RESPONDENT: Michael Broudo, et al.
LOCATION: City of New London Town Hall
DOCKET NO.: 03-932
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Ninth Circuit
CITATION: 544 US 336 (2005)
GRANTED: Jun 28, 2004
ARGUED: Jan 12, 2005
DECIDED: Apr 19, 2005
Deputy Solicitor General Hungar - argued the cause for the United States as amicus curiae urging reversal
Patrick J. Coughlin - argued the cause for Respondents
Thomas G. Hungar - argued the cause for Petitioners, on behalf of the United States, as amicus curiae
William F. Sullivan - argued the cause for Petitioners
Facts of the case
Michael Broudo and a group of shareholders sued Dura Pharmaceuticals under the Securities and Exchange Act after the price of the company's stock dropped sharply. The shareholders alleged the company's misleading statements about its antibiotic sales and about the possibility of FDA approval of an asthma device caused the price drop. The district court ruled the investors failed to prove "loss causation" because they could not prove a causal connection between the alleged fraud and the drop in price. The Ninth Circuit Court of Appeals reversed and ruled the investors proved loss causation because they proved the stock price on the date of purchase was inflated because of misrepresentation.
To prove "loss causation" in a securities fraud case, is it sufficient to show that the price of the security on the date of purchase was inflated because of misrepresentation?
Media for Dura Pharmaceuticals, Inc. v. BroudoAudio Transcription for Oral Argument - January 12, 2005 in Dura Pharmaceuticals, Inc. v. Broudo
Audio Transcription for Opinion Announcement - April 19, 2005 in Dura Pharmaceuticals, Inc. v. Broudo
William H. Rehnquist:
The opinion of the court in Dura Pharmaceuticals versus Broudo will be announced by Justice Breyer.
Stephen G. Breyer:
This case comes form the Ninth Circuit, it is about a private action under the SEC Act, an anti fraud action under the 10b-5.
The respondents were the plaintiffs below; they bought stock in a company called Dura Pharmaceuticals.
And they say that Dura and some of its managers and directors made false statements about whether the FDA would approve a new spray device.
They basically said, "Oh the FDA is likely to approve it" and according to the plaintiffs such was not true and they did not approve.
They said because of that we bought Dura's stock on the open market and moreoevr when we paid for the stock the price was higher than we otherwise would have paid.
It was artificially inflated by the misrepresentation about the FDA.
So, our case law on private actions and recent amendments to the securities law say that if you are going to bring a private fraud suit you have to have suffered a loss and the loss has to have been caused by the misrepresentation.
So, the District Court looked at the allegations I have just mentioned and said that is not good enough.
Saying that you paid too much for the stock is just not enough.
The Court of Appeals disagreed.
It said it is enough all you have to allege is that you paid more for the stock when you bought it that you otherwise would have paid, say, I paid $30 and without the misrepresentation about the FDA I would have only had to pay $25.
That is good enough says the the Ninth Circuit and that conclusion is what we are reviewing.
Well, we reverse the Ninth Circuit; we think that the Ninth Circuit is wrong about that.
In our review just saying you paid too much for the stock is not enough to show a loss it does not show that was a loss and it does not show there was approximate causation of some other loss.
But one thing, the minute that the purchase takes place there is no lose the plaintiff pays the $30 and he has something in his hand and at that moment is worth $30.
If he turns around and resells it he will get his $30 back.
Of course it might later go down in price and he might later lose money.
But that later loss might be caused by many different things.
You cannot say it is automatically caused by having paid too much for the stock to begin with.
I mean there might be a change in economic conditions, the industry might change, the company might change all kinds of things might happen.
The misrepresentation may or may not play a role in the later loss, but you can say that paying too much in the beginning can help bring about a later loss.
But you cannot say that paying too much is the later loss and you can not say it automatically or inevitably will lead to a later loss.
So the Ninth Circuit approach, as a matter of pure logic, does not seem well supported, and if you look at the precedent there is even less support and if you look at the views of the other Courts of Appeals there is still less support because none of them have adapted it, and if you look at the reason amendments to the securities laws it seems pretty clear that the Congress, in writing this laws, does not intend to permit that particular approach to the problem.
So, we think they are wrong about that.
We also conclude that the plaintiffs complaint was not sufficient.
We have to follow the rules of giving in a complaint you have to give the defendant a fair notice; it does not take much.
But you do have to give the defendant fair notice of what you claim is in the grounds upon which you press.
Well, when you get to loss in causation the only thing this complaint talks about is that inflated purchase price, and as we have just said that inflated purchase price is not itself the relevant loss and it may or may not mean a future loss that you have to allege more than that.
Now for these reasons which we explained further in the opinion and other set forth, we reverse the judgment of the Ninth Circuit and we remand for further proceedings.