Amicus Curiae Brief — Facebook, Inc., et al., Petitioners v. Amalgamated Bank, et al.

No. 23-980

In the Supreme Court of the United States

FACEBOOK, INC., ET AL., PETITIONERS,

v.

AMALGAMATED BANK, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF FOR AMICI CURIAE LAW PROFESSORS

AND FORMER OFFICIALS OF THE SECURITIES

AND EXCHANGE COMMISSION SUPPORTING

PETITIONERS

WILLIAM T. SHARON

ARNOLD & PORTER

KAYE SCHOLER LLP

250 West 55th Street

New York, NY 10019

(212) 836-8000

ARTHUR LUK

ANTHONY J. FRANZE

Counsel of Record

KOLYA D. GLICK

ADRIEN K. ANDERSON

ARNOLD & PORTER

KAYE SCHOLER LLP

601 Massachusetts Ave., NW

Washington, DC 20001

(202) 942-5000

anthony.franze@arnoldporter.com

TABLE OF CONTENTS

Page

INTERESTS OF AMICI CURIAE ..................................1

INTRODUCTION AND SUMMARY OF

ARGUMENT ...................................................................2

ARGUMENT .........................................................................2

I. THE NINTH CIRCUIT’S RULE WOULD

UNDERMINE

THE

SEC’S

RISKDISCLOSURE REGIME AND HURT

INVESTORS ...................................................................2

A. The SEC’s Risk-Disclosure Regime ........................3

B. The Decision Below Contravenes the SEC’S

“Materiality” Requirement and Will Lead to

Information Overload and “Overwarning” .............5

II. THE NINTH CIRCUIT’S RULE ERODES

RULE 9(b)’S PROTECTIONS AGAINST

IMPROPER

SECURITIES

FRAUD

LITIGATION ................................................................10

CONCLUSION ...................................................................15

(i)

TABLE OF AUTHORITIES

Cases

Page(s)

Air & Liquid Sys. Corp. v. DeVries,

586 U.S. 446 (2019) ............................................................. 9

Basic Inc. v. Levinson,

485 U.S. 224 (1988) ................................................... 5, 7, 13

Blue Chip Stamps v. Manor Drug Stores,

421 U.S. 723 (1975) ........................................................... 10

In re Bristol-Myers Squibb Co. CVR Sec. Litig.,

658 F. Supp. 3d 220 (S.D.N.Y. 2023) .............................. 13

Cerveny v. Aventis, Inc.,

855 F.3d 1091 (10th Cir. 2017) .......................................... 9

Clark Cnty. Sch. Dist. v. Breeden,

532 U.S. 268 (2001) ........................................................... 14

CTIA–The Wireless Assoc. v. City of Berkeley,

487 F. Supp. 3d 821 (N.D. Cal. 2020) ............................... 9

Dura Pharmaceuticals, Inc. v. Broudo,

544 U.S. 336 (2005) ....................................................... 2, 10

In re Facebook Inc. Sec. Litig.,

87 F.4th 934 (9th Cir. 2023) ............................................... 6

Ford Motor Credit Co. v. Milhollin,

444 U.S. 555 (1980) ............................................................. 8

In re Gilead Scis. Sec. Litig.,

536 F.3d 1049 (9th Cir. 2008) .......................................... 13

Goldman Sachs Grp., Inc. v. Ark. Tchr. Ret. Sys.,

594 U.S. 113 (2021) ..................................................... 11, 13

Halliburton Co. v. Erica P. John Fund, Inc.,

573 U.S. 258 (2014) ........................................................... 12

Katyle v. Penn Nat’l Gaming, Inc.,

637 F.3d 462 (4th Cir. 2011) ............................................ 10

Lormand v. US Unwired, Inc.,

565 F.3d 228 (5th Cir. 2009) ............................................ 10

(ii)

iii

Cases—Continued

Page(s)

