                                   United States Court of Appeals,

                                           Eleventh Circuit.

                                       Nos. 95-2882, 95-3069.

  Lawrence ROBBINS, C. Alan Peck, George Levy, Max Bloom, Alfred Edwards, Leonard J.
Goldfarb, Milton Stark, Richard Swire, Andrew Mastrangelo, Irving Metzner, Charles Carroll,
Thomas Farber, Vincent R. Scala, Betty R. Ramsey, Sidney Field, Mitchell State, Abraham Galfunt,
Robert I. Shane, Eva Shane, John A. Brooks, Marian J. Brooks, Leander H. Peterson, Herbert J.
Zeiss, Mary Alice Johnson, Howard Perlman, Victor L. Mesaros, R. Bruce Simpson Trust, Plaintiffs-
Appellees,

                                                   v.

KOGER PROPERTIES, INC., Ira M. Koger, Wallace F.E. Kienast, James B. Holderman, Allen
R. Ransom, Defendants,

                             Sol. H. Proctor, Sandra Proctor, Claimants,

                              Deloitte & Touche, Defendant-Appellant,

  American Institute of Certified Public Accountants, Business and Securities Lawyers, Amicus
for Appellant,

           National Association of Securities and Commercial Law Attorneys, Amicus.

                                            July 14, 1997.

Appeals from the United States District Court for the Middle District of Florida. (No. 90-896-CIV-J-
10), William T. Hodges, Judge.

Before COX, Circuit Judge, HILL, Senior Circuit Judge, and VINING*, Senior District Judge.

        COX, Circuit Judge.
                                            I. Introduction

        Deloitte and Touche challenges the district court's denial of its Fed.R.Civ.P. 50(a) motion

for judgment as a matter of law. The district court held that plaintiffs offered sufficient proof of loss

causation to support their Rule 10b-5 claim. We reverse and render judgment in favor of Deloitte

and Touche.

                                               II. Facts1

   *
   Honorable Robert L. Vining, Jr., Senior U.S. District Judge for the Northern District of
Georgia, sitting by designation.
   1
     In reviewing a district court's denial of a motion for judgment as a matter of law, we consider
all of the evidence "in the light and with all reasonable inferences most favorable to the party
        Deloitte and Touche ("Deloitte"), an accounting firm, conducted audits of the 1988, 1989,

and 1990 financial statements of Koger Properties, Inc. ("KPI"), a commercial real estate

construction and management company listed on the New York Stock Exchange. KPI included

these audited financial statements in its 1989 and 1990 Annual Reports and in its 1989 and 1990

Form 10-K filings with the Securities and Exchange Commission ("SEC"). In both the Annual

Reports and the Form 10-K filings, Deloitte represented that, in its opinion, the financial statements

presented fairly, in all material respects, the financial position of KPI in accordance with generally

accepted accounting principles (GAAP).

       The information audited by Deloitte included cash flow figures calculated by KPI for its

fiscal years 1988, 1989, and 1990. KPI calculated its cash flow by subtracting from its operating

revenues costs related to administration, rental property maintenance, interest, and income tax. KPI

generated operating revenue both by leasing properties it developed and by selling such properties.

       In the course of its audits, Deloitte noted problems with the accounting methods utilized by

KPI to calculate cash flow. Specifically, Deloitte and KPI disagreed at times about whether certain

costs should be treated as expenses in a particular year or should be capitalized.2

       For example, in auditing KPI's fiscal year 1988 statement, Deloitte informed KPI that its

capitalization of interest payments was in violation of GAAP. Deloitte initially insisted that KPI

record the amount of the discovered overcapitalizations in the fiscal year 1988 financial statement.
However, Deloitte ultimately approved KPI's fiscal year 1988 financial statement without a full

adjustment for the interest overcapitalization. In addition, throughout the 1989 and 1990 audits,

Deloitte repeatedly identified discrepancies between KPI's capitalization of "lease-up" costs and

GAAP. Nevertheless, Deloitte approved the financial statements as in accordance with GAAP

without requiring a correction. Plaintiffs' expert identified other instances of Deloitte improperly


opposed to the motion." Boeing Company v. Shipman, 411 F.2d 365, 374 (5th Cir.1969). Our
narrative of the facts, therefore, is constructed in such a fashion.
   2
    Capitalizing a cost involves spreading the cost over several years (or "amortizing" the cost),
as opposed to treating the cost as an expense in the year in which it is incurred. Thus,
capitalizing costs paints a more favorable current financial picture than expensing costs.
approving KPI's capitalization of indirect property costs. In the end, all of these overcapitalizations

increased KPI's apparent cash flow.

