                             UNITED STATES DISTRICT COURT
                             FOR THE DISTRICT OF COLUMBIA

DANA ROSS, Individually and on Behalf
                                   )                    Civil Action No. 1:07-CV-00402
of Others Similarly Situated       )
                                   )
            Plaintiff,             )
                                   )
                                   )                    MEMORANDUM OPINION AND
      v.                           )                    ORDER
                                   )
WILLIAM L. WALTON, PENNY F.ROLL,)
JOAN M. SWEENEY, and               )
ALLIED CAPITAL CORPORATION.        )
                                   )
            Defendants             )
__________________________________ )


                                             Introduction

       Presently before the Court is Defendants’ Motion to Dismiss Plaintiffs’ First Amended

Complaint. Defendants argue the Complaint ought to be dismissed under Federal Rules of Civil

Procedure 12(b)(6) and 9(b) on the following four grounds: (1) Plaintiffs fail to plead

particularized facts to show that any defendant misstated or omitted a material fact; (2) even

assuming a material misstatement or omission had been pled, Plaintiffs have not satisfied their

burden under the Private Securities Litigation Reform Act (PSLRA) 15 U.S.C. § 78u-4(b)(1) to

plead particularized facts that defendants acted with scienter, or an intent to deceive; (3) Plaintiffs


                                                  -1-
fail to show real economic damages or loss causation; and (4) Plaintiffs cannot establish

secondary liability because they have not pled that any individual defendant was either a “control

person” or a “culpable participant” in a securities fraud context.

        On April 24, 2009, the Court held a hearing on the matter and is prepared to rule on

Defendants’ Motion.

                                       Factual Background

        This case presents a class action lawsuit on behalf of purchasers of the common stock of

Allied Capital Corporation (Allied) between November 7, 2005 and January 22, 2007, inclusive

(the “Class Period”). Plaintiffs request remedies under the Securities Exchange Act of 1934 (the

“SEA”) within the scope of the PSLRA.

        Allied is a business development corporation with headquarters located in Washington,

D.C. Amended Class Action Complaint (Complt.) ¶ 2. Defendants William L. Walton, Penni F.

Roll and Joan M. Sweeney are or were officers and/or directors of Allied. Complt ¶ 17. Allied

manages and participates in the operation of certain “portfolio companies” which include

unconsolidated subsidiaries. Id. at 2. Allied finances the portfolio companies through debt

financing in the form of senior loans, second lien debt, and subordinated debt. Id.

        One such portfolio company is Business Loan Express (“BLX”), which deals in small

business loans guaranteed under the U.S. Small Business Administration’s (SBA) Section 7(a)

Guaranteed Loan Program. Id. at ¶ 3. BLX and its predecessors were largely owned by Allied

since on or about the year 2000. Id. Patrick J. Harrington (“Harrington”) was the Executive

Vice President of BLX’s Troy, Michigan branch office from January 1, 2000 until September 8,

2006.   On January 9, 2007, an indictment against Harrington was unsealed in Federal District


                                                 -2-
Court in Detroit, Michigan (the “Harrington Indictment”). Id. ¶ 10.     The Harrington Indictment

concerned at least 76 fraudulently originated SBA guaranteed loans with a value of

approximately $76,869,200. Id. ¶ 11. On January 11, 2007, Allied issued a press release

concerning the Harrington Indictment. Consequently, Plaintiffs allege, the Company’s stock

price fell closing at $29.40, falling more than $2.00 per share from its previous day’s close of

$31.58 per share. Id. ¶ 13. The stock was traded more than 5 million shares, ten times its average

daily trading volume of approximately 500,000 shares. Id.

