BNA INSIGHTS: Is Civil Loss Causation Applicable to Federal Criminal Sentencings?

By Thomas Hanusik and Rebecca Baden, Crowell & Moring

The Supreme Court’s 2005 decision in Dura Pharmaceuticals, Inc. v. Broudo is the seminal authority on the appropriate measure of loss caused by a defendant’s fraudulent conduct in a civil securities fraud action. Under the Dura standard, a plaintiff must provide actual evidence that the defendant’s conduct proximately caused the plaintiff’s losses. The Dura standard thus requires “loss causation.” Less clear is whether this same standard should drive a federal sentencing court’s determination of actual losses when calculating a defendant’s sentence under the federal guidelines. The Fifth and Second Circuits have held that Dura’s “loss causation” standard applies to federal sentencing for securities fraud cases, but the Ninth Circuit has refused to adopt this same approach and a circuit split has developed as a result.

Loss Causation under Dura Pharmaceuticals

In 2005, a unanimous Supreme Court decided Dura Pharmaceuticals, Inc. v. Broudo, an important decision with significant ramifications for “fraud-on-the-market” private securities litigations.  The Dura Court held that a private plaintiff claiming to be the victim of a “fraud-on-the-market” scheme must both plead and prove that the defendant’s fraud proximately caused her to suffer economic loss.  In so holding, the Dura Court overruled the Ninth Circuit, which had found that a stock’s inflated purchase price sufficiently proved the plaintiff’s economic loss.  In rejecting the Ninth Circuit’s analysis, the Dura Court emphasized that any plaintiff alleging securities fraud must establish traditional notions of proximate causation, and that an inflated purchase price alone is not enough to make that showing.

The Dura Court identified three distinct rationales for rejecting the notion that an inflated purchase price alone could establish the requisite proximate loss causation. First, the Court relied on what it referred to as “pure logic.”  Second, the Court considered the similarities between securities litigation and common law misrepresentation claims, and analogized their respective proximate cause analyses.  Third, the Court found that Congress’ intent in enacting the Private Securities Litigation Reform Act of 1995 militated against the Ninth Circuit’s interpretation of loss.

Second, according to the Dura Court, securities fraud actions have common law roots. And, at common law, a successful plaintiff in a misrepresentation action must prove that a defendant’s conduct caused her to suffer actual loss.  Because an inflated purchase price neither demonstrates that a plaintiff has suffered actual loss, nor that any potential loss was caused by the defendant’s conduct, it is insufficient to support an action for fraud.  To allow a “fraud-on-the-market” claim to proceed based on allegations that do nothing more than identify an inflated purchase price would violate this basic tenet of common law.

Third, the statute enabling plaintiffs to bring claims based on a “fraud-on-the-market” theory evidences Congress’ intent to provide for a recovery only where a plaintiff demonstrates that the defendant’s conduct proximately caused her to suffer an actual loss.  When enacting the Private Securities Litigation Reform Act of 1995, the Court found that Congress “expressly impose[d] on plaintiffs the burden of proving that the defendant’s misrepresentations caused the loss for which the plaintiff seeks to recover.”  “By way of contrast, the Ninth Circuit’s approach would allow recovery where a misrepresentation leads to an inflated purchase price but nonetheless does not proximately cause any economic loss.”  Having found that proximate cause was a requirement, the Court rejected the Ninth Circuit’s approach…

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