YET ANOTHER BOUGH ON THE "JUDICIAL OAK"1: THE SECOND CIRCUIT CLARIFIES INQUIRY NOTICE AND ITS...

"October. This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February."2

INTRODUCTION

Mark Twain's timeless quip, coined over a century ago by the sage-like curmudgeon,

serves as a fitting prologue to this Comment. Even when viewed through the rose-tinted lenses of hindsight bias3 and with an appreciation of the efficient capital markets hypothesis,4 Wall Street arguably remains the same fickle yet alluring mistress it was when Twain put pen to paper. From time in memorial, echoes of a mantra could be heard from the Street: one person's loss is another's gain.5 The past decade-awash with waves of frenzied, high-risk speculation-was aptly epitomized the era of "irrational exuberance."6 At the risk of sounding profound, the resulting deluge of securities litigation was inevitable, particularly in the area of analyst conflicts of interest. Disappointed investors invoked the securities laws in hope of recouping their losses.

The federal courts have construed section 10(b)7 of the Exchange Act and its regulatory counterpart, securities and Exchange Commission Rule 10b-5,8 as collectively establishing a private right of action for fraud and misrepresentation under the federal securities laws.9 Litigants alleging a violation of these general antifraud provisions confront a Homeric dilemma as they attempt, often unsuccessfully,10 to navigate the waters between the statutory Scylla and Charybdis embodied in the loss causation requirement forged under section 21D(b)(4)11 of the Private securities Litigation Reform Act of 1995 (the "PSLRA")12 and the inquiry notice trigger that commences the running of the antifraud provisions' statute of limitations.13

Recently, in Lentell v. Merrill Lynch & Co.,14 Judge Dennis Jacobs, writing for a unanimous panel of the United States Court of Appeals for the second Circuit, clarified two frequently litigated aspects of the PSLRA.15 In affirming, though reversing in part, the district court's dismissal of two consolidated securities fraud class actions,16 the Second Circuit: (1) clarified that only detailed information relating directly to the alleged misrepresentations and omissions of the defendant will trigger the inquiry notice provision applicable to the statute of limitations17 and, more notably, (2) elucidated prior circuit opinions dealing with the elusive and ever fluid concept of loss causation, providing hornbook-like guidance on the second Circuit's stringent standard for pleading loss causation, especially in suits premised on analysts' conflicts of interest.18 Lentell was immediately touted as '"a very significant decision for the securities litigation bar."'19 This Comment critically examines the decision, focusing on the circuit's meticulous analysis of both inquiry notice and the loss causation requirement.

It is submitted that the Second Circuit's decision in Lentell bolsters the already Sisyphean task of pleading securities fraud under the PSLRA, especially for claims based solely on analysts' conflicts of interest. In doing so, the second Circuit advanced Congress's statutory intentions in drafting the PSLRA a decade ago-curbing abusive private securities litigation20-rather than averting the clear congressional mandate as other circuits had done.21 This Comment argues that Lentell's precedential value lies in its clarification of the murky waters surrounding the circuit's narrow reading of the loss causation standard that were muddied, in part, by other second Circuit decisions. The circuit reconfirmed that a fact-specific inquiry into the causal link between the fraud and the drop in price is still an indispensable touchstone of pleading securities fraud. As a result of the Lentell court's analysis, the circuit reset the benchmark of its loss causation pleading standards to the heightened level originally intended by Congress under the PSLRA. Additionally, although of somewhat lesser jurisprudential import than the circuit's tutorial on loss causation, Lentell reemphasized that generalized "storm warnings" of market-wide research analysts' conflicts do not trigger the statute of limitations' inquiry notice provision. Lentell will unquestionably increase the mortality rate for securities fraud cases22 still lingering on the federal docket,23 especially those premised on analysts' conflicts. Moreover, Lentell arguably "paved the way for the Supreme Court's opinion in Dura Pharmaceuticals,"24 where the circuit split over the proper loss causation requirement was recently laid to rest.25

Part I of this Comment begins with an overview of the underlying claims at issue in Lentell and the district court's rationale for dismissing those claims on the pleadings.26 Part II provides a synopsis of the concerns surrounding securities analysts' conflicts of interest as a backdrop for the legal analysis employed by the circuit.27 Part III focuses on the two issues that Lentell illuminated: the inquiry notice provision applicable to the statute of limitations28 and the loss causation requirement under the PSLRA.29 Ultimately, the Comment concludes with the author's forecast of Lentell's weight and moment on pending, and yet to be filed, securities fraud litigation.

