for violations of Section 10(b). Plaintiffs alleged that Central Bank was secondarily liable for aiding and abetting the fraud. Plaintiffs argued that the statute should be read to cover aiding and abetting, because it includes the language “directly or indirectly,” which showed that Congress intended the statute to reach indirect violators, such as those who aid and abet. Id. at 176. The Court rejected this argument, reasoning that “aiding and abetting liability extends beyond persons who engage, even indirectly, in a proscribed activity; aiding and abetting liability reaches persons who do not engage in the proscribed activities at all.” Id. The Supreme Court acknowledged the several circuits that had allowed a private cause of action for aiding and abetting under Section 10(b). However, in a 5-4 opinion, the Court eliminated decades of decisional law and decided that such an expanded reading of Section 10(b) was not warranted, instead opting for a strict textualist reading of the statute: . . .[T]he private plaintiff may not bring a 10b-5 suit against a defendant for acts not prohibited by the text of § 10(b). To the contrary, our cases considering the scope of conduct prohibited by § 10(b) in private suits have emphasized adherence to the statutory language, “‘the starting point in every case involving construction of a statute.’” [] We have refused to allow 10b-5 challenges to conduct not prohibited by the text of the statute. Id. at 173. The rejection of aiding and abetting liability in private plaintiff securities fraud litigation is of tremendous importance because it limits plaintiffs’ ability to pursue secondary actors (often those seen as having deep pockets) who, prior to Central Bank, may have faced liability although having no duty to disclose and having made no material misstatements. III. Where We Are Now: The Conservative Tide With Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 125 S. Ct. 1627, 161 L. Ed 2d 577 (2005), the Supreme Court for the first time offered guidance as to the standard for pleading loss causation subsequent to the passage of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u-4. In Dura, plaintiffs represented a putative class of investors who bought stock in Dura Pharmaceuticals Inc. when its price was allegedly artificially inflated due to defendants’ false public statements regarding profits and the likelihood that the Food and Drug Administration (“FDA”) would approve certain products in the future. On February 24, 1998, the last day of the putative class period, the company disclosed that earnings would be lower than previously expected due to slow drug sales. The next day, Dura’s stock lost almost half its value, falling from $39 per share to approximately $21 per share. Eight months later, in November 1998, the company announced that the FDA would not approve its new asthmatic spray device. The following day, Dura’s stock price fell, but almost fully recovered within one week. With respect to the economic losses attributable to misstatements concerning the spray device, plaintiffs’ complaint alleged that, “n reliance on the integrity of the market, [the plaintiffs]. . . paid artificially inflated prices for Dura securities” and plaintiffs suffered “damage(s)” thereby. Id. at 339-40. The district court dismissed the complaint, holding that, with respect to the spray device claim, plaintiffs failed to allege loss causation adequately. Id. at 340. The 9th Circuit reversed, holding that “plaintiffs establish loss causation if they have shown that the price on the date of purchase was inflated because of the misrepresentation.” Id. (quoting 9th Circuit opinion, 339 F.3d 933, 938 (original emphasis)). The 9th Circuit “added that ‘the injury occurs at the time of the transaction’” and that, “[s]ince the complaint pleaded ‘that the price at the time of purchase was overstated’ and it sufficiently identified the cause, its allegations were legally sufficient.” Id. (quoting Ninth Circuit opinion, 339 F.3d at 938). The Supreme Court reversed the judgment of the 9th Circuit, holding that it is not enough for an alleged misrepresentation to “touch upon” an investment’s subsequent decline in value. Id. at 343. Rather, the specific misrepresentation at issue, not other factors, must actually cause a loss. Id. at 343-44. As to the specific pleading deficiencies of plaintiffs’ complaint, the Supreme Court noted that, while Rule 8(a)(2) of the Federal Rules of Civil Procedure requires only “a short and plain statement of the claim showing that the pleader is entitled to relief,” the mere allegation that plaintiff class members purchased their shares at artificially inflated prices did not serve to place defendants on “‘fair notice of what the plaintiff’s claim is and the grounds upon which it rests.’” Id. (quoting Conley v. Gibson, 355 U.S. 41, 47, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957)). Significantly, the plaintiffs’ “lengthy” complaint in Dura failed (1) “to claim that Dura[’s] share price fell significantly after the truth became known,” (2) to specify “the relevant economic loss,” and (3) to describe “the causal connection . . . between that loss and the misrepresentation.” Id. at 347. Thus, Dura dictates that, under Rule 8(a), plaintiffs need to allege the factual basis for artificial price inflation, and that the particular misrepresentations, and nothing else, caused the price drop. Page: 2 of 4 pages for this article < 1 2 3 4 >
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