Elan/Dura Shareholder Lawsuit Gets Supreme Court Hearing Jan. 12

At issue is whether shareholders in a securities lawsuit must demonstrate “loss causation” by proving a causal link between the alleged fraud and a decline in stock price. The lawsuit stems from statements made by Dura about Ceclor CD sales and development of the Spiros albuterol device. Elan acquired Dura in 2000.

The Supreme Court will hear oral arguments Jan. 12 in Elan's efforts to throw out a shareholders lawsuit that alleges Dura's stock price was artificially inflated by misrepresentations about Ceclor CD sales and development of the Spiros albuterol device.

At issue in Dura v Broudo is whether shareholders seeking to demonstrate "loss causation" must prove a causal link between the alleged fraud and a corresponding decline in stock price.

Dura was acquired by Elan in 2000.

In February 1998, Dura announced lowered expectations for sales of the antibiotic Ceclor CD due, in part, to wholesaler stocking. Dura's stock experienced a 47% one-day decline on the news.

In November 1998, Dura announced that FDA had deemed its Spiros albuterol "not approvable."

In January 1999, shareholders filed a class action suit alleging that Dura's pre-1998 projections about Ceclor CD sales and Spiros development activities led to an artificially inflated share price. The shareholders sought to recover losses associated with the February 1998 decline in the value of Dura's stock.

The claims were dismissed by a San Diego federal judge on the grounds that the shareholders did not demonstrate a causal link between the allegedly misleading statements and the February drop in the stock's value.

The San Francisco-based Ninth Circuit Court of Appeals reinstated the lawsuit in August 2003.

The appeals court ruled that in a fraud-on-the-market case, plaintiffs only have to establish the stock price on the date of purchase was inflated because of misleading statements. The court said it is not necessary to also establish that a disclosure and subsequent drop in stock price actually occurred "because the injury occurs at the time of the transaction."

The Supreme Court granted Dura's petition for certiorari June 28 (¹ (Also see "Supreme Court To Hear Elan/Dura Shareholder Lawsuit On Securities Fraud Standards" - Pink Sheet, 28 Jun, 2004.)).

In its brief to the high court, Dura argues that the shareholders failed to directly connect alleged misrepresentations regarding Spiros development to the February 1998 drop in the stock's value.

"A plaintiff invoking the fraud-on-the-market theory must establish a causal connection between the defendant's alleged fraud and the post-transaction decline in stock price for which the plaintiff seeks to recover losses," the ² Dura brief states.

"Defining loss causation in terms solely of artificial inflation at the time of purchase, as the Ninth Circuit here has done, divorces 'loss causation' from the reality of the market's response and renders its application meaningless," the Dura brief states.

The November 1998 disclosure of FDA's not approvable letter for Spiros fell outside the statutory 90-day "look back" period for recovery based upon the February stock decline, Dura argues.

"Here, the loss for which respondents sought to recover is the stock price decline that occurred on Feb. 24, 1998. However, the 'corrective disclosure' relating to Albuterol Spiros was not made until nine months later," Dura said.

"Congress could not possibly have intended such an absurd inconsistency between the loss causation requirement and the 'look back' provision governing the availability of damages."

The shareholders argue that statements made by Dura beginning in 1997 artificially inflated the market.

In April 1997, Dura "began to crow about Ceclor CD sales and AlSpiros," the ³ shareholders' brief states. "As a consequence, Dura's stock rose from $27-7/8 in April to $44-7/8 by mid-July 1997."

Dura's February 1998 announcement, which lowered projections for Ceclor CD sales and cited a need to expand the product's sales force, began the stock's tumble, shareholders say. "The continuing cost of upgrading Dura's sales force, the market would have understood, applied to all of Dura's products," the brief states.

Dura's interpretation of the burden of proof for a fraud-on-the-market case and the "look back" provision would allow companies to reduce the recoverable loss by perpetuating the fraud, the shareholders assert.

"On Dura's theory, simply concealing a fraud would reduce the recoverable loss - not the loss actually suffered," the shareholders' brief states. "Once expectations are lowered, even if the full extent of the fraud is then revealed, its disclosure's impact on a stock's price could be negligible."

- Adam Eckstein