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Northern District Of California Dismisses Putative Class Action With Prejudice For Failure To Adequately Allege Loss Causation And Standing
04/16/2024On April 9, 2024, Judge Beth Labson Freeman of the United States District Court for the Northern District of California dismissed with prejudice a putative class action asserting claims under the Securities Exchange Act of 1934 against a technology company, certain of its current and former officers and directors, and related corporate entities. Mehedi v. View, Inc., 2024 WL 1560009 (N.D. Cal. Apr. 9, 2024). Lead plaintiff alleged that the company materially misstated its financial results. The Court held that lead plaintiff could not establish loss causation and therefore lacked standing to pursue claims on behalf of the putative class, requiring the case to be dismissed in its entirety.
The company became publicly traded after completing a merger with a special purpose acquisition company. Id. at *1. Five months after going public, the company announced in August 2021 that its audit committee had begun investigating the company’s disclosures respecting warranty accruals related to a product the company offered. Id. In November 2021, the company announced that the investigation revealed that the company had materially misstated its liabilities in connection with its warranty-related obligations, and that the company would therefore need to restate its financial information. Id. Lead plaintiff, however, did not own any company stock in November 2021, having sold its stock after the company’s August 2021 announcement. Id. at *6.
The Court first held that lead plaintiff could not plead loss causation as required by Section 10(b) of the Exchange Act, because lead plaintiff had sold its shares before the truth of the company’s situation had been announced to the market. Id. The Court observed that, while the company had announced in August 2021 the subject of the audit committee’s investigation, the truth respecting the company’s financial statements became known only when the investigation was completed in November 2021; therefore, the Court held lead plaintiff could not attribute its alleged losses to the company’s August 2021 announcement. Id. at *7. The Court rejected the suggestion that the August 2021 announcement amounted to a partial corrective disclosure; rather, the Court noted that the announcement merely announced an investigation, and an investigation “simply puts investors on notice of a potential future disclosure of fraudulent conduct.” Id. (quoting Loos v. Immersion Corp., 762 F.3d 880, 890 (9th Cir. 2014)). As the Court explained, “because [lead plaintiff] sold its shares before the truth was revealed, [lead plaintiff] was not injured by the alleged misrepresentations.” Id. at *8. In the absence of an injury, the Court held lead plaintiff lacked constitutional standing to pursue a claim against the company. Id.
The Court similarly concluded that lead plaintiff lacked standing to pursue a claim under Section 14 of the Exchange Act, which concerns alleged misstatements in a proxy statement. Id. Lead plaintiff held shares as of the record date (January 2021) for the merger proxy that allegedly contained misstated financial information respecting the company’s warranty accruals, but sold those shares in March 2021, before the truth of the company’s alleged financial misstatements reported in that proxy statement was revealed in November 2021. Thus, the Court held lead plaintiff could not show that the revelation of this information caused it to suffer an economic loss. Id. at *9. While lead plaintiff also purchased shares after the record date, the Court held that those shares could not be the basis upon which to state a claim concerning alleged misstatements in the company’s proxy statement. Id.
The Court further held that the addition of a proposed new plaintiff in an amended complaint could not cure the fact that the original lead plaintiff never had standing. Id. While the Court observed that the appointment of a new or additional lead plaintiff would not violate the requirements for lead plaintiff approval set forth in the Private Securities Litigation Reform Act, the Court explained that it could not allow this substitution based on binding Ninth Circuit precedent, requiring the dismissal of case where the original plaintiff never had standing to pursue the case from the outset. Id. at *9–10. The Court further explained that, while the Court had permitted the filing of an amended complaint, it had not specifically granted leave to add a new plaintiff, and that, in any event, adding a new plaintiff could not cure lead plaintiff’s lack of standing. Id. at *10. The Court thus dismissed the entire action with prejudice. Id. at *11.
