Two courts recently granted summary judgment to defendants in federal securities cases based on the plaintiffs’ failure to establish loss causation: In re Omnicom Group, Inc. Sec. Litig., No. 02 Civ. 4483 (WHP), 2008 WL 243788 (S.D.N.Y. Jan. 29, 2008), and Ryan v. Flowserve Corp., 245 F.R.D. 560 (N.D. Tex. 2007). The loss causation element of a securities fraud claim requires a showing that the defendant’s alleged conduct caused the economic loss about which the plaintiff complains. Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 342 (2005). Linking a plaintiff’s losses to the defendant’s earlier alleged misrepresentations is important because a lowered stock price “‘may reflect, not the earlier misrepresentation, but changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions or other events.’” Omnicom, 2008 WL 243788, at *4 (quoting Dura 544 U.S. at 343). Plaintiffs in both Omnicom and Flowserve claimed that their losses occurred when the market reacted negatively to “corrective disclosures” by the company that supposedly revealed the company’s fraud. Both courts, however, rejected these claims and these opinions provide helpful guidance as to what disclosures are truly relevant to pleading and proving loss causation.
Disclosures are not “corrective” if they merely rehash information previously known to the market. Omnicom, 2008 WL 243788, at *5; Flowserve, 245 F.R.D. at 571. To qualify as corrective, a disclosure must relate directly to the misrepresentations alleged by plaintiffs and reveal the falsity of previous misstatements. Omnicom Group, 2008 WL 243788, at *6; Flowserve, 245 F.R.D. at 568. Moreover, to establish loss causation, plaintiffs must demonstrate that the market reacted negatively to the corrective disclosure as opposed to other information contemporaneously released into the market, and the negative impact must be statistically significant. See Omnicom, 2008 WL 243788, at *7; Flowserve, 245 F.R.D. at 571. In sum, these holdings demonstrate that, to establish loss causation based on the effect of supposed corrective disclosures, such disclosures must reveal new information directly related to the alleged misrepresentations, and they must have a significant negative impact on the stock price, to the exclusion of other factors potentially affecting the price.
Interestingly, both the Omnicom and Flowserve decisions rejected the plaintiffs’ experts’ opinions relating to loss causation. The court in Omnicom discounted the expert’s analysis for failing to parse out the individual impact of each factor that led to a decrease in stock price. See Omnicom, 2008 WL 243788, at *8. In Flowserve, the court rejected the expert’s theory that the acute drops in Flowserve’s stock price were a “revelation of the Company’s true financial condition,” even where the allegedly fraudulent conduct was not revealed at the time of these price decreases. Flowserve, 245 F.R.D. at 573. The court stated that such a theory would allow plaintiffs “with debatable evidence of fraud [to] pick the largest stock drop irrespective of the actual reason and still relate the fraud [to the stock price drop] because the stock drop is nevertheless a revelation of the company’s true financial health.” Id. at 573-74. The Court reasoned that such a theory would amount to “what the Dura Court expressly proscribed: an insurance policy for investors.” Id. at 574.