Re: Court Allows Some Claims To Proceed Against Bond Fund
- FundLaw readers also might be interested in my 2008 article, Dura, Loss Causation, and Mutual Funds: A Requiem for Private Claims? 76 Cin. L. Rev. 559 (2008), the reasoning of which is reflected by the Schwab order. My article explains, in part, that loss causation in the mutual fund context must be broader than the price-drop theory because a mutual fund's share price is fixed it cannot drop in response to the correction of a misstatement. A strict application of the price-drop theory generally would make it impossible for a mutual fund shareholder to bring a '33 Act claim, a position that I argued courts would be unlikely to adopt. In the market timing MDL 2008 decision, and now in the Schwab decision, courts have agreed that a strict price-drop theory does not make sense in the mutual fund context. For those interested in an early 10b-5 approach to loss causation in the mutual fund context, see Siemers v. Wells Fargo & Co., No. C 05-04518 WHA, 2007 WL 760750 (N.D. Cal. Mar. 9, 2007); Siemers v. Wells Fargo & Co., No. C 05-04518 WHA, 2006 WL 2355411 (N.D. Cal. Aug. 14, 2006).
President and Founder
Associate Professor of Law
University of Mississippi School of Law
--- In FundLaw@yahoogroups.com, "david_geffen_dechert_com" <david.geffen@...> wrote:
> In my forthcoming article, A Shaky Future for Securities Act Claims
> Against Mutual Funds, 37 Sec. Reg. L.J. ___ (Spring 2009), I
> anticipated that some courts would erroneously apply the more-
> flexible Rule 10b-5 loss causation standard. This appears to be what
> happened in Schwab, which cites only Rule 10b-5 loss causation
> When pleading loss causation, a Rule 10b-5 plaintiff does not have to
> claim that a misstatement was the sole cause of a plaintiff's losses;
> rather, liability attaches if the losses were foreseeable and arose
> due to the "materialization of the concealed risk." This is the
> Schwab approach, citing the Rule 10b-5 case, Lentell v. Merrill Lynch
> & Co., Inc. (2d Cir. 2005).
> The purpose of Securities Act § 11(a) and § 12(a)(2) differs from the
> purpose of Rule 10b-5. Not surprisingly, the measure of damages in
> one regime differs from the measure of damages in the other regime.
> Unlike claims under § 11(a) and § 12(a)(2), Rule 10b-5 claims are not
> constrained by a statutory price-depreciation damages formula. See
> In re Mutual Funds Inv. Litig., 384 F.Supp.2d 845, 867 (D. Md. 2005).
> In Worlds of Wonder Sec. Litig. (N.D. Cal. 1993), a different judge
> (as in Schwab, from the N.D. Cal.) wrote:
> "Rule 10b-5 is a catch-all provision that provides a remedy
> for any misleading conduct made in connection with the purchase or
> sale of securities, provided that the defendant possessed fraudulent
> intent, or scienter. The broad "loss causation" standard applied in
> the Rule 10b-5 cases . . . is judicially created to deter
> fraudulent conduct.
> * * *
> "By contrast, Section 11 is not a fraud provision. Section
> 11 applies to any misleading statements that appear in a prospectus.
> Section 11 does not require the plaintiff to prove fraudulent intent,
> or even negligence, on the part of the defendant. In order to balance
> the harsh, strict liability features of Section 11, Congress
> expressly has limited the damages to those directly caused by the
> defendant's misleading conduct. The remedy and the loss causation
> defense are provided by statute, and stand in stark contrast to the
> judge-made remedy for Rule 10b-5 violations."
> The rationale for a broader, more-flexible remedy in a case of fraud
> does not carry over obviously to a case of strict liability or
> negligence. See Herman & MacLean v. Huddleston, 459 U.S. 375, 386-
> 388 & n.22 (1983). Furthermore, the differences between a scienter-
> based fraud regime and a strict-liability or negligence-based regime,
> including the regimes' different allocations of burden of proof,
> militate against facilely importing the more-flexible Rule 10b-5 loss
> causation standard to claims under Securities Act § 11(a) and § 12(a)
> (2). Nevertheless, I fear that this is what the Schwab court did,
> without explanation.
> David Geffen
> Dechert LLP
> 200 Clarendon Street, 27th Floor
> Boston, MA 02116
> tel 617.728.7112
> fax 617.275.8368