Lehman Analyst Case Dismissed on Loss Causation Grounds.

You may recall two years ago, in April 2003, when Lehman Brothers paid $80 million and entered into consent orders with the SEC, the NASD, and Spitzer & Co., because Lehman’s “research analysts generated undeservedly positive coverage of Lehman's investment banking clients in order to help secure additional investment banking fees from those clients.” Lehman even “acknowledged that this practice gave rise to conflicts of interest between its equity research function and its investment banking function.” Investors in Sunrise Technologies, a stock that was covered by Lehman, were none too happy about it, and they filed a securities fraud lawsuit against Lehman and two of its analysts for “seven Lehman research reports concerning Sunrise that are alleged to have contained material misrepresentation or omissions.”

Last Friday, Senior Judge Robert W. Sweet (S.D.N.Y.) addressed Defendants' motion to dismiss, and while finding that Plaintiffs had met the statute of limitations and adequately alleged falsity and scienter, he dismissed the action for failure to properly allege loss causation. In analyzing the issue under the Supreme Court’s recent Dura decision, the court found that Plaintiffs’ complaint “contained no allegations of a causal connection between the alleged misrepresentations and a subsequent economic loss suffered by the Plaintiffs. Rather, the [complaint] merely alleged that (1) Sunrise stock is publicly traded and (2) that the Defendants' misrepresentations falsely inflated the value of Sunrise' shares. The Dura court rejected the proposition that such allegations are adequate to plead loss causation.” Plaintiffs have until July 13, 2005 to amend their complaint.

You can read the decision, issued June 23, 2005, at 2005 U.S. Dist. LEXIS 12313.

Nugget: “The revelations concerning the activities of securities firms has presented the courts with difficult issues as those injured by these practices seek redress. The resolution of this motion reflects that tension.”