"Simply because the stock dropped in price does not mean that the drop was the result of securities fraud"

In Durham v. Whitney Information Network (2:06-cv-00687), Middle District of Florida Judge Avern Cohn entered a 44 page opinion in an interesting securities fraud case.  The decision can be viewed here.  The Judge summarized the decision as follows:

Plaintiff has not plead a securities fraud case. The CAC centers on three theories of fraud which plaintiff says were revealed with the issuance of two press releases, neither of which admit any wrongdoing. The substance of the press releases do not mention, much less relate, to any of plaintiff’s theories of securities fraud.  Moreover, the CAC fails to contain allegations to show that any of the defendants acted with scienter. When the press releases issued, given the particular volatility of the market at the time and the uncertainty generated by the press releases, the price of the Company stock dropped. The disconnect between the text of the press releases, the theories of fraud, and the allegations of wrongdoing leads to the conclusion that the case is not about securities fraud. Rather, it is about an attempt to find securities fraud after the Company’s stock price fell upon news that it was being investigated by the SEC and was the subject of a grand jury subpoena. The case brings to mind the Latin phrase post hoc ergo procter hoc. Simply because the stock dropped in price does not mean that the drop was the result of securities fraud.

It is for these reasons that defendants’ motion to dismiss have been granted and the case dismissed.

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