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(Article from Securities Law Alert, November/December 2017) 

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

On November 21, 2017, the Ninth Circuit held that a government agency’s disclosure of consumer complaints of possible fraud “did not form a sufficient basis for a viable loss causation theory.” Curry v. Yelp, 2017 WL 5583889 (9th Cir. 2017) (Gould, J.).[1] The Ninth Circuit explained that “[a]lthough a securities fraud plaintiff need not allege an outright admission of fraud to survive a motion to dismiss, ‘the mere ‘risk’ or ‘potential’ for fraud is insufficient to establish loss causation.’” Id. (quoting Loos v. Immersion, Corp., 762 F.3d 880 (9th Cir. 2014)).[2] 

The Ninth Circuit noted that it previously held in Loos “that the mere announcement of an investigation was insufficient to establish loss causation because it does not ‘reveal’ fraudulent practices to the market.” Id. (quoting Loos., 762 F.3d 880).  Here, plaintiffs attempted to “rely on even less” because they cited only to the disclosure of customer complaints “without a subsequent investigation.” The Ninth Circuit held that “the element of loss causation cannot be adequately made out merely by resting on a number of customer complaints and asserting that where there is smoke, there must be fire.”

[1] The Ninth Circuit stated that in order “to prove loss causation, the plaintiff must demonstrate a causal connection between the deceptive acts that form the basis for the claim of securities fraud and the injury suffered by the plaintiff” (quoting Ambassador Hotel Co. v. Wei-Chuan Inv., 189 F.3d 1017 (9th Cir. 1999)).

[2] Please click here to read our prior discussion of the Ninth Circuit’s decision in Loos.