On February 17, 2017, the United States Court of Appeals for the Ninth Circuit affirmed the dismissal of a putative securities class action brought against DreamWorks Animation SKG Inc. (“DreamWorks”), its CEO and CFO. Roofers Local No. 149 Pension Fund v. DreamWorks Animation SKG, Inc., et al., No. 15-55945, 2017 WL 655789 (9th Cir Feb. 17, 2017). Plaintiff had alleged that defendants violated Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Securities and Exchange Commission Rule 10b-5 promulgated thereunder, along with Section 20(a) of the Exchange Act, by knowingly making false or misleading statements regarding the profitability of DreamWorks’ animated movie “Turbo” during announcements of second- and third-quarter results in 2013. The Court affirmed the dismissal of the claims, holding that plaintiff failed to adequately allege a false or misleading statement or loss causation, underscoring that complaints filed in response to poorer-than-expected results and/or the mere announcement of a regulatory investigation are not likely to succeed.

Plaintiff alleged that DreamWorks violated Section 10(b) by claiming that Turbo would be profitable in the second and third fiscal quarters of 2013 and by failing to record an impairment charge on the film in the third fiscal quarter of 2013. The Ninth Circuit held that plaintiff’s allegations did not establish that defendants “had no reasonable basis for the belief” the movie could be profitable, and that in any event defendants adequately caveated statements regarding the movie’s potential for profitability.

The Court also held plaintiff failed to adequately allege loss causation. Plaintiff asserted that defendants’ purported fraud was revealed first in February 2014, when DreamWorks’ write-down on Turbo was announced, and again in July 2014, when defendants announced that Turbo was unlikely to be profitable and that the SEC had launched an investigation into the movie’s accounting. The Court rejected these arguments. With respect to the write-down, the Court noted that a plaintiff cannot allege loss causation merely by showing that the market had reacted to the purported “impact” of the alleged fraud, i.e., a failure to meet earnings expectations. Instead, plaintiffs must allege that the market reacted “to the fraudulent acts themselves,” which plaintiff had not done. The Court further held that loss causation cannot be alleged by pointing merely to the “announcement of an investigation,” because such an announcement generally does not reveal any previous statement to have been false. Indeed, the Court highlighted that the “parties do not dispute that the SEC ended its investigation without taking enforcement action against Defendants.”

This decision serves as an important reminder of the high pleading standard that plaintiffs must meet when alleging a false or misleading statement. It also affirms the Court’s view that defendants have good loss causation defenses when the alleged corrective disclosures merely announce poorer than expected results and do not otherwise reveal that a prior statement was misleading.

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