# Amicus Curiae Brief — Dura Pharmaceuticals, Inc. v. Broudo > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0731%3A16 ## Record - **Collection:** Supreme Court brief - **Document type:** Amicus Curiae Brief - **Published:** January 1, 2005 - **Citation:** 544 U.S. 336 ## Text No. 03-932 IN THE Supreme Court of the United States DURA PHARMACEUTICALS, INC. ET AL., Petitioners, Vv. MICHAEL BROUDO ET AL., Respondents. On Writ of Certiorari to the United States Court of Appeals for the Ninth Circuit BRIEF OF THE CHAMBER OF COMMERCE OF THE UNITED STATES AS AMICUS CURIAE IN SUPPORT OF PETITIONERS ROBIN S. CONRAD NEIL M. GORSUCH STEPHANIE A. MARTZ Counsel of Record NATIONAL CHAMBER PAUL B. MATEY LITIGATION CENTER, INC. KELLOGG, HUBER, HANSEN, 1615 H Street, N.W. TODD & EVANS, P.L.L.C. Washington, D.C. 20036 1615 M Street, N.W. (202) 463-5337 Suite 400 Washington, D.C. 20036 (202) 326-7900 Counsel for Amicus Curiae September 13, 2004 eee TABLE OF CONTENTS Page CE deter cenicinircanennerennmentecnmememee iil INTEREST OF THE AMICUS CURIAE................0..00s0000 l RIES PU GUI IIIIIITT cccccccccncecsccnnescesesesescerevecconees 2 San Lisclasinschssnsssillihicsbtinienbhialiaauiiidibiniinianianisinhigtanmnntennenummenn 4 I. THE PRESSURE TO SETTLE EVEN MERITLESS SECURITIES CLASS AC- TIONS {MPOSES AN ENORMOUS TOLL ON THE AMERICAN ECONOMY ................::00008 4 Il. THE NINTH CIRCUITS RULE WOULD SIGNIFICANTLY EXACERBATE THE PROBLEMS AND INCREASE THE SOCIAL COSTS ASSOCIATED WITH MERITLESS SECURITIES CLASS ACTIONS ...............::0s0000 10 | _______EEEnE ne DO ee eEE DENTS ESTED 17 TABLE OF AUTHORITIES Page CASES BankAmerica Corp. Sec. Litig., In re, 95 F. Supp. 2d 1044 (E.D. Mo. 2000), affd, 263 F.3d 795 SL 10 Basic Inc. v. Levinson, 485 U.S. 224 (1988)...................-. 16 Bastian v. Petren Res. Corp., 892 F.2d 680 a cessnenenenens 3, 15, 16 Blue Chip Stamps v. Manor Drug Stores, 421 U.S. TT 4,6 California Micro Devices Sec. Litig., In re, No. C- 94-2817-VRW, 1995 WL 476625 (N.D. Cal. Aug. a cenomonononoonones 9 Daubert v. Merrell Dow Pharms., Inc., 509 U.S. a cosnnnesonsooccs 14, 15 Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189 (2d Cir. 2003) .................000. 3 Ferber v. Travelers Corp., 785 F. Supp. 1101 a ovensnscunece 7 Fruchter v. Florida Progress Corp., No. 99-6167CI- 20, 2002 WL 1558220 (Fla. Cir. Ct. Mar. 20, a. sssstennnnonoooacovecs 9 General Elec. Co. v. Joiner, 522 U.S. 136 (1997)............. 14 Goldberger v. Integrated Res., Inc., 209 F.3d 43 a neteenenenes 8 1V Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999) ...... 14 Network Assocs., Inc. Sec. Litig., In re, 76 F. Supp. ae er ee Cs Me iciiniceictestiinsaciasieinliitdaiali tate icin 3 Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154 (3d Cir. 2001)............000000000..0000000000. 8 Quantum Health Res., Inc. Sec. Litig., In re, 962 F. Supp. 1254 (C.D. Cal. 1997)............ccccccccccssseeees 8 Qwest Communications Int'l, Inc. Sec. Litig., In re, 243 F. Supp. 2d 1179 (D. Ss 6 Robbins v. Koger Props., Inc., 116 F.3d 1441 Is ii aaa altace iad 3,13 SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 PD Mtr acciinisncresiesitiiehiehitiiiteiiin dtitiartihasteatiaataeitahidliaaiiaceaaa 6 Semerenko v. Cendant Corp., 223 F.3d 165 (3d Cir. STU UTTet cncchesiiehapiiiinhieaehe ahaa teak cialis cddaaiaes ia hia 3 West v. Prudential Secs., Inc., 282 F.3d 935 IIE: SIITITTT ccsincitatenstaiasiiasaiaileeniietindceieaiademiacathdiaiaineiaitatenal 7, 15 STATUTES AND RULES Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 37.................c0000sseseeeee 5 Securities Litigation Uniform Standards Act of 1998, Pub. L. No. 105-353, 112 Stat. 3227............... 5 ie ie My ee ictininnii nant ehiadiatanttaaiatincinaaieiealainainniliatdiiicaass 14 8 en rN EE Re NEO See ee 1 v LEGISLATIVE MATERIALS Conference Report on H.R. 1058. Private Securities Litigation Reform Act of 1995, 141 Cong. Rec. EET Ti SUIT iccinsiorittarsicesesiieiniciniiabiniinaniaibeninenies H.R. Rep. No. 106-320 (1909) ...............c.ccccscrsccccsscssseessees Securities Fraud on the Internet: Hearings Before the Permanent Subcomm. on Investigations of the Senate Comm. on Government Affairs, 106th Cong. (Mar. 22-23, 1999), available at OTHER AUTHORITIES 2003 PricewaterhouseCoopers Securities Litigation Study (rel. Aug. 2, 2004), at http:/Awww.10b5. IED ccnecninnittisirtittinicsisiinnitllaemtnmmnaatemmaiess Janet Cooper Alexander, Do the Merits Matter? A Study of Settlements in Securities Class Actions, 43 Stan. L. Rev. 497 (1991) ...............2...00e0000 Janet Cooper Alexander, Rethinking Damages in Securities Class Actions, 48 Stan. L. Rev. 1487 Jennifer H. Arlen & William J. Carney, Vicarious Liability for Fraud on Securities Markets: