On September 11, 2014, the Ninth Circuit published its amended opinion in John Loos v. Immersion Corp. et al., No. 12-15100 (9th Cir. 2014), holding that “the announcement of an investigation, without more, is insufficient to establish loss causation,” a necessary element of a securities fraud claim under Section 10(b) and Rule 10b-5.  The appellate court did include a footnote to this holding in its amended opinion cautioning that this does not mean “an investigation can never form the basis of a viable loss causation theory,” but rather, as the Eleventh Circuit held, “that the announcement of an investigation, ‘standing alone and without any subsequent disclosure of actual wrongdoing, does not reveal to the market the pertinent truth of anything, and therefore does not qualify as a corrective disclosure.’”

Shortly after Immersion Corp. “revealed that it had launched an internal investigation into revenue recognition practices,” and “that its prior financial statements ‘should no longer be relied upon’ due to irregularities with ‘certain revenue transactions,’” several securities fraud cases were filed against it and its senior officers. The federal district court consolidated the cases, and the defendants moved to dismiss the case, claiming that the plaintiff failed to state a claim.  The district court agreed with the defendants, finding that the plaintiff failed to adequately plead loss causation, among other deficiencies, but granted plaintiff leave to amend his complaint. 

In the amended complaint, “[t]he gravamen of Plaintiff’s loss causation theory [was] that Immersion’s disappointing financial results signaled that the company lacked the ‘growth drivers and profitability’ that it had previously claimed, and that the subsequent announcement of an investigation into prior revenue transactions confirmed that Immersion had fraudulently overstated its historical revenues.”  Once again, the district court found these allegations failed to meet the pleading requirement that “the decline in the defendant’s stock price was proximately caused by a revelation of fraudulent activity rather than by changing market conditions, changing investor expectations, or other unrelated factors.”  As a result, the district court dismissed the case without leave to amend.

The plaintiff appealed, “challeng[ing] the district court’s conclusion that he failed to establish loss causation by alleging a precipitous decline in Immersion Corp.’s stock price on the heels of a July 1, 2009 press release announcing an internal investigation into the company’s revenue accounting practices.”

The appellate court rejected the plaintiff’s argument and affirmed the lower court’s ruling, holding “that the announcement of an investigation, standing alone, is insufficient to establish loss causation.”  The appellate court “further conclude[d] that Plaintiff cannot establish loss causation on the facts alleged in the amended complaint because he has not attempted to correlate his losses to anything other than the announcement of an internal investigation.”

In reaching its holding, the three-judge panel agreed with the reasoning of the Eleventh Circuit case Meyer v. Greene, 710 F.3d 1189, (11th Cir. 2013).  The plaintiff in that case premised his theory of loss causation on the announcement of an SEC investigation of the defendant.  The Eleventh Circuit held that an “announcement of an investigation reveals just that—an investigation—and nothing more.  To be sure, stock prices may fall upon the announcement of an SEC investigation, but that is because the investigation can be seen to portend an added risk of future corrective action.” 

Likewise, the Ninth Circuit concluded that “[t]he announcement of an investigation does not ‘reveal’ fraudulent practices to the market.”  The appellate court noted that “at the moment an investigation is announced, the market cannot possibly know what the investigation will ultimately reveal,” and that even though it is “an ominous event, it simply puts investors on notice of a potentialfuture disclosure of fraudulent conduct.”  Consequently, the appellate court attributed any decline in stock price following the announcement of an investigation as “market speculation about whether fraud had occurred."  The appellate court concluded that “[t]his type of speculation cannot form the basis of a viable loss causation theory.”