February 25, 2016

Securities 101: A Circuit Split in the Standard for Pleading Loss Causation in Securities Fraud Cases

How the split came to be and why the Supreme Court should resolve it

Jonathan Schwartz

Most securities fraud cases are brought under section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated by the Securities and Exchange Commission (SEC). Section 10(b) makes it unlawful to “use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe. . . .” Rule 10b-5 prohibits any person from

mak[ing] any untrue statement of a material fact or . . . omit[ting] to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading . . . in connection with the purchase or sale of any security.

It is well settled that, to state a claim for securities fraud under section 10(b) and Rule 10b-5, a plaintiff must adequately allege (1) a material misrepresentation or omission; (2) made with scienter; (3) in connection with the purchase or sale of a security; (4) reliance on the misstatement or omission; (5) economic loss; and (6) a causal connection between the material misrepresentation or omission and the loss, commonly called “loss causation.” Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341–42 (2005).

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