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The Eleventh Circuit recently overturned the dismissal of a putative securities fraud class action, finding the complaint sufficiently alleged loss causation to state a fraud claim under SEC Rule 10b-5 in City of Hollywood Police Officers' Retirement Syst. v. NextEra Energy, Case No. 24-13372 ("NextEra Energy").
As a quick legal primer: securities fraud claims under Rule 10b-5 require a plaintiff to show "loss causation" by establishing a causal connection between the alleged misrepresentation and the investment's subsequent decline in value. In "fraud-on-the-market" theory cases like NextEra Energy, loss causation requires a plaintiff to (1) identify a "corrective disclosure," meaning information that "reveals to the market the pertinent truth that was previously concealed or obscured by the company's fraud," (2) show the stock declined shortly after the corrective disclosure, and (3) sufficiently eliminate other possible explanations for the price drop. The NextEra Energy opinion addresses how courts should assess whether a complaint adequately meets these elements on a motion to dismiss.
The District Court (S.D. Fla.) found the complaint failed to adequately identify a corrective disclosure and dismissed the action with prejudice. In reversing that finding, the Eleventh Circuit clarified that, at the pleading stage, the standard does not require a corrective disclosure "to decisively and unequivocally debunk the earlier fraud." Instead, "the proper inquiry is whether enough truth has saturated the market to make investors second-guess the earlier fraud." It further explained that the District Court erred by "improperly search[ing] for a singular corrective disclosure," which "both contravenes our precedent and erroneously assumes markets cannot link multiple pieces of information."
The Eleventh Circuit also emphasized that a court should not substitute "its own judgment about whether the corrective statements related to the fraud, in lieu of well-pleaded facts that investors made the connection." Under this investor-focused analysis, it found the complaint alleges facts that "plausibly imply enough truth was illuminated to cause investors to seriously question Appellees' earlier misstatements" and that it meets the remaining elements to plead loss causation (subsequent price drop and plausibly ruling out other explanations).
The Court concluded by noting that regardless of loss causation, "a plaintiff still must show material fraud to recover under Rule 10b-5," which requires "that fraud must be pled with particularity to survive a motion to dismiss." Loss causation "simply asks whether the loss was proximately caused by the alleged misstatements. In other words, whether the price dropped for the reason the plaintiff claimed it dropped. Here, we hold that the Retirement Funds have identified adequate corrective disclosures, a subsequent price drop, and have plausibly ruled out other explanations."
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