Amicus Curiae Brief — Dura Pharmaceuticals, Inc. v. Broudo

ii ; (LED

—

ob. NOV 1 2 2004

No. 03-932 7 ea

In The

Supreme Court of the United States

_ +

DURA PHARMACEUTICALS, INC. et ai.,

Petitioners,

v.

MICHAEL BROUDO et a/.,

Respondents.

+

On Writ Of Certiorari To The

United States Court Of Appeals

For The Ninth Circuit

°

BRIEF FOR AMICI CURIAE NATIONAL

ASSOCIATION OF SHAREHOLDER AND

CONSUMER ATTORNEYS, AARP, AND THE

CONSUMER FEDERATION OF AMERICA IN

SUPPORT OF RESPONDENTS

¢

DEBORAH M. ZUCKERMAN KEVIN P. Roppy

AARP FOUNDATION Counsel of Record

MICHAEL SCHUSTER HAGENS BERMAN LLP

AARP 700 South Flower Street,

601 E Street, N.W. Suite 2940

Washington, DC 20049 Los Angeles, California 90017

Telephone: (202) 434-2060 Telephone: (213) 330-7150

Counsel for Amicus Counsel for Amicus

Curiae AARP Curiae NASCAT

[Additional Counsel Listed On Signature Page]

COCKLE LAW BRIEF PRINTING CO (800) 225-6964

OR CALL COLLECT (402) 342-2831

III.

IV.

i

TABLE OF CONTENTS

Page

INTEREST OF AMICI CURIAE ...............00000085 1

TITTY snticticnansnepadibtnisiosnesetiedicnsinientnes 3

I icidisnuicidedenienbasustiniinienietieneninimendis 7

A. SECTION 21D OF THE PSLRA DID NOT

CHANGE THE TRADITIONAL PLEAD-

ING RULES CONCERNING THE “LOSS

CAUSATION” ELEMENT OF SECURI-

TIES FRAUD CLAIMGB...............:ccccccseeeeeees 7

B. THE COURT BELOW CORRECTLY

HELD THAT RESPONDENTS PROP-

ERLY PLED THE “LOSS CAUSATION”

ELEMENT OF THEIR SECTION 10(B)/

RULE 10B-5 CLAIMS ..............ccccscceeeeeeeeees 19

GP EIDD censdcscssccesccccsssecensersseesensssonessseevees 29

ii

TABLE OF AUTHORITIES

Page

CASES

In re AOL Time Warner Sec. & “ERISA” Litig., 2004

U.S. Dist. LEXIS 7917, 2004 WL 992991, Fed.

Sec. L. Rep. (CCH) 9 92,812 (S.D.N.Y. May 5,

| NN 16, 29

Affiliated Ute Citizens v. United States, 406 U.S.

BBB (ID TE) cccccccccccoscceccescocescsensensnsanmaunsunnnne 23

Ambassador Hotel Co. v. Wei-Chuan Inv., 189 F.3d

2017 (Bein Cle. 2GDB) ..ccccccccccstecscncssnenssnaiaee 8, 23

In re Atlas Air Worldwide Holdings, Inc. Sec. Litig.,

2004 U.S. Dist. LEXIS 13147, 2004 WL 1554840

(B.DIN.F. BOOS) .00cccccccesccescosaseseccnsnnnmmsannanee 15

Basic Inc. v. Levinson, 485 U.S. 224 (1988).............. 8, 9,15

Bateman Eichler. Hill Richards, Inc. v. Berner, 472

USB. SBD (IGGSP cccoccecccscccsmnens oocsesseoouneteatinansaiae 6

Blackie v. Barrack, 524 F.2d 89) (9th Cir. 1975)..... 15, 25, 26

Broudo v. Dura Pharms., Inc. 339 F.3d 933 (9th Cir.

BOBS) 2. nccccocccsossersccsscenctensasammmunee 19, 21, 23, 25

Caremark, Inc. v. Coram Healthcare Corp., 113 F.3d

O46 (Tele Cle. 1607) ..ccocccccccocscoccsenmsnsssaaa 14, 16, 28

Castellano v. Young & Rubicam, Inc., 257 F.3d 171

(23d Cle. SOG1) ....0.00ccscccccocccecosscocensncssnnuunumnnnnnnnnnnnn 8

Central Bank, N.A. v. First Interstate Bank, N.A.,

B11 U.S. 16464 (1GDS). ....ccccosccocccocccccececssenssnunnuanae 3

Coates v. Heartland Wireless Comm., Inc., 26

F. Supp. 2d 910 (N.D. Tex. 1998)..............ccccccccsseecereeeees 10

In re Control Data Corp. Sec. Litig., 933 F.2d 616

(Sth Cir. 1901)........000.000csccecsscocsesessscosedbcessenennnnn 9

iii

TABLE OF AUTHORITIES — Continued

Page

In re Credit Suisse First Boston Corp. Sec. Litig.,

1998 U.S. Dist. LEXIS 16560, 1998 WL 734365

8 eee 23

Crowell v. Ionics, Inc., 2004 U.S. Dist. LEXIS

22254, 2004 WL 2475332 (D. Mass. Nov. 3, 2004)........ 28

D.E. & J.L.P. v. Conaway, 284 F. Supp. 2d 719 (E.D.

I la renepenemgammennnpsnnnncsncacansaneneseets 12

Danis v. USN Commuans., Inc., 73 F. Supp. 2d 923

5 I 18

DeMarco v. Lehman Bros., Inc., 309 F. Supp. 2d 631

ET 29

DeMarco v. Robertson Stephens, Inc., 318 F. Supp.

Ce 9, 15, 25

Deposit Guaranty Nat'l Bank v. Roper, 445 U.S. 326

EEE A ee 6

Desert Palace, Inc. v. Costa, 539 U.S. 90 (2003) ............... 12

Diamond Multimedia Systems; Inc. v. Superior

Court, 968 P.2d 539 (Cal. 1999)....................ccccccccsceereerees 5

In re Digital Islands Sec. Litig., 357 F.3d 322 (3d

eI 11

EP Medsystems, Inc. v. Echocath, Inc., 235 F.3d 865

a aT 10, 18, 27

Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974).......... 21

In re Elec. Data Sys. Corp. Sec. & “ERISA” Litig.,

298 F. Supp. 2d 544 (E.D. Tex. 2004) .................00. 10, 29

Emergent Capital Inv. Mgmt., LLC v. Stonepath

Group, Inc., 343 F.3d 189 (2d Cir. 2003) ........... 14, 15, 27

iv

TABLE OF AUTHORITIES -— Continued

Page

Fogarazzo v. Lehman Bros., Inc., 2004 U.S. Dist.

LEXIS 9193, 2004 WL 1151542 (S.D.N.Y. May

iiiiy JEFEEIUD vnnesusenmeninenapensceremnnedinetnpsniniatanetinniiaetiiniteits 9, 28

Ganino v. Citizens Utils. Co., 228 F.3d 154 (2d Cir.

SPIED nswrinesecnnnncngemnsonsrnmmmneneimmnennisienememiannieienitimmnianiat 15

Gebhardt v. ConAgra Foods, Inc., 335 F.3d 824 (8th

EE Ge ccntpennpronemagneenenneinnnnnaninniniieanesl 10, 26, 27

Green v. Occidental Petroleum Corp., 541 F.2d 1335

SE, See iiceecesmecsmmnnmancmisninnsimemmmennnees 24

Huddleston v. Herman & MacLean, 640 F.2d 534

(5th Cir. 1981), aff’d in part, rev'd in part on

other grounds, 459 U.S. 375 (1983)................... 16, 18, 19

In re Initial Pub. Offering Sec. Litig., 2004 U.S.

Dist. LEXIS 20497, 2004 WL 2297401 (S.D.N.Y.

GUD, ER, Gi etcncneccenssasesnscsesnnesnstsemenemnaserenssensmenineseneen 15—

In re Initial Pub. Offering Sec. Litig., 2004 U.S.

Dist. LEXIS 20552, 2004 WL 2320364 (S.D.N_Y.

EEE Senne! ae ee eee we 28

In re Initial Pub. Offering Sec. Litig., 297 F. Supp.

RR Cee eee 9,15

J. I. Case Co. v. Borak, 377 U.S. 426 (1964) .............. cee. 6

Johnson v. Aljian, 2004 U.S. Dist. LEXIS 14986

Se Ce I GE, SIE ccttrrtnrnnnssnsiniintiisnapinineientiaee 10, 28

-In re K-Tel Int'l Sec. Litig., 300 F.3d 881 (8th Cir.

EE Ce ee en ae me nT 8

McGonigle v. Combs, 968 F.2d 810 (9th Cir. 1992)........... 19

Miller v. Asensio & Co., 364 F.3d 223 (4th Cir. 2004)......... 8

Movitz v. First Natl Bank, 148 F.3d 760 (7th Cir.

IID cnnansewnsussensnpesemsimamemsenveimnnsinapenncsesienemsnsaes 16, 17, 18

v

TABLE OF AUTHORITIES — Continued

y Page

Musick, Peeler & Garrett v. Employers Ins., 508

Ss Se cincncnnmmmneienmninnenmanitniniennienes 3

In re NUI Sec. Litig., 314 F. Supp. 2d 388 (D.NWJ.

