Houston Municipal Employees Pension System v. BofI Holding, Inc., No. 18-55415 (9th Cir. 2020)
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The Ninth Circuit reversed the district court's judgment dismissing a securities fraud class action, holding that the shareholders have adequately pleaded a viable claim under Section 10(b) of the Securities Exchange Act and Rule 10b-5 for the two categories of misstatements the district court found actionable, with the whistleblower lawsuit serving as a potential corrective disclosure.
The panel held that one way to prove loss causation is to show that the defendant's fraud was revealed to the market through one or more "corrective disclosures" and that the company's stock price declined as a result. In this case, plaintiff alleged loss causation by relying on two corrective disclosures: a whistleblower lawsuit filed by a former company insider and a series of blog posts offering negative reports about the company's operations. The panel agreed with the district court that the Seeking Alpha blog posts could not qualify as corrective disclosures and, even if the posts disclosed information that the market was not previously aware of, it is not plausible that the market reasonably perceived these posts as revealing the falsity of BofI's prior misstatements, thereby causing the drops in BofI's stock price on the days the posts appeared. However, the panel held that the whistleblower lawsuit filed by a former company insider was a potential corrective disclosure. The panel joined the Sixth Circuit in rejecting any categorical rule that allegations in a lawsuit, standing alone, can never qualify as a corrective disclosure. Finally, the panel rejected the shareholders' allegations regarding a new category of misstatements concerning government and regulatory investigations.
Court Description: Securities Fraud The panel reversed the district court’s judgment dismissing a securities fraud class action brought under § 10(b) of the Securities Exchange Act and Rule 10b-5 and remanded for further proceedings. Shareholders alleged that executives of BofI Holding, Inc., committed securities fraud by falsely portraying the banking company as a safer investment than it actually was. In particular, the shareholders alleged that defendants made false or misleading statements touting the bank’s conservative loan underwriting standards, its effective system of internal controls, and its robust compliance structure. The district court concluded that the shareholders adequately pleaded the first five elements of their claim, at least as to some of the challenged misstatements, but failed to adequately plead loss causation, meaning a causal connection between defendants’ fraudulent conduct and the shareholders’ economic loss. IN RE BOFI HOLDING, INC. SECURITIES LITIG. 3 The panel held that one way to prove loss causation in a fraud-on-the-market case is to show that the defendant’s fraud was revealed to the market through one or more “corrective disclosures” and that the company’s stock price declined as a result. In Part III.B., the panel agreed with the district court that a series of blog posts offering negative reports about the company’s operations did not qualify as a corrective disclosure. The panel concluded that even if the posts disclosed information that the market was not previously aware of, it was not plausible that the market reasonably perceived the posts as revealing the falsity of BofI’s prior misstatements, thereby causing the drops in BofI’s stock price on the days the posts appeared. In Part III.A., however, the panel held that a whistleblower lawsuit filed by a former company insider was a potential corrective disclosure. The panel joined the Sixth Circuit in rejecting a categorical rule that allegations in a lawsuit, standing alone, can never qualify as a corrective disclosure. Finally, the panel agreed with the district court that the shareholders failed to plausibly allege the falsity of statements concerning government and regulatory investigations. Judge Lee concurred in judgment in Part III.B. and dissented as to Part III.A. Judge Lee wrote that he agreed with much of the analysis in the majority’s opinion but would require additional external confirmation of fraud allegations in a whistleblower lawsuit for them to count as a corrective disclosure. Accordingly, he dissented from the majority’s holding that plausible insider allegations, standing alone, can qualify as a corrective disclosure. 4 IN RE BOFI HOLDING, INC. SECURITIES LITIG.
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