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No Deep Pockets to Bail Out Losing Stock Owners
Description Accounting firm allowed dubious, but acceptable, financial calculations to be used in audit statements of public firms. When company collapsed, stockholders sued accounting firm. Appeals court held there was no proof of causation between the accounting statements and the losses investors incurred, so no securities fraud. (Updated 10-3-97)
Topic Securities Law
Key Words 10b-5 Fraud; Causation
C A S E   S U M M A R Y
Facts Deloitte and Touche conducted audits of financial statements of Koger Properties, a commercial real estate firm listed on the New York Stock Exchange. The audit statements were included in Koger’s annual reports and in its 10-K filings with the SEC. Deloitte and Koger disagreed about certain accounting practices, but Deloitte usually allowed the statements to go forward as Koger preferred, which made the company position appear more favorable. When problems with Koger began to become known, its stock price quickly collapsed. Robbins and others sued for damages under Rule 10b-5. Deloitte became the sole defendant. "Plaintiffs claimed that Deloitte misled investors into thinking that [Koger's] cash flow was sufficient to support its dividend. As a result ... the price of the stock was ‘artificially inflated.’" Verdict against Deloitte for $81 million. “Deloitte moved for judgment as a matter of law, contending that plaintiffs had failed to prove the loss causation element of a Rule 10b-5 claim.” The district court denied the motion, holding Deloitte's material misrepresentations and omissions to be a proximate cause of the loss. Deloitte appealed.
Decision Reversed. "To prove loss causation, a plaintiff must show ‘that the untruth was in some reasonably direct, or proximate way responsible for his loss.’" It does not have to be the sole cause of the loss, but must be "a significant contributing cause." Here, “plaintiffs "may have offered sufficient evidence for a reasonable jury to conclude that Deloitte's misrepresentations artificially inflated the price of stock during the class period. This showing of price inflation, however, does not satisfy the loss causation requirement." We "require proof of a causal connection between the misrepresentation and the investment's subsequent decline in value." The decline in stock price was not shown to be linked to Deloitte's misrepresentations.
Citation Robbins v. Koger Properties, 116 F.3d 1441 (11th Cir., 1997)

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