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Cause for Concern: Causation and Federal Securities Fraud

Jill E. Fisch

University of Pennsylvania Law School - Institute for Law and Economics

Iowa Law Review, Vol. 94, p. 811, 2009
U of Penn, Inst for Law & Econ Research Paper No. 08-19

The Supreme Court's decision in Dura Pharmaceuticals dramatically changed federal securities fraud litigation. The Dura decision itself said little, but counseled lower courts to fashion new requirements of causation and harm modeled upon common law tort principles. These instructions have led lower courts to craft a series of confusing and inconsistent decisions that incorporate little of the reasoning upon which the common law principles are based.

This Article accepts the Dura challenge and examines both common law causation principles and their applicability to federal securities fraud. In so doing, the Article identifies the failure of the federal courts properly to confront the complex causation challenges presented by securities fraud and the extent to which common law approaches to multiple and indeterminate causation offer guidance. Common law causation analysis further highlights the critical issue of harm specification. The Article demonstrates how, from Basic to Dura, the Supreme Court has refused to address the issue of what constitutes an appropriate economic loss, despite the fact that this determination is a necessary predicate to formulating a causation requirement. The Article goes on to show how, in Basic, the Court shifted the nature of actionable harm and, in so doing, exacerbated the complexity of causation analysis.

Defining the appropriate harm involved in securities fraud is challenging. Drawing upon tort law principles, the Article considers several alternatives, ranging from artificial price inflation and ex post stock drop, to increased investment risk. The choice among these alternatives reflects policy judgments about the appropriate goals of private securities fraud litigation. In its final section, the Article considers current critiques of securities fraud litigation and demonstrates how these concerns should influence the scope of the private right of action.

Number of Pages in PDF File: 62

Keywords: corporations, stock fraud litigation, private right of action, common law tort of fraud, economic loss, artificial price inflation, ex post stock drop, investment risk

JEL Classification: G30, K22, K42

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Date posted: August 19, 2008 ; Last revised: June 22, 2009

Suggested Citation

Fisch, Jill E., Cause for Concern: Causation and Federal Securities Fraud. Iowa Law Review, Vol. 94, p. 811, 2009; U of Penn, Inst for Law & Econ Research Paper No. 08-19. Available at SSRN: http://ssrn.com/abstract=1234021

Contact Information

Jill E. Fisch (Contact Author)
University of Pennsylvania Law School - Institute for Law and Economics ( email )
3501 Sansom Street
Philadelphia, PA 19104
United States
215-746-3454 (Phone)
215-573-2025 (Fax)
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