October 7, 2011

Repeating Falsehoods

Is it necessary for the alleged false statements to have artificially inflated the company's stock price to establish loss causation? The Eleventh Circuit recently considered this question in a case where the plaintiffs' expert found that the company's stock price was artificially inflated both before and during the class period by the same amount. The district court granted summary judgment for the defendants, concluding that because the stock price inflation predated the class period, the alleged false statements made during the class period could not have caused the inflation or any subsequent losses.

On appeal - FindWhat Investor Group v. FindWhat.com, 2011 WL 4506180 (11th Cir. Sept. 30, 2011) - the Eleventh Circuit disagreed. The court concluded that false statements "that prevent a stock price from falling can cause harm by prolonging the period during which the stock is traded at inflated prices." Accordingly, "defendants can be liable for knowingly and intentionally causing a stock price to remain inflated by preventing preexisting inflation from dissipating from the stock price."

Holding: Vacating dismissal of claims based on failure to establish loss causation (but affirming the dismissal of certain other claims)

Quote of note: "Defendants whose fraud prevents preexisting inflation in a stock price from dissipating are just as liable as defendants whose fraud introduces inflation into the stock price in the first instance. We decline to erect a per se rule that, once a market is already misinformed about a particular truth, corporations are free to knowingly and intentionally reinforce material misconceptions by repeating falsehoods with impunity."

Posted by Lyle Roberts at October 7, 2011 10:10 PM | TrackBack
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