Judge David F. Hamilton (S.D. Ind.) has granted the Individual Defendants’ motions to dismiss in the Conseco securities class action. Basically, the court held that Plaintiffs "failed to allege loss causation adequately under the standards set forth by" Dura because "the truth about matters that plaintiffs allege were concealed or misrepresented did not come out publicly until months after the end of the class period." The court also observed that "this is not a case where Plaintiffs can point to a sharp drop in the company's stock price following announcement of the allegedly concealed truth," as "the stock had long since hit bottom before these alleged misrepresentations became known."
Plaintiffs were probably in trouble from the beginning when they relied on the Ninth Circuit’s soon-to-be-doomed version of Dura, as Judge Hamilton pointed out that Plaintiffs’ "brief asserts ‘the absurdity of applying a loss causation standard which requires the value of plaintiffs' shares to decline following the revelation of the truth.’" As the Supreme Court’s version of Dura eventually obliterated that argument midstream, Plaintiffs were forced to shift gears, seizing "on Justice Breyer's use of the phrase ‘leak out’ in the sentence: ‘But if, say, the purchaser sells the shares quickly before the relevant truth begins to leak out, the misrepresentation will not have led to any loss.’" In other words, Plaintiffs argued "they can prove that the truth was beginning to ‘leak out’ about some of the matters they allege, contributing to the massive decline in Conseco stock prices during the Class Period as Conseco disclosed a host of financial problems it faced." Judge Hamilton noted that "whether the Court's use of the phrase ‘leak out’ shows that plaintiffs' suggestion would be sufficient under Dura Pharmaceuticals is not clear." What is clear, he said, is "that this theory is certainly not what Plaintiffs have alleged in the operative complaint."
Judge Hamilton is going to let Plaintiffs have another crack at it anyway though, saying "perhaps plaintiffs can salvage some portions of the case under the Dura Pharmaceuticals standard," so "they are entitled to try to do so by amending their complaint, though in light of the many and daunting problems Conseco faced, the problem of loss causation may pose a major challenge of proof even if plaintiffs can plead it adequately for a portion of the case."
You can find Porter v. Conseco Inc., issued July 14, 2005, at 2005 U.S. Dist. LEXIS 15466.
Nugget: "This is not so much a case where plaintiffs are alleging that defendants painted a falsely rosy picture. It is more as if plaintiffs allege that defendants painted with shades of gray that were not quite dark and gloomy enough."