Securities fraud actions are often filed on the heels of an announcement of an internal or SEC investigation.  A recent Ninth Circuit decision, Loos v. Immersion Corp., may make it easier for company executives to sleep at night following such an announcement.  The Ninth Circuit has joined a growing number of circuits holding that the announcement of an internal investigation, standing alone, is insufficient to show loss causation at the pleading stage.

The Ninth Circuit affirmed the lower court’s dismissal of a shareholder securities action against Immersion Corporation.  Plaintiff Loos’ overarching theory of liability was that Immersion “cooked the books” in response to mounting pressure from investors to become profitable.  Specifically, the Plaintiff alleged that Immersion systematically recognized medical sales revenue earlier than permitted under GAAP in order to mislead investors that the troubled company was finally on the brink of achieving sustained profitability.  Plaintiff’s securities fraud claims under §10(b) and Rule 10b-5 of the Securities Exchange Act failed to satisfy the loss causation requirement.  Ultimately, to prove loss causation a securities fraud plaintiff must prove that the defendant’s misrepresentation was a “substantial cause” of his or her loss.  At the pleading stage a plaintiff must plausibly allege that the defendant’s fraud was revealed to the market and caused the resulting losses.

Loos alleged that Immersion’s fraudulent activity was revealed to the market through a series of disappointing earnings results followed by the subsequent announcement of an internal investigation into the company’s revenue practices related to its medical device division.  The Plaintiff argued that the announcement of the internal investigation completed the revelation of the fraud and removed the inflation caused by the fraud from the stock price.  The Court disagreed.  In so holding, the Ninth Circuit joined the Eleventh Circuit in explicitly holding that the “announcement of an investigation, standing alone, does not give rise to a viable loss causation allegation.” The Court reasoned that the announcement of an investigation does not “reveal” fraudulent practices to the market because at the moment the investigation is announced, the market cannot possibly know what the investigation will ultimately reveal.  This decision, of course, leaves the door open for plaintiffs to allege that subsequent announcements revealing the results of an internal investigation are sufficient to show loss causation.