       KPI derived a significant amount of its 1989 and 1990 operating revenue from sales of

developed commercial properties to Koger Equity ("KE"). KPI owned a twenty percent interest in

KE, and Ira Koger served as chairman and CEO of both KPI and KE. Plaintiffs offered testimony

that reporting gains from these sales as operating revenue violated GAAP. In 1991, the SEC required

KPI to restate these gains as financing activities, not as operating revenue. These misstated

revenues, like the overcapitalizations, increased KPI's apparent cash flow in 1989 and 1990.

       During the 1990 audit, Michael Goodbread was a partner at Deloitte with responsibility for

the KPI audit. Goodbread owned KPI stock during part of the 1990 audit. This ownership was a

violation of generally accepted accounting standards (GAAS). Goodbread did not work at Deloitte

during the 1989 audit.

       KPI consistently paid nearly all of its cash flow out in the form of quarterly stockholder

dividends. Thus, by overstating its cash flow, KPI could pay its shareholders higher dividends. The

high dividends were one of the forces behind KPI's stock price. Deloitte, however, never stated that

KPI's dividend could continue to be paid. (R.30 at 99.)

       According to KPI's 1990 Form 10-K, although the percentage of revenues generated from

its leasing operations steadily declined from 1988 through 1990, KPI's quarterly dividend increased

throughout this period from $.625 to $.70 per share. Thus, the dividend was increasingly sustained

by sales of real estate and was a non-taxable return of capital. Concomitantly, the price of KPI stock

steadily declined from 1988 to 1990, from a high of $27.38 in the first quarter of 1988 to $21.13 on

June 25, 1990. In the face of a rising dividend, this decrease in stock price meant that KPI's

dividend yield rose substantially, from around 10% in July 1989 to over 15% in September 1990.

Moreover, this 15% yield was completely non-taxable.

       On September 28, 1990, Standard and Poor's downgraded KPI's credit rating, stating that

"[t]he company's continued increases in debt and declining equity base are concerns in light of the

deteriorating real estate environment." (DX247-C.)
       With rumors of a dividend cut swirling, on September 30, 1990, KPI's board of directors

decided to cut KPI's future quarterly dividend from seventy cents per share to twenty-five cents per

share. The cut took effect after KPI paid a seventy cent dividend it had declared on August 7, 1990.

As revealed in the minutes of the board meeting, the board was motivated to reduce its dividend, a

form of cash outflow, by a perceived decrease in the availability of future real estate financing. Such

financing was necessary if KPI was to continue to sell developed properties and pay the dividend

those sales supported. Moreover, the board expressed concern that the current dividend was hard

to justify given the recent declines in KPI's stock price.

       The dividend cut was announced officially in a press release on October 1, 1990. The press

release stated that "[t]here has been no decline in the cash flow of Koger Properties." (DX 253.)

Following this announcement, KPI's stock price fell to an average price of $8.20 between October

1 and October 5, down from an average price of $18.25 between September 11 and September 17,

a difference of $10.05. It was not until sometime in 1992, according to plaintiffs' expert, that it was

discovered that the audited financial statements were false. (R.30 at 48, 83.) Following this

discovery, KPI charged an adjustment of over $100,000,000 to its balance sheet. (Id.)

                                       III. Procedural History

       Lawrence Robbins filed this action on October 1, 1990, against KPI and several individual

defendants seeking certification of a plaintiff class under Fed.R.Civ.P. 23 and damages under section

10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated

thereunder, 17 C.F.R. § 240.10b-5. In January 1991, plaintiff filed an amended complaint adding

more named plaintiffs and including Deloitte as an additional defendant. In February 1993, the

district court certified a plaintiff class composed of all purchasers of KPI common stock from July

5, 1989, through and including October 1, 1990. KPI and the individual defendants were later

dismissed at plaintiffs' request, leaving Deloitte as the sole defendant.

       During a nineteen day trial in February and March of 1995, plaintiffs presented their claims

to a jury. Plaintiffs claimed that Goodbread's ownership of KPI stock during the 1990 audit

impaired Deloitte's ability to act as an independent auditor and that Deloitte, in each of the audits
in question, approved capitalizations and statements of operating revenue that it knew were in

violation of GAAP. (R.15-352 at 3-5; R.43 at 182-84.) Plaintiffs claimed that Deloitte misled

investors into thinking that KPI's cash flow was sufficient to support its dividend. (R.15-352 at 5.)

As a result, members of the plaintiff class suffered damage when they purchased KPI stock during

the class period because the price of the stock was "artificially inflated." (R.15-352 at 6; R.2-41

at 11; R.43 at 187.)