Mass. Ret. Sys. v. CVS Caremark Corp.,

716 F.3d 229 (1st Cir. 2013)............................................. 10

Merck Sharp & Dohme Corp. v. Albrecht,

587 U.S. 299 (2019) ............................................................. 8

In re Nuvelo, Inc., Sec. Litig.,

668 F. Supp. 2d 1217 (N.D. Cal. 2009) ........................... 13

O’Neal v. Ferguson Constr. Co.,

237 F.3d 1248 (10th Cir. 2001) ........................................ 14

O’Neil v. Crane Co.,

266 P.3d 987 (Cal. 2012) ..................................................... 9

In re Odyssey Healthcare, Inc. Sec. Litig.,

424 F. Supp. 2d 880 (N.D. Tex. 2005) ............................ 11

Provenz v. Miller,

102 F.3d 1478 (9th Cir. 1996) ............................................ 6

Robinson v. McNeil Consumer Healthcare,

615 F.3d 861 (7th Cir. 2010) .............................................. 9

TSC Industries v. Northway, Inc.,

426 U.S. 438 (1976) ......................................................... 5, 7

U.S. Aviation Underwriters, Inc. v. United States,

562 F.3d 1297 (11th Cir. 2009) .......................................... 9

In re Zofran (Ondansetron) Prods. Liab. Litig.,

57 F.4th 327 (1st Cir. 2023) ............................................... 9

Regulations and Rules

47 Fed. Reg. 11,380 (Mar. 16, 1982) .................................... 5

81 Fed. Reg. 23,916 (Apr. 22, 2016) ......................... 3, 4, 5, 9

84 Fed. Reg. 44,358 (Aug. 23, 2019) ................................ 5, 6

85 Fed. Reg. 63,726 (Oct. 8, 2020) ................................... 4, 7

17 C.F.R. § 229.105 ................................................................ 3

17 C.F.R. § 240.12b-2 ............................................................ 5

Fed.R.Civ.P. 8(a)(2)............................................................. 10

iv

Regulations and Rules—Continued

Page(s)

Fed.R.Civ.P. 9(b) ................................................................. 10

Other Authorities

Anne Beatty et al., Are Risk Factor Disclosures Still

Relevant? Evidence from Market Reactions to Risk

Factor Disclosures Before and After the Financial

Crisis, 36 Contemp. Acct. Res., 805 (2019) ..................... 4

Donald C. Langevoort, Toward More Effective Risk

Disclosure for Technology-Enhanced Investing, 75

Wash. U. L. Q. 753, 759 (1997) .......................................... 8

Emily Strauss, Is Everything Securities Fraud?, 12 UC

Irvine L. Rev. 1331 (2022) ............................................... 12

Matt Levine, Money Stuff: Everything Everywhere Is

Securities Fraud (June 26, 2019),

https://bloom.bg/43xNFby .............................................. 12

Matthew C. Turk, Securitization Reform After the

Crisis: Regulation by Rulemaking or Regulation by

Settlement?, 37 Rev. Banking & Fin. L. 861 (Spring

2018) ................................................................................... 12

Merritt B. Fox and Joshua Mitts, Event-Driven Suits

and the Rethinking of Securities Litigation, 78 Bus.

Law. 1 (Winter 2022-2023) .............................................. 11

Stephen M. Shapiro et al., Supreme Court Practice

§ 4.5 (11th ed.) ................................................................... 10

Susanna Kim Ripken, The Dangers and Drawbacks of

the Disclosure Antidote: Toward a More Substantive

Approach to Securities Regulation,

58 Baylor L. Rev. 139 (2006) ......................................... 8, 9

Troy A. Paredes, Blinded by the Light: Information

Overload and its Consequences for Securities

Regulation, 81 Wash. U. L. Q. 417 (2003) ................... 7, 8

INTERESTS OF AMICI CURIAE1

Amici curiae are law professors and former officials

of the Securities and Exchange Commission (“SEC”).