Theory and Evidence, 1992 U. Ill. L. Rev. 691 ........... Elaine Buckberg et al., NERA, Recent Trends in Securities Class Action Litigation: 2003 Early Update (Feb. 2004) .............s.ccscsscessessecsesessecsesecseeneens 1,5 Guido Calabresi, Concerning Cause and the Law of Torts: An Essay for Harry Kalven, Jr., 43 U. Ss les a ncrrscnsissiiestnpnaininmantniiicaiaiiaiiieees vi CNBC, CNBC TV, at http://moneycentral.msn.com/ nn. eceeieniemiasmaniiainmials 16 CNN, CNNfn on TV, at http://money.cnn.com/ontv........ 16 Frank H. Easterbrook & Daniel R. Fischel, Optimal Damages in Securities Cases, 52 U. Tn il 5, 10 Paul A. Ferrillo et al., The “Less Than” Efficient Capital Markets Hypothesis: Requiring More Proof from Plaintiffs in Fraud-on-the-Market Cases, 78 St. John’s L. Rev. 81 (2004) ...........00.0000000.. 13 Kenneth R. Foster et al., Phantom Risk: Scientific Inference and the Law (1993) ...............cccccceececeeeees 14, 15 FOXNews.com, FNC Shows, at http://www. ES _S LTTE AOTC Fe RAE Le eT 16 W. Page Keeton et al., Prosser and Keeton on Torts | Ee SAS reno omea? 4,15 Donald C. Langevoort, Capping Damages for Open- Market Securities Fraud, 38 Ariz. L. Rev. 639 Christopher B. Mueller & Laird C. Kirkpatrick, I re 14 Richard Painter et al., The Federalist Society for Law and Public Policy Studies, Private Securi- ties Litigation Reform Act: A Post-Enron Analysis (2003), at http://www.fed-soc.org/pdf/ TST ERATE IIL AC: 8,9 Michael A. Perino, Did the Private Securities Litigation Reform Act Work?, 2003 U. IIL L. vii Richard A. Posner, Economic Analysis of the Law GI, TIE icrnnanithienienanicnnadensdeniniemeainininenensdetiens 12, 17 Press Release, Qwest Communications, Qwest Communications Statement In Response to Motion Filed by Milberg Weiss Bershad Hynes BD ree Ee te & FI cccrctetitecseneseccnscneneeesesecescnns 6 Victor E. Schwartz et al., Federal Courts Should Decide Interstate Class Actions: A Call for Fed- eral Class Action Diversity Jurisdiction Reform, 36 Harv. J. on Legis. 483 (2000) .................cccceeeseeeeeeeees 7 Laura E. Simmons & Ellen M. Ryan, Cornerstone Research, Post-Reform Act Securities Lawsuits: Settlements Reported Through December 2002 Laura E. Simmons & Ellen M. Ryan, Cornerstone Research, Post-Reform Act Securities Lawsuits: Settlements Reported Through December 2003 Stanford Law School & Cornerstone Research, Securities Class Action Clearinghouse, at http://securities.stanford.edu/companies.html ............. 8 Jonathan Weil, Win Lawsuit — and Pay $300 Million, Wall St. J., Aug. 2, 2004, at C3 .................0000.. 4 Elliot J. Weiss & John S. Beckerman, Let the Money Do the Monitoring: How Institutional Investors Can Reduce Agency Costs in Securi- ties Class Actions, 104 Yale L.J. 2053 (1995)................ 4 Woodruff-Sawyer & Co., A Study of Shareholder Class Action Litigation (2002)...............:.:cssseeeeeeeeeeeeeees 4 INTEREST OF THE AMICUS CURIAE ' The Chamber of Commerce of the United States (the “Chamber”) is the world’s largest business federation. The Chamber represents an underlying membership of_ more than three million businesses and organizations of every size, in every industry sector, and from every region of the country. The Chamber regularly advocates the in- terests of its members in court involving issues of national concern to the American business community. The Chamber has a substantial interest in the issu. presented in this case: the proper application of the loss causation principle in securities litigation. Securities class action litigation imposes an enormous toll on the na- tional economy, affecting virtually every public corpora- tion in America at one time or another and costing Ameri- can businesses billions of dollars in settlements every year. Indeed, recent studies conclude that, over a five- year period, the average public corporation faces a 9% probability of facing at least one securities class action lawsuit. See Elaine Buckberg et al., NERA, Recent Trends in Securities Class Action Litigation: 2003 Early Update 4 (Feb. 2004) (“2003 Early Update”). As Con- gresswoman Anna Eshoo (D-Cal.) has put it, “Businesses in my region place themselves in one of two categories: those who have been sued for securities fraud and those that will be.”” Because of pressures unique to securities class action litigation, virtually all claims that survive initial motions practice are settled. With little prospect that their claims will be fully tested by the adversarial process, plaintiffs ' Pursuant to Supreme Court Rule 37.6, counsel for amicus repre- sents that they authored this brief and that no entity other than amicus, its counsel, or its members made a monetary contribution to its preparation or submission. All parties have consented to the filing of this amicus brief, and letters reflecting their consent have been filed with the Clerk. ? Conference Report on H.R. 1058, Private Securities Litigation Re- form Act of 1995, 141 Cong. Rec. H14039, H14051 (Dec. 6, 1995). 