The Second Circuit held today that plaintiffs who alleged a securities fraud claim against Omnicom Group lacked proof of "loss causation" — an often fatal flaw in such cases.  The panel affirmed summary judgment for the defendants.

Plaintiffs pointed to an expert's opinion that a disclosure in June 2002 prompted Omnicom's stock price to drop.  The announcement revealed that an outside director, who served as head of the Audit Committee, had resigned.  The expert opined that the Audit Committee chair's quitting made the market realize — at long last — that bad events in May 2001 hurt the company worse than they suspected.

The panel's ruling turned on its disbelief that the June 2002 event disclosed anything the market didn't already know.  It said:

The generalized investor reaction of concern causing a temporary share price decline in June 2002 is far too tenuously connected — indeed, by a metaphoric thread — to the Seneca transaction to support liability. The securities laws require disclosure that is adequate to allow investors to make judgments about a company’s intrinsic value. Firms are not required by the securities laws to speculate about distant, ambiguous, and perhaps idiosyncratic reactions by the press or even by directors. To hold otherwise would expose companies and their shareholders to potentially expansive liabilities for events later alleged to be frauds, the facts of which were known to the investing public at the time but did not affect share price, and thus did no damage at that time to investors. A rule of liability leading to such losses would undermine the very investor confidence that the securities laws were intended to support.

New Orleans Employees' Retirement System v. Omnicom Group, Inc. (In re Omnicom Group, Inc. Securities Litig.), No. 08-0612-cv, slip op. at 26 (2d Cir. Mar. 9, 2010).