Loss causation is typically established through the identification of corrective disclosures that are found to cause securities prices to decline, often in the form of a company announcement, over a short period of time. However, the courts have recognized that specific, identifiable corrective disclosures are not the only possible way truth may be revealed to the market. Under the “leakage” theory, loss causation may be established and damages may be derived from price movements, during a period when corrective information leaks gradually or intermittently to the market.
In this Insights, CRA’s Aaron Dolgoff, Nikolai Caswell, and Samanvaya Agarwal evaluate characteristics typical of cases involving leakage theory of loss causation and damages, some of the relevant legal standards, and economic issues that may need to be addressed to plead or rebut loss causation. The authors review previous private securities fraud cases involving leakage theory to highlight potential challenges in the identification of leakage, reliably accounting for confounding information, estimation and statistical interference of cumulative abnormal returns in the leakage period, and disentangling total inflation into components attributable to each allegation when there is more than one allegation.
Read about leakage theory of loss causation and damages in securities litigation.
