IRVING FIREMEN‘S RELIEF & RETIREMENT FUND v. UBER TECHNOLOGIES, INC.; TRAVIS KALANICK
No. 19-16667
United States Court of Appeals for the Ninth Circuit
May 19, 2021
D.C. No. 4:17-cv-05558-HSG
FOR PUBLICATION
MORGAN STANLEY INVESTMENT MANAGEMENT INC.; NEW RIDERS LP, Intervenors.
Appeal from the United States District Court for the Northern District of California Haywood S. Gilliam, Jr., District Judge, Presiding
Argued and Submitted December 7, 2020 Pasadena, California
Filed May 19, 2021
Before: Paul J. Kelly, Jr.,* Ronald M. Gould, and Ryan D. Nelson,
Opinion by Judge Gould
SUMMARY**
Securities Fraud
The panel affirmed the district court‘s dismissal for failure to state a claim in a putative class action brought by Irving Firemen‘s Relief & Retirement Fund (“Irving“) against Uber Technologies, Inc. and Travis Kalanick, cofounder and former CEO of Uber, alleging a claim of securities fraud under
The district court assumed that the heightened pleading standards of
The panel held that
The panel affirmed the district court‘s holding that Irving did not adequately allege loss causation.
Specifically, the panel rejected Irving‘s contention that the district court erred by applying the federal standard for loss causation rather than the “less-rigid” state law standard. The panel held that California law, as cited by the parties, provided only limited guidance on how its causation element should be applied in this case. The panel held further that the district court did not err in looking to federal cases interpreting loss causation for claims brought under section 10(b) of the Securities Exchange Act.
Looking to the federal loss causation regime as persuasive authority, the panel held that Irving did not adequately allege loss causation. Typically, to establish loss causation, a plaintiff must show that the defendants’ alleged misstatements artificially inflated the price of stock and that, once the market learned of the deception, the value of the stock declined. The panel held that this “fraud-on-the-market-theory” conflicted with Irving‘s assertion that mere inflation was enough. Even assuming without deciding that Uber and Kalanick made actionable misstatements, and news articles and government investigations revealed the truth to the market, the panel held that the claims still failed because Irving did not adequately and with particularity allege that those revelations caused the resulting drop in Uber‘s valuation.
Because Irving did not plausibly allege that Uber and Kalanick‘s alleged misstatements caused its damages, the panel did not reach the other elements of Irving‘s claim or the other arguments advanced by the parties.
COUNSEL
Joseph D. Daley (argued) and Luke O. Brooks, Robbins Geller Rudman & Dowd LLP, San Diego, California; Dennis J. Herman, Robbins Geller Rudman & Dowd LLP, San Francisco, California; for Plaintiff-Appellant.
A. Matthew Ashley (argued), Andra Greene, and Michael D. Harbour, Irell & Manella LLP, Newport Beach, California, for Defendant-Appellee Uber Technologies, Inc.
Sarah M. Harris (argued), Joseph G. Petrosinelli, Eden Schiffmann, Harrison L. Marino, and Kimberly Broecker, Williams & Connolly LLP, Washington, D.C.; Walter F. Brown and James N. Kramer, Orrick Herrington & Sutcliffe LLP, San
OPINION
GOULD, Circuit Judge:
This case concerns allegations of securities fraud against Uber Technologies, Inc. (“Uber” or the “Company“), a technology startup known for its ridesharing application, and Travis Kalanick (“Kalanick“), cofounder and former CEO of Uber. After Uber‘s founding in 2009, its valuation soared, with some investors assigning a valuation as high as $68 billion by mid-2016. Between June 2014 and May 2016, Kalanick and Uber completed four preferred stock offerings, raising more than $10 billion in additional capital through limited partnerships and other entities. Irving Firemen‘s Relief & Retirement Fund (“Irving“), a retirement fund for firefighters based in Irving, Texas, acquired Uber securities through one of these offerings on February 16, 2016. Throughout 2017, several alleged corporate scandals surfaced, and by early 2018, investors estimated a nearly 30% decline in Uber‘s valuation.
