A Healthy Grain of Salt

Can allegations in a short seller report, even if the report’s issuance coincides with a stock price decline, form a basis for asserting loss causation?  In its 2020 decision in In re BofI Securities Lit., the U.S. Court of Appeals for the Ninth Circuit held that certain negative blog posts about the company could not support the existence of loss causation because they were written by short sellers and expressly disclaimed their own accuracy.

The Ninth Circuit recently had the opportunity to revisit the issue of short sellers and loss causation.  In In re Nektar Therapeutics Sec. Lit., 34 F. 4th 828 (9th Cir. 2022), the plaintiffs alleged that a report written by “anonymous short-sellers” examining Nektar’s clinical trial data was a “corrective disclosure” that led to a stock price decline.  The panel was not so sure.

The panel conceded that the report may have provided “new information to the market” by comparing statements made by Nektar at different conferences and cross-checking sources provided by the company.  Moreover, the report related directly to the false statements alleged in the complaint.  Citing the BofI decision, however, the panel concluded that the key issue was the fact that the report was written by short sellers with a financial incentive to convince others to sell and made no representations as to its accuracy.  Accordingly, “it is not plausible that the market would perceive [the report] as revealing false statements because the nature of the report means that investors would have taken its contents with a healthy grain of salt.”

Holding: Dismissal affirmed.

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