John Loos v. Immersion Corporation

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
JOHN P. LOOS, individually and on No. 12-15100
behalf of all others similarly
situated, D.C. No.
Plaintiffs-Appellants, 3:09-cv-04073-
MMC
v.
IMMERSION CORPORATION; VICTOR ORDER AND
A. VIEGAS; RALPH EDWARD AMENDED
CLENTON RICHARDSON; STEPHEN OPINION
AMBLER; RICHARD VOGEL,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of California
Maxine M. Chesney, Senior District Judge, Presiding
Argued and Submitted
February 12, 2014—San Francisco, California
Filed August 7, 2014
Amended September 11, 2014
Before: Richard C. Tallman and Johnnie B. Rawlinson,
Circuit Judges, and Thomas O. Rice, District
Judge.*
*
The Honorable Thomas O. Rice, United States District Judge for the
Eastern District of Washington, sitting by designation.
2 LOOS V. IMMERSION CORP.
Order;
Opinion by Judge Rice
SUMMARY**
Securities Fraud
The panel filed (1) an order amending opinion and (2) an
amended opinion in which it affirmed the district court’s
dismissal for failure to state a claim of a securities fraud class
action alleging violations of Sections 10(b), 20(a), and 20A
of the Securities Exchange Act of 1934 and Rule 10b-5.
Agreeing with the Eleventh Circuit, the panel held that the
announcement of an investigation, standing alone, and
without any disclosure of actual wrongdoing, is insufficient
to establish loss causation. It held that the plaintiff could not
establish loss causation on the facts alleged in the amended
complaint because he had not attempted to correlate his losses
to anything other than the announcement of an internal
investigation.
COUNSEL
David A.P. Brower and Richard H. Weiss (argued), Brower
Piven, New York, New York; and Sanford Svetcov, Susan K.
Alezander, and Willow E. Radcliffe, Robbins Geller Rudman
& Dowd, LLP, San Francisco, California, for Plaintiffs-
Appellants.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
LOOS V. IMMERSION CORP. 3
Susan S. Muck, Jennifer C. Bretan (argued), and Marie C.
Bafus, Fenwick & West, LLP, San Francisco, California; and
Felix S. Lee, Fenwick & West, LLP, Mountain View,
California, for Defendants-Appellees.
ORDER
The Opinion filed on August 7, 2014, is hereby amended
as follows: At the end of the final sentence of the first full
paragraph on page 18 (now page 19), the following footnote
3 is appended:
We do not mean to suggest that the
announcement of an investigation can never
form the basis of a viable loss causation
theory. Like the Eleventh Circuit, we merely
hold that the announcement of an
investigation, “standing alone and without any
subsequent disclosure of actual wrongdoing,
does not reveal to the market the pertinent
truth of anything, and therefore does not
qualify as a corrective disclosure.” Meyer,
710 F.3d at 1201 n.13 (internal quotation
marks omitted). To the extent an
announcement contains an express disclosure
of actual wrongdoing, the announcement
alone might suffice.
An amended opinion is filed concurrently with this Order.
No further petitions for panel rehearing or rehearing en banc
will be entertained.
4 LOOS V. IMMERSION CORP.
OPINION
RICE, District Judge:
Plaintiff John Loos appeals the district court’s dismissal
of his securities fraud class action for failure to state a claim.
Plaintiff argues that the district court erred by analyzing his
allegations of scienter in isolation rather than “collectively”
as mandated by Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 308 (2007). Plaintiff further challenges the district
court’s conclusion that he failed to establish loss causation by
alleging a precipitous decline in Immersion Corp.’s stock
price on the heels of a July 1, 2009 press release announcing
an internal investigation into the company’s revenue
accounting practices.
We hold that the announcement of an investigation,
standing alone, is insufficient to establish loss causation. We
further conclude that Plaintiff cannot establish loss causation
on the facts alleged in the amended complaint because he has
not attempted to correlate his losses to anything other than the
announcement of an internal investigation. We therefore
affirm the district court on this loss causation issue. We do
not reach Plaintiff’s arguments regarding scienter.
I.
Immersion Corporation (“Immersion”) is a publicly-
traded company listed on the NASDAQ stock exchange.