Irving filed a putative class action against Uber and Kalanick alleging one claim of securities fraud under
I
At the time Irving filed the Second Amended Complaint (“SAC“)—the operative complaint in this appeal—in 2018, Uber had raised more than $11.5 billion in financing through a series of private equity and debt offerings to investors. In 2009, Uber was valued at $4 million and sold its first $200,000 in securities. The next year, it raised $1.3 million. And in the year after that, Uber‘s value increased to $350 million after it raised $48 million through its Series A and B funding rounds. In 2013, after raising an additional $363 million through its Series C funding round, Uber was worth more than $3.5 billion. By June 2014, Uber was valued at more than $18 billion.
Between no later than June 20141 and May 24, 2016, Uber offered and sold Series D, E, F, and G securities (“Offerings“), the offerings at issue in this appeal. These private offerings were sold through limited partnerships and other entities formed to sell and hold securities issued in the Offerings. Irving acquired its interests in Uber securities by becoming a limited partner of New Riders LP (“New Riders“), a Delaware limited partnership, on February 16, 2016; New Riders then in turn invested in Uber‘s Series G Preferred Stock. The Offerings netted more than $10 billion. By mid-2016, investors valued Uber at as much as $68 billion, higher than any other private technology startup at the time.
Throughout 2017, a series of alleged corporate scandals surfaced. We set forth a brief overview of these scandals in chronological order. In February 2017, former
On April 12, 2017, a news article exposed a secret Uber program dubbed “Hell,” which was in use between 2014 and 2016. In cities where Uber competed with Lyft—another ridesharing service—Uber collected information on Lyft drivers through spoofed2 accounts. This information allowed Uber to track Lyft‘s prices and the number of drivers at each location in real time and identify which drivers were driving for both Uber and Lyft. On April 25, 2017, Reuters reported that a South Korean court had determined that Uber had violated South Korea‘s national transport law. Sometime in the third quarter of 2017, the U.S. Department of Justice began a criminal probe into Uber‘s foreign practices. In September 2019, Bloomberg reported “widespread” Asia bribery allegations against Uber. And on November 22, 2017, reports surfaced of a data breach that occurred in October 2016 and affected 57 million riders and drivers.
As an apparent result of these cascading scandals, from fall 2016 to February 28, 2018, several funds holding stakes in Uber wrote down the value of their Uber holdings, which were not yet being publicly traded. For instance, BlackRock, a mutual fund investor, wrote down its investment by 33.3%. Similarly, Fidelity devalued its investment by 28%; Hartford Funds by 28%; and T. Rowe Price by 29.3%. In April 2017, media outlets reported that Uber had lost $10 billion in value since the beginning of 2017. Kalanick resigned as Uber‘s CEO in June 2017. In August 2017, investors such as Vanguard Group, Principal Funds, Hartford Funds, and T. Rowe Price marked down their Uber investments by as much as 15%, or $10.2 billion. In September 2017, news reports indicated that SoftBank valued the Company at $50 billion, representing at least $18 billion in lost value. In October 2017, BlackRock marked down its Uber investment by 16%.
On November 27, 2017, a consortium of investors led by SoftBank made an $8 billion offer to purchase a stake in Uber from its existing shareholders. The amount of this offer implied a $48 billion overall valuation of Uber, which was a 30% reduction from its apparent estimated peak in mid-2016. Around the same time as the SoftBank tender offer, Uber reported a 40% increase in its quarterly losses. The SoftBank sale was completed in January 2018. Kalanick sold nearly a third of his 10% stake in Uber pursuant to that transaction. After the tender offer, Fidelity Investments marked down its Uber investment by 21%. In December 2017, Vanguard Group also marked down its Uber investment by another 15.3%. By early 2018, investors estimated a nearly 30% decline in Uber‘s valuation.
Irving filed this putative class action lawsuit against Uber and Kalanick soon after. It asserted one violation of securities fraud under
The SAC divides Uber‘s alleged misrepresentations into six categories, five of which correspond directly to each of the 2017 corporate scandals: (1) government regulation and “Greyball,” (2) data security, (3) competition and the “Hell” program, (4) self-driving cars and trade secrets litigation, and (5) corporate culture and sexual harassment allegations. The sixth category concerns misrepresentations about the general risks to Uber‘s business from negative publicity and other events that threatened to curtail its rapid growth.
