Jacksonville Police & Fire Pf v. Cvb Financial Corp

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
BARRY R. LLOYD, No. 13-56838
Plaintiff,
D.C. No.
and 2:10-cv-06256-
MMM-PJW
JACKSONVILLE POLICE AND FIRE
PENSION FUND,
Plaintiff-Appellant, OPINION
v.
CVB FINANCIAL CORPORATION;
CHRISTOPHER D. MYERS; EDWARD J.
BIEBRICH, JR.,
Defendants-Appellees.
Appeal from the United States District Court
for the Central District of California
Margaret M. Morrow, District Judge, Presiding
Argued and Submitted
December 10, 2015—Pasadena, California
Filed February 1, 2016
2 JACKSONVILLE PENSION FUND V. CVB
Before: Harry Pregerson, Consuelo M. Callahan,
and Andrew D. Hurwitz, Circuit Judges.
Opinion by Judge Hurwitz
SUMMARY *
Securities Fraud
The panel affirmed in part and reversed in part the
district court’s dismissal of a putative class action under
Section 10(b) of the Securities and Exchange Act of 1934
and Rule 10b-5, alleging misrepresentations in defendant’s
filings with the Securities and Exchange Commission.
The panel held that the announcement of an SEC
investigation related to an alleged misrepresentation,
coupled with a subsequent revelation of the inaccuracy of
that misrepresentation, can serve as a corrective disclosure
for the purpose of loss causation. Accordingly, the second
amended complaint stated a claim as to two alleged
misrepresentations.
Affirming as to other alleged misrepresentations, the
panel held that vague, optimistic statements were correctly
characterized as puffery and were not actionable. In context,
there was nothing misleading about statements regarding the
Southern California real estate market. In addition, the
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
JACKSONVILLE PENSION FUND V. CVB 3
second amended complaint did not allege facts raising a
strong inference of scienter as to statements regarding
defendant’s accounting practices.
The panel affirmed the dismissal of claims based on an
SEC filing of November 2009. It reversed, however, as to
SEC filings of March and May, 2010. The panel held that
the second amended complaint sufficiently alleged falsity
and scienter as to statements in these SEC filings.
Answering a question left open in Loos v. Immersion Corp.,
762 F.3d 880 (9th Cir. 2014), and agreeing with the Fifth
Circuit, the panel held that the complaint also sufficiently
alleged loss causation because the announcement of an
investigation can form the basis for a viable loss causation
theory if the complaint also alleges a subsequent corrective
disclosure by the defendant.
COUNSEL
Timothy A. DeLange (argued), Niki L. Mendoza, Bernstein
Litowitz Berger & Grossmann LLP, San Diego, California,
for Plaintiff-Appellant.
George T. Conway, III (argued), David M. Murphy, Warren
R. Stern, Wachtell, Lipton, Rosen & Katz, New York, New
York; Scott Vick, Jason T. Riddick, Rachelle S. Torres, Vick
Law Group, APC, Los Angeles, California, for Defendants-
Appellees.
4 JACKSONVILLE PENSION FUND V. CVB
OPINION
HURWITZ, Circuit Judge:
The last recession put the Garrett Group, a commercial
real estate company, into serious financial trouble. In 2008,
Garrett informed its largest creditor, CVB Financial
Corporation (“CVB”), that it could not make payments on
its loans. After the loans were restructured, Garrett informed
CVB in early 2010 that it again could not make the required
payments and was contemplating bankruptcy.
CVB nonetheless represented in 2009 and 2010 filings
with the Securities and Exchange Commission (“SEC”) that
there was no basis for “serious doubt” about Garrett’s ability
to repay its borrowings. In 2010, the SEC served a subpoena
on CVB, seeking information about its loan underwriting
methodology and allowance for credit losses. The day after
CVB announced receipt of the subpoena, its stock dropped
22%, and analysts noted the probable relationship between
the subpoena and CVB’s loans to Garrett, its largest
borrower. A month later, CVB wrote down $34 million in
loans to Garrett and placed the remaining $48 million in its
non-performing category.
