Grigsby v. Bofi Holding, Inc.

• Decision Date: 03 November 2020
• Docket Number: No. 19-55042,19-55042
• Citation: 979 F.3d 1198
• Parties: David GRIGSBY; Joseph Shepard, On Behalf of Themselves and All Others Similarly Situated, Plaintiffs-Appellants, and Bar Mandalevy; David Siebert, Plaintiffs, v. BOFI HOLDING, INC.; Gregory Garrabrants; Andrew J. Micheletti; Eshel Bar-Adon; Paul J. Grinberg, Defendants-Appellees, v. BofI Investors Group; Vickie Siebert; Chao Wang ; Larry L. Dooley; Linda Ostermann; Philip Ricciardi, Movants.
• Court: U.S. Court of Appeals — Ninth Circuit

979 F.3d 1198

David GRIGSBY; Joseph Shepard, On Behalf of Themselves and All Others Similarly Situated, Plaintiffs-Appellants,

and

Bar Mandalevy; David Siebert, Plaintiffs,

v.BOFI HOLDING, INC.; Gregory Garrabrants; Andrew J. Micheletti; Eshel Bar-Adon; Paul J. Grinberg, Defendants-Appellees,

v.BofI Investors Group; Vickie Siebert; Chao Wang ; Larry L. Dooley; Linda Ostermann; Philip Ricciardi, Movants.

No. 19-55042

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 7, 2020 Pasadena, California

Filed November 3, 2020

Jeremy A. Lieberman (argued), Emma Gilmore, Brenda F. Szydlo, and Jennifer Banner Sobers, Pomerantz LLP, New York, New York; Patrick M. Dahlstrom, Pomerantz LLP, Chicago, Illinois; Adam M. Apton and Adam McCall, Levi & Korsinsky LLP, Washington, D.C.; for Plaintiffs-Appellants.

John P. Stigi III (argued), Sheppard Mullin Richter & Hampton LLP, Los Angeles, California; Polly Towill, Sheppard Mullin Richter & Hampton LLP, Los Angeles, California; for Defendants-Appellees.

Before: Mary H. Murguia and Morgan Christen, Circuit Judges, and Alvin K. Hellerstein,^* District Judge.

CHRISTEN, Circuit Judge:

In this securities fraud appeal, we consider whether information obtained through the Freedom of Information Act (FOIA) can constitute a corrective disclosure for purposes of alleging loss causation. Plaintiffs, who represent a putative shareholder class, filed a complaint alleging that Defendant BofI Holding, Inc. (BofI) and its senior executives violated §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) – 78t(a), by denying that BofI was the subject of a money laundering investigation. The complaint also alleged that BofI falsely stated that a whistleblower's separate allegations that BofI made undisclosed loans to criminals were "disconnected from the reality of BofI's highly compliant and top-performing business."

To establish a causal connection between BofI's two statements and declines in BofI's stock price, plaintiffs pointed to two articles that allegedly revealed the falsity of BofI's statements immediately prior to drops in BofI's stock price. One of the articles relied on information obtained through a FOIA request to the Securities and Exchange Commission (SEC); the other appeared on a website called Seeking Alpha .

The district court concluded that plaintiffs adequately alleged the falsity of defendants’ statements, but failed to adequately allege loss causation. The court determined that the article premised on information obtained from a FOIA request did not reveal new information to the market, and thus could not be a corrective disclosure of any misrepresentation. In reaching this conclusion, the court decided as a matter of law that the information obtained pursuant to the FOIA request was publicly available prior to its disclosure. The court ruled that the Seeking Alpha article also failed to disclose information that had not already been made public. The court dismissed plaintiffs’ complaint.

We have jurisdiction pursuant to 28 U.S.C. § 1291, and we reverse in part and remand. 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. We therefore reverse the district court's loss causation ruling to the extent it deemed information obtained via a FOIA request to be publicly available prior to its disclosure. We conclude the district court correctly ruled that this particular Seeking Alpha article did not constitute a corrective disclosure, in part because it was written by an anonymous short-seller with no expertise beyond that of a typical market participant who based the article solely on information found in public sources.

i.

BofI is a nationwide bank that provides various financial products and services.¹ The SEC opened an informal inquiry into BofI in May 2015 and began a formal investigation in February 2016, for which it issued two subpoenas to BofI. The first subpoena requested information about BofI's related party transactions, potential conflicts of interests, and loans to two financial entities. The second subpoena requested information related to "single-family residential loans extended to non-resident aliens." BofI never disclosed the existence of either subpoena.

