Cases & Deals

Lehman Brothers dismissal of securities fraud claims affirmed by Second Circuit

Clients Lehman Brothers Inc.

Jones Day obtained an appellate victory for Lehman Brothers Inc. and two former Lehman research analysts in a federal securities case brought by 37 investors. The investors purchased stock in Sunrise Technologies, Inc., allegedly in reliance on certain analyst reports in which Lehman rated Sunrise stock a "buy." The investors lost over $6.3 million when Sunrise declared bankruptcy in September 2002. Seeking to be made whole for their investment losses, the investors sued Lehman Brothers and the two Lehman research analysts who had opined about Sunrise.

The action, commenced in May 2004 in the Southern District of New York, alleged securities fraud under § 10(b) of the Securities Exchange Act arising from certain opinions in seven Lehman research analyst reports. Jones Day successfully obtained an initial dismissal of the action on the ground of "loss causation," i.e., the complaint contained no allegations of a causal connection between the alleged misrepresentations in the research analyst reports and the economic loss allegedly suffered by plaintiffs, as required by the Supreme Court's decision in Dura Pharmaceuticals, Inc. v. Bruodo, 544 U.S. 336 (2005). Although the plaintiffs amended their pleading, the District Court granted a renewed motion to dismiss because plaintiffs had failed to plead facts necessary to demonstrate that the alleged misstatements or omissions in the analyst reports proximately caused the decline in Sunrise stock price. Joffee v. Lehman Brothers, Inc., 410 F. Supp. 2d 187 (S.D.N.Y. 2006). Plaintiffs appealed to the Second Circuit.

On December 19, 2006, just eight days after hearing oral argument, the Second Circuit affirmed the dismissal of the amended complaint, finding persuasive Jones Day's arguments that plaintiffs had failed to establish the requisite causal connection between the analyst reports and plaintiffs' investment losses. The Court ruled that allegations of artificial stock price inflation were insufficient in light of Dura Pharmaceuticals and that plaintiffs could not demonstrate loss causation because they never alleged that the alleged falsity of the analyst opinions ever was revealed to the public. Furthermore, all the facts that plaintiffs claimed were concealed from them were, in fact, revealed to the market in various public filings.

Previously, Jones Day represented Lehman Brothers and its analysts in connection with an NASD arbitration brought by another investor who claimed to have been misled by the Lehman's analyst reports on Sunrise. Jones Day commenced an action in the Western District of Pennsylvania and obtained an injunction precluding that investor from arbitrating claims that allegedly were "assigned" to him by other Sunrise investors. Then, in the NASD arbitration, Jones Day obtained summary judgment from the Panel on all claims on grounds that (i) the claims were time-barred and, in the alternative, (ii) the claimant could not establish either detrimental reliance or loss causation. Subsequently, Jones Day successfully opposed a motion to vacate that arbitration award in the Western District of Pennsylvania.

Joffee, et al. v. Lehman Brothers, Inc., et al., No. 04 Civ. 3507 (RWS) (S.D.N.Y.); No. 06-0903-CV (2d Cir.)