(Article from Securities Law Alert, February 2018)
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On January 31, 2018, the Ninth Circuit held that “a general proximate cause test … is the proper test” for loss causation under Section 10(b) and Rule 10b-5 and that disclosure of the fraud is not a prerequisite for loss causation. Mineworkers’ Pension Scheme v. First Solar, 2018 WL 626948 (9th Cir. 2018) (per curiam).
The Ninth Circuit found the district court had appropriately applied the general proximate cause test in holding that “[a] plaintiff can satisfy loss causation by showing that the defendant misrepresented or omitted the very facts that were a substantial factor in causing the plaintiff’s economic loss.” Id.
The district court read the Ninth Circuit’s earlier decisions as divided on the appropriate test for loss causation. In the district court’s view, one line of prior Ninth Circuit opinions held that “[s]ecurities fraud plaintiffs can recover only if the market learns of the defendants’ fraudulent practices. It is not enough that plaintiffs are injured by the consequences of those practices.” Smilovits v. First Solar, 119 F. Supp. 3d 978 (D. Ariz. 2015).[1] The district court found that another group of Ninth Circuit rulings held that “drawing a causal connection between the facts misrepresented and the plaintiff’s loss will satisfy loss causation. A plaintiff need not show that the fraudulent practices themselves were revealed.” [2]
The district court followed the latter approach, but certified the following question for interlocutory appeal:
[W]hat is the correct test for loss causation in the Ninth Circuit? Can a plaintiff prove loss causation by showing that the very facts misrepresented or omitted by the defendant were a substantial factor in causing the plaintiff’s economic loss, even if the fraud itself was not revealed to the market, or must the market actually learn that the defendant engaged in fraud and react to the fraud itself?
Id. (internal citations omitted).
On appeal, the Ninth Circuit explained that the Exchange Act, as modified by the Private Securities Litigation Reform Act, “defines ‘loss causation’ as the plaintiff’s ‘burden of proving that the act or omission of the defendant alleged to violate [Section 10(b)] caused the loss for which the plaintiff seeks to recover damages.’” Mineworkers’ Pension Scheme, 2018 WL 626948 (quoting 15 U.S.C. § 78u-4(b)(4)). The court found “[t]his inquiry requires no more than the familiar test for proximate cause.”
The Ninth Circuit stated that in order “[t]o prove loss causation, plaintiffs need only show a causal connection between the fraud and the loss, by tracing the loss back to the very facts about which the defendant lied.” Id. (internal citations omitted). The court emphasized that “‘[d]isclosure of the fraud is not a sine qua non of loss causation, which may be shown even where the alleged fraud is not necessarily revealed prior to the economic loss.’” Id. (quoting Nuveen Mun. High Income Opportunity Fund v. City of Alameda, 730 F.3d 1111 (9th Cir. 2013)).
The Ninth Circuit noted that its recent decision in Lloyd v. CVB Financial Corporation, 811 F.3d 1200 (9th Cir. 2016)[3]—issued after the district court’s order—“clarifie[d] the applicable rule.” The Lloyd court observed that “loss causation is a context-dependent inquiry, as there are an infinite variety of ways for a tort to cause a loss.” 811 F.3d 1200 (internal citations omitted). The Lloyd court stated that “[b]ecause loss causation is simply a variant of proximate cause, the ultimate issue is whether the defendant’s misstatement, as opposed to some other fact, foreseeably caused the plaintiff’s loss.”
In Mineworkers’ Pension Scheme, the Ninth Circuit explained that “[r]evelation of fraud in the marketplace is simply one of the ‘infinite variety’ of causation theories a plaintiff might allege to satisfy proximate cause.”[4] 2018 WL 626948. The court noted that if “a stock price drop comes immediately after the revelation of fraud,” this “can help to rule out alternative causes.” However, the Ninth Circuit emphasized that “[a] plaintiff may also prove loss causation by showing that the stock price fell upon the revelation of an earnings miss, even if the market was unaware at the time that fraud had concealed the miss.”
[1] The district court found the following Ninth Circuit rulings took this approach: Oregon Public Employees’ Retirement Fund v. Apollo Group, 774 F.3d 598 (9th Cir. 2014); Loos v. Immersion Corporation, 762 F.3d 880 (9th Cir. 2014); In re Oracle Corp. Securities Litigation, 627 F.3d 376 (9th Cir. 2010); and Metzler Investment GMBH v. Corinthian Colleges, 540 F.3d 1049 (9th Cir. 2008).
[2] The district court cited to the following decisions: Nuveen Municipal High Income Opportunity Fund v. City of Alameda, 730 F.3d 111 (9th Cir. 2013); Berson v. Applied Signal Technology, 527 F.3d 982 (9th Cir. 2008); and In re Daou Systems, 411 F.3d 1006 (9th Cir. 2005).
[3] Please click here to read our prior discussion of the Lloyd decision.
[4] The Ninth Circuit indicated that there was no conflict in its prior rulings on loss causation. The court stated that its “approval of one theory should not imply [its] rejection of others.” Mineworkers’ Pension Scheme, 2018 WL 626948.