MARCUS, Circuit Judge:
In this securities fraud class action, the investor Plaintiffs sued the Defendant company MIVA, Inc. ("MIVA")
The district court rejected all of the Plaintiffs' claims. It dismissed nine of the eleven allegedly misleading statements on the pleadings for failure to state a claim. The district court then granted summary judgment to the Defendants with respect to the remaining two statements, on the grounds that the Plaintiffs had failed to demonstrate genuine issues of material fact regarding loss causation and damages. The Plaintiffs have appealed both of these orders, placing before us today claims deriving from four of the original eleven statements made by the Defendants—two that were dismissed as insufficiently pled, and two that were rejected at summary judgment.
After thorough review, we hold that the district court properly dismissed the Plaintiffs' claims arising from the alleged misstatements made on March 5, 2004 and July 26, 2004, because the Plaintiffs have inadequately pled scienter and falsity, respectively. However, as for the Plaintiffs' claims arising out of the Defendants' February 23, 2005 and March 16, 2005 statements, we vacate the district court's entry of summary judgment. We hold that the securities laws prohibit corporate representatives from knowingly peddling material misrepresentations to the public—regardless of whether the statements introduce a new falsehood to the market or merely confirm misinformation already in the marketplace. In other words, a defendant may be liable for
Since we assume the Plaintiffs' factual allegations to be true when reviewing a motion to dismiss, Garfield v. NDC Health Corp., 466 F.3d 1255, 1261 (11th Cir.2006), and the Defendants do not dispute the relevant facts for purposes of summary judgment, we take the relevant facts from the Plaintiffs' First Amended Consolidated Class Action Complaint ("Complaint") and other documents submitted or incorporated by reference by the Plaintiffs.
MIVA is an Internet commerce company that provides "pay-per-click" advertising services. (Compl. ¶ 2). MIVA places advertisements for online sellers on the websites of numerous entities with whom MIVA contracts (called MIVA's "distribution partners" or "affiliates"). The advertisers pay MIVA each time an Internet user "clicks" on their ad. MIVA then shares a portion of that revenue with its network of distribution partners—the websites that first generated the click.
MIVA contracts with the advertisers on a keyword-targeted, bid-for-position, pay-per-click basis. (Id. ¶ 23). Keyword-targeted advertising allows advertisers to reach a targeted audience: the advertisement appears on the user's computer screen only if a user types a particular keyword or keyword phrase into a search box on a website of one of MIVA's distribution partners. (Id. ¶ 23 n. 6 (and materials cited therein)). Bid-for-position means that the advertisers bid against each other for ad placement. (Id. ¶ 23 n. 4). The highest bidder for a particular keyword receives the first-place advertisement position with respect to that keyword, and the other advertisers for that keyword are listed in descending bid order. (Id.) Pay-per-click means that an advertiser only pays when an Internet user clicks on its ad and gets transferred to its website. (Id. ¶ 23 n. 5). These clicks are supposed to be highly qualified leads likely to convert into a sale, since the user intentionally clicked on the ad and, therefore, presumably has some interest in the advertised product. (Id.)
Not surprisingly, it's very important to MIVA to generate high-quality Internet traffic for its advertisers. MIVA's revenue is determined by the price that advertisers bid for a click on their ads and the number of clicks MIVA can generate on those ads. (Id. ¶ 28). The price an advertiser is willing to bid depends on the advertisement's conversion rate, i.e., the rate at which the seller's advertising expenditure translates into additional sales income. (Id.) The greater the sales conversion rate, the more the advertiser is willing to bid on a particular keyword. (Id. ¶¶ 25-26, 28). Conversely, the more advertiser-paid clicks that fail to translate into income for the advertiser—in other words, the lower the conversion rate—the lower the price that advertisers are willing to bid. (Id. ¶¶ 4, 28). Therefore, it is essential to MIVA's success that the clicks it directs to its advertisers have a high conversion rate, that is, that they frequently translate into actual sales. (Id. ¶¶ 25-26).
"Click fraud" generally refers to the practice of clicking on an Internet advertisement for the sole purpose of forcing the advertiser to pay for the click. (Id. ¶ 43). Because advertisers only pay when someone clicks through to their website, artificial clicks can be very costly to advertisers.
According to the Plaintiffs' allegations, in or around 2003, two of MIVA's top revenue-generating distribution partners ("Saveli" and "Dmitri")—who together generated almost one-third of MIVA's revenue during 2003, 2004, and 2005, and represented about 36 percent of MIVA's click revenue (id. ¶¶ 40-41)—began using click fraud to generate revenue. Saveli and Dmitri's click fraud included the use of spyware, browser hijacking software, and other non-human traffic. (Id. ¶ 43). According to a former Business Development Manager at MIVA, Saveli and Dmitri were "turn and burn guys" who focused primarily on driving in a lot of traffic, regardless of its quality. (Id. ¶ 39). This low-quality traffic caused advertisers to lower their advertising bids, decreasing Company revenue. A former MIVA Account Manager described the result as "serious, serious bid deflation." (Id. ¶ 29).
Due to MIVA's low-quality distribution partners,
By the summer of 2005, an analysis of MIVA's affiliates revealed that its supposedly extensive and diversified partner network had shrunk, with 95 percent of the Company's click revenue coming from its top fifty distribution partners—the top two being Saveli and Dmitri. (Id. ¶ 37). In short, according to the Plaintiffs' allegations, the Defendants had created a distribution network that was primarily fueled by illicit traffic-generating techniques, and, according to a former MIVA Marketing Manager, was best described as a "house of cards ... held together by a thread." (Id.)
