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Subprime-Fueled Financial Crisis Was Intervening Cause of Investors? Loss Thereby Precluding Rule 10b-5 Recovery

By Jim Hamilton

Shareholders of a failed bank alleging that the FDIC?s announcement that it was taking over the bank caused the value of their stock to decline did not adequately allege loss causation under Rule 10b-5, ruled a federal judge (ND GA), since they failed to distinguish losses caused by the bank?s alleged misrepresentations and the intervening subprime crisis that wreaked havoc on the banking industry as a whole. Far from establishing that the alleged misrepresentations caaused their loss, the shareholders established instead that the loss was caused by the FDIC?s decision to close the bank due to the effect of the subprime mortgage and financial crises on the bank?s loan portfolio and the value of its real estate collateral. Patel v. Patel, No. 1:09-CV-3684-CAP, July 14, 2011.

When investors? loss coincides with a market-wide phenomenon causing comparable losses to other investors, reasoned the court, the prospect that the loss was caused by fraud decreases, noted the court, and a claim fails when it has not adequately pled facts which if proven would show that he loss was
caused by the alleged misstatements as opposed to intervening events. Even if the defendants? misconduct induced shareholders to make the investment, said the court, if their loss is caused by supervening general market forces or other factors unrelated to that misconduct that operated to reduce the value of the securities, the shareholders are precluded from recovery under Rule 10b-5.

Full post as published by Jim Hamilton's World of Securities Regulation on January 21, 2011 (boomark / email).