       As proof of the amount of artificial inflation, plaintiffs offered the testimony of its damages

expert. To demonstrate damages, this expert assumed that KPI would have had to cut its dividend

at the beginning of the class period had KPI's financial statements been corrected to eliminate the

incorrect statements of cash flow. (R.30 at 49-50.) The expert then looked to the decline in the

price of KPI stock that occurred after the October 1990 dividend cut—on average $10.05 per

share—as a reasonable indicator of the amount that KPI stock would have dropped had the dividend

been cut at the beginning of the class period. (R.30 at 49-57.) Therefore, according to this expert,

plaintiffs overpaid $10.05 per share for their KPI stock. (R.30 at 49-50.) Plaintiffs did not claim

that this October 1990 dividend cut resulted from the discovery of any financial statement errors.

(See generally R.15-352; R.2-41.) To show that they relied on Deloitte's misrepresentations,

plaintiffs utilized the fraud on the market theory which presumes that the plaintiff class relied on an

open, well-developed, and efficient market in purchasing KPI stock.

       At the close of the evidence, Deloitte moved for judgment as a matter of law pursuant to

Fed.R.Civ.P. 50(a), contending that plaintiffs had failed to prove the loss causation element of a

Rule 10b-5 claim. The district court denied the motion.

       The jury entered a verdict, by way of a special interrogatory verdict form, finding that

"Plaintiffs suffered damages as a proximate result of [Deloitte's] material misrepresentation and/or

omissions." (R.19-450 at 5.) The jury fixed damages at $10.05 per share and estimated the total

damages for the class at $81,338,647.

       After denying Deloitte's post-trial motions, the district court entered its judgment and order

directing final judgment and retained jurisdiction to supervise the distribution of the award to the
plaintiff class. Deloitte appeals this judgment (appeal 95-2882). At the same time, the district court

certified its judgment, the order directing judgment, and the jury verdict for appeal as involving "a

controlling question of law as to which there is substantial ground for difference of opinion." 28

U.S.C § 1292(b). We granted Deloitte's § 1292(b) petition (appeal 95-3069).3

                           IV. Issue on Appeal and Standard of Review

        We must decide whether the district court properly denied Deloitte's motion for judgment

as a matter of law. Specifically, we must determine whether plaintiffs offered sufficient proof of

loss causation to support their Rule 10b-5 fraud claim.4 We review de novo the denial of a motion

for judgment as a matter of law. See Sherrin v. Northwestern Nat. Life Ins. Co., 2 F.3d 373, 377

(11th Cir.1993). We therefore utilize the same standard the district court utilized in deciding

whether to grant the motion. Under this standard,

       we consider all the evidence, and the inferences drawn therefrom, in the light most favorable
       to the nonmoving party. If the facts and inferences point overwhelmingly in favor of one
       party, such that reasonable people could not arrive at a contrary verdict, then the motion was
       properly granted. Conversely, if there is substantial evidence opposed to the motion such
       that reasonable people, in the exercise of impartial judgment, might reach differing
       conclusions, then such a motion was due to be denied and the case was properly submitted
       to the jury.

Carter v. City of Miami, 870 F.2d 578, 581 (11th Cir.1989) (footnotes omitted). A mere scintilla

of evidence is not sufficient to support a jury verdict. See id.

                                    V. Contentions of the Parties

       Deloitte contends that the district court should have granted its motion for judgment as a

matter of law because plaintiffs did not offer sufficient proof of loss causation as required under

Rule 10b-5. Deloitte argues that a 10b-5 plaintiff must show that a defendant's conduct was the

actual cause of the decline in value of the plaintiff's investment and that plaintiffs here offered no

such proof. Deloitte argues that what might have happened if KPI's cash flow figures had been

adjusted during the class period is irrelevant to the issue of loss causation.

   3
    Given our jurisdiction under § 1292(b), we need not decide whether a judgment that reserves
jurisdiction over distribution of an award to a plaintiff class is an appealable final judgment.
   4
   Deloitte raises several other issues on this appeal. Our disposition of the loss causation issue
obviates the need to discuss these issues.
       Plaintiffs contend that they offered sufficient proof of loss causation. Plaintiffs argue that

Deloitte's improper approval of KPI's financial statements misled investors about the ability of KPI

to maintain its high dividend and thereby artificially inflated KPI's stock price. As evidence of this

price inflation, plaintiffs maintain that an adjustment in the stated amount of cash flow in July 1989,

the beginning of the class period, would have required KPI to cut or eliminate its dividend, causing

a $10.05 decline in KPI's stock price like the decline that occurred in October 1990.

