Rediscovering the Economics of Loss Causation


Abstract This article explores the economic principles and theories underlying loss causation in the context of securities fraud litigation. It explains the difference between “investment loss” and recoverable “inflationary loss” and posits that the latter consists of the difference between inflation in stock prices caused by the fraud at the time of purchase and inflation in the price at the time of sale. It reviews scenarios in which inflationary loss due to fraud may occur and would be recognized as a matter of economic theory as well as a matter of law. It urges that Dura v. Broudo Pharmaceuticals, 125 S. Ct. 1627 (2005), did not change these fundamental premises, but that pleaders may need to be far more specific in pleading loss causation and in clarifying these principles, as a result of the Supreme Court’s opinion in that case.


Banking and Finance Law | Economics | Law and Economics | Securities Law | Torts

Date of this Version

December 2005