       Plaintiffs allege that throughout the Class Period, Defendants knowingly or recklessly

failed to disclose that Allied’s financial condition was inflated, because a substantial amount of

the income reported by BLX was from fraudulently procured SBA backed Section 7(a) loans. Id.

at ¶ 4. Further, Plaintiffs claim that Defendants misrepresented the nature and scope of the

government investigations of both Allied and BLX, by failing to disclose U.S. Attorney’s and

SBA Office of Inspector General’s (“SBA-OIG”) investigations in the Eastern District of

Michigan concerning the lending activities of BLX’s Troy, Michigan office.

    Essentially, Plaintiffs allege that Defendants knew of, or were reckless in not knowing, the

fraudulent loan origination practices at BLX through the following: (1) discovery demands made

by the U.S. Attorney’s Office not later than December, 2004; (2) letters provided to Allied’s

board not later than March 11, 2005 by an investment firm; (3) government interviews and

testimony provided by Allied and BLX employees, including grand jury testimony by a BLX

principal in October of 2005; and (4) Defendants’ managerial involvement in BLX. Id. ¶ 5.

Plaintiffs argue that Allied set forth optimistic and inflated projections (misstatements) despite the

fact that they were the result of fraudulent loan practices at BLX.


                                                 -3-
       Subsequent to filing Defendants’ Motion to Dismiss, Harrington pled guilty in U.S.

District Court for the Eastern District of Michigan to a two count superceding indictment for

conspiracy to defraud the United States and making false declarations to a grand jury. See

Defendants’ Notice of Supplemental Authority p.2 [Doc. No. 35], United States v. Harrington,

06-cr-20662 (E.D. Mich. 2008). In a sentencing memorandum, Harrington’s attorney represents

that the Government sought to implicate the senior managers at BLX, by way of Harrington,

suggesting a possible significant reduction in his sentence. Id. (Exhibit 2). However, Harrington

could provide no assistance to the Government. In support, Harrington provided a privately

administered polygraph examination which indicated he was telling the truth that no one above

him at BLX knew or was involved in his fraudulent activities. Id. Ultimately, Harrington was

sentenced to 120 months in prison and ordered to pay $30 million in restitution to BLX. Id.

(Exhibit 3, Court’s Sentencing Memorandum).

                                              Standard

       Rule 12(b)(6) of the Federal Rules of Civil Procedure allows dismissal of a complaint if

plaintiffs fail “to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). In Bell

Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), the Supreme Court clarified the standard of

pleading that plaintiffs must meet in order to survive a motion to dismiss under Rule 12(b)(6).

The Court noted that “Federal Rule of Civil Procedure 8(a)(2) requires only ‘a short and plain

statement of the claim showing that the pleader is entitled to relief,’ in order to ‘give the

defendant fair notice of what the ... claim is and the grounds upon which it rests[.]’ “ Id. at 555

(quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)); see also Aktieselskabet AF 21 v. Fame Jeans

Inc., 525 F.3d 8, 15 (D.C.Cir.2008). Although “detailed factual allegations” are not necessary to


                                                  -4-
withstand a Rule 12(b)(6) motion to dismiss, to provide the “grounds” of “entitle[ment] to relief,”

plaintiffs must furnish “more than labels and conclusions” or “a formulaic recitation of the

elements of a cause of action.” Bell Atlantic Corp. v. Twombly, 550 U.S. at 555; see also Papasan

v. Allain, 478 U.S. 265, 286 (1986). The Court stated that there was no “probability requirement

at the pleading stage,” Bell Atlantic Corp. v. Twombly, 550 U.S. at 556, but “something beyond

... mere possibility ... must be alleged[ .]” Id. at 557-58. The facts alleged in the complaint “must

be enough to raise a right to relief above the speculative level,” id. at 555, or must be sufficient

“to state a claim for relief that is plausible on its face.” Id. at 570. The Court referred to this newly

clarified standard as “the plausibility standard.” Id. at 560 (abandoning the “no set of facts”

language from Conley v. Gibson). According to the D.C. Circuit, Twombly “leaves the

long-standing fundamentals of notice pleading intact.” Aktieselskabet AF 21 v. Fame Jeans Inc.,

525 F.3d at 15.

        Nevertheless, the Court need not accept inferences drawn by plaintiffs if those inferences

are unsupported by facts alleged in the complaint; nor must the Court accept plaintiffs' legal

conclusions. See Browning v. Clinton, 292 F.3d 235, 242 (D.C.Cir.2002).

