Academic journal article St. John's Law Review

Yet Another Bough on the "Judicial Oak"1: The Second Circuit Clarifies Inquiry Notice and Its Loss Causation Requirement under the Pslra in Lentell V. Merrill Lynch & Co

Academic journal article St. John's Law Review

Yet Another Bough on the "Judicial Oak"1: The Second Circuit Clarifies Inquiry Notice and Its Loss Causation Requirement under the Pslra in Lentell V. Merrill Lynch & Co

Article excerpt

"October. This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February."2

INTRODUCTION

Mark Twain's timeless quip, coined over a century ago by the sage-like curmudgeon, serves as a fitting prologue to this Comment. Even when viewed through the rose-tinted lenses of hindsight bias3 and with an appreciation of the efficient capital markets hypothesis,4 Wall Street arguably remains the same fickle yet alluring mistress it was when Twain put pen to paper. From time in memorial, echoes of a mantra could be heard from the Street: one person's loss is another's gain.5 The past decade-awash with waves of frenzied, high-risk speculation-was aptly epitomized the era of "irrational exuberance."6 At the risk of sounding profound, the resulting deluge of securities litigation was inevitable, particularly in the area of analyst conflicts of interest. Disappointed investors invoked the securities laws in hope of recouping their losses.

The federal courts have construed section 10(b)7 of the Exchange Act and its regulatory counterpart, securities and Exchange Commission Rule 10b-5,8 as collectively establishing a private right of action for fraud and misrepresentation under the federal securities laws.9 Litigants alleging a violation of these general antifraud provisions confront a Homeric dilemma as they attempt, often unsuccessfully,10 to navigate the waters between the statutory Scylla and Charybdis embodied in the loss causation requirement forged under section 21D(b)(4)11 of the Private securities Litigation Reform Act of 1995 (the "PSLRA")12 and the inquiry notice trigger that commences the running of the antifraud provisions' statute of limitations.13

Recently, in Lentell v. Merrill Lynch & Co.,14 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.15 In affirming, though reversing in part, the district court's dismissal of two consolidated securities fraud class actions,16 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 limitations17 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.18 Lentell was immediately touted as '"a very significant decision for the securities litigation bar."'19 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 litigation20-rather than averting the clear congressional mandate as other circuits had done.21 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. …

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