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The case involved an investor and a class of plaintiffs alleging that the issuers and lead underwriter involved in several IPOs defrauded investors by setting their earnings estimates below their true estimates to dramatically drive up the prices of the IPOs once they went public. In analyzing the proper pleading standard, the court was faced with what it called “ambiguous” precedent in the Second Circuit. The Supreme Court's recent decision in Dura Pharmaceuticals v. Broudo, 125 S.Ct. 1627, 1630 (2005), held that to prove fraud, plaintiffs must provide a direct link between a fall in a company's stock price and the alleged fraud or misrepresentation. In so ruling, the Supreme Court rejected the more liberal standard applied by the Ninth Circuit, which allowed plaintiffs to prove loss causation without showing a direct link between a drop in a company's stock price and misrepresentation or fraud.

To this end, the court noted that “in each situation, 'the loss be foreseeable and the loss be caused by the materialization of the concealed risk.'” Applying this standard to the instant matter, the court found that the plaintiffs would need to demonstrate either facts to support an inference showing the defendants' fraud and not other salient factors proximately caused plaintiffs' loss; or facts sufficient to apportion the losses between the disclosed and undisclosed portions of the risk that ultimately destroyed their investment. Here, the court stated, the plaintiffs failed to allege facts sufficient to do either.