November 15, 2018 Articles

Challenging Loss Causation after First Solar

Defenses may focus on pleading standards, especially particularity and plausibility, or on directness principles

By Jeanne Detch

Loss causation is an essential element of a claim of securities fraud under section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. The idea is that fraud artificially inflates the stock price, and investors are damaged when the truth comes out, causing the price inflation to dissipate. But any bad news about a company usually causes the stock price to drop, and defendants cannot be held liable for losses caused by things other than fraud. Thus, for years, there has been a debate over what plaintiffs must plead and prove to establish that a stock price drop was caused by fraud. Did the market have to learn that a fraud occurred and react to that news? Or would other facts suffice? In Mineworkers’ Pension Scheme v. First Solar Inc., 881 F.3d 750 (9th Cir. 2018), the Ninth Circuit held that loss causation requires “no more than the familiar test for proximate cause.” This article discusses the implications of First Solar and the tools that are emerging to challenge loss causation in its wake.

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