Alleging Fraud in a Financial Crisis: The Second Circuit Articulates a Less Stringent Pleading Standard for Loss Causation:
Loss causation has emerged as a central obstacle to post-financial-crisis fraud cases. The loss causation element of a fraud claim requires plaintiffs to show, in addition to detrimental reliance, that the facts or circumstances concealed by a fraudulent statement caused an ascertainable portion of their losses. In the aftermath of the 2008 financial crisis, plaintiffs have struggled at times to convince state and federal courts that their losses were caused by the alleged fraud, rather than the larger marketwide downturn. The most challenging cases have arisen from losses in asset classes that experienced a broad-based deterioration in value, such as mortgage-related securities and derivatives. If all assets in a particular class lose value during a financial crisis, how does a defrauded plaintiff distinguish the losses attributable to the fraud, as opposed to the crisis?
Two recent decisions out of the Second Circuit Court of Appeals have made the task easier for fraud victims. In Financial Guarantee Insurance Co. v. Putnam Advisory Co. and Loreley Financing (Jersey) No. 3 Limited v. Wells Fargo Securities, LLC, the Second Circuit has roundly repudiated strict requirements for pleading loss causation, deferring knotty causation issues out to later stages of the litigation where plaintiffs have the benefit of a more developed factual record. Quinn Emanuel represents the plaintiff in Putnam.
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