They have spent years studying and advising on the

federal securities laws, the SEC’s enforcement practices,

and securities class action litigation. They have an

interest in the appropriate construction and operation of

the laws in those areas. Amici are:2

Amanda M. Rose: Cornelius Vanderbilt Chair in Law

at Vanderbilt University Law School, and Professor of

Management at Vanderbilt University Owen Graduate

School of Management.

Matthew Turk: Associate Professor of Business Law

& Ethics at Indiana University Kelley School of Business.

Andrew N. Vollmer: Senior Affiliated Scholar,

Mercatus Center at George Mason University; former

Professor of Law, General Faculty, University of Virginia

School of Law; former Deputy General Counsel of the

SEC; former partner in the securities enforcement group

of Wilmer Cutler Pickering Hale and Dorr LLP.

Amici are unanimous in their view that the Ninth

Circuit’s decision below not only is wrong and contrary to

the SEC’s risk-disclosure regime, but also that it will

hinder and confuse investors seeking to understand the

material risks of their investments and confound

companies trying to comply with SEC disclosure

obligations.

No counsel for a party authored this brief in whole or in part. No

person other than amici or their counsel made a monetary

contribution to its preparation or submission. The parties were given

timely notice of this filing.

2

The views in this brief are those of the amici curiae only and not

necessarily of any of the institutions with which they are or have been

affiliated. The names of the institutions are included for identification

only.

1

(1)

2

INTRODUCTION AND

SUMMARY OF ARGUMENT

This case is a textbook example of a case warranting

this Court’s review because it is the result of circuit court

conflicts on issues of nationwide importance: the integrity

of the SEC’s disclosure regime and the pleading standard

for loss causation, which provide critical checks on

securities class action abuse.

As petitioners ably demonstrate, review is needed to

resolve a circuit conflict and provide certainty and

uniformity on the critical standards for risk factor

disclosures. Amici further submit that review is needed

to correct the Ninth Circuit’s outlier standard, which

contravenes the SEC’s efforts to make the “risk factors”

section in companies’ public disclosures more effective.

Among other deficiencies, the Ninth Circuit’s standard

encourages “information overload” and “overwarning,”

which studies and common sense show prevent investors

from making informed decisions.

This case also presents the ideal vehicle to resolve

another divide on an important prophylactic to litigation

abuse: the pleading standard for alleging loss causation.

This Court’s decision in Dura Pharmaceuticals, Inc. v.

Broudo, 544 U.S. 336 (2005), left this question open. Since

then, developments in securities litigation, including the

proliferation of event-driven litigation, underscore the

need to resolve this question and stem abusive securities

class actions.

ARGUMENT

I. THE

NINTH

CIRCUIT’S

RULE

WOULD

UNDERMINE THE SEC’S RISK-DISCLOSURE

REGIME AND HURT INVESTORS

Lower courts are divided on what information

companies must include in the required “risk factors”

section of their Form 10-Ks, Form 10-Qs, and other public

3

filings to comply with Item 105 of Regulation S-K, 17

C.F.R. § 229.105.

One circuit has held that risk

disclosures need not discuss past instances when a risk

came to fruition, and six other circuits have concluded that

companies must disclose past events only if the companies

knew the events had harmed or would inevitably harm the

business. The Ninth Circuit below rejected all these

approaches, holding that risk disclosures must include

past instances when the risks came to fruition even where

the companies had no basis to believe that those events

would harm the business. The circuit conflict alone

warrants this Court’s review, as petitioners demonstrate.

Review is also warranted to prevent the Ninth Circuit’s

outlier approach from undermining the SEC’s riskdisclosure regime and hurting investors.

A.

The SEC’s Risk-Disclosure Regime

SEC rules require risk disclosures from certain

market participants. Since 2005, subject companies have

been required to describe the material risks of an

investment in the company’s securities in both annual and

periodic reports filed with the SEC pursuant to

Regulation S-K (“Reg S-K”).

