On February 25, 2013, the U.S. Court of Appeals for the Eleventh Circuit affirmed the U.S. District Court for the Northern District of Florida's dismissal of a securities fraud claim for failure to adequately plead loss causation against a publicly traded company. The court held that neither an in-depth analysis of previously publicly available information, nor the announcement of an SEC inquiry or investigation, constituted a corrective disclosure that evidenced loss causation.

In the complaint, the plaintiffs alleged that the company overstated its assets and knowingly and unreasonably failed to take impairment charges on assets, artificially inflating share prices. The plaintiffs' claims were based on a prominent short-sale hedge fund investor's presentation and the company's announcement of an SEC investigation. In the two days of trading after the expert investor's presentation, which suggested that the company assets were significantly overvalued and should be classified as impaired, the company's stock price dropped 20 percent. Shortly thereafter, the company disclosed that the SEC was initiating an informal inquiry into its policies and practices concerning impairment of investments. Six months later, the company announced the SEC had issued an order of private investigation as to its compliance with federal antifraud provisions and reporting requirements.

Loss causation — proof of a casual connection between the alleged misrepresentation and the investment's subsequent decrease in value — is an essential element of claims under §10(b) of the Exchange Act. As only losses attributable to the alleged misrepresentation are actionable, loss causation serves as a gate to protect defendants and ensure that "federal securities laws do not become a system of investor insurance that reimburses investors for any decline in the value of their investment." The plaintiffs attempted to show loss causation by identifying a corrective disclosure, but the court noted that such a disclosure "must at least relate back to the misrepresentation and not some other negative information about the company." It is, therefore, dependent on the "relevant truth eventually com[ing] out" and causing the plaintiffs a loss. The plaintiffs claimed that a hedge fund expert's detailed analysis of publicly available information that suggested the company was falsely representing its finances, and the company's announcement of an SEC inquiry and later an SEC investigation, were corrective disclosures that established loss causation. The court of appeals disagreed, however.

The Eleventh Circuit held that an interpretation or analysis of already publicly available information could not be considered corrective information, even if it suggested or revealed a company's alleged prior misrepresentation. "The mere repackaging of already-public information," the court found, "is simply insufficient to constitute a corrective disclosure," because the only new information was the analyst's opinion, which the court held was insufficient by itself to constitute a corrective disclosure. The court reasoned that "if every analyst or short-seller's opinion based on already-public information could form the basis for a corrective disclosure, then every investor who suffers a loss in the financial markets could sue under §10(b) using an analyst's negative analysis for public filings as a corrective disclosure,"which "cannot be the law."

As to the SEC inquiry and investigation, the court held that an "SEC investigation, without more, is insufficient to constitute a corrective disclosure for purposes of §10(b)." The announcement of an investigation was proof of an investigation and "nothing more." The court observed that, while stock prices typically fall when an SEC investigation is announced, it is simply because there is a risk of future corrective action; it is not proof that the company previously made false or fraudulent statements. As such, the announcement of an SEC investigation or inquiry is insufficient to constitute a corrective disclosure for purposes of establishing loss causation. Given that the plaintiffs failed to prove this crucial element, the court of appeals affirmed the lower court's holding and dismissed the plaintiffs' complaint with prejudice.

Although the fraud on the market theory continues to aid plaintiffs in establishing reliance in securities fraud claims, the Eleventh Circuit's recent decision underscores that asserting the theory does not provide plaintiffs with an automatic pass when facing a motion to dismiss. Plaintiffs must link the alleged material misrepresentation to their loss in order to survive a motion to dismiss brought by defendant corporations. SEC investigations or commenters' theories, opinions and analyses of publicly available information will not overcome the loss-causation hurdle.

The opinions is Meyer v. Greene, No. 12-11488, 2013 WL 656500 (11th Cir. Feb. 25, 2013), and is available at: http://www.ca11.uscourts.gov/opinions/ops/201211488.pdf