In this putative class action, Jacksonville Police & Fire
Pension Fund (“Jacksonville”) alleges violations of Section
10(b) of the Securities and Exchange Act of 1934, 15 U.S.C.
§ 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R.
§ 240.10b-5. The district court granted CVB’s motion to
dismiss, holding that the Second Amended Complaint
(“SAC”) failed to plausibly allege that any of the statements
by CVB challenged in the pleading were either knowingly
or recklessly false or caused a loss to shareholders.
JACKSONVILLE PENSION FUND V. CVB 5
We affirm in part and reverse in part, finding that the
SAC stated a claim as to two alleged misrepresentations. In
doing so, we hold that the announcement of an SEC
investigation related to an alleged misrepresentation,
coupled with a subsequent revelation of the inaccuracy of
that misrepresentation, can serve as a corrective disclosure
for the purpose of loss causation. See Loos v. Immersion
Corp., 762 F.3d 880, 890 n.3 (9th Cir. 2014) (reserving this
question).
I. Background 1
A. The September 2008 Meeting and Subsequent
Loans
In late August or early September 2008, Garrett’s Board
of Advisors, including its Chief Operating Officer (“COO”),
met to discuss an upcoming meeting with CVB. According
to the COO, whom the SAC does not otherwise identify, the
Board was told that management planned to inform CVB
that Garrett had laid off twenty people, reduced salaries, and
could not make payments on its loans. At the time, Garrett
was CVB’s largest borrower.
CVB officials and Garrett executives Paul Garrett and
Kirk Wright, Garrett’s Chief Executive Officer, met about
two weeks later, in the fall of 2008. Two weeks after that
meeting, Wright confirmed to the Board that CVB had been
informed of the layoffs and salary reductions and told that
Garrett could not meet its current obligations, including its
loan payments to CVB.
1
Because this is an appeal from an order dismissing the SAC for failure
to state a claim, we take the well-pleaded allegations in the SAC as true.
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007).
6 JACKSONVILLE PENSION FUND V. CVB
CVB subsequently made an additional $10 million loan
to Garrett, secured by an interest in rent in fifteen properties.
When the new loan closed, Garrett was ninety days
delinquent on its loan payments to CVB. Garrett used a
quarter of the new loan to get current with CVB. Garrett’s
COO recalled that “CVB was trying to keep the house of
cards standing.” Other Garrett employees confirmed that
Garrett’s financial situation in 2008 and early 2009 was
“rotten,” with rental properties vacant for years, and that
Garrett had considered bankruptcy.
In March 2009, CVB provided Garrett with $53 million
in refinancing. CVB also made other modifications to
Garrett loans in 2009.
B. The November 2009 Representations
On November 5, 2009, CVB issued a quarterly report,
known as a Form 10-Q, for the period ending September 30,
2009. The 10-Q listed troubled loans and then stated that
CVB was “not aware of any other loans as of September 30,
2009 for which known credit problems of the borrower
would cause serious doubts as to the ability of such
borrowers to comply with their loan repayment terms, or any
known events that would result in the loan being designated
as non-performing at some future date.” The loans to Garrett
were not listed.
C. The January 2010 Meeting
By the end of 2009, Garrett again became delinquent
with CVB. According to Garrett’s COO, in late December
2009 or early January 2010, Wright told his Board that
Garrett needed to meet with CVB to address this situation.
JACKSONVILLE PENSION FUND V. CVB 7
The meeting with CVB occurred one week later, in early
January 2010. A week after that, Wright reported back to
the Garrett Board. Wright reported that Garrett told CVB it
would file for bankruptcy unless the loans were modified.
Garrett also discussed two other options with CVB: selling
assets or bringing on a new equity partner. It also provided
CVB with the financial projections and presentation it had
used in unsuccessful attempts to woo new investors. Wright
told the Board that Garrett had pleaded with CVB for more
time to resolve the loan situation, but that no agreement had
been reached.
