Buy and sue

In agreeing to hear Dura Pharmaceuticals Inc. vs. Michael Broudo et al. last week, the U.S. Supreme Court has taken on an Alice-in-Wonderland notion that it is not necessary for a stock price to actually drop in order to claim that a company harmed investors by making misrepresentations about its business.

The dispute involves circumstances under which a company's alleged misrepresentation is said to have inflated its stock price. The issue, according to briefs filed with the high court, is whether a suit for market fraud can be brought without showing "loss causation" - that the misrepresentation eventually resulted in a lower share price, thus damaging investors...