2 have a strong incentive to bring securities class action claims without regard to their underlying merit. By di- verting resources away from productive economic uses, meritless securities actions threaten to slow the spread of new investments, reduce the efficiency of capital markets, and limit the competitiveness of the American economy. The membership of the Chamber thus has a strong inter- est in ensuring that the requirements of the federal secu- rities laws are applied in a correct and uniform manner, weeding out meritless suits as quickly and regularly as practicable, in order to avoid undue harm to the nation’s commerce and industry. SUMMARY OF ARGUMENT While the statutory and legislative history arguments for reversal are familiar, what may not be so apparent is the practical impact of the Ninth Circuit’s ruling in con- temporary securities class action litigation. Simply put, the court of appeals’ decision, if affirmed, would make what is already a bad situation very much worse. First, due to pressures unique to American securities litigation, businesses are typically forced to settle even meritless suits. Unless a case can be dismissed through early motions practice, the subsequent threat of class cer- tification forces corporate executives to choose between staking the future of their companies on the outcome of a single jury verdict, or settling even when they may have no legal liability. Securities class action suits, moreover, often benefit class counsel more than they do class members, with set- tlement payments simply involving a transfer of wealth from current shareholders to former shareholders, minus, of course, contingent attorneys’ fees that typically run be- tween 19% and 45%. As one leading securities class ac- tion plaintiff's lawyer has candidly admitted: “I have the greatest practice in the world because I have no clients. I 3 bring the case. I hire the plaintiff. I do not have some client telling me what to do. I decide what to do.”* Second, into this environment the Ninth Circuit’s hold- ing introduces a new legal rule that only further encour- ages plaintiffs to file and companies to settle meritless claims by removing a key safeguard against such suits. Worse still, the Ninth Circuit’s rule encourages risky in- vestment behavior, effectively forcing issuers to insure against speculative losses having nothing to do with their own conduct. Under the Ninth Circuit’s rule, an investor can file a claim and obtain recovery even when the disclo- sure of an aliegedly fraudulent statement has absolutely no effect on the stock price. To estimate damages in the absence of any contemporaneous real world stock price movement, moreover, the Ninth Circuit’s rule requires litigants (and courts) to resort to exactly the sort of “junk science” economics this Court has consistently discour- aged. And because it permits claims for any allegedly false statement, without respect to demonstrated market injury, the Ninth Circuit’s rule has the effect of chilling investment advice and reporting within the securities industry. By contrast, the alternative loss causation rule en- dorsed by the Government, petitioners, and four circuits‘ would avoid all of these problems while ensuring full re- covery of real losses, consistent with the established tort principle that, although “the consequences of an act go 3 See In re Network Assocs., Inc. Sec. Litig., 76 F. Supp. 2d 1017, 1032 (N.D. Cal. 1999) (quoting attorney William S. Lerach). * The court of appeals below acknowledged that this interpretation of the loss causation requirement differed from the standards articu- lated by the Third and Eleventh Circuits. See Semerenko v. Cendant Corp., 223 F.3d 165 (3d Cir. 2000); Robbins v. Koger Props., Inc., 116 F.3d 1441 (11th Cir. 1997). The court of appeals did not, however, cite or discuss the additional conflicting decisions of the Second and Sev- enth Circuits. See Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189 (2d Cir. 2003); Bastian v. Petren Res. Corp., 892 F.2d 680 (7th Cir. 1990). 4 forward to eternity, . . . legal responsibility must be lim- ited to those causes which are so closely connected with the result.” W. Page Keeton et al., Prosser and Keeton on Torts § 41, at 264 (5th ed. 1984). ARGUMENT I. THE PRESSURE TO SETTLE EVEN MUDIT- LESS SECURITIES CLASS ACTIONS IMPOSES AN ENORMOUS TOLL ON THE AMERICAN ECONOMY This Court has long recognized that securities fraud Liti- gation presents “a danger oi vexatiousness different in degree and in kind from that which accompanies litigation in general.” Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 739 (1975). Because the amount of damages demanded can be so great, corporations are frequently forced to forgo the adversarial process, settling even meritless suits in order to avoid the prospect of bank- ruptcy. Indeed, studies indicate that, unless a securities class action is dismissed on the pleadings, it is virtually certain to settle. See Elliot J. Weiss & John S. Becker- man, Let the Money Do the Monitoring: How Institutional Investors Can Reduce Agency Costs in Securities Class Ac- tions, 104 Yale L.J. 2053, 2064 (1995); Woodruff-Sawyer & Co., A Study of Shareholder Class Action Litigation 25 (2002) (83% of securities fraud cases are resolved through settlement). So great is the pressure on corporations to settle that, even when defendants do succeed in obtaining a trial court dismissal, the risk of losing on appeal can still lead to enormous settlements. By way of example, just earlier this year one securities defendant agreed to settle a pend- ing class action for $300 million even after the suit was dismissed on the merits with prejudice in the trial court.°® ° Jonathan Weil, Win Lawsuit —and Pay $300 Million, Wall St. J., Aug. 2, 2004, at C3. 5 To be sure, Congress has sought to address these prob- lems, passing the Private Securities Litigation Reform Act (“PSLRA”) in 1995 and the Securities Litigation Uniform Standards Act in 1998. Despite these efforts at reform, however, the number of securities class actions has not declined. See Laura E. Simmons & Ellen M. Ryan, Cor- nerstone Research, Post-Reform Act Securities Lawsuits: Settlements Reported Through December 2003 (May 2004) (“PSLRA Settlements”). Quite the opposite, in fact, has — occurred: in the six years since the enactment of the PSLRA, the mean number of securities fraud suits has risen by an astonishing 32%. See Michael A. Perino, Did the Private Securities Litigation Reform Act Work?, 2003 U. Ill. L. Rev. 913, 930. Another published study has con- cluded that, following the enactment of the PSLRA, public companies now face a nearly 60% greater chance of being sued by shareholders. See 2003 Early Update. And the dismissal rate of securities fraud lawsuits between 1996 and 2003 averaged only 8.4%, with dismissals in three of the 11 federal circuits averaging just 4%, a result that Congress hardly anticipated or intended. See id. at 5. Just as the number of cases continues to rise despite congressional efforts to rein them in, class members all too often continue to find themselves in the unfortunate position of losing regardless of the outcome of these cases. Because payments come out of corporate coffers, securities class actions frequently involve only “a transfer of wealth from current shareholders to former shareholders.” Janet Cooper Alexander, Rethinking Damages in Securities Class Actions, 48 Stan. L. Rev. 1487, 1503 (1996). Thus, 6 See also Frank H. Easterbrook & Daniel R. Fischel, Optimal Dam- ages in Securities Cases, 52 U. Chi. L. Rev. 611, 638-39 (1985); see also Jennifer H. Arlen & William J. Carney, Vicarious Liability for Fraud on Securities Markets: Theory and Evidence, 1992 U. Ill. L. Rev. 691, 698-700; Donald C. Langevoort, Capping Damages for Open-Market Securities Fraud, 38 Ariz. L. Rev. 639, 650 & n.48 (1996); Perine, Did the Private Securities Litigation Reform Act Work?, 2003 U. Ill. L. Rev. at 921-22. 6 to the extent that class members still own shares in the company at the time of the suit (as they often do), “pay- ments by the corporation to settle a class action amount to transferring money from one pocket to the other, with about half of it dropping on the floor for lawyers to pick up.” Jd. As Judge Friendly once remarked, securities fraud litigation carries the risk of “‘large judgments, pay- able in the last analysis by innocent investors, for the benefit of speculators and their lawyers.’” Blue Chip Stamps, 421 U.S. at 739 (quoting SEC v. Texas Gulf Sul- phur Co., 401 F.2d 833, 867 (2d Cir. 1968)). A recent case against Qwest Communications illus- trates the phenomenon. There, plaintiffs’ counsel sought to increase the pressure on defendants to settle by moving to freeze approximately $400 million of potential proceeds from a planned sale of a Qwest business unit.’ The plain- tiffs’ lawyers claimed that the sale should be enjoined to ensure that the as-yet-to-be certified class (and its coun- sel) would get paid if they ultimately won the suit. But Qwest badly needed the proceeds from the sale to avoid bankruptcy.* The district court eventually denied the mo- tion and expressly found that a freeze would not benefit all putative class members or the company, but only for- mer shareholders and the attorneys.’ According to the court, entering the injunction sought would likely have bankrupted the company and rendered worthless the stock of thousands of would-be class members who were still shareholders in Qwest.'° : Securities class actions are also frequently filed so quickly after a stock price decline that any reasonable fac- 7 In re Qwest Communications Int, Inc. Sec. Litig., 243 F. Supp. 2d 1179 (D. Colo. 2003). ® Press Release, Qwest Communications, Qwest Communications Statement In Response to Motion Filed by Milberg Weiss Bershad Hynes & Lerach LLP (Nov. 4, 2002). ® Qwest Communications, 243 F. Supp. 2d at 1186-87. 1° Td. at 1188. 7 tual investigation into the merits is simply impossible. By way of example, one court found it “peculiar that four of the lawsuits consolidated in this action were filed around 10:00 a.m. on the first business day following [the defendant’s] announcement” and that “[mJost of the com- plaints are virtually identical (including typographical errors).”'! At the hearing on the defendant’s motion to dismiss, the judge inquired “How did you get to be so smart and to acquire all this knowledge about fraud from Friday to Tuesday? ... On Friday afternoon did your cli- ent suddenly appear at your doorstep and say ‘My God, I just read in the Wall Street Journal about Travelers. They defrauded me,’ and you agreed with them and you interviewed them and you determined that there was fraud and therefore you had a good lawsuit, so you filed it Tuesday morning, is that what happened?” The court noted that “[cJounsel for the plaintiffs was not responsive to this line of inquiry.”"” Efforts at reform notwithstanding, virtually all securi- ties class action cases continue to be settled with little or no regard to their underlying merit. As Congress, the courts, and commentators have all observed, “[t]oo fre- quently, corporate decisionmakers are confronted with the implacable arithmetic of the class action: even a meritless case with only a 5% chance of success at trial must be set- tled if the complaint claims hundreds of millions of dollars in damages.” H.R. Rep. No. 106-320, at 8 (1999).'*° The 1! Ferber v. Travelers Corp., 785 F. Supp. 1101, 1106 n.8 (D. Conn. 1991). 12 Td. (brackets omitted). 13 See also West v. Prudential Sec., Inc., 282 F.3d 935, 937 (7th Cir. 2002) (noting scholarly concerns that “settlements in securities cases reflect high risk of catastrophic loss, which together with imperfect alignment of managers’ and investors’ interests leads defendants to pay substantial sums even when the plaintiffs have weak positions”); Victor E. Schwartz et al., Federal Courts Should Decide Interstate Class Actions: A Call for Federal Class Action Diversity Jurisdiction Reform, 37 Harv. J. on Legis. 483, 490 (2000) (“For defendants, the risk 8 magnitude of the continuing pressure to settle even strike suits is perhaps most clearly exposed by the fact that, since the PSLRA’s passage, more than 2,000" securities fraud cases have been filed in federal court, yet defen- dants have taken less than 1% to trial.!° As one observer commented over a decade ago in words equally applicable today, there is simply “no appreciable risk of non- recovery” in securities class actions. Janet Cooper Alex- ander, Do the Merits Matter? A Study of Settlements in Securities Class Actions, 43 Stan. L. Rev. 497, 578 (1991).'© Merely “/gJetting the claim into the legal system, without more, sets in motion forces that ultimately com- pel a multi-million dollar payment.” Jd. at 569 (emphasis added). Accord Hevesi v. Citigroup Inc., 366 F.3d 70, 80 (2d Cir. 2004) (noting “numerous courts and scholars have warned that settlements in large [securities] class actions can be divorced from the parties’ underlying legal posi- tions”); Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 164 (3d Cir. 2001) (discussing the “in- ordinate or hydraulic pressure on [securities fraud] defen- of participating in a single trial [of all claims], and facing a once-and- for-all verdict is ordinarily intolerable.”) (internal quotation marks omitted). '* See Stanford Law School & Cornerstone Research, Securities Class Action Clearinghouse, at http://securities.stanford.edu/ companies. html. ® Richard Painter et al., The Federalist Society for Law and Public Policy Studies, Private Securities Litigation Reform Act: A Post-Enron Analysis 8 (2003), at http://www.fed-soc.org/pdf/PSLRAF™NALII.PDF (“PSLRA Analysis”). © As the Second Circuit has observed, “[a]necdotal evidence tends to confirm [Professor Alexander's] conclusion. Indeed, [Melvyn I.] Weiss and his partner William S. Lerach of the Milberg firm have stated that losses in these cases are ‘few and far between,’ and they achieve a ‘sig- nificant settlement although not always a big legal fee, in 90% of the cases [they] file.” Goldberger v. Integrated Res., Inc., 209 F.3d 43, 52 (2d Cir. 2000) (quoting Jn re Quantum Health Res., Inc. Sec. Litig., 962 F. Supp. 1254, 1258 (C.D. Cal. 1997)). 