“Loss causation”—the notion that a plaintiff generally must plead and prove that the defendant’s action (or inaction) caused their loss—is one of the most fundamental concepts in all of law. But while the basic concept is easily explained, the devil of its application is in the details. Nowhere is this more true than in securities fraud cases, where thousands of individuals and entities trade stock based on company and third-party statements alike.

A perennial question in securities fraud cases is whether a given corporate announcement regarding an investigation constitutes a “corrective disclosure,” such that supports a loss causation argument. For instance, the Ninth Circuit Court of Appeals has held that merely alleging that a company has announced an SEC investigation does not adequately plead loss causation in a securities fraud case. However, the announcement of an investigation, when coupled with a subsequent confirmation of wrongdoing, can constitute a corrective disclosure.

What about a situation involving both an announcement of an investigation and a subsequent confirmation of wrongdoing, where the plaintiff sells their stock before the final announcements?

That is the fact pattern that the Eleventh Circuit Court of Appeals recently faced. In MacPhee v. MiMedx Group, Inc., the plaintiffs alleged that MiMedx, the “leading global supplier of amniotic tissue products,” reported “explosive” growth between 2012 and 2017 that was, in fact, predicated on improper sales and distribution practices, as well as a “massive accounting fraud.” The plaintiffs alleged that the truth regarding the misconduct “leaked into the market through a series of partial corrective disclosures” that included, among other things: (a) a December 2014 press release that the company was under government investigation; (b) September 2017 and February 2018 press releases regarding audit committee investigations; and (c) a July 2018 announcement of the results of the final audit committee investigation, and related resignations.

The wrinkle? The lead plaintiff sold its stock after the announcement of the final internal investigation, but before the announcement of the results of that investigation. Per the Supreme Court’s decision in Dura Pharms., Inc. v. Broudo, there is no loss causation where a shareholder sells their stock “before the relevant truth begins to leak out.” Accordingly, the MacPhee court held that because the lead plaintiff sold its stock in February 2018, before the announcement of the results of the investigation: “the announcement of an internal investigation, a government investigation, and a whistleblower lawsuit” “did not qualify as corrective disclosures.”

While it remains unclear how the Ninth Circuit Court of Appeals would rule on such a fact pattern, California practitioners should keep MacPhee in mind, should they find themselves faced with similar circumstances.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.

****

Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.