Opinion ID: 586827
Heading Depth: 3
Heading Rank: 1

Heading: Federal Securities Laws Claims

Text: 24 The district court determined that the fourth amended complaint failed to adequately plead the in connection with requirement of § 10(b), and that the complaint did not adequately plead loss causation. 25 a) In Connection With Requirement 26 On appeal, Citibank claims that the district court too narrowly interpreted the in connection with requirement. Citibank contends that the misrepresentations alleged in the complaint were sufficiently connected with the value of the pledged stock because the alleged misrepresentations directly involved the net economic effect of the actual consideration paid for the aerospace subsidiaries. 27 Assuming arguendo, that these allegations were adequate to satisfy the in connection with requirement, the fourth amended complaint still did not state a claim under the federal securities laws because it did not adequately plead loss causation. See Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57, 61 (2d Cir.1985). 28 b) Loss Causation 29 Appellant asserts that the district court improperly required that it allege in the complaint loss causation as something wholly different and apart from transaction causation. Citibank argues that loss causation is easily demonstrated by proof of some economic damage and that, in any event, the requirement has been substantially eliminated in this Court, in cases in which the misrepresentations actually are alleged to have induced the transaction. It asserts that this is such a case. 30 We disagree. We believe that the fourth amended complaint fails to allege loss causation. To establish loss causation a plaintiff must show, that the economic harm that it suffered occurred as a result of the alleged misrepresentations. See Bloor, 754 F.2d at 61. We have on occasion likened loss causation to the tort concept of proximate cause, see Litton, 967 F.2d at 747 (The causation analysis [in a § 10(b) claim] encompasses two related, yet distinct elements--reliance and causation--elements that, in effect, correspond respectively with common law notions of 'but for' and proximate causation.), because, similar to proximate cause, in order to establish loss causation, a plaintiff must prove that the damage suffered was a foreseeable consequence of the misrepresentation. Manufacturers Hanover Trust Co. v. Drysdale Sec. Corp., 801 F.2d 13, 20-21 (2d Cir.1986). 31 Contrary to Citibank's assertion otherwise, this Court also requires the plaintiff to allege that the misrepresentation induced it to enter into the transaction and that the misrepresentation was the cause of the actual loss suffered. Id. at 20 (citing Chemical Bank, 726 F.2d at 943 & n. 23; Marbury Management, Inc. v. Kohn, 629 F.2d 705 (2d Cir.), cert. denied, 449 U.S. 1011, 101 S.Ct. 566, 66 L.Ed.2d 469 (1980); Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 380 (2d Cir.1974), cert. denied, 421 U.S. 976, 95 S.Ct. 1976, 44 L.Ed.2d 467 (1975)). 32 In the fourth amended complaint Citibank alleged that Stoecker's and Fruehauf's fraud induced it to extend credit to GAIL. However, we agree with the district court that the fourth amended complaint's assertion that [i]f Citibank had been aware of the agreements between Fruehauf and Stoecker, it would have reacted appropriately, in this case by refusing to provide the financing as contemplated, alleged only but-for causation. Citibank does not allege facts that support its allegation that there is a causal connection between the fraud alleged and the subsequent loss that it suffered. In short, in the complaint Citibank suggest[s] no reason why the investment was wiped out. [Citibank has] alleged the cause of [its] entering into the transaction in which [it] lost money but not the cause of the transaction's turning out to be a losing one. Bastian v. Petren Resources Corp., 892 F.2d 680, 684 (7th Cir.) (emphasis omitted), cert. denied, 496 U.S. 906, 110 S.Ct. 2590, 110 L.Ed.2d 270 (1990); see also Securities Investors Protection Corp. v. Vigman, 908 F.2d 1461, 1467 (9th Cir.1990) ( '[L]oss causation' is simply a label used to describe the standard rule of tort law that a plaintiff must allege and prove a sufficient causal connection between the defendant's wrongdoing and the plaintiff's harm.), rev'd on other grounds, --- U.S. ----, 112 S.Ct. 1311, 117 L.Ed.2d 532 (1992); Restatement (Second) Torts § 548A cmt. b at 107 (1977) ([T]here is no liability [for legal causation of pecuniary loss] when the value of the stock goes down after the sale, not in any way because of the misrepresented financial condition, but as a result of some subsequent event that has no connection with or relation to its financial condition.). Accordingly, because the fourth amended complaint did not properly allege proximate causation between the alleged fraud and the loss Citibank subsequently suffered, it failed to satisfy the loss causation requirement under § 10(b) and Rule 10b-5. Therefore, the judgment dismissing Count I of the complaint was proper. Bloor, 754 F.2d at 62. Counts III and V of the fourth amended complaint, which alleged aiding, abetting and conspiracy liability premised on a violation of § 10(b) and Rule 10b-5, were also properly dismissed because primary liability under the federal securities laws was not established. Id. at 63.