                                           VI. Discussion

        To succeed on a Rule 10b-5 fraud claim, a plaintiff must establish (1) a false statement or

omission of material fact (2) made with scienter (3) upon which the plaintiff justifiably relied (4)

that proximately caused the plaintiff's injury. See Bruschi v. Brown, 876 F.2d 1526, 1528 (11th

Cir.1989). To prove the causation element, a plaintiff must prove both "transaction causation" and

"loss causation." See id. at 1530. "Transaction causation, another way of describing reliance, is

established when the misrepresentations or omissions cause the plaintiff "to engage in the

transaction in question.' " Currie v. Cayman Resources Corp., 835 F.2d 780, 785 (11th Cir.1988)

(quoting Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 380 (2d Cir.1974)). As such,

transaction causation is akin to actual or "but for" causation. Transaction causation is not at issue

on this appeal.

        Loss causation is at issue. To prove loss causation, a plaintiff must show "that the untruth

was in some reasonably direct, or proximate, way responsible for his loss." Huddleston v. Herman

& MacLean, 640 F.2d 534, 549 (5th Cir. Unit A 1981), aff'd in part, rev'd in part on other grounds,

459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983). "If the investment decision is induced by

misstatements or omissions that are material and that were relied on by the claimant, but are not the

proximate reason for his pecuniary loss, recovery under the Rule is not permitted." Id. (citing

Marbury Management, Inc. v. Kohn, 629 F.2d 705, 718 (2d Cir.1980)(Meskill, J., dissenting)). In

other words, loss causation describes "the link between the defendant's misconduct and the plaintiff's

economic loss." Rousseff v. E.F. Hutton Co., Inc., 843 F.2d 1326, 1329 n. 2 (11th Cir.1988).

        Because market responses, such as stock downturns, are often the result of many different,
complex, and often unknowable factors, "the plaintiff need not show that the defendant's act was the

sole and exclusive cause of the injury he has suffered; "he need only show that it was "substantial,'

i.e., a significant contributing cause.' "5 Bruschi, 876 F.2d at 1531 (quoting Wilson v. Comtech

Telecommunications Corp., 648 F.2d 88, 92 (2d Cir.1981)). In other words, plaintiff must show that

"the misrepresentation touches upon the reasons for the investment's decline in value." Huddleston,

640 F.2d at 549. This intermediate approach balances our twin concerns of compensating investors

who have suffered loss as a result of a fraudulent misrepresentation, while at the same time

preventing 10b-5 from becoming a system of investor insurance that reimburses investors for any

decline in the value of their investments. See id.

        Because Rule 10b-5 provides a remedy for fraud in a wide variety of securities transactions,

the loss causation requirement must be applied on a case-by-case basis. In the present case,

plaintiffs may have offered sufficient evidence for a reasonable jury to conclude that Deloitte's

misrepresentations artificially inflated the price of KPI stock during the class period.6 This showing

of price inflation, however, does not satisfy the loss causation requirement. Our cases do not hold

that proof that a plaintiff purchased securities at an artificially inflated price, without more, satisfies


   5
    The distinction between the loss causation requirement and proof of damages is important.
To satisfy the loss causation element, a plaintiff need not show that a misrepresentation was the
sole reason for the investment's decline in value. Ultimately, however, a plaintiff will be allowed
to recover only damages actually caused by the misrepresentation. 15 U.S.C. § 78bb(a). The
proper measure of damages utilizes the out-of-pocket rule: the plaintiff can recover "the
difference between the price paid and the "real' value of the security, i.e., the fair market value
absent the misrepresentations, at the time of the initial purchase by the defrauded buyer."
Huddleston, 640 F.2d at 556. Consequently, as long as the misrepresentation is one substantial
cause of the investment's decline in value, other contributing forces will not bar recovery under
the loss causation requirement. But in determining recoverable damages, these contributing
forces must be isolated and removed. This is often done, as it was here, with the help of an
expert witness. See, e.g., Huddleston, 640 F.2d at 553-554. Proof of damages under the
out-of-pocket rule is not proof of loss causation. Our cases have repeatedly treated loss
causation and damages as involving discrete inquiries. See, e.g., Bruschi, 876 F.2d at 1530-
1532; Huddleston, 640 F.2d at 549-556.
   6
     Plaintiffs made this showing through expert testimony that had these accounting errors come
to light at the beginning of the class period, KPI would have been forced to cut its dividend and
the stock price would have declined. This showing—which essentially established the value of
the investment absent the misrepresentation—was the appropriate proof of damages under the
out-of-pocket rule. The attempt to characterize this testimony as proof of loss causation is
misplaced. See supra note 5.
the loss causation requirement. Some courts have held that "[i]n a fraud-on-the-market case,

plaintiffs establish loss causation if they have shown that the price on the date of purchase was

inflated because of the misrepresentation." Knapp v. Ernst & Whinney, 90 F.3d 1431, 1438 (9th