TTI cnsensernennenectecstinaspessenmatiinsesiiniatisieniatiheianiasainaieiiaeianeenininte 11

Nathenson v. Zonagen Inc., 267 F.3d 400 (5th Cir.

TIT ccceestentnsitpaseuatetaianstansipatasiieiaeiatieniaidaltascitaiaaiadaaaiiiaaimetinatas 19

In re Navarre Corp. Sec. Litig., 299 F.3d 735 (8th ,

ie, Ge cccenccscunstncsnceresmininnnicnviiinvctinaiasminatainiamaitens 11

In re Enron Corp. Sec. Litig., 310 F. Supp. 2d 819

A Fah: Bee ccienesncnstetnnnntsnnnnivinemnneniiniomannass 14, 28

Peek v. Derry, 37 Ch. Div. 541 (1889)............::cccceeeeeeeeeeees 24

Provenz v. Miller, 102 F.3d 1478 (9th Cir. Cal. 1996)....... 25

Randall v. Loftsgaarden, 478 U.S. 647 (1986)................+. 23

In re Ravisent Techs., Inc. Sec. Litig., 2004 U.S.

Dist. LEXIS 13255, 2004 WL 1563024 (E.D. Pa.

Daliay 2B, BIB ccccevecceesscseerssmennmnnnmmmmnnas 9

In re Rhythms Sec. Litig., 300 F. Supp. 2d 1081 (D.

CO 14

Robbins v. Koger Props., 116 F.3d 1441 (11th Cir.

BE cticccncustustoemenassmemmiameneeieamnmne 18

Robidoux v. Celani, 987 F.2d 931 (2d Cir. 1993)............... 21

In re Rockefeller Ctr. Props. Sec. Litig., 311 F.3d 198

OG Glee, Ge ecccescnnscsnensesssneesnmmimenienninmstianaman 11

SEC v. Edwards, 540 U.S. 389 (2004) ............cccccceeeeeeeeeeees 3

SEC v. Zandford, 535 U.S. 813 (2002)............ccccccceeeeeseeeees 3

Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374

a 8

vi

TABLE OF AUTHORITIES -— Continued

Page

Semerenko v. Cendant Corp., 223 F.3d 165 (3d Cir.

RE eee Re 8, 20, 27

Sigafus v. Porter, 179 U.S. 116 (1900) ..............ccccceeeeeeeeees 24

In re Stellent, Inc. Sec. Litig., 2004 U.S. Dist.

LEXIS 14152, 2004 WL 1646500 (D. Minn. July

iin Ae cociticnestitianniicianninitenniiibiittatendataaniatiienpmitianetinl 28

Suez Equity Investors, L.P. v. Toronto-Dominion

Bank, 250 F.3d 87 (2d Cir. 2001) .00...........ccccceeeeeeeeees 8, 28

Superintendent of Ins. v. Bankers Life & Casualty

eas GE Ge eel iicicnctinrnsnnnnenesnenensdnnesemenninamsicsiiins 19

Wool v. Tandem Computers, Inc., 818 F.2d 1433 (9th

SE SUT ccriscccsasiesisinindceiteentiepenictaenielciitinitahbinitasinbiaiseniinnanieaaiens 23, 24

STATUTES

EE PA ccna iain atti teaia 12

I aie nla 7

ees I eisai iaiaiaienianleiiiainalabiaiaaaditeaae dials 11

Py Oe Se incteistinucinnisiseniiicccsianecsinininbtnmeninnintiapanduatiaiegs 11

I iti iceiniariieniaiitinnaitiiainiieiaaa 12

I iii alii aeeial rela 9

UNINC iii cicada onion 25

re passim

a ey I IE oar cneesicisenhtaienecebadceeetahdaniaieatetinitiasiiiaiciiaiieilidl 10

Sane: Tots IN TEITD TOI ccsccsnensinennieseensiniedeiaietideniaieinietigmenaiaiaiaanenusien 10, 11

H.R. Conf. Rep. No. 104-369 (1995) ..000.0.......cccccceeeeeeeeeeee 5, 6

Vii

TABLE OF AUTHORITIES - Continued

| Page

i RR, Be es GI cictcctineeetnirccincrteitnitcteinineiitascciai 13

S. 1533, 102nd Cong. 15-16 (1992)............ccccceceeeseeeceeeeneeees 6

iT Be hice cincteterennitniesicnacmeticthneatl 20

SECONDARY AUTHORITIES

7B Charles Alan Wright, Arthur R. Miller & Mary

Kay Kane, FEDERAL PRACTICE AND PROCEDURE:

CUVEE, BD F RIGS BIO CAD cccccvescccescsscsccscsssscseccscsssscsesecs 21

Andrew L. Merritt, A Consistent Model of Loss

Causation in Securities Fraud Litigation: Suiting

the Remedy to the Wrong, 66 TEx. L. REv. 469,

ei cnenticsteviverenamnnensndicnanmnsnnsionuantinnmenens 18

Ethan G. Zelizer, The Sarbanes-Oxley Act: Account-

ing for Corporate Corruption?, 15 Loy. CON-

TED Be. TR. SF Ga cerccnnscncccncncncsnssnnmnnssacssmamecnescsscses 4

Faith Stevelman Kahn, Bombing Markets, Subvert-

ing the Rule of Law: Enron, Financial Fraud and

September 11, 2001, 76 TUL. L. Rev. 1579 (2002)........... 4

Jay W. Eisenhofer et al., Securities Fraud, Stock

Price Valuation, and Loss Causation: Toward a

Corporate Finance-Based Theory of Loss Causa-

tion, 59 Bus. LAW. 1419 (2004)...................ccccceccssseseseeee 24

John C. Coffee, Jr., What Caused Enron? A Capsule

Social and Economic History of the 1990s, 89

CORNELL L. REV. 269 (2004) ..............cccsssscscssssessessssseoeees 4

John Paul Lucci, Enron - The Bankruptcy Heard

Around the Worid and the International Ricochet

of Sarbanes-Oxley, 67 ALB. L. REV. 211 (2003) ............... 4

TABLE OF AUTHORITIES — Continued

John W. Avery, Securities Litigation Reform: The

Long and Winding Road to the Privaie Securities

Litigation Reform Act of 1995, 51 Bus. Law. 335,

SR ccccsoenesenccsnesmntenssenemmestapdiatpenmsemiestemmanens 13

Joseph F. Morrissey, Catching the Culprits: Is

Sarbanes-Oxley Enough?, 2003 CoLum. Bus. L.

I I I aca siasteeaciaimmnintininiatd ssiaatadaadaidbdiaes 4,5

Lisa L. Casey, Reforming Securities Class Actions

from the Bench: Judging Fiduciaries and Fiduci-

ary Judging, 2003 B.Y.U. L. REv. 1239 (2003) ............... 6

Marianne M. Jennings, A Primer on Enron: Lessons

from a Perfect Storm of Financial Reporting,

Corporate Governance and Ethical Culture Fail-

ures, 39 CAL. W. L. REV. 163 (20038) ...................:se0eeseeeees 4

Michael J. Kaufman, Loss Causation: Exposing a

Fraud on Securities Law Jurisprudence, 24 IND.

I a, i aa cakes 18, 19

Steven Schwarcz, Some Thoughts on the Enron

Bankruptcy, 70 U. CIN. L. REV. 1309 (2002)...............004. 4

Securities Investor Protection Act of 1991: Hearing

on S. 1533 Before the Subcomm. on Sec. of the S.

Comm. on Banking, Hous. & Urban Affairs,

SES Came, Bip Ci prccccscccncssceveasscesessssccsesasssssnscensees 6

Common Sense Legal Reform Act: Hearing Before

the Subcomm. on Telecomm. & Fin. of the House

Comm. on Commerce, 104th Cong. 1 (1995)...............004. 6

1

I. INTEREST OF AMICI CURIAE'

AARP is a nonprofit, non-partisan organization with

more than 35 million members, dedicated to addressing

the needs and interests of Americans aged 50 and older.

As the largest membership organization representing

the interests of older Americans, AARP is very con-

cerned about fraudulent practices in the securities

industry and our capital markets. Older people are

frequent targets of fraud because they often have sig-

nificant assets and are looking for investment opportu-

nities to supplement the Social Security and pension

benefits they will receive during retirement. As a result,

AARP has made the need to combat securities fraud a high

priority, and advocates the availability and enforcement of

adequate federal and state statutory remedies to provide

victims with financial redress.

The Naticnal Association of Shareholder and Con-

sumer Attorneys (“NASCAT”) is a nonprofit membership

organization founded in 1989. The member law firms

represent investors (both individuals and institutions) and

consumers in securities fraud and shareholder derivative

cases throughout the United States. NASCAT and its

members are devoted to representing victims of corporate

abuse, fraudulent schemes, and so-called “white-collar”

criminal activity in cases that have the potential for

advancing the state of the law, educating the public,

modifying corporate behavior, and improving access to

' In accordance with Rule 37.6, counsel for AARP, NASCAT, and

CFA represent that they authored this brief and that no person other

than these amici curiae or their counsel made a monetary contribution

to its preparation or submission. Petitioners and Respondents have

consented to the filing of this brief.

justice and compensation for the wrongs inflicted upon

victims. NASCAT advocates the principled interpretation

and application of the federal securities laws — including

the Securities Act of 1933 (the “1933 Act”), the Securities

Exchange Act of 1934 (the “1934 Act”), and the Private

Securities Litigation Reform Act of 1995 (the “PSLRA”) —

to protect investors from manipulative, deceptive and

fraudulent practices and to ensure that the nation’s

securities markets operate fairly and efficiently.

