By: Devin F. Ryan
The federal courts have construed section 10(b) of the Exchange
Act and its regulatory counterpart, Securities and Exchange
Commission Rule 10b–5, as collectively establishing a private right
of action for fraud and misrepresentation under the federal
securities laws. Litigants alleging a violation of these
general antifraud provisions confront a Homeric dilemma as they
attempt, often unsuccessfully, to navigate the waters between the
statutory Scylla and Charybdis embodied in the loss causation
requirement forged under section 21D(b)(4) of the Private
Securities Litigation Reform Act of 1995 (the “PSLRA”) and the
inquiry notice trigger that commences the running of the antifraud
provisions’ statute of limitations.
Recently, in Lentell v. Merrill Lynch & Co., Judge
Dennis Jacobs, writing for a unanimous panel of the United States
Court of Appeals for the Second Circuit, clarified two frequently
litigated aspects of the PSLRA. In affirming, though
reversing in part, the district court’s dismissal of two
consolidated securities fraud class actions, the Second
Circuit: (1) clarified that only detailed information
relating directly to the alleged misrepresentations and omissions
of the defendant will trigger the inquiry notice provision
applicable to the statute of limitations and, more notably, (2)
elucidated prior circuit opinions dealing with the elusive and ever
fluid concept of loss causation, providing hornbook-like guidance
on the Second Circuit’s stringent standard for pleading loss
causation, especially in suits premised on analysts’ conflicts of
interest. Lentell was immediately touted as “‘a very
significant decision for the securities litigation bar.’”
This Comment critically examines the decision, focusing on the
circuit’s meticulous analysis of both inquiry notice and the loss
causation requirement.
It is submitted that the Second Circuit’s decision in
Lentell bolsters the already Sisyphean task of pleading
securities fraud under the PSLRA, especially for claims based
solely on analysts’ conflicts of interest. In doing so, the
Second Circuit advanced Congress’s statutory intentions in drafting
the PSLRA a decade ago—curbing abusive private securities
litigation—rather than averting the clear congressional mandate as
other circuits had done. This Comment argues that
Lentell’s precedential value lies in its clarification of
the murky waters surrounding the circuit’s narrow reading of the
loss causation standard that were muddied, in part, by other Second
Circuit decisions. The circuit reconfirmed that a
fact-specific inquiry into the causal link between the fraud and
the drop in price is still an indispensable touchstone of pleading
securities fraud. As a result of the Lentell court’s
analysis, the circuit reset the benchmark of its loss causation
pleading standards to the heightened level originally intended by
Congress under the PSLRA. Additionally, although of somewhat
lesser jurisprudential import than the circuit’s tutorial on loss
causation, Lentell reemphasized that generalized “storm
warnings” of market-wide research analysts’ conflicts do not
trigger the statute of limitations’ inquiry notice provision.
Lentell will unquestionably increase the mortality rate
for securities fraud cases still lingering on the federal docket,
especially those premised on analysts’ conflicts. Moreover,
Lentell arguably “paved the way for the Supreme Court’s
opinion in Dura Pharmaceuticals,” where the circuit split
over the proper loss causation requirement was recently laid to
rest.