When Alleged Loss Is Delayed Or Tracks The Market, The United States Court Of Appeals For The Second Circuit Holds That Private Securities Plaintiffs Must Plead More To Survive Dismissal

On June 26, 2026, in Huey v. Anavex Life Sciences Corporation, No. 25-1752, the United States Court of Appeals for the Second Circuit affirmed the district court’s dismissal of a putative class action asserting securities fraud claims where the plaintiff-shareholder failed to plead a plausible causal link between the alleged misrepresentations and the loss in share price, as was necessary to plead loss causation. Circuit Judge Guido Calabresi held that, when the issuer’s stock did not drop on the date of the alleged corrective disclosure, the losses only took place days later, and those losses coincided with a market-wide phenomenon, the plaintiff bore a heightened burden to plead a plausible causal link between the alleged misrepresentation and the delayed drop in stock price. 

Background

Plaintiff-appellant Huey brought a putative class action against Anavex Life Sciences Corporation, a publicly traded biopharmaceutical company, and its CEO, alleging that they misled investors by implying that the FDA had approved their methodology for measuring a drug candidate’s efficacy in clinical trials. 

In 2016, Anavex first announced that one of its drug candidates showed “positive preclinical data” for treating Rett syndrome. Rett syndrome is a rare genetic neurodevelopmental disorder that causes progressive loss of motor skills and language. The drug candidate, called ANAVEX 2-73, uses SIGMAR1 activation in order to restore cellular balance. To obtain FDA approval to sell the drug, Anavex conducted the AVATAR and EXCELLENCE trials starting in 2019. Each of these trials used “endpoints,” or standardized metrics, to measure the drug’s efficacy. One endpoint was a patient’s improvement on a behavioral questionnaire (RSBQ), and another was the patient’s improvement on the Clinical Global Impression-Improvement (CGI-I) scale. For improved accuracy, the endpoints are “anchored” together. Neuren, a competitor, was also developing a drug for Rett syndrome at this time and received FDA approval in 2023 using the same RSBQ/CGI-I endpoint. Neuren compared the final RSBQ/CGI-I score with the baseline pretreatment score to determine a net improvement. Anavex, however, took a different approach for one of its trials. Instead of comparing the baseline and end-of-treatment scores, Anavex also accounted for scores reported during the trial. By doing so, Anavex could show a positive result, even if the end-of-treatment score showed no improvement from the baseline. This method was called RSBQ-AUC or “Area Under the Curve.” 

Anavex’s statements regarding its endpoint usage were central to the plaintiff’s case. The plaintiff alleged that: 

• On February 1, 2022, when asked during a special conference call whether Anavex would be using the same endpoint in the EXCELLENCE trial as in the AVATAR trial, the CEO said they would be using the “same endpoint” because it was the “preference of the FDA.”
• Over the course of 2022, Anavex and its CEO made several misleading statements reiterating their intention to use the same RSBQ-AUC endpoint in its clinical trials. The CEO referenced “really specific” guidance from the FDA. 
• On February 2, 2023, Anavex issued a press release on the EXCELLENCE trial announcing that the company exceeded its enrollment and “received [the FDA’s] input on the endpoints” utilized. The press release did not indicate whether the FDA approved of the AUC endpoint.
• On February 7, 2023, during a conference call discussing quarterly earnings, an analyst asked whether the EXCELLENCE endpoint was the same as was used in the AVATAR study and whether the FDA had approved the AUC method as an appropriate endpoint. The CEO responded that the RSBQ/CGI-I endpoint was used and clarified that it was a different measurement from that used in the AVATAR study.

The February 7, 2023 statement was the first time Anavex stated it would not be using the RSBQ-AUC endpoint. By market close on the day of the conference call, the stock price increased from $11.11 to $11.75 per share. The next day, the stock fell to $10.93 per share and then to $10.41 the day following.

The plaintiff brought suit to represent a class of shareholders similarly situated and alleged that Anavex violated the Securities and Exchange Act by fraudulently using the RSBQ-AUC endpoint to conceal weak data even though Anavex knew the FDA would not find the endpoint acceptable. 

Anavex and its CEO moved to dismiss the class action, and the United States District Court for the Southern District of New York granted the motion and dismissed the case with prejudice. While the court concluded that the plaintiff adequately alleged falsity and scienter for the February 2, 2023 press release statement, the court held that the plaintiff failed to plead loss causation when, on the day of the corrective disclosure, the stock price went up rather than down and the decreased share price on the two days following the disclosure moved in the same direction as the market generally. The court also denied the plaintiff’s motion to amend her complaint as she could not establish loss causation. The plaintiff appealed. 

