Opinion ID: 2968358
Heading Depth: 3
Heading Rank: 3

Heading: Dismissal of Common Law Fraud Claim Under Dura

Text: Plaintiffs next challenge the dismissal of their common law fraud claim for failure to satisfy the Dura pleading requirements of loss causation. First, the plaintiffs contend that this Court had already specifically held that their common law fraud complaint was legally sufficient and there was no basis for the district court to ignore that ruling. Second, the plaintiffs argue that Dura did not change the law considered by this Court, but merely rejected a holding in the Ninth Circuit. Finally, plaintiffs assert they do not rely on the theory of loss causation that was rejected in Dura. We find plaintiffs’ arguments unpersuasive. Instead, we agree with the district court that Dura requires plaintiffs to plead loss causation by alleging that the stock price fell after the truth of a misrepresentation about the stocks was revealed, and the plaintiffs in this case did not so plead. See 544 U.S. at 342. This Court has not previously addressed the adequacy of plaintiffs’ loss causation allegations, most significantly because it was not the basis of the district court’s original dismissal of the common law fraud claim. Subsequent to this Court’s opinion and mandate remanding the action to the district court, the Supreme Court issued its decision in Dura which addressed analogous fraud allegations and specifically rejected the inflated purchase price approach to causation relied upon by plaintiffs in their pleadings. With the benefit of Dura, the district court determined that plaintiffs’ pleadings of common law fraud failed as a matter of law because plaintiffs were unable to link their losses to the alleged misrepresentations by showing that the Enzo stock price dropped upon revelation of the true state of facts. 6 GLASER v. ENZO BIOCHEM, INC. The plaintiffs in Dura were purchasers of stock in a pharmaceutical company which allegedly made false statements about expected future Food and Drug Administration approval of a new asthmatic spray device resulting in an artificially-inflated stock price. The Dura plaintiffs alleged that they purchased the stock at inflated prices and that they suffered resulting damages. Id. at 339. In its analysis, the Dura court analogized the federal securities law case there to common-law tort actions for deceit and misrepresentation. Id. at 341. The Supreme Court rejected the Ninth Circuit’s holding that loss causation is established by showing that the price on the date of purchase was inflated because of the misrepresentation, id. at 342, and concluded that to properly plead loss causation in a fraud claim, a plaintiff must allege that the price fell after the truth came to light about a misrepresentation, and that the plaintiff suffered damages as a result, and even this may not be sufficient to show actual loss: For one thing, as a matter of pure logic, at the moment the transaction takes place, the plaintiff has suffered no loss; the inflated purchase payment is offset by ownership of a share that at that instant possesses equivalent value. Moreover, the logical link between the inflated share purchase price and any later economic loss is not invariably strong. Shares are normally purchased with an eye toward a later sale. But if, say, the purchaser sells the shares quickly before the relevant truth begins to leak out, the misrepresentation will not have led to any loss. If the purchaser sells later after the truth makes its way into the market place, an initially inflated purchase price might mean a later loss. But that is far from inevitably so. When the purchaser subsequently resells such shares, even at a lower price, that lower price may reflect, not the earlier misrepresentation, but changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions, or other events, which taken separately or together account for some or all of that lower price. . . . Other things being equal, the longer the time between purchase and sale, the more likely that this is so, i.e., the more likely that other factors caused the loss. GLASER v. ENZO BIOCHEM, INC. 7 Id. at 342-343 (emphasis added). The loss causation principle endorsed by Dura can be illustrated by a simple hypothetical: Assume an investor purchased 100 shares of Enzo for $12 per share on January 12, 2000, after the alleged misrepresentations were made. If the market had known the truth about the science, instead of trading for $12 per share, the stock would have traded for only $1 per share. Plaintiffs in this case would have stopped the analysis there, contending that, on the very day of purchase, the investor has suffered