I. BACKGROUND

The plaintiffs in Lentell were a putative class of jaded, nonclient purchasers30 who bought shares in certain Internet-related companies during the waning portion of the technology stock boom.31 The defendants were Wall Street titans, Merrill Lynch & Company and Henry M. Blodget, Merrill Lynch's infamous research analyst,32 who published research reports recommending the purchase of shares in certain Internet companies.33 The reports purported to reflect the analysts' opinions on the competitive position of these investments, evaluations of past performance, and projections of estimated future performance.34 Moreover, the reports contained a rating system encompassing both the investment risk and the appreciation potential of the companies in question.35 Of particular analytical significance in the Lentell opinion was the fact that Merrill Lynch's reports indicated the highly volatile level of investment risk for these stocks36 but, nonetheless, forecasted substantial appreciation potential.37 The plaintiffs claimed, inter alia, that the non-disclosure of securities analysts' conflicts of interest led Merrill Lynch to issue "false and misleading reports recommending that investors purchase shares" in these Internet ventures.38 The plaintiffs' calculus, however, erroneously equated the non-disclosure of these conflicts of interest to a violation of federal securities laws' antifraud provisions.39

Presiding over the underlying class actions was the recently deceased Senior Judge for the Southern District of New York, Milton Pollack,40 who was no stranger to this genre of complex securities litigation.41 With his legendary wit,42 Judge Pollack granted the defendants' pre-answer motion to dismiss43 the "two prolix"44 complaints pursuant to section 21D of the PSLRA45 and Rules 12(b)(6)46 and 9(b)47 of the Federal Rules of Civil Procedure, while threatening, but not employing, the use of sanctions.48 In a thorough, forty-three page opinion, the district court dismissed the pleadings mainly for failing to adequately plead loss causation,49 failing to plead fraud with the requisite level of particularity,50 and failing to commence the action in a timely manner.51

On appeal, the circuit held that the actions were timely filed;52 however, it affirmed the underlying dismissal "on the ground that the complaints failfed] to plead that the alleged misrepresentations and omissions caused the claimed losses."53 Paying considerable attention to the "systematic and consistent risk indicator[s]" contained in these research reports,54 Lentell culminates in a succinct tutorial on the second Circuit's loss causation standard in analyst conflict cases.55 The court's tutorial reaffirms and clarifies a line of recent circuit decisions56-Emergent Capital Investment Management, LLC v. Stonepath Group, Inc.;57 Castellano v. Young & Rubicam, Inc.;58 and Suez Equity Investors, L.P. v. Toronto-Dominion Bank59-while casting considerable doubt on the efficacy of one often-criticized second Circuit decision, Marbury Management, Inc. v. Kohn.60

By clarifying the circuit's standard for pleading loss causation, Lentell reserved its place among the long line of prodigious second Circuit decisions wrestling with the construction and application of the federal securities laws. Furthermore, Judge Jacobs' sound opinion reserved his place among the circuit's distinguished securities law jurists, such as Judges L. Hand, Friendly, Feinberg, Meskill, and Winter.

II. OVERVIEW OF SECURITIES ANALYSTS' CONFLICTS OF INTEREST: REGULATORY REFORM, ENSUING ENFORCEMENT EFFORTS, AND A LITANY OF LITIGATION

In the wake of the scandalous corporate debacles and the bursting of the thinly walled Internet stock bubble-even after the promulgation of tomes of disclosure-oriented regulations61-Wall Street appeared more volatile than ever.62 The allegations in Lentell stemmed directly from one of the many hot button topics rearing its ugly head with the implosion of the technology stock bubble: the inherent conflicts of interest under which securities research analysts operate.63 Commentators had long known of the concern that sell-side research analysts issued overly optimistic recommendations of the securities on which they were reporting64 because the analysts were significantly influenced by and wished to curry favor with their firm's investment banking arm, which in turn wanted to attract more business to the firm by having analysts issue positive recommendations of their clients.65 In essence, the analysts did not want to bite the hand of the investment bankers that fed them by issuing less than favorable recommendations of their firm's clients. It was the existence of these cozy, symbiotic relationships between the theoretically independent research analysts and the investment banks, which paid the analysts' steep salaries, that raised many eyebrows.66 Investor frustration influenced the political barometer, which in turn signaled a change in the regulatory sea state.