The Consumer Federation of America (“CFA”) is a

nonprofit association of 300 consumer groups that repre-

sent more than 50 million Americans. It was established in

1968 to advance the consumer’s interest through research,

education, and advocacy. As increasing numbers of Ameri-

cans have come to rely on the nation’s financial markets to

fund their retirements and save for other long-term goals,

CFA has made enhancing investor protections a top

legislative and regulatory priority. CFA’s policies in this

area are based on a fundamental belief that investors are

entitled to a marketplace that provides them with a choice

of appropriate investments and service providers, the

information necessary to make informed choices, protec-

tion against fraud and abuse, and effective recourse when

they are the victims of wrongdoing. To achieve that goal,

CFA has for nearly two decades been actively involved in

efforts to promote investor protection legislation and

regulations, and to oppose efforts to weaken those protec-

tions, at the state and federal levels. Consistent with its

belief that access to redress for wrongdoing is essential to

maintaining investor faith in the integrity of our securities

markets, CFA’s efforts have included opposition to meas-

ures that would limit the ability of defrauded investors to

recover their losses in court.

———

RS

3

AARP and NASCAT have previously filed amicus

curiae briefs in this Court in cases involving the construc-

tion and application of the Federal securities laws.’

Il. INTRODUCTION

This case concerns the “loss causation” element of

investors’ claims seeking to recover damages under Sec-

tion 10(b) of the 1934 Act and Rule 10b-5 promulgated by

the Securities and Exchange Commission (“SEC”). For the

reasons stated above, AARP, NASCAT and CFA are quali-

fied to advise this Court, as amici curiae, of the meaning

and import of Section 21D(b)(4) of the PSLRA, which

codified the “loss causation” elements of Section 10(b)/Rule

10b-5 claims recognized by the circuit courts two genera-

tions ago. We note that the courts below did not analyze

the language or meaning of that statutory provision in this

case; however, amici believe that when this Court exam-

ines the relevant statutory language and the record, it will

agree that Respondents properly alleged the “loss causa-

tion” element of their securities fraud claims against

Petitioners. Further, AARP, NASCAT and CFA believe that

the Ninth Circuit’s ruling concerning the “loss causation”

requirement is consistent with the important public

policies underlying the federal securities laws, and that

affirming the decision of the court below will further the

* See SEC v. Edwards, 540 U.S. 389 (2004) (AARP); SEC uv.

Zandford, 535 U.S. 813 (2002) (AARP-NASCAT); Central Bank, N.A. v.

First Interstate Bank, N.A., 511 U.S. 164 (1994) (NASCAT); Musick,

Peeler & Garrett v. Employers Ins., 508 U.S. 286 (1993) (NASCAT).

4

goal of protecting victims of investment fraud and help

ensure they can obtain adequate recovery for their losses.

AARP, NASCAT and CFA submit that any reasoned

analysis of the PSLRA’s statutory provisions, and their

application to the facts and circumstances of this case, must

take into account the unprecedented wave of corporate

scandals and schemes to violate the federal securities laws

that have infected our securities markets over the past ten

years. Well-publicized financial scandals at Enron, World-

Com, Qwest, Global Crossing, Adelphia Communications,

ImClone Systems, and Tyco International have cost share-

holders more than $460 billion.’ These financial scandals

caused investors to question the fundamentals of investing

and corporate responsibility.‘ Investors’ confidence in the

U.S. stock market was so low that in June 2002, investors

withdrew more than $18 billion from stock funds, the third

largest such withdrawal in history. Joseph F. Morrissey,

Catching the Culprits: Is Sarbanes-Oxley Enough?, 2003

CoLvum. Bus. L. REv. 801, 806 (2003). Professor Morrissey

asserts that these corporate and accounting scandals

* See John Paul Lucci, Enron - The Bankruptcy Heard Around the

World and the International Ricochet of Sarbanes-Oxley, 67 ALB. L. REV.

211, 212 (2003). When filed, Enron’s bankruptcy was the largest in U.S.

history, and shareholders lost in excess of $60 billion in market value of

Enron's stock. Faith Stevelman Kahn, Bombing Markets, Subverting

the Rule of Law: Enron, Financial Fraud and September 11, 2001, 76

TuL. L. Rev. 1579 (2002); see also John C. Coffee, Jr., What Caused

Enron? A Capsule Social and Economic History of the 1990s, 89

CORNELL L. REV. 269 (2004); Marianne M. Jennings, A Primer on

Enron: Lessons from a Perfect Storm of Financial Reporting, Corporate

Governance and Ethical Culture Failures, 39 CAL. W. L. REV. 163

(2003); Steven Schwarcz, Some Thoughts on the Enron Bankruptcy, 70

U. Cin. L. REV. 1309 (2002).

* Ethan G. Zelizer, The Sarbanes-Oxley Act: Accounting for

Corporate Corruption?, 15 Loy. CONSUMER L. REV. 27, 27 (2002).

- ee

5

demonstrate that “corporate America and its industry

insiders (including accountants, investment bankers,

brokers and lawyers) seem to influence — if not make — the

rules, but subsequently take liberties in complying with or

ignoring these rules as they see fit.” Jd. He also poses the

following questions that this Court should consider in

deciding this case:

Is there a rule of law in corporate America? Alter-

natively, have the professional and corporate

managerial classes in America been participating

in a scheme to present the investing world with a

system that seems to be ruled by law but in fact is

not? At the same time, the professional and

managerial classes have enjoyed enormous profits

while most investors have sat by with little re-

course or compensation to redress their losses re-

sulting from fraud in the securities markets. . . .

Any nation purporting to be governed by a rule of

law must actually provide for mechanisms of en-

forcement against fraud and deception in its se-

curities markets.

Id. at 806-07, 809 (footnotes omitted). As the Supreme

Court of California has recognized, American business

“depends on a national investment market” to support its

industry. Effective remedies for fraud and market manipu-

lation help ensure that the flow of capital necessary to the

growth of American business will continue. Diamond

Multimedia Systems, Inc. v. Superior Court, 968 P.2d 539,

557 (Cal. 1999).

When it enacted the PSLRA, Congress codified private

securities actions as “an indispensable tool with which

defrauded investcrs can recover their losses without having

to rely upon government action.” H.R. Conf. Rep. No. 104-

369, at 31 (1995), reprinted in 1995 U.S. CopE Cona. &

6

ADMIN. NEws 730, 731. Lawmakers concluded in 1995 that

class actions (like this case) are socially beneficial, both for

compensating victims of securities fraud and for deterring

future wrongdoing by corporate actors, thereby promoting

confidence in the nation’s securities markets. Jd. at 31-32."

Private securities litigation “promotes public and global

confidence in our capital markets and helps to deter wrong-

doing and to guarantee that corporate officers, auditors,

directors, lawyers, and others properly perform their jobs.”

Id. at 31; see also Lisa L. Casey, Reforming Securities Class

Actions from the Bench: Judging Fiduciaries and Fiduciary

Judging, 2003 B.Y.U. L. REv. 1239, 1247-50 (2003). Over the

past forty years, this Court has repeatedly recognized an

implied private right-of action to enforce the securities laws

as a supplement to government regulatory efforts for the

benefit of defrauded investors and the capital markets

generally. See Bateman Eichler, Hill Richards, Inc. v. Berner,

472 U.S. 299, 315 (1985); Deposit Guaranty Natl Bank v.

Roper, 445 U.S. 326, 339 (1980); J. I. Case Co. v. Borak, 377

* More than a decade ago, then-SEC Chairman Richard Breeden told

lawmakers that budgetary limitations meant that private class actions

must “perform a critical role in preserving the integrity of our securities

markets.” Securities Investor Protection Act of 1991: Hearing on S. 1533

Before the Subcomm. on Sec. of the S. Comm. on Banking, Hous. & Urban

Affairs, 102nd Cong. 15-16 (1992) (testimony of then-SEC Chairman

Richard C. Breeden). A few years later, Breeden’s successor, Arthur Levitt,

declared that private lawsuits, rather than government actions, had

become “the primary vehicle for compensating defrauded investors.”

Common Sense Legal Reform Act: Hearing Before the Subcomm. on

Telecomm. & Fin. of the House Comm. on Commerce, 104th Cong. 1 (1995)

(prepared statement of then-SEC Chairman Arthur Levitt) (“Private

actions ... provide a ‘necessary supplement’ to the |SEC’s] own enforce-

ment activities by serving to deter securities law violations. Private actions

are crucial to the integrity of our disclosure system because they provide a

direct incentive for issuers and other market participants to meet their

obligations under the securities laws.”) (footnote omitted).

7

U.S. 426, 432 (1964). The PSLRA has now made that implied

right an explicit statutory right of action.

Petitioners and their amici ignore these important

public policies, just as they ignore the express language of

the PSLRA’s “loss causation” provision at issue in this case.

The briefs they filed in this Court fail to mention the ongoing

corporate and accounting scandals that have robbed inves-

tors of their life savings and sapped their confidence in the

securities markets. Needless to say, they also fail to acknow!l-

edge some of their own roles in causing billions of dollars in

shareholder losses or their potential liability to investors

when and if pending securities fraud actions are resolved

against them. See note 26, supra. Their deliberately incorrect

reading of the PSLRA would make it much more difficult — if

not impossible — for the defrauded investors who lost hun-

dreds of billions of dollars in recent corporate and accounting

scandals to recover their losses. This unfortunate result

cannot, and should not, be countenanced by this Court.

