This week, the U.S. District Court for the District of Minnesota issued a 39-page order granting summary judgment to the defense on loss causation grounds. On the basis of the court’s loss causation analysis, the court dismissed all of the remaining claims in the case, which arose under Section 10(b) and 20(a) of the 1934 Act. The Court’s ruling is significant because it provides a thorough review of loss causation principles as they apply at the summary judgment stage, as opposed to the pleading stage.
Several aspects of the Retek ruling are important for securities litigators grappling with loss causation issues at the summary judgment and trial phase of a securities case.
First, the Retek decision contains a thorough review of the law pertaining to the “true financial condition” theory and other “indirect” disclosure theories that plaintiffs are increasingly relying upon at the pleading and summary judgment stages of securities class actions. The Retek court notes that many courts have rejected such theories at the summary judgment stage in the absence of admissible evidence that the market perceived the relevant truth, thus triggering the stock drop. In its analysis, the Retek court explains that the fate of such “true financial condition” theories may hinge upon the procedural posture of the case. While Rule 8 requires only a “short and plain statement of the claim,” Rule 56 puts plaintiffs “past the point of placing [defendants] on notice of what plaintiffs intend to prove.” At summary judgment, a plaintiff pressing a “true financial condition” or “indirect disclosure” theory must come forward with specific evidence demonstrating that the public became aware of the relevant truth, as Dura requires. If plaintiffs are allowed to proceed in the absence of such evidence, Dura means nothing at the proof stage.
The decision confirms that loss causation remains a significant hurdle for plaintiffs at the Rule 56 stage, even for plaintiffs who have survived a pleading challenge on loss causation grounds. Three years ago, a key question among securities litigators was how the Supreme Court’s Dura decision would apply at summary judgment and trial. The Retek decision addresses this issue squarely. Earlier in the Retek case, the district court assumed, like the Supreme Court in Dura, that Rule 8’s liberalized standard would apply to loss causation questions at the pleading stage. Accordingly, the plaintiff were able to survive loss causation challenges. However, in this week’s summary judgment ruling, the Retek court explained that pro-plaintiff inferences at the pleading stage no longer apply at summary judgment. At summary judgment, it is evidence that matters.
The Retek court’s loss causation analysis is comprehensive. The court reviews almost every published post-Dura case featuring loss causation arguments at summary judgment or trial. Notably, it appears that most of these cases have broken for the defense. This may not be a coincidence. The latitude that some courts are allowing at the pleading stage on loss causation issues is the result of Rule 8’s relaxed standard, which most courts apply to loss causation questions on the pleadings due to Dura’s “assumption” (stated in dicta) that Rule 8’s notice pleading standard applies. Celotex presents a far stiffer challenge, and serves a gatekeeping function beyond that of Rule 8.
The Retek case illustrates clearly that Rule 8 rulings are not an accurate barometer of the strength of a plaintiff’s loss causation case at summary judgment and trial. While Rule 8’s standard has stiffened in the wake of the Supreme Court’s Twombly decision, weak loss causation cases nevertheless survive pleading challenges on a regular basis. The plaintiff in Retek attempted to rely on the district court’s earlier rulings allowing the case past the pleading stage. However, in the absence of admissible evidence satisfying Dura’s standard, Rule 8 rulings were of little help. Securities litigators on both sides of the aisle should take note. Even where loss causation allegations are sustained on the pleadings, discovery may reveal significant and fatal weaknesses in a “true financial condition” or other “indirect disclosure” theory of loss causation.
The Retek ruling also confirms a key point: the mere existence of competing causation experts will not prevent summary judgment if plaintiffs cannot present sufficient underlying evidence of loss causation. The defendants in Retek put forth Dr. Alan Kleidon of Cornerstone Research to affirmatively show the absence of loss causation. The defense also moved to exclude the testimony of plaintiff’s expert, Scott Hakala. However, the Court found it unnecessary to address the exclusion motion in reaching its conclusion. The Retek court’s approach is consistent with recent rulings by other courts, which have granted summary judgment despite plaintiffs’ proffer of expert testimony.