This week, the Ninth Circuit examines how the loss-causation requirement of a securities-fraud claim may be satisfied in cases involving FOIA disclosures, and considers the application of Younger v. Harris to a State civil-enforcement action pressed by private counsel.
DAVID GRIGSBY v. BOFI HOLDING, INC.
The Court holds that information obtained through the Freedom of Information Act can constitute a corrective disclosure for purposes of alleging loss causation in a securities-fraud action.
Panel: Judges Murguia, Christen, and Hellerstein (S.D.N.Y.), with Judge Christen writing the opinion.
Key highlight: “Plaintiffs may rely on a corrective disclosure derived from a FOIA response by plausibly alleging that the FOIA information had not been previously disclosed. If a plaintiff relies on information obtained via a FOIA request, the pleading burden to allege loss causation is no different from the pleading burden for other types of corrective disclosures.”
Background: Plaintiffs filed a putative class action on behalf of shareholders alleging that BofI Holding, Inc. and its executives violated securities law by, among other things, denying that the company was being investigated for money laundering. To prove loss causation, plaintiffs pointed to a news article that revealed the existence of an SEC investigation through a FOIA request and that immediately preceded a drop in the company’s stock price. The district court dismissed the suit on the ground that information obtained under FOIA was, as a matter of law, publicly available prior to its disclosure, and thus could not be a corrective disclosure of a misrepresentation.
Result: The Ninth Circuit affirmed in part and reversed in part. The Court began by explaining that a securities fraud “plaintiff can satisfy the loss-causation pleading burden by alleging that a corrective disclosure revealed the truth of a defendant’s misrepresentation and thereby caused the company’s stock price to drop and investors to lose money.” “In general,” the Court continued, “a disclosure is not ‘corrective’ if it contains information derived entirely from public filings and other publicly available sources of which the stock market was presumed to be aware.” BofI had argued that the investigation was already reflected in its stock price before the article was published because the information was discoverable through FOIA. The Court rejected that approach for two reasons: First, FOIA information is not generally available, but must be specifically requested. And second, because the government may invoke exceptions to FOIA, certain information may never come to light. “At a minimum,” the Court said, “there must be some indication that the relevant information was requested and produced before the information contained in a FOIA response can be considered publicly available for purposes of loss causation.”
The Court went on to conclude that plaintiffs had adequately alleged that the investigation into BofI had not been publicly disclosed prior to publication of the news article. It was enough that the plaintiffs had “alleged that the [news] article disclosed BofI had been the subject of a formal SEC investigation, that the article revealed the falsity of BofI’s prior statement, and that the revelation caused BofI’s stock price to drop.” Plaintiffs were not required to make an additional showing that no one else had obtained the same information through FOIA before the article’s publication, and documents showing five other BofI-related FOIA requests did not render the initial allegations implausible.
The Court also concluded that the news article was corrective of BofI’s allegedly false statement, rejecting BofI’s argument that the article did not establish that it knew about the investigation. Nonetheless, the Ninth Circuit affirmed the district court’s separate conclusion that a different news article was not a corrective disclosure with respect to another allegedly false statement because the article contained only public information, and did not require any expertise or specialized skills beyond what a typical market participant would possess. Finally, the Court declined to consider whether plaintiffs adequately pleaded scienter because the district court did not reach that issue.
BRISTOL-MYERS SQUIBB COMPANY v. CONNORS
The Court holds that Younger v. Harris precludes a federal-court challenge to a state-court civil enforcement proceeding, even where that state-court prosecution is led by private counsel and allegedly profit-driven.
The panel: Judges Watford, Friedland, and Miller, with Judge Miller writing the opinion.
Key highlight: "Conducting litigation on behalf of a State is a core sovereign function, and the people of each State, through their elected representatives, have the right to decide whether that function should be carried out by full-time government employees or, as here, by outside counsel retained for a particular case."
Background: The State of Hawaii filed suit in Hawaii state court against a variety of pharmaceutical companies. The State asserted that the defendants’ advertising of the drug Plavix had been misleading given the drug’s allegedly reduced effectiveness in people with a genetic variation particularly prevalent among those of Asian or Pacific Islander descent. The State retained two private law firms on a contingency-fee basis in bringing this suit.
The pharmaceutical companies then sued the State in federal court, seeking an injunction against the state-court proceedings, which the companies claimed violated their First Amendment rights. The district court dismissed, invoking Younger abstention.
Result: The Ninth Circuit affirmed. As the Court explained, while federal courts have a “virtually unflagging” obligation to hear all cases within their jurisdiction, Younger establishes an exception to that obligation when the federal-court plaintiff seeks to enjoin certain types of “civil enforcement proceedings” that are “akin to criminal prosecutions.” The Court dismissed the companies’ arguments that this exception was not applicable here.
First, the Court rejected the contention that the state-court action was not in fact brought by the State because the State was relying on private counsel. As the Court explained, it is up to the State to decide who will represent it in court (or elsewhere), and thus the Court saw “no reason why the application of Younger should turn on the State’s choice of lawyers.” Rather, what mattered was that the “Attorney General of Hawaii made the decision to bring the action, and the people of Hawaii may hold her accountable for that decision.”
Next, the Court rejected the contention that the case was not a civil enforcement action because private counsel had conducted most of the underlying investigation, and the State was purportedly motivated by profit rather than any desire to punish wrongdoing. The Court concluded that what was relevant, for Younger purposes, was not the State’s interest in any particular case, but rather its interest in a given class of proceedings. After all, “[a] federal-court inquiry into why a state attorney general chose to pursue a particular case, or into the thoroughness of the State’s pre-filing investigation, would be entirely at odds with Younger’s purpose of leaving state governments ‘free to perform their separate functions in their separate ways.’” And here, the Court held, the State sought to recover civil penalties for an alleged violation of a statute punishing deception, bring the proceeding comfortably within the general class of proceedings to which Younger applies.
Finally, the Court rejected the argument that because the companies’ First Amendment rights were at issue, the Court should apply special scrutiny, reasoning that “Younger abstention routinely applies even when important rights are at stake.” Because the companies’ claim did not fall within the narrow exception for “cases of proven harassment . . . by state officials in bad faith,” it was properly dismissed.