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(Article from Securities Law Alert, December 2014)

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Fifth Circuit Holds That Partial Disclosures, Taken Together, May Constitute a Corrective Disclosure for Loss Causation Purposes

On October 2, 2014, the Fifth Circuit reversed dismissal of a securities fraud action based on its finding that plaintiffs’ alleged partial disclosures of Medicare fraud “collectively constitute[d] and culminate[d] in a corrective disclosure that adequately [pled] loss causation.” Pub. Emps. Ret. Sys. of Mississippi v. Amedisys, Inc., 769 F.3d 313 (5th Cir. 2014) (Gilstrap, J.). The court explained that its “holding can best be understood by simply observing that the whole is greater than the sum of its parts.”

The Fifth Circuit underscored that there is “no requirement that a corrective disclosure take a particular form or be of a particular quality.” The court explained that “[a] corrective disclosure can come from any source, and can take any form from which the market can absorb [the information] and react … so long as it ‘reveal[s] to the market the falsity’ of the prior misstatements.” The Fifth Circuit further stated that a corrective disclosure need not “be a single disclosure” but “rather, the truth can be gradually perceived in the marketplace through a series of partial disclosures.”

Fifth Circuit Holds That the PSLRA’s Heightened Pleading Standards Do Not Apply to Loss Causation Allegations

On July 15, 2014, the Fifth Circuit reversed dismissal of a securities fraud action based, inter alia, on its finding that the district court had erred by requiring plaintiffs to allege loss causation with particularity. Spitzberg v. Houston Am. Energy Corp., 758 F.3d 676 (5th Cir. 2014) (Davis, J.). The Fifth Circuit determined that loss causation allegations are not subject to the heightened pleading requirements of the Private Securities Litigation Reform Act (“PSLRA”).

The Fifth Circuit explained that “the plain text of 15 U.S.C. § 78u-4(b)(4) does not indicate that it imposes any heightened standard, or make any mention of a ‘particularity’ requirement with respect to loss causation.”[1] Moreover, the Fifth Circuit noted that in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), “the Supreme Court explicitly declined to address whether any heightened pleading requirement applies to [loss causation].”

The Fifth Circuit stated that under its precedent, courts are “not authorized or required to determine whether the plaintiffs[’] plausible inference of loss causation is equally or more plausible than other competing inferences, as [courts] must in assessing allegations of scienter under the PSLRA.” While plaintiffs must “eventually” prove loss causation “by a preponderance of the evidence,” the Fifth Circuit explained that “the PSLRA does not obligate a plaintiff to deny affirmatively that other factors affected the stock price in order to defeat a motion to dismiss.”

Ninth Circuit Finds the Announcement of an Internal Investigation, Standing Alone, Insufficient to Establish Loss Causation

On August 7, 2014, the Ninth Circuit held that “the announcement of an investigation, standing alone, is insufficient to establish loss causation.” Loos v. Immersion Corp., 762 F.3d 880 (9th Cir. 2014) (Rice, J.). The Ninth Circuit reasoned that “[t]he announcement of an investigation does not ‘reveal’ fraudulent practices to the market.” The court explained that “at the moment the investigation is announced, the market cannot possibly know what the investigation will ultimately reveal.” Although “the disclosure of an investigation is … an ominous event,” the Ninth Circuit underscored that the announcement of an investigation “simply puts investors on notice of a potential future disclosure of fraudulent conduct.” The court found that “any decline in a corporation’s share price following the announcement of an investigation can only be attributed to market speculation about whether fraud has occurred.” The Ninth Circuit held that “[t]his type of speculation cannot form the basis of a viable loss causation theory.”

In an amended opinion issued on September 11, 2014, the Ninth Circuit clarified that it did not “mean to suggest that the announcement of an investigation can never form the basis of a viable loss causation theory.” The court stated that “[t]o the extent an announcement contains an express disclosure of actual wrongdoing, the announcement alone might suffice.”