Tuesday, April 17, 2007
The Seventh Circuit provides further clarification on the distinction between transaction and loss causation and upholds summary judgement against plaintiff in this securities fraud class action because plaintiff introduced no evidence of loss causation. Ray v. Citigroup Global Markets, Inc., 2007 WL 1080426 (4/12/07). Plaintiffs represented a class of retail investors who purchased shares in a wireless data services company allegedly based on stockbrokers' misrepresentations and the stock price dropped along with the rest of the market in similar companies. The appellate court agreed with the district court that plaintiffs had no evidence that would show that any particular misrepresentation had a causal connection with the loss in value of the shares. The Seventh Circuit identified three approaches to establishing loss causation: the "materialization of risk" standard ("it was the very facts about which the defendant lied which caused its injuries"); the "fraud on the market" scenario (the Dura situation, where plaintiff has to show that the alleged misrepresentations inflated the value of the stock and that the value of the stock declined once the market learned of the deception), and a third situation where loss causation "might be shown" if a broker falsely assures the plaintiff that the investment is "risk-free." The latter approach (if tenable at all after Dura) requires that the plaintiff to show that the broker used very explicit language to misrepresent that the investment was risk-free.