On January 31, 2018, the United States Court of Appeals for the Ninth Circuit affirmed in a per curiam decision a district court decision denying in part defendants’ motion for summary judgment on claims brought under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by investors in First Solar, Inc., one of the world’s largest producers of solar panels. Mineworkers’ Pension Scheme et al. v. First Solar Inc., No. 15-17282 (9th Cir. Jan. 31, 2018). After partially denying summary judgment, the district court certified for interlocutory appeal a question as to the correct test for loss causation under the Exchange Act in the Ninth Circuit. In addressing this question, the Ninth Circuit resolved a perceived ambiguity between two lines of decisions in the Circuit by affirming the district court’s holding that a plaintiff can establish loss causation by proving that “the defendant misrepresented or omitted the very facts that were a substantial factor in causing the plaintiff’s economic loss” even if the alleged fraud was not itself disclosed to the market before the plaintiff suffered the loss. In so doing, the Ninth Circuit rejected the defendants’ argument that “[s]ecurities fraud plaintiffs can recover only if the market learns of the defendants’ fraudulent practices” before the claimed loss.
Plaintiffs alleged that First Solar wrongfully concealed manufacturing and design defects in their solar panels, misrepresented the cost and scope of these defects, and reported false information in press releases, earnings calls, and filings with the Securities and Exchange Commission. Plaintiffs further alleged that First Solar’s stock fell following disclosures of defects and disappointing financial results. Relying on Metzler v. Corinthian Colleges Inc., 540 F.3d 1049 (9th Cir. 2008), First Solar argued that loss causation can be proven only if the market learns of the alleged misrepresentation and the stock drops in response. Citing In re Daou Systems Inc., 411 F.3d 1006 (9th Cir. 2005), plaintiffs argued they could prove First Solar’s alleged misrepresentations caused their loss when the stock price fell from $300 in 2008 to less than $50 in 2012 because they could prove a connection between the misrepresented facts and the losses, though the alleged misrepresentations had not yet been revealed.
In affirming the district court’s decision, the Ninth Circuit observed that the test for loss causation under the Exchange Act is the same as “the familiar test for proximate cause” and is “fact-specific.” According to the panel, a plaintiff can prove loss causation if the losses precede the revelation of a misrepresentation provided the plaintiff can show that its losses were caused by “the very facts about which the defendant lied.” In so holding, the panel looked to the Ninth Circuit’s recent decision in Lloyd v. CVB Fin. Corp., 811 F.3d 1200 (9th Cir. 2016), which held that the “ultimate issue is whether the defendant’s misstatement, as opposed to some other fact, foreseeably caused the plaintiff’s loss.”
The Ninth Circuit acknowledged that a stock drop that occurs after the revelation of the fraud could help to rule out alternative causes of the loss. Because of this, and because claimed losses must be causally tied to the “very facts” that allegedly were misrepresented and not anything else, plaintiffs in the Ninth Circuit continue to face substantial challenges in proving loss causation, particularly in cases where losses are not preceded by the disclosure of a misrepresentation.