Ill. ARGUMENT

A. SECTION 21D OF THE PSLRA DID NOT

CHANGE THE TRADITIONAL PLEADING

RULES CONCERNING THE “LOSS CAUSA-

TION” ELEMENT OF SECURITIES FRAUD

CLAIMS

To state a claim for securities fraud under Section

10(b) of the 1934 Act, 15 U.S.C. § 78j(b), and SEC Rule

10b-5, 17 C.F.R. § 240.10b-5, Respondents must allege that

Petitioners (1) made a false statement or omission; (2) of a

material fact; (3) with scienter; (4) in connection with the

purchase or sale of securities; (5) upon which Respondents

justifiably (or reasonably) relied; and (6) that Respondents’

8

reliance was the proximate cause of their injury. See, e.g.,

Miller v. Asensio & Co., 364 F.3d 223, 227 (4th Cir. 2004);

In re K-Tel Intl Sec. Litig., 300 F.3d 881, 888 (8th Cir.

2002); Suez Equity Investors, L.P. v. Toronto-Dominion

Bank, 250 F.3d 87, 95 (2d Cir. 2001); Semerenko v. Cen-

dant Corp., 223 F.3d 165, 174 (3d Cir. 2000).

The Question Presented addresses only the causa-

tion requirement of a Section 10(b)/Rule 10b-5 claim,

which has two components: Respondents must allege and

prove at trial (a) that Petitioners’ violations of the securi-

ties laws caused Respondents to engage in their stock

transactions (“transaction causation”) and (b) that the

misrepresentations, omissions, or other violations caused

Respondents’ harm (“loss causation”). See Castellano v.

Young & Rubicam, Inc., 257 F.3d 171, 179 (2d Cir. 2001).

“Transaction causation” is the causal connection between a

securities fraud defendant’s fraud and plaintiff’s entering

in the transaction in question. Schlick v. Penn-Dixie

Cement Corp., 507 F.2d 374, 380 (2d Cir. 1974); see also

Ambassador Hotel Co. v. Wei-Chuan Inv., 189 F.3d 1017,

1027 (9th Cir. 1999) (establishing transaction causation

requires the plaintiff to prove that “but for the fraud, the

plaintiff would not have engaged in the transaction at

issue”). “[T]ransaction causation is generally understood

as reliance.” Castellano, 257 F.3d at 186. Under Basie Inc.

v. Levinson, 485 U.S. 224, 241-42 (1988), a rebuttable

presumption of “transaction causation” is established

under the “fraud on the market” theory, even if Respon-

dents were unaware of the fraudulent conduct at the time

of their purchases of Dura’s common stock.’ But the

* Under the “fraud on the market” doctrine, the trial court must

presiime that (a) the market price of Dura’s common stock actually

(Continued on following page)

9

“transaction causation” component of securities fraud

causation is mot an issue in this case.’

Contrary to Petitioners’ assertion, nothing in the

PSLRA heightened the pleading requirements for the “loss

causation” element of Section 10(b)/Rule 10b-5 claims.

Rather, as codified in Section 21D(b)(4) of the PSLRA,

Respondents have the “burden of proving that the act or

omission of the [Petitioners] ... caused the loss for which

the [Respondents] seek[] to recover damages.” 15 U.S.C.

§ 78u-4(b)(4) (emphasis added). In a misguided effort to

convince this Court to impose a heightened pleading

burden, Petitioners and their amici misstate the express

incorporated Petitioners’ alleged misrepresentations; (b) Respondents

actually relied on the market price of those securities as an indicator of

their value; and (c) Respondents acted reasonably in relying on the market

price of Dura’s stock. Jd. Paragraphs 37, 48, 51, 55, 85, 111, 128, 138 and

174 of Respondents’ Second Amended Complaint allege the necessary facts:

Dura’s common stock traded in an efficient market on the NASDAQ

National Market System; the company filed periodic public reports with

the SEC; and Respondents and Class members purchased stock during the

Class Period. These allegations are sufficient to establish reliance. See, e.g.,

In re Ravisent Techs., Inc. Sec. Litig., 2004 U.S. Dist. LEXIS 13255, at *45-

46, 2004 WL 1563024 (E.D. Pa. July 12, 2004); Fogarazzo v. Lehman Bros.,

Inc., 2004 U.S. Dist. LEXIS 9193, at *29, 2004 WL 1151542 (S.D.N.Y. May

21, 2004); In re Initial Pub. Offering Sec. Litig., 297 F. Supp. 2d 668, 670

(S.D.N_Y. 2003).

’ Citing Basic, 485 U.S. at 247, some courts recognize a presump-

tion of “loss causation,” asserting that in “fraud-on-the-market” cases,

“(c)ausation lies in the fact that the plaintiff relied on the market price

of the security as an indicator of the future value of the stock. To the

extent that the defendant’s misrepresentations artificially altered the

price of the stock and defrauded the market, causation is presumed.” Jn

re Control Data Corp. Sec. Litig., 933 F.2d 616, 619-20 (8th Cir. 1991);

accord DeMarco v. Robertson Stephens, Inc., 318 F. Supp. 2d 110, 124-25

(S.D.N.Y. 2004) (collecting cases).

10

statutory language of the PSLRA.* “However, the PSLRA

did not change traditional pleading rules with respect to

causation.” Johnson v. Aljian, 2004 U.S. Dist. LEXIS

14986, at *53 (C.D. Cal. July 30, 2004) (citing Gebhardt v.

ConAgra Foods, Inc., 335 F.3d 824, 830 n.2 (8th Cir. 2003)

(noting that the PSLRA’s heightened standard for pleading

misrepresentations “is not involved in this appeal”; “The

complaint’s allegations of misconduct are involved here

only as they relate to the questions of materiality and loss

causation. The new statute does not change traditional

pleading rules with respect to those issues.”), and Coates v.

Heartland Wireless Comm., Inc., 26 F. Supp. 2d 910, 923

(N.D. Tex. 1998) (“the PSLRA does not alter the standards

for pleading loss causation”)). As the Third Circuit has

stated, “this provision” — Section 21D(b)(4) — “does not deal

with pleading.” EP Medsystems, Inc. v. Echocath, Inc., 235

F.3d 865, 883 (3d Cir. 2000).

“Because the PSLRA does not affect causation plead-

ings, Plaintiffs’ causation pleadings must only meet the

traditional ‘fair notice’ standards” of FED. R. Civ. P. 8(a). In

re Electronic Data Sys. Corp. Sec. & “ERISA” Litig., 298

F. Supp. 2d 544, 560 (E.D. Tex. 2004). The Solicitor Gen-

eral asserts that “because loss causation is an element of a

fraud cause of action, the allegations must be ‘stated with

particularity.’” Sol. Gen. Br. at 15 (quoting FED. R. Civ. P.

9(b)). But Rule 9(b) does not say that, and no case applying

the PSLRA has so held.

* See, e.g., Brief for Petitioners (“Pet. Br.”) at 11 (claiming that Section

21D(bX4) of PSLRA “requires that a plaintiff plead and prove” loss

causation); id. at 4 (same; “pleading and proving”), id. at 15 (asserting that

“Congress codified a plaintiffs burden of pleading and proving ‘loss

causation’ in [Section] 10(b) cases”); id. at 20 (same). The Brief for the

United States as Amicus Curiae (“Sol. Gen. Br.”) offers the same distortion

of the express statutory language. See Sol. Gen. Br. at 6, 8.

11

In contrast, other subdivisions of Section 21D of the

PSLRA, when read in conjunction with FED. R. Civ. P. 9b),

impose heightened pleading requirements that must be

satisfied for a complaint sounding in securities fraud to

survive a motion to dismiss. For example, Section 21D(b\(1)

requires plaintiffs to “specify each statement alleged to have

been misleading, the reason or reasons why the statement is

misleading, and, if an allegation regarding the statement or

omission is made on information and belief, the complaint

shall state with particularity all facts on which that belief is

formed.” 15 U.S.C. § 78u-4(b\(1).’ Section 21D(b\(2) also

modifies the burden of pleading intent, or scienter, by requir-

ing plaintiffs to “state with particularity facts giving rise to a

strong inference that the defendant acted with the required

state of mind.” 15 U.S.C. § 78u-4(b\(2). Thus, under Section

21D of the PSLRA, both falsity and scienter must be alleged

with particularity. See In re Navarre Corp. Sec. Litig., 299

F.3d 735, 743 (8th Cir. 2002). Reference to these statutory

provisions makes clear that Congress knew how and when to

impose a heightened pleading burden when it enacted the

PSLRA; however, Congress did not do so in Section

21D(b)(4), the “loss causation” provision at issue in this case.

This conclusion is supported by reference to Section

21D(bX(3) of the PSLRA, which states in relevant part:

“Dismissal for failure to meet pleading requirements. In

* See, e.g., In re Rockefeller Ctr. Props. Sec. Litig., 311 F.3d 198, 218 (3d

Cir. 2002) (this “particularity [requirement] ... extends that of Rule 9b)

and requires plaintiffs to set forth the details of allegedly fraudulent

statements or omissions, including who was involved, where the events

took place, when the events took place, and why any statements were

misleading”). Accord In re Digital Islands Sec. Litig., 357 F.3d 322, 329 (3d

Cir. 2004); In re NUI Sec. Litig., 314 F. Supp. 2d 388, 397-98 (D.N.J. 2004).