CVB and Garrett continued negotiations about the loans
throughout 2010. Garrett never again became current on its
obligations to CVB.
D. The March and May 2010 Representations
On March 4, 2010, CVB filed a Form 10-K for calendar
year 2009. The 10-K stated that CVB was “not aware of any
other loans as of December 31, 2009 for which known credit
problems of the borrower would cause serious doubts as to
the ability of such borrowers to comply with their loan
repayment terms.” As with the previous 10-Q, this statement
appeared after a list of non-performing or past-due loans.
That list did not include the Garrett loans.
CVB made a nearly identical “no serious doubts”
statement in a 10-Q filed on May 10, 2010. That statement
differed from the previous “no serious doubts” statements
only in that it was “as of March 10, 2010.”
E. The Alleged Disclosures
In May and June 2010, an anonymous blogger suggested
that CVB was engaging in a “cycle of extend and pretend”
8 JACKSONVILLE PENSION FUND V. CVB
with its loans to Garrett and others, often restructuring the
loans at the end of the quarter or year, before FDIC audits.
But, other analysts did not credit these blog posts, and
neither did the market at large; CVB’s stock price rose,
climbing to $10.61 on July 26, 2010.
On July 26, 2010, CVB received a subpoena from the
SEC. On August 9, 2010, after the stock market closed,
CVB filed a form 10-Q for the second quarter of 2010, which
disclosed receipt of the subpoena, stating:
The subpoena requests information regarding
our loan underwriting guidelines, our
allowance for credit losses and our allowance
for loan loss calculation methodology, our
methodology for grading loans and the
process for making provisions for loan losses,
and our provision for credit losses. In
addition, the subpoena requests information
regarding presentations we have given or
conferences we have attended with analysts,
brokers, investors or prospective investors.
The next day, CVB’s stock fell 22%, from $10.30 to $8.00
per share, a loss of $245 million in market capitalization.
Several analysts commented on the subpoena. The
blogger claimed that it “appear[s] to validate our overall
concerns with the bank.” Dow Jones specifically noted a
connection to the Garrett loans:
Discussion of CVB Financial centers on its
largest exposure, loans to a property
company called the Garrett Group. Skeptics
believe this exposure is backed by collateral
whose market value is well below that of the
JACKSONVILLE PENSION FUND V. CVB 9
loan amount. Some also question whether
CVB extended a new loan to Garrett to help
it pay existing loans, something Myers
denies. He said the Garrett Group was
current on its loans at the end of the second
quarter, but the bank had reserves against the
exposure.
Credit Suisse observed that the investigation appeared to
pertain to the adequacy of CVB’s reserves, including those
for its largest borrower, Garrett, and the adequacy of CVB’s
disclosures. And, on August 11, FIG Partners wrote:
It appears the SEC is looking into whether
CVB[] misled the Street by hiding the true
performance of loans the company said were
performing. In doing so, the SEC is also
implying that company management hid the
true nature of the loan portfolio from the
FDIC and California Department of Financial
Institutions (the bank’s primary regulators).
...
The information sought [in the SEC
subpoena] is very similar to stories in the
press recently that the company was
overstating credit quality.
A month later, after the market closed on September 9,
CVB announced that Garrett was unable to pay its loans as
scheduled; the bank charged off $34 million in Garrett loans
and characterized the remaining $48 million as non-
performing and impaired. CVB announced that it had $24.7
million in reserves for credit losses and was recording an
additional $9.3 million to account for the $34 million charge-
off. CVB also announced that it had only an equity interest,
10 JACKSONVILLE PENSION FUND V. CVB
and no direct liens, on the fifteen properties that served as
collateral for the largest loan to Garrett, which had a balance
of $42.5 million, and that it was discounting the value of its
UCC-1 filings on those properties to zero.
The next day, Credit Suisse published an analysis of
CVB’s announcement:
More importantly, in our view, CVB[]
announced that it was placing its largest (and
most controversial) loan on non-performing
status, and writing it down to its recent
appraisal (less assumed OREO costs).
