Federal District Court Rebuffs Mutual Fund’s Prospectus Liability: Alleged Misrepresentations Could Not Have Affected the Fund Shares’ Price

April 25, 2011
In a decision that could sharply curtail the potential liability of mutual funds and their advisers and directors for non-fraudulent prospectus misrepresentations, the U.S. District Court for the Southern District of New York recently dismissed a putative class action arising out of the precipitous decline in the share price of a mutual fund during the 2007 and 2008 credit crisis. The court, in Yu v. State Street Corp, rejected the plaintiffs’ claims on loss causation grounds. This update discusses the Yu decision and the current legal debate regarding the loss causation defense.