Loss Causation in Securities Fraud Cases: Why Your Stock Drop Matters

The Four Elements of a Securities Fraud Claim

To prevail in a securities fraud class action under Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5, plaintiffs must prove four elements:

1. Misrepresentation or omission: The defendant made a material false statement or omitted a material fact that was required to be disclosed
2. Scienter: The defendant acted with intent to defraud or with reckless disregard for the truth
3. Reliance (transaction causation): The investor purchased or sold securities in reliance on the misrepresentation
4. Loss causation: The misrepresentation caused the investor's economic loss

Loss causation — element four — is where many securities cases are won or lost. Even if the first three elements are clearly established, defendants aggressively challenge whether the fraud — and not some other factor — caused the investors' losses.

What Is Loss Causation?

Loss causation was cemented as a necessary pleading requirement by the Supreme Court in Dura Pharmaceuticals, Inc. v. Broudo (2005). The Court held that purchasing stock at an inflated price alone is not sufficient to establish loss — plaintiffs must show that the inflation was removed from the price when the truth was disclosed, causing actual economic harm.

This matters because a stock that trades at an inflated price might later decline for many reasons unrelated to the alleged fraud — a market crash, an industry-wide decline, a product failure, management departure. Loss causation requires isolating the fraud-related cause of the decline.

Transaction Causation vs. Loss Causation

Securities lawyers distinguish between two types of causation:

• Transaction causation (reliance): The investor purchased (or sold) securities because of the misrepresentation — the fraud caused them to enter the transaction. This is established through the "fraud-on-the-market" presumption: in an efficient market, material misstatements are reflected in the stock price, so every investor who bought at the inflated price effectively "relied" on the fraud.
• Loss causation: The investor suffered an actual economic loss because of the revelation of the misrepresentation — the correction caused the stock price to fall, inflicting the loss.

Transaction causation gets investors into the class. Loss causation determines how much they can recover.

The Role of Corrective Disclosures

Loss causation is typically established through a corrective disclosure — a public revelation that corrects the previously false information and causes the stock price to decline. Corrective disclosures can take several forms:

• A formal restatement or non-reliance 8-K (like Immersion Corporation's September 2025 filing)
• A press release revealing that previously reported data was incorrect
• An analyst report identifying discrepancies in the company's public filings
• A regulatory action (SEC investigation, SEC comment letter publicly disclosed)
• A whistleblower disclosure or news investigation
• A series of partial disclosures that cumulatively reveal the truth

The price decline following a corrective disclosure is the mechanism of loss causation — the market was previously deceived into overvaluing the stock, and the corrective disclosure "deflates" the artificial inflation. The deflation is the investors' loss.

How Defendants Challenge Loss Causation

Loss causation is a battleground in almost every securities fraud case. Defendants — the company, its officers, and sometimes auditors — typically make one or more of these arguments:

• "The market already knew." The disclosure wasn't new information — analysts and sophisticated investors had already priced in the risk, so the stock drop wasn't caused by the disclosure.
• "It was a market-wide decline." The stock fell not because of the specific disclosure but because of broad market conditions, sector rotation, or macroeconomic factors.
• "The disclosure was for unrelated reasons." The company's bad news was about something other than the alleged fraud — a product failure, an earnings miss, an executive departure — and those non-fraud factors caused the drop.
• "The stock already corrected before the disclosure." The stock had already declined before the official corrective disclosure, meaning there was nothing left to "correct" when the disclosure occurred.

These arguments require plaintiffs to employ financial experts who can isolate the fraud-related component of the stock price decline using statistical methods.

Event Studies: Proving Causation Quantitatively

The primary tool for establishing loss causation in securities fraud cases is the event study — a statistical analysis performed by financial economists that measures the "abnormal return" (excess movement beyond what market and sector factors would predict) on specific event dates.

An event study works as follows:

1. The economist builds a model predicting what the stock's return would have been on a given date based solely on market-wide and industry factors
2. The actual return on the corrective disclosure date is measured
3. The "abnormal return" is the difference — the portion of the price change that can't be explained by broader factors
4. A statistically significant negative abnormal return on a corrective disclosure date is evidence that the disclosure caused the price decline

Event studies are submitted as expert reports in securities litigation. Defendants submit competing event studies arguing that the abnormal returns are not statistically significant or are attributable to non-fraud disclosures. Courts and juries evaluate the competing analyses.

Loss Causation in the IMMR Case

For Immersion Corporation (IMMR) investors, loss causation analysis will center on the September 8–9, 2025 Non-Reliance 8-K filing — the corrective disclosure in which the Board announced that three quarters of financial statements could no longer be relied upon.

The key questions for the loss causation analysis will be:

• Did IMMR's stock price decline significantly on or around September 8–9, 2025?
• Was that decline statistically abnormal — i.e., not explained by market-wide or sector-wide factors on those days?
• Was the decline causally connected to the non-reliance disclosure specifically, rather than other news released around the same time?

Non-reliance 8-K filings under Item 4.02 — which formally declare previously issued financial statements unreliable — are among the most clearly defined corrective disclosures in securities law. They directly contradict specific prior public statements (the inaccurate financial filings) and typically generate immediate, identifiable market reactions. This makes loss causation analysis relatively straightforward compared to cases involving more ambiguous corrective events.

From Causation to Damages

Once loss causation is established, damages are calculated using the per-share "inflation" — the amount by which the stock was artificially overpriced during the class period due to the alleged fraud.

Under the PSLRA, recoverable damages are capped by a "90-day look-back" rule: if the stock's 90-day post-disclosure average trading price exceeds the actual disclosure-date price, recoverable damages are calculated using the average price rather than the lowest post-disclosure price. This prevents investors from recovering the full spread if the market "overreacted" to the disclosure.

For IMMR investors, the calculation involves:

• Your purchase price per share (paid during the class period)
• Minus: the "true value" of the stock after the corrective disclosure (using the 90-day average or actual sale price, whichever is lower)
• Multiplied by: the number of shares held

This calculation is performed for each class member in the eventual claims process. A securities attorney can estimate your potential recovery based on your transaction details before any formal settlement is reached.