Last Thursday, in In re Williams Securities Litigation – WCG Subclass, — F.3d –, 2009 WL 388048 (10th Cir. Feb. 18, 2009), the Tenth Circuit affirmed the district court’s exclusion, under Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 589 (1993), of testimony of plaintiffs’ expert witness as to loss causation.  It therefore also affirmed a summary judgment order against the plaintiffs on the ground that they had failed to offer evidence raising a reasonable inference of loss causation.

Loss causation, an element of a Rule 10b-5 claim, is the causal connection between the defendant’s material misrepresentation or omission and the plaintiff’s loss.   In Williams, the Williams Companies had allegedly misled the market as to the reasons for spinning off a subsidiary, calling it “the best way to ensure that both our energy and communications businesses have the efficient and effective access to the capital necessary to pursue the substantial growth that each enjoys.”  Within two years, the former subsidiary had filed for bankruptcy protection, its stock price having fallen from a peak of $61.81 to $0.06.

The slide in the stock price, however, began well before the alleged misrepresentations, and at no point was there a sharp fall in price immediately following any alleged misstatement.  The plaintiffs therefore relied on testimony of an expert witness, Blaine Nye, a professional expert consultant in these kinds of cases, to explain how the revelation of the truth caused the price drop and plaintiffs’ loss.

Nye offered two theories, neither of which impressed the district court or the Circuit.  The first was that the truth slowly leaked into the market, causing a gradual fall in the stock price.  While plaintiffs are, in principle, free to show loss causation through a “truth leaked out” kind of theory, the Circuit disallowed it here, because, it held, they were required, regardless of the theory, “to show some mechanism for how the truth was revealed,” and they had not done so here.  The second theory was that four specific corrective disclosures caused specific drops in the price.  The court, however, held that Nye had been unable to “tie these four particular disclosures to any of the alleged misrepresentations or describe why they should be considered ‘corrective.’”

Having held that the district court had not abused its discretion by excluding the expert testimony, the Circuit then rejected the plaintiffs’ argument that the jury should be permitted to reach its own inference that the misstatements caused plaintiffs’ loss, based on one of the same two theories.

Tags: 10b-5, loss causation, PSLRA

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