Heightened Pleading Requirements under the PLSA.

        Historically, “[t]o state a claim for securities fraud under Rule 10b-5, a plaintiff must

allege that the defendant knowingly or recklessly made a false or misleading statement of material

fact in connection with the purchase or sale of a security, upon which plaintiff reasonably relied,

... proximately causing his injury.” Kowal v. MCI Communications Corp., 16 F.3d 1271, 1276

(D.C. Cir 1994). Congress enacted the Private Securities Litigation Reform Act of 1995

(PSLRA), as a check against abusive litigation by private parties. Under the PSLRA, Congress


                                                  -5-
requires exacting heightened standards of pleading for security fraud cases. The PLSRA requires

plaintiffs to state with particularity both the facts constituting the alleged violation, and the facts

evidencing scienter, i.e., the defendant's intention “to deceive, manipulate, or defraud.” Ernst &

Ernst v. Hochfelder, 425 U.S. 185, 194, and n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976); see 15

U.S.C. § 78u-4(b)(1),(2). The PSLRA's heightened pleading instructions require that any private

securities complaint alleging that the defendant made a false or misleading statement: (1) “specify

each statement alleged to have been misleading [and] the reason or reasons why the statement is

misleading,” 15 U.S.C. § 78u-4(b)(1); and (2) “state with particularity facts giving rise to a strong

inference that the defendant acted with the required state of mind,” § 78u-4(b)(2). Plaintiffs must

also allege facts sufficient to show that the defendants had knowledge that the statements were

false at the time they were made. See Jacobs v. Coopers & Lybrand, L.L.P., No. 97 CIV

3374(RPP), 1999 WL 101772, at *16-17 (S.D.N.Y. Mar. 1, 1999).

                                              Discussion

A. Material Misstatement

        Defendants first argue that Plaintiffs fail to plead a misstatement or omission with

particularity as required by Fed.R.Civ. P. 9(b). Because a claim under § 10(b) involves fraud,

Fed.R.Civ.P. 9(b) requires plaintiffs to plead “the circumstances constituting fraud” with

particularity. To satisfy this requirement, plaintiffs must “state the time, place, and content of the

false misrepresentations, the fact misrepresented and what was retained or given up as a

consequence of the fraud.” Kowal, 16 F.3d at 1278 (citation omitted)1.


         1
           Plaintiff’s claim is based largely on alleged false or misleading statements and
 certifications made by Allied. Generally, projections and statements of optimism are false and
 misleading for the purposes of the securities laws if they were issued without good faith or

                                                   -6-
       Basically, Plaintiffs’ 114 page complaint recites nearly every public statement or

Sarbanes- Oxely certification made by Allied and concludes that each statement was, “knowingly

or recklessly false or misleading” because of the fraudulent loan activities of BLX. However,

Defendants argue, Plaintiffs fail to set forth or allege that Allied knew those representations to be

false at the time they were made. In turn, Plaintiffs allege that in view of a variety of “red flags”

discussed below, Allied “must have known” the statements were misleading. Because any

material misstatement must have been made with some degree of knowledge, the issues

concerning a misstatement and scienter are intertwined.

