Southern District Of California Dismisses Shareholder Class Action Alleging Exchange Act Claims For Failure To Allege Falsity And Loss Causation
On June 19, 2018, Judge Gonzalo P. Curiel of the United States District Court for the Southern District of California dismissed a securities class action alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against BofI Holding, Inc. (“BofI” or “Company”), an online bank, and certain of its officers and directors. Mandalevy v. BofI Holding Inc. et al., No. 3:17-cv-00667 (S.D. Cal., June 19, 2018). The complaint’s allegations were based on public articles and a whistleblower complaint accusing the Company of making loans to “criminals and politically exposed persons” and announced regulatory activities. The Court dismissed the complaint, among other reasons, for failure to allege loss causation. Relying on the principles of the efficient market theory, the Court held that corrective disclosures generally cannot be based on already public information and that even information available only through Freedom of Information Act (“FOIA”) requests to regulators is considered to be publicly available.
Plaintiffs alleged, among other things, that the Company failed to disclose ongoing regulatory investigations and that it may have been lending to criminals. While the Court held that certain statements were not false, e.g., the Company’s statement that there was an “absence of public enforcement actions” was not inconsistent with the pendency of an investigation, the Court held that plaintiffs had pleaded falsity with respect to other statements, including one by the Company denying knowledge of an SEC money-laundering investigation when it allegedly was under investigation.
With respect to the statements for which falsity was adequately alleged, the Court found the complaint failed to allege loss causation because the alleged corrective disclosures were all based on publicly available information. For example, plaintiffs alleged that a news article reporting that the Company was lending to a criminal was a corrective disclosure. The Court held, however, that the news article was based on public information and therefore could not have been a corrective disclosure: “As the term suggests, a corrective disclosure normally must reveal some piece of previously undisclosed information showing the falsity of the misrepresentation. If the alleged disclosure is duplicative of public information, the market will already have incorporated that information into the stock price . . . .” While the Court acknowledged that an article analyzing public information may serve as a corrective disclosure when it interprets complex economic data through expert analysis, here, plaintiffs had failed to explain why the market would not have pieced together the same information relied on in the news articles about the Company. Because the analysis done by the author of the article was based on public information, the Court held there was no reason the “efficient market” would not reach the same conclusion and that the information therefore must already have been reflected in the Company’s stock price.
With respect to statements denying knowledge of the SEC money-laundering investigation, the alleged corrective disclosure was a news article that relied on information reporters obtained through FOIA requests made to the SEC. The Court held that the information the reporters obtained must be considered “public” for purposes of analyzing loss causation. Because the efficient market theory presumes that market participants are “information-hungry,” the Court “must assume” that a market participant “would have made the sensible step” of filing a FOIA request after the Company’s denial and “that all available information—‘no matter how far flung it may be’—had already been incorporated into the market price.”