Ever since the U.S. Supreme Court’s decision in Dura Pharmaceuticals v. Broudo, 544 U.S. 336 (2005), federal courts have generally required shareholders in civil securities litigation to use financial experts to prove loss causation, most commonly by conducting event studies or similar, statistical and economic modeling.

Now the courts may be expanding the reach of Dura to criminal securities claims. In United States v. Schiff, an ongoing prosecution of two high-ranking Bristol Meyers executives, the federal district court (New Jersey) required the government to prove loss causation with expert evidence that tied certain public disclosures of the alleged fraud to a substantial drop in Bristol’s market price. But at a Daubert hearing, the government limited the expert’s testimony to only one disclosure. Further, it declined to ask the expert to disaggregate the fraud-related events from other corporate announcements (in the same disclosure) that also could have caused the fraud. The government said it would call fact witnesses to prove this element—and the federal district court expressed serious concerns, not only about the late disclosure of possible lay witnesses, but also that, given the government’s restrictions on its expert, there still could be an “analytical gap” in the expert’s testimony, such that it did not “fit” the case.

Nevertheless, the district court permitted the government to present its lay witnesses at trial and then try to introduce its expert’s limited event study. If the lay witnesses have failed to lay a sufficient foundation for loss causation however, then the court will limit the government’s expert to rebutting arguments of market efficiency and/or external factors causing the fraud. The government appealed the ruling, but the U.S. Court of Appeals for the Third Circuit affirmed in United States v. Schiff, 2010 WL 1338141 (April 7, 2010). Read the complete case digest in the next (June 2010) Business Valuation Update™; the full-text of the 3rd Circuit’s opinion will also be available at BVLaw™.