” See, e.g., Digital Isl., 357 F.3d at 329; NUI Sec., 314 F. Supp. 2d

at 397-98.

12

any private action arising under this title, the court shall,

on the motion of any defendant, dismiss the complaint if

the requirements of paragraphs (1) and (2) are not met.”

15 U.S.C. § 78u-4(b\3\A)." Petitioners and their amici

ignore Section 21D(b)(3) and its significance. See, e.g., Sol.

Gen. Br. at 15. If, as they would have this Court believe,

Section 21D(b)(4) imposes a heightened pleading burden

for the “loss causation” element, why does Section

21D(b)\(3)(A) not direct district courts to dismiss cases that

fail to meet that supposed “pleading” burden?

Certain lower federal courts, grasping at threads of

the PSLRA’s legislative history, assert that Section

21D(b)(4) imposes a heightened pleading requirement for

the “loss causation” element of Section 10(b)/Rule 10b-5

securities fraud claims. See, e.g., D.E. & J.L.P. v. Conaway,

284 F. Supp. 2d 719, 746 (E.D. Mich. 2003). Because the

text of Section 21D(b)(4) is plain and unambiguous,

however, there is no need to resort to the PSLRA’s legisla-

tive history.” See, e.g., Desert Palace, Inc. v. Costa, 539

“ Under Section 21D(bX3), “all discovery and other proceedings

shall be stayed during the pendency of any motion to dismiss” a

securities fraud complaint, “unless the court finds upon the motion of

any party that particularized discovery is necessary to preserve

evidence or to prevent undue prejudice to that party.” 15 U.S.C. § 78u-

4(b\3). During the district court proceedings in this case, the PSLRA’s

“discovery stay” remained in effect and no discovery was conducted.

“ Indeed, Petitioners laud the “plain language of the [PSLRA),”

including Section 21D(b\(4). Pet. Br. at 11. Petitioners cite the “broad”

or “overall statutory scheme” of the PSLRA, observing that it amended

Section 12(b) of the 1933 Act to provide defendants with an “affirmative

defense” of “loss causation.” Pet Br. at 11, 15, 18-19. Section 12(b)

requires defendants to “prove| |” that affirmative defense at trial. 15

U.S.C. § 77l(b) (emphasis added). As Petitioners concede, it is a “basic

canon of statutory construction that identical terms within an Act bear

the same meaning.” Pet. Br. at 20 n.6 (quoting Estate of Cowart v.

Nicklos Drilling Co., 505 U.S. 469, 479 (1992)). Therefore, one must

(Continued on following page)

13

U.S. 90, 98 (2003) (“And where, as here, the words of the

statute are unambiguous, the judicial inquiry is com-

plete.”) (citations and internal quotation marks omitted).

Nevertheless, reference to the Senate Report that

Congress submitted with the PSLRA demonstrates that

Section 21D(b)(4) merely codified securities fraud plain-

tiffs’ burden to prove “loss causation” at trial:

The Committee also requires the plaintiff to

show that the misstatement or loss alleged in the

complaint caused the loss incurred by the plain-

tiff. For example, the plaintiff would have to

prove that the price at which the plaintiff bought

the stock was artificially inflated as the result of

the misstatement or omission. The defendant

would then have the opportunity to prove any

mitigating circumstances, or that factors unre-

lated to the fraud contributed to the loss.

S. Rep. No. 104-98, at 15 (1995), reprinted in 1995 U.S. CopDE

Conc. & ADMIN. News 679, 694." To whatever extent this

conclude that the word “proves” in Section 12(b) of the 1933 Act means

the same thing as “proving” in Section 21D(b\4) of the 1934 Act.

Petitioners do not explain how an “affirmative defense” of “loss causa-

tion” can be “prove(n]” on a motion to dismiss where (as here) they have

yet to answer Respondents’ Complaint.

” §. 240, entitled “The Private Securities Litigation Reform Act of

1995,” was introduced in January 1995. S. 240, 104th Cong. (1995). See

John W. Avery, Securities Litigation Reform: The Long and Winding Road

to the Private Securities Litigation Reform Act of 1995, 51 Bus. Law. 335,

350 (1996) (discussing introduction of S. 240). The first version of S. 240,

dated January 22, 1995, contained the following “loss causation” provision:

and in which the plaintiff claims to have bought or sold the se-

curity based on a reasonable belief that the market value of the

security reflected all publicly available information, the plain-

tiff shall have the burden of proving that the misstatement or

omission caused any loss incurred by the plaintiff.

(Continued on following page)

14

Court can even consider the PSLRA’s relevant legislative

history, nothing in the Senate Report even hints at a height-

ened pleading burden for the “loss causation” element.

With regard to securities fraud actions that are subject

to the PSLRA, the Seventh Circuit has pronounced that loss

causation is a “practical requirement” that “ought not place

unrealistic burdens on the plaintiff at the initial pleading

stage.” Caremark, Inc. v. Coram Healthcare Corp., 113 F.3d

645, 649 (7th Cir. 1997). “It does not require ... that the

plaintiff plead that all of its loss can be attributed to the false

statement of the defendant.” Id.; accord In re Enron Corp.

Sec. Litig., 310 F. Supp. 2d 819, 831-32 (S.D. Tex. 2004); Jn re

Rhythms Sec. Litig., 300 F. Supp. 2d 1081, 1092 (D. Colo.

2004) (“It is not Plaintiffs’ burden to prove loss causation in

the pleadings.”) (citation omitted).

In order to survive a motion to dismiss for failure to

plead loss causation, Respondents must “adequately allege

a causal connection between” Petitioners’ misleading

statements or omissions and the decline in value of Dura’s

common stock. Emergent Capital Inv. Mgmt., LLC uv.

Stonepath Group, Inc., 343 F.3d 189, 197 (2d Cir. 2003).

Although Petitioners might be able to demonstrate that

some intervening event caused investors’ losses, “such is a

matter of proof at trial and not to be decided on a Rule

12(b\6) motion to dismiss.” Jd."

S. 240, § 104. Conferees of the Senate and House met in November 1995

and reconciled the differences between S. 240 and the House bill, H.R.

1058, which also contained a “loss causation” provision. Although the

conferees made several significant changes, the bill’s final form was

predominantly based on the Senate version.

“ The same is true of the “truth-on-the-market” defense, where

securities fraud defendants seek to counter the “fraud-on-the-market”

reliance presumption (see note 6, supra) by showing that the investing

(Continued on following page)

15

As Petitioners observe, “loss causation” allows courts to

“take account of intervening factors, such as a war or a

recession, that may have caused the price decline” of a

particular stock. Pet. Br. at 21. Given the procedural posture

of this case, Petitioners cannot identify any such “interven-

ing factors,” and they did not do so in the courts below.

According to the Second Circuit, “if the loss was caused by an

intervening event, like a general fall in the price of Internet

stocks, the chain of causation will not have been established.

But such is a matter of proof at trial and not to be decided”

on a motion to dismiss. Emergent Capital, 343 F.3d at 197;

accord In re Initial Pub. Offering Sec. Litig., 2004 U.S. Dist.

LEXIS 20497, at *166 & n.378, 2004 WL 2297401 (S.D.N_.Y.

Oct. 13, 2004). This Court recognized in Basic, 485 U.S. at

249 n.29, that “[p]roof of that sort is a matter for trial.”

In pre-PSLRA cases, the federal courts uniformly

recognized that securities fraud plaintiffs were required to

prove “loss causation” at trial, and that “causation” issues

presented factual questions that must be resolved by

juries. See, e.g., Blackie v. Barrack, 524 F.2d 891, 906 n.22

(9th Cir. 1975). The Seventh Circuit recognizes that

public received accurate, “corrective information” from an alternate

source “with a degree of intensity and credibility sufficient to counter-

balance effectively any misleading information created by the alleged

misstatements.” Ganino v. Citizens Utils. Co., 228 F.3d 154, 167 (2d Cir.

2000) (citation omitted). “(T]he truth-on-the-market defense is intensely

fact-specific and is rarely an appropriate basis for dismissing a [Section]

10(b) complaint for failure to plead materiality.” Jd.

* Accord In re Atlas Air Worldwide Holdings, Inc. Sec. Litig., 2004

U.S. Dist. LEXIS 13147, at *58-59, 2004 WL 1554840 (S.D.N.Y. 2004);

DeMarco, 318 F. Supp. 2d at 124 & n.6 (while “defendants may be able to

show after discovery that an unforeseeable intervening event caused the

stock price to decline,” court recognized that “(t)hese are all matters for the

factfinder on a fully-developed record”); Jn re Initial Public Offering Sec.

Litig., 297 F. Supp. 2d 668, 675 & n.33 (S.D.N.Y. 2003) (same).

16

nothing precludes a securities fraud defendant “from

submitting, at the summary judgment stage, that [plain-

tiff] cannot prove the loss causation that it has alleged” in

the complaint. Caremark, 113 F.3d at 649. “At summary

judgment, this burden usually is met by establishing that

the decline in the value of the security is attributable in

total to some other factor.” Jd. at 649-50 (citation omitted).

“To defeat Caremark’s claim at summary judgment, ...

