When the Ninth Circuit issued its opinion in the Daou securities class action this past February, the U.S. Supreme Court hadn’t yet decided Dura Pharms., Inc. v. Broudo, 125 S. Ct. 1627 ( 2005). However, the day after Dura was decided on April 19, 2005, the panel, consisting of Circuit Judges Betty B. Fletcher, Harry Pregerson, and Melvin Brunetti ordered the parties to brief Dura's impact on their original opinion. Sort of makes one wonder why they just didn’t wait a couple more months for Dura to be decided before issuing the original opinion. How much could two more months hurt an appeal that was filed during Thanksgiving of 2002? At any rate, the old opinion has been amended, and unless you saved a copy of it, you might want to grab it here before the judges send it to that warehouse where they put the Ark in the first Indiana Jones film.
What’s the bottom line? Well, it seems Dura didn’t change the final result (that Plaintiffs sufficiently alleged loss causation and damages) one bit. However, consistent with Dura, the Ninth Circuit modified the final three factors it uses to evaluate the basic elements of a securities fraud claim from causation, reliance, and damages to “a connection with the purchase or sale of a security, transaction and loss causation, and economic loss.” In analyzing these three factors, the Panel knocked the first one out in a single sentence, saying “plaintiffs have sufficiently alleged a connection.” The court also disposed of the economic loss prong in two sentences, holding that the complaint’s “assertions of a steep drop in Daou's stock price following the revelation of Daou's true financial situation” are sufficient. The only real discussion occurred in the analysis of the causation requirements. In a somewhat fact-specific analysis, the court held that Plaintiffs allegations regarding the “disclosures of Daou's true financial health, the result of prematurely recognizing revenue before it was earned, led to a "dramatic, negative effect on the market, causing Daou's stock to decline to $ 3.25 per share, a staggering 90% drop from the Class Period high of $ 34.375 and a $ 17 per share drop from early August 1998." Draw your own conclusion, but the italics in that sentence was added by the court, not the Plaintiffs.
The other significant holding in the case (which didn’t change from the original opinion, but is interesting nonetheless) relates to 1933 Act claims sounding in fraud. The court accepted the doctrine, and found Plaintiffs ’33 Act claims did in fact sound in fraud. However, it also found that Plaintiffs met Rule 9(b)’s standard for pleading fraud with particularity, and refused to dismiss those claims. For reasons unknown, Plaintiffs appear to have incorporated the ’34 Act allegations into their ’33 Act counts. The court seemed persuaded that this makes all the ’33 Act claims sound in fraud. Might not want to do that next time.
You can read the amended decision, issued June 21, 2005, here or at 2005 U.S. App. LEXIS 1641.
Nugget: "As long as the misrepresentation is one substantial cause of the investment's decline in value, other contributing forces will not bar recovery under the loss causation requirement but will play a role in determining recoverable damages."