Co-authored by Allison Wuertz.

The U.S. Court of Appeals for the Third Circuit affirmed the district court’s ruling that plaintiffs had failed to establish two key elements of their securities fraud claim against a corporate defendant and its two shareholders. Plaintiffs, who also were shareholders of the defendant corporation, alleged that defendants had violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder when they issued only “condensed financial statements,” which omitted transactions between defendants and another corporation that the shareholder defendants owned. The district court found that plaintiffs had failed to create a genuine dispute as to loss causation and reliance—two key elements to a securities fraud claim. The Third Circuit agreed, finding first that the plaintiffs did not prove loss causation because they did not prove that the defendants’ fraudulent transfers diminished the value of plaintiffs’ stock, and second, that plaintiffs were unaware of defendants’ alleged misstatements and omissions, and therefore could not establish reliance. In discussing reliance, the Third Circuit noted that defendants had met their burden of proving plaintiffs’ non-reliance by showing that the latter never had read the “condensed financial statements” at issue.

Gallup v. Clarion Sintered Metals, Inc. et al., Nos. 11-4003, 11-4004 (3d Cir. July 26, 2012).