In September 2006, this column ran a headline commenting on the Supreme Court decision in Dura Pharmaceuticals v. Broudo: “Does High Court Mean the Buyer Must Beware in Securities Markets?” Addressing loss, or proximate, causation — the causal connection between a defendant’s material misrepresentations and a plaintiff’s losses — Dura held that the securities fraud action provides redress only for the “loss the purchaser sustains when the facts become generally known and as a result share value depreciates.” In other words, the evidence must show that a plaintiff’s losses are attributable to some form of revelation of wrongfully concealed or misrepresented information.

Commenting on the decision in the spring of 2006, Columbia University law professor John Coffee explained in a column for Legal affiliate the New York Law Journal that Dura had become “a weapon” for defense counsel as a basis for new defense tactics. Coffee explained that because “market declines prior to the time of the corrective disclosure may escape liability, the issuer now has an incentive to modify its approach to disclosure, leaking out adverse information to the market on a not for attribution basis.” If such information can “reach the market in vague and generalized terms … then defendants may be able to diminish expectations [and] break up the likely stock price decline … .” Coffee also explained the technique of “bundling … adverse and favorable information together” to lessen the blow of bad news.

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