Ninth Circuit Clarifies Loss Causation Decision in Loos v. Immersion Corporation

The Ninth Circuit recently clarified its decision in Loos v. Immersion Corporation, 762 F.3d 880 (9th Cir. 2014) regarding when the announcement of an investigation may constitute a corrective disclosure under the loss causation element of a securities fraud claim under Section 10(b) and Rule 10b-5.  In Loos, the court held that the announcement of an investigation into the company’s business and operations alone was not sufficient to constitute a corrective disclosure.

In Lloyd v. CVB Fin. Corp., 811 F.3d 1200 (9th Cir. 2016), decided on February 1, 2016, the Ninth Circuit addressed the question left open by Loos, specifically, under what circumstances the announcement of an investigation may be sufficient to constitute a corrective disclosure.  In CVB, the company announced that it had received a subpoena from the SEC seeking information about the company’s loan underwriting methodology and allowances for credit losses.  In response, the company’s stock price fell.  A month later, CVB announced that one if its largest borrowers was unable to pay its loans as scheduled, causing CVB to charge off millions of dollars in loans.  However, the stock price hardly reacted to this second announcement.  The plaintiff alleged that the first announcement of the subpoena was a partial corrective disclosure whereby the market perceived the subpoena to be related to CVB’s borrowers’ ability to pay and then the market’s fears about the subpoena were confirmed by the second announcement.  The court agreed, explaining that “any other rule would allow a defendant to escape liability by first announcing a government investigation and then waiting until the market reacted before revealing that prior representations under investigation were false.”

Therefore, in a positive development for securities fraud plaintiffs, the court in CVB relaxed the Loos standard, determining that the announcement of an investigation, when followed by subsequent disclosures confirming the company’s wrongdoing, can constitute a corrective disclosure for loss causation purposes.