Coram would have to establish that, as a matter of undis-

puted fact, the depreciation in the value of the [securities]

could not have resulted from the alleged false statement or

omission of the defendant.” Jd. at 650."

This approach was typified by Huddleston v. Herman

& MacLean, 640 F.2d 534 (5th Cir. 1981), aff’d in part,

rev'd in part on other grounds, 459 U.S. 375 (1983), a

securities fraud class action brought by investors who

alleged that misstatements had been made by defendants

in the prospectus for a securities offering to raise money to

construct an automobile racetrack. Investors proved at

* Thus, in Jn re AOL Time-Warner Sec. & “ERISA” Litig., 2004 U.S.

Dist. LEXIS 7917, 2004 WL 992991, Fed. Sec. L. Rep. (CCH) 9 92,812

(S.D.N.Y. May 5, 2004), a securities fraud class action was filed following the

restatement of $477 million in advertising revenue purportedly earned by

AOL Time Warner (“AOLTW”). In its motion to dismiss, AOLTW contended

that Plaintiff's “economic harm was not a result of the alleged misrepresenta-

tions, but rather the product of intervening external forces, such as the

marketwide decline in Internet stocks and the fallout from the September 11

{, 2001} terrorist attacks.” 2004 U.S. Dist. LEXIS 7917, at *96-97. Judge

Kram stated that “defendants will have every opportunity at tral to prove

that the decline in AOLTW stock was caused by September 11, 2001, its

aftermath and generalized market conditions; AOLTW will not, however,

have that opportunity now [on a motion to dismiss].” Jd. at *97 n.39; see also

Movuz v. First Natl Bank, 148 F.3d 760, 762 (7th Cir. 1998) (reversing jury

verdict for plaintiff real estate investor because defendant bank proved at

trial that loss was caused by “disastrous downturn that the Houston real

estate market experienced in the early 1980s”).

ee ee

17

trial that the racetrack’s promoters and accountants had

fraudulently induced them to purchase stock by overstat-

ing the company’s working capital and understating the

costs of completing the project. 640 F.2d at 539 & n.2.

Subsequently, the business failed and the racetrack filed

for bankruptcy. After a three-week jury trial, the trial

court submitted the case to the jury on special issues

concerning whether the speedway prospectus was materi-

ally misleading and, if so, whether this was done with

scienter of various defendants; however, the judge refused

to submit special issues relating to reliance and causation.

Id. Based upon the jury verdict, the district court awarded

the defrauded securities purchasers the difference be-

tween the purchase price of the securities and the pro-

ceeds received by them on any sale of the securities. The

trial court awarded the full purchase price to those inves-

tors who still held their securities because those securities

essentially were worthless. Jd. at 554.

On appeal, the Fifth Circuit addressed the problem as

an issue of both loss causation and damages calculation.

Addressing loss causation, the court ruled that the plaintiff

could only prevail if “the untruth was in some reasonably

direct, or proximate, way responsible for his loss.” Jd. at 549.

The Fifth Circuit stated that the “causation” element is

satisfied in a Section 10(b)/Rule 10b-5 case “if the [defen-

dants’] misrepresentation touches upon the reasons for the

investment’s decline in value.” Jd. “If the investment decision

is induced by misstatements or omissions that are material

and that were relied on by the claimant, but are not the

proximate reason four his pecuniary loss, recovery under

[Section 10(b)/Rule 10b-5] is not permitted.” Jd. (footnote

omitted). Because at trial the defendants attributed the

racetrack’s failure to the materialization of risks described in

the prospectus, such as bad weather conditions and lack of

18

spectator attendance at the racetrack, the trial court erred in

failing to instruct the jury on the issue of proximate cause.

Id. at 549-50. “The trial court’s failure to submit the reliance

and causation issues to the jury requires us to grant a new

trial.” Id. at 550.”

The Fifth Circuit’s wisdom in Huddleston has stood

unchallenged for more than two decades and was echoed

by the Third Circuit in EP Medsystems, 235 F.3d at 884,

which observed that the “causation issue becomes most

critical at the proof stage. Whether the plaintiff has

proven causation is usually reserved for the trier of fact.””

Nothing in Section 21D(b)(4) of the PSLRA (or its legisla-

tive history, for that matter) changed the traditional

pleading rules governing the “loss causation” element of

Section 10(b)/Rule 10b-5 claims, or the lower courts’

" See generally Michael J. Kaufman, Loss Causation: Exposing a

Fraud on Securities Law Jurisprudence, 24 IND. L. REV. 357, 363-64

(1991) (discussing Huddleston); Andrew L. Merritt, A Consistent Model

of Loss Causation in Securities Fraud Litigation: Suiting the Remedy to

the Wrong, 66 Tex. L. REV. 469, 478-79 (1988) (same).

“ In Robbins v. Koger Props., 116 F.3d 1441 (11th Cir. 1997), investors

sought to prove at trial that a decline in the company’s stock price provided

the measure of their loss, but they could not prove any connection between

that decline and the accounting fraud alleged. Nevertheless, the jury

returned a verdict in the investors’ favor. Uncontradicted evidence

introduced by defendants at trial showed that the stock dividend was cut

because the company was concerned that future financing would be

unavailable, not because it “discovered [and then disclosed] that past

accounting errors had overstated its cash flow.” /d. at 1448. Plaintiffs were

unable to show that the drop in stock price was related to defendants’

alleged misrepresentations, thus, the Eleventh Circuit held that the trial

court had properly granted defendants’ Rule 51(a) motion to set aside the

j <y verdict because plaintiffs had failed to satisfy the “loss causation”

requirement. Jd. at 1448-49. In this case, however, because the district

court’s “loss causation” ruling was made on Petitioners’ motion to dismiss

Respondents’ Complaint, “Robbins is inapplicable here.” Danis v. USN

Commuas., Inc., 73 F. Supp. 2d 923, 943 n.13 (N.D. Ill. 1999).

19

repeated recognition that “causation” issues in securities

fraud cases present factual questions for triers of fact. In

the following section, we demonstrate that whatever

“pleading standard” is employed, Respondents properly

pled the “loss causation” element in this case.

B. THE COURT BELOW CORRECTLY HELD

THAT RESPONDENTS PROPERLY PLED

THE “LOSS CAUSATION” ELEMENT OF

THEIR SECTION 10(B)/RULE 10B-5 CLAIMS

In its opinion in this case, the Ninth Circuit correctly

posited the test for “loss causation” in a Section 10(b)/Rule

10b-5 case: “In this circuit, loss causation is satisfied

where ‘the plaintiff shows that the misrepresentation

touches upon the reasons for the investment’s decline in

value.’” Broudo v. Dura Pharms., Inc., 339 F.3d 933 at

937-38 (citations and internal quotations marks omitted).”®

After citing and quoting from Ninth, Second and Eighth

Circuit cases offering the same formulation of the applica-

ble “loss causation” test, the court below explained:

[Flor a cause of action to accrue, it is not neces-

sary that a disclosure and subsequent drop in the

market price of the stock have actually occurred,

because the injury occurs at the time of the

* This is the same formulation stated by the Fifth Circuit in

Huddleston, 640 F.2d at 549, as quoted above. Professor Kaufman

states that the phrase “touches upon” is taken from this Court’s opinion

in Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 12

(1971). See Kaufman, Loss Causation, 24 IND. L. REV. at 363 & n.48.

Quoting Huddleston, 640 F.2d at 549, the Ninth Circuit stated the same

rule in McGonigle v. Combs, 968 F.2d 810, 821 (9th Cir. 1992). See also

Nathenson v. Zonagen !nc., 267 F.3d 400, 413 n.10 (5th Cir. 2001)

(defendants’ actions need only “touch{] upon the reasons for the

investment’s decline in value”).

20

transaction. It is at that time that damages are to

be measured. Thus, loss causation does not require

pleading a stock price drop following a corrective

disclosure or otherwise. It merely requires pleading

that the price at the time of purchase was over-

stated and sufficient identification of the cause.

339 F.3d at 938 (footnote omitted). Even though the court

below did not cite Section 21D(b)(4) of the PSLRA, the rule

the Ninth Circuit stated matched perfectly the explication

of the “loss causation” rule offered in the Senate Report:

“For example, the plaintiff would have to prove that the

price at which the plaintiff bought the stock was artifi-

cially inflated as the result of the misstatement or omis-

sion.” S. Rep. No. 104-98, at 15, reprinted in 1995 US.

CODE Conc. & ADMIN. NEWS at 694.

In a footnote, the Ninth Circuit observed that some

other circuit courts “do require demonstration of a correc-

tive disclosure followed by a stock price drop to be alleged

in the complaint.” Jd. at 938 n.4 (citing the Third Circuit's

decision in Semerenko, 223 F.3d 165). But, as set forth

below, Respondents’ allegations in this case were more

than sufficient to satisfy even this (arguably) more strin-

gent “loss causation” pleading standard.

In their Second Amended Complaint, Respondents

asserted securities fraud claims on behalf of investors who

purchased Dura securities, including common stock and

subordinated notes, between April 15, 1997 and February

24, 1998 (the “Class Period”). JA 138a-139a.” During the

* This is the Class Period identified in Paragraphs 1 and 172 of

Respondents’ Second Amended Complaint; however, because Respon-

dents’ securities fraud claims against Petitioners were dismissed on a

Rule 12(b\6) motion, Respondents never moved for class certification.