While the SEC subpoena remains
outstanding, we believe the announcement
removes a major component of uncertainty in
regards to problem loans; for which the
subpoena also seeks to address (to a certain
extent).
Consistent with that analysis, CVB’s stock dropped only
slightly on September 10, from $7.05 to a closing price of
$6.99. By the next week the stock had risen above $7.05,
and it never again fell below that price. As another analyst
wrote on September 13, 2010:
The company’s share price plummeted by
~22% to $8.00 on August 10, which was the
day after it disclosed the SEC investigation.
Since then, the share price has drifted down
by an additional ~13% to $6.99 on September
10. There was only a modest decline of ~1%
following the earnings preannouncement as
further deterioration in credit quality and
uncertainty surrounding the SEC
JACKSONVILLE PENSION FUND V. CVB 11
investigation are already reflected in the
share price.
In January and February 2011, CVB recorded Notices of
Default on $58 million of Garrett loans. Despite the 2010
SEC subpoena, no formal agency proceedings were
instituted against CVB.
F. Procedural History
In 2010, two securities fraud actions were filed against
CVB in the United States District Court for the Central
District of California. The district court consolidated the
suits and appointed Jacksonville as lead plaintiff. The court
then dismissed in turn, each time with leave to amend, the
consolidated complaint, a First Amended Complaint, and the
SAC. Jacksonville declined to further amend its complaint
and requested that the district court enter judgment. The
court did so, and Jacksonville timely appealed.
II. Standard of Review
We review a dismissal for failure to state a claim de
novo, accepting all well-pleaded allegations as true. Metzler
Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1061
(9th Cir. 2008). Securities fraud claims must satisfy the
“exacting pleading standards of Federal Rule of Civil
Procedure 9(b) and the Private Securities Litigation Reform
Act (PSLRA).” Or. Pub. Emp. Ret. Fund v. Apollo Grp. Inc.,
774 F.3d 598, 604 (9th Cir. 2014).
III. Discussion
The SAC alleged that CVB, Myers, and CVB’s former
Chief Financial Officer, Edward Biebrich (collectively,
“CVB”) violated Section 10(b) of the Securities and
12 JACKSONVILLE PENSION FUND V. CVB
Exchange Act of 1934 and Rule 10b-5. 2 The elements of a
private securities fraud action under Section 10(b) and Rule
10b-5 are: “(1) a material misrepresentation or omission by
the defendant; (2) scienter; (3) a connection between the
misrepresentation or omission and the purchase or sale of a
security; (4) reliance upon the misrepresentation or
omission; (5) economic loss; and (6) loss causation.” Erica
P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179, 2184
(2011) (citation omitted).
The complaint must plead specific facts indicating why
any alleged misrepresentation was false or any omission
rendered a representation misleading. 15 U.S.C. § 78u–
4(b)(1); Metzler, 530 F.3d at 1070. To plead scienter
adequately, the complaint must “state with particularity facts
giving rise to a strong inference,” 15 U.S.C. § 78u–
4(b)(2)(A), that “defendants engaged in knowing or
intentional conduct,” which includes “deliberate
recklessness,” S. Ferry LP, No. 2 v. Killinger, 542 F.3d 776,
782 (9th Cir. 2008) (internal citation and quotation marks
omitted). The inference of scienter must be “at least as
compelling as any opposing inference of nonfraudulent
intent.” Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 308, 314 (2007).
The SAC alleges four general categories of false and
misleading statements:
2
The SAC also alleged that Myers and Biebrich violated Section 20(a)
of the Securities and Exchange Act of 1934, 15 U.S.C. § 78t(a), as
controlling employees of CVB. The parties correctly agree that, in the
context of this appeal from an order granting a motion to dismiss, the
control person liability claim rises or falls with the primary violation
claim. See Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990
(9th Cir. 2009).
JACKSONVILLE PENSION FUND V. CVB 13
1. CVB’s touting of its loan underwriting
culture, credit metrics, and the quality of
its loan portfolio.
