A District Court granted summary judgment to a corporate defendant and its officers in a class action securities fraud lawsuit. The corporate defendant sold supply chain software to retail companies. Plaintiffs asserted claims under Section 10(b) of the Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 in which they alleged that the corporation’s stock price had been artificially inflated by defendants’ failure to disclose the company’s “true financial condition” for a two-year period ending on July 8, 2008. On July 8, 2002, the company issued a press release stating that it was disappointed with the volume of new business from one of its joint ventures and would have to write off deferred revenue from the transaction. The following day the stock price fell more than 60%. Plaintiffs claimed that the company’s pre-disclosure stock price was based upon misleading statements made in connection with five different transactions (including the joint venture referred to in the July 8 press release) and that even though the press release only referred to the joint venture transaction, it indirectly disclosed the company’s alleged misrepresentations relating to the other four transactions.  

The court found that the “true financial condition” theory permits a plaintiff at the pleading stage to withstand a motion to dismiss by alleging that a corrective disclosure revealed the true financial results and condition of the defendant company, even if the alleged disclosure did not also identify the misrepresentations that allegedly concealed the company’s actual condition. However, the court ruled that at the summary judgment stage a plaintiff must produce evidence that the public became aware of the alleged misrepresentation through the alleged corrective disclosure and that the claimed loss was caused by the alleged misrepresentation. The court held that the plaintiffs failed to meet this burden with respect to any of the five transactions underlying their claim.  

With respect to the joint venture transaction mentioned in the July 8 press release, the court found two deficiencies: (i) all of the information disclosed in the press release had been disclosed months earlier in two analyst reports that predicted the write-off, and (ii) the release did not reveal any misrepresentations about the defendant’s accounting practices or disclosures relating to the joint venture. With respect to the other transactions, where the plaintiffs alleged that the misrepresentations regarding those transactions were indirectly corrected by the press release, the court also found the evidence lacking for two reasons: (i) because no evidence had been presented that the public recognized a relationship between the alleged “corrective disclosures” in the July 8 press release and any misrepresentations concerning any of the four transactions, and (ii) because there was no evidence of any connection between the stock price drop and any such misrepresentations. (In re Retek, Inc., 2009 WL 928483 (D. Minn Apr. 10, 2009))