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.”