In my Sec. Reg. class, we are covering Section 10(b) of the Securities Exchange Act of 1934. One of my students raised a question today regarding Section 10(b) after Dura that left me ruminating. The student’s question was about whether a selling stockholder who sold at a profit can bring a suit after Dura if the stock the stockholder was misled into selling later went up in price when the truth was revealed:
Assume Corp. X issued a press release indicating that their long-awaited drug, Drug 1, had just received FDA approval and Corp. X expected the drug to make 2006 a great year. The press release stated that Corp. X viewed Drug 1 as the drug of a lifetime. What Corp. X did not disclose for competitive reasons is that, actually, Corp. X had an even better product in the pipeline that is a sister product to the drug that was just released and is sure to get FDA approval. This product, Drug 2, was basically cleared by the FDA, but Corp. X had to wait for some formalities to be tended to. In the meanwhile, Corp. X did not want to alert its competitors that Drug 2 lurked in the wings.Â
Stockholder A sells her Corp. X stock when the press release regarding Drug 1 is issued. Stockholder A bought at $10 and sold at $20.  Seven weeks after Stockholder A sells her Corp. X stock, Corp. X announces FDA approval of Drug 2, and the stock price of Corp. X soars to $40 per share.
Assuming Stockholder A can establish materiality and scienter, can Stockholder A sue to recover the difference between $20 and $40? I have not actually contemplated this question since the Dura opinion was issued. Without looking carefully at the Dura language one more time, I had to hold off on answering the question. Has anyone else thought about this point? (I am sure many of you have; feel free to share your thoughts.)
Perhaps if I stop typing and sit quietly for a moment, the answer will be obvious. . . .
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Excellent comments, both. I have printed out three of Jack Coffee’s NYLJ articles on the topic; I will report back.
Thank you both, again.
Professor Coffee has examined this concept, I believe, calling the notion “phantom losses.” I don’t believe Dura forecloses such a theory of liability, although establishing the other elements could be difficult, as the previous commentor noted. Also, under the common law of fraud, an actual loss in value is probably required. This is important because 10(b) is an implied private action that looks to the common law for direction, so a court might say that a complaint must allege an actual loss. (But of course there is no fraud-on the-market theory in the common law, so who knows.) Some plaintiff will give it a shot one day, I’m sure.
You have a falsity problem. The securities laws only impose a duty to disclose material facts that are necessary to make disclosed statements, whether mandatory or volunteered, not misleading. The principal issue, it seems to me, is whether the pharmaceutical company’s failure to disclose the development of Drug 2 renders the company’s literally true statements about Drug 1 misleading.