Congress responded to the hue and cry of thwarted investors and, more importantly, to voters with a rash of regulatory activism.67 The congressional regulatory response also prompted actions from the self-regulatory organizations (SROs),68 such as the New York Stock Exchange (NYSE)69 and the National Association of Securities Dealers (NASD).70

In accord with the ensuing rush of regulatory reform to address these conflicts of interest, New York State Attorney General Eliot Spitzer71 answered the cries of disenchanted investors by making application under the archaic Martin Act72 for an ex parte order enjoining Merrill Lynch from issuing analyst reports and ordering certain disclosures.73 The ensuing investigation and disclosure demands resulted in a $100 million settlement by Merrill Lynch.74 With the scent of blood in the air, Spitzer also sounded the charge in a cooperative effort with the Securities and Exchange Commission (SEC), investigating analyst practices at ten leading Wall Street firms.75 This joint enforcement action yielded a settlement award of $1.4 billion, and drafted a blueprint for shoring the firms' defunct "Chinese walls"76 and for patching the sizeable cracks that undermined the systems that theoretically insulated research analysts from the objectivity-defeating effect of underwriter oversight.77

Eliot Spitzer's adept wielding of the enforcement sword led many investors, or rather their class action lawyers, to file federal securities fraud complaints similar to those in Lentell.78 The gravamen of the allegations in Lentell was based substantially, if not entirely, on Eliot Spitzer's probe into analyst practices at Merrill Lynch.79 As such, the Lentell plaintiffs claimed "that the analyst opinions expressed in the research reports were materially misleading,"80 and that "the analysts misrepresented their true opinions in the reports . . . and did not disclose certain alleged conflicts of interest within the Merrill Lynch brokerage house."81

Although setting forth egregious behavior by Merrill Lynch's analysts, their complaints failed to satisfy the Second Circuit's interpretation of the PSLRA's requirements for adequately pleading actionable securities fraud.82 The following section details the stringent pleading standards-ultimately clarified by Lentell-that are applicable in the torrent of analysts' conflicts cases filed in federal court.

III. THE LENTELL COURT REINVIGORATES AND CLARIFIES THE SECOND CIRCUIT'S REQUIREMENTS FOR TRIGGERING INQUIRY NOTICE AND PLEADING Loss CAUSATION UNDER THE PSLRA

In a legislative attempt to reduce the number of frivolous securities fraud cases and strike suits brought in federal court, Congress proposed instituting considerable statutory hurdles for plaintiff classes seeking relief under the securities laws' antifraud provisions.83 Congress's grand design came to fruition with the passage of the PSLRA.84 This amendment to the Exchange Act advanced Congress's assault on strike suits by placing the following Herculean requirements on plaintiffs pleading a cause of action under section 10(b) and Rule 10b-5:85 (1) a plaintiff must specify each allegedly false statement or omission with particularity;86 (2) a plaintiff must plead and prove that the defendant acted with the requisite state of mind;87 and (3) a plaintiff must plead and prove "loss causation."88 In addition to these arduous pleading obstacles, plaintiffs must contend with the brusque statute of limitations for section 10(b) and Rule 10b-5 claims.89

The circuit's decision in Lentell alleviated much of the academic, judicial, and practicing bar's debate over two critical elements of the PSLRA: the requirements for triggering the inquiry notice provision of the statute of limitations90 and the requisite standard for pleading and proving loss causation in analyst conflict cases.91 The Lentell court's careful analysis of these statutory provisions will hopefully obviate future confusion surrounding their application, not only in the Second Circuit but, moreover, in the various district and circuit courts where Lentell's highly persuasive doctrinal guidance merges with the Supreme Court's recent loss causation pronouncement in Dura Pharmaceuticals.92

A. Inquiry Notice: Lentell Reaffirms that Non-Detailed "Storm Warnings"Are Insufficient To Trigger the Inquiry Notice Provision of the Statute of Limitations