Over time, concerns emerged that disclosures were

becoming too long and detailed while at the same time less

effective. In 2016, the SEC investigated its disclosure

regime under Reg S-K and issued a concept release that

emphasized a significant number of concerns it had

received about the growing length of risk factor

disclosures. See Business and Financial Disclosure

Required by Regulation S-K, 81 Fed. Reg. 23,916, 23,955

(Apr. 22, 2016). In 2019 a prominent “study found that

registrants increased the length of risk factor disclosures

from 2006 to 2014 by more than 50 percent in terms of

word count * * * and that this increase in risk factor word

count may not be associated with better disclosure.”

Modernization of Regulation S-K Items 101, 103, and 105,

4

85 Fed. Reg. 63,726, 63,743 n.198 (Oct. 8, 2020) (citing

Anne Beatty et al., Are Risk Factor Disclosures Still

Relevant? Evidence from Market Reactions to Risk

Factor Disclosures Before and After the Financial Crisis,

36 Contemp. Acct. Res., 805 (2019)).

In 2020, the SEC amended the disclosure

requirements “to address the lengthy and generic nature

of the risk factor disclosure presented by many

registrants.” Id. at 63,742. The SEC cited comment

letters and the 2019 study, which attributed the growing

length of risk factor disclosure to the fear of litigation for

failing to disclose risks that later materialized. See id. at

63,742, 63,743. Recognizing that repetitive and generic

risk disclosure can “obscure relevant information or

render it difficult to evaluate the importance of the

information,” 2016 Concept Release at 23,995, the SEC

amended Item 105 of Reg S-K, requiring that if a

company’s risk factor disclosure section exceeds 15 pages,

the company must provide a summary risk factor

disclosure that is no longer than two pages. The

amendment further changed the standard for disclosure

from the “most significant” risks to “material” risks, with

the aim that it would “result in risk factor disclosure that

is more tailored to the particular facts and circumstances

of each registrant, which should reduce the disclosure of

generic risk factors and potentially shorten the length of

the risk factor discussion, to the benefit of both investors

and registrants.” 2020 Amendments Release at 63,744.

As discussed next, the Ninth Circuit’s decision

contravenes the SEC’s goal of risk factors that are “more

tailored” to the “material risks.”

5

B.

The Decision Below Contravenes the SEC’S

“Materiality” Requirement and Will Lead to

Information Overload and “Overwarning”

In addition to resolving the circuit conflict, see Pet.

18-23, this Court should intervene to address two core

problems with the Ninth Circuit’s rule.

1. The Ninth Circuit’s approach waters down Reg SK Item 105’s “materiality” limitation by requiring

companies to make overly cautious risk disclosures for

past events even when the company has no reason to

suspect those events will harm the business in the future.

Materiality is a guiding principle under federal

securities laws used by the SEC since 1937. See 2016

Concept Release at 23,925. In 1982, the SEC formally

adopted this Court’s materiality standard articulated in

TSC Industries v. Northway, Inc., 426 U.S. 438 (1976).

See Adoption of Integrated Disclosure System, 47 Fed.

Reg. 11,380, 11,393-94 (Mar. 16, 1982). And in 1988, this

Court applied the materiality standard from TSC

Industries to Section 10(b) of the Securities and

Exchange Act of 1934, 15 U.S.C. §§ 78a-78rr, and Rule

10b-5, 17 C.F.R. 240.10b-5. See Basic Inc. v. Levinson,

485 U.S. 224, 232 (1988).

Information is material if there is a substantial

likelihood that disclosure of the omitted fact would have

been viewed as important by the reasonable investor. In

adopting the materiality standard for risk disclosures

under Item 105, the SEC likewise advised that “the term

material, when used to qualify a requirement for the

furnishing of information as to any subject, limits the

information required to those matters to which there is a

substantial likelihood that a reasonable investor would

attach importance in determining whether to purchase

the security.” Modernization of Regulation S–K Items

101, 103, and 105, 84 Fed. Reg. 44,358, 44,376 (Aug. 23,

2019) (quoting 17 C.F.R. § 240.12b-2 (emphasis added)).