In March 2017, the New York Post reported that the Department of Justice, with involvement from the SEC, was investigating BofI for possible money laundering. The same day, BofI issued a press release stating that it had "received no indication of, and ha[d] no knowledge regarding, such purported money laundering investigation." But on October 25, 2017, the Post published an article titled "Bank of Internet was under 16-month SEC investigation." Plaintiffs contend this article revealed that BofI's earlier denial of any knowledge of an SEC investigation was false. The October 25, 2017 Post article was based on a report by a subscription research service called Probes Reporter that obtained information about the SEC investigation through a FOIA request.² The day after the Post article was published, BofI's stock price declined by 4.57%.

ii

Plaintiffs filed an amended complaint on February 20, 2018. It alleged that BofI and several of its executives violated § 10(b) and § 20(a) of the Securities and Exchange Act. Defendants filed a motion to dismiss, which the district court granted, but the court allowed plaintiffs leave to amend. Concerning the money laundering allegation, the court agreed with plaintiffs that BofI's statement that it had "no indication of ... [a] money laundering investigation" represented a material misrepresentation, but the court concluded that plaintiffs had insufficiently alleged loss causation, another § 10(b) pleading requirement, because they had not sufficiently alleged that the October 25, 2017 Post article revealed nonpublic information to the market. The court reasoned that because the article relied on "information available from a federal agency through FOIA," the article only disclosed information that was already publicly available. The court assumed that "information-hungry market participants" must have sought the same information through the FOIA process prior to the article's publication. In the court's view, "[w]hat matters is whether other investors, seeking information about BofI, would reasonably have been able to obtain [the FOIA] information."

Plaintiffs’ second amended complaint asserted that the FOIA information reported in the Post article had not been previously disclosed to the public. The second amended complaint included new allegations that the SEC received only five other BofI-related FOIA requests during the relevant time period that were granted in full or in part, that there can be "significant delays" in the agency's response to FOIA requests, and that the agency "often refuses to provide information regarding investigations in response to FOIA requests."

BofI moved to dismiss the second amended complaint, and this time the district court granted the motion with prejudice. The court again concluded that plaintiffs failed to plead loss causation adequately and reiterated its prior ruling that "information about a company that is available from its federal regulator through the FOIA is publicly available to an information-hungry market." Mandalevy v. Bofi Holding, Inc ., No. 17CV667-GPC-KSC, 2018 WL 6436723, at *9 (S.D. Cal. Dec. 7, 2018) (internal quotation marks omitted). The court determined the new allegations regarding other BofI-related FOIA requests were too speculative or generalized to plausibly allege that the FOIA-derived information in the October 25, 2017 Post article had not already been obtained by market participants. Id. at *9–10. Similarly, the court concluded that the Seeking Alpha article failed to disclose new information to the market, and therefore did not qualify as a corrective disclosure.³ Plaintiffs timely appealed.

iii.

We review de novo a district court's order granting a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). Loos v. Immersion Corp. , 762 F.3d 880, 886 (9th Cir. 2014).

iv.

To state a securities fraud claim under § 10(b) of the Securities Exchange Act of 1934, a plaintiff must allege: "(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. (Halliburton I ), 563 U.S. 804, 810, 131 S.Ct. 2179, 180 L.Ed.2d 24 (2011) (quoting Matrixx Initiatives, Inc. v. Siracusano , 563 U.S. 27, 37–38, 131 S.Ct. 1309, 179 L.Ed.2d 398 (2011) ). The disputed element in this appeal is loss causation.

"Loss causation is shorthand for the requirement that ‘investors must demonstrate that the defendant's deceptive conduct caused their claimed economic loss.’ " Lloyd v. CVB Fin. Corp ., 811 F.3d 1200, 1209 (9th Cir. 2016) (quoting Halliburton I , 563 U.S. at 807, 131 S.Ct. 2179 ); see also 15 U.S.C. § 78u-4(b)(4). We apply a proximate cause test in which "the ultimate issue is whether the defendant's misstatement, as opposed to some other fact, foreseeably caused the plaintiff's loss." Mineworkers’ Pension Scheme v. First Solar Inc. , 881 F.3d 750, 753 (9th Cir. 2018) (quoting Lloyd , 811 F.3d at 1210 ). At the pleading stage, a plaintiff need only allege that the "revelation of fraudulent activity," rather than changing market conditions or other unrelated factors, proximately caused the decline in defendant's stock price. Loos , 762 F.3d at 887.

A plaintiff can satisfy the loss-causation pleading burden by alleging...