The district court dismissed the SAC without granting leave to amend. The district court assumed that the heightened pleading standards of
II
We review de novo a district court‘s dismissal pursuant to
It is established law that Rule 9(b)‘s particularity requirement applies to state law causes of action relating to fraud when asserted in federal court. Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103 (9th Cir. 2003). Furthermore, “Rule 9(b) applies to all elements of a securities fraud action, including loss causation.” Oregon Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 605 (9th Cir. 2014). To satisfy Rule 9(b), the allegations must contain “sufficient detail” to (1) give the defendant “ample notice of [the plaintiff‘s] loss causation theory” and (2) provide the court “some assurance that the theory has a basis in fact.” In re Gilead Scis. Sec. Litig., 536 F.3d at 1056 (quoting Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 989-90 (9th Cir. 2008)). The second requirement in particular serves “to deter the filing of complaints as a pretext for the discovery of unknown wrongs, to protect defendants from the harm that comes from being subject to fraud charges, and to prohibit plaintiffs from unilaterally imposing upon the court, the parties and society enormous social and economic costs absent some factual basis.” United States ex rel. Anita Silingo v. WellPoint, Inc., 904 F.3d 667, 677 (9th Cir. 2018) (cleaned up).
III
To establish a securities fraud violation under the Securities Exchange Act, “the plaintiff shall have the burden of proving that the act or omission of the defendant . . . caused the loss for which the plaintiff seeks to recover damages.”
The SAC asserts that, “[v]aluation experts and market observers” attributed Uber‘s reduction in value to “revelations of truth regarding the true state of Uber‘s
Uber contends, however, that Irving did not satisfy the element of loss causation. We agree, and we affirm the district court‘s holding that Irving did not adequately allege loss causation.
A
Irving contends that the district court erred by applying the federal standard for loss causation rather than the “less-rigid state law standard.” Under Irving‘s interpretation, it need only show that the proposed class members purchased securities that were overvalued—or inflated—at the time of the offerings. By Irving‘s account, class members’ damages arose at the moment they purchased overinflated securities, and no subsequent corrective disclosures or public price declines were needed. We disagree.
Although Irving brings claims under state law,
California law, as cited by the parties, provides only limited guidance on how its causation element should be applied in this case.
Irving‘s cited case law in our view does not support its argument that mere inflation is enough to show loss causation under California law. Quoting Mirkin v. Wasserman, 858 P.2d 568, 580 (Cal. 1993), Irving contends that, under California law “[a]ll that is required is that the plaintiff establish that the price which he paid . . . was affected by the defendant‘s conduct or statements.” The sentence that Irving relies upon, taken from the Mirkin decision, is not even a holding of that court. Instead, the California court there merely contrasted the plaintiffs’ claim of common law deceit, which was before it, with a hypothetical claim under sections 25400 and 25500, claims that were not before it, and which hypothetical claims “conspicuously avoid[s] the requirement of actual reliance.” Id. (cleaned up). Moreover, Mirkin noted the fraud-on-the-market doctrine applies equally to Rule 10b-54 and California securities law. Id. at 583. And as explained below, the fraud-on-the-market theory requires a revelation to “cause[] the fraud-induced inflation in the stock‘s price to be reduced or eliminated.” In re BofI Holding, Inc. Sec. Litig., 977 F.3d 781, 789 (9th Cir. 2020).
Irving also points to Diamond Multimedia Systems, Inc. v. Superior Court, 968 P.2d 539, 543 (Cal. 1999), for crediting allegations that “[a]t the time of [plaintiffs‘] purchases the fair market value of the shares was substantially less than the price paid by class members.” But this, too, was dicta. There, the California Supreme Court expressly disclaimed any binding comment on the merits of the underlying lawsuit, see id. at 546, focusing exclusively on the discrete legal issue of whether a “civil remedy [under
Because the parties have not pointed to California law directly addressing this issue, we turn to the federal standard for loss causation. We nonetheless emphasize that, although federal precedent is unusually persuasive, California law still governs claims brought pursuant to sections 25400 and 25500. See Smith v. Lenches, 263 F.3d 972, 977-78 (9th Cir. 2001) (expressing that California law governs the determination whether California securities laws were violated).
