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An ongoing issue in securities litigation is to what extent a short seller’s report can act as a corrective disclosure for purposes of establishing loss causation.  The U.S. Court of Appeals for the Fourth Circuit had the opportunity to address that issue for the first time last week.

In Defeo v. IonQ, Inc., 2025 WL 1035292 (4th Cir. April, 8, 2025), the plaintiffs alleged that a short seller report had revealed to investors that IonQ, which makes quantum computing systems, did not have a working product and its revenues were driven by phony related-party transactions.  The company responded to the report with a short press release deriding the report’s inaccuracies and then later issued a longer rebuttal.  The company’s stock price declined during this period.

The district court held that the plaintiffs’ complaint did not contain any reliable sources and therefore failed to adequately plead the elements of a federal securities claim.  In addressing a subsequent amended complaint, however, the district court found that the amendment was futile solely on the basis that the plaintiffs could not adequately plead loss causation.

On appeal, the Fourth Circuit only addressed the issue of loss causation.  As to the short seller report, the court noted that while short seller reports could potentially act as corrective disclosures, in this instance the report “relies on anonymous sources for its nonpublic information and disclaims its accuracy.”  Indeed, as to the report’s use of sources, the publisher stated that some quotations “may be paraphrased, truncated, and/or summarized solely at our discretion, and do not always represent a precise transcript of those conversations.”  Under these circumstances, the Fourth Circuit concluded that the “potential evidentiary value [of the report] evaporates” and it could not form the basis for loss causation.

Alternatively, the plaintiffs argued that the company’s initial response to the short seller report, which did not provide a point-by-point rebuttal, revealed to investors that the report was to some extent accurate.  The Fourth Circuit noted it could “envision a scenario where a third party exposes some unverified bombshell about a company and the company’s tacit mea culpa could function as a verification of that bombshell” but that this “theory holds no water here.”  The company’s press release generally rejected the report’s allegations.

Holding: Judgment of the district court finding amendment futile affirmed.

Quote of note: “The Report’s publisher admits some quotations ‘may be paraphrased, truncated, and/or summarized solely at our discretion, and do not always represent a precise transcript of those conversations.’ That disclosure is particularly troubling because it gives Scorpion Capital the kind of editorial license that could allow it to say just about anything and cloak it in the imprimatur of truth in order to make a buck. For example: If an expert represented, ‘IonQ’s 32-qubit system is revolutionary. By comparison, Company Y’s system looks prehistoric,’ Scorpion Capital gave itself the freedom to say, ‘IonQ’s 32-qubit system looks prehistoric,’ and attribute that quote to an expert. In all, those disclosures lead to the conclusion that ‘the character of the’ Report ‘rendered it inadequate’ to reveal any alleged truth to the market.”

In Kolominsky v. Root, Inc., 2024 WL 1854474 (6th Cir. April 29, 2024), the plaintiffs brought claims under Section 10(b) of the Exchange Act (securities fraud) and Sections 11 and 12(a)(2) of the Securities Act (misstatements in registration statements and offerings) related to alleged misstatements about the company’s purportedly low customer-acquisition cost. The district court dismissed the claims based on the plaintiffs’ failure to adequately plead falsity. On appeal, the Sixth Circuit joined the majority of other circuits on two important issues related to Securities Act claims.

“Sounds in fraud” – Section 11 and 12(a)(2) claims do not have fraud as an element, so generally they are not subject to the heightened pleading standard of Federal Rule of Civil Procedure 9(b). When plaintiffs bring both Section 10(b) and Section 11 and 12(a)(2) claims in the same complaint, however, many courts have found that all of the claims “sound in fraud” and uniformly must be pled with particularity. In Kolominsky, the Sixth Circuit agreed that if the claims are “grounded in one fraudulent course of conduct relying on one set of facts” then Rule 9(b) applies.

“Bespeaks caution doctrine” – The bespeaks caution doctrine addresses situations where optimistic projections are coupled with cautionary language that impacts whether the statements are material or could reasonably have been relied upon by investors. The Private Securities Litigation Reform Act (PSLRA) has a safe harbor for forward-looking statements that applies to Securities Act claims, but there is an exclusion for statements made in connection with initial public offerings. In Kolominsky, the court held that the bespeaks caution doctrine has survived the codification of the PSLRA and joined its “sister circuits that hold when companies such as Root make forward-looking statements contained in a registration statement or in connection with an initial public offering, the Bespeaks Caution doctrine will shield those companies from liability when the forward-looking statements are accompanied by meaningful cautionary language so that a reasonable investor would understand the statements.”

Holding: Motion to dismiss affirmed.

The U.S. Supreme Court has issued a decision in Macquarie Infrastructure Corp. v. Moab Partners, L.P. holding that the failure to disclose information required by Item 303 of Regulation S-K can support a Rule 10b-5(b) claim only if the omission renders affirmative statements misleading.  It is a unanimous decision authored by Justice Sotomayor.

Item 303 of Regulation S-K requires companies to describe “known trends or uncertainties” that may have a material impact on the company’s operations.  There has been a circuit split over whether a company’s failure to meet its Item 303 disclosure requirement can support a private claim under Section 10(b) and Rule 10b-5(b) in the absence of an otherwise-misleading statement.  The Second Circuit has held that a private claim can be brought based on this omission, while other circuits – notably the Ninth Circuit and Third Circuit – have disagreed.

In Macquarie, the Court had little trouble concluding that the Second Circuit had gone too far in expanding the scope of potential securities fraud liability.  The Court clarified that “Rule 10b-5(b) does not proscribe pure omissions.”  Instead, it prohibits only affirmative misstatements and the omission of materials facts necessary to ensure that statements are not misleading (i.e., “half-truths”).  The failure to provide required information under Item 303 is not a half-truth, but instead is a pure omission of information.  Had Congress or the SEC wanted to make pure omissions a basis for liability under Section 10(b) or Rule 10b-5, the Court noted, they knew how to do so because that type of liability exists under Section 11 of the Securities Act for misstatements in registration statements.

Holding: Judgment vacated and case remanded for further proceedings consistent with opinion.

Quote of note:  “[T]he difference between an omission and a half-truth is the difference between a child not telling his parents he ate a whole cake and telling them he had dessert.  Rule 10b-5(b) does not proscribe pure omissions. . . . Put differently, it requires disclosure of information necessary to ensure that that statements already made are clear and complete (i.e., that the dessert was, in fact, a whole cake.)”

Disclosure:  The author of The 10b-5 Daily participated in an amicus brief in support of Macquarie filed by the Washington Legal Foundation.