US Supreme Court Sets Standard For Stock Fraud Suits

by Glen Shapiro, LawAndTax-News.com, New York

21 April 2005

Ruling on Tuesday, the US Supreme Court set the standard for actions brought by investors against firms whose share prices drop unexpectedly.

In an unanimous rejection of a looser standard put in place by the 9th US Cisrcuit Court of Appeals in the case of Dura Pharmaceuticals Inc. v. Broudo, the Supreme Court argued that aggrieved shareholders in such cases must prove that the company's alleged misrepresentations of its situation and subsequent share price falls are clearly connected in order to seek damages for fraud.

Writing on behalf of the Supreme Court, Justice Stephen Breyer observed that a "tangle of factors" can cause share prices to drop and that the "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".

The decision has been welcomed by other firms in a similar position to Dura. The firm found itself facing the shareholder suit when its share price dipped in 1998, following the revelation that the US Food and Drug Administration had not approved one of its devices.

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