B
Irving next contends that the district court misapplied federal law when it rejected Irving‘s loss causation theory. Looking to the federal loss causation regime as persuasive authority, we conclude that Irving
1
In the loss causation analysis, “the ultimate issue is whether the defendant‘s misstatement, as opposed to some other fact, foreseeably caused the plaintiff‘s loss.” Lloyd v. CVB Fin. Corp., 811 F.3d 1200, 1210 (9th Cir. 2016). A plaintiff must show that the defendant‘s misrepresentation was a “substantial cause” of his or her financial loss. Loos v. Immersion Corp., 762 F.3d 880, 887 (9th Cir. 2014) (citation omitted), as amended (Sept. 11, 2014). To survive a motion to dismiss, a plaintiff “need only allege that the decline in the defendant‘s stock price was proximately caused by a revelation of fraudulent activity rather than by changing market conditions, changing investor expectations, or other unrelated factors.” Id.
Typically, to establish loss causation, a plaintiff must show that the defendants’ alleged misstatements artificially inflated the price of stock and that, once the market learned of the deception, the value of the stock declined. Nuveen, 730 F.3d at 1119-20 (citing McCabe v. Ernst & Young, LLP, 494 F.3d 418, 425-26 (3d Cir. 2007)). Courts refer to this theory as “fraud-on-the-market.” Id. at 1120. In this scenario, “the plaintiff must show that after purchasing her shares and before selling, the following occurred: (1) ‘the truth became known,’ and (2) the revelation caused the fraud-induced inflation in the stock‘s price to be reduced or eliminated.” In re BofI Holding, Inc. Sec. Litig., 977 F.3d at 789 (quoting Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 347 (2005)). This theory notably conflicts with Irving‘s assertion that mere inflation is enough.
We stress the second element, which requires a showing that the revelation of the truth “caused the company‘s stock price to decline and the inflation attributable to the misstatements to dissipate.” Id. at 791. This analysis involves a temporal component. Id. at 790. “[A] disclosure followed by an immediate drop in stock price is more likely to have caused the decline.” Id. For example, we have held that investors adequately alleged loss causation when they claimed that a company engaged in improper accounting practices because the “stock [price] fell precipitously after [the company] began to reveal figures showing the company‘s true financial condition.” In re Daou Sys., Inc., 411 F.3d 1006, 1026 (9th Cir. 2005). However, we have rejected “a bright-line rule requiring an immediate market reaction because the market is subject to distortions that prevent the ideal of a free and open public market from occurring.” In re Gilead Scis. Sec. Litig., 536 F.3d at 1057-58 (cleaned up).
2
Even assuming without deciding (1) that Uber and Kalanick made actionable misstatements and (2) that the news articles, the Waymo lawsuit, and the government investigations cited by Irving revealed the truth to the market, still the claims fail because Irving did not adequately and with particularity allege that these revelations caused the resulting drop in Uber‘s valuation.
Irving‘s loss causation theory lumps together more than 60 alleged misstatements, which Irving associates with at least eight purported corporate scandals that took place throughout the course of a year, and Irving concludes that the disclosure of these scandals resulted in a year-long decline in Uber‘s valuation. But Irving‘s allegations fail to link Uber‘s reduced valuation to any particular scandal or misstatement.
Irving provided a chart purporting to show how various funds responded to revelations between October 2016 and February 2018. At best, however, this chart does not support Irving‘s theory; at worst, the chart undermines it. As the district court pointed out:
This chart . . . shows that every fund maintained or increased its valuation after the alleged revelations of “Susan Fowler Blog post,” “Waymo sues Uber,” and “News of Greyball Program breaks.” . . . And the majority of funds maintained or increased their valuation after the alleged revelations of “News of Hell Program breaks,” and “CEO Travis Kalanick Resigns.” . . . [E]ven if the Court were to find that these fund valuations do not definitively contradict the claim that certain “revelations” materially depressed Uber‘s valuation, their inclusion in the operative complaint at a minimum magnifies Plaintiff‘s general failure to tie particular misrepresentations to a decline in Uber‘s value. Plaintiff continues to plead that an amalgam of misrepresentations decreased Uber‘s value over time, and yet Plaintiff‘s pleaded facts demonstrate that at least several of those had little or no effect.