Judge Calabresi’s detailed explanation of loss causation 

Judge Calabresi, himself a leading torts scholar, began the court’s review by providing an explanation of loss causation generally. 

He explained that, at common law, there are three general requirements of causation: (1) but-for causation, (2) causal link, and (3) proximate cause. But-for causation questions whether the plaintiff would have been harmed but for the defendant’s conduct. Causal link then considers whether the defendant’s actions increased the likelihood that the harm occurred to the plaintiff. It assesses whether there is a relationship between the nature of the conduct and the harm suffered. Both the but-for cause and the causal link must be proximate, but courts often conflate causal link with proximate cause. Although a causal link may exist, it may be too weak to impose liability under proximate cause. 

While the three causation elements may not be required under every statute, they are necessary in the securities context. Private damages actions under the Securities Exchange Act of 1934 and Rule 10b-5 “resemble[], but [are] not identical to, common-law tort actions for deceit and misrepresentation.” In the Private Securities Litigation Reform Act, Congress added a causal requirement that the plaintiff has the burden of proving the violation caused the loss. As a result, all three causation elements must be met. This requirement was affirmed by the United States Supreme Court in Dura Pharmaceuticals, Inc. v. Bruda, where the Court stated the plaintiff must plead reliance, which is “essentially but-for causation in a fraud-on-the-market context,” and “loss causation.” In the relevant statute the plaintiff relied on, loss causation requires both causal link and proximity.

Judge Calabresi then turned to the pleading standards for loss causation. While in some contexts the causal link between the misrepresentation and the harm is plausible “upon first glance,” there are other situations that appear coincidental, requiring the plaintiff to allege something additional. In the securities context, when the share price decreased following the reveal of a misrepresentation, courts generally find causation rather than coincidence. Judge Calabresi noted, however, that this assessment fails to conceive of common situations in a sophisticated market. For example, it is entirely possible that on the day a corrective statement is made, the whole market declines generally. While a “plausible causal link is easy to establish where the share price declines and the market does not,” more must be pled when that is not the case. 

Timing is essential to establish plausible loss causation, as, in an efficient market, courts will assume an immediate reaction in stock price. Judge Calabresi noted that this assumption is not necessarily a per se rule. Instead, “where a plaintiff alleges a loss that occurs some time after the corrective disclosure is made, it becomes that plaintiff’s burden to allege plausibly why the loss was not immediate.” The “purpose of these additional pleadings is to explain why the market did not operate with 100% efficiency in absorbing the material information.” Because the ordinary pleading rules are “not meant to impose a great burden,” the court’s role is to assess the loss causation in light of the broader market’s movements and the gap in time between the corrective statement and the alleged loss. 

The court’s ruling

While a securities fraud complaint must meet a heightened pleading standard under Rule 9(b), the loss causation pleading requirement is not subject to the Rule, and the court analyzed the claim accordingly. 

Judge Calabresi first noted that not only did the alleged loss not occur on the day of the corrective disclosure, the decline actually occurred two days after, as the sum of the movements on the first two days balanced out and tracked the market. The rarity of this sort of delay created a heightened burden on the plaintiff to establish a plausible causal link. 

That burden was then increased when, on the days of the alleged losses, the market also declined. “In such cases where it is difficult to know whether the defendants’ misrepresentation rather than larger market forces influenced a company’s share price, it is not the role of district courts to undertake their own complex causal disaggregation analysis or event study at the pleading stage.” The plaintiff instead must allege more. 

Here, the plaintiff did not adequately plead a causal link, as she merely pointed to the subsequent but delayed decline in share price. Had the decline been immediate and contrary to the market, the pleading would likely have been sufficient, but instead she needed to prove “‘some indication’ of why the loss was delayed and why the loss was caused by the corrective disclosure rather than intervening market forces.” 

 While on appeal the plaintiff argued that the corrective disclosure was “technical in nature” and its ramifications “were not readily apparent,” and therefore took more time to be assimilated by the market, the court held that argument was conclusory and did not “save the absence of plausible assertions” in her complaint. Accordingly, the plaintiff failed to plead loss causation and the dismissal was affirmed. And because the court was not persuaded the plaintiff could plead loss causation as to the February 2, 2023 statement, the court affirmed the district court’s denial of leave to amend as futile. 

Comment

The court’s heightened pleading burden may provide an efficient path to early dismissal for defendants facing private securities claims. When loss is delayed or merely parallels that of the market, plaintiffs will need to allege more. The courts will not “devise new theories of causation to save a deficient complaint,” and plaintiffs will need to overcome the commonsense understanding that an efficient market will react immediately to a corrective statement. For many private plaintiffs, this may be a challenging task.

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