## Facts

- Purchasers of 24/7 Real Media, Inc. and Interliant, Inc. stock sued Merrill Lynch and analyst Henry Blodget in putative class actions.
- Plaintiffs alleged Merrill Lynch issued materially false, overly optimistic analyst reports and recommendations despite internal negative views, to gain or keep investment-banking business.
- Plaintiffs claimed these reports portrayed analysts as independent while allegedly concealing conflicts of interest and bias.
- Plaintiffs bought the stocks during the internet-boom period and later sold at substantial losses.
- The alleged losses occurred during the broader collapse of internet/technology stocks and adverse company performance, rather than following a specific market disclosure correcting the alleged analyst fraud.
- The district court dismissed the complaints on multiple grounds, including untimeliness and failure to plead loss causation; plaintiffs appealed.

## Issues

1. Whether the claims were time-barred under the applicable limitations rules for federal securities fraud.
2. Whether plaintiffs adequately pleaded loss causation (proximate cause) for claims under Exchange Act § 10(b) and Rule 10b-5.
3. Whether dismissal could be affirmed without reaching other pleaded-defect grounds (e.g., Rule 9(b)/PSLRA particularity and cautionary-language doctrines).

## Decision

- The Second Circuit held the complaints were timely filed.
- The court affirmed dismissal because plaintiffs failed adequately to plead loss causation.
- The court treated loss causation as dispositive and did not need to rely on the district court’s other alternative bases to affirm.

## Legal Principles

- A private plaintiff under § 10(b) and Rule 10b-5 must plead loss causation: the misstatement or omission must be the proximate cause of the claimed economic loss.
- Transaction causation (reliance or “but-for” causation) is distinct from loss causation; pleading that the plaintiff bought at an inflated price is not enough.
- To plead loss causation, the complaint must allege that the misstatement or omission concealed something from the market that, when disclosed, negatively affected the security’s value.
- When losses coincide with a marketwide or sector-wide decline, plaintiffs must plead facts showing the loss is attributable to the alleged fraud rather than intervening market forces or company-specific setbacks unrelated to the alleged misrepresentation.
- Loss causation requires allegations that the “subject of the misrepresentation” caused the actual loss suffered.

## Conclusion

The Second Circuit affirmed dismissal of the securities-fraud claims because, although plaintiffs alleged biased research induced purchases, they did not plausibly connect their later losses to disclosure of the alleged fraud; the pleadings instead tied the losses to the dot-com downturn and other intervening causes, failing the loss-causation requirement.


Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005)