Irving does not dispute the district court‘s description of the chart, but instead provides three arguments arrayed against the district court‘s conclusion.
First, Irving contends that the district court impermissibly required an immediate market-price reaction to disclosed information. Irving is correct that we have not adopted a “bright-line rule requiring an immediate market reaction.” In re Gilead Scis. Sec. Litig., 536 F.3d at 1057. Nor do we require an immediate drop in valuation here. Rather, our concern is with the lack of consistency among the valuation reactions that the chart reveals. If the purported revelations—“as opposed to some other fact“—really caused the drops, the funds would have been expected to price the stock consistently downward in response to each revelation, rather than subsequently decreasing, maintaining, or even increasing their valuations. See Lloyd, 811 F.3d at 1210. These disparate reactions of multiple funds to the serial revelations of scandals indicate that the funds, in making their decisions on reevaluation of their holdings of Uber stock shares, were not responding to the specific revelations Irving cites.5
The value of stocks turns not only on the net value of assets of a company, but also on its earnings. We hesitate to try to summarize the diverse factors that can affect the price at which a willing buyer and seller will get together on a completed sale of securities. But these factors rather obviously must include not only any current scandals or problems for management, but also the prospect of future earnings for a company with anticipated growth of earnings, and such things as what is an appropriate multiple of earnings that the market will pay for this type of stock, whether buyers are willing to pay a premium for companies within certain sectors of the economy that are considered hot at any given time, what political or natural events predictably may occur, the general mood of the stock market, whether irrational exuberance for or undue pessimism about the market exists at any particular time, whether investors think the general market or a particular stock is in a pendulum swing one way or the other, and whether a company is valued as a growth stock or as a value stock. See generally Benjamin Graham, The Intelligent Investor: The Definitive Book on Value Investing (rev. ed. 2003) (thoughtfully discussing many market conditions that may affect price); see also Dura Pharms., Inc., 544 U.S. at 343.
Second, Irving contends that a different analysis should apply because Uber‘s Offerings’ shares were privately traded rather than publicly listed securities. But the private nature of the transactions does not excuse Irving from pleading loss causation.
When a case concerns shares of a privately held company, “a comparison of market stock price to establish loss causation has less relevance because market forces will less directly affect the sales prices of shares of a privately held company.” Nuveen, 730 F.3d at 1120 (citation omitted). Even in a privately traded
Irving acknowledges that Uber‘s valuation, even if privately traded, was monitored by major investors. Irving provided the valuations of these investors as “Market Evidence of Declining Value Due to Revelations of the True State of Uber‘s Business,” concluding that “in the absence of [a] daily trading market, investor valuations provide reliable indicators of security‘s worth.” Under Irving‘s theory, then, these revelations should have had an impact reflected in the next round of publicly reported portfolio valuations issued by each mutual fund. Yet Irving‘s own chart demonstrates that this did not happen.
Finally, Irving contends that it was not required to plead a “revelation-of-the-fraud theory.” We have expressed that “loss causation is a ‘context-dependent’ inquiry” and that a tort may cause a loss in an “infinite variety” of ways. Lloyd, 811 F.3d at 1210 (citations omitted). However, “[w]hen plaintiffs plead a causation theory based on market revelation of the fraud, this court naturally evaluates whether plaintiffs have pleaded or proved the facts relevant to their theory.” Mineworkers’ Pension Scheme v. First Solar Inc., 881 F.3d 750, 754 (9th Cir. 2018).
Irving acknowledges that the SAC pleads a “revelation-of-the-fraud theory” but contends that it should be allowed to plead in the alternative. But Irving identifies its alternative theory as “the truism” that, under California law, losses may arise the moment investors purchase inflated securities. We have already rejected that contention. See supra Section III.B.
IV
Irving did not plausibly allege that Uber and Kalanick‘s alleged misstatements caused its damages. Accordingly, we do not reach the other elements of Irving‘s claim or the other arguments advanced by the parties.
AFFIRMED.