Securities Regulation Daily One news article deemed a ‘corrective disclosure’ for loss causation
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Wednesday, November 4, 2020

One news article deemed a ‘corrective disclosure’ for loss causation

By Jay Fishman, J.D.

The court scrutinizes two news articles, narrowly finding one a corrective disclosure proving loss causation while finding the other too public to have directly caused the investors stock loss.

The Ninth Circuit Court of Appeals partly affirmed and partly reversed a California Southern District Court decision by agreeing with the lower court that one of two complaint-cited news articles was not a corrective disclosure for proving loss causation but that the other article was a corrective disclosure warranting remand (Grigsby v. Bofl Holdings, Inc., November 3, 2020, Christen, M.).

Investors two complaints alleging loss causation. The district court dismissed both the plaintiff investors’ first and second amended class action fraud complaint against the defendant bank (Bofl) and its officers and directors for Exchange Act Section 10(b) primary liability for Section 20(a) control person liability, respectively. The court held that while the two complaint-cited news articles correctly alleged Bofl’s falsity, they were not deemed corrective disclosures for proving 10(b)/Rule 10b-5 "loss causation," which was the only fraud element in dispute. The court dismissed the first complaint with leave to amend (Mandalevy v. Bofl Holding, Inc., June 19, 2018, Curiel, G.). The court dismissed the second complaint with prejudice from which the investors appealed (Mandalevy v. Bofl Holding, Inc., December 7, 2018, Curiel, G.).

The investors alleged in both 2018-filed complaints that Bofl denied that it was subject to an SEC money laundering investigation, and had also falsely stated that a whistleblower’s separate allegations that Bofl made undisclosed loans to criminals were "disconnected from the reality of Bofl’s highly compliant and top performing business." When the falsity of these statements was revealed, Bofl’s stock tumbled, to the investors’ detriment. To prove loss causation, in other words that the plaintiffs’ economic losses were directly caused by the above Bofl statements, the investors pointed to two articles that allegedly revealed the falsity of the Bofl’s statements immediately before the stock price fell 14.53 percent.

The first article—from the New York Post—which relied on information obtained from a Freedom of Information Act (FOIA) request for an SEC investigation, suggested that Bofl was lending to individuals who were later convicted or accused of fraud, as well as lending to those persons who had defaulted on large loans to other banks. The second article from a website called Seeking Alpha asserted that Bofl’s practice of making loans to "foreigners" involved anti-money laundering scrutiny from regulators, and was followed by a former Bofl auditor’s whistleblower protection suit alleging that Bofl loaned money to "criminals and politically exposed persons" potentially in violation of the Bank Secrecy Act.

The district court’s determination of whether the cited articles proved loss causation hinged on whether the articles were corrective disclosures; to be corrective disclosures, the court said that the articles must not have already been publicly available when they were disclosed. While the court agreed that the investors’ articles revealed Bofl’s falsity, the articles could not demonstrate loss causation as a matter of law because they were not corrective disclosures.

The court reasoned that because the investors relied on the fraud-on-the-market theory, it (the court) had to assume that the available information, including information available through a FOIA request, had already been made public so, therefore, was incorporated into the market price for the stock by the time the article was published.

Similarly, the court did not consider the Seeking Alpha article to be a corrective disclosure because it relied on already available public information; in fact, the Seeking Alpha article was written by an anonymous short-seller with no expertise beyond that of a typical market participant who based the article solely on information found in public sources.

On appeal: New York Post article. The appellate court remanded the case upon reversing the district court’s incorrect finding that the New York Post article was not a corrective disclosure. The appellate court proclaimed that the investors could rely on a corrective disclosure derived from a FOIA request by plausibly alleging that the FOIA information was not previously disclosed to the public. The court agreed with precedent that previously disclosed information to the public cannot be considered a corrective disclosure directly causing an investor’s losses because that information, by already being out in the public, is assumed to have factored into the stock market price fluctuations. Here, however, the court narrowly ruled that the FOIA request for an SEC investigation might not have become public by the time it was disclosed. An investigator such as the SEC might, for example, keep a FOIA request on the shelf for a while before making it public. Alternatively, stated the court, information must first be produced before it becomes publicly available, and not all FOIA requests yield disclosure of the sought-after information.

Seeking Alpha website article. The court, however, affirmed the district court’s decision that the Seeking Alpha website article was not a corrective disclosure. The court declared that unlike the New York Post article, the Seeking Alpha article was written by an anonymous short-seller with no expertise beyond that of a typical market participant who based the article solely on information found in public sources. The court therefore reasoned that the Seeking Alpha information is likely to have been in the public domain before it was disclosed, thereby making the previous public access to the information the reason for the stock market tumble rather the article’s disclosure of Bofl’s false statements.

This case is No. 19-55042.

Attorneys: Jeremy A. Lieberman (Pomerantz LLP) for Bar Mandalevy. John P. Stigi III (Sheppard Mullin Richter & Hampton LLP) for Bofl Holding, Inc.

Companies: Bofl Holding, Inc.

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