On February 9, 2018, Judge Charles E. Breyer of the United States District Court for the Northern District of California held that “newly discovered evidence” regarding the basis for an auditor’s resignation and the scope of improper expense reimbursements did not justify reconsidering the Court’s prior dismissal of claims under Section 10(b) of the Securities Exchange Act of 1934 for failure to sufficiently allege scienter and loss causation.

Plaintiff in Rok alleges that defendants, the security technology company Identiv, Inc. and two of its executives, concealed the improper reimbursement of personal expenses to one of those executives in proxy statements from 2013 and 2014. The Court dismissed the claims in January 2017 because, among other things, (a) plaintiff had not pleaded facts supporting a compelling inference that defendants’ failure to disclose the improper reimbursements was intended to defraud investors and (b) plaintiff had not established that the decline in defendant’s stock price was proximately caused by revelation of the improper reimbursements.

The auditor’s resignation had been disclosed in a November 2015 Form 8-K and had been highlighted in plaintiff’s complaint, but in his latest motion plaintiff argued that he had not previously had access to the auditor’s resignation letter. Plaintiff argued the letter showed that the resignation was a “‘strong, corrective measure’ intended by the auditor to distance itself from wrongdoing and potential illegality” directly relating to alleged improper reimbursement practices and Identiv’s response thereto, which plaintiff claimed “directly [tied] the circumstances of [the auditor’s] noisy resignation with the allegations raised in the [complaint].” Id. at *5. Judge Breyer, however, held that even though the letter demonstrated a direct link between the resignation and the improper reimbursements, it did not establish the relevant scienter – i.e., that defendants “had a contemporaneous intent to defraud investors.” Id. In this regard, the Court stressed that an intent merely to provide or receive reimbursement for personal expenses was not enough.

Second, plaintiff argued that new evidence demonstrated that the amount of improper reimbursements was actually more than $500,000, nearly five times larger than the amount alleged in the complaint. In its January 2017 order, the Court had noted that, among other factors weighing against a finding of scienter, was that the amount of money involved was “relatively small.” Id. at *6. The Court acknowledged that “the Court’s point is clearly weaker in light of the new amount” and that it was unlikely that the Court would conclude that the higher amount weighed against an inference of scienter. Nevertheless, the Court’s original conclusion regarding scienter was supported by other factors and the Court’s conclusion remained unchanged that plaintiff’s allegations did not give rise to a strong inference that defendants acted with an intent to defraud investors, as opposed to an intent (inapposite under the Exchange Act) to reimburse an executive for personal expenses. Id. at *6 & n.4.

The Court also rejected plaintiff’s argument that the auditor’s resignation letter should result in a different conclusion on the issue of loss causation. The Court acknowledged that the letter shed light on the reasons for the auditor’s resignation; however, since that letter was not known to the market in late 2015 (when plaintiff’s alleged loss was suffered) it could not have impacted what the market knew at the time. Nothing in the letter could therefore have had any bearing on what revelations may (or may not) have caused plaintiff’s alleged loss. Id. at *7.

Judge Breyer’s decision is a reminder that an inference of scienter must be based on facts relating to the relevant intent, rather than merely to questionable conduct not intended to deceive investors. It also demonstrates that attempts to plead loss causation based on revelation of the alleged “truth” cannot be premised on disclosures that post-date the claimed harm.

Rok v. Identiv, Inc.