Securities Regulation Daily SG says certiorari should be denied in First Solar case
Monday, May 20, 2019

SG says certiorari should be denied in First Solar case

By Rodney F. Tonkovic, J.D.

Solicitor General says further review of corrective disclosure question is not warranted because the Ninth Circuit was in line with Court precedent and because there is no circuit conflict.

The Solicitor General has recommended that certiorari be denied for a petition asking the court to address the proximate cause standard in securities cases. Petitioner First Solar asserts a circuit split in how plaintiffs are required to show the market's reaction to information revealing the fraudulent nature of the defendant's conduct. The petition argues that the Ninth Circuit adopted a "dramatically less demanding" proximate cause standard that is inconsistent with the Court's precedent. In an amicus brief, the Solicitor General maintained that the Ninth Circuit was correct and that there is no circuit conflict on the question presented (First Solar, Inc. v. Mineworkers' Pension Scheme, May 15, 2019).

Proximate cause. Investors in First Solar, Inc., a producer of solar panels, alleged that the company and its management concealed manufacturing defects and the financial impact of those defects. First Solar allegedly issued misleading public statements that distorted its share price until a series of disclosures over the course of two years partially corrected the misstatements; each disclosure was followed by a significant drop in share price.

The district court was tasked with weighing competing lines of Ninth Circuit case law on loss causation. In a line of cases stemming from In re Daou Systems, Inc. (9th Cir. 2005), loss causation is satisfied by drawing a causal connection between the misrepresented facts and the plaintiff's loss. In a more restrictive line urged by First Solar (following Metzler Investment GMBH v. Corinthian Colleges, Inc. (9th Cir. 2008)), an injury is not enough, and a plaintiff must show a market reaction to the fraud itself. The district court opted to follow Daou, and deny First Solar's motion for summary judgment, but, recognizing that the two lines of cases would lead to very different results, certified the loss causation issue for immediate interlocutory appeal to the Ninth Circuit.

The Ninth Circuit affirmed, holding that the loss causation inquiry "requires no more than the familiar test for proximate cause." Here, the panel pointed to its most recent decision on loss causation, Lloyd v. CVB Fin. Corp. (decided after the district court's order) holding that "the ultimate issue is whether the defendant’s misstatement, as opposed to some other fact, foreseeably caused the plaintiff’s loss."

Petition. First Solar's petition for certiorari asks the Court to reconcile what it describes as a three-way circuit split. The First, Fourth, Seventh, and Eleventh circuits require a showing that the market learned of and reacted to information that revealed the fraudulent nature of the defendant's conduct. The Second, Fifth, Sixth, and Tenth circuits take a more permissive approach and hold that a plaintiff must show that the market learned of and reacted to the facts fraudulently concealed by the defendant, even if the fraud itself was not revealed. Finally, the Third Circuit, and now the Ninth, holds that a plaintiff can prove loss causation by "tracing" the information revealed to the market back to the facts concealed by the defendant, even if the market was ignorant at the time of both those facts and the fraud.

SG says deny cert. Having been invited to submit an amicus brief, the Solicitor General concluded that the Ninth Circuit's decision does not conflict with any decision of the Supreme Court, or of any other appellate court. According to the brief, the Ninth Circuit's decision is consistent with the Court's 2005 holding in Dura Pharm., Inc. v. Broudo (followed by Erica P. John Fund, Inc. v. Halliburton Co. (2011)), that loss causation can be shown by proving the existence of a corrective disclosure. Under the Court's precedent, the plaintiff does not need to go further and prove that the market actually learned of and reacted to the information revealing the fraud. What the brief refers to as a "revelation-of-the-fraud" requirement would be inconsistent with Court precedent, Congress's codification of the loss-causation requirement, common law principles, and the overall purposes of the securities laws.

The Solicitor General then explained that there is no circuit conflict on the question presented: no court of appeals has a revelation-of-the-fraud requirement. On the contrary, the brief says, the courts have applied consistent legal standards, and there is no sound reason to believe that this case would have been decided differently in another circuit. According to the Solicitor General, the "various circuits standards for establishing loss causation in private securities-fraud suits actually reflect a striking degree of jurisprudential harmony." The circuits have even cited each other, and no court expresses the view that there is a circuit conflict on the issue, the brief says.

The petition is No. 18-164.

Attorneys: Neal Kumar Katyal (Hogan Lovells) for First Solar, Inc. Susan K. Alexander (Robbins Geller Rudman & Dowd LLP) for Mineworkers Pension Scheme.

Companies: First Solar, Inc.; Mineworkers Pension Scheme

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