6

The Ninth Circuit’s decision treats past events as

material even if there is no reason to believe they will

harm the business, undermining the purpose of the

materiality requirement. Put simply, when there is no

reason to believe a past event poses a current risk of

business harm, the event is not a matter “to which there

is a substantial likelihood that a reasonable investor would

attach importance in determining whether to purchase

the security.” Ibid.

The decision below is all the more troublesome

because the court found the omission of the Cambridge

Analytica data misuse was material even though it was

widely known by the public in 2015 through news reports,

well before the forward-looking risk factor statements on

Facebook’s 2016 Form 10-K was filed in February 2017.

The Ninth Circuit drew this conclusion despite

recognizing that “if the market has already ‘become aware

of the allegedly concealed information,’ the allegedly false

information or material omission ‘would already be

reflected in the stock’s price’ and the market ‘will not be

misled.’” In re Facebook Inc. Sec. Litig., 87 F.4th 934, 948

(9th Cir. 2023) (quoting Provenz v. Miller, 102 F.3d 1478,

1492 (9th Cir. 1996)).

The Ninth Circuit also incongruously found that a

non-disclosure of a past event is material, even where the

company includes a forward-looking risk factor about the

same type of risk. A simple example illustrates the fallacy

of the Ninth Circuit’s reasoning. Retail stores use yellow

wet-floor signs to warn customers of the potential risk of

slipping. It would be absurd to assert that the wet-floor

sign is misleading unless the retailer also posts a list of

everyone who has slipped on wet floors in the past. Yet

the Ninth Circuit’s rule would render the store’s slip-andfall warning inadequate unless it also included all past

falls, with no temporal limit.

7

2. The Ninth Circuit’s decision also undermines the

SEC’s requirements aimed at “risk factor disclosure that

is more tailored to the particular facts and circumstances

of each registrant [to] reduce the disclosure of generic

risk factors and potentially shorten the length of the risk

factor discussion, to the benefit of both investors and

registrants.” 2020 Amendments Release at 63,744. If left

standing, the decision below would encourage, if not

require, companies to disclose the cumulative history of

their business, no matter how immaterial to the risk of

future business harm.

By “bring[ing] an overabundance of information

within its reach,” the Ninth Circuit’s rule would require

companies to “bury the shareholders in an avalanche of

trivial information—a result that is hardly conducive to

informed decisionmaking.” Basic, Inc., 485 U.S. at 231 (in

part quoting TSC Industries, 426 U.S. at 488).

Regulators, courts, and scholars repeatedly have

recognized the risks of “information overload” or

“overwarning” in the securities and numerous other

contexts. The principle is always the same: “more

disclosure can mean less effective disclosure.” Troy A.

Paredes, Blinded by the Light: Information Overload

and its Consequences for Securities Regulation, 81 Wash.

U. L. Q. 417, 446 (2003).

“Studies show that at some point, people become

overloaded with information and make worse decisions

than if less information were made available to them.” Id.

at 419. “In particular, studies show that when faced with

complicated tasks that involve vast quantities of

information, people tend to adopt simplifying decision

strategies that require less cognitive effort, but that are

less accurate than more complex decision strategies.”

Ibid.

“The net result of having access to more

information, combined with using a less accurate decision

strategy as the information load increases, is often an

8

inferior decision.” Ibid. (discussing studies). “Borrowing

Brandeis’ terminology, in addition to being a disinfectant,

sunlight can also be blinding.” Ibid.

Information overload can result in investors

becoming “overwhelmed and confused.” Id. at 441.

“Making matters worse, studies show that people do not

always focus on the most relevant information but might

become distracted by less relevant information.” Id. at

442. “[T]he more information there is, the more each bit

of it is diluted. The immediate and salient crowds out the

less attention-grabbing.” Donald C. Langevoort, Toward

More Effective Risk Disclosure for TechnologyEnhanced Investing, 75 Wash. U. L. Q. 753, 759 (1997)

(footnote omitted). As a result, “[w]hen the average

investor is presented with disclosure that is too long and

complex to be processed efficiently, the overload can

hinder informed decision-making and thereby defeat the

very purpose of disclosure requirements.” Susanna Kim

Ripken, The Dangers and Drawbacks of the Disclosure

Antidote: Toward a More Substantive Approach to

Securities Regulation, 58 Baylor L. Rev. 139, 162 (2006).

