Cengage Advantage Books: Business Law Today, The Essentials 10th Edition by Roger LeRoy Miller

تمرين 17

Spotlight on Proving Securities Fraud
FACTS Michael Broudo and other investors purchased stock in Dura Pharmaceuticals, Inc. The company represented that its drug sales were profitable and that the U.S. Food and Drug Administration (FDA) would soon approve the sale of its new asthmatic spray device. Both statements turned out to be untrue. Dura's stock price fell by almost half after the company announced lower earnings due to slow drug sales. When Dura announced that the FDA would not approve its spray device, the price fell again, although it soon rebounded close to its previous level. The investors sued Dura under Section 10(b).
The investors argued that Dura's statements had inflated the price of the stock, causing them to suffer a greater loss when the bad news was disclosed. The investors provided no other evidence about the connection between the statements and the loss. The trial court dismissed the case, in part, because the investors failed to sufficiently prove that their loss was caused by Dura's statements. The appellate court reversed, and the case was appealed to the United States Supreme Court.
ISSUE Can the investors prove that Dura's misstatements caused the loss simply by establishing that the price on the date of purchase was inflated because of the misrepresentations?
DECISION No. The fact that the stock price dropped after the firm's disclosure of bad news, without other evidence, is not sufficient to prove that the misrepresentations caused the economic loss under Section 10(b) of the 1934 act.
REASON Although an inflated share price can cause a later economic loss, that causation cannot be assumed in every situation. When a purchaser resells shares at a lower price, that price might reflect other factors besides the earlier misrepresentation. Changed economic circumstances, industry-specific challenges, and investor expectations can all affect the price of a stock. The longer the time between the purchase and the sale, the more likely it is that other factors besides the misrepresentation caused the loss. Investors must show not only that had they known the truth about the stock they would not have purchased it, but also that they suffered an actual economic loss.
CRITICAL THINKING-Financial Consideration How does the decision in this case make it more difficult for plaintiffs to prove fraud?