B. Scienter

       To survive a motion to dismiss a plaintiff must plead facts which give rise to a strong

inference of scienter. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499, 2509

(2007). The Supreme Court defines “scienter” as “a mental state embracing intent to deceive,

manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 & n. 12, 96 S.Ct. 1375,

47 L.Ed.2d 668 (1976). In Tellabs, the Supreme Court defined “strong inference” explaining

that a securities fraud complaint will survive a motion to dismiss under Rule 12(b)(6), “only if a

reasonable person would deem the inference of scienter cogent and at least as compelling as any

opposing inference one could draw from the facts alleged.” 127 S.Ct. at 2510 (emphasis

supplied). Thus, a court examining a complaint's scienter allegations under the PSLRA must




lacked a reasonable basis when made. See In re Trump Casino Sec. Litig., 7 F.3d 357, at 371 (3d
Cir.1993); Roots Partnership v. Land's End, Inc., 965 F.2d 1411, 1417 (7th Cir.1992); Sinay v.
Lamson & Sessions Co., 948 F.2d 1037, 1040 (6th Cir.1991); See also In re Apple Computer
Sec. Litig., 886 F.2d 1109, 1113 (9th Cir.1989), cert. denied, 496 U.S. 943, 110 S.Ct. 3229, 110
L.Ed.2d 676 (1990).


                                                 -7-
“consider the complaint in its entirety, as well as other sources courts ordinarily examine when

ruling on Rule 12(b)(6) motions to dismiss, in particular documents incorporated into the

complaint by reference, and matters of which a court may take judicial notice.” Id. at 2509. The

court must determine whether “ all of the facts alleged, taken collectively, give rise to a strong

inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that

standard.” Id. Finally, when “determining whether the pleaded facts give rise to a ‘strong’

inference of scienter, the court must take into account plausible opposing inferences.” Id. The

foregoing, “inquiry is inherently comparative.” Id. at 2510. The court, “must compare the

malicious and innocent inferences cognizable from the facts pled in the complaint, and only allow

the complaint to survive a motion to dismiss if the malicious inference is at least as compelling as

any opposing innocent inference.” Zucco Partners, LLC v. Digimarc Corp. 552 F.3d 981, 991 (9th

Cir. 2009)( citing Tellabs 127 S.Ct at 2510).


       Because there can be no misleading statement or scienter absent Defendants’ knowledge

of the Harrington Fraud, the question turns on Defendants’ knowledge of the fraudulent lending

activities at BLX at the time the statements were made. Plaintiffs argue that Allied had a duty to

disclose the facts underlying the fraud at BLX and the source and nature of revenues obtained

from BLX. See Memorandum in Opposition to Motion to Dismiss (Opp. Mem.) at 8. Essentially,

Plaintiffs claim that Allied was required to disclose more than it did about BLX which

consequently had a financial impact on the company. Plaintiffs come to the conclusion that

Allied and the individual Defendants knew or must have known of the fraud at BLX at the time

the statements were made. Defendants hotly contest this fact.

       The question becomes intertwined with the issue of whether Plaintiffs adequately pled

                                                 -8-
scienter within the heightened particularity requirement of the PLSRA. Plaintiffs argue that a

strong inference of scienter can arise where the complaint sufficiently alleges that Defendants had

a duty to investigate wrongdoing but failed to do so. See Belizan v. Hershon, 495 F.3d 686, 692

(D.C. Cir. 2007). Defendants made several SEC disclosures regarding the government

investigations of BLX and legal expenses incurred. However, Plaintiffs claim the disclosures

were inaccurate because Allied withheld the underlying facts surrounding the fraudulent loan

originations. Further, Plaintiffs argue that they pled sufficient “red flags” and motive on the part

of Defendants to produce a “strong inference of scienter.” Specifically, Plaintiffs have alleged the

following “red flags” in their Amended Complaint;

       (1)     Allied was named as a defendant (initially as well as ultimately) in several
               lawsuits which included allegations of fraudulent loan practices, ¶¶ 286-
               291;

       (2)     Allied was named as a defendant in an earlier securities class action
               containing allegations of improper valuation of its portfolio company
               [BLX], which was later validated by conclusions drawn following the
               SEC’s investigation, ¶¶ 272-276;

       (3)     Defendants received letters from Greenlight Capital placing the Board on
               notice of fraudulent activities, ¶¶ 284, 285, 292;

       (4)     Defendants were made aware of numerous governmental investigations,
               which involved the production of “millions of pages” of documents by
               Allied, numerous interviews and depositions of current and former
               employees, and legal fees in excess of $30 million all related to business
               practices at BLX, ¶¶ 280-283, 293, 294.


