At a Loss

Who’s ready to chalk yet another Dura victory up on the board for Plaintiffs? OK, OK, calm down, they’ll be plenty more to come, so don’t worry, everyone will get their turn. This time ‘round, it’s Judge George B. Daniels (S.D.N.Y.) in the Winstar Communications securities class action, who says that “to establish loss causation by pleading a corrective disclosure, a plaintiff must allege that when truthful word revealing the falsity of defendant's representation reached the public, the market reacted negatively causing plaintiff to suffer an injury.”

Makes sense right? Maybe to you, but not to these Defendants, who “notwithstanding the absence of legal authority,” (hey, why let a pesky thing like that stand in the way?) “seek to complicate this basic pleading standard by claiming that there are additional components, relating to the source and form that the disclosure must take, that also must be satisfied to plead a corrective disclosure.” They also “argue that a corrective disclosure must be based on fact-specific information, and cannot simply be opinions or speculations.”

But Judge Daniels rejected these arguments, holding that “it is the exposure of the falsity of the fraudulent representation that is the critical component of loss causation,” and that “a defendant should not be rewarded by denying defrauded investors recovery simply because the information revealing the alleged fraud was a third party's opinion, notwithstanding the fact such opinion is proven to be true.” So, since “allegations that the market reacted negatively to an opinion or speculation which in fact exposes the falsity of defendants' representations can be sufficient to plead loss causation,” “plaintiffs have sufficiently pled a causal nexus between the Winstar defendants' alleged fraudulent accounting practices and plaintiffs' claimed losses.”

You can read In re Winstar, issued February 27, 2006, at 2006 U.S. Dist. LEXIS 7618.

Nugget: “To require the pleadings establish that when word exposing the falsity of defendants' statements leaked into the market place, it took the form of a factual revelation which was, at that time, verifiably truthful, would place a prohibitively unreasonable burden on a plaintiff.”