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Over a quarter of a century ago, Judge Henry Friendly coined the term "fraud by hindsight" in upholding the dismissal of a proposed securities class action. As he explained, it was too simple to look backward with full knowledge of actual events and allege what should have been earlier disclosed by a public corporation in its Security and Exchange Commission (SEC) filings. Because hindsight has twenty/twenty vision, plaintiffs could not fairly "seize [] upon disclosures" in later reports, he ruled, to show what defendants should have disclosed earlier.

Today, a parallel concept – "causation by presumption" – is before the Supreme Court, and it too deserves to be rejected. At issue is whether a loss that never actually occurred in the real world – but arguably would have if other events had not intervened or if full corrective disclosure had been made – can support a Rule 10b-5 cause of action against a public corporation. The key problem with such a hypothetical determination of loss involves the limited institutional competence of judges and juries to infer losses. Generally, markets determine the loss, and the judicial system (judges and juries) allocates it among the parties to litigation. This makes sense; markets know best what information to value, and the legal fact-finder can best make the normative judgements about the defendant's requisite culpability and relative fault.


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