See Opp. Mem., p. 372.


        2
         Plaintiffs also claim that violations of Generally Accepted Accounting Principles
(GAAP) also give rise to a strong inference of scienter. However, violations of GAAP, standing
alone, are insufficient to support § 10(b) cause of action. Securities Exchange Act of 1934, §
10(b), as amended, 15 U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b-5.

                                                 -9-
       Defendants counter that the above “red flags” do not show that Defendants knew of the

Harrington Fraud at the time the events transpired. Defendants argue that all of these facts were

publically known and if they indicated an ongoing fraud at BLX, then presumably the market

would be aware of them as well. A specific allegation of fraud involves a 2005 letter from a Mr.

Einhorn of Greenlight Capital, a hedge fund. Defendants point out that while the letter concerns

BLX it does not specifically implicate Harrington or the Detroit Office3. In addition, Einhorn did

not respond to an invitation to provide support for the allegations. Further, Defendants dismiss

any of his allegations because Einhorn was a short seller of Allied stock with a motive to drive

down the share price4. Defendants state that the other red flags cited by Plaintiffs simply do

nothing to place them on notice of the Harrington fraud.

        The record before the Court demonstrates no compelling evidence that Allied or the

individual defendants knew or “must have known” about Harrington’s fraud. Generally, a vague

assertion that a defendant must have known about the fraud by virtue a position of authority does

not result in a strong inference of scienter. See Orton v. Parametric Tech. Corp., 344 F.Supp.2d

290, 307 (D.Mass.2004); Carney v. Cambridge Tech. Partners, Inc., 135 F.Supp.2d 235, 255


        3
         Defendants note that BLX is one of 140 portfolio companies in which Allied invests
with 53 offices nationwide and approximately 300 employees.
        4
           Defendants provide notice of supplemental authority regarding a case cited in the First
Amended Complaint, claiming Plaintiffs relied upon allegations made in a federal False Claims
Act suit, United States ex rel. Brickman & Greenlight Capital v. BLX, LLC, No. 1:05 CV 3147
(JEC) (the “Brickman Action”), brought by two short-sellers of Allied stock. Defendants point
out that on December 18, 2007, Judge Carnes, noted that the plaintiffs were short-sellers of
Allied, and that they had simply aggregated and republished already-public information, which
is insufficient to confer jurisdiction under the FCA, and dismissed the Complaint with prejudice.
The case was dismissed on jurisdiction issues and did not resolve the factual disputes.

                                               -10-
(D.Mass.2001). Additionally, a § 10(b) case cannot be sufficiently supported by facts which

constitute mere negligence. See Leasco Corp. v. Taussig, 473 F.2d 777, 785 (2d Cir.1972).

        The Court agrees with Defendants that Harrington had every motivation to implicate his

superiors in BLX and yet failed to do so. The sentencing court ordered Harrington to pay

restitution to BLX in the amount of $30 million. Certainly this judicial determination would not

have been made had BLX acted with knowledge of the fraud. Instead, BLX was determined to be

the primary victim of Harrington’s fraud. The Supreme Court held that the “strong inference” of

scienter required for a § 10(b) claim “must be more than merely plausible or reasonable-it must

be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs

127 S.Ct. at 2504-05. The foregoing judicial determinations create a plausible opposing

inference that Defendants had no knowledge of the Harrington fraud. In other words, because

BLX was significantly damaged by the Harrington fraud a compelling inference arises that it had

no knowledge of such fraud. Additionally, Plaintiffs’ nonspecific “red flags” neither rebut the

inference that Harrington acted alone nor affirmatively demonstrate knowledge on the part of

Allied of the Harrington Fraud at the time it occurred5. None of the red flags proffered by

Plaintiffs contain facts which demonstrate Defendants were aware of the Harrington Fraud prior

to the unsealing of the indictment on January 9, 2007. The Court finds the “red flags” set forth

by Plaintiffs raise neither a cogent nor compelling inference of scienter.

