Under the “true financial condition” theory, a plaintiff can adequately allege loss causation by citing a corrective disclosure that reveals the company’s true financial results and condition, even if the disclosure does not directly reveal any alleged misrepresentations. Although the theory has been applied by some courts at the motion to dismiss stage (most notably by the 9th Circuit in its Daou decision), it has failed to gain wide acceptance. Courts have been particularly skeptical at the proof stage of a case, where the plaintiff bears the burden of producing evidence demonstrating a link between a corrective disclosure, public awareness of a misrepresentation, and a drop in the company’s stock price (see, e.g., the Flowserve decision from the N.D. of Tex.)
In In re Retek Inc. Sec. Litig., 2009 WL 928483 (D. Minn. March 31, 2009), the court considered and rejected the true financial condition theory on a summary judgment motion. Noting that even the plaintiffs’ expert witness “concedes that until the original complaint was filed, there was no disclosure such that the market became aware that Retek had committed improper or fraudulent practices regarding those four ventures,” the court found that there was insufficient evidence demonstrating that the disclosures about Retek’s financial condition revealed the truth about the alleged misrepresentations to the public.
Holding: Defendants’ motions for summary judgment granted.
Addition: Note that yesterday the U.S. Supreme Court denied cert in the Gilead case, foregoing an opportunity to bring some clarity to the issue of what is necessary to adequately plead loss causation. SCOTUSBlog has links to all of the cert papers.