Cause for concern: causation and federal securities fraud.

ABSTRACT: The Supreme Court's decision in Dura Pharmaceuticals dramatically changed federal securities fraud litigation. The Dura decision itself said little, but counseled lower courts to fashion new requirements of causation and harm modeled upon common law tort principles. These instructions have led lower courts to craft a series of confusing and inconsistent decisions that incorporate little of the reasoning upon which the common law principles are based.

This Article accepts the Dura challenge and examines both common law causation principles and their applicability to federal securities fraud. In so doing, the Article identifies the failure of the federal courts to confront properly the complex causation challenges presented by securities fraud and the extent to which common law approaches to multiple and indeterminate causation offer guidance. Common law causation analysis further highlights the critical issue of harm specification. The Article demonstrates how, from Basic to Dura, the Supreme Court has refused to address the issue of what constitutes an appropriate economic loss, despite the fact that this determination is a necessary predicate to formulating a causation requirement. The Article goes on to show how, in Basic, the Court shifted the nature of actionable harm and, in so doing, exacerbated the complexity of causation analysis.

Defining the appropriate harm involved in securities fraud is challenging. Drawing upon tort law principles, this Article considers several alternatives, including artificial price inflation, ex post stock price drop, and increased investment risk. The choice among these alternatives reflects policy judgments about the appropriate goals of private securities fraud litigation. In its final section, this Article considers current critiques of securities fraud litigation and demonstrates how these concerns should influence the scope of the private right of action.

 
  I. INTRODUCTION 
 
 II. THE CAUSATION REQUIREMENT IN 10b-5 LITIGATION 
     A. THE DEVELOPMENT OF THE CAUSATION REQUIREMENT 
     B. THE DURA DECISION 
     C. POST-DURA CASES 
     D. STONERIDGE 
 
III. TORT LAW FOUNDATIONS OF THE CAUSATION REQUIREMENT 
     A. THE CAUSATION REQUIREMENT IN TORT LAW 
     B. TORT LAW APPROACHES TO CAUSAL COMPLEXITY 
     C. CAUSAL COMPLEXITY IN SECURITIES LITIGATION 
 
 IV. THE HARM IN SECURITIES FRAUD 
     A. ARTIFICIAL PRICE INFLATION 
     B. OUTCOME HARM 
     C. RISK VERSUS INJURY--ANOTHER VIEW OF DURA 
     D. NETTING 
 
  V. CAUSATION AND FEDERAL SECURITIES FRAUD 
     A. SECURITIES FRAUD AND TORT LAW 
     B. THE APPROPRIATE SCOPE OF THE STATUTORY FRAUD REMEDY 
 
 VI. CONCLUSION 

I. INTRODUCTION

In 2005, the U.S. Supreme Court considered the scope of the loss causation requirement in federal securities fraud litigation. In Dura Pharmaceuticals, Inc. v. Broudo, (1) the Court explained that, in formulating the causation requirement, the lower courts should look to the common law for guidance. As the Dura Court stated, the "traditional elements of causation and loss" (2) are derived from "common-law deceit and misrepresentation actions." (3)

Three years later, the Supreme Court decided another case involving federal securities fraud. In Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., the Court rejected a claim by investors against secondary defendants on the ground that the investors could not meet the reliance requirement.4 In so doing, the Court explicitly rejected an interpretation of the reliance requirement based on common law fraud. According to the Court: "Section 10(b) does not incorporate common-law fraud into federal law." (5)