To adequately plead loss causation, a plaintiff must establish the existence of a corrective disclosure that reveals to the market the pertinent truth that was previously concealed or obscured by the company’s fraud. Determining whether an alleged corrective disclosure actually provides “new news” or is merely a restatement of previously-disclosed information, however, has proven difficult for courts.
In Luczak v. National Beverage Corp., 2020 WL 2111947 (11th Cir. May 4, 2020) (per curiam), the plaintiffs alleged that the company (a) made misleading statements regarding two sales metrics the Company purportedly touted as an important measure of growth and sales, and (b) failed to disclose that its CEO had engaged in a pattern of sexual misconduct.
As to the sales metrics statements, the plaintiffs alleged that the truth was revealed to the market by a March 2018 SEC letter questioning the company’s use of the metrics and a subsequent June 2018 media report discussing the issue. The lower court, however, found that neither of these items were “corrective disclosures” because the SEC letter “merely confirm[ed] the SEC’s already established doubt of the veracity” of the sales metrics and the media report was just a summary of the SEC correspondence. As to the sexual misconduct claims, the plaintiffs argued that a July 2018 Wall Street Journal article had revealed the misconduct, but the lower court found that the article only repeated allegations that had been made in publicly-filed lawsuits.
On appeal, the Eleventh Circuit rendered a split decision. The panel found that the lower court had read the March 2018 SEC letter and the June 2018 media report too narrowly. Although the SEC’s interest in the sales metrics was publicly known, the SEC letter and media report arguably provided “new news” that the company was failing to cooperate with the SEC in its inquiry by not providing additional information about the metrics. Moreover, the media report could be read to suggest that this conclusion came from sources beyond the SEC correspondence. As to the sexual misconduct claims, however, the panel agreed that the 2018 Wall Street Journal article did not provide any additional information that could not be found in the lawsuits.
Holding: Affirmed in part, reversed in part, and vacated in part.
Additional note: The decision points out that the Eleventh Circuit has never decided whether the heightened pleading standards of the PSLRA or FRCP 9(b) apply to the pleading of loss causation. The panel declined to address the issue, however, holding that its decision would not be affected by which pleading standard was used.