Opinion ID: 2820087
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Heading: The Nature of Loss Causation

Text: Loss causation has long been a requirement in securities and other fraud cases. See Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 380 (2d Cir. 1974); Bastian v. Petren Res. Corp., 892 F.2d 680, 683 (7th Cir. 1990) (Posner, J.) (“Indeed what securities lawyers call ‘loss causation’ is the standard common law fraud rule, merely borrowed for use in federal securities fraud cases.” (parenthetical citation omitted)); Moore v. PaineWebber, Inc., 189 F.3d 165, 174 (2d Cir. 1999) (Calabresi, J., concurring) (RICO fraud). What loss causation is, however, has not always been expressed with great precision and clarity. Perhaps the best way to describe it is negatively, by adducing a few examples of its absence. Take the classic torts case of Berry v. Sugar Notch Burrough, 191 Pa. 345 (1899), in which a negligently speeding trolley car is damaged by a falling tree. The wrongfulness—the speeding—is a but-for cause of the accident and injury: had the trolley car not been speeding, it would have been elsewhere when the tree fell. As a general matter, though, and apart from the chance occurrence in this case, speeding does not make it likelier that trees will fall on trolley cars. Indeed, speeding arguably reduces the likelihood of such accidents by reducing the amount of time that one is under any given tree. But-for cause is present; causal link or tendency is not. (It would, of course, be different if one could demonstrate that speeding trolley cars create vibrations that lead damaged trees to fall with greater frequency. In that case, a causal relation could be said to exist between the speeding and the injury. See Guido Calabresi, Concerning Cause and the Law of Torts, 43 U. Chi. L. Rev. 69, 72 (1975).) 41 13‐1476‐cv Loreley Financing (Jersey) No. 3 v. Wells Fargo Securities, LLC The requirements of transaction and loss causation are exactly analogous to butfor cause and causal tendency in this classic torts case. Suppose a real estate company misrepresents that a certain house belonged to Abraham Lincoln, and a buyer purchases the house because of this. Suppose the buyer can show that, absent the lie, she would not have bought the house and would instead have bought a house in another part of town. Subsequently, a flood destroys her house and others in the neighborhood, while leaving the “other part of town” unscathed. The loss to her would not have occurred but for the fraud. And yet, so long as the neighborhood was not more prone to flooding,15 the lie in no way increased the chances of the actual damage to her house. Transaction causation is present; loss causation is not. (To be sure, if the buyer paid a premium for Lincoln’s house, that premium—i.e., the amount above the fair market value of the house in light of its true, non-presidential provenance—represents a separate harm whose causal linkage to the lie is evident.16) 15 If the neighborhood turns out to be more prone to flooding than surrounding areas, then inducing people to buy in that neighborhood by lying (whether about Lincoln, the school system, or the drainage basin) actually increases the flood risk to these homebuyers, even if the liar is oblivious to this increased risk. As far as loss causation is concerned, the question is whether the fraud creates a risk that materialized in the ultimate harm to the plaintiff and, if repeated, would create a similar risk to others in the future. See Zuchowicz v. United States, 140 F.3d 381, 388 n.7 (2d Cir. 1998) (describing test as whether wrongful activity “enhanced (at the time the defendant acted) the chances of the harm occurring or . . . increase[d] the chances of a similar accident in the future if the defendant should repeat the same wrong”). Where such a risk exists—regardless of whether it is only discovered after the fact—there is a cost that is properly deemed a cost of the misstatement. Of course, how we wish to allocate that cost is a separate question, the answer to which depends on a host of factors having to do with what is normally analyzed under the rubric of “proximate cause.” See infra note 18. For example, even if the neighborhood is more prone to flooding, we may wish to allocate the cost of flood damage not to all lying brokers who attract buyers to this neighborhood but only to those who, say, lie about the drainage basin. 16 Relevant parallels can be drawn from the so‐called “darting out” cases, in which speeding drivers hit children who run into the street from behind an object that blocks the driver’s view. First, while the speeding is a but‐for cause—but for the velocity the car would have been elsewhere—causal tendency is 42 13‐1476‐cv Loreley Financing (Jersey) No. 3 v. Wells Fargo Securities, LLC Some authors have treated loss causation as if it were part of proximate cause, whereas transaction causation is treated as part of cause-in-fact. See Jill E. Fisch, Cause for Concern: Causation and Federal Securities Fraud, 94 Iowa L. Rev. 811, 816-17 (2009) (“Subsequent courts have analogized loss causation to proximate or legal cause, while they analogize transaction causation to ‘but-for’ or factual cause.”); id. at 817 n.23 (citing examples).17 In truth, proximate cause is separate, and transaction causation and loss causation alike, to the extent that they are required in a given case, are each subject to the further requirement of proximity. Lack of proximity between the wrongful activity and the transaction will preclude liability, just as liability will not attach if the causal tendency—the thing that increases the chances of the actual occurrence of the harm—is too remote. In sum, proximity applies to both transaction and loss causation, and for both elements the additional element of proximity must be present before liability may be imposed. It is only because some of the considerations relevant to showing proximate cause (nature of the risk and existence