a loss of $1,100 — the difference between the price paid ($1,200) and the price that would have been paid ($100) had the true facts been known. This analysis ignores the fact that the true facts are not yet known and the hypothetical investor has not yet suffered a loss. If the stock later drops, as a result of normal market fluctuations, to $6 per share (again assuming the fraud has not yet been disclosed), then the investor owns stock worth only one-half of what was paid for it. If he sells at this point, he has lost $600 of his initial $1,200 investment, to be sure, but this loss was not caused by the fraudulent conduct, because, under the hypothetical, the market is still unaware of the misrepresentations. It is only after the fraudulent conduct is disclosed to the investing public, followed by a drop in the value of the stock, that the hypothetical investor has suffered a loss that is actionable after the Supreme Court’s decision in Dura. In other words, so long as the fraud is undisclosed, normal fluctuations in price attendant to any market may have a direct effect on the value of the investor’s portfolio, but cannot be said to be a loss that is actionable under the federal securities laws, or as here, the common law of Virginia. In Dura, the Supreme Court swept away precedent holding that it is enough to show causation if the alleged misrepresentation touches If one month later, with the fraud still undisclosed to the market, the Enzo stock climbs to $16 per share, then the hypothetical investor now owns stock worth $400 more than was paid for it, yet has still suffered a $1,100 loss under plaintiffs’ theory of loss causation. 8 GLASER v. ENZO BIOCHEM, INC. upon the economic loss. Id. at 343. To ‘touch upon’ a loss is not to cause a loss, and it is the latter that the law requires. Id. (emphasis in original). A higher purchase price may lead to a future loss and may be a necessary condition of any such loss, the Court said, but it does not by itself show loss causation. Id. Dura makes clear that plaintiffs’ damages theory — one that relies on the inflated purchase price theory of causation — cannot be sustained. While plaintiffs repeat throughout their complaint that they were fraudulently induced to invest in and retain common shares of Enzo at artificially inflated prices (A. 271, 272, 277, 287, and 294; Complaint at ¶¶ 64, 70, 84, 114 and 135), they make no effort to link the drop in stock price to any revelation of the true facts behind any alleged misrepresentations by defendants, let alone to one of the eight actionable alleged misrepresentations remaining after this Court’s prior opinion. Plaintiffs must have pled an actual causal connection between the alleged misrepresentations and a subsequent decline in Enzo’s stock. Plaintiffs’ failure to do so is fatal to their common law fraud claim. In fact, plaintiffs’ own admissions establish that any decline they experienced is unrelated to the defendants’ alleged misrepresentations. Plaintiffs concede in their complaint that the alleged truth about Enzo’s science was not publicly revealed until a Recombinant Advisory Committee (RAC) meeting on March 8, 2001. (A. at 286, 289; Complaint, ¶ 109 and 119). By that time, however, plaintiffs had already sold all their Enzo shares and filed for bankruptcy protection. (A. at 259; Complaint, ¶ 12; A.44). Consequently, any declines in the price of Enzo stock that occurred before that date must have been the result of market factors or other factors, not the revelation of the alleged truth relating to any of the eight alleged misrepresentations by the defendants. Apart from the reference to the RAC meeting, plaintiffs do not provide any indication as to when or how the truth became known to them with respect to any of the eight alleged misrepresentations this Court identified. Finally, the Court finds unpersuasive plaintiffs’ attempts to distinguish Dura from the instant case. Although plaintiffs correctly note that Dura is a class action and did not decide Virginia law or any common law fraud claim, the Supreme Court in Dura extensively discussed the requirements of loss causation at common law and specifiGLASER v. ENZO BIOCHEM, INC. 9 cally articulated the causation pleading requirements for a fraud claim. The Court finds nothing in the Dura court’s analysis of the common law loss causation requirements that justifies a different standard for plaintiffs’ common law fraud claim under Virginia law. In light of the intervening precedent provided by Dura, the Court finds that plaintiffs do not properly allege loss causation, and that the district court did not err in dismissing plaintiffs’ common law fraud claims.