       Consequently, considering all the facts in the Complaint as true, Plaintiffs fail to, “state

with particularity facts giving rise to a strong inference that the defendant acted with the required



        5
         At the hearing Plaintiffs were largely silent on the argument advanced by Defendants
that Harrington’s superiors had no knowledge of his fraudulent activities at BLX.

                                                -11-
state of mind.” Id. at 2501 (quoting 15 U.S.C. § 78u-4(b)(2) (emphasis supplied)).


C. Loss Causation

       Even assuming Plaintiffs met the particularity requirements with respect to scienter, their

Complaint is equally flawed on the issue of loss causation. The Supreme Court's decision in Dura

Pharms., Inc. v. Broudo, 544 U.S. 336, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005) mandates that a

plaintiff must also plead economic loss and “ ‘loss causation,’ i.e., a causal connection between

the material misrepresentation and the loss.6” Id. at 1631. In so doing, Plaintiffs must prove that

they have, “suffered actual economic loss.” Id. At 336.

        Defendants argue that Plaintiffs did not satisfy the pleading requirements for loss

causation. Specifically, they argue Plaintiffs cannot demonstrate loss causation because (1) they

received only “paper losses” normal in the markets, and (2) there was never a “curative

disclosure” which caused a subsequent decline in the price of Allied’s stock7. Def. Mem. at 52-57.

       Plaintiffs disagree and argue that they do not need to sell their shares to adequately plead

loss causation, only that they need to demonstrate that the shares went down when the fraud was

exposed or the truth was exposed by a series of partial disclosures resulting in a subsequent price



        6
        The Supreme Court in Dura Pharmaceuticals rejected the Ninth Circuit's legal
conclusion that, in order to establish loss and causation, a plaintiff need only prove that “the
price on the date of purchase [of the securities at issue] was inflated because of the
misrepresentation.” 125 S.Ct. at 1631 (quotation omitted). Specifically, the Court noted that “as
a matter of pure logic” an artificially inflated purchase price is not by itself an economic loss at
the moment of the transaction as the immediate value of the security is equivalent to the inflated
purchase price. Id.
        7
          Generally, courts may take judicial notice of publicized stock prices without converting
a motion to dismiss into summary judgment. See Ganino v. Citizens Utils. Co., 228 F.3d 154,
167 n. 8 (2d Cir.2000) .

                                                -12-
drop that was causally connected to the truth reaching the market.

        Plaintiffs note that on January 11, 2007, two days after the indictment was unsealed,

Allied issued a press release disclosing the Harrington Indictment. ¶¶ 10, 192. Plaintiffs argue

that as a consequence, Allied’s stock price reacted to this news. “On January 10, the stock opened

at $33.00 per share and closed at $31.58 per share.” See Op. Memo p. 48. “On January 11, the

stock opened at $27.79 per share. Id. The price rose slightly later in the day, following Allied’s

press release, but in the ninety days that followed, it never again closed at a price above $32.00,

and remained at an average trading price of $29.40. Id. Thus, “disclosure of Harrington’s

indictment and its impact on the Company – facts which were not previously disclosed to

investors – indisputably caused the share price to decline and Plaintiffs to suffer their loss.”

(Emphasis Supplied) Id.

