Blog Post

Ninth Circuit clarifies loss causation in securities fraud case

Christopher J. Waznik • Oct 19, 2020

While no bright line rule applies in cases involving loss causation under a fraud-on-the-market theory, the Ninth Circuit made clear that bona fide admissions of guilt by the defendant are not necessary.

Chris Waznik

On October 8, 2020, the U.S. Court of Appeals for the Ninth Circuit clarified the loss causation standard for a fraud-on-the-market private securities fraud claim under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. In re BofI Holding, Inc. Securities Litigation, -- F.3d --, 2020 WL 5951150 (9th Cir. 2020).


Under the holding, a plaintiff pleading loss causation does not need to point to an outright admission by the company or formal determination of fraud.


For years prior to the lawsuit, BofI Holding, Inc., the holding company of BofI Federal Bank, had strong earnings and a rising stock price. But between August 2015 and February 2016, its stock price plummeted 47%. Numerous shareholders filed securities fraud lawsuits, which were eventually consolidated. The operative complaint alleged that BofI committed securities fraud by falsely depicting itself as a safer investment than it actually was, via false or misleading statements about its loan underwriting standards, system of internal controls, and compliance infrastructure.

The district court held that the shareholders adequately pleaded the first five elements for the claim — (1) material misrepresentation or omission, (2) scienter, (3) in connection with purchase or sale of a security, (4) reliance, and (5) economic loss — but not the sixth, loss causation.


To establish loss causation in a fraud-on-the-market case, a plaintiff must show that, after purchasing shares at an inflated price caused by the fraud and before selling, the truth became known and the revelation caused the fraud-induced inflation in the stock price to be reduced or eliminated. To meet this element, most shareholders point to “corrective disclosures” — e.g., a corporate press release — that disseminates a correct statement to the market. Here, the shareholders identified two disclosures:


  • a whistleblower lawsuit filed by a former mid-level auditor at BofI; and


  • anonymous blog postings written by self-identified short sellers that consolidated publicly-available information.


To the district court, neither was enough.


At the Ninth Circuit, writing for the majority in a split decision, Judge Watford agreed that the blog post was insufficient but disagreed as to the whistleblower lawsuit. He explained that a corrective disclosure need not be an admission of fraud by the company or a formal finding of fraud. Instead, he continued, the inquiry focuses on whether the market reasonably perceived the identified corrective disclosure as true and acted upon it accordingly.


Under the posture of the case, the complaint met that standard because the facts alleged in the whistleblower lawsuit revealed to the market that at least some of BofI’s alleged misstatements were false. Thus, the court drew a sharp line between the falsity and loss causation elements for a Rule 10b-5 claim: To plead loss causation, the shareholders did not have to establish that the allegations in the whistleblower complaint were in fact true.


The panel joined the Sixth Circuit in rejecting a categorical rule that allegations in a separate lawsuit cannot serve as a corrective disclosure because, by their very nature, they are unproven allegations.


In sum, no bright line rule applies in cases involving loss causation under a fraud-on-the-market theory, but the Ninth Circuit made clear that bona fide admissions of guilt by the defendant are not necessary.


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