Dura and Section 10(b)

Cite this Article
Elizabeth Nowicki, Dura and Section 10(b), Truth on the Market (November 13, 2006), https://truthonthemarket.com/2006/11/13/dura-and-section-10b/

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. . . .