Loss Causation and the Global Economic Crisis

When fraud coincides with a stock market crash, one question inevitably looms large. What caused the investors' losses: the fraud or outside economic forces?

When fraud coincides with a stock market crash, one question inevitably looms large. What caused the investors' losses: the fraud or outside economic forces? In the present economic environment, widely regarded as the worst financial crisis since the stock market crash of 1929, the courts will have to grapple with this central question of causation.

Causation was front and center in a recent decision in Countrywide Financial Corporation Securities Litigation. There, in what appears to be the first ruling to address causation in investments tied to the subprime mortgage industry, the United States District Court for the Central District of California held that plaintiffs had adequately pled causation despite the market crash. This article discusses the court's analysis of causation in the Countrywide case, and addresses generally the impact of the current financial crisis on the requirement that plaintiffs plead loss causation in securities fraud cases.