Tell Me Something New

Plaintiffs often establish the existence of loss causation by pointing to a “corrective disclosure” that allegedly revealed the fraud and led to a stock price decline. What a disclosure must contain to be deemed “corrective,” however, has been the subject of extensive debate.

In Rand-Heart of New York v. Dolan, 2016 WL 521075 (8th Cir. Feb. 10, 2016), the plaintiffs alleged that Dolan, a professional services company, had failed to adequately disclose that a major customer had stopped sending new work to the company in early 2013.  It was not until November 2013 that Dolan told securities analysts about the problem.  Although the company’s stock price declined based on that announcement, the plaintiffs argued that the fraud was not fully revealed until January 2014, when the company also announced that it had hired a new restructuring officer and the stock price declined again.

While the U.S. Court of Appeals for the Eighth Circuit was willing to allow claims based on the early 2013 to November 2013 time period to proceed, it found that the plaintiffs had inadequately plead loss causation as to any claims based on the November 2013 to January 2014 time period. The court agreed with the Fourth Circuit and Eleventh Circuit that a “corrective disclosure” must contain “new facts” about the alleged fraud to provide a basis for establishing loss causation.  In contrast, “the appointment of a restructuring officer on January 2 does not correct a misrepresentation; it elaborates on the previously disclosed plan to restructure.”

Holding: Dismissal affirmed in part, reversed in part, and case remanded for further proceedings.

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