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Second Circuit defines standard for loss causation pleadings: The District Court for the Southern District of New York has ruled that the pleading standard for loss causation in the Second Circuit requires plaintiffs in a securities fraud case to allege a concealment of risk and to show that this concealment caused the plaintiff's loss. Amy Liu v. Credit Suisse First Boston, 04 Civ 3757 (June 27).
The case involved an investor and a class of plaintiffs alleging that the issuers and lead underwriter involved in several IPOs defrauded investors by setting their earnings estimates below their true estimates to dramatically drive up the prices of the IPOs once they went public. In analyzing the proper pleading standard, the court was faced with what it called “ambiguous” precedent in the Second Circuit. The Supreme Court's recent decision in Dura Pharmaceuticals v. Broudo, 125 S.Ct. 1627, 1630 (2005), held that to prove fraud, plaintiffs must provide a direct link between a fall in a company's stock price and the alleged fraud or misrepresentation. In so ruling, the Supreme Court rejected the more liberal standard applied by the Ninth Circuit, which allowed plaintiffs to prove loss causation without showing a direct link between a drop in a company's stock price and misrepresentation or fraud.
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