Immersion develops and licenses “haptics” technology,
which, in broad strokes, allows high-tech electronic devices
to produce tactile feedback to the user. One example of a
haptics-enabled device is a smartphone that produces a
“pulse” or a “pushback” sensation when the user clicks a
LOOS V. IMMERSION CORP. 5
button on the screen. At the times relevant to this appeal,
Immersion focused primarily on developing haptics
technology for use in handheld electronics and medical
training devices.
Plaintiff John Loos (“Plaintiff”) and several other
purchasers of Immersion stock filed class actions against
Immersion in the Northern District of California in late 2009.
The district court consolidated the cases and appointed
Plaintiff to represent the putative class. Plaintiff subsequently
filed a consolidated complaint on behalf of himself and a
class of shareholders who purchased Immersion stock
between May 3, 2007, and July 1, 2009 (the “class period”).
This complaint alleged violations of Sections 10(b), 20(a) and
20A of the Securities Exchange Act of 1934 and Rule 10b-5
of the Securities and Exchange Commission’s implementing
regulations. Named as defendants were Immersion and five
of its top executives, Defendants Victor Viegas, Clent
Richardson, Stephen Ambler, Richard Vogel and Daniel
Chavez.
Defendants moved to dismiss the complaint on June 15,
2010, for failure to state a claim. The district court granted
the motion on March 11, 2011, ruling, inter alia, that Plaintiff
failed to adequately plead the scienter and loss causation
elements of his claims. Finding that these deficiencies could
potentially be cured, the district court granted Plaintiff leave
to amend.
Plaintiff filed an amended complaint asserting the same
causes of action on April 29, 2011.1 Defendants filed a
1
Daniel Chavez was not named as a defendant in Plaintiff’s amended
complaint and is not a party to this appeal.
6 LOOS V. IMMERSION CORP.
second motion to dismiss on July 1, 2011. The district court
granted the motion on December 16, 2011, concluding, once
again, that Plaintiff failed to plausibly allege the scienter and
loss causation elements of his claims. Because Plaintiff had
failed to correct the deficiencies identified in its prior
dismissal order, the district court dismissed the amended
complaint with prejudice.
Plaintiff now appeals.
II.
From the time it went public in 1999 until the fourth
quarter of 2006 (“4Q06”2), Immersion did not turn a profit.
Although the company appeared to be poised for growth, it
struggled to control its operating costs. During this period,
Immersion experienced significant pressure from its investors
to “ramp up” to sustained profitability.
Immersion’s fortunes appeared to change in 1Q07, when
the company settled a patent infringement claim against a
large electronics manufacturer for $150 million. With the
receipt of these funds, Immersion was able to report its first
profitable quarter as a publicly traded company. Although
the company was pleased with the impact of the settlement on
its balance sheet, it recognized that investors would not be
content with a one-time influx of capital. Thus, Immersion
announced during a conference call about 1Q07 earnings that
it would invest the settlement funds in new growth initiatives
that would translate to profitable quarters and sustained
revenue growth for the remainder of 2007.
2
For convenience, we will use this abbreviation format for all financial
quarters throughout our opinion.
LOOS V. IMMERSION CORP. 7
Immersion disclosed its 2Q07 earnings on August 2,
2007. In a press release, the company’s CEO, Defendant
Victor Viegas, announced that Immersion had achieved
“back-to-back profitable quarters” as a result of strong sales
in its Medical Division. On a subsequent conference call
with investors, Viegas reported that Medical Division
revenues had grown 19% over the second quarter of 2006 and
were poised for further growth. When asked about
Immersion’s prospects for growth internationally, Viegas
stated that the company anticipated considerable success
marketing its medical products in China.
Immersion released its 3Q07 financial results on
November 1, 2007. In a press release announcing the results,
Immersion proclaimed that it had achieved “three consecutive
profitable quarters” and had experienced “very strong year-
to-date revenue growth.” On a subsequent earnings call,
Viegas informed investors that the company’s Medical
Division revenues had grown 39% over the third quarter of
2006.
Immersion reported its 4Q07 earnings on February 28,
2008. In yet another press release, the company declared that
it had achieved “profitability in each of the four quarters” in
2007. During a conference call with investors, Viegas
boasted that the company’s 4Q07 and fiscal year 2007 results
were “the best in Immersion’s history.” Immersion’s CFO,
Defendant Stephen Ambler, reiterated that these numbers
were “record highs.”