9 dants to settle, avoiding the risk, however small, of poten- tially ruinous liability”). It is well known, too, that the same few law firms bring the great bulk of these claims. One recent study found that, since the passage of the PSLRA, a single firm (re- cently split into two) has been involved as lead or co-lead plaintiffs’ counsel in over 50% of securities class action settlements.'’ In the cases where competition for lead counsel status does emerge, accusations are sometimes exchanged by the plaintiffs’ bar that one or another firm has offered to “pay off” competitors to withdraw their ap- plications to serve as lead counsel, leading at least one court to observe that [w]hile over a dozen law firms participated early on in this litigation, only two filed proposals to represent the class, and only one of these proposals appears se- rious. This suggests an understanding or collabora- tion among plaintiff firms engaged in securities class action litigation that many would choose not to bid for this litigation .... The indicia of such cooperation raises serious doubts about the conditions of competi- tion in this segment of the legal services industry.'® Commenting on the phenomenon of contemporary secu- rities class action litigation, a Florida court described the whole process as “the class litigation equivalent of the ‘Squeegee boys’ who used to frequent major urban inter- sections and who would run up to a stopped car, splash soapy water on its perfectly clean windshield and expect payment for the uninvited service of wiping it off.” Fruchter v. Florida Progress Corp., No. 99-6167CI-20, 2002 WL 1558220, at *10 (Fla. Cir. Ct. Mar. 20, 2002). 17 See PSLRA Settlements at 14 (discussing the Milberg Weiss Ber- shad Hynes & Lerach firm, now divided into two separate partnerships known as Milberg Weiss Bershad & Schulman, and Lerach Coughlin Stoia Geller Rudman & Robbins); see also PSLRA Analysis at 15-16. 8 In re California Micro Devices Sec. Litig., No. C-94-2817-VRW, 1995 WL 476625, at *4 (N.D. Cal. Aug. 4, 1995). 10 Simply put, despite Congress’s clear intent and two ef- forts at reform, American business continues to contend with “precisely the sort of lawyer-driven machinations the PSLRA was designed to prevent.” In re BankAmerica Corp. Sec. Litig., 95 F. Supp. 2d 1044, 1050 (E.D. Mo. 2000) (criticizing the “outrageous” attempts of plaintiffs’ counsel to commandeer the class action for their own benefit), affd, 263 F.3d 795 (8th Cir. 2001). The drain on the American economy and its global competitiveness is substantial. In the last four years alone, securities class action settlements have exceeded two billion dollars per year."® And the problem continues to grow. In 2002, the average price of settling a securities fraud claim rose to $24.3 million, a 68% increase from 2001. See Laura E. Simmons & Ellen M. Ryan, Cornerstone Research, Post- Reform Act Securities Lawsuits: Settlements Reported Through December 2002, at 3 (May 2003). In 2003, the average settlement value for accounting-related securities fraud cases reached $26.5 million. 2003 Pricewater- houseCoopers Securities Litigation Study (rel. Aug. 2, 2004), at http:/Awww.10b5.com/2003_study.pdf. Il. THE NINTH CIRCUIT'S RULE WOULD SIG- NIFICANTLY EXACERBATE THE PROBLEMS AND INCREASE THE SOCIAL COSTS ASSOCI- ATED WITH MERITLESS SECURITIES CLASS ACTIONS “The economics of sanctions starts from the proposition that the objective of a legal rule is to deter certain unde- sirable behavior without simultaneously deterring (too much) beneficial behavior.” Easterbrook & Fischel, Op- tional Damages in Securities Cases; 52 U. Chi. L. Rev. at 612. The Ninth Circuit's rule disregards this fundamen- tal objective in many notable and problematic respects. '? See PSLRA Settlements at 1. In 2000 alone, the total value of se- curities fraud cases (adjusted for inflation) was estimated at $4.428 bilhon. Jd. Settlements in 2001 were estimated at $2.1 billion, rising to $2.53°7 billon in 2002, and holding at $2.016 billion in 2003. Id. 11 A. Rather than holding companies liable for the dam- age they inflict, as reflected by actual market events, the Ninth Circuit’s rule permits liability to be found and damages to be awarded even when the plaintiff can point to no actual market price reaction to a corrective disclo- sure. By way of example, suppose a plaintiff buys $50 of stock in the defendant corporation. As time passes, the value of the plaintiff's