Plaintiffs, shareholders in UCAP, Inc., a multi-state provider of mortgage lending and brokerage services, brought a 10b-5 action against several UCAP executives and UCAP’s outside auditor, Moore Stephens Frost, PLC (MSF). Plaintiffs alleged that defendants defrauded them by inducing them to invest in UCAP through misrepresentations and false statements about UCAP’s financial condition. The U.S. District Court for the Western District of Arkansas dismissed the action, holding that plaintiffs failed to meet the heightened pleading standards of the Private Securities Litigation Reform Act. After an earlier appeal was denied, plaintiffs appealed the dismissal of the claims against MSF for federal securities fraud.
The Eighth Circuit upheld the District Court’s dismissal of the claims against MSF, finding that the complaint failed to allege loss causation adequately. In order to plead loss causation, a plaintiff must “state facts showing a causal connection between defendant’s misstatements and the plaintiff’s losses.” The court found that the complaint’s allegations that the investors suffered damages because they purchased stock at “artificially inflated prices” inadequately plead loss causation because it did not set forth either (i) the value of UCAP’s stock when plaintiffs made their investments or (ii) the value of the stock at the time of the restatements of UCAP’s financials. The failure to allege such facts was particularly damaging to plaintiffs’ case because UCAP’s financial troubles were publicly known prior to the time the restatements were announced. (McAdams v. McCord, No. 09-1303, 2009 WL 3350036 (8th Cir. October 20, 2009))