2. CVB’s statement that the deteriorating
real estate market “could” harm its
borrowers’ ability to repay.
3. CVB’s financial statements, which
allegedly violated Generally Accepted
Accounting Principles (“GAAP”).
4. CVB’s assurance in its SEC filings that it
was “not aware of any other loans . . . for
which known credit problems of the
borrower would cause serious doubts as
to the ability of such borrowers to comply
with their loan repayment terms.” 3
We analyze these alleged misrepresentations to determine
whether the SAC includes detailed allegations compelling
the inference that each statement was false and made with
the requisite scienter. See Tellabs, 551 U.S. at 314; S. Ferry,
542 F.3d at 782.
A. The First Three Categories of Statements
First, the SAC alleges that CVB committed securities
fraud by boasting that “[t]he overall credit quality of the loan
portfolio is sound”; “CVB’s credit metrics are superior” to
3
The SAC also alleges that CVB committed securities fraud by
reporting no nonperforming dairy loans throughout the alleged Class
Period and then classifying $5.2 million in dairy loans as nonperforming.
But, the SAC does not explain why there was not enough time between
reporting periods for performing loans later to become non-performing.
The allegation therefore fails the heightened pleading standards of the
PSLRA and Rule 9(b).
14 JACKSONVILLE PENSION FUND V. CVB
those of its peers; “strong credit culture and underwriting
integrity remain paramount at CVB”; and CVB’s culture has
“limited its exposure to problem credits.” The district court
dismissed the claims based on these boasts, characterizing
them as puffery. That decision was correct. These vague,
optimistic statements by CVB officials are not actionable.
See In re Cutera Sec. Litig., 610 F.3d 1103, 1111 (9th Cir.
2010). 4
Jacksonville next argues that CVB committed securities
fraud by describing the Southern California real estate
market in several SEC filings simply as a “risk factor” that
“could” affect the ability of loan customers to repay “in the
future,” when in fact that risk had already come to fruition.
But, in context, there is nothing misleading about these
statements, which were accompanied by information about
CVB’s credit losses and charge-offs and a warning that
“[w]e may be required to make additional provisions for loan
losses and charge off additional loans in the future.”
Jacksonville also alleges that there were GAAP
violations in CVB’s published accounting figures. But, “the
mere publication of inaccurate accounting figures, or a
failure to follow GAAP, without more, does not establish
scienter.” DSAM Glob. Value Fund v. Altris Software, Inc.,
288 F.3d 385, 390 (9th Cir. 2002) (quoting In re Software
Toolworks Inc., 50 F.3d 615, 627 (9th Cir. 1994)). To raise
4
Jacksonville also briefly argues that Myers committed securities
fraud by boasting that, although ten buildings on CVB’s street each had
a 75% vacancy rate, CVB had no loans against any of them. The SAC
alleges that CVB “did have a loan against a building on the avenue where
CVB is headquartered.” However, the SAC does not allege that this
building was one of the ten Myers identified. Nor does the SAC
adequately allege that this boast was material or made with the requisite
scienter.
JACKSONVILLE PENSION FUND V. CVB 15
a strong inference of scienter, the SAC must allege facts
demonstrating that defendants “knowingly and recklessly
engaged in an improper accounting practice,” for example,
that a company’s external auditors counseled against a
practice or that a company’s CFO was aware that the practice
was improper. Metzler, 540 F.3d at 1068–69. The SAC
contains no such allegations. Nor does it allege the role of
the individual defendants in preparing the company’s
accounting statements or what knowledge they had of GAAP
principles. Accordingly, the district court correctly
dismissed the GAAP claims.
B. The SEC Filings
The SAC alleges that, in November 2009, March 2010,
and May 2010, CVB’s SEC filings falsely assured investors
that Garrett had no “known credit problems” that “would
cause serious doubts” as to its ability to repay. We examine
each filing in turn.
