Washington Journal of Law, Technology and Arts Volume 6, Issue 4 Spring 2011
United States v. Berger: The Rejection Of Civil Loss Causation Principles In Connection With Criminal Securities Fraud
James A. Jones II(fn*)
Abstract
In United States v. Berger, a Ninth Circuit panel declined to apply the civil loss causation principles established by the United States Supreme Court in Dura Pharmaceuticals, Inc. v. Broudo in connection with sentencing in a criminal securities fraud prosecution. The Ninth Circuit declined to follow Second and Fifth Circuit decisions endorsing the application of Dura Pharmaceuticals to criminal sentencing, creating a circuit split. This Article examines this split over how to apply the loss causation principles of Dura Pharmaceuticals in connection with sentencing in criminal securities fraud prosecutions. In addition, this Article discusses the implications of each approach for criminal securities fraud prosecutions, and more specifically, for sentencing.
Table of Contents
Introduction .............................................................................. 274
I. The Supreme Court's Decision in Dura Pharmaceuticals, Inc. v. Broudo .................................................................... 275
II. Application of Loss Causation Principles to Criminal Securities Fraud Sentencing ............................................... 276
A. Loss Under the U.S. Sentencing Guidelines ................... 277
B. The Fifth Circuit's Decision in United States v. Olis ...... 279
C. The Second Circuit's Decision in United States v. Rutkoske ..................................................................... 280
III. The Ninth Circuit Declines to Apply Loss Causation Principles in Connection with Criminal Securities Fraud Sentencing ......................................................................... 281
IV. Implications of the Ninth Circuit's Decision in United States v. Berger .................................................................. 283
Conclusion ................................................................................ 284
Introduction
In 2005, the Supreme Court resolved a circuit split by holding in Dura Pharmaceuticals, Inc. v. Broudo(fn1) that a private plaintiff claiming securities fraud must show both that the alleged fraud was disclosed to the market and the disclosure caused a loss to shareholders, that is, that the share price fell after the defendant's fraud became known. No longer could civil plaintiffs merely allege that the price of a security was inflated on the date of the purchase because of a defendant's misrepresentation. Although the Supreme Court's decision applied to loss calculation in civil securities fraud cases, the Second and Fifth Circuits have since suggested that the loss causation principles described in Dura Pharmaceuticals also apply in sentencing for criminal securities fraud cases.(fn2)
In United States v. Berger, the Ninth Circuit diverged from the Second and Fifth Circuits and held that federal judges need not follow the loss causation principles that apply in private securities actions when calculating the amount of loss for U.S. Sentencing Guidelines purposes in criminal securities fraud cases.(fn3) This ruling could have a profound effect on criminal securities fraud prosecutions in the Ninth Circuit, resulting in sentencing enhancements for defendants in criminal securities fraud cases where "fraud-on-the-market" formed the basis of the shareholders' losses.
This Article explores the Supreme Court's decision in Dura Pharmaceuticals as it applies to loss causation in civil securities fraud cases. This Article then examines the U.S. Sentencing Guidelines a nd the importance of loss calculation in sentence determination. Next, this Article examines the split among the Second, Fifth, and Ninth Circuits in applying the loss causation principles of Dura Pharmaceuticals in connection with sentencing in criminal securities fraud prosecutions. Finally, this Article addresses the implications of each approach on criminal securities fraud prosecutions, and more specifically, on sentencing.
I. The Supreme Court's Decision in Dura Pharmaceuticals, Inc. v. Broudo
In Dura Pharmaceuticals, Inc. v. Broudo, the Supreme Court addressed whether a plaintiff could satisfy the loss causation requirement simply by establishing that the price of the security on the date of purchase was inflated because of the defendant's misrepresentation.(fn4) The plaintiffs were a class of individuals who bought stock in Dura Pharmaceuticals, Inc. (Dura) on the public securities market between April 15, 1997, and February 24, 1998.(fn5) The plaintiffs alleged that during that period, Dura's managers and directors allegedly made false statements regarding the company's profits and prospects for future approval of its products by the Food and Drug Administration (FDA).(fn6)
On February 24, 1998, Dura announced that its earnings would be lower than expected, and the company's shares lost almost half their value in trading the next day.(fn7) Nine months later, Dura announced that the FDA would not approve its new product, resulting in another drop in its share price.(fn8) The plaintiffs argued that they suffered damages by paying artificially inflated prices for Dura securities in reliance on the integrity of the market.(fn9)
The Court recognized that an inflated purchase price in itself does not necessarily equate to or proximately cause the economic loss.(fn10) At the time of initial purchase, the stock still reflects an economic value of the inflated purchase price. If the purchaser sells the stock at that instant, or at...
