The issue of loss causation is proving to be difficult for the S.D.N.Y. as it addresses the numerous research analyst cases. The general theme of the cases is straightforward: the defendants committed fraud by disseminating research reports that they knew to be overly optimistic. A key question, however, has been whether the subsequent decline in the company's stock price was caused by the research reports.
In the Merrill Lynch decision, the court found that there was no alleged connection between the research reports and the companies' financial troubles or the collapse of the overall market. (See this post.) In distinguishing that case, other S.D.N.Y. judges have pointed to additional facts linking the research reports to the alleged loss. In the Robertson Stephens decision, for example, the court noted that there was "evidence that disclosure of defendants' scheme caused a further decline in the price of [the] stock, even after the overall bubble had burst." (See this post.) While in the WorldCom decision, the plaintiffs had alleged that the analyst was aware of and concealed the accounting irregularities that led to the loss. (See this post.)
This week has seen the issuance of another research analyst decision from the S.D.N.Y., with what appears to be a new take on loss causation. In DeMarco v. Lehman Brothers, Inc., 2004 WL 602668 (S.D.N.Y. March 29, 2004), the plaintiffs allege that a Lehman analyst made buy recommendations for RealNetworks, Inc. stock during the class period (July 11, 2000 to July 18, 2001) while secretly holding negative views of the stock. In October 2000, the stock price declined, allegedly causing plaintiffs' losses. Investors did not discover that the Lehman analyst had misled them about his opinion on RealNetworks until the release of certain e-mails by the SEC in April 2003.
On the issue of loss causation the court made the following holding:
"[A]ssuming arguendo that plaintiffs must plead that their losses proximately resulted from the marketplace's reaction to the revelation of the truth that defendant's actionable statements concealed (as contrasted to independent market forc