Cir.1996). See also In Re Control Data Corp. Securities Litigation, 933 F.2d 616, 619-20 (8th

Cir.1991) ("This is a "fraud on the market' case....To             the extent that the defendant's

misrepresentations artificially altered the price of the stock and defrauded the market, causation is

presumed.") But the fraud on the market theory, as articulated by the Supreme Court, is used to

support a rebuttable presumption of reliance, not a presumption of causation. See Basic v. Levinson,

485 U.S. 224, 241-2, 108 S.Ct. 978, 992, 99 L.Ed.2d 194 (1988) ("Because most publicly available

information is reflected in market price, an investor's reliance on any public material

misrepresentations, therefore, may by presumed for purposes of a Rule 10b-5 action."). The theory

was used for this purpose by the plaintiffs in this case. Because the theory supports a presumption

of reliance, it is more closely related to the transaction causation requirement. Our cases have not

utilized the theory to alter the loss causation requirement, and we refuse to do so here. Our decisions

explicitly require proof of a causal connection between the misrepresentation and the investment's

subsequent decline in value. See, e.g., Huddleston, 640 F.2d at 549; Currie, 835 F.2d at 785;

Bruschi, 876 F.2d at 1530-1531. But see Michael J. Kaufman, Loss Causation: Exposing a Fraud

on Securities Law Jurisprudence, 24 Ind. L.Rev. 357, 364 (1991) (incorrectly concluding that "[i]n

application, the [Huddleston ] court allows plaintiffs to recover even when the misrepresentation

does not touch upon the reasons for the investment's ultimate decline in value, so long as the

misrepresentation creates a disparity between the purchase price and the true value of the securities

at the time of the transaction").

       Plaintiffs here offered no evidence of a connection between Deloitte's misrepresentations and

the decline in price of KPI stock throughout the class period or following the October 1990 dividend

cut. In fact, the claims presented to the jury do not attempt to link Deloitte's misrepresentations to

any decline in the value of plaintiffs' investment. Instead, plaintiffs simply claim they paid too

much. But there is no evidence that this price inflation was removed from the market price of KPI
stock, causing plaintiffs a loss. In 1990, the investing public continued to believe that KPI's 1988,

1989, and 1990 cash flow figures were correct and that KPI would not have to adjust its balance

sheet to cover any past errors. Plaintiffs' expert testified that if the market had learned of the

overstated cash flow figures while KPI was operating "the stock would have totally collapsed"—that

is, any price inflation due to Deloitte's misrepresentations was still present after October 1990 and,

therefore, the value plaintiffs lost was not caused by Deloitte's misrepresentations. (R.30-153.) It

was not until 1991 that KPI corrected its past operating revenue figures and not until 1992 that KPI

charged an adjustment for the previous overcapitalizations.

        The minutes of the September 1990 board meeting as well as KPI's financial situation point

to the conclusion that KPI cut its dividend in October 1990 because it was concerned that future

financing would not be available to sustain its sales of properties—not because it discovered that

past accounting errors had overstated its cash flow. No testimony supporting a contrary conclusion

was offered. Thus, no evidence supports a conclusion that Deloitte's misrepresentations were a

substantial cause of the decline in value of plaintiffs' KPI stock. In short, plaintiffs have proven "the

cause of their entering into the transaction in which they lost money but not the cause of the

transaction's turning out to be a losing one." Bastian v. Petren Resources Corp., 892 F.2d 680, 684

(7th Cir.1990).

        For these reasons, we hold that a reasonable jury could not conclude that Deloitte's

misrepresentations were "in some reasonably direct, or proximate, way responsible for [plaintiffs']

loss." Huddleston, 640 F.2d at 549. See also Bennett v. United States Trust Co. of New York, 770

F.2d 308, 314 (2d Cir.1985) (Plaintiffs "fail to establish the necessary loss causation; there is simply

no direct or proximate relationship between the loss and the misrepresentation."). Because plaintiffs

failed to support an essential element of their 10b-5 claim, loss causation, the district court erred in

denying Deloitte's Fed.R.Civ.P. 50(a) motion for judgment as a matter of law. The district court's

judgment is REVERSED, and judgment is RENDERED in favor of defendant.

        REVERSED and RENDERED.