One of the decisive issues on appeal in Lentell was whether the plaintiffs' claims-irrespective of the heightened pleading requirements mandated by the PSLRA-were time-barred under the judicially imposed, one-year statute of limitations.93 The question on appeal focused on whether the plaintiffs were placed on inquiry notice of their fraud claims by the plethora of "judicially-noticeable"94 press coverage concerning analyst conflicts of interest.95 In a painstakingly detailed analysis, the circuit found that the plaintiffs were not placed on inquiry notice of their fraud claims based on generalized, industry-wide "storm warnings" of analyst conflicts reported by the financial press.96 The Lentell court held that more particularized detail, such as issuer-specific data, was required for triggering inquiry notice, but the court cautiously left the requisite level of specificity and detail mostly undefined.97

Although the antifraud provisions did not originally contain an express statute of limitations, the Supreme Court incorporated by reference a one-year statute of limitations to claims brought under section 10(b) and Rule 10b-5 of the Exchange Act.98 The Court borrowed the statute of limitations from section 9(e) of the Exchange Act.99 A plaintiff triggered this brief, one-year statute of limitations by either "obtain[ing] actual knowledge of the facts giving rise to the action,"100 or by being placed on inquiry notice such that "in the exercise of reasonable diligence, [the plaintiff] should have discovered the facts underlying the alleged fraud."101

As in most securities fraud cases, the application of the inquiry notice provision was implicated in Lentell.102 Courts within the second Circuit ran the gamut as to what they deemed to be sufficient inquiry notice to commence running of the statute of limitations.103 The resulting confusion was alleviated, in part, by a series of Second Circuit decisions establishing some consensus on the appropriate level of "notice."104 In the lower court's opinion, however, Judge Pollack found that the Lentell plaintiffs' complaints were time-barred based on the extensive amount of press coverage that analyst conflicts of interest received in the financial press.105 The plaintiffs moved for reconsideration of the district court's dismissal on statute of limitations grounds in light of an influential second Circuit decision, Newman v. Warnaco Group, Inc.,106 which was reported after Judge Pollack rendered his initial decision.107 Yet again, the district court relied on the extensive, although non-stock specific, press coverage of industry-wide analyst conflicts of interest in support of its conclusion that the plaintiffs were placed on inquiry notice of their fraud claims; hence, the district court denied reconsideration of its dismissal on statute of limitations grounds.108

The panel in Lentell, reversing on the statute of limitations grounds, was unwilling to extend the inquiry notice provision with the same breadth that the district court felt was proper.109 Notably, the circuit followed the straightforward analysis employed in Newman and Levitt v. Bear Stearns & Co.,110 which tempered the reach of inquiry notice to only instances where the data '"relates directly to the misrepresentations and omissions' that plaintiffs allege against Merrill Lynch."111 The circuit remarked that the scores of articles cited by the district court in support of its conclusion that inquiry notice was established did not specifically mention either of the Internet companies at issue in Lentell.112 The circuit found it unreasonable to hold that the one-year statute of limitations was triggered for every company recommended in a Merrill Lynch report by press releases generally discussing analysts' conflicts at Merrill Lynch.113 The race to timely file securities fraud complaints would occur at the expense of "the level of particularity in pleading required by the PSLRA,"114 thus thwarting Congress's intent behind drafting the PSLRA.115 Lentell also cautioned that since much of the information relied on in the complaints was discovered as a result of Eliot Spitzer's investigation, the court would not '"punish [a] pleader for waiting until the appropriate factual information [has been] gathered by dismissing the complaint as time-barred.'"116

By clearing away much of the fog that surrounded prior courts' application of inquiry notice, it is submitted that the Lentell court reinserted the oft-missing variables of reasonableness117 and fact-specific inquiry118 back into the inquiry notice equation. Generalized "storm warnings," no matter how prolific, on sweeping, market-wide issues like analysts' conflicts of interests do not place the reasonable investor on inquiry notice of specific instances of securities fraud in the companies in which they hold stock.119 The circuit held that issuer-specific detail is necessary. But what quantum of detail is required?

Regrettably, the Lentell panel skirted this question, providing little guidance on the extent to which the information must be directly related to the alleged fraud before the inquiry notice provision is triggered.120 By warily leaving this follow-up question open-ended, practitioners will inevitably seek further instruction from the bench.121 It seems axiomatic, however, to suggest that each instance of purported securities fraud requires a thorough, fact-specific examination by both counsel and the court to see if inquiry notice was implicated. Yet, this Comment suggests that this seemingly obvious approach is exactly what the Lentell court suggests. Lentell did not impart an inflexible, bright line rule on inquiry notice. Rather, it provided yet another example, albeit a persuasive one, of facts and circumstances surrounding a typical conflicted analyst case that did not satisfy the inquiry notice threshold.

