Litigation Team Wins Dismissal of Class Action Against State Street

A Ropes & Gray litigation team has won dismissal of a securities class action against State Street Corporation in a case that could sharply narrow the ability of plaintiffs' lawyers to bring prospectus liability claims against mutual funds and their advisers and directors. 
 
The case was filed by mutual fund shareholders who alleged that the SSgA Yield Plus Fund's prospectus misled investors about the Fund's "subprime" mortgage exposure in violation of Sections 11 and 12(a)(2) of the Securities Act of 1933. The plaintiffs claimed that their investment losses in 2007-2008 were "caused" by the "undisclosed risk" associated with the Fund's mortgage-related holdings. The Ropes & Gray team filed a motion to dismiss the complaint, arguing that the plaintiffs could not establish a causal connection between the alleged misrepresentations in the prospectus and a drop in the Fund's share price. Since the price of open-end mutual fund shares is always equal to the fund's net asset value, an alleged misstatement or omission in fund disclosures cannot artificially inflate or deflate the price at which investors buy or sell. Thus, Ropes & Gray argued, the Yu plaintiffs simply could not logically connect the dots between the prospectus and any damages.
 
On March 31, Judge Holwell of the Southern District of New York dismissed the complaint with prejudice based on the lack of loss causation, agreeing with the argument made by the Ropes & Gray team. The Court held that the Securities Act's "statutory scheme envisions material misrepresentations in the prospectus inflating the market price of the security at the time of the statement. When the nature of the misrepresentation is revealed, whether by the issuer or by other circumstances, the market corrects the price of the security to the value it would have had absent the misrepresentation." As a result, "it is crucial that there be a revelation of the concealed risk and that the revelation cause a depreciation in the value of the security." It is insufficient for the plaintiff merely to allege that he would not have purchased fund shares absent the alleged misstatements — that establishes only "transaction causation," not the required "loss causation." In the mutual fund context, because "NAV does not react to … any misstatements in the Fund's prospectus, no connection between the alleged material misstatement and a diminution in the security's value has been or could be alleged."
 
The Ropes & Gray litigation team was led by Boston-based partners John Donovan and Rob Skinner; Boston-based associate Geoff Atkins; and Washington, D.C.-based associate Rob Dugas.