investment declines to $5. After this decline, the defendant announces the restatement of an accounting item, yet the plaintiff's shares remain at $5. In most circuits, any subsequent securities class ac- tion would be dismissed. By contrast, under the Ninth Circuit’s rule, a plaintiff can proceed to trial simply by hiring an expert to render an opinion on how much of the price the plaintiff paid was “inflated” because of the un- disclosed accounting issue. Plaintiffs and their lawyers, thus, can obtain a recovery even where investors are not demonstrably hurt by the alleged fraud — including in cases where the plaintiffs sold before the alleged misrep- resentation was exposed, or the misrepresentation was never exposed at all, or it was exposed but the market did not respond negatively. 7 Such a regime serves only to exacerbate the already- intense pressure on companies to settle securities class action suits without regard to their merit. Denying courts any means for weeding out at the pleading stage suits where the alleged fraud had no empirical effect on share price, and thus imposed no demonstrable harm on class members, the Ninth Circuit’s rule adds fuel to a fire in which virtually every case is settled, wealth is transferred away from current shareholders and productive economic uses to former shareholders, and lawyers are enriched. The facts of this case are illustrative. On February 24, 1998, Dura announced a revenue shortfall for the follow- ing year, unrelated to any alleged fraud. By the next day, shares in Dura dropped from $39.125 to $20.75 for a one- day loss of 47%. Some nine months later, on November 3, 1998, Dura announced for the first time that the United 12 States Food and Drug Administration had declined to ap- prove its Albuterol Spiros product — an announcement that plaintiffs contend constitutes the first public disclo- sure of the alleged fraud in this case. Following this an- nouncement, however, Dura shares fell only slightly and briefly. Share prices initially dropped from $12.375 to $9.75, but, within 12 trading days, they recovered to $12.438, ultimately climbing to $14.00 within 90 days of the announcement. Plaintiffs in this suit, however, never alleged damages based on the brief and shallow $2.625 stock price dip after the November 3 disclosure of the supposed fraud. Rather, they demand recovery based on the much more significant February 24 stock price decline of $19, even though plain- tiffs themselves allege no corrective disclosure in that an- nouncement. In short, plaintiffs in this case seek dam- ages based on a decline in share value that occurred nine months before the disclosure of the alleged fraud. And it is beyond cavil that a company facing potential liability of $19 per share is in a wildly different posture when it comes to deciding whether to litigate or settle than one facing potential liability of, at most, $2.625 per share. B. Relatedly, the Ninth Circuit’s rule dangerously skews investment incentives. To be sure, speculative in- vestments are a natural — and even beneficial — part of any free and open market: “[I]n stock trading, as else- where, speculation serves the salutary purpose of ena- bling the rapid adjustment of prices to current values.” Richard A. Posner, Economic Analysis of the Law 458 (6th ed. 2003). Because “[t]he speculator is the eager searcher for undervalued and overvalued securities,” information discovered through this search “diffuses rapidly through- out the market.” Jd. In particular, speculators may be attracted to what economists refer to as “rational bubbles,” where a stock’s price incorporates all publicly available information with- out “represent[ing]} the true [market] value of the underly- 13 ing company.” Paul A. Ferrillo et al., The “Less Than” Ef- ficient Capital Markets Hypothesis: Requiring More Proof from Plaintiffs in Fraud-on-the-Market Cases, 78 St. John’s L. Rev. 81, 114 (2004). Investors might reasonably conclude that an overvalued stock will continue to appre- ciate during the life of the bubble. See id. at 115. These investors realize that “[e]ventually the bubble will burst, of course, but it is always a fair investment until that point.” Id. Naturally, the significant potential benefits of specula- tion also carry a correspondingly high degree of risk. Un- der the Ninth Circuit’s rule, however, much of that risk is transferred away. If the price of a stock investment de- clines, the speculator can state a claim for relief, and likely obtain a significant settlement, merely by alleging that the defendant made a “misleading” statement — and do so even if the stock failed to decline after a corrective disclosure and moved downward only much later after other news. Such a regime unnaturally