Hmeps v. Bofi Holding, Inc.
977 F.3d 781
9th Cir.2020Background
- BofI Holding, Inc. (holding company for BofI Federal Bank) reported strong earnings previously but its stock fell >47% between Aug 2015–Feb 2016; multiple shareholder suits were consolidated into a class action.
- Lead plaintiff alleged defendants made materially false statements about conservative underwriting, effective internal controls, and robust BSA/AML compliance, and plead falsity via confidential witnesses.
- Plaintiffs adequately pled falsity (for underwriting and compliance/internal-control statements) and scienter as to CEO Garrabrants; reliance, connection to securities, and economic loss were undisputed.
- For loss causation plaintiffs relied on two alleged corrective disclosures: (1) a whistleblower lawsuit filed by former auditor Charles Erhart (Oct 13, 2015) accompanied by a New York Times article and a ~30% one-day stock drop; and (2) eight anonymous Seeking Alpha blog posts (Aug 2015–Feb 2016) alleging problems and followed by price declines.
- The district court dismissed the complaint for failure to plead loss causation, concluding the Erhart suit was only unconfirmed accusation (not corrective) and the Seeking Alpha posts disclosed only public information; Ninth Circuit reverses dismissal as to Erhart (allows it as a potential corrective disclosure) and affirms rejection of the blog posts, remanding for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Erhart whistleblower lawsuit qualifies as a corrective disclosure for loss causation | Erhart’s detailed insider allegations revealed facts that, if believed, corrected plaintiffs’ theory (undercut underwriting/internal-control claims) and the market reacted (30% drop) | Allegations in a lawsuit are mere unconfirmed accusations and cannot, without subsequent confirmation, qualify as corrective disclosure | Ninth Circuit: Erhart’s insider, first-hand, detailed allegations plausibly could be perceived by the market as true and serve as a corrective disclosure; reversal as to loss causation on this ground |
| Whether anonymous Seeking Alpha posts qualify as corrective disclosures | Posts uncovered non-public relationships/data (required extensive analysis) that could reveal falsity of statements and caused price drops | Posts relied on publicly available information and were authored by anonymous short-sellers with disclaimers, so they could not have revealed new information to an efficient market | Ninth Circuit: Plaintiffs failed to plausibly allege the posts were corrective disclosures; affirmed dismissal as to the blog-post theory |
| Adequacy of pleadings on falsity and scienter for underwriting and compliance statements | Plaintiffs relied on confidential witnesses whose allegations sufficiently alleged falsity and scienter (as to CEO) | Defendants challenged many alleged misstatements; district court already dismissed some statements as nonactionable | Ninth Circuit: Plaintiffs adequately pleaded falsity (for two categories) and scienter as to CEO; those claims survive |
| Actionability of newly pled statements about regulatory investigations | Plaintiffs added statements about regulatory relations and investigations as false assurances | Defendants argued these are puffery/opinion or accurate statements and not tied to alleged facts | Ninth Circuit: Most new statements are nonactionable opinion/puffery; three narrow OCC-related statements were found accurate—plaintiffs failed to plead falsity for the new category |
Key Cases Cited
- Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (fraud-on-the-market reliance presumption)
- Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (loss causation requires revelation of truth that reduces inflation)
- Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (confidential-witness reliability and personal-knowledge standards)
- In re Gilead Sciences Sec. Litig., 536 F.3d 1049 (public disclosures may be corrective only when market did not appreciate their significance)
- Norfolk County Ret. Sys. v. Community Health Sys., Inc., 877 F.3d 687 (third-party/whistleblower disclosures can be corrective if market could perceive them as true)
- Public Emps.’ Ret. Sys. of Miss. v. Amedisys, Inc., 769 F.3d 313 (complex public data may require analysis before market absorbs significance)
- Loos v. Immersion Corp., 762 F.3d 880 (announcement of an investigation alone is not a corrective disclosure)
- Curry v. Yelp Inc., 875 F.3d 1219 (customer complaints lacking firsthand knowledge do not establish corrective disclosure)
- In re Daou Sys., Inc., 411 F.3d 1006 (misrepresentation must be a substantial cause of decline; other causes may coexist)
- Apollo Group, Inc. v. Oregon Pub. Emps. Ret. Fund, 774 F.3d 598 (Rule 9(b) particularity applied to loss causation allegations)