December 23, 2010

Is It Time To Revisit Loss Causation?

The Apollo Group securities class action has turned out to be far more interesting than anyone could have predicted. The case is based on the company's alleged failure to disclose the existence of a government report finding that its wholly-owned subsidiary, the University of Phoenix, had violated Department of Education regulations.

After a jury trial, the plaintiffs won a $277.5 million verdict. The trial court, however, held that the plaintiffs had failed to prove loss causation and overturned the verdict. In its decision, the court found that the two analyst reports relied upon by the plaintiffs as "corrective disclosures" that led to a stock price decline "did not provide any new, fraud-revealing analysis." Instead, the reports merely repeated information about the government report already known to the market or provided information about the University of Phoenix that was factually wrong (and therefore could not have been corrective).

The plaintiffs appealed to the Ninth Circuit and, in a summary, unpublished opinion, the appellate court held that "the jury could have reasonably found that the [analyst] reports following various newspaper articles were ‘corrective disclosures’ providing additional or more authoritative fraud-related information that deflated the stock price."

So it is on to the Supreme Court, where the question will be whether the justices are ready to revisit the issue of loss causation a mere five years after their Dura decision. Commentators are making a strong argument that the court should grant cert. The Ninth Circuit's decision appears to suggest that the efficient market hypothesis, which forms the basis for the presumption of reliance in securities class actions, somehow does not really apply when examining loss causation. In other words, the market rapidly absorbs information for the purpose of allowing investors to argue that they relied on false information incorporated into the stock price, but once that information is disclosed, these same investors can argue that it was only when the media or analysts more widely broadcast the information that their loss occurred.

In a recent New York Law Journal column (Dec. 8 edition - subscrip. req'd), the authors discuss the case and the related circuit splits over the necessary timing and nature of a "corrective disclosure." SCOTUSblog has the cert petition and other pertinent information here. According to the docket, a number of amicus briefs have already been filed (e.g., a brief from the National Association of Manufacturers supporting the granting of the cert petition).

Posted by Lyle Roberts at December 23, 2010 6:53 PM | TrackBack
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