1. The November 2009 10-Q
Jacksonville argues that the statement in the 10-Q filed
in November 2009— that there was no basis for “serious
doubts” about Garrett’s ability to pay—was false because, in
September 2008, Garrett had expressly told CVB of its
financial difficulties. But by November 2009, Garrett had
been current on its loans for about a year, and the SAC does
not allege that Garrett gave CVB any cause for concern
during that year. A meeting a year earlier that led to
restructuring does not compel the inference that the
November 2009 statement was false.
The SAC also alleges that Garrett personnel continued to
be concerned about the company’s financial position in
2009. But it does not allege that these concerns were
16 JACKSONVILLE PENSION FUND V. CVB
communicated to CVB. The SAC also alleges that, in March
2009, CVB restructured $53 million of Garrett loans by
providing $44 million in a stand-alone second mortgage and
$9 million in a non-purchase-money loan, for which it
obtained security interests in at least eleven parcels of
property, at least two of which already had tax liens.
Additionally, it alleges that CVB provided Garrett with $4
million in refinancing on September 23, 2009. The fact that
CVB gave Garrett additional loans in 2009, even if some
later turned out to be unwise, does not show that CVB had a
basis for “serious doubts” about Garrett’s ability to repay in
November 2009; if anything, it points to the contrary. We
therefore affirm the district court’s dismissal of
Jacksonville’s claims based on the November 2009 10-Q. 5
2. The 2009 10-K and the May 10, 2010 10-Q
By late December 2009, Garrett was again delinquent on
its loan payments to CVB and had no liquidity to meet its
ongoing obligations. The SAC alleges that Garrett told CVB
in early January 2010 that unless modifications to loan terms
were made, Garrett could not meet its obligations and might
file for bankruptcy.
Assuming that these allegations are true, they would
seem to demonstrate that the “no serious doubts” statements
5
The SAC also alleges that, at a presentation to analysts on December
2, 2009, Myers falsely stated that Garrett was “a fully performing asset
in all respects,” that “we don’t have specific reserves against that,” and
“[t]hey are paying everything. It’s performing as agreed.” The only new
information that came to light between the November and December
statements was the foreclosure on three Garrett properties, none of which
were collateral for CVB. That knowledge would not make false CVB’s
statements that Garrett was “a fully performing asset” and “paying
everything.” We therefore agree with the district court that the SAC
failed to state a claim with respect to the December 2009 allegations.
JACKSONVILLE PENSION FUND V. CVB 17
in CVB’s 2009 10-Q, filed on March 4, 2010, and in CVB’s
10-Q for the first quarter of 2010, filed on May 10, 2010,
were false and made with knowledge of, or recklessness
towards, their falsity. The district court discounted these
allegations because they involved hearsay, as they were
based on what Garrett’s COO, whom the SAC does not
identify by name, said Wright told the Board about the
January 2010 meeting. But “the fact that a confidential
witness reports hearsay does not automatically disqualify his
statement from consideration in the scienter calculus.”
Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 997
n.4 (9th Cir. 2009). Instead, we examine a confidential
witness’s hearsay report to determine if it is “sufficiently
reliable, plausible, or coherent.” Id. Here, the statements
reported by the COO were specific in time, context, and
details, and involved important communications from a
chief executive officer to his Board. They are sufficiently
reliable for pleading purposes.
The district court also reasoned that, because the COO
was not present at the meeting with CVB, Wright’s
statements to the Garrett Board cannot capture the precise
context of the CVB meeting, leaving open the possibility that
Garrett’s lament was understood by the lender merely as a
negotiating tactic. The district court found this inference
strengthened by Garrett’s discussion of alternatives to
bankruptcy, and its active pursuit of capital investments.
The court therefore concluded that the most plausible
inference was that CVB did not credit Garrett’s threat of
bankruptcy and believed Garrett would find a way to repay
its loans.
