On July 10, 2023, the United States Court of Appeals for the
Eleventh Circuit affirmed the dismissal of a consolidated putative
class action alleging violations of Section 10(b) of the Securities
Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5
promulgated thereunder, against a biomedical company (the
"Company"), certain of its executives, and its former
auditor. Carpenters Pension Fund of Ill. v. MiMedx Group,
Inc., No. 22-10633 (11th Cir. July 10, 2023). The United
States District Court for the Northern District of Georgia
dismissed plaintiff's second amended complaint
("SAC"), holding that plaintiff lacked standing to bring
the claim and further holding that plaintiff failed to plead loss
causation. While the Eleventh Circuit determined that the district
court erred in holding that plaintiff lacked standing, it affirmed
the district court's holding that plaintiff failed to
sufficiently plead loss causation.
Plaintiff—a union pension fund—allegedly purchased shares of the Company between August 2017 and October 2017, sold those shares in December 2017, then purchased new shares on January 16, 2017, which it sold on February 26, 2018. Plaintiff alleged that from March 7, 2013 through June 29, 2018 (the purported class period), the Company—which manufactures and sells regenerative skin grafting products—engaged in improper sales and distribution practices, as well as a massive accounting fraud, to give the Company the appearance of consistent revenue growth, despite the fact that, as plaintiff contended, the Company was unable to sell its overstocked products. Although the SAC alleged that the Company continued to misrepresent its financials during this period, plaintiff alleged that from December 31, 2014 through February 22, 2018, the "truth regarding Defendants' extensive misconduct leaked into the market through a series of partial corrective disclosures, culminating in the Company's admission that nearly six years of financial results were tainted by fraud[.]" Plaintiff asserted that these were partial corrective disclosures because they both revealed the truth of the fraud and were accompanied by alleged misstatements and omissions that misled investors about the true extent of the fraud. Accordingly, the district court categorized the alleged disclosures into the following categories: (1) allegedly misleading corrective disclosures, (2) news articles and analyst reports, and (3) lawsuits and investigations.
On February 26, 2018, the same day plaintiff allegedly sold its remaining shares, the DOJ announced an investigation of the Company. On March 15, 2018, the Company publicly disclosed that it was under DOJ investigation, but on the same day issued a press release providing allegedly misleading positive statements about the Company's performance. On April 26, 2018, the Company issued another positive press release stating that it was enjoying overwhelmingly strong sales and financial results. However, on May 8, 2018, the DOJ released a statement that a federal grand jury returned an indictment of certain of the Company's key distributors for conspiracy to commit health care fraud. Finally, on July 2, 2018, the Company announced the resignation of its CEO and CFO in connection with findings from an audit investigation that the Company had disclosed on February 20, 2018.
In dismissing the SAC, the district court held that plaintiff lacked standing because its alleged losses were not fairly traceable to defendants' alleged misrepresentations because, at the time that plaintiff sold its stock, the "artificial inflation caused by the misrepresentations was still 'baked into' the stock's price." As such, the district court found that plaintiff's alleged loss was "wholly unrelated to the alleged misrepresentations." The district court further held that, in any event, plaintiff had failed to sufficiently plead loss causation, as the partial corrective disclosures during the purported class period were not actually corrective disclosures, and that plaintiff had disposed of all of its shares before any corrective disclosure.
As an initial matter, the Eleventh Circuit held that the district court erred in finding that plaintiff lacked standing at the time it filed its suit, and that the court erroneously "equated a failure to adequately allege an element of a cause of action and thus a failure to state a claim with the nonexistence of a 'Case' or 'Controversy' for purposes of Article III standing." The Eleventh Circuit found that here, plaintiff adequately alleged it suffered a decrease in value of its shares that was caused by, or fairly traceable to, defendants alleged misrepresentations, and that, "[t]aken as true, the allegations sufficiently satisfy [the] test for Article III's traceability requirement."
Turning to the issue of loss causation, the Eleventh Circuit addressed the three categories of disclosures identified by the district court. First, the Eleventh Circuit concluded that the district court did not err in holding that the "allegedly misleading corrective disclosures" were not corrective and did not establish loss causation because plaintiff was not permitted to "have it both ways" by alleging defendants made certain misstatements that were simultaneously alleged to be corrective disclosures. The Court reasoned that, accepting the allegations as true, this category consisted of misleading statements to conceal the ongoing alleged fraud, and the market continued to digest this information, precluding a finding of loss causation at that point. Second, the Eleventh Circuit upheld the district court's holding that the "news articles and analyst reports" were not corrective disclosures because they did not disclose any new or non-public information, and that any stock drop associated with the publication of such articles or reports was not due to a "corrective disclosure" but rather the market's perception of how news outlets and analysts viewed already public information. Finally, with respect to the category of disclosures regarding lawsuits and investigations, the Eleventh Circuit stated that it did not need to decide whether it is possible for the announcement of an investigation to qualify as a partial corrective disclosure for purposes of opening the class period when the investigation is coupled with a later finding of fraud or wrongdoing because plaintiff allegedly sold all of its stock on February 26, 2018, before the later finding of fraud or wrongdoing alleged in the SAC.
Accordingly, the Eleventh Circuit vacated the part of the district court's decision dismissing the case on grounds of standing but affirmed the district court's dismissal on the basis that plaintiff failed to sufficiently plead loss causation. Additionally, the Eleventh Circuit affirmed the district court's denial of plaintiff's request for leave to further amend.
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