There is currently a split among US Circuit courts on the requirements to plead loss causation in shareholder class actions. Some circuits require plaintiffs to plead that there was a price decline associated with the fraud or its disclosure. Others require plaintiffs to plead only that the stock price was inflated at the time of purchase. In this paper, NERA Senior Vice President Dr. David Tabak argues that the resolution of the issue affects not only how loss causation must be pled, but also the measurement of damages. Moreover, consideration of the analyses in damage calculations may inform the question of the requirements for pleading loss causation.

In the paper, he argues that two steps—overpayment on purchase and a price decline due to the fraud or its disclosure—are generally needed for a plaintiff to have a damage claim. If a plaintiff fails to purchase the stock in question while its price is inflated, she has no standing to bring a suit. In addition, if the plaintiff purchases and resells a share, she has no damage claim if the effect of the misrepresentation on the stock price was unchanged between the time of purchase and the time of sale. For example, if the plaintiff overpaid by $40 on purchase and then sold her share and received $40 in excess proceeds (proceeds above the true value of the stock), on net she has not been harmed by the fraud. Thus, for a plaintiff to have a damage claim, she will ultimately have to prove both that she purchased the stock at an inflated price and that the effect of the fraud declined between the times of her purchase and her sale.

The paper also discusses how the loss causation concept has been applied in cases of securities fraud. Dr. Tabak argues that for a loss causation pleading requirement to be meaningful for most cases, plaintiffs would have to explicitly argue that the price of the stock they purchased declined as a result of the fraud and at least implicitly allege that there was an inflation at the time of purchase. He further discusses how these requirements should affect the measurement of damages.