High Court To Hear Securities Case

In dispute is what standard of evidence can be used to bring a securities litigation case.

Federal Circuit courts are split on the issue, said Lyle Roberts, a securities litigation attorney in Reston, Va., with the law firm of Wilson Sonsini.

One group of federal appeals courts has said that the evidence must show that the alleged misstatement or omissions directly resulted in the stock's decline. Other federal courts have ruled that the alleged misstatement or omission inflated the price of the security and that is all they have to show in the initial submission of the case.

He explained that in securities litigation cases, the allegations presented to the court (the pleading standards) often determine whether the case goes forward or not.

In this case, filed in the U.S. District Court for the Southern District of California, plaintiffs contend that from April 15, 1997, through Feb. 24, 1998, Dura released misleading information about the drug trial performance of one of its drugs, Albuterol Spiros NDA, an asthma medication, and the sales of Ceclor CD, an antibiotic, which the company contended was selling well.

In February, after informing shareholders that sales of Ceclor were not doing as well as thought, the stock fell dramatically. Dura later explained that it had miscalculated the sale volume of the drug. In November, Dura revealed that Albuterol would not get FDA approval.

The plaintiffs contend that Dura inflated the stock price by issuing misleading press releases from 1997 to 1998, concerning the performance of the drugs.

The District Court ruled that the plaintiffs did not show the announced failure of Albuterol had an impact on the price of the stock or that Dura intentionally withheld information on Ceclor sales, and threw out the case.

The U.S. 9 ^th Circuit Court of Appeals in San Francisco reinstated the suit, ruling that a plaintiff's showing that there was misstated information to inflate the price of the stock was enough to bring suit. Dura appealed.

Mr. Roberts said that in other cases decided by the U.S. 2^nd, 3^rd and 11^th Circuits the level of evidence upheld by the 9^th Circuit was found insufficient.

Mr. Roberts noted that it is rare that the Supreme Court reviews security litigation and the Court did so at the urging of U.S. Solicitor General and the Securities Industry Association.

A decision in the case is not expected until the Court's next term that runs from Oct. 2004 to Oct. 2005.

Should the Court decide in favor of the defendants, it could potentially benefit insurers facing D&O claims, insurance executives said.

Often these cases are settled before going to trial because trials are expensive, no one can be certain what a jury will decide, and the alleged damages often far exceed the amount of insurance "and no company can take that risk," noted Kevin LaCroix, president of Genesis Professional Liability Managers, a provider of D&O insurance in Beachwood, Ohio.

He added that insurers pay out in a settlement, no matter what the allegations are, because there was never a finding of fraud.

"It's an important issue," observed Joe Monteleone, vice president of Hartford Financial Products in New York City, a subsidiary of Hartford Financial Group, "but if it brings any change to the market it would be subtle, not dramatic."