The plaintiffs asserted claims under Section 10(b) of Securities Exchange Act of 1934 following their acquisition of shares in a car rental company pursuant to the defendant’s recommendation and representation that he would not let them lose money on the investment. The plaintiffs provided defendant with money to acquire shares in their name which the defendant allegedly used to acquire shares in his own name.

The Court held, among other things, that the complaint failed to allege any theory upon which the plaintiffs’ federal securities fraud claim could prevail. Although plaintiffs alleged that the defendant wrongfully failed to carry out his commitment to purchase stock in their names, the court ruled that this claim was, at most, one for breach of contract. In support of its ruling, the Court noted that in contrast to plaintiffs’ state law claim, which asserted that the defendant fraudulently intended not to purchase the shares in plaintiffs’ names when he accepted their money, the federal claim did not contain a comparable allegation. (Foster v. Wilson, 2007 WL 2893608 (9th Cir. October 5, 2007))

Class Action Securities Fraud Complaint Dismissed

The District Court granted the defendants’ motion to dismiss a class action complaint alleging violations of Section 10(b) of the Securities Exchange Act of 1934, ruling, in part, that plaintiffs failed to adequately plead loss causation. The plaintiffs based their claim on defendants’ alleged misrepresentation and concealment of material negative information concerning Mattel’s new release of a competing product line and problems with the corporation’s supply chain and product distribution system.

Plaintiffs alleged that the failure to disclose material information regarding Mattel during the class period caused a decline in the corporation’s stock price. However, defendant argued that the drop in the stock price was due to an “operating climate” that was “tougher” than anticipated due to “unanticipated increases in costs of commodities and an industry-wide decline in toy sales,” and not to new competition from Mattel. The Court found that plaintiffs had failed to allege any facts which would support a conclusion that the drop in the stock price was due to competition from Mattel rather than the factors that the defendant raised. Based on that ruling, the Court held that none of the disclosures provided a casual link between the decline in defendant’s stock price and the allegedly misleading statements or omissions regarding competition from Mattel and that, as a result, loss causation could not be established. (In re Leapfrog Enterprises, Inc. Securities Litigation, 2007 WL 2900566 (N.D.Cal. Sept. 30, 2007))