The Second Circuit, via the progeny of decisions following Newman, insists that district courts conduct a careful, factspecific examination of the available information to see if inquiry notice was implicated by way of particularized, issuer-specific data that would place a reasonable investor on inquiry notice of potential securities fraud.122 This Comment posits that Lentell made one of the sizable barriers that Congress erected under the PSLRA-the inquiry notice trigger to the statute of limitations-appear surmountable for similarly situated plaintiffs. Consequently, securities fraud plaintiffs could breathe a sigh of relief-well, at least until they encountered the next arduous hurdle: loss causation.

B. Loss Causation: Lentell Clarifies the Second Circuit's Stringent Standard for Adequately Pleading Loss Causation Under the PSLRA

The second, and more influential, issue on appeal dealt with the hotly contested topic of loss causation.123 The question on appeal essentially turned on whether the pleadings established that the alleged misrepresentations or omissions-Merrill Lynch's failure to disclose its analysts' conflicts of interest-caused the losses suffered by the plaintiffs.124 In holding that the pleadings did not pass muster under the Second Circuit's precedents narrowly interpreting the PSLRA's loss causation provision, the Lentell court clarified many of its prior, less than lucid, opinions dealing with loss causation125 and, perhaps implicitly, negated the efficacy of a questionable earlier decision, Marbury Management.126 Simultaneously, the circuit raised the pleading bar in analyst conflicts cases to the level originally intended by Congress.127 Arguably, Lentell's reasoning on the issue of loss causation will receive far more scholarly criticism than its guidance on inquiry notice. It is submitted, however, that Judge Jacobs' sound loss causation analysis in Lentell, although not cited by the Court, served as one of the jurisprudential guideposts utilized by the Supreme Court in the much-anticipated Dura Pharmaceuticals v. Broudo decision.128

The indispensable element of causation under the federal securities laws was judge-made129 and was principally bottomed in tort law theory.130 As a pioneer in the realm of securities litigation, the Second Circuit was first to establish that plaintiffs must plead and prove two separate, yet related, causation elements: transaction causation and loss causation.131 Transaction causation, or "but for" causation in fact, can be equated to the common law fraud concept of reliance,132 while loss causation, the far more subtle stepchild of causation, is arguably analogous to the tort concept of proximate or legal causation.133 Judge Winter's dissent in A USA Life Insurance Co. v. Ernst and Young134-which draws largely from Cardozo's famed proximate causation characterization of the "zone of danger"-demonstrates just how illustratively ingrained tort law concepts have become in the Second Circuit's approach to causation, especially loss causation.135

To establish transaction causation, a plaintiff must show that but for the defendant's alleged fraud, she would not have bought the security in question.136 A rebuttable presumption of transaction causation can be established using the fraud on the market theory advanced in the watershed securities case Basic Inc. v. Levinson.137 Transaction causation, however, is merely one part of the causation puzzle. A successful plaintiff must also establish the more obscure loss causation element by illustrating "the causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff."138 The loss causation requirement attempts to '"fix a legal limit on a person's responsibility, even for wrongful acts.'"139 Many plaintiffs, like those in Lentell, bound over the transaction causation prong140 just to founder on the unforgiving rocks of this nebulous loss causation standard.141

Further confounding the inherent complexity in these causation requirements, the hallowed halls of 40 Foley Square,142 by way of a trilogy of recent decisions,143 imposed the additional tort law concept of foreseeability144 and the Seventh Circuit's "materialization of the risk"145 constraint into its loss causation equation. To establish foreseeability the court examines whether it was reasonably foreseeable that the alleged misrepresentation or omission would lead to the market devaluation causing a plaintiff's loss.146 On the other hand, to establish "materialization of the risk," a plaintiff must show that the "loss was caused by the materialization of a risk that was undisclosed because of the defendant's fraud."147 One facet of Lentell's importance is that the circuit made abundantly clear that both of these prerequisites-foreseeability and the materialization of risk-remain viable in the Second Circuit's approach to loss causation.148 As a result, it is suggested that the circuit's reaffirmation of its post-Suez precedents in Lentell quelled much of the debate surrounding the import of these somewhat amorphous loss causation factors. This, in turn, offered little solace to plaintiffs' class action lawyers struggling with these concepts, yet provided significant fodder for the cannons of the securities defense bar.149