        Plaintiffs Rely on In re Royal Dutch/Shell Transp. Sec. Litig., 404 F. Supp.2d 605, 608

(D.N.J. 2005) as rejecting the argument that plaintiffs who hold stock rather than sell

it cannot demonstrate loss causation. Plaintiffs point out that Section 21D(e)(1) of the PSLRA

provides that a private plaintiff’s damages for securities fraud are limited to the difference

between the purchase price paid for the security and the mean trading price of the security during

the 90-day period following disclosure of the fraud. Therefore, Plaintiffs argue, there is no “sell

to sue” rule.

        Defendants apparently concede this point and argue that regardless of whether Plaintiffs

held their stock, it was trading at a profit to the Plaintiffs one month before the Amended

Complaint was filed. Therefore, Defendants argue, if the current value was commensurate with

the purchase price, there can be no loss. In support, Defendants cite Malin v. XL Capital Ltd.


                                                 -13-
2005 WL 2146089 (D.Conn.,2005), (Not Reported in F.Supp.2d, ) (holding that , “a price

fluctuation without any realization of an economic loss is functionally equivalent to the Supreme

Court's rejection of an artificially inflated purchase price alone as economic loss. If the current

value is commensurate to the purchase prices, there is no loss, regardless of whether the purchase

price was artificially inflated.”); In re Estee Lauder Companies, Not Reported in F.Supp.2d, 2007

WL 1522620, N. 5 (S.D.N.Y.,2007) (“economic loss is sustained simply as a result of the fact that

the price of the stock dropped following disclosure is unpersuasive.”).

       Defendants argue that Plaintiffs cannot show that the alleged corrective disclosure (press

release of Harrington Indictment) caused a negative market reaction. To this end, they

demonstrate that after the January 11, 2007 press release, at around 11:00 am the stock enjoyed a

daily gain. Also, Defendants dismiss the January 22 , 2007 letter by Mr. Einhorn as nothing more

than vague and sweeping allegations of publically known facts by a short seller. Regardless,

Defendants state that in the month following Einhorn’s letter the stock value rose 10 percent.

       In Malin, the defendants in a security fraud case set forth evidence that the stock had

returned to the pre-disclosure trading price shortly after the class period ended. Id. at *4. The

Defendants argued that the plaintiff’s allegations were insufficient based on Dura. Id. at *3. The

Plaintiffs responded that all they were required to plead was a causal connection between the

misrepresentation and a price drop. Id. at *4. The Court held that a sale of stock is not necessary

for a plaintiff to plead economic loss. Id. However, the Court did conclude that when the current

value is commensurate to the purchase price there is no loss. Id. ( holding that, “a price

fluctuation without any realization of an economic loss is functionally equivalent to the Supreme

Court's rejection in Dura of an artificially inflated purchase price alone as economic loss.”).


                                                 -14-
        Plaintiffs accurately point out that the, “traditional out-of-pocket loss rule and Section

21D(e) of the PSLRA provide that a purchaser's loss may be calculated by reference to the

amount that the purchaser overpaid and the true value of the securities, a purchaser has not

needed to sell the securities to have suffered or to recover ‘actual damages.’” In re Royal

Dutch/Shell Transport Securities Litigation, 404 F.Supp.2d 605, 610 (D.N.J.,2005). The cases

cited by Plaintiffs all exhibit sharp drops in the stocks value. Plaintiffs provide supplemental

authority in the way of Lorman v. US Unwired, 565 F.3d 228, (5th Cir.2009) (concluding, “that

Rule 8(a)(2) [only] requires the plaintiff to allege, in respect to loss causation, a facially

‘plausible’ causal relationship between the fraudulent statements or omissions and plaintiff's

economic loss, including allegations of a material misrepresentation or omission, followed by the

leaking out of relevant or related truth about the fraud that caused a significant part of the

depreciation of the stock and plaintiff's economic loss.”).