Unfortunately, Immersion’s momentum stalled in early
2008. On May 1, 2008, Immersion announced a net loss of
$2.6 million for 1Q08. Despite this disappointing news,
Ambler emphasized to investors that Medical Division
8 LOOS V. IMMERSION CORP.
revenues had increased by 13% over 1Q07 and would
continue to drive growth. When questioned about the
company’s progress internationally, Viegas forecast that
Immersion would see a “dramatic increase” in Medical
Division revenues over the next three quarters.
On July 31, 2008, Immersion announced a net loss of $3.1
million for 2Q08. In an effort to put a positive spin on this
disappointing news, Immersion highlighted in a press release
that its total revenue had grown by 8% over 2Q07 and by
16% over the first six months of 2007. Defendant Clent
Richardson, who by that time had succeeded Viegas as CEO,
further emphasized that Immersion was beginning to see
significant returns on its investments internationally: “We are
already seeing positive and measurable results from our
investments. Second quarter of international revenues
reached $4.5 million, almost 50% of total [company] revenue,
and an increase of 25% compared to the year-ago quarter.”
Immersion released its 3Q08 results on October 30, 2008.
After adjusting for a one-time charge related to the settlement
of a lawsuit, the company reported a net loss of $4.3 million.
Once again, Immersion attempted to focus investors’
attention on revenue growth. In a press release, the company
announced that it had exceeded $10 million in quarterly
revenue for the first time in its history. During an earnings
call, Ambler explained that $5.6 million of this sum had come
from international medical sales, a figure that represented a
112% year-over-year increase. Richardson further reported
that “[o]verseas revenue for medical grew more than 3 times
over [3Q07].”
Immersion announced its 4Q08 earnings on March 2,
2009. Adjusting for a one-time charge related to the
LOOS V. IMMERSION CORP. 9
divestiture of a business segment, the company reported a net
loss of $7.1 million. In contrast to the revenue growth
reported for the prior three quarters, Immersion’s 4Q08
revenues declined 9% over the prior year period. Despite
these poor results, Immersion highlighted to investors that it
“continued to see strong growth in international sales with
[the] medical line of business. Medical international
revenues grew 135% over the year-ago period, and also grew
24% sequentially.”
Results for 1Q09 were announced on May 4, 2009.
Immersion reported a net loss of $7.5 million and only a 1%
increase in revenues over the prior year period. The company
also announced a 16% decrease in medical revenues over the
prior year period. Immersion conceded that the Medical
Division “ha[d] not met revenue expectations.”
Shortly thereafter, on July 1, 2009, Immersion disclosed
a potential problem with its previously reported revenues. In
a press release issued before the stock market opened, the
company revealed that it had launched an internal
investigation into revenue recognition practices in its Medical
Division:
[T]he Audit Committee of the Board of
Directors of Immersion Corporation
(“Immersion”) is conducting an internal
investigation into certain previous revenue
transactions in its Medical line of business.
The investigation is being conducted with the
assistance of outside counsel. The Audit
Committee has not yet determined the impact,
if any, to Immersion’s historical financial
statements. As a result of this investigation,
10 LOOS V. IMMERSION CORP.
Immersion may discover information that
could raise issues with respect to its
previously-reported financial information,
which could be material. Immersion will not
be able to evaluate the full impact of the
aforementioned matters until the Audit
Committee completes its review and further
analysis is completed.
Immersion’s stock price dropped over 23% to close at $3.80
per share on this news.
On August 10, 2009, Immersion advised investors that its
prior financial statements “should no longer be relied upon”
due to irregularities with “certain revenue transactions” in the
Medical Division. The company further disclosed that, as a
result of these irregularities, it would restate its financials for
fiscal year 2008 at a later date.