Although click fraud is deleterious in the long term because it drives away advertisers, it produces short-term revenue gains through increased clicks. The Plaintiffs allege that the click fraud within MIVA's network enabled the Company to report an uninterrupted string of quarter-by-quarter
During 2004 and 2005, state and federal regulators' scrutiny of click fraud intensified, causing the Defendants to fear that the "hammer" would be coming down on the spyware industry. (Id. ¶¶ 61-62). In an effort to lull investors and advertisers into believing that the Company was proactive and aggressive about policing click fraud, Defendant CEO Pisaris-Henderson claimed during a Company conference call on February 23, 2005 that, in the fourth quarter of 2004, the Company had voluntarily removed distribution partners representing $70,000 in revenue per day because "our focus is to deliver traffic that converts rather than just clicks alone." (Id. ¶¶ 12, 87, 95).
However, according to the Senior Director of Business Development responsible for the oversight and management of all of MIVA's affiliates, "no traffic was taken off line in the fourth quarter of 2004." (Id. ¶ 88). This Senior Director also said that the announcement in the February conference call clearly referred to Saveli and Dmitri, who earned a combined average of $70,000 in revenue per day. (Id.) Notably, however, Saveli and Dmitri were not removed from the network. (Id.) This fact was corroborated by a former MIVA Marketing Manager who stated that it was "an open secret within the Company that Dmitri and Saveli were not taken off line in December 2004, and neither was anyone else." (Id.)
On March 16, 2005, in a Form 10-K annual report filed with the Securities and Exchange Commission ("SEC"), the Defendants repeated their claim that in the "fourth quarter of 2004, we ceased displaying advertisements with distribution partners... whose traffic did not adequately convert to revenue for our advertisers," and that "the removal of these distribution partners reduced our average click-through revenue by approximately $70,000 per day." (Id. ¶ 95). The Company asserted that the removal was in conformity with its "long-stated goal of provided [sic] high quality traffic to our advertisers." (Id.) (alteration in original). In the same 10-K, the Company also affirmatively asserted that "[w]e do not rely on `spyware' for any purpose and it is not part of our product offerings," that "[w]e have implemented screening policies and procedures to .... detect[] fraudulent click-throughs, which are not billed to our advertisers," and that "[w]e have developed automated proprietary screening applications and procedures to minimize the effects of ... fraudulent clicks." (Id. ¶¶ 89, 91).
Before the stock market
The Plaintiffs filed their initial complaint against the Defendants on May 6, 2005, in the United States District Court for the Middle District of Florida. On July 27, 2005, the district court consolidated five lawsuits against FindWhat (by then known as "MIVA"), and appointed the FindWhat Investor Group as lead plaintiff. On January 17, 2006, the Plaintiffs filed their First Amended Consolidated Class Action Complaint ("Complaint"), which is the operative pleading on appeal. Styled as a Rule 23(b)(3)
On March 15, 2007, the district court partially granted the Defendants' motion to dismiss, dismissing as insufficiently pled all claims in the Plaintiffs' Complaint except those relating to statements made by the Defendants on February 23, 2005 and March 16, 2005. See In re Miva, Inc., Sec.
In November 2009, the district court, after referring the matter to a magistrate judge, adopted the magistrate judge's Report and Recommendation and granted final summary judgment in favor of the Defendants on the two remaining misrepresentations, on the grounds that the Plaintiffs had failed to demonstrate triable issues of fact with respect to loss causation and damages. See In re MIVA, Inc., Sec. Litig., No. 2:05-cv-201, 2009 WL 3821146 (M.D.Fla. Nov. 16, 2009). Thereafter, the Plaintiffs timely filed this appeal, challenging both the district court's dismissal order and the district court's final order of summary judgment.
We address first whether the Plaintiffs have sufficiently pled a Rule 10b-5 action concerning the Defendants' statements made on March 5, 2004 and July 26, 2004.
We review a district court's order dismissing a complaint de novo. Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1236 (11th Cir.2008).
To state a claim under § 10(b) and Rule 10b-5, a plaintiff must allege:
Id. at 1236-37 (citing Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005)).
Under the federal notice pleading standards, a complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). For purposes of this analysis, "all well-pleaded facts are accepted as true, and the reasonable inferences therefrom are construed in the light most favorable to the plaintiff." Garfield, 466 F.3d at 1261 (quoting Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1273 n. 1 (11th Cir.1999)).
Federal Rule of Civil Procedure 9(b) requires that, for complaints alleging fraud or mistake, "a party must state with particularity the circumstances constituting fraud or mistake," although "[m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Fed.R.Civ.P. 9(b). While Rule 9(b) does not abrogate the concept of notice pleading, it plainly requires a complaint to set forth (1) precisely what statements or omissions were made in which documents or oral representations; (2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making) them; (3) the content of such statements and the manner in which they misled the plaintiff; and (4) what the defendant obtained as a consequence of the fraud. Garfield, 466 F.3d at 1262; Ziemba, 256 F.3d at 1202. Notably, the "[f]ailure to satisfy Rule 9(b) is a ground for dismissal of a complaint." Corsello v. Lincare, Inc., 428 F.3d 1008, 1012 (11th Cir.2005) (per curiam).
