The extent to which an alleged "corrective disclosure" needs to have revealed the fraud to investors - thereby establishing the existence of loss causation based on a related stock price decline - continues to bedevil courts. One particular fact pattern that has proven difficult to analyze is when an SEC investigation is announced. Although some post-Dura cases found that loss causation had been adequately plead based on the disclosure of an SEC investigation, a couple of recent cases have gone the other way.
In Maxim Integrated Products, Inc. Sec. Litig., 2009 WL 2136939 (N.D. Cal. July 16, 2009), the court considered whether the company's "disclosures regarding compliance with an SEC investigation, subpoenas from the United States Attorney's office, and the formation of its own Special Committee to investigate options granting practices" were corrective disclosures for the purposes of pleading loss causation. The court concluded that these disclosures were "indicators of risk," but did not adequately reveal the alleged fraud. See also In re Hansen Natural Corp. Sec. Litig., 527 F. Supp. 2d 1142, 1162 (C.D. Cal. 2007).
Holding: Motion to dismiss granted in part and denied in part.
Quote of note: "A reasonable investor may view these disclosures as indicators of risk because they reveal the potential existence of future corrective information. However, they do not themselves indicate anything more than a 'risk' or 'potential' that Defendants engaged in widespread fraudulent conduct. Thus, the court finds that these statements are not corrective disclosures for which Plaintiffs can plead loss causation."Posted by Lyle Roberts at July 24, 2009 9:53 PM | TrackBack