Immersion disclosed the findings of its internal
investigation on February 8, 2010. In an amended Form 10-
K/A filed with the Securities and Exchange Commission
(“SEC”), the company admitted to having made “errors in . . .
the recording of revenue transactions from [its] Medical line
of business.” More specifically, Immersion revealed that it
had recognized sales revenue prematurely, in violation of
generally accepted accounting principles (“GAAP”) and its
own internal policies, in three main areas: (1) on orders
shipped to a Chinese customer pursuant to a “side agreement”
that granted the customer unauthorized shipping and payment
terms; (2) on orders of products that were either “not
available” or “not fully developed” when sold; and (3) on
orders that were not promptly delivered, that included non-
standard terms, or that lacked probable collectability. As a
LOOS V. IMMERSION CORP. 11
result of these errors, Immersion restated its earnings for
2006, 2007, 2008 and 1Q09. The most significant impact of
the restatement was on fiscal year 2008, in which Immersion
reversed $623,000 in medical sales revenue and deferred
another $3 million to later periods.
III.
We have jurisdiction over this appeal pursuant to
28 U.S.C. § 1291. We review the dismissal of a securities
fraud claim under Federal Rule of Civil Procedure 12(b)(6)
de novo. Zucco Partners, LLC v. Digimarc Corp., 552 F.3d
981, 989 (9th Cir. 2009). The scope of our review is
“generally limited to the face of the complaint, materials
incorporated into the complaint by reference, and matters of
which we may take judicial notice.” Id. Dismissal without
leave to amend is reviewed for abuse of discretion. Id.
IV.
Section 10(b) of the Securities Exchange Act of 1934
makes it unlawful to “use or employ, in connection with the
purchase or sale of any security . . . any manipulative or
deceptive device or contrivance in contravention of such rules
and regulations as the Commission may prescribe as
necessary or appropriate in the public interest or for the
protection of investors.” 15 U.S.C. § 78j(b). SEC Rule
10b-5, which implements § 10(b), prohibits the following
practices “in connection with the purchase or sale of any
security”:
(a) To employ any device, scheme, or artifice
to defraud,
12 LOOS V. IMMERSION CORP.
(b) To make any untrue statement of a
material fact or to omit to state a material fact
necessary in order to make the statements
made, in the light of the circumstances under
which they were made, not misleading, or
(c) To engage in any act, practice, or course of
business which operates or would operate as
a fraud or deceit upon any person[.]
17 C.F.R. § 240.10b-5.
Violations of § 10(b) and Rule 10b-5 give rise to a cause
of action in favor of any purchaser or seller of securities who
has been injured by a company’s fraudulent practices.
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308,
318 (2007). There are six elements to a securities fraud claim
under § 10(b) and Rule 10b-5: (1) a material
misrepresentation or omission; (2) scienter (i.e., a wrongful
state of mind); (3) a connection between the
misrepresentation and the purchase or sale of a security;
(4) reliance upon the misrepresentation (often established in
“fraud-on-the-market” cases via a presumption that the price
of publicly-traded securities reflects all information in the
public domain); (5) economic loss; and (6) loss causation.
Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 341–42
(2005).
At issue here is the element of loss causation. Broadly
speaking, loss causation refers to the causal relationship
between a material misrepresentation and the economic loss
suffered by an investor. Id. at 342. Ultimately, a securities
fraud plaintiff must prove that the defendant’s
misrepresentation was a “substantial cause” of his or her
LOOS V. IMMERSION CORP. 13
financial loss. In re Daou Sys., Inc., 411 F.3d 1006, 1025
(9th Cir. 2005). At the pleading stage, however, the plaintiff
need only allege that the decline in the defendant’s stock
price was proximately caused by a revelation of fraudulent
activity rather than by changing market conditions, changing
investor expectations, or other unrelated factors. Metzler Inv.
GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1062 (9th
Cir. 2008). In other words, the plaintiff must plausibly allege
that the defendant’s fraud was “revealed to the market and
caused the resulting losses.” Id. at 1063 (emphasis added).
Plaintiff’s overarching theory of liability is that
Immersion “cooked the books” in response to mounting
pressure from investors to become profitable. Specifically,
Plaintiff alleges that Immersion systematically recognized
medical sales revenue earlier than permitted under GAAP in
order to mislead investors into believing that the company
was on the cusp of finally achieving sustained profitability.
As a result of this practice, Plaintiff contends, Immersion’s
stock price remained artificially “inflated” throughout the
class period.