The PSLRA imposes additional heightened pleading requirements on Rule 10b-5 actions. For Rule 10b-5 claims predicated on allegedly false or misleading statements or omissions, the PSLRA provides that "the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1). And for all private Rule 10b-5 actions requiring proof of scienter, "the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind [i.e., scienter]." Id. § 78u-4(b)(2). Although factual allegations may be aggregated to infer scienter, scienter must be alleged with respect to each defendant and with respect to each alleged violation of the statute. Phillips, 374 F.3d at 1016-18. If
On March 5, 2004, MIVA filed its Form 10-K annual report with the SEC for the fiscal year ending December 31, 2003. Both Defendants Pisaris-Henderson (CEO) and Thune (COO)
(MIVA 10-K, Mar. 5, 2004, at 5, 6 & Ex. 14.2) (emphasis added) (quoted in Compl. ¶¶ 75, 73).
The district court concluded that these Form 10-K statements were not actionable because they were not misleading. In particular, the court determined that "[s]tatements expressing an expectation of associating with ethical and lawful third-parties does not mean that FindWhat warrants that it does not have current questionable associations." In re Miva, 511 F.Supp.2d at 1254. The court also concluded that "a dedication to high-quality keyword ads and traffic is not inconsistent with the existence of low-quality keyword ads and traffic." Id. Moreover, the court found that "the Form consists of mostly forward-looking statements, [which are] protected by the safe harbor provisions of Section 78u-5(c), [because] ... the statements are accompanied by cautionary statements." Id.; see 15 U.S.C. § 78u-5(c)(1)(A)(i), (i)(1) (defining "forward-looking statements" as encompassing, inter alia, projections of revenues, statements regarding management's future plans and objectives, and statements regarding future economic performance, and providing a "safe harbor" for such statements to the extent that they are identified as forward-looking and are accompanied by "meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement"); see generally Bryant, 187 F.3d at 1276 n. 7 (describing the PSLRA's safe-harbor provision).
We disagree, however, with the district court's view that no portion of the Form 10-K could be considered materially misleading. The Form 10-K contains affirmative statements of present fact— "[w]e employ an integrated system ... that continually monitor[s] traffic quality," and "[w]e enforce strict guidelines ... to ensure the quality of traffic," (Compl. ¶ 75) (emphases added)—that unquestionably create the impression that MIVA maintains an active and sophisticated monitoring system for screening fraudulent traffic. Accepting the Plaintiffs' allegations as true, these statements are misleading because they could mislead a reasonable investor into believing that the Defendants had systems in place that would detect and remove distribution partners engaged in extensive fraudulent revenue-generating practices, when in truth and in fact they did not. See SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 863 (2d Cir.1968) (en banc) (holding that a statement is misleading if "in the light of the facts existing at the time of the [statement] ... [a] reasonable investor, in the exercise of due care, would have been misled by it"). To avoid being misleading, the Defendants' statements triggered a duty to disclose the grave defects that existed within the "enforce[ment]"
The Defendants' failure to disclose these defects rendered their statements materially misleading, which was not cured by any general cautionary or risk-disclosing language. See Merchant Capital, 483 F.3d at 769. The Form 10-K's cautionary language consisted only of general warnings about risks inherent to the Company's business model, and was not "specifically tailored" to risks from click fraud. See id. at 768. Indeed, the 10-K disclosed nothing to indicate even potential weaknesses in the Company's click-fraud monitoring systems, much less any information regarding actual known breaches of those systems.
Nonetheless, although we disagree with the ground on which the district court found that the March 5, 2004 Form 10-K filing was non-actionable— namely, that the statements were not misleading—we affirm the district court's dismissal of the March 5, 2004 Form 10-K statements on the alternative ground that the Plaintiffs have failed to plead scienter adequately with respect to these statements.
Rule 10b-5 requires a plaintiff to show that the defendant made the material misstatement or omission with the requisite culpable state of mind, or scienter. In this Circuit, "scienter consists of intent to defraud or severe recklessness on the part of the defendant." Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc., 594 F.3d 783, 790 (11th Cir.2010)
Mizzaro, 544 F.3d at 1238 (quoting Bryant, 187 F.3d at 1282 n. 18).
As we've noted, the PSLRA explicitly requires that the complaint's allegations create "a strong inference" of scienter. 15 U.S.C. § 78u-4(b)(2) (emphasis added). "To qualify as `strong' ... an inference of scienter must be more than merely plausible or reasonable—it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). "The inquiry is inherently comparative," as "the court must take into account plausible opposing inferences." Id. at 323, 127 S.Ct. 2499. The PSLRA also mandates that the court assess scienter "with respect to each act or omission alleged to violate this chapter." 15 U.S.C. § 78u-4(b)(2); accord Phillips, 374 F.3d at 1016 ("[Scienter] must be inferred for each defendant with respect to each violation." (emphasis added)).
The full extent of the Plaintiffs' allegations that could potentially contribute to an inference of scienter by the time of the Defendants' March 5, 2004 10-K statements are these
After reviewing all of the Plaintiffs' allegations relating to scienter, we agree with the district court that "[t]he earliest possible date which can be ascertained from the Amended Complaint [on which the Defendants knew, or were severely reckless in not knowing, of the alleged fraudulent revenue-generating scheme] was June 2004, when a meeting took place to discuss the termination of Saveli and Dmitri." In re Miva, 511 F.Supp.2d at 1252. Even viewing all of the Plaintiffs' allegations in concert, the Complaint contains no allegations from which we can infer that anyone in MIVA's management knew or "must have" known about the click fraud before June 2004. See Mizzaro, 544 F.3d at 1238.
