A district court dismissed securities fraud claims asserted against a corporation and one of its former directors. The plaintiffs invested over $5,000,000 in the corporation, which sold one-way pagers in China. Plaintiffs alleged that they made these investments in reliance on the company’s financial statements, which they later learned did not reflect the company’s obligation to make approximately $76,000 in salary payments to a former director. After the company fired the defendant from the board, he brought a successful claim against the company for his unpaid salary which the company could not satisfy from its liquid assets. Plaintiff alleged that as a result of this unsatisfied obligation, the plaintiffs’ stock became “essentially worthless.” Plaintiffs claimed that the failure of the company to disclose the unpaid salary on its financial statements was a material misstatement in violation of Section 10(b) of the Securities and Exchange Act and Rule 10b-5 that caused them to lose their multi-million dollar investment.
Defendants moved for the summary judgment dismissal of plaintiffs’ claims on the grounds that no reasonable jury could find that the alleged misrepresentation caused plaintiffs’ loss. The court granted the motion after finding that (i) the market in China for one-way pagers had experienced a steep decline subsequent to the time plaintiffs made their investment, (ii) the losses they sustained arose from the deterioration of the paging market, and (iii) the losses were “wholly unrelated to any misstatements that were made” regarding the unpaid salary. The court ruled that plaintiffs’ inability to demonstrate a causal connection between the claimed misrepresentations and the harm they allegedly suffered was fatal to their claims. (Shanahan v. Vallat, 2008 WL 4525452 (S.D.N.Y. Oct. 3, 2008))