June 20, 2006
Enron & Dura Pharmaceuticals, Thought #1
Posted by Christine Hurt

In doing research for an article, I've re-read the briefs and opinions in Dura Pharmaceuticals, Inc. v. Broudo, decided last year by the Supreme Court.  The case holds that the plaintiffs in the securities fraud case did not sufficiently plead "loss causation" because although the price at which the plaintiffs bought may have been artificially inflated because of misstatements or omissions, the price drop was not directly caused by an announcement tied to the same misstatements.  So, I'm wondering how this reasoning is going to result in a verdict for the Enron plaintiffs.  The opinion is rather narrow; it does not thoroughly give all scenarios in which loss causation can be proved, but it doesn't seem to hold out hope for fraud on the market cases where the price slowly lets out steam over a number of months instead of falling dramatically after one big announcement. 

With Enron, there was an announcement of restatement of earnings on November 18, 2001, and the pleadings in the securities fraud class action case plead that the 12-month high before that date was $90 and change a share.  Then, the pleadings state that on November 18, the price fell to $8.41 and continued to $4 in the next few weeks.  However, the price the day before was nowhere near $90.  The stock price had been falling steadily since February and had not been over $20 since October.  From October 16 to November 17, the price had fallen 75% to a little over $9.  And in case we've forgotten, many factors were negatively affecting the stock market as a whole in September, October and November 2001.

Enron had been dying a death of a thousand cuts, with the November restatements a big nail in a recently purchased coffin.  So, how can this case square with Dura, either on pleading loss causation or in determining damages?  However, the Enron securities fraud class action case survived a motion to dismiss with a class period from 11/27/95 to 11/27/01.  And, as we know, defendants are settling every day at very large prices.  The spectre of a jury trial must be incredibly frightening.

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