It goes without saying that courts must look to Congress's statutory intentions when construing the securities laws, or any other law for that matter.150 Congress, however, looked instead to the courts, particularly to the Second Circuit, for guidance in drafting the PSLRA.151 As a result, Congress codified much of the Second Circuit's loss causation prerequisites under section 21D of the PSLRA,152 which states that "the plaintiff shall have the burden of proving that the act or omission of the defendant alleged to violate this chapter caused the loss for which the plaintiff seeks to recover damages."153 This statutory provision codifies what the second, Third, Fourth, Seventh, and Eleventh Circuits require: that plaintiffs plead and prove that the defendants' misstatements or omission formed the causal basis for the stock's decline in market value.154 Conversely, both the Eight and Ninth Circuits took a strikingly different and far more lenient approach to loss causation.155 Both of these circuits merely required some showing of artificial price inflation, which focuses not on the causal link between the fraud and the stock's decline in price, but rather on whether the stock's price was inflated at the time of purchase based on the alleged misrepresentation or omission.156 Unfortunately, a critique of these two divergent loss causation standards is beyond the scope of this Comment. It is suggested, however, that the second Circuit's narrow loss causation approach-as clarified in Lentell and unanimously affirmed in Dura Pharmaceuticals-is far more in keeping with Congress's obvious intentions in drafting the PSLRA.

Based on the foregoing, the plaintiffs in Lentell had to establish that Merrill Lynch's failure to disclose its analysts' conflicts of interest satisfied the requirements of both transaction causation and loss causation.157 As to the transaction causation prong, the Lentell plaintiffs, without contest from the defendants, relied on the fraud on the market theory to establish transaction causation.158 The circuit and the district courts held steadfast to the supposition that "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."159 The fraud on the market theory cannot be used to shoe horn a showing of transaction causation into a showing of the more complicated and difficult loss causation standard.160

In wrestling with the loss causation requirement, the plaintiffs made a brash and largely misdirected attempt at striding over the loss causation hurdle by arguing that "the 'Internet bubble' was a classic stock market manipulation engineered by Wall Street's investment bankers and research analysts."161 The weight of the plaintiffs' argument collapsed on itself. The district court hastily discounted this reckless allegation: "There is no factual predicate or legitimate inference from the facts alleged . . . for plaintiffs' semantic invention of a stock market manipulation for internet company securities . . . ."162 Giving short shrift to the plaintiffs' arguments, the district court opined that it was the sudden deflation of the technology stock bubble that caused the market depreciation of the stocks at issue, not the failure to disclose alleged conflicts of interest.163 Moreover, both courts swiftly distinguished the present case from others in which the second Circuit found that loss causation was established based on a combination of theories such as the materiality of the concealed risk and artificial price inflation.164 The circuit noted that the plaintiffs did not allege that the '"subject of the fraudulent statement"' was Merrill Lynch's recommendation to buy shares in these Internet companies, nor that Merrill Lynch made a subsequent "corrective disclosure" in reference to its recommendations, nor that Merrill Lynch concealed the risks associated with either of the companies in question.165 Yet, the Lentell plaintiffs misguidedly argued that the "defendant's misrepresentations and omissions induced a 'purchase-time value disparity' between the price paid for a security and its 'true investment quality."'166 Squarely disagreeing with the plaintiffs' suggestion, the circuit enlisted the service of a prior decision where it sounded the death knell to this line of debatable reasoning.167

In dicta, the court candidly remarked that members of the Second Circuit have historically "disagreed as to whether certain losses were attributable to a concealed risk."168 As a result of this disparity, the circuit explained the proper application of its loss causation calculus, drawing considerably from three key decisions:

[O]ur precedents make clear that loss causation has to do with the relationship between the plaintiffs investment loss and the information misstated or concealed by the defendant. If that relationship is sufficiently direct, loss causation is established, but if the connection is attenuated, or if the plaintiff fails to "demonstrate a causal connection between the content of the alleged misstatements or omissions and 'the harm actually suffered,"' a fraud claim will not lie.169

The precedential jewel in Lentell came when the circuit, citing no authority for its pronouncement, uncluttered much of the ambiguity enveloping loss causation by reducing its loss causation standard into a neatly packaged gift for practitioners and law students alike: "To plead loss causation, the complaints must allege facts that support an inference that Merrill's misstatements and omissions concealed the circumstances that bear upon the loss suffered such that plaintiffs would have been spared all or an ascertainable portion of that loss absent the fraud."170