Following appropriate discovery, Respondents foreseeably could have

(Continued on following page)

21

Class Period, Petitioners - Dura and its high-ranking

corporate officers - made false and misleading statements

regarding the company’s “Spiros” drug delivery device for

the asthma medicine Albuterol (the “Albuterol Spiros

Device”), and its “Ceclor CD” antibiotic. JA 34a-58a.

Petitioners falsely claimed that completed testing showed

the Albuterol Spiros Device was effective, that it was

poised for approval by the U.S. Food & Drug Administra-

tion (“FDA”), and that it was expected to add $100 million

in sales by 2000. In fact, Dura’s clinical trials and in-house

tests showed that the Albuterol Spiros Device was fatally

flawed. Petitioners also falsely claimed that Ceclor CD

sales were strong and increasing during the Class Period;

however, Ceclor CD sales were dropping each quarter,

with extra product clogging Dura’s sales channels as

Petitioners sought to revive flagging sales numbers. JA

48a-52a. See Broudo, 339 F.3d at 935-36 (summarizing

Respondents’ allegations and quoting from Petitioners’

public statements indicating satisfactory development and

testing of Albuterol Spiros Device and claiming rising sales

of Ceclor CD, “both of which [Respondents] allege were

known to [Petitioners] to be untrue”).

Between June 1997 and February 1998, the four named

Plaintiffs purchased shares of Dura stock at prices from

$36.35 to $45.35 per share. JA 59a-60a. During the Class

Period alleged in the Second Amended Complaint, Dura’s

filed a motion to certify a different (i.e., longer) Class Period. The

federal courts have repeatedly recognized that they are “not bound by

the class definition proposed in the complaint.” Robidoux v. Celani, 987

F.2d 931, 937 (2d Cir. 1993); see also Eisen v. Carlisle & Jacquelin, 417

U.S. 156, 184-85 (1974) (Douglas, Brennan & Marshall, JJ., dissenting);

7B Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, FEDERAL

PRACTICE AND PROCEDURE: CIVIL 2D § 1700, at 270 (1986).

22

stock reached $52-1/4 per share (on October 8, 1997), an all-

time high. JA 45a, 67a, 81a, 94a.” On February 24, 1998,

Dura revealed that it expected lower-than-forecast 1998

revenues and earnings per share due to, inter alia, slower-

than-expected sales of Ceclor CD. JA 51a, 110a-111a. Dura’s

stock price then dropped from $39.12 on February 24, 1998

to $20.75 on February 25, 1998, a 47% one-day loss marked

by an unprecedented 32-million share trading volume. JA

5la. In contemporaneous published reports, securities

analysts excoriated Petitioners, stating that “[m]anagement

credibility has been severely damaged by this [earnings]

announcement, particularly in light of recent investor

conference presentations exuding confidence on the Com-

pany’s fundamentals. . . .” JA 109a.”

Later, in an April 16, 1998 telephone conference call

with stock analysts, Dura revealed that as early as De-

cember 1997, wholesale channels had been clogged with

many months of excess inventory and that actual sales of

several products, including Ceclor CD, had in fact been

declining. JA 110a. Then, in November 1998, Dura re-

vealed that the FDA had decided not to approve the

* Respondents allege that Petitioners took advantage of Dura’s

inflated stock price and profited handsomely from their scheme to

defraud investors. In July 1997, Dura successfully completed a $287.5

million convertible note offering, the largest securities offering in the

company’s history. JA 92a. Two of the lead plaintiffs purchased 65 of

those notes at a price of $1,000 each. JA 60a. Dura’s insiders sold nearly

200,000 shares of their stockholdings, netting $7.27 million in proceeds.

JA 120a-122a. Three months later, after Dura’s stock price reached its

all-time high, certain Petitioners again unloaded their stockholdings,

netting $9.2 million in proceeds. JA 105a, 120a-122a. Thus, Respon-

dents allege that Petitioners garnered over $300 million from securities

offerings and insider bailouts.

* Over the ensuing months, Dura’s stock price dropped another

40% on further bad news. See JA 54a (stock price chart).

ES

23

Albuterol Spiros Device due to electro-mechanical reliabil-

ity issues and chemistry, manufacturing, and control

concerns. JA 110a, 1lla; Broudo, 339 F.3d at 936. Even

with the FDA's rejection announcement, however, Peti-

tioners failed to truthfully disclose to investors the FDA’s

directive that further clinical trials must be conducted,

prompting the FDA to issue a “notice of violation” to Dura

three days later. The FDA notice stated that Dura had

“misleadingly minimize[d] the fact that Dura must con-

duct a completely new clinical data [study].” JA 1lla.

Although Petitioners failed to reveal the complete truth

about Dura’s dealings with the FDA, even upon Petition-

ers’ November 1998 revelations concerning the FDA's

rejection of the Albuterol Spiros Device, Dura’s stock price

dropped another 21% in a single day, from $12.37 to

$9.75 per share. JA 156a.

AARP, NASCAT, and CFA submit that Respondents’

allegations, taken as a whole, properly allege the “causa-

tion” and “damages” elements of their Section 10(b)/Rule

10b-5 claims. “Damages for securities fraud under § 10(b)

or Rule 10b-5 need not be pleaded with specificity, particu-

larly at the pleading stage of the litigation.” In re Credit

Suisse First Boston Corp. Sec. Litig., 1998 U.S. Dist.

LEXIS 16560, at *34, 1998 WL 734365 (S.D.N.Y. Oct. 19,

1998) (citation omitted). Under the well-settled rule followed

in securities cases, the measure of damages is Respondents’

and Class members’ “out-of-pocket” loss, or the difference(s)

between the price(s) they paid for Dura securities and the

value of securities received at the time of their purchase(s).”

* See, eg. Randall v. Loftsgaarden, 478 U.S. 647, 662 (1986);

Affiliated Ute Citizens v. United States, 406 U.S. 128, 155 (1972); Ambassa-

dor Hotel, 189 F.3d at 1030; Wool v. Tundem Computers, Inc., 818 F.2d

1433, 1437 (9th Cir. 1987) (“out-of-pocket” rule fixes recoverable damages

(Continued on following page)

24

At trial, and on a complete evidentiary record — including

“event studies” prepared by expert witnesses — the trier of

fact will determine the amount of damages, if any, Re-

spondents are entitled to recover.” But “[t)hese are all

as “the difference between the purchase price and the value of the stock

at the date of purchase”) (citation omitted). The principle underpinning this

rule is that plaintiff's injury is not the loss of what he or she might have

gained if the false facts had been true, but rather what he or she has

actually lost by being deceived into the purchase. See Wool, 818 F.2d at

1437 n.2; see also Jay W. Eisenhofer et al, Securities Fraud, Stock Price

Valuation, and Loss Causation: Toward a Corporate Finance-Based Theory

of Loss Causation, 59 Bus. LAW. 1419, 1424-28 (2004).

The “out-of-pocket” measure of damages is traceable to Sigafus v.

Porter, 179 U.S. 116 (1900), where plaintiff was fraudulently induced to

invest in a gold mine whose value had been exaggerated by defendant.

“(T]he loss, in the transaction before us, is the difference between the

real value of the stock at the time of the sale, and the fictitious value at

which the buyer was induced to purchase.... ” Jd. at 124 (citation

omitted). Justice Harlan wrote that the “same principle was recognized”

by the English Court of Appeal in Peek v. Derry, 37 Ch. Div. 541 (1889),

an action to recover damages for defendant's fraudulent representations

whereby plaintiff was induced to take shares in a certain company at

the price of £ 4000:

The question of the proper measure of damages in such a

case was directly presented and considered. Lord Justice

Cotton said: “The damage to be recovered by the plaintiff is

the loss which he sustained by acting on the representations

of the defendants. That action was taking the shares. Before

he was induced to buy the shares, he had the £ 4000 in his

pocket. The day when the shares were allotted to him,

which was the consequence of , he paid over that £

4000, and he got the shares; and the loss sustained by him

in consequence of his acting on the representations of the

defendants, was having the shares, instead of having in his

pocket the £ 4000. The loss, therefore, must be the differ-

ence between his £ 4000 and the then value of the shares.”

179 US. at 124.

* In his concurring opinion in Green v. Occidental Petroleum Corp.,

541 F.2d 1335, 1341 (9th Cir. 1976), Judge Sneed set forth a milestone

theory for calculating damages, postulating that in any securities fraud

(Continued on following page)

eee ee

25

matters for the factfinder on a fully-developed record.”

DeMarco, 318 F. Supp. 2d at 124 n.6.”

In this case, the Ninth Circuit held that Respondents

had satisfied the “loss causation” element of their securi-

ties fraud claims by alleging that Dura’s stock price was

overstated at the time of their purchases and providing

“sufficient identification” of the cause for this overvalua-

tion; namely, Petitioners’ material misrepresentations and

omissions concerning the Albuterol Spiros Device and

Ceclor CD sales. Broudo, 339 F.3d at 939. Under well-

settled precedent, Respondents would satisfy the “loss

causation” requirement by pointing to a subsequent stock

price drop. See Blackie, 524 F.2d at 909 n.25. They will

then have shown that Petitioners’ misleading statements

“touch upon” the reasons for the stock’s later decline in

value. See Provenz v. Miller, 102 F.3d 1478 at 1492. But

while a drop in price upon corrective disclosure “is of

course circumstantial evidence of the inflation when

class action, the best way to measure the loss proximately caused by

defendant's misrepresentation is to create a chart containing a “price

line” and a “value line.” Under this method, damages are calculated by

subtracting the true value of the stock on the date of purchase from the

price actually paid, with the spread between the price and value lines

varying over time.