Not only do the Plaintiffs fail to allege any direct evidence that the Defendants knew about MIVA's click fraud problems before the June 2004 meeting, but none of the Plaintiffs' circumstantial allegations of knowledge relate to the time period before June 2004 either. The internal e-mail regarding pornographic websites was not sent until February 2005. (Compl. ¶¶ 47-48). The alleged insider trading did not occur until the fourth quarter of 2004. (Id. ¶¶ 117-20). The revenue-split increase from 50 percent to 70 percent intended to dilute illicit traffic did not occur until roughly November 2004. (Id. ¶ 57). And other allegations, including those regarding the "Interface" computer system, (id. ¶¶ 52-53), Saveli and Dmitri's excessively high revenue-per-click rates, (id. ¶¶ 59-60), and the weekly War Reports, (id. ¶ 51), are undated entirely.
The Plaintiffs admit that the Complaint only provides dates for relevant events occurring in June 2004 or thereafter. (Appellant Br. at 34). However, the Plaintiffs argue that "those interactions with Defendants detail their acknowledgment of an ongoing problem, not one that had suddenly surfaced." (Id.) The Plaintiffs assert that, "if a decision had already been made in June 2004 to remove Saveli and Dmitri as distribution partners because of their reliance on click fraud," the Defendants must have known of the problem before that. (Id.)
This claim is wholly speculative. It is equally plausible that management made the decision to terminate Saveli and Dmitri immediately upon learning of their reliance on click fraud. In addition, the Plaintiffs are necessarily asking the court to project the Defendants' presumed knowledge of click fraud a full three months into the past, to the time of the March 5, 2004 Form 10-K filing. Even if the Defendants' interactions suggest that the June 2004 meeting was not the first time management learned of MIVA's click fraud problems, there are no facts, much less any that are pled with particularity, demonstrating that the Defendants had such knowledge a full three months earlier. Cf. Mizzaro, 544 F.3d at 1250-51 ("[W]e indulge at least some skepticism about allegations that hinge entirely on a theory that senior management `must have known' everything that was happening.... The ... complaint ... must at least allege some facts showing how knowledge of the fraud would or should have percolated up to senior management.").
Similarly, the Plaintiffs' allegation that it was "commonly known" within the Company that Saveli and Dmitri relied on click fraud, (Compl. ¶ 45), is conclusory and plainly lacks sufficient particularity to create a strong inference of scienter. See Thompson, 610 F.3d at 634 ("[C]onclusory allegations are insufficient to establish a `strong inference that the defendants acted with the required state of mind.'" (quoting Tellabs, 551 U.S. at 314, 127 S.Ct. 2499)).
The Defendants' alleged motives to meet Wall Street's revenue expectations are also insufficient to establish scienter. We have rejected the notion that "allegations of motive and opportunity to commit fraud, standing alone, are sufficient to establish scienter in this Circuit." Bryant, 187 F.3d at 1285; see also Thompson, 610 F.3d at 689 (Tjoflat, J., concurring in the appeal and dissenting in the cross-appeal) ("It stands to reason, of course, that a company's officers and directors have a motive to commit securities fraud. But that could be said of any public company's officers and directors, which is why the precedent of this circuit squarely forecloses any argument that stand-alone allegations of `motive and opportunity' will satisfy the PSLRA's standard.").
In addition, because scienter analysis is comparative, we note the alternative inferences that arise from the Complaint's allegations (and apparent omissions). First, if click fraud were so dramatically driving down traffic quality in early 2004, it might be expected that advertisers would have complained to MIVA about the diminishing conversion rates they were experiencing, thereby bringing the problem to management's attention. However, despite the Plaintiffs' access to numerous management-level employees, including a former Director of Business Development "primarily responsible for the development and maintenance of distribution partner relationships," (Compl. ¶ 40), the Complaint makes no mention of even a single advertiser who complained about low conversion rates. Cf. Mizzaro, 544 F.3d at 1253 ("[T]he ... complaint makes no mention of even a single vendor who complained to anyone at Home Depot [about allegedly widespread return-to-vendor fraud], let alone complained to senior management.").
Second, the Plaintiffs neglect to provide even approximate dates for numerous allegations, despite the allegations' otherwise detailed nature. Thus, for example, no approximate date is offered for the allegation
Finally, despite having access to a former Manager of Business Development who was allegedly involved in providing the weekly War Reports to the executive management team, the Plaintiffs have failed to allege even a single instance in which click fraud was discussed in the War Reports. (See Compl. ¶ 51). This glaring omission raises an inference that such fraud was not in fact discussed.
Therefore, even though the March 5, 2004 statements may have been materially misleading, the Plaintiffs have not alleged sufficient facts to yield a strong inference of scienter on or before that date. We, therefore, affirm the district court's dismissal of all claims predicated on this statement.
On July 26, 2004, MIVA held a public conference call to discuss financial results for the second quarter of 2004.
(Compl. ¶ 78) (some emphasis omitted).
To begin with, Thune's statement that "we believe that every one of our divisions can grow revenue from Q2 to Q3" is non-actionable. Statements regarding future performance are actionable only if "they are worded as guarantees or are supported by specific statements of fact or if the speaker does not genuinely or reasonably believe them." Merchant Capital, 483 F.3d at 767 (internal quotation marks and alteration omitted). There are no allegations in the Complaint suggesting any of these possibilities.
