The elements of securities fraud are well established. A plaintiff must show: (1) a material misrepresentation or omission (2) made with scienter (3) in connection with the purchase or sale of a security; (4) reliance on the misrepresentation or omission; (5) economic loss; and (6) loss causation. The last element—a causal connection between the defendant’s fraudulent conduct and the plaintiff’s economic loss—is often the most difficult to prove, especially in a “fraud on the market” case. Under Dura Pharmaceuticals v. Broudo, 544 U.S. 336 (2005), the standard approach is to show that the defendant’s misrepresentations artificially inflated the purchase price for the plaintiff’s shares and that the subsequent revelation of the truth later caused their value to drop, thereby producing the economic loss.

What kinds of revelations (also known as “corrective disclosures”) count? The easiest cases involve admissions by the defendant or findings by a governmental regulator or tribunal that wrongdoing occurred. In the recent case of In re BofI Holding, Inc. Sec. Litig., 977 F.3d 781 (9th Cir. 2020), a divided Ninth Circuit panel grappled with two other types of disclosures: those that originate in whistleblower complaints, and those based on publicly available information. The majority held that both could qualify as corrective disclosures in theory, although it found that the plaintiffs here had not established loss causation as to the latter. A separate opinion argued that whistleblower complaints should not qualify without independent corroboration, while publicly available information never constitutes a corrective disclosure.

The Lower Court Decision