Brief Fact Summary. Publically traded stock investors (Plaintiff) claimed that Merrill Lynch & Co. (Merrill) (Defendant), via its analyst Blodget, released false information and misrepresentative reports endorsing buying specific Internet companies stock, claimed that these falsifications and omissions caused the investors’ losses, and argued that they adequately pleaded loss causation.
Synopsis of Rule of Law. In a securities fraud action, to sufficiently plead loss causation, where considerable indicia of the risk that appeared are decidedlyobvious on the face of the disclosures purported to hide that exact risk, a plaintiff must assert (i) facts able to support an implication that it was the defendant’s fraud, as opposed to other prominentinfluences, that proximately caused the plaintiff ‘s loss; or (ii) facts satisfactory enough to allocate of the losses betwixt the disclosed and hidden sections of the risk that finally annihilated an investment.
Thus, whether a plaintiff had sufficient facts to place it on inquiry notice is often inappropriate for resolution on a motion to dismiss under Rule 12(b)(6).
View Full Point of LawIssue. During a securities fraud action, to sufficiently plead loss causation, where considerable indicia of the risk that appeared are decidedly obvious on the face of the disclosures purported to hide that exact risk, must a plaintiff assert (i) facts able to support an implication that it was the defendant’s fraud, as opposed to other prominent influences, that proximately caused the plaintiff ‘s loss; or (ii) facts satisfactory enough to allocate of the losses betwixt the disclosed and hidden sections of the risk that finally annihilated an investment?
Held. (Jacobs, J.) Yes. During a securities fraud action, to sufficiently plead loss causation, where considerable indicia of the risk that appeared are decidedly obvious on the face of the disclosures purported to hide that exact risk, a plaintiff must assert (i) facts able to support an implication that it was the defendant’s fraud, as opposed to other prominent influences, that proximately caused the plaintiff ‘s loss; or (ii) facts satisfactory enough to allocate of the losses betwixt the disclosed and hidden sections of the risk that finally annihilated an investment. It is long decided that a securities-fraud plaintiff must demonstrate both transaction and loss causation. Transaction causation is like reliance, and needs only an accusation that but for the alleged misrepresentation or omission, the plaintiff would not have engaged in detrimental securities transactions. Loss causation “is the casual link between the alleged misconduct and the economic harm ultimately suffered by a plaintiff.†In this case, only if the investors pleaded loss causation is of concern. On this issue, the plaintiff carries the onus and needs to demonstrate that a misstatement or omission is the “proximate cause†of an investment loss if the risk could have been avoided if not hidden by the misstatements and omission. The misrepresentation or omission must have hidden something from the market that, once disclosed, had a negative impact on the value of the security, otherwise the loss was unexpected. These pleading principles necessitate that the loss be both predictable and triggered by the emergence of the hidden risk, so, loss causation has to do with the connection betwixt the plaintiff’s loss and the information misrepresented or hidden by the defendant. A fraud claim will not last if this connection is fragile. It is not sufficient for a plaintiff to plead that a defendant’s misstatement and omissions induced a “purchase-time value disparity†betwixt the purchase price for a security and its “true investment quality.†An allegation like this is basically an assertion of transaction causation, but it fails to mention the association between the fraud and the loss of the investment. In this case, to plead loss causation, the investors must state facts that support an implication that Merrill’s misrepresentations and omissions hid the situations that brought about loss sustained by the investors in such a way that they would have been freed from all or a calculable section of that loss minus the fraud. No such accusations were made, in other words, the investors failed to make an accusation that the market had a negative reaction to a corrective disclosure about the deceptiveness of Merrill’s “buy†and “accumulate†recommendations and made no claims that Merrill misrepresented or omitted that led to the loss. The investors failed to allege the reason behind the decline of their stock value as being a result of Merrill’s fake and deceitful recommendations. They are also lacking an allegation that Merrill hid or misrepresented any dangers connected with investing in these companies, clearly stated in each report were the dangers of devaluation. So, the investors did not adequately claim loss causation; there are potentially allegations of transaction causation though. Affirmed.
Discussion. While the plaintiffs here failed to succeed on their claims, the case still inspired Merrill to settle other multiple actions against it. Merrill settled three class action lawsuits in early 2007 claiming it gave deceptive analyst research regarding Internet companies to buyers of mutual friends. Refer to In re Merrill Lynch & Co. Research Reports Sec. Litig., 2007 U.S. Dist LEXIS 9450 (S.D.N.Y. 2007).