October 28, 2011

Win Big Or Go Home

A variation on the normal securities fraud case occurs when a short seller alleges that a company's misstatements caused it to cover its short positions at artificially high prices. Although few cases have directly addressed loss causation in the context of short selling, they generally are not favorable for the plaintiffs. That trend continues in the recent decision in Wilamowsky v. Take-Two Interactive Software, Inc., 2011 WL 4542754 (S.D.N.Y. Sept. 30, 2011).

Take-Two previously had settled a securities class action related to options backdating, but the settlement's plan of allocation excluded short sellers from recovery. Wilamowsky opted out of the settlement and brought his own individual action. On the issue of loss causation, however, the court noted that Wilamowsky's transactions in Take-Two stock (both short sales and covering purchases) ended "prior to the relevant curative disclosure." As a result, Wilamowsky could not "plausibly articulate why [his alleged] losses are attributable to Defendants' misstatements and omissions" as opposed to "legitimate market circumstances and intervening events." The court found that was "particularly so here, where the in-and-out stock transactions began after the stock price was already inflated, spanned an extended time period punctuated by constant legitimate market stimuli and repeated misstatements, and terminated more than a year prior to the corrective disclosure."

Holding: Dismissed with prejudice.

Quote of note: "With hindsight, Plaintiff may wish that he either covered immediately at the end of his short-selling period in January 2005, when the stock fell below his average sale price, or waited until after the corrective disclosure, by which point the price declined enough to put him in a position to earn millions of dollars. But allowing him to state a claim under these circumstances would permit a short seller in any standard misrepresentation case to either win big in the marketplace by covering after a corrective disclosure, or win in court by 'transforming a private securities action into a partial downside insurance policy.'"

Posted by Lyle Roberts at October 28, 2011 6:20 PM | TrackBack
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