The SAC need not allege, however, that CVB actually
believed that Garrett was about to go bankrupt, only that
CVB was on notice of facts that would reasonably give rise
to “serious doubts” about Garrett’s ability to repay. The
18 JACKSONVILLE PENSION FUND V. CVB
SAC adequately alleges that CVB had such notice. In
January 2010, Garrett not only told CVB that it could not
repay its loans and was considering bankruptcy, but that it
had fallen delinquent on its CVB loans and never again
became current. Thus, the SAC adequately alleges that
before May 10, 2010, CVB had been alerted to facts which
“would cause serious doubts” about Garrett’s ability to
repay.
The SAC also adequately alleges that the “no serious
doubts” statement made on March 4, 2010 in CVB’s 10-Q
was a misrepresentation. That statement assured investors
that there was no basis for “serious doubts” about Garrett’s
loans “as of December 31, 2009.” Technically, this may
have been true, given that the critical meeting with Garrett
did not take place until January 2010. But the statement was
plainly misleading when made. By March 2010, CVB had
known for two months that there was a basis for serious
doubts about the ability of Garrett, CVB’s largest borrower,
to repay. The omission of that fact, combined with the
reassurance that everything was fine as of December 31,
2009, meets the pleading standard for a material omission.
See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449
(1976) (An omission is material if there is “a substantial
likelihood that the disclosure of the omitted fact would have
been viewed by the reasonable investor as having
significantly altered the ‘total mix’ of information made
available”); Operating Local 649 Annuity Tr. Fund v. Smith
Barney Fund Mgmt., LLC, 595 F.3d 86, 92 (2d Cir. 2010)
(“The veracity of a statement or omission is measured not by
its literal truth, but by its ability to accurately inform rather
than mislead prospective buyers.”); Brody v. Transitional
Hosps. Corp., 280 F.3d 997, 1006 (9th Cir. 2002) (“To be
actionable under the securities laws, an omission must be
misleading; in other words it must affirmatively create an
JACKSONVILLE PENSION FUND V. CVB 19
impression of a state of affairs that differs in a material way
from the one that actually exists.”).
Therefore, we conclude that the SAC sufficiently alleges
falsity and scienter as to the “no serious doubts” statements
in the 10-K on March 4, 2010, and the 10-Q on May 10,
2010.
C. Loss Causation
Even when deceptive conduct is properly pleaded, a
securities fraud complaint must also adequately plead “loss
causation.” Erica P. John Fund, 131 S. Ct. at 2183. Loss
causation is shorthand for the requirement that “investors
must demonstrate that the defendant’s deceptive conduct
caused their claimed economic loss.” Id. Thus, like a
plaintiff claiming deceit at common law, the plaintiff in a
securities fraud action must demonstrate that an economic
loss was caused by the defendant’s misrepresentations,
rather than some intervening event. Dura Pharm., Inc. v.
Broudo, 544 U.S. 336, 343–44 (2005). The burden of
pleading loss causation is typically satisfied by allegations
that the defendant revealed the truth through “corrective
disclosures” which “caused the company’s stock price to
drop and investors to lose money.” Halliburton Co. v. Erica
P. John Fund, Inc., 134 S. Ct. 2398, 2406 (2014).
The district court held that the SAC failed to adequately
allege loss causation. The only significant fall in CVB’s
share price occurred after the August 9, 2010 announcement
of the SEC subpoena, and the district court found that the
announcement of the subpoena could not constitute a
corrective disclosure.
We recently held that “the announcement of an
investigation, ‘standing alone and without any subsequent
20 JACKSONVILLE PENSION FUND V. CVB
disclosure of actual wrongdoing, does not reveal to the
market the pertinent truth of anything, and therefore does not
qualify as a corrective disclosure.’” Loos, 762 F.3d at 890
n.3 (quoting Meyer v. Greene, 710 F.3d 1189, 1201 n.13
(11th Cir. 2013)). But in so doing, we left open whether the
announcement of an investigation can “form the basis for a
viable loss causation theory” if the complaint also alleges a
subsequent corrective disclosure by the defendant. Id.; see
also Meyer, 710 F.3d at 1201 n.13 (reserving same
question).