Therefore, the only potentially actionable part of Thune's statement is the factual claim that "by June revenue was increasing." (Compl. ¶ 78). Nowhere in the Complaint, however, do the Plaintiffs allege that this statement was inaccurate,
Rule 10b-5 prohibits not only literally false statements, but also any omissions of material fact "necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5(b). By voluntarily revealing one fact about its operations, a duty arises for the corporation to disclose such other facts, if any, as are necessary to ensure that what was revealed is not "so incomplete as to mislead." Backman v. Polaroid Corp., 910 F.2d 10, 16 (1st Cir. 1990) (en banc) (quoting Texas Gulf Sulphur, 401 F.2d at 862); accord Rudolph, 800 F.2d at 1043 ("Where a defendant's failure to speak would render the defendant's own prior speech misleading or deceptive, a duty to disclose arises."); Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 248 (5th Cir.2009) ("[T]he disclosure required by the securities laws is measured not by literal truth, but by the ability of the statements to accurately inform rather than mislead prospective buyers."). "[E]ven absent a duty to speak, a party who discloses material facts in connection with securities transactions assumes a duty to speak fully and truthfully on those subjects." In re K-tel Intern., Inc. Sec. Litig., 300 F.3d 881, 898 (8th Cir.2002) (internal quotation marks and alteration omitted). In sum, "a defendant may not deal in half-truths." First Va. Bankshares, 559 F.2d at 1314.
A statement is misleading if "in the light of the facts existing at the time of the [statement] ... [a] reasonable investor, in the exercise of due care, would have been misled by it." Texas Gulf Sulphur, 401 F.2d at 863. Thus, the "appropriate primary inquiry" is "into the meaning of the statement to the reasonable investor and its relationship to truth." Id. at 862.
According to the Plaintiffs, because the Defendants "failed to disclose that the only reason for the purported `increase' [in revenue] was the inclusion of illegitimate traffic, which would inevitably have to be removed," Defendant Thune's statement was fatally misleading. (Appellant Br. at 24). However, the Plaintiffs' argument fails. Requiring that disclosures be "`complete and accurate' ... does not mean that by revealing one fact about a product, one must reveal all others that, too, would be interesting, market-wise." Backman, 910 F.2d at 16. A corporation has a duty to neutralize only the "natural and normal implication" of its statements. See Donald C. Langevoort, Half-Truths: Protecting Mistaken Inferences by Investors
Defendant Thune's statement would be misleading only if it "conveyed to the public a false impression" of the quality of the Company's click traffic. See Texas Gulf Sulphur, 401 F.2d at 862. However, Defendant Thune's statement—a general report about an actual increase in total revenue in the preceding month across the Company as a whole, which at that time included MIVA's recently acquired companies, as well—conveyed no message regarding the underlying quality of MIVA's click traffic. Thune's statement did not even mention MIVA's click traffic or click revenue. No reasonable investor would believe that a conclusory, but apparently accurate, report of company-wide revenue growth naturally implied that all was well within every component of the company that could possibly affect revenue in the future. Otherwise, factual reporting of past earnings—disclosure of which the securities laws always encourage and frequently require
Because Thune's statement made during the July 26, 2004 conference call was neither false nor misleading, the district court was correct to conclude that the statement could not supply a basis for liability, and thus to dismiss as non-actionable all claims relying on it.
The Defendants' summary judgment motion raised the issue of whether, through the report of their expert, economist Scott D. Hakala, Ph.D., C.F.A., the Plaintiffs have demonstrated genuine issues of material fact as to loss causation and damages—two necessary elements of a Rule 10b-5 action. The district court concluded as a matter of law that Dr. Hakala's report did not create triable issues of fact concerning either loss causation or damages because Hakala himself acknowledged that MIVA's stock price was inflated by 26.44 percent before the Defendants' first actionable misrepresentation, and remained inflated at that same level after the Defendants made the two allegedly actionable misstatements on February 23, 2005 and March 16, 2005. The court reasoned that because the inflation level in MIVA's stock price did not change as a result of the alleged misrepresentations,
This ruling constituted legal error. The Defendants may be held liable for knowingly making materially false statements that continued to prop up the already inflated price of MIVA's stock and thereby caused losses to investors, regardless of whether MIVA's stock price was already inflated before the actionable statements were made. Investors who purchased MIVA stock at inflated prices during the Class Period—and, notably, after the purportedly fraudulent statements were made—may have sustained substantial losses that they would not have suffered had the Defendants revealed the truth at the start of the Class Period. As a result of its incorrect legal premise about the significance of pre-Class Period inflation, the district court did not attempt to evaluate the Plaintiffs' evidence to determine whether it created questions of fact necessitating a trial. Accordingly, we vacate the district court's summary judgment ruling and remand for the district court to address the motion measured against the correct legal standard.
We review the district court's grant of summary judgment de novo. Norfolk S. Ry. Co. v. Groves, 586 F.3d 1273, 1277 (11th Cir.2009). Summary judgment is proper if "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). The moving party bears the initial burden of demonstrating the absence of a genuine dispute of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). A fact is "material" if it "might affect the outcome of the suit under the governing law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A dispute over such a fact is "genuine" if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id.
In making this determination, we view all of the evidence in the light most favorable to the nonmoving party and draw all reasonable inferences in that party's favor. Johnson v. Booker T. Washington Broad. Serv., Inc., 234 F.3d 501, 507 (11th Cir. 2000). On summary judgment, a court may not weigh conflicting evidence or make credibility determinations of its own. Hilburn v. Murata Elecs. N. Am., Inc., 181 F.3d 1220, 1225 (11th Cir.1999). If the record presents disputed issues of fact, the court may not decide them; rather, it must deny the motion and proceed to trial. Tullius v. Albright, 240 F.3d 1317, 1320 (11th Cir.2001).
