The U.S. Court of Appeals for the Ninth Circuit has issued a series of recent decisions on the pleading of loss causation, but if anything the court’s jurisprudence in this area is becoming more unclear.
In Wochos v. Tesla, Inc., 2021 WL 246210 (9th Cir. Jan. 26, 2021), the plaintiffs alleged that Tesla made false and misleading statements about the company’s progress in building its production capacity for its mass-market electric vehicle. The district court dismissed the case on the basis that the alleged misstatements were inactionable under the PSLRA’s safe harbor for forward-looking statements.
On appeal, the plaintiffs argued that not only did the district court improperly find that the misstatements alleged in the complaint were inactionable, but it also wrongly denied them leave to amend their complaint to allege the existence of an additional misstatement. In a lengthy and careful opinion, the 9th Circuit panel held that the alleged misstatements in the complaint were either forward-looking and accompanied by meaningful cautionary language, or were otherwise inadequately plead as false. As to the issue of leave to amend, however, the panel went on an interesting tangent.
The plaintiffs argued that in August 2017, Tesla made a statement falsely suggesting that it “had completed the ‘machine-that-makes-the-machine’—that is, the automated assembly line—and had started such automated production in July.” The panel found that an amendment to the complaint to add this alleged misstatement would be futile because the plaintiffs would be unable to establish loss causation. An October 6, 2017 Wall Street Journal article revealed that the cars were still being made by hand. In the immediate aftermath of that article, Tesla’s stock price dropped from $356.88 to $342.94. However, the panel noted, “the stock price immediately rebounded, closing at $355.59 on October 10 and trading between $350 and $360 over the next week.” The panel found that this “quick and sustained” stock price recovery refuted “the inference that the alleged concealment of this particular fact caused any material drop in the stock price” and “Plaintiffs have thus failed to show that they can adequately plead loss causation.”
The panel failed to cite any real precedent for this holding. Corporate defendants will be enthused to learn that an immediate stock price rebound can refute an inference of loss causation on a motion to dismiss (as opposed to simply limiting the potential damages associated with the claim). Plaintiffs confronted with this factual scenario, however, are likely to point out that a subsequent rise in the company’s stock price could be the result of a number of factors (overall market rise, unrelated positive news about the company, etc.) that are unconnected to the alleged fraud. Stay tuned.
Holding: Dismissal affirmed.