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Dura Pharmaceuticals
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Broudo v. Dura Pharmaceuticals is one of the most significant securities cases the Supreme Court has addressed in a decade. In early 1999, Dura shareholders filed class action suits to claim damages for a loss in stock value that preceded an announcement regarding an asthma drug delivery system that failed to win FDA approval. Investors argued that they bought the Dura stock on misleading information from the company, and that the stock was inflated by the time it took its precipitous plunge. The problem was that there was no clear link between the alleged fraud and the loss that came later.
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Oral argument in Dura Pharmaceuticals v. Broudo, the U.S. Supreme Court case on loss causation, has been set for January 12, 2005. Broudo's brief is due in a couple of days and will be posted when available on the web. (Links to Dura's brief and various amicus briefs can be found here.)
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With the Dura Pharmaceuticals decision the Supreme Court has reined in an overly broad extension of the federal securities laws, helping to protect companies, officers and directors from damage claims that are inherently speculative. In many securities fraud cases the alleged misrepresentations can arguably be tied to a drop in the stock price – typically through a disclosure of what plaintiffs call the "true facts." Companies and other defendants will still face damages claims in those cases. But where misrepresentations cannot be tied to a price drop, or where the price drop can be attributed at least in part to factors other than the alleged misrepresentations, the decision should provide additional protection from claims.
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The Supreme Court's recent Dura Pharmaceuticals decision requires a plaintiff to show a market decline (ex post losses), as opposed to price inflation at the time of purchase (ex ante losses), in order to maintain an action for securities fraud. Since fraud is actionable only where a market decline attributable to the fraud occurs under the ex post loss rule, firms that can bundle together disclosures or business projects are under-deterred by the antifraud regime: the success of one project may compensate for the failure of another, the firm can time the release of good and bad news to mask fraud's effect on price, and other factors that would have caused a loss of investment value even without the fraud can disallow a claim for damages. Strategically, firms may bundle to minimize exposure to liability. On the other hand, firms that value transparency may wish to unbundle. In this sense, the credibility of disclosure under an ex post loss rule depends on the extent to which firms can and do unbundle, whereas an ex ante regime is theoretically perfect in any case. This analysis ... reveals two additional problems with an ex post rule: market tests for ex post damages awards (a chief purported benefit) are generally not available for bundled firms, and awarding ex post damages may over-punish small frauds but reward big ones.
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In 1997, Dura Pharmaceuticals – a San Diego-based maker of allergy and asthma prescription drugs – made several statements promoting "strong" sales of Ceclor CD, a respiratory antibiotic, while indicating that FDA approval of a new asthma inhaler called Albuterol Spiros was likely. The company's stock that year reached a high of $53 a share.
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Elan Corp., based in Dublin, Ireland, may consolidate New Jersey and San Francisco units of its pharmaceuticals division at a new North American headquarters in Sorrento Valley, where its recently-acquired Dura Pharmaceuticals is located. Plans would include expanding research space at the existing facility and possibly constructing an additional structure nearby. Elan focuses on drug development for pain management, cancer, and neurological disorders.
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