Publications

(Article from Securities Law Alert, January 2015)

For more information, please visit the Securities Law Alert Resource Center.

Under Rule 8(a) of the Federal Rules of Civil Procedure, plaintiffs need only provide “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a).  However, Rule 9(b) requires that a plaintiff “alleging fraud or mistake …  state with particularity the circumstances constituting fraud or mistake.”  Fed. R. Civ. P. 9(b).[1] On December 16, 2014, the Ninth Circuit held that “Rule 9(b) applies to all elements of a securities fraud action, including loss causation.” Oregon Public Employees’ Retirement Fund v. Apollo Group Inc., 2014 WL 7139634 (9th Cir. 2014) (Smith, Jr., J.).

Ninth Circuit Finds Loss Causation Is Among the “Circumstances Constituting Fraud” Within the Meaning of Rule 9(b)

At the outset, the Ninth Circuit observed that while “it is clear that Rule 9(b) and the [Private Securities Litigation Reform Act (“PSLRA”)] apply to almost all elements of a securities fraud action, the law is less clear about the pleading standard that applies to the loss causation element.” The court noted that in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), “the Supreme Court suggested that Rule 8’s ‘short and plain statement’ might apply” to loss causation allegations. The Ninth Circuit explained that “[a]fter Dura,” it had “applied a plausibility standard to loss causation, which avoid[ed] the question of whether the Rule 8(a) or Rule 9(b) pleading standard applie[d].” Under this plausibility standard, courts in the Ninth Circuit considered whether “the complaint allege[d] facts that, if taken as true, plausibly establish[ed] loss causation.” In re Gilead Sciences Sec. Litig., 536 F.3d 1049 (9th Cir. 2008). On occasion, courts in the Ninth Circuit “applied both Rule 8(a) and 9(b) standards to allegations of loss causation.”  Apollo, 2014 WL 7139634.  

In Apollo, the Ninth Circuit squarely addressed for the first time the question of which pleading standard applies to loss causation allegations. The Ninth Circuit determined that applying Rule 9(b) to loss causation allegations “is appropriate for at least three reasons.” First, the court reasoned that “[s]ince Rule 9(b) applies to all circumstances of common-law fraud, … and since securities fraud is derived from common law fraud, it makes sense to apply the same pleading standard to all circumstances of securities fraud,” including loss causation. The court noted that “[t]he requirement of loss causation, in particular, is founded on the common law of fraud and deceit.” Second, the Ninth Circuit found that “[l]oss causation is part of the ‘circumstances’ constituting fraud” within the meaning of Rule 9(b) “because, without it, a claim of securities fraud does not exist.” Third, the Ninth Circuit explained that its approach “creates a consistent standard through which to assess pleadings in 10(b) actions, rather than the piecemeal standard adopted by some courts.”

Ninth Circuit Recognizes a Circuit Split on Whether Rule 9(b) Applies to Loss Causation Allegations

The Ninth Circuit discussed a circuit split on the applicable pleading standard for loss causation allegations.  The Fourth and Seventh Circuits have “suggested that heightened pleading standards apply to loss causation” (citing Katyle v. Penn Nat’l Gaming,  Inc., 637 F.3d 462 (4th Cir. 2011); Tricontinental Indus., Ltd. v. PricewaterhouseCoopers, LLP, 475 F.3d 824 (7th Cir. 2007)). “The Second Circuit applies a different, but heightened, two-part test for loss causation, requiring that plaintiffs show that the loss was both foreseeable and caused by the materialization of the risk concealed by the fraudulent statement” (citing ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007)).  “The Fifth Circuit has concluded that Rule 8(a) applies” to loss causation allegations (citing Lormand v. U.S. Unwired, Inc., 565 F.3d 228 (5th Cir. 2009)).  Finally, the First Circuit “has only stated that it is unclear whether a plaintiff has to plead loss causation under Rule 8(a) or 9(b) (citing Mass. Ret. Sys. v. CVS Caremark Corp., 716 F.3d 229 (1st Cir. 2013)).

The Ninth Circuit explained that it was “persuaded by the approach adopted in the Fourth Circuit.” Courts in the Fourth Circuit “review allegations of loss causation for ‘sufficient specificity,’ a standard largely consonant with [Rule] 9(b)’s requirement that averments of fraud be pled with particularity.”  Penn. Nat’l Gaming, 637 F.3d 462.

Ninth Circuit Finds Plaintiffs Failed to Plead Loss Causation Under Either Rule 8(a) or Rule 9(b)

Turning to plaintiffs’ loss causation allegations in the case before it, the Ninth Circuit found that plaintiffs did “not allege specific statements made by the [d]efendants that were made untrue or called into question by subsequent disclosures.” The Ninth Circuit determined that plaintiffs’ loss causation allegations did not pass muster under either Rule 8(a) or Rule 9(b), and therefore affirmed dismissal of plaintiffs’ complaint.