of intervening causes) typically lacking unless a driver in the same position going only the posted speed limit could have avoided the collision. See Gulf Oil Corp. v. Reed, 334 F.2d 960, 963 (D.C. Cir. 1964); Underwood v. Fultz, 331 P.2d 375, 378‐ 79 (Okla. 1958); 4 Fowler V. Harper, Fleming James, Jr., & Oscar S. Gray, The Law of Torts § 20.5, at 165‐ 66 & n.48 (2d ed. 1986); see id. at 80 (cumulative supplement 2004). Second, although speeding may have no bearing on the risk of the accident, to the extent the child was injured more than would have been the case had the driver been going more slowly, the unlawful velocity clearly bears on the additional injury. The risk of greater injury thus represents a cost of speeding that we may, if we so wish, allocate to the driver in tort. Loss causation has also been described as the conclusion that all the requirements of common‐law 17 causation—but‐for cause, causal link, and proximate cause—are present with respect to the loss. See Moore v. PaineWebber, Inc., 189 F.3d 165, 175 (2d Cir. 1999) (Calabresi, J., concurring). We believe it clearer to analogize loss causation to causal link or tendency, as we have done here, and to analyze it separately from both but‐for and proximate cause. 43 13‐1476‐cv Loreley Financing (Jersey) No. 3 v. Wells Fargo Securities, LLC pertain to loss that courts frequently, albeit unnecessarily, analyze loss causation under the rubric of proximate cause.18 Some writers have also suggested that while the requirement of transaction causation (but-for cause) may occasionally be waived, as in cases of multiple or statistical causation, loss causation (causal tendency) is virtually always required. This is not so. See Calabresi, supra, at 100-01 & n.49. Both requirements are based, as much of law is, on policy grounds. There are jurisdictions that choose not to require loss causation in suits based on fraud. See Jane Stapleton, Benefits of Comparative Tort Reasoning: Lost in Translation, 1 J. Tort L., no. 3, 2007, at 2 (“[I]n the U.S. it seems to be a principle that a defendant in the tort of deceit cannot be liable for coincidental consequences; but that principle is rejected in England.”). Additionally, in certain areas of the law, the requirement of loss causation is eliminated either by contract or by statute. To take a common example from the law of insurance, a decedent’s estate may be denied payment on her life insurance policy if she 18 The conflation of loss causation with proximate cause appears to result, in many cases, from the conflation of each, in turn, with foreseeability. But, whereas foreseeability is to some extent relevant to proximate cause, it is “aftseeability” that matters for loss causation. That is, to return to the Berry case, if speeding trolley cars can be shown to create vibrations that increase the chance of rotten branches falling, then causal tendency (loss causation) is present, even though the link may not have been anticipated and may only have been shown to exist after the fact. Foreseeability, on the other hand, goes partly to how strong or weak, near or remote, we take the causal connection to be and ultimately, then, to the question of whether we wish to hold those speeding liable for an increased likelihood of falling branches damaging passing trolley cars. The unforeseeability of a particular risk, which may indicate the relative weakness of a causal connection, is among the factors courts consider under “proximate cause,” but a decision not to impose liability due to lack of proximity does not negate the presence, in fact, of causal tendency. It may be that this is what Justice Loevinger meant when—conflating causal tendency with proximate cause, as was commonly done at the time—he wrote, “It is enough to say that negligence is tested by foresight but proximate cause is determined by hindsight.” Dellwo v. Pearson, 259 Minn. 452, 456 (1961). 44 13‐1476‐cv Loreley Financing (Jersey) No. 3 v. Wells Fargo Securities, LLC lied about her health on her application, even if the risk of the specific illness or accident that killed her was totally unaffected by the undisclosed ailment. See Dormer v. Nw. Mut. Life Ins. Co., 408 F. App’x 452, 454 (2d Cir. 2011). The occasional “deviation” case that does not require causal tendency can be explained in similar fashion: a carrier is held liable for the destruction of goods in transit, having shipped them by a route other than that “specified in the contract or reasonably within the contemplation of the parties,” even though the destructive event was not made likelier by the choice of route. GreenWheeler Shoe Co. v. Chicago, R.I. & P.R. Co., 130 Iowa 123 (1906) (applying this approach to a shipping delay). The relaxed requirements in suits brought under the Federal Employers’ Liability Act bear a family resemblance to these cases, and indeed have been criticized on this very ground, as a departure from the common-law requirement of causal link. See Gallick v. Baltimore & Ohio R.R. Co., 372 U.S. 108, 126-27 (1963) (Stewart & Goldberg, JJ., dissenting); CSX Transp., Inc. v. McBride, 131 S. Ct. 2630, 2645 (2011) (Roberts, C.J., dissenting) (“The test the Court would substitute—whether negligence played any part, even the slightest, in producing the injury—is no limit at all. It is simply ‘but for’ causation.”). Where does all of this leave us in the present case? In the securities fraud context in general, an investor may buy shares of a certain stock because her broker falsified— or neglected to mention—some detail but then suffer a loss due to a nationwide recession. Loss causation is lacking unless the fraudulent statement that induced her to invest can also be shown to have made her investment, in fact, more disposed to suffer 45 13‐1476‐cv Loreley Financing (Jersey) No. 3 v. Wells Fargo Securities, LLC the alleged harm—a catastrophic market collapse—than honestly described alternative investments. See Powers v. British Vita, P.L.C., 57 F.3d 176, 189 (2d Cir. 1995).