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Ninth Circuit Affirms That “Cascading Scandals” and a General Stock-Price Decline are Insufficient to Establish Loss Causation under California Securities Law

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On May 19, 2021, the Ninth Circuit affirmed the dismissal of a putative securities fraud class action against Uber Technologies, Inc. and its co-founder and former CEO, Travis Kalanick, holding that, under California law, investors cannot simply allege that they purchased stock at a fraud-inflated price but must also show that the revelation of “the truth” caused the stock price to drop. Irving Firemen's Relief & Ret. Fund v. Uber Techs., 398 F. Supp. 3d 549 (N.D. Cal. 2019). aff'd sub nom. Irving Firemen's Relief & Ret. Fund v. Uber Techs., Inc., 19-16667, 2021 WL 1992242 (9th Cir. May 19, 2021).

Plaintiff, Irving Firemen's Relief & Retirement Fund (“Irving”) alleged that it acquired Uber securities through a series of private placements made between 2014 and 2016. These 2014-2016 offerings netted more than $10 billion and investors valued Uber at as much as $68 billion. But in 2017, Uber faced allegations of “cascading” scandals including: “Greyball”—a secret Uber program that collected data through its app and other sources to skirt regulation in jurisdictions that restricted its operations; an October 2016 data security breach involving 57 million riders and drivers that was not reported until November, 2017; the “Hell” program, which Uber used to track its competitor Lyft via spoofed accounts; litigation related to self-driving cars and trade secrets; and allegations related to Uber’s corporate culture and sexual harassment allegations.

In early 2018, investors estimated there was a 30% decline in Uber’s valuation. Irving alleged securities fraud under California Corporations Code sections 25400(d) and 2550, claiming that Uber and Kalanick made false and misleading statements about Uber to induce the purchase of its securities. The complaint categorized the above scandals into five categories of Uber’s alleged misrepresentations, including a sixth category concerning misrepresentations related to the risks to Uber’s business from negative publicity.

The District Court, applying the federal pleading standards under FRCP 9(b) and the Private Securities Litigation Reform Act and cases interpreting the Securities Exchange Act of 1934 (the “Exchange Act”), dismissed without leave to amend, holding that Irving did not adequately allege false or misleading representations or loss causation. The Ninth Circuit affirmed, holding, principally, that California law tracks the federal securities laws on the issue of loss causation, and that, under both California and federal law, a securities-fraud plaintiff must allege loss of value tied to the “revelation” of the “truth.”

The Ninth Circuit rejected Irving’s argument that, under California law, it need only to show that the Uber securities were inflated at the time that they purchased the stock. Under this theory, Irving suffered damages at the time of purchase and that neither corrective disclosures nor public price declines were needed to allege loss causation. Noting the “substantially identical language” of the California Corporations Code sections 25400(d) and 2550, and the Exchange Act, the court held that the District Court did not err in looking to federal court cases interpreting loss causation claims. Irving pointed to California cases to argue that “[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 Ninth Circuit rejected these arguments as arising from dicta, and reiterated its position that those “cases do not establish that the state loss causation regime is less rigid than the federal loss causation regime or that mere inflation is enough under California law.”

Ninth Circuit then affirmed the District Court’s rejection of Iving’s theory of loss causation, noting that the central inquiry was whether the defendants’ “misstatement, as opposed to some other fact, foreseeably caused the plaintiff's loss,” and that the misrepresentation must be a substantial cause of Irving’s loss. Generally, a plaintiff is required to show that defendants’ “alleged misstatements artificially inflated the price of stock and that, once the market learned of the deception, the value of the stock declined.” Stressing the second element of the “fraud-on-the-market” theory, “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,’” the Ninth Circuit concluded Irving failed to “adequately and with particularity allege that the[] revelations [of Uber’s alleged corporate scandals, taken as true] caused the resulting drop in Uber's valuation” finding:

These general allegations, which lump together the effects of various alleged scandals, do not contain sufficient detail to provide Uber and Kalanick with ample notice of Irving's loss causation theory or provide us with assurance that its theory is plausibly based in fact as required by Rule 9(b).

At the District Court, Irving introduced a chart to demonstrate the effect of Uber’s corporate scandal revelations between October 2016 and February 2018. But the District Court noted that the chart demonstrated that most funds either maintained or increased their value after the revelations, and that Irving failed to tie any particular misrepresentation to any particular depression of Uber’s value.

Irving argued that the District Court came to the wrong conclusion. First, it argued that the District Court required it demonstrate an immediate market-price reaction to disclosed information, but that it should have considered the 30% devaluation of Uber over the duration of the year that was attributed to the revelations. But as discussed above, the Ninth Circuit held that Irving failed to show with sufficient particularity how any of the specific misrepresentations and revelations caused any decrease in Uber’s value.

Disposing of Irving’s final arguments, the Ninth Circuit adopted a rule from the Seventh Circuit, holding that in a privately traded security case, “[a] plaintiff is not relieved of the burden of showing ‘the necessary link between the claimed misrepresentations and the economic loss [she] suffered” and “showing loss causation for privately traded securities requires plaintiffs to carry the greater burden of proving the causal links that an efficient secondary market establishes automatically.”

The Ninth’s Circuit’s willingness to read a federal securities law loss-causation requirement into California law may indicate a tendency to view federal standards as a “default” unless they are contradicted by the language of state securities law statutes or state-court case law. For instance, Oregon’s Supreme Court has cited to the loss-causation requirement with approval—without adopting it—suggesting that the Ninth Circuit would likely reach the same conclusion it did here.[1] In contrast, Washington’s Supreme Court has expressly held a plaintiff need not prove loss causation under the Washington State Securities Act.[2]

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[1] State v. Marsh & McLennan Companies, Inc., 353 Or. 1, 292 P.3d 525 (2012); Oregon Steel Mills, Inc. v. Coopers & Lybrand, LLP, 336 Or. 329, 83 P.3d 322 (2004)

[2] Hines v. Data Line Sys., Inc., 114 Wn.2d 127, 134–35, 787 P.2d 8, 12–13 (1990)