Internal Investigation Annoucement and Poor Quarterly Reports Insufficient for Pleading Loss Causation

In Loos v. Immersion Corp. (2014 WL 3866084), the Plaintiff appealed the district court’s dismissal of his securities fraud class action for failure to state a claim. Initially, Immersion had failed to turn a profit. After a recovering a significant patent infringement claim, Immersion reinvested and reported profits throughout 2007. The profits were short lived and losses were reported for the following five quarters. Immersion then disclosed the potential of problems with prior revenue reports and launched an internal investigation. The investigation revealed improper premature recognition of sales revenue. Both the announcement of the investigation and the subsequent revelation caused the stock price to drop. The Plaintiff filed a class action suit for violations of §10(b), 20(a) and 20A of the Securities Exchange Act and Rule 10b-5. The plaintiff alleged the quarterly reports issued after 2007 and the announcement of an internal investigation constituted loss causation.

Loss causation under §10(b) or Rule 10b-5 requires the plaintiff to allege that the defendant’s fraud was revealed to the market and caused the plaintiff’s losses. The court first dismissed the disappointing quarterly reports, attributing the market response to poor financial health, not the defendant’s fraud. The Court next held that the announcement of an internal investigation is insufficient for loss causation; although it did result in a drop in the stock price, fraud is only speculative or potential at that point. The drop in stock price is not caused by the fraud, but by the added risk that fraud may later be revealed. Because neither of these allegations constituted loss causation, the plaintiff’s claim failed.

The Court affirmed dismissal of the §10(b) and Rule 10b-5 claims with prejudice, declined to address the plaintiff’s scienter claims, and the dismissed the remaining derivative claims.