In securities class actions, plaintiffs must plead and prove that the defendants’ alleged misstatements caused the stock price decline about which they complain, which is known as the “loss causation” requirement. Plaintiffs frequently try to satisfy this requirement by pointing to a negative public announcement by a company followed by a significant stock price decline and claiming that this announcement revealed “the truth” that had been concealed by the defendants’ fraud. This type of public statement is frequently referred to as a “curative” or “corrective” disclosure.
The issue often arises in these cases as to what type of public statement by a company can qualify as a proper curative disclosure and thereby assist plaintiffs in meeting their burden of pleading and proving loss causation. The Eleventh Circuit Court of Appeals recently issued an opinion in Meyer v. Greene, No. 12-11488, 2013 WL 656500 (11th Cir. Feb. 25, 2013), that is extremely helpful to defendants who wish to raise the issue of a deficient curative disclosure at the motion to dismiss stage.
In Meyer, the Eleventh Circuit held that the district court properly dismissed a complaint with prejudice where the plaintiffs failed to identify any public statement that could possibly qualify as curative of the alleged fraud. Id. at *8. In Meyer, the plaintiffs wished to rely on a presentation by a hedge-fund investor that, although public, merely repeatedly information that had been previously disclosed to the market. Id. at *6. Their need to rely on this statement for loss causation purposes created a fatal problem for them with respect to the separate requirement of pleading and proving reliance on the defendants’ alleged misstatements. Id. at *3.
Plaintiffs in securities class actions typically invoke the “fraud-on-the-market” theory in support of the argument that reliance on public statements may be presumed for the class as a whole. Id. It is only through invoking a presumption of reliance under this theory that a Section 10(b) case can be certified as a class action. A plaintiff cannot, however, successfully invoke the fraud-on-the-market theory without first demonstrating that the stock at issue traded in an “efficient market.” Id. In an efficient market, “‘the price of a company’s stock is determined by the available material information regarding the company and its business.’” Id. (internal citations omitted).
If the supposed curative disclosure to be used for loss causation purposes is comprised of information previously released to the market, as was the case in Meyer, then basic principles of market efficiency dictate that the information could not have been responsible for any stock price reaction registered in the wake of that announcement. “‘A corollary of the efficient market hypothesis is that disclosure of confirmatory information – or information already known by the market – will not cause a change in the stock price.’” Id. at *6 (internal citations omitted). Under these circumstances, a plaintiff’s need to argue that an efficient market for the stock existed for reliance purposes can prove to be fatal on the issue of loss causation. Id. at *6-*7. This is precisely what happened in Meyer. Where no new information is released to the market as a result of the alleged curative disclosure, it necessarily follows that, in an efficient market, a plaintiff cannot show the requisite connection between that disclosure and any later stock price decline that supposedly caused them injury. Id.
The Eleventh Circuit in Meyer observed that, “[h]aving based their claim of reliance on the efficient market theory, the [i]nvestors must now abide by its consequences.” Id. at *6. A corrective disclosure “‘must present facts to the market that are new, that is, publicly revealed for the first time.’” Id. at *6 (internal citations omitted). In this respect,
[t]he efficient market theory . . . is a Delphic sword; it cuts both ways. . . . Investors cannot contend that the market is efficient for purposes of reliance and then cast the theory aside when it no longer suits their needs for purposes of loss causation. Either the market is efficient or it is not. A plaintiff . . . must take the bitter with the sweet, and if he chooses to embrace the efficient market theory for purposes of proving one element of a § 10(b) claim, he cannot then turn around and contend that the market is not efficient for purposes of proving another element of the very same claim.