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United States: 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."
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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