Espy v. J2 Global, Inc., No. 22-55829 (9th Cir. 2024)
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The case involves Jonathan Espy, a shareholder of J2 Global, Inc., who alleged that the company and its individual defendants committed securities fraud. Espy claimed that J2 made materially misleading statements by omitting key facts about a 2015 acquisition and a 2017 investment, and concealed underperforming acquisitions through consolidated accounting practices. He also alleged that investors learned of J2’s corporate mismanagement and deception not from J2’s disclosures, but from two short-seller reports.
The district court dismissed Espy's complaint twice, stating that he failed to sufficiently plead scienter, which is the intent to deceive or act with deliberate recklessness. The court found that Espy's allegations, including statements from two confidential former employees, did not establish reliability or personal knowledge, or demonstrate that J2 acted with the intent to deceive or with deliberate recklessness.
The United States Court of Appeals for the Ninth Circuit affirmed the district court's decision. The appellate court held that Espy failed to sufficiently plead scienter because he did not state with particularity facts giving rise to a strong inference that J2 acted with the intent to deceive or with deliberate recklessness. The court also held that Espy failed to sufficiently plead loss causation by showing that J2’s misstatement, as opposed to some other fact, foreseeably caused Espy’s loss. The court concluded that the two short-sellers’ reports did not qualify as corrective disclosures because one did not relate back to the alleged misrepresentations in Espy’s complaint, and the other’s analysis was based entirely on public information and required no expertise or specialized skills beyond what a typical market participant would possess.
Court Description: Securities Fraud. The panel affirmed the district court’s dismissal of Jonathan Espy’s securities fraud action against J2 Global, Inc., and individual defendants under § 10(b) of the Securities Exchange Act and Rule 10b-5.
Espy alleged that J2, an international information services company, made materially misleading statements by omitting key facts regarding a 2015 acquisition and a 2017 investment, and hid underperforming acquisitions from investor scrutiny through consolidated accounting practices. Espy also alleged that investors learned of J2’s corporate mismanagement and deception not from J2’s disclosures, but from two short-seller reports.
The panel held that Espy failed to sufficiently plead scienter because he did not state with particularity facts giving rise to a strong inference that J2 acted with the intent to deceive or with deliberate recklessness as to the possibility of misleading investors. As to omitted disclosures regarding the acquisition, Espy endeavored to plead scienter by reference to statements of two confidential former employees, but the majority of the former employees’ statements failed to establish reliability or personal knowledge, or simply amounted to criticisms of J2’s management practices and compensation structure. As to the investment disclosure, Espy did not adequately explain why omitted information compelled a strong inference of scienter. And Espy failed to plead scienter as to J2’s consolidated accounting practices because inconsistent statements from former employees did not demonstrate that the individual defendants actually knew the underlying data of each of their acquisitions with the requisite accuracy to report detailed financials for each. The panel further held that viewing Espy’s allegations holistically did not alter its conclusion.
Addressing an issue not reached by the district court, the panel held that Espy also failed to sufficiently plead loss causation by showing that J2’s misstatement, as opposed to some other fact, foreseeably caused Espy’s loss. The panel concluded that the two short-sellers’ reports did not qualify as corrective disclosures because one did not relate back to the alleged misrepresentations in Espy’s complaint, and the other’s analysis was based entirely on public information and required no expertise or specialized skills beyond what a typical market participant would possess.
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