We today answer that question in the affirmative. We
start from the premise that loss causation is a “context-
dependent” inquiry, Miller v. Thane Int’l, Inc., 615 F.3d
1095, 1102 (9th Cir. 2010), as there are an “infinite variety”
of ways for a tort to cause a loss, Assoc’d. Gen. Contractors
of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S.
519, 536 (1983). Because loss causation is simply a variant
of proximate cause, Dura, 544 U.S. at 343–46, the ultimate
issue is whether the defendant’s misstatement, as opposed to
some other fact, foreseeably caused the plaintiff’s loss.
Loos made clear that the announcement of a government
investigation, without more, cannot meet the loss causation
requirement, but much more is alleged here. About a month
after it announced the SEC subpoena, CVB disclosed that it
was charging off millions in Garrett loans. Although
Garrett’s stock dropped over 20% the day after the
announcement about the subpoena, the market reacted
hardly at all to CVB’s bombshell disclosure about its largest
borrower, confirming that investors understood the SEC
announcement as at least a partial disclosure of the
inaccuracy of the previous “no serious doubts” statements.
See In re Take-Two Interactive Sec. Litig., 551 F. Supp. 2d
247, 285 (S.D.N.Y. 2008) (investors’ understanding of
disclosure is relevant, because “the pertinent inquiry trains
JACKSONVILLE PENSION FUND V. CVB 21
on the most plausible understanding of a given disclosure at
the time it was made”). Under the facts of this case, loss
causation was sufficiently pleaded. Indeed, any other rule
would allow a defendant to escape liability by first
announcing a government investigation and then waiting
until the market reacted before revealing that prior
representations under investigation were false.
Our conclusion is consistent with a recent Fifth Circuit
decision. In Public Employees’ Retirement System of
Mississippi v. Amedisys, Inc., the operative complaint
alleged five partial disclosures of the Medicare fraud,
including the announcements that the SEC, Department of
Justice, and Senate Finance Committee had initiated
investigations into the defendant’s billing practices.
769 F.3d 313, 317–19 (5th Cir. 2014). The Fifth Circuit
reasoned that, “to establish proximate causation, the plaintiff
must prove that when the relevant truth about the fraud
began to leak out, it caused the price of stock to depreciate
and thereby proximately cause the plaintiff’s economic
loss.” Id. at 321; see also In re Williams Sec. Litig.-WCG
Subclass, 558 F.3d 1130, 1140 (10th Cir. 2009) (“To be
corrective, the disclosure need not precisely mirror the
earlier misrepresentation, but it must at least relate back to
the misrepresentation and not to some other negative
information about the company.”). The court held that, even
if the announcements of the government investigations were
not in themselves enough to establish loss causation, they
were sufficient when “viewed together with the totality of
the other alleged partial disclosures.” Amedisys, 769 F.3d at
324.
We similarly conclude that the SAC adequately pleads
loss causation. It plausibly alleges that: (1) CVB’s
disclosure of the subpoena caused its stock price to drop
precipitously; (2) the market and various analysts perceived
22 JACKSONVILLE PENSION FUND V. CVB
the subpoena to be related to CVB’s alleged misstatements
about Garrett’s ability to repay; (3) the market’s fears about
the subpoena were confirmed by CVB’s September 9
disclosure that it was writing off $34 million in Garrett loans
and categorizing the remainder as non-performing; and
(4) the September 9 disclosure’s minimal effect on CVB’s
stock price indicates that the earlier 22% drop reflected, at
least in part, the market’s concerns about the Garrett loans.
Thus, Jacksonville has adequately pleaded “a causal
connection between the material misrepresentation and the
loss.” Dura, 544 U.S. at 342. Whether Jacksonville can
establish that causal connection is another question. See
Amedisys, 769 F.3d at 325.
CONCLUSION
We vacate the dismissal of the SAC with respect to the
“no serious doubts” representations made in the 10-K on
March 4, 2010 and the 10-Q on May 10, 2010, and remand
for further proceedings consistent with this opinion. The
order of the district court is otherwise affirmed.
AFFIRMED IN PART, REVERSED IN PART, AND
REMANDED.