encourages risky investments by underwriting speculative losses unrelated to the defendant’s conduct, and effectively serves to trans- form the federal securities laws into “a system of investor insurance that reimburses investors for any decline in the value of their investments.” Robbins, 116 F.3d at 1447. C. The Ninth Circuit regime also encourages, and in fact depends upon, a return to the use of “junk science.” Because the Ninth Circuit's rule allows recovery where disclosures do not prompt any stock price decline, plain- tiffs’ experts are, by necessity, forced to resort to a grab- bag of speculative theories to estimate damages; and without any negative market reaction to the actual disclo- sure there is simply no objective way for courts, juries, or opposing parties to check their work. See Robbins, 116 F.3d at 1448. Such a result stands in marked contrast with the Court’s repeated attempts to remove precisely this sort of speculation about damages from the federal court system. 14 Cf. General Elec. Co. v. Joiner, 522 U.S. 136 (1997); Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999); Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 579 (1993). Indeed, the same concerns that spurred the pas- sage of the PSLRA in 1995 — including an abundance of frivolous suits, questionable claims of injury, and specula- tive theories of causation — prompted the adoption of Federal Rule of Evidence 702 and this Court’s holding in Daubert. Both Daubert and Rule 702 address the need to ensure that the nexus between a plaintiff's injury and the alleged cause of that injury is supported by reliable evidence. Prior to Daubert, courts viewed relevancy under a loose standard that tolerated almost any correlation between cause and injury. Without a rigorous examination of the causal nexus underlying the allegations, “marginal or un- reliable” theories of causation regularly proceeded to trial. See Kenneth R. Foster et al., Phantom Risk: Scientific In- ference and the Law 433 (1993). Daubert and Rule 702 provided courts with the tools to screen out scientifically questionable claims in two ways. First, Daubert allowed courts to determine whether a claim is based on a proper temporal logic, where the al- leged harmful act precedes the alleged injury. Second, Daubert required plaintiffs to exclude other factors, be- yond the alleged harmful act, that could have caused their alleged injuries. Together, these guideposts “invite[d] courts to take a hard look” at the causal basis underlying a plaintiff's alleged injury and thus to “act with dispatch” in rejecting speculative, unproven, and unprovable dam- ages claims. Christopher B. Mueller & Laird C. Kirkpatrick, Evidence § 7.17, at 740 (2d ed. 1999). Loss causation under the PSLRA, as interpreted by other circuit courts, achieves this same goal in the securi- ties context. By subjecting securities claims to the re- quirement of a decline in stock price close in time to the disclosure of the alleged fraud, courts are able to test for 15 some reliable indication whether plaintiffs’ alleged dam- ages were caused by fluctuations in the marketplace due to causes other than the defendant’s putative fraud. Like the gatekeeping function endorsed in Daubert, the loss causation requirement helps to screen out securities fraud actions built upon “phantom” injuries — cases involving actual harms producing actual suffering, but for which no single cause can be reliably identified. See Foster, Phan- tom Risk 1. Judge Easterbrook has discussed exactly this point in the class vertification context, noting that, unless courts insist on a firm “causal link between non-public informa- tion and securities prices,” they are left with only a “clash” of experts, a situation that amounts “to a delega- tion of judicial power to the plaintiffs, who can obtain class certification just by hiring a competent expert,” leav- ing defendants subject to damages that have not been — and cannot be — “verified empirically.” West, 282 F.3d at 938-40. Such a result, invited by the Ninth Circuit’s reasoning, defies the “universal requirement” that any claim sound- ing in tort must include a sufficient allegation that the defendant's conduct caused the plaintiff's injury, or, stated simply, “[nJo hurt, no tort.” Bastian, 892 F.2d at 683-84; see also Guido Calabresi, Concerning Cause and the Law of Torts: An Essay for Harry Kalven, Jr., 43 U. Chi. L. Rev. 69, 79 (1975). And without a hard look by the courts to ensure “some reasonable connection between the act or omission of the defendant and the damage which the plaintiff has suffered,” Keeton, Prosser and Keeton on Torts § 41, at 263, litigants risk being exposed to “infinite liability for all wrongful acts,” no matter how loos