(The Return of) Ignatz, by Sam Heldman

Wednesday, January 12, 2005

Supreme Court
When in doubt about what to say, pontificate about the Supreme Court. That's my blogging motto for the day.

This morning they're having argument in an important securities fraud case, Dura Pharmaceuticals. I am probably going to go down to the Court to watch, assuming I can make the logistics work. But I can pontificate even without having seen it. Especially after having read the summary of the case at Goldstein Howe's SCOTUSblog.

The question is, what sort of "loss causation" does a plaintiff have to prove, in order to win a case? The basic model of such a case is, "I was induced to buy the stock at an inflated price, through misrepresentations (fraud) on the company's part." But the question is, what if anything do you have to allege and prove beyond that, in order to show that you had a loss that was caused by the fraud? The Ninth Circuit said, in paraphrase, that you don't have to prove anything beyond that: it is enough that you have shown that you were induced to pay an inflated price because of the fraud. Other Circuits, however, have said that you can't prevail unless you ALSO show that the stock price later came crashing down because the fraud was disclosed and corrected.

Unless there's some peculiar statutory language that I don't know about, the answer seems obvious to me: that the Ninth Circuit is right. I sell you a car, telling you that it's got a bitchin' V8 engine. But it really has only a little 4-cylinder dinky engine. 8-cylinder cars, all other things being equal, sell for more than 4-cylinder cars. I have thereby defrauded you, and caused you a discernible amount of loss (discernible, at least, within a reasonable approximation). There is absolutely no doubt that you can sue me, and win. The Ninth Circuit rule seems to me to be simply that same rule. This does not mean, in my view, that the plaintiff can recover the entire price he paid for the stock -- the damages would be the amount by which the price was inflated by the fraud. Getting an approximation of that amount, through expert economic testimony, is not more complicated than lots of things that are decided by trials every day of the week.

We'll see if the Supreme Court gets it.

posted by sam 6:53 AM 2 comments


Well, the key phrase where the analogy breaks down is:

"8-cylinder cars, all other things being equal, sell for more than 4-cylinder cars."

Of course, if you can submit public records showing that the car can still be sold for the same price, you've pretty well established that I haven't suffered any financial loss. I've suffered loss in the use and enjoyment of the car, yes. But you don't take your stocks out for a drive; they're worth what the market says they are worth. If "the truth" comes out and the stock's price doesn't change (all else being held equal), then the stock really is worth what it was represented to be worth, period.

By Blogger Crank, at 1:59 PM  

You're pretty much right, as I realized during oral argument when Justice Scalia made this point. But that (to my admittedly non-expert eye) still doesn't mean what the company, and Justice Scalia, wanted it to mean. Let me take the analogy one step further. Let's say you sell me a car, falsely claiming that it has a v8 engine. I buy it, and that afternoon it is crushed by a falling piano, reducing its value to $0. I think that you harmed me by defrauding me into paying a higher price, and that I can recover against you for the price differential that was caused by the fraud -- even though the crash in the car's value had nothing to do with the fraud. Similarly, if buy a stock at a price that is inflated by fraud, and it later crashes for whatever reason you want to posit, I ought to be able to recover for the increase in the amount-I-lost that was caused by my having paid an inflated price because of fraud. Now, whether this is right as a matter of securities law, I don't know; but it should be!

By Blogger sam, at 2:07 PM  

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