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Thursday, May 05, 2005

U.S. Supreme Court Decision Does Not End the "Research" Case

The U.S. Supreme Court unanimously ruled that investors seeking damages due to securities fraud would have to demonstrate that their losses were directly caused by corporate misrepresentation, in other words, they must prove "loss causation" --that the news that prior statements were false is directly responsible for stock's decline.

The Supreme Court's decision was hailed as a victory for Wall Street and Corporate America and it is predicted that this will put a damper on frivolous class action law suits.

By contrast, in securities arbitrations where investors claim they were misled by "tainted" stock research, I believe that the case will not have any significant effect. Where a customer can show that they received tainted or fraudulent research and relied upon the research in making an investment decision (to buy or hold a stock), investors should still have a viable claim.

The key is "reliance", namely, that an investor can show that they actually relied on a research report in deciding to buy or hold the stock. As an example, if an investor receives a fraudulent research report from his brokerage firm on March 1 and then on March 2 after reading the report decides to buy the stock, I believe that that is sufficient to show "causation" between the misleading statement and the customer's decision to buy or hold a stock.

It will continue to be a battle for investors to recover their losses in securities arbitration but I believe that the "research" case survives the Supreme Court decision.


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