Summary
This Ninth Circuit opinion affirms the district court's dismissal of a securities fraud class action for failure to state a claim. The panel held that the mere announcement of an internal investigation into revenue accounting practices, without more, is insufficient to establish loss causation under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The court reasoned that such an announcement does not reveal actual wrongdoing to the market and therefore cannot serve as a corrective disclosure. Consequently, the plaintiff failed to plausibly allege that the resulting stock price decline was caused by the revelation of fraud rather than general market speculation.
Topics
Practice areas
Questions Presented
- Whether the announcement of an internal investigation, standing alone and without disclosure of actual wrongdoing, can establish loss causation under Section 10(b) and Rule 10b-5.
- Whether the amended complaint plausibly alleged loss causation based on disappointing earnings reports and the announcement of Immersion's internal investigation.
- Whether the district court abused its discretion by dismissing the amended complaint with prejudice and denying further leave to amend.
- Whether the derivative control-person and insider-trading claims could proceed absent a viable underlying Section 10(b) and Rule 10b-5 violation.
Holdings
- The announcement of an investigation, standing alone and without disclosure of actual wrongdoing, is insufficient to establish loss causation because it does not reveal fraudulent practices to the market.
- Loos failed to plausibly plead loss causation because the disappointing earnings reports showed only poor financial health, and the amended complaint did not allege the stock-price impact of the later disclosures that allegedly confirmed the fraud.
- The district court did not abuse its discretion by dismissing the amended complaint with prejudice and denying further leave to amend.
- The derivative control-person and insider-trading claims failed because Loos did not state a viable underlying Section 10(b) and Rule 10b-5 claim.
Key quotations
“Accordingly, we hold that the announcement of an investigation, without more, is insufficient to establish loss causation.” (762 F.3d at 889)
“The announcement of an investigation does not “reveal” fraudulent practices to the market.” (762 F.3d at 889)
“Plaintiff’s omission of this information is fatal to his ability to plausibly allege loss causation.” (762 F.3d at 890)
Factual background
Immersion Corporation reported a series of profitable quarters and revenue growth, followed by disappointing results and declining medical-division revenue. On July 1, 2009, Immersion announced an internal investigation into prior medical-division revenue transactions, and its stock price fell more than 23 percent. Later disclosures stated that prior financial statements should no longer be relied upon and that Immersion had prematurely recognized revenue in violation of GAAP, resulting in restatements. The complaint alleged that the July 1 investigation announcement revealed accounting fraud and caused the investors' losses.
Procedural history
Several shareholder class actions were consolidated, and Loos was appointed as the putative class representative. The district court initially dismissed the complaint for inadequate pleading of scienter and loss causation but granted leave to amend. After the amended complaint repeated the same theory, the court dismissed it with prejudice and denied further leave to amend. The Ninth Circuit affirmed.