Only two of the Defendants' allegedly false or misleading statements were found on the pleadings to be actionable by the district court so as to survive the Defendants' motion to dismiss: (1) a February 23, 2005 conference call, and (2) a March 16, 2005 Form 10-K filing.
The first allegedly actionable misstatement occurred on February 23, 2005, when Defendant Pisaris-Henderson (CEO) participated in a public conference call and said the following:
(Dkt. 39-9, Ex. F, at 17-18) (quoted in Compl. ¶ 87). The Plaintiffs allege that, in
The second of the allegedly actionable fraudulent statements was made in MIVA's Form 10-K annual report filed with the SEC on March 16, 2005. The 10-K was signed by Defendants Pisaris-Henderson (CEO) and Thune (COO), and its accuracy was certified pursuant to Sarbanes-Oxley by Pisaris-Henderson and then-CFO Brenda Agius. (See MIVA 10-K, filed Mar. 16, 2005, at 64 & Exs. 31.1-32.2). In the 10-K, the Company made the following relevant statements about click fraud:
(MIVA 10-K, filed Mar. 16, 2005, at 17, 20, 44) (quoted in Compl. ¶¶ 89, 91).
The Form 10-K also made the following representations regarding MIVA's distribution partners:
(MIVA 10-K, filed Mar. 16, 2005, at 43-44) (quoted in Compl. ¶¶ 93, 95). The Plaintiffs allege that, in fact, MIVA's network heavily relied on spyware and other forms of click fraud to generate revenues, that almost one-third of MIVA's 2004 revenue came from the illegitimate traffic generated by Saveli and Dmitri, and, again, that MIVA did not remove any distribution partners from its network in the fourth quarter of 2004. (Compl. ¶¶ 90, 92, 94, 96).
Under the Plaintiffs' theory of the case, the Defendants' statements on February 23, 2005 and again on March 16, 2005 were materially misleading because the Defendants knowingly omitted information regarding the Company's significant click fraud problems and resultant bid deflation (i.e., that MIVA's advertisers were bidding less and less for clicks on their ads), and disclosure of this omitted information was "necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5(b); cf. Schleicher v. Wendt, 618 F.3d 679, 684 (7th Cir.2010) ("[T]he [alleged] fraud ... was the omission from public [disclosures] of information ..., at a time when the omission of this news made other statements misleading or incomplete...."). The Plaintiffs claim that the Defendants knowingly and intentionally continued to withhold
Because the Defendants' summary judgment motion contested only the elements of loss causation and damages, we accept (for present purposes only) the Plaintiffs' allegations concerning the other elements of their Rule 10b-5 claim—that is, that the Defendants made (1) materially false or misleading statements or omissions (2) with scienter, (3) upon which the Plaintiffs relied (4) in purchasing securities. Thus, for present purposes, our loss causation analysis assumes that the Defendants had a duty to reveal the truth about MIVA's click fraud as early as February 23, 2005 in order to prevent the statements they made during the Class Period from being materially misleading.
The loss causation element of a Rule 10b-5 claim requires that the defendant's fraud be both the but-for and proximate cause of the plaintiff's later losses. In re Omnicom Group, Inc. Sec. Litig., 597 F.3d 501, 510 (2d Cir.2010); see also Bastian v. Petren Resources Corp., 892 F.2d 680, 683, 685 (7th Cir.1990) (calling loss causation simply "an exotic name" for "the standard common law fraud rule" requiring the plaintiff to prove both factual and legal causation); 4 Thomas Lee Hazen, Law of Securities Regulation § 12.11 (6th ed. 2009) (section cited with approval in Dura, 544 U.S. at 342, 125 S.Ct. 1627) ("Causation in securities law involves the same analysis of cause in fact and legal cause that was developed under the common law."); cf. Dura, 544 U.S. at 344-45, 125 S.Ct. 1627 (noting "common-law roots of the securities fraud action" and basing loss causation analysis on common-law tort causation). The plaintiff must show that the defendant's fraud—as opposed to some other factor—proximately caused his claimed losses. Dura, 544 U.S. at 342-43, 125 S.Ct. 1627; Bruschi v. Brown, 876 F.2d 1526, 1530 (11th Cir.1989). However, the plaintiff need not show that the defendant's misconduct was the "sole and exclusive cause" of his injury; he need only show that the defendant's act was a "substantial" or "significant contributing cause." Robbins v. Koger Properties, Inc., 116 F.3d 1441, 1447 (11th Cir.1997) (quoting Bruschi, 876 F.2d at 1531).
The Plaintiffs' claims here rely on a fraud-on-the-market theory of causation. Fraud-on-the-market claims derive from
A "fraud on the market" occurs when a material misrepresentation is knowingly disseminated to an informationally efficient market. Basic, 485 U.S. at 247, 108 S.Ct. 978. Just as an efficient market translates all available truthful information into the stock price, the market processes the publicly disseminated falsehood and prices it into the stock as well. See id. at 241-42, 243-44, 246-47, 108 S.Ct. 978. The market price of the stock will then include an artificial "inflationary" value—the amount that the market mistakenly attributes to the stock based on the fraudulent misinformation. So long as the falsehood remains uncorrected, it will continue to taint the total mix of available public information, and the market will continue to attribute the artificial inflation to the stock, day after day. If and when the misinformation is finally corrected by the release of truthful information (often called a "corrective disclosure"), the market will recalibrate the stock price to account for this change in information, eliminating whatever artificial value it had attributed to the price. That is, the inflation within the stock price will "dissipate."