         The Court finds Plaintiffs’ arguments unavailing and the reasoning in Malin and Estee

Lauder instructive. Analogous to Malin, Plaintiffs here argue that all they need to allege is a

facially plausible price drop caused by the misrepresentation. However, the Court is unaware of

any authority in which actual economic loss was found when the stock value returned to pre-

disclosure prices and could have been sold at a profit just after the class period.

        It appears undisputed that on at least three occasions in June 2007 each Plaintiff could

have sold the stock at a profit8. The Court agrees with Defendants that, while a sale of stock is

not necessary, if the stock’s value was commensurate to the pre-disclosure trading price after the



         8
         The highest purchase price paid by any Plaintiff was $32.50. The Stock was trading
 above this amount on June 4-7, 11, 12, and 22, 2007. See http://finance.yahoo.com/

                                                  -15-
close of the class period could have been sold at a profit, the “actual economic loss” contemplated

in Dura is precluded. Further, Dura requires that a plaintiff show that it was this revelation that

caused the loss and not one of the “tangle of factors” that affect price9. Id. at 343, 125 S.Ct. 1627.

       Section 21D(e) of the PSLRA serves as a model for the Courts to calculate damages and

provides in relevant part as follows:

       In any private action ... in which the plaintiff seeks to establish damages by
       reference to the market price of a security, the award of damages to the plaintiff
       shall not exceed the difference between the purchase or sale price paid or received
       ... by the plaintiff ... and the mean trading price of that security during the 90-day
       period beginning on the date on which the information correcting the misstatement
       ... is disseminated to the market.

Codified at 15 U.S.C. § 78u-4(e)(1).

       Plaintiffs argument that Section 21D(e) provides a presumption of a causal connection is

misplaced. Any conclusion otherwise would “automatically supply the causation element to all

securities plaintiffs”, contravene Dura which mandates a judicial inquiry into the causation

element. In re Intelligroup Securities Litigation, 468 F.Supp.2d 670, 697 (D.N.J. 2006).

Logically, a plaintiff can not demonstrate the amount the purchaser overpaid if the stock value

rose greater than the purchase price on multiple occasions. Indeed, Plaintiffs’ authority is

distinguished in that it bears the common thread of a “significant” decline in stock value not

present in the case at bar. See Lorman v. US Unwired, 565 F.3d 228, 262 (5th Cir.2009) (finding

the Complaint linked a series of disclosures to a, “significant stock price drop from $4.94 to

$0.90"); In re Royal Dutch/Shell Transport Securities Litigation, 380 F.Supp.2d 509, 556



        9
         The stocks fluctuation in value may well belie a causal connection between the loss and
misrepresentation. However, such a determination would raise factual issues precluding
adjudication on a Rule 12 motion to Dismiss.

                                                 -16-
(D.N.J.,2005) (( finding the complaint detailed the announcements impact and subsequent drop in

stock price) as amended by In re Royal Dutch/Shell Transport Securities Litigation, 404

F.Supp.2d 605 (D.N.J.,2005)).

       Consequently, the Court finds that even under the Rule 8(a)(2) “facially plausible”

standard, Plaintiffs cannot demonstrate economic loss beyond a simple fluctuation in value or, at

best, an artificially inflated purchase price, specifically rejected by Dura .

                                             Conclusion

       After considering the prescriptions set forth in Tellabs, the Court finds that Plaintiffs

failed to plead scienter with particularity. Further, Plaintiffs fail to set forth facts demonstrating

actual economic damages within the context of loss causation as required by Dura. Consequently,

it is unnecessary to address the issue of control person liability.

       Accordingly, IT IS ORDERED that Defendants’ Motion to Dismiss Plaintiffs’ First

Amended Complaint [Doc. No. 20] is GRANTED.

       The Clerk of Court shall enter judgment in favor of Defendants and notify the parties of

the making of this Order.


               DONE and DATED this 4th day of November, 2009




                                                      /s/ Jack D. Shanstrom
                                               ________________________________
                                               Jack D. Shanstrom
                                               Senior United States District Judge




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