With regard to loss causation, Plaintiff alleges that
Immersion’s fraudulent accounting was revealed to the
market through a series of “partial disclosures” consisting of
(1) disappointing earnings results for 1Q08, 2Q08, 4Q08 and
1Q09; and (2) the subsequent announcement of an internal
investigation into prior revenue transactions. The gravamen
of Plaintiff’s loss causation theory is that Immersion’s
disappointing financial results signaled that the company
lacked the “growth drivers and profitability” that it had
previously claimed, and that the subsequent announcement of
an investigation into prior revenue transactions confirmed
that Immersion had fraudulently overstated its historical
14 LOOS V. IMMERSION CORP.
revenues. Most notably for purposes of the instant case,
Plaintiff alleges that Immersion’s July 1, 2009 announcement
of an internal investigation completed the revelation of fraud
to the market and removed all inflation from the company’s
stock price:
As a direct result of [D]efendants’ July 1,
2009 disclosure, Immersion’s stock price fell
23% in one day...to close at $3.80 per share[.]
This drop resulted in a market capitalization
loss of $31.9 million and removed the
inflation from Immersion’s publicly traded
securities, causing real economic loss to
investors who had purchased the securities
during the Class Period.
A.
The district court concluded that the allegations regarding
Immersion’s disappointing financial results were insufficient
to establish loss causation as a matter of law. We agree. As
the district court correctly recognized, our precedent requires
a securities fraud plaintiff to allege that the market “learned
of and reacted to th[e] fraud, as opposed to merely reacting to
reports of the defendant’s poor financial health generally.”
Metzler, 540 F.3d at 1063; see also In re Oracle Corp. Sec.
Litig., 627 F.3d 376, 392, 394 (9th Cir. 2010) (holding that an
earnings miss, standing alone, is insufficient to establish loss
causation; the market must have learned of and reacted to the
company’s fraudulent practices as opposed to the financial
impact of those practices). Immersion’s disappointing
earnings for 1Q08, 2Q08, 4Q08 and 1Q09 are merely
indicative of poor financial health; they do not tend to suggest
that the company had engaged in fraudulent accounting
LOOS V. IMMERSION CORP. 15
practices. At bottom, these disclosures simply reveal that
Immersion failed to meet its revenue goals.
Our decision in Daou does not dictate a different result.
Like Plaintiff, the investors in Daou alleged that their losses
were caused, at least in part, by the defendant’s
announcement of “dismal” financial results. 411 F.3d at
1025–26. According to the investors, these disappointing
results were the direct result of the defendant systematically
recognizing revenue prematurely in violation of GAAP. Id.
at 1026. The district court dismissed the complaint, ruling
that the investors had not adequately linked the disappointing
earnings (and the ensuing drop in the defendant’s share price)
to the alleged accounting fraud. Id.
We reversed, holding that the investors had alleged a
plausible connection between the disappointing earnings and
the alleged fraud. Id. at 1026–27. Crucial to our holding was
the fact that the defendant’s earnings statement revealed more
than $10 million in unbilled receivables in a “work in
progress” account. Id. at 1026. Having previously taken note
of allegations that the defendant recognized revenue on
contracts for which “little or no labor had yet taken place”
(including one anticipated contract that the defendant
ultimately lost to a competitor), id. at 1019–20, we concluded
that $10 million in unbilled revenue was sufficiently
suggestive of accounting fraud to survive a motion to dismiss.
Id. at 1026–27.
Unlike the disappointing earnings disclosure in Daou,
Immersion’s 1Q08, 2Q08, 4Q08 and 1Q09 results do not
reveal any information from which revenue accounting fraud
might reasonably be inferred. In fact, the only disclosure that
might arguably support an inference of fraud is the
16 LOOS V. IMMERSION CORP.
company’s statement during a 1Q09 earnings call that
“payments [were] not taking place on a timely basis from
some of [its] overseas customers.” But this revelation comes
nowhere close to the circumstances presented in Daou. For
one thing, the missing revenue at issue here had actually been
billed to a client. More importantly, however, this statement
reveals very little about the reason for the underlying
problem. Whereas a “rapidly escalating work in progress
account represent[ing] over $10 million in unbilled
receivables” supports an inference of premature revenue
recognition on a monumental scale, see id. at 1026, a single
offhand reference to slower than normal collection of
accounts receivable does not. Accordingly, we find no error
in the district court’s analysis of Immersion’s 1Q08, 2Q08,
4Q08 and 1Q09 financial results.
