More Than an Earnings Miss

Can a plaintiff adequately allege or prove loss causation by pointing to a corrective disclosure that reveals the company’s financial results and condition, even if the disclosure does not directly reveal any alleged misrepresentations? Courts have been reluctant to apply this “true financial condition theory,” especially at the proof stage of a case. The U.S. Court of Appeals for the Ninth Circuit is the latest court to find that an earnings miss, or similar adverse financial result, is by itself insufficient to establish loss causation.

In In re Oracle Corp. Sec. Litig., 2010 WL 4608794 (9th Cir. Nov. 16, 2010), the Ninth Circuit reviewed a grant of summary judgment for the defendants. The district court held that plaintiffs failed to identify sufficient evidence as to loss causation for their non-forecasting claims. In particular, plaintiffs relied on an earning miss rather than any actual disclosure about defects in a key product.

On appeal, the Ninth Circuit agreed that the “overwhelming evidence produced during discovery indicates the market understood Oracle’s earnings miss to be a result of several deals lost in the final weeks of the quarter,” not “that customers did not buy [the product] as a result of defects.” The fact that two analyst reports questioned this explanation for the earnings miss could not overcome the “market’s consensus.” Moreover, Oracle continued to sell large amounts of the product during the following quarter, suggesting that there was no public knowledge of the supposedly concealed defects.

Holding: Grant of summary judgment affirmed.

Quote of note: “Plaintiffs take issue with our opinion in Metzler. Specifically, they assert that they should be able to prove loss causation by showing that the market reacted to the purported ‘impact’ of the alleged fraud—the earnings miss—rather than to the fraudulent acts themselves. We reject that assertion. Loss causation requires more than an earnings miss.”

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