On May 28, 2013, in Delshah Group LLC v. Javeri, a rare securities trial regarding credit-crisis related claims, Judge Katherine B. Forrest of the United States District Court for the Southern District of New York issued an order directing a complete defense judgment following a two-week bench trial. The decision includes a noteworthy discussion and analysis of loss causation in the context of credit crisis litigation—directly applicable to pending cases under Sections 10, 11 and 12—and highlights a tension between the Private Securities Litigation Reform Act and longstanding securities law when it comes to proving culpable intent.

Factual Background

The case arose from a real estate investment gone bad. In March of 2007, plaintiff purchased interests in a venture called 40 Broad Street Project. That project sought to make a return on converting commercial real estate space into condominiums and thus take advantage of the rapidly rising value of condos in New York City. Plaintiffs claimed that defendant misrepresented how far along the building project was, whether it was under budget, and how much “skin in the game” defendants had in the project. When the credit crisis hit and the real estate market collapsed, plaintiff lost substantial sums on its investment and claimed the above misstatements were its cause.

Loss Causation

In the court’s opinion, the plaintiffs were attempting to use the securities laws to insure against market forces, not fraud. The court noted that “The securities laws are not an insurance policy for investments gone wrong, inexperience, bad luck, poor choices, or unexpected market events.” It comprehensively analyzed loss causation in the context of the 2008 credit crises, and held that plaintiff had not succeeded in establishing that the misstatements and omissions, rather than the 2008 meltdown in the financial and real estate markets, caused its loss. “The risk of an unprecedented crash in the financial and housing markets was present irrespective of any misrepresentations regarding the Project schedule or cost overruns,” Judge Forrest concluded. “It was not concealed. Defendants could only be held responsible for the damage that was reasonably related to the alleged misrepresentations and omissions; an epic financial crisis was not one of those risks.”

The decision is timely and relevant to pending credit-crisis litigation, especially in the Southern District, where defendants may find the court’s analysis and holding useful on similar loss causation issues.


The case also reveals an interesting tension between the Reform Act and long-standing securities law governing state of mind or “scienter.” Under the Reform Act, a private plaintiff bringing a claim under Section 10(b) and Rule 10b-5 must plead facts giving rise to a “strong inference” that the defendant acted with culpable intent. 15 U.S.C. § 78u-4(b)(2). Under the Supreme Court’s standard in Tellabs, Inc. v. Makor Issues & Rights. Ltd., that inference must be “more than merely plausible or reasonable—it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” 551 U.S. 308, 314 (2007).

But because the “strong inference” standard is limited to the pleadings under the statute, there has been some uncertainty as to whether a plaintiff must also bring forward enough evidence at trial to establish a “strong inference” of culpable intent. Although the Delshah court did not specifically apply that the strong inference standard in its reasoning, it did discuss it in its conclusions of law. This could suggest that in Judge Forrest’s view, the standard applies equally at all phases of litigation, not just the pleadings. In many ways this makes sense; why should a plaintiff be subjected to the highest standard at the pleading stage, only for that standard to weaken as trial approaches? On the other hand, public plaintiffs are not typically subject to the Reform Act, raising questions as to whether there are two different species of scienter under the substantive securities laws, a question rarely considered given how infrequent securities actions go to trial and one to be resolved another day.