In a fraud-on-the-market case, the Supreme Court allows the reliance element of a Rule 10b-5 claim to be rebuttably presumed, so long as the defendant's fraudulent misstatement was material and the market was informationally efficient. See id. at 247, 108 S.Ct. 978 ("Because most publicly available information is reflected in market price, an investor's reliance on any public material misrepresentations... may be presumed for purposes of a Rule 10b-5 action."). This presumption follows directly from the efficient market hypothesis. Because an informationally efficient market rapidly and efficiently translates public information into the security's price, the market price will reflect the defendant's fraudulent statement, and everyone who relies on the market price as a reflection of the stock's value in effect relies on the defendant's misrepresentation.
While reliance focuses on the front-end causation question of whether the defendant's fraud induced or influenced the plaintiff's stock purchase, loss causation provides the "bridge between reliance and actual damages." In re Cooper Cos. Sec. Litig., 254 F.R.D. 628, 638 (C.D.Cal.2009). In a fraud-on-the-market case—where the plaintiff's claim is generally not that the initial investment transaction would not have occurred at all without the fraudulent misrepresentation, but only "that it would have occurred at a different price," Hazen, supra, § 12.11—loss causation requires proof that the fraud-induced inflation that was baked into the plaintiff's purchase price was subsequently removed from the stock's price, thereby causing losses to the plaintiff. See Robbins, 116 F.3d at 1448 (holding that loss causation requires plaintiffs to show that the "price inflation was removed from the market price of [the] stock, causing plaintiffs a loss"). In other words, proof of a fraudulently inflated purchase price only satisfies reliance; loss causation requires going a step further to supply "the logical link between the inflated share purchase price and any later economic loss." Dura, 544 U.S. at 342, 125 S.Ct. 1627; see also Robbins, 116 F.3d at 1448-49 (explaining that an inflated purchase price supports a finding of reliance, but not loss causation).
Plaintiffs frequently demonstrate loss causation in fraud-on-the-market cases circumstantially, by: (1) identifying a "corrective disclosure" (a release of information that reveals to the market the pertinent truth that was previously concealed or obscured by the company's fraud);
In opposing summary judgment, the Plaintiffs relied on the expert report of Dr. Hakala as evidentiary support for both loss causation and damages. The Defendants expressly assumed the admissibility of Dr. Hakala's report for purposes of their summary judgment motion.
Through his event study, Dr. Hakala concluded that MIVA's stock price was inflated by 26.44 percent before and throughout the Class Period due to the false information in the marketplace that MIVA did not rely on click fraud to boost revenues. Dr. Hakala also concluded through his event study that immediately after the Company finally revealed the truth about its heavy reliance on click fraud on May 5, 2005—admitting in an investor conference call that "a couple" of MIVA's distribution partners had been employing "capabilities ... to get additional traffic that just simply don't adhere to our standards" (Compl. ¶ 103)—the inflation in MIVA's stock price dissipated, causing substantial losses to Class Period investors. (Hakala Report, at 7, 23-24, 29, Ex. B-1 at 9-10; Hakala Dep., at 58:2-4; Hakala Dec., Dkt. 172-1, at 3). Dr. Hakala excluded other possible explanations for the price drop following the May 5, 2005 disclosure, concluding that "the primary if not exclusive reason for the [price] drop [on May 5-9, 2005] was related to ... the subject matter of the fraud.... [T]he confounding information in my analysis could not account for the drop—did not account for the drop...." (Dkt. 153-6, at
Even though the Plaintiffs purported to demonstrate that the market substantially devalued MIVA stock upon learning the truth about the Company's click fraud woes on May 5, 2005—a devaluation that the Plaintiffs claim would have occurred at the start of the Class Period if only the truth had been revealed then— the district court concluded that the Plaintiffs' evidence was insufficient as a matter of law to demonstrate loss causation and damages. The district court explained its reasoning this way: "Dr. Hakala testified that the full amount of the alleged price inflation of the stock—26.44%—existed ... more than a year before either of the[se] statements ..., and remained at that level after the statements at issue. Thus, the evidence from plaintiff establishes that the inflation in the stock price was caused by statements made prior to the class period in this case." In re MIVA, 2009 WL 3821146, at *5. In other words, the basic logic underlying the district court's grant of summary judgment is that, because the inflation in MIVA's stock price predated the Class Period, the statements made by the Defendants during the Class Period— even if knowingly and materially false or misleading—could not have "caused" the inflation, and therefore could not have "caused" the Plaintiffs' losses. This reasoning misapprehends the nature of market fraud.
The district court erroneously assumed that simply because confirmatory false statements have no immediate effect on an already inflated stock price in an efficient market, these statements cannot cause harm. But the inflation level need not change for new investors to be injured by a false statement. Fraudulent statements that prevent a stock price from falling can cause harm by prolonging the period during which the stock is traded at inflated prices. We therefore hold that confirmatory information that wrongfully prolongs a period of inflation—even without increasing the level of inflation—may be actionable under the securities laws.
