In myÂ Sec. Reg. class, we are covering Section 10(b) of the Securities Exchange Act of 1934.Â One of my students raised a question today regarding Section 10(b) after Dura that left me ruminating.Â 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,Â had just received FDA approval and Corp. X expected the drug to make 2006 a great year.Â The press release stated that Corp. X viewed Drug 1 as the drug of a lifetime.Â What Corp. X did not disclose forÂ competitive reasonsÂ 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.Â This product, Drug 2, was basically cleared by the FDA, but Corp. X had to wait for some formalities to beÂ tended to.Â 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.Â Stockholder A bought at $10 and sold at $20.Â Â 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?Â I have not actually contemplated this question since the Dura opinionÂ was issued.Â Without looking carefully at the Dura language one more time, I had to hold off on answering the question.Â Has anyone else thought about this point?Â (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. . . .