* Under Section 21D(e\1) of the PSLRA, the damages awarded in

any securities fraud action “shall not exceed the difference between the

purchase ... price paid .. . by the plaintiff for the subject security and

the mean trading price of that security during the 90-day period

beginning on the date on which the information correcting the mis-

statement or omission that is the basis for the action is disseminated to

the market.” 15 U.S.C. § 78u-4(eX1). Although the relevant “mean

trading price” of Dura stock has not been established, and the issue was

not briefed or discussed in the court below, Respondents have calculated

that the “mean trading price” was $12.96. Respondents paid more than

double this approximated “mean trading price” for their Dura stock.

26

purchased, . . . it is not the exclusive method of measuring

inflation.” Blackie, 524 F.2d at 909 n.25.

Decisions from other circuit courts demonstrate that

Respondents’ allegations in this case were more than

sufficient. In Gebhardt, 335 F.3d at 827, the investors’

class action alleged that United Agri Products (““UAP”), a

wholly-owned subsidiary of ConAgra Foods, engaged in

misleading accounting practices, thereby causing UAP’s

(and, hence, ConAgra’s) earnings statements to be over-

stated. In May 2001, ConAgra announced that, due to

UAP’s subterfuge, it was going to have to restate its past

and present earnings. The company’s stock price dropped

by about 4% the day after the announcement. Jd. Revers-

ing the district court’s dismissal of the case due to the

investors’ purported failure to allege “loss causation,” the

Eighth Circuit stated in relevant part:

The plaintiffs also demonstrated loss causation

by pleading that a decline in the value of their

stock was related to UAP’s accounting issues.

They did plead this, and the stock declined by

roughly 4 per cent the day after the May an-

nouncement. This was a sufficient allegation of a

causal link between the company’s misbehavior

and a subsequent decline. ...

Id. at 831. On appeal, ConAgra argued that because its

stock’s value increased in the weeks following the May 2001

announcement, plaintiffs could “show no connection between

the misrepresentations and any loss.” Jd. In a passage that is

relevant to this case, the Eighth Circuit rejected this conten-

tion on substantive and procedural grounds:

|S}tockholders can be damaged in ways other

than seeing their stocks decline. If a stock does

not appreciate as it would have absent the

fraudulent conduct, investors have suffered a

27

harm. Therefore, we decline to attach dispositive

significance to the stock’s price movements ab-

sent sufficient facts and expert testimony, which

cannot be considered at this procedural juncture,

to put this information in its proper context.

Id. at 831-32.

In Semerenko, the case cited by the Ninth Circuit in

footnote 4 of its decision, the Third Circuit equated “loss

causation” with proximate cause, stating that there must be

a “sufficient causal nexus between the loss and the alleged

misrepresentation.” 223 F.3d at 184. In that case, plaintiffs

alleged that they purchased shares at a price that was

inflated due to misrepresentations made by several corporate

officers and directors and that, when the truth was made

known, the company’s stock price dropped to its true value.

Id. at 185. As in this case, the investors’ complaint in Semer-

enko alleged that defendants’ misrepresentations

directly or proximately caused, or were a substan-

tial contributing cause of, the damages sustained

by plaintiff and the other members of the Class.

The misstatements . . . had the effect of creating in

the market an unrealistically positive assessment

of Cendant, as well as of its financial condition,

causing ABI’s common stock to be overvalued and

artificially inflated at all relevant times.

Id. at 186. Defendants urged that plaintiffs did not ade-

quately plead “loss causation” but the Third Circuit

rejected that argument, finding that these allegations

adequately pled this element. Jd.; see also EP Medsystems,

235 F.3d at 883-85 (discussing and following Semerenko).

Other circuit courts have reached the same result

when analyzing similar securities fraud “loss causation”

allegations. See Emergent Capital, 343 F.3d at 197-99

(holding that allegations of a “pump and dump scheme,” in

28

which defendants allegedly inflated a security's market

price so that they could sell shares before it fell, provided a

sufficient connection between defendants’ misrepresenta-

tions and plaintiffs’ losses); see also Suez Equity Investors,

250 F.3d at 97-98; Caremark, 113 F.3d at 649-50. In

addition, a legion of recent district court decisions constru-

ing and applying Section 21D(b)(4) of the PSLRA have

reached the same conclusion. See, e.g., Enron, 310 F. Supp.

2d at 832 (holding that investors’ amended complaint

“does allege the requisite loss causation between plaintiffs’

alleged economic loss and the acts, misrepresentations,

missions, and/or concealment of the realities underlying

the sham financial reports and image of success projected

by Enron and co-Defendants”).”

* See also Crowell v. Ionics, Inc., 2004 U.S. Dist. LEXIS 22254, at

*62, 2004 WL 2475332 (D. Mass. Nov. 3, 2004) (“The pleading burden

for floss causation] is only a ‘minimal burden,’ much less than the

‘strong inference’ requirement for scienter, and can be satisfied by

alleging that the Ionics Defendants’ misstatements artificially inflated

the price of Ionics common stock during the class period.”) (footnote and

citations omitted); In re Initial Public Offering Sec. Litig., 2004 U.S.

Dist. LEXIS 20552, at *61-65, 2004 WL 2320364 (S.D.N.Y. Oct. 15,

2004) (refusing to dismiss securities fraud complaint on “loss causation”

grounds); Johnson, 2004 U.S. Dist. LEXIS 14986, at *54 (“Plaintiff

alleges he would not have purchased the DCX stock if he was aware of

this artificial [stock price] inflation. Plaintiff's allegations satisfy the

causation pleading requirement... .”); Jn re Stellent, Inc. Sec. Litig.,

2004 U.S. Dist. LEXIS 14152, at *35 n.7, 2004 WL 1646500 (D. Minn.

July 23, 2004) (“The entire Amended Complaint is premised on the

allegation that Stellent’s stock plummeted as the truth about the

company’s dubious transactions became known. This is loss causation,

classically pled, and does not require the company to have restated

revenues.”) (citation omitted); Jn re Tyson Foods, Inc. Sec. Litig., 2004

U.S. Dist. LEXIS 1112°, at *35-36 (plaintiffs adduced sufficient

evidence of “loss causation” to withstand defendants’ summary judg-

ment motion); Fogarazzo, 2004 U.S. Dist. LEXIS 9193, at *40-41

(“plaintiffs here have adequately alleged that the Banks’ misrepresen-

tations caused their loss ... the Banks are alleged to have lied about

(Continued on following page)

29

IV. CONCLUSION

AARP, NASCAT, and CFA submit that the Ninth

Circuit correctly found that Respondents properly alleged

the “loss causation” element of their Section 10(b)/Rule

10b-5 claims. For the reasons stated herein, if this Court

reverses the decision of the court below and accepts

Petitioners’ misguided construction of the PSLRA’s “loss

causation” provision, it will make it much more difficult —

if not impossible — for defrauded investors who have been

victimized in the above-referenced multi-billion dollar

securities frauds to recover their out-of-pocket losses. Any

such result will further diminish investors’ confidence in

our securities markets.

the financial health and future prospects of RSL — namely, the invest-

ment quality of RSL securities ... RSL ultimately failed because of the

very facte that the Banks misrepresented: that RSL was in financial

trouble and that the entire ‘internet telephony sector’ was collapsing”);

AOL Time Warner, 2004 U.S. Dist. LEXIS 7917, at *97 (“the Amended

Complaint quite clearly alleges losses caused by a disparity between the

transaction price and the true investment value of AOL and AOLTW. As

such, loss causation is properly pled. .. .”) (footnote omitted); DeMarco

v. Lehman Bros., 309 F. Supp. 2d 631, 636 (S.D.N.Y. 2004) (“assuming

arguendo that plaintiffs must plead that their losses resulted from the

marketplace’s reaction to the revelation of the truth that defendant’s

actionable statements concealed (as contrasted to independent market

forces), the Complaint adequately alleges that in or around October,

20°0 the market was finally apprised of the negative information

concerning RealNetworks ... and that, as the result of thos ela-

tions, the stock declined, causing the losses on which plain’ . nere

sues”); Electronic Data Sys., 298 F.Supp. 2d at 560 (“Defendants’

misrepresentations inflated the stock value such that the stock value

decreased when investors learned of the problems with the NMCI

Contract”).

30

DATED: November 12, 2004

Respectfully submitted,

KEVIN P. RODDY

Counsel of Record

HAGENS BERMAN LLP

700 South Flower Street,

Suite 2940

Los Angeles, CA 90017

Telephone: (213) 330-7150

Counsel for Amicus Curiae NASCAT

DEBORAH M. ZUCKERMAN

AARP FOUNDATION

MICHAEL SCHUSTER

AARP

. 601 E Street, N.W.

Washington, DC 20049

Telephone: (202) 434-2060

Counsel for Amicus Curiae AARP

RACHEL WEINTRAUB

Assistant General Counsel

CONSUMER FEDERATION OF AMERICA

1424 16th Street,.N.W., Suite 604

Washington, DC 20036

Counsel for Amicus Curiae CFA