At bottom, it is irrelevant to securities fraud liability that the stock price was already inflated before a defendant's first actionable misrepresentation; fraudulent misstatements that prolong inflation can be just as harmful to subsequent investors as statements that create inflation in the first instance. Inflation creates an ongoing risk of harm. Every investor who purchases at an inflated price—whether at the beginning, middle, or end of the inflationary period—is at risk of losing the inflationary component of his investment when the truth underlying the misrepresentation comes to light. Investors who quickly resell their stock during the inflationary period generally will not suffer any economic loss from the fraud, because, although they overpaid for their stock, they can recoup the amount they overpaid by selling at the same inflated price. See Dura, 544 U.S. at 342, 125 S.Ct. 1627 ("[I]f... [a] purchaser sells the shares ... before the relevant truth begins to leak out, the misrepresentation will not have led to any loss."). When the truth underlying the falsehood is finally revealed, however, the market will digest the new information and cease attributing the artificial inflation to the price. At that time, investors who purchased at inflated prices (and who still hold their stock) will suffer economic loss,
Because thousands of shares of stock are purchased each day, the longer that inflation remains within a stock price, the more shares that are purchased at inflated prices, and the more shares that stand to lose when the inflation subsequently dissipates from the price. Clearly then, a falsehood that endures within the marketplace for a longer period of time, all else being equal, will cause greater harm than one that endures for a shorter period of time. There is no reason to draw any legal distinction between fraudulent statements that wrongfully prolong the presence of inflation in a stock price and fraudulent statements that initially introduce that inflation. See In re Cooper, 691 F.Supp.2d at 1116 (denying summary judgment to defendants on loss causation grounds on the basis that "it [was] disputed as to whether the [defendants'] statements caused artificial inflation to continue to be incorporated into the stock price, as opposed to revealing the truth, which allegedly would have caused the stock price to fall" (emphasis added)); In re Scientific Atlanta, Inc. Sec. Litig., 754 F.Supp.2d 1339, 1380 n. 12 (N.D.Ga.2010) ("Plaintiffs argue persuasively that the class period inflation includes ... the pre-class period inflation that would have been removed from the stock price had [the company] accurately provided information about [the relevant truth at the start of the class period]."); In re Bristol-Myers Squibb Sec. Litig., No. Civ.A. 00-1990(SRC), 2005 WL 2007004, at *17 (D.N.J. Aug. 17, 2005) (stating, in the materiality context, that "it is conceivable that [an affirmative] misstatement could serve to maintain the stock price at an artificially inflated level without also causing the price to increase further").
According to the Plaintiffs, MIVA's stock price was already inflated before the Class Period because the market erroneously believed that MIVA did not rely on click fraud to boost revenues. The Plaintiffs allege that this information was materially false; in fact, MIVA suffered from rampant click fraud. According to the Plaintiffs, the Defendants had a duty to disclose the corrective truth about MIVA's click fraud problems at the start of the Class Period. If the Defendants had revealed the truth then, the market would have digested this information and the artificial inflation within MIVA's stock price would have dissipated. Instead, the Plaintiffs allege, the Defendants wrongfully continued to withhold this material truth from the market by making knowingly false or misleading statements to the public on February 23, 2005 and March 16, 2005, in which they failed to disclose the extent of MIVA's reliance on click fraud and even affirmatively misrepresented that MIVA actively policed click fraud and "d[id] not rely on `spyware' for any purpose." (See Compl. ¶¶ 89, 91). According to the Plaintiffs, in so doing, the Defendants' statements caused the market to continue to
Meanwhile, each day that MIVA's stock price remained purportedly inflated, investors purchased thousands of shares of MIVA stock at inflated prices. These investors thus "overpaid" for MIVA stock based on the false information that MIVA did not rely on click fraud to generate Internet traffic. When the alleged truth about MIVA's click fraud was revealed to the market on May 5, 2005, each of those investors who still held his stock lost the inflationary component of his purchase price—at that time, the market ceased attributing inflation to the stock, and investors who had purchased at inflated prices were no longer able to recoup their overpayment by reselling their stock in the marketplace. Therefore, investors who purchased MIVA stock during the Class Period and still held their stock when the truth came out at the end of the Class Period paid inflated prices for their investment—prices they would not have paid but for the defendant's purported fraud—and lost this inflationary overpayment when the revelation of the truth caused the market to drain the inflation from the stock price.
The securities laws do not immunize defendants who knowingly disseminate materially false or misleading information simply because their fraud concerns false information already believed by the market. Defendants whose fraud prevents preexisting inflation in a stock price from dissipating are just as liable as defendants whose fraud introduces inflation into the stock price in the first instance. We decline to erect a per se rule that, once a market is already misinformed about a particular truth, corporations are free to knowingly and intentionally reinforce material misconceptions by repeating falsehoods with impunity. Defendants who commit fraud to prop up an already inflated stock price do not get an automatic free pass under the securities laws.
In short, we affirm the district court's order dismissing the Plaintiffs' claims regarding the Defendants' March 5, 2004 and July 26, 2004 statements. However, as for the Plaintiffs' claims arising from the Defendants' February 23, 2005 and March 16, 2005 statements, we vacate the district court's order granting summary judgment to the Defendants, and remand the case for the district court to consider in the first instance whether the Plaintiffs have demonstrated triable issues of fact regarding loss causation and damages.
15 U.S.C. § 78j(b). Rule 10b-5, promulgated by the SEC pursuant to § 10(b), provides in relevant part:
17 C.F.R. § 240.10b-5(b).
Basic, 485 U.S. at 243-44, 108 S.Ct. 978 (footnotes and internal quotation marks omitted).
Id. at 419; see also Regents of Univ. of Cal. v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372, 403 n. 14 (5th Cir.2007) (Dennis, J., concurring in the judgment) ("[T]here appears to be no basis in Nathenson or otherwise for Greenberg's conclusion that false `confirmatory' statements can never support a claim proceeding under a fraud-on-the-market theory.").
