District Court Holds That A Blog Post Compiling “Far-Flung” But Publicly Available Information Was Not A Corrective Disclosure
 

On September 2, 2016, Judge William Orrick of the Northern District of California dismissed with prejudice a putative class action against Cellular Biomedicine Group, Inc. (“CBMG”) alleging securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934.  Bonanno v. Cellular Biomedicine Group, Inc., No. 15-CV-01795-WHO, 2016 WL 4585753 (N.D. Cal. Sept. 2, 2016).  The Court held that plaintiffs failed to plead with particularity that a blog post compiling publicly available information about CBMG’s efforts to promote its stock was a corrective disclosure causing CBMG’s share price to drop, even in light of the allegation that the information was far-flung or effectively “hidden” or impossible for a lay person to compile.

On April 7, 2015, a blogger posted a 25-page report that discussed a campaign CBMG had undertaken to boost its stock price by paying for research or other publicity, as well as patient deaths following clinical trials the company had run and other allegations of dishonesty on the part of CBMG’s owners.  That day, the company’s stock declined 21.7% in value.  Plaintiffs sued on behalf of a class of shareholders, alleging that CBMG had engaged in a fraudulent scheme to inflate its stock price by secretly paying for publicity and that the blog’s “revelation” of CBMG’s “promotional campaign” caused the 21.7% price drop.  The Court had earlier dismissed plaintiffs’ claim because plaintiffs had failed to allege that the blog constituted a corrective disclosure linking the alleged fraud to shareholders’ losses.  The plaintiffs amended their complaint on June 9, 2016.

The Court concluded the amended complaint suffered from the same defect.  The Court noted that the plaintiffs bore the burden of showing that some corrective disclosure caused CBMG’s stock price to drop and were required to plead the required loss causation with particularity.  Here, the Court found that the blog post was not a corrective disclosure for three reasons.  First, the plaintiffs had not explained how the post revealed any “true facts” about CBMG rather than “mere opinion.”  Second, the post’s discussion of the fact that the research and publicity had likely been paid for was derived exclusively from public disclosures made by the providers and, therefore, under the efficient market theory, the information it contained would already have been reflected in CBMG’s share price, even if no one lay person could compile it or understand it.  The fact that the blog post compiled this information into one article for public consumption did not change this analysis because “[o]ne presumes that all public information is incorporated into the market price no matter how far flung it may be.”  Third, the plaintiffs had not shown that the blog’s discussion of the promotional campaign was a “substantial cause” of CBMG’s share price drop because the blog also contained other “serious and unrelated” accusations regarding patient deaths and the purported dishonesty of CBMG’s owners.

Because plaintiffs declined further leave to amend the complaint, the Court determined that they could not cure their defective causation allegations and that granting leave to amend would be futile, and therefore dismissed the case with prejudice.