By Britt Latham and Jason Hale
Can a statement that confirms preexisting information in the market and does not itself inflate a stock price serve as a basis for a securities fraud claim? According to a recent Eleventh Circuit opinion, the answer is yes: “confirmatory statements” that wrongfully prolong a period of inflation caused by prior inactionable statements may be actionable under the securities laws, even if the “confirmatory statements” do not increase the level of inflation.
In FindWhat Investor Group v. FindWhat.com, 2011 WL 4506180 (11th Cir. Sept. 30, 2011), investors sued defendant FindWhat.com and some principal officers alleging that defendants made false or misleading statements to the public in violation of § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. The district court rejected all the claims, granting summary judgment on two claims related to “confirmatory statements” because plaintiffs had not demonstrated loss causation in connection with these statements. The district court concluded that because defendant’s stock price was artificially inflated prior to these “confirmatory statements” being made (according to plaintiff’s expert), these statements — which merely confirmed existing information in the market — could not have caused the price of the stock to rise. These statements were therefore inactionable.
Plaintiffs appealed on two of the claims dismissed on the pleadings, which related to statements made on March 5, 2004 and July 26, 2004, and on the claims related to “confirmatory statements,” which were made on February 23, 2005 and March 16, 2005. The Court of Appeals affirmed that the earlier 2004 false statements were not actionable because plaintiffs failed to adequately plead scienter. Id., at *7-16. However, the Court reversed the district court’s summary judgment, holding that the 2005 “confirmatory statements” responsible for perpetuating the falsehood were in fact actionable because they sustained the inflated stock price longer than it would have remained inflated had the truth come out earlier. Id. at *23.
The Court stated that the district court misconstrued the fraud-on-the-market theory and explained that “the inflation level need not change for new investors to be injured by a false statement” because “[f]raudulent statements that prevent a stock price from falling can cause harm by prolonging the period during which the stock is traded at inflated prices.” Id. The Court refused to draw any legal distinction between fraudulent statements that initially cause the stock price inflation and the subsequent statements that perpetuate that inflation. Id. at 24. The rationale behind the Court’s holding was clear: “Defendants who commit fraud to prop up an already inflated stock price do not get an automatic free pass under the securities laws.” Id. at *25.
This decision could have a number of implications. As an initial matter, the Court, in analyzing loss causation, did not require a nexus between the corrective disclosure and the false statement that caused the stock price inflation, holding instead that subsequent confirmatory statements made more than a year after the alleged price inflation occurred could also cause shareholder damages. It is also interesting to note that the Court allowed these claims to proceed despite the fact that the plaintiffs’ own damages expert opined that the alleged inflation occurred prior to the class period. As such, this holding may open the door for claims based on “confirmatory statements” that would otherwise be time-barred.
The only other circuit that appears to have addressed this question — the Fifth Circuit — disagrees that “confirmatory statements” are actionable under the securities laws. See, e.g., Greenberg v. Crossroads Sys., Inc., 364 F.3d 657, 665-66 (5th Cir. 2004). While it is unclear how other circuits may resolve this issue, corporations should expect that later false statements could expose them to liability under federal securities laws.
(Britt K. Latham is a Member of Bass, Berry & Sims PLC, focusing his practice on complex business, securities and class action litigation and the representation of clients in connection with internal and governmental investigations. Jason Hale is an attorney at Bass, Berry & Sims PLC, focusing his practice on general commercial litigation with an emphasis in business disputes, corporate and securities matters, and financial products and broker-dealer litigation).