B.
With regard to the July 1, 2009 announcement, the district
court ruled that “the announcement of an investigation,
standing alone, does not give rise to a viable loss causation
allegation.” We have never squarely addressed whether the
disclosure of an internal investigation can satisfy the loss
causation element of a § 10(b) and Rule 10b-5 claim. On one
hand, we have stated that a securities fraud plaintiff is not
required to allege an outright admission of fraud to survive a
motion to dismiss. See Metzler, 540 F.3d at 1064 (“[N]either
Daou nor Dura require an admission or finding of fraud
before loss causation can be properly pled.”). This statement
supports Plaintiff’s argument that the disclosure of an
investigation, which raises the prospect of fraud, is relevant
to establishing loss causation. On the other hand, we have
stated in the very same breath that a mere “risk” or
“potential” for fraud is insufficient to establish loss causation.
LOOS V. IMMERSION CORP. 17
See id.(“[N]either Daou nor Dura support the notion that loss
causation is pled where a defendant’s disclosure reveals a
‘risk’ or ‘potential’ for widespread fraudulent conduct.”).
This statement supports the district court’s conclusion that the
mere announcement of an investigation is not enough to
establish loss causation.
Our decision in Metzler, while relevant, is not particularly
instructive here. In that case, the plaintiff’s theory of loss
causation relied, in part, on a newspaper article which
disclosed that the defendant, a nationwide for-profit college,
had been investigated and sanctioned by the Department of
Education for facilitating financial aid fraud. Although only
one of the defendant’s eighty-eight campuses had been
investigated, the plaintiff argued that the resulting sanctions
revealed a “potential but real risk” that other campuses had
engaged in similar misconduct. Id. at 1055, 1063 (emphasis
in original). We rejected this argument, holding that the
sanctions imposed against the single campus were not
indicative of fraud on a company-wide scale. Id. at 1063–64.
We further noted that, in any event, the defendant’s stock
price made a full recovery within three days of the article
being published. Id. at 1063–65. Given the limited scope of
the investigation at issue in Metzler, the most we can say is
that the announcement of an investigation can potentially be
relevant to a securities fraud plaintiff’s theory of loss
causation.
The Eleventh Circuit has examined the disclosure of a
fraud investigation under much more analogous
circumstances. In Meyer v. Greene, the plaintiff alleged that
the defendant, a developer of commercial and industrial real
estate, committed fraud by failing to depreciate the value of
its real estate holdings in the wake of a significant depression
18 LOOS V. IMMERSION CORP.
of the real estate market from 2008 to 2010. 710 F.3d 1189,
1192–93 (11th Cir. 2013). Following a presentation by a
prominent stock market analyst suggesting that the
defendant’s real estate holdings were substantially
overvalued, the company’s stock price dropped by 20%. Id.
at 1193. Three months later, the defendant disclosed that the
SEC had initiated an informal inquiry into the company’s real
estate valuation practices. Id. The defendant’s stock price
dropped an additional 7% on this news. Id. at 1201. Six
months later, the defendant announced that the SEC’s inquiry
had ripened into a “order of private investigation.” Id. at
1193. The defendant’s stock price dropped another 9% as a
result of this disclosure. Id. at 1201. The plaintiff attempted
to establish loss causation by arguing that the defendant’s
accounting fraud was revealed to the market through (1) the
analyst’s presentation; (2) the disclosure of the SEC’s
informal inquiry; and (3) the announcement of the SEC’s
private order of investigation. Id. at 1197. The Eleventh
Circuit rejected this theory. As to the presentation, the court
explained that the analyst’s information had been derived
“entirely from public filings and other publicly available
[sources]” of which the stock market was presumed to be
aware. Id. at 1198. With regard to the SEC investigations,
the court reasoned that there had been no “revelation” of a
prior false statement to the market:
In our view, the commencement of an SEC
investigation, without more, is insufficient
to constitute a corrective disclosure for
purposes of § 10(b). The announcement of
an investigation reveals just that—an
investigation—and nothing more. To be sure,
stock prices may fall upon the announcement
of an SEC investigation, but that is because
LOOS V. IMMERSION CORP. 19
the investigation can be seen to portend an
added risk of future corrective action. That
does not mean that the investigations, in and
of themselves, reveal to the market that a
company’s previous statements were false or
fraudulent.