The circuit dealt its coup de grace by emphasizing that the plaintiffs "failfed] to grapple" with "the price-volatility risk inherent in the stocks they chose to buy."171 All of the analysts' reports were clearly captioned with warnings of the high level of investment risk involved in these stocks.172 It was this "systematic and consistent risk indicator" denoted on the reports in question that sealed the loss causation fate of the plaintiff class.173 With constructive knowledge of the inherent risks at play in these investments from the outset, how could the plaintiffs plead that their losses were causally linked to a later materialization of the risks that were known at the time of purchase?174 Such reasoning defies logic.

When viewed in the aggregate, by clarifying its prior decisions in Emergent Capital, Castellano, and Suez Equity, it is submitted that the second Circuit reinvigorated its loss causation standards, stripping away much of the confusion and ambiguity that had crept into the application of its loss causation principles by the various courts within the second Circuit.175 This Comment submits that the Lentell decision-irrespective of its dispositive affect on analyst conflict cases-will be noted, and perhaps criticized, for parsing through the fuzzy lines drawn by prior precedents, culling from a chosen few decisions the pearls that represent the central focus of the second Circuit's loss causation standard, while leaving behind most of the defective reasoning and ambiguity.

CONCLUSION: THE REACH OF LENTELL

Lentell unequivocally makes the already uphill battle even steeper for putative plaintiff classes alleging a violation of the federal securities laws based on analyst conflicts of interest. By providing black-letter guidance on what must be pleaded and proven to establish loss causation, the Lentell court made the historically elusive requirement of loss causation-especially as applied to analysts' conflicts of interest-far less evasive. Now that the loss causation standard has been clarified, it is submitted that many more dismissals will be granted in securities analyst conflict cases for failure to adequately plead loss causation. This was a substantial gift to Wall Street, as it provided a reprieve from the bombardment of class action lawsuits it is presently embroiled in defending.

Nonetheless, the Lentell court passed on a small parting gift to similarly situated plaintiffs; it tempered the draconian application of Congress's brisk statute of limitations. By insisting that district courts conduct a careful, fact-specific examination of the available information to see if inquiry notice was implicated, the circuit reconfirmed that only particularized, issuer-specific data that places a reasonable investor on notice of potential securities fraud would trigger the commencement of the statute of limitations clock.

It is suggested that the precedential significance of the Lentell decision reaches far beyond the analysts' conflicts of interest cases. The second Circuit established that it is unwavering in its role as a PSLRA gatekeeper, ensuring that pleading standards remain at the level originally intended by Congress. Moreover, by clarifying prior and somewhat contradictory second Circuit decisions dealing with loss causation, the Lentell panel answered a few of the questions that troubled both sides of the counsel table, as well as the bench, in securities fraud cases dealing with the PSLRA requirements. Moments of judicial clarity, like those found in Lentell's thorough analysis, serve as an exemplar-be it mandatory or persuasive-for district courts both within and without the second Circuit as federal courts continue to grapple with the proper application of the loss causation requirement.

IMAGE FORMULA 1IMAGE FORMULA 2IMAGE FORMULA 3IMAGE FORMULA 4IMAGE FORMULA 5IMAGE FORMULA 6IMAGE FORMULA 7IMAGE FORMULA 8IMAGE FORMULA 9IMAGE FORMULA 10IMAGE FORMULA 11IMAGE FORMULA 12IMAGE FORMULA 13IMAGE FORMULA 14IMAGE FORMULA 15IMAGE FORMULA 16IMAGE FORMULA 17IMAGE FORMULA 18IMAGE FORMULA 19IMAGE FORMULA 20IMAGE FORMULA 21IMAGE FORMULA 22IMAGE FORMULA 23IMAGE FORMULA 24IMAGE FORMULA 25IMAGE FORMULA 26IMAGE FORMULA 27IMAGE FORMULA 28IMAGE FORMULA 29IMAGE FORMULA 30IMAGE FORMULA 31IMAGE FORMULA 32IMAGE FORMULA 33IMAGE FORMULA 34AUTHOR_AFFILIATION

DEVIN F. RYAN[dagger]

AUTHOR_AFFILIATION

[dagger] J.D. Candidate, June 2005, St. John's University School of Law; B.S., 1997, United States Merchant Marine Academy.