Monthly Archives: September 2014

Can the announcement of an investigation act as a “corrective disclosure” sufficient to support the existence of loss causation?  Last year, the Eleventh Circuit concluded that investigations do not “in and of themselves, reveal[] to the market that a company’s previous statements were false or fraudulent.”

In Loos v. Immersion Corp., 2014 WL 3866084 (9th Cir. Aug. 7, 2014), the Ninth Circuit has agreed with the Eleventh Circuit’s reasoning.  In particular, the court noted that because the disclosure of an investigation “simply puts investors on notice of a potential future disclosure of fraudulent conduct . . . any decline in a corporation’s share price following the announcement of an investigation can only be attributed to market speculation about whether fraud has occurred.”  Accordingly, “the announcement of an investigation, without more, is insufficient to establish loss causation.”

Holding: Dismissal affirmed.

Addition: Interestingly, this month the Ninth Circuit added a footnote to the decision clarifying that it did not “mean to suggest that the announcement of an investigation can never form the basis of a viable loss causation theory.”  Instead, the court was merely adopting the Eleventh Circuit’s position that the announcement of an investigation “standing alone and without any subsequent disclosure of actual wrongdoing, does not reveal to the market the pertinent truth of anything, and therefore does not qualify as a corrective disclosure.”

Next term, the U.S. Supreme Court will hear argument in the Omnicare case.  The issue in Omnicare is the pleading standard for a claim under Section 11 of the Securities Act alleging a false or misleading opinion.  While the Second, Third, and Ninth Circuits have held that the plaintiff must allege the statement was both objectively and subjectively false – requiring allegations that the speaker’s actual opinion was different from the one expressed – in Omnicare the Sixth Circuit held that if a defendant “discloses information that includes a material misstatement [even if it is an opinion], that is sufficient and a complaint may survive a motion to dismiss without pleading knowledge of falsity.”

While Omnicare is pending, the Tenth Circuit has provided its own views on the subject.  In MHC Mutual Conversion Fund, L.P. v. Sandler O’Neill & Partners, L.P., 2014 WL 3765717 (10th Cir. Aug. 1, 2014), the court identified at least three possible conclusions that could be drawn from Section 11 and relevant legal precedent.  First, the court noted that “many common law authorities took a dim view of opinion liability” and one could find that Section 11 liability simply does not extend to opinions (as opposed to misstatements of fact).  Second, “an opinion can qualify as a factual claim by the speaker regarding his current state of mind.”  In that case, the opinion might be actionable if the plaintiff shows “both that the defendant expressed an opinion that wasn’t his real opinion (sometimes called ‘subjective disbelief’) and that the opinion didn’t prove out in the end (sometimes called ‘objective falsity’).”  Finally, there is support in the law for the view that “at least some subset of opinions about future events contain within them an implicit factual warranty that they rest on an objectively reasonable basis – and providing an opinion without an objectively reasonable foundation, at least without disclosing that deficiency, can give rise to a claim for negligent misrepresentation.”

Although the Tenth Circuit – in line with the majority view – appeared inclined to require allegations of both objective and subjective falsity, it found that it did not have to resolve the issue.  Even under the “objectively reasonable basis test,” the plaintiffs had failed to undermine the conclusion that the company had “a reasonable (if not universally shared) basis for the opinion it expressed.”  Moreover, the company had clearly disclosed that its “opinion about the prospects for its securities wasn’t unqualified – that an essential premise of the opinion rested on a judgment about near-term economic trends, a judgement that could well fail to bear out.”

Holding: Dismissal affirmed.

Quote of note:  “For centuries legions accepted Newtonian physics without qualification.  Last year some of us fervently believed the Broncos would win the Super Bowl.  In 2008, no doubt there were those who genuinely thought the market for mortgage backed securities would rebound.  Events have disproved each of these opinions, but that hardly means the opinions were anything other than honestly offered – true opinions at the time made.”