The problem of information overload or

“overwarning” is well recognized in an array of contexts.

For instance, this Court has recognized that consumer

protection disclosures must avoid “information overload,”

because “[m]eaningful disclosure does not mean more

disclosure.” Ford Motor Credit Co. v. Milhollin, 444 U.S.

555, 568, (1980) (discussing liability for a failure to disclose

under the Truth in Lending Act). Drug labels that include

too many warnings risk “overshadow[ing]” more

important information. Merck Sharp & Dohme Corp. v.

Albrecht, 587 U.S. 299, 304 (2019). And “[r]equiring a

product manufacturer to imagine and warn” of risks

based on “how its product might be used with other

products or parts[,] []would impose a difficult and costly

burden on manufacturers, while simultaneously

9

overwarning users.” Air & Liquid Sys. Corp. v. DeVries,

586 U.S. 446, 454 (2019). Other courts and agencies have

recognized the risks of overwarning; as one court put it:

“To warn of all potential dangers would warn of nothing.”

O’Neil v. Crane Co., 266 P.3d 987, 1006 (Cal. 2012)

(quotation marks omitted).3

Unsurprisingly, the SEC and its officials have

recognized that information overload can hinder informed

decision-making. E.g., Business and Financial Disclosure

Required by Regulation S-K, 81 Fed. Reg. 23,916, 23,919

(Apr. 22, 2016) (“There is also a possibility that high levels

of immaterial disclosure can obscure important

information or reduce incentives for certain market

participants to trade or create markets for securities.”);

Ripken, supra, at 162 (“Even former SEC Chairman

Arthur Levitt noted that ‘[t]oo much information can be

as much a problem as too little’ and ‘[m]ore disclosure

does not always mean better disclosure.’”).

Nevertheless, the decision below demands that

companies saturate their disclosures with overwhelming

information about past events despite no reasonable belief

that these events present risks of harm to the business.

That may result in material information being overlooked

or diluted and lead to worse, not better, decisions.

See, e.g., In re Zofran (Ondansetron) Prods. Liab. Litig., 57 F.4th

327, 330 (1st Cir. 2023) (“[O]ne of [the FDA’s] objectives is to prevent

overwarning, which may deter appropriate use of medical products,

or overshadow more important warnings.” (quotation marks

omitted)); Cerveny v. Aventis, Inc., 855 F.3d 1091, 1102 (10th Cir.

2017) (same); Robinson v. McNeil Consumer Healthcare, 615 F.3d

861, 869 (7th Cir. 2010) (same); U.S. Aviation Underwriters, Inc. v.

United States, 562 F.3d 1297, 1300 (11th Cir. 2009) (noting “the

dangers of over warning” in forecasting turbulence to aircraft pilots);

CTIA – The Wireless Assoc. v. City of Berkeley, 487 F. Supp. 3d 821,

834 (N.D. Cal. 2020) (agreeing with FCC that city ordinance on risks

of cell phone usage presented risk of overwarning).

3

10

II. THE NINTH CIRCUIT’S RULE ERODES RULE

9(b)’S PROTECTIONS AGAINST IMPROPER

SECURITIES FRAUD LITIGATION

Under the existing state of the law, “[i]t is unclear

whether a plaintiff may plead loss causation with ‘a short

and plain statement of the claim showing that the pleader

is entitled to relief,’ Fed.R.Civ.P. 8(a)(2),” or if the

plaintiff must meet the rule that “‘a party must state with

particularity the circumstances constituting fraud,’

Fed.R.Civ.P. 9(b).” Mass. Ret. Sys. v. CVS Caremark

Corp., 716 F.3d 229, 239 n.6 (1st Cir. 2013).4

The divide in the lower courts stems in part from

Dura Pharmaceuticals., Inc. v. Broudo, 544 U.S. 336, 346

(2005), which declined to address the pleading standard

for Rule 10b-5 cases. This Court often accepts review

“where the decision below is premised upon a prior

Supreme Court opinion whose implications are in need of

clarification.” Shapiro et al., Supreme Court Practice § 4.5

(11th ed.). That is the case here.

