Okay, get this.  You buy stock in a company for $10 a share.  You sell it months later for $6 a share.  Have you suffered a loss?  Yep.  If somebody induced you to purchase by lying about the company’s financial condition, can you get your money back from him?  It depends.

Why does it depend?  You had a $4 per share loss.  Right.  But so far you’ve proved only "transaction causation" — that you bought in reliance on misrepresentations.  You haven’t yet shown, as you must, that the fraud also caused the stock’s price to go down — by, for example, reducing the market price when the truth comes out.

The Third Circuit spilled 49 pages of ink on the differences between transaction causation and loss causation and the necessity of proving both. 

If securities law really makes your heart sing and shout, Blawgletter urges you to read the opinion cover to cover.  The rest of us may prefer to start on page 42.  McCabe v. Ernst & Young, LLP, No. 06-1318 (3d Cir. July 23, 2007).

Barry Barnett

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