Id. at 1201 (emphasis in original) (internal citations omitted).
We agree with the Eleventh Circuit’s reasoning. The
announcement of an investigation does not “reveal”
fraudulent practices to the market. Indeed, at the moment an
investigation is announced, the market cannot possibly know
what the investigation will ultimately reveal. While the
disclosure of an investigation is certainly an ominous event,
it simply puts investors on notice of a potential future
disclosure of fraudulent conduct. Consequently, any decline
in a corporation’s share price following the announcement of
an investigation can only be attributed to market speculation
about whether fraud has occurred. This type of speculation
cannot form the basis of a viable loss causation theory.
Accordingly, we hold that the announcement of an
investigation, without more, is insufficient to establish loss
causation.3
3
We do not mean to suggest that the announcement of an investigation
can never form the basis of a viable loss causation theory. Like the
Eleventh Circuit, we merely hold that the announcement of an
investigation, “standing alone and without any subsequent disclosure of
actual wrongdoing, does not reveal to the market the pertinent truth of
anything, and therefore does not qualify as a corrective disclosure.”
Meyer, 710 F.3d at 1201 n.13 (internal quotation marks omitted). To the
extent an announcement contains an express disclosure of actual
wrongdoing, the announcement alone might suffice.
20 LOOS V. IMMERSION CORP.
Plaintiff attempts to save his loss causation theory by
arguing that two post-class period disclosures “solidif[ied] the
causative link” between the fraud and his loss. The crux of
this argument is that fears prompted by the July 1, 2009
announcement were later confirmed by (1) an August 10,
2009 disclosure that Immersion’s financial statements
“should no longer be relied upon”; and (2) the February 8,
2010 restatement itself. This argument fails for the simple
reason that the impact of these events on Immersion’s stock
price was not alleged in the TAC.4 Plaintiff’s omission of
this information is fatal to his ability to plausibly allege loss
causation. We therefore affirm the dismissal of Plaintiff’s
§ 10(b) and Rule 10b-5 claims for failure to state a claim.
C.
The district court dismissed Plaintiff’s amended
complaint without leave to amend because Plaintiff failed to
correct the deficiencies identified in his original complaint.
We find no abuse of discretion in that decision. The district
court gave Plaintiff a detailed explanation of why his original
theory of loss causation was deficient. Despite having this
explanation, Plaintiff persisted in attempting to establish loss
causation through Immersion’s disappointing earnings results
and the July 1, 2009 announcement of an internal
investigation. Because Plaintiff “essentially re-pled the same
facts and legal theories” in his amended complaint, the
district court did not abuse its discretion in dismissing
Plaintiff’s claims with prejudice. U.S. Mortg., Inc. v. Saxton,
494 F.3d 833, 843 n.11 (9th Cir. 2007), abrogated on other
4
We further note that Plaintiff did not advance this argument in the
district court. The argument is therefore waived. In re: Mercury
Interactive Corp. Sec. Litig., 618 F.3d 988, 992 (9th Cir. 2010).
LOOS V. IMMERSION CORP. 21
grounds by Proctor v. Vishay Intertechnology Inc., 584 F.3d
1208 (9th Cir. 2009); see also Zucco Partners, 552 F.3d at
1007 (“[W]here the plaintiff has previously been granted
leave to amend and has subsequently failed to add the
requisite particularity to [his] claims, the district court's
discretion to deny leave to amend is particularly broad.”).
D.
Plaintiff also appeals the dismissal of his claims for
failure to plausibly allege scienter under the Private Securities
Litigation Reform Act’s heightened pleading standards. In
view of our holding above, we decline to address Plaintiff’s
scienter arguments.
E.
Plaintiff’s final contention on appeal is that the district
court erred in dismissing his control person and insider
trading claims for failure to properly allege an underlying
violation of § 10(b) and Rule 10b-5. Because we agree that
Plaintiff lacks a viable claim under § 10(b) and Rule 10b-5,
we affirm the district court’s dismissal of these derivative
claims.
AFFIRMED.