High Court Declines Review of 9th Circuit Test for Loss Causation Under the Securities Exchange Act

On June 24, 2019, the Supreme Court rejected defendants’ petition for writ of certiorari to consider a securities fraud class action that sought a determination as to whether, for loss causation purposes, a plaintiff must link a company’s stock drop to a disclosure of an alleged fraud. The case is First Solar Inc. et al. v. Mineworkers’ Pension Scheme et al., Case No. 2:12-cv-00555-DGC (D. Ariz. 2012). This class action was filed on March 15, 2012 and alleged that certain fraudulent misrepresentations concerning First Solar, Inc.’s (“First Solar”) expenses caused investor losses, including a decline in the solar panel company’s stock price from $300 in 2008 to less than $50 in 2012.

U.S. District Judge David G. Campbell certified the investor class on October 8, 2013, and later denied most of First Solar’s motion for summary judgment on August 11, 2015. However, conflicting loss causation law caused Judge Campbell to request guidance from the Ninth Circuit pursuant to 28 U.S.C. § 1292(b). The conflicting lines of case law were generated from two Ninth Circuit decisions: Sparling v, Daou (In re Daou Systems Inc.), 411 F.3d 1006 (9th Cir. 2005) (loss causation adequately pled where the disclosure of the company’s financial problems were caused by fraudulent accounting practices – not the fraud itself – led to the stock loss) and Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049 (9th Cir. 2008) (for loss causation, plaintiff must establish that the alleged fraud was revealed to the market and caused the stock losses, not just that the market reacted to a company’s poor financial condition). Judge Campbell followed Daou, noting it was decided first and that the decision stated the better rule in line with traditional notions of proximate causation.

On January 31, 2018, the Ninth Circuit held that the plaintiffs could connect loss causation in their class action to First Solar’s alleged misrepresentations, as opposed to public disclosure of the alleged fraudulent conduct. See Mineworkers’ Pension Scheme v. First Solar Inc., 881 F.3d 750 (9th Cir. 2018). That decision upheld the loss causation test established in Lloyd v. CVB Fin. Corp., 811 F.3d 1200 (9th Cir. 2016) in which the Ninth Circuit affirmed that investors had adequately pled a causal connection between the alleged misrepresentations and their loss. First Solar then appealed to the U.S. Supreme Court asserting loss causation can only be proven when the market learns of alleged fraud and reacts to it, but the high court denied the petition on June 24, 2019.

Accordingly, in the Ninth Circuit, the correct test for loss causation under the Securities Exchange Act of 1934 remains the general proximate cause test applied by Judge Campbell: “[a] plaintiff can satisfy loss causation by showing that the defendant misrepresented or omitted the very facts that were a substantial factor in causing the plaintiff’s economic loss.” Mineworkers’ Pension Scheme, 881 F.3d at 753.