More than Basic: Causation in Securities Misstatement Cases

Abstract

In misstatement cases, a causal link can be based on the claimant’s reliance on the misstatement (direct causation), or the reliance of a third party or a class of third parties (indirect causation). In terms of direct causation, whether the misstatement is a cause of the loss can be determined by the ‘but-for’ test and, in cases where a non-fraudulent misstatement would be in the plaintiff’s favour assuming it were true, by the SAAMCO test. While the general rule is that the burden of proof for causation is on the plaintiff, this has been changed by statutes in the United States, Ontario and New Zealand regarding misstatements in prospectuses. In addition, the United States case law has created a presumption of reliance in class actions. The purpose of these measures is to address the evidential difficulties faced by investors in securities misstatement cases. Currently, neither approach has been adopted under the Australian law. However, a string of recent interlocutory judgments show that a market-based causation is at least arguable in the context of securities class actions.