Though Dura did not resolve the question, the Court

recognized the need for meaningful constraints on the loss

causation element to prevent “a plaintiff ‘with a largely

groundless claim [from] simply tak[ing] up the time of a

number of other people, with the right to do so

representing an in terrorem increment of the settlement

value, rather than a reasonably founded hope that the

[discovery] process will reveal relevant evidence.’” Dura,

544 U.S. at 347 (quoting Blue Chip Stamps v. Manor

Drug Stores, 421 U.S. 723, 741 (1975)). Twenty years

later, that problem is worse than ever, underscoring the

need for this Court to confirm that a more demanding

pleading standard is required.

Compare, e.g., Lormand v. US Unwired, Inc., 565 F.3d 228, 258

(5th Cir. 2009) (applying Rule 8(a)(2)), with, e.g., Katyle v. Penn Nat’l

Gaming, Inc., 637 F.3d 462, 471 (4th Cir. 2011) (applying Rule 9(b)).

4

11

1. Three trends in securities fraud litigation illustrate

how a diminished loss-causation requirement encourages

baseless fraud-by-hindsight lawsuits.

First, whereas common-law fraud typically requires

a “misrepresentation,” securities fraud cases have

become plagued with omission-based theories. See, e.g.,

Goldman Sachs Grp., Inc. v. Ark. Tchr. Ret. Sys., 594 U.S.

113, 120 (2021). More and more, securities-fraud lawsuits

allege fraud-by-hindsight, accusing companies of failing

to disclose information that they could have included in an

earlier public filing. See ibid.; see also, e.g., Merritt B.

Fox and Joshua Mitts, Event-Driven Suits and the

Rethinking of Securities Litigation, 78 Bus. Law. 1, 1-3

(Winter 2022–2023). Omission-based lawsuits—like this

one—often depend on a “partial disclosure,” where the

plaintiffs argue that a broad disclosure by the company

triggered a duty to disclose certain specific, loosely

related facts.

Rule 9(b) is especially important for partial disclosure

theories because particularized pleading requires

plaintiffs to identify precisely what allegedly should have

been disclosed, and when. See In re Odyssey Healthcare,

Inc. Sec. Litig., 424 F. Supp. 2d 880, 892 (N.D. Tex. 2005)

(“The particularity requirements of the PSLRA apply

with equal force to omissions.”). Only by identifying a

specific omission—and tying that omission to an

affirmative “partial” disclosure—can a court properly

assess whether the alleged losses were caused by that

omission, or by other market forces. See Fox, supra, at 1

(“In an event-driven case, the plaintiff points to a predisaster statement that allegedly underplayed the

likelihood that the disaster would occur and argues that

the disaster announcement was the corrective

disclosure.”).

Second, the problems underlying overbroad

omission-based theories are aggravated by a rise in

12

“event-driven” securities fraud lawsuits. See Emily

Strauss, Is Everything Securities Fraud?, 12 UC Irvine

L. Rev. 1331, 1340 (2022) (detailing “event-driven” fraud

actions); see also Matt Levine, Money Stuff: Everything

Everywhere Is Securities Fraud, Bloomberg.com (June

26, 2019), https://bloom.bg/43xNFby. Event-driven cases

follow a familiar pattern: A stock-price drops in response

to a news source disclosing a negative event such as an oil

spill, product recall, global pandemic, plant explosion,

climate change, or data breach; plaintiffs’ lawyers then

scour 10-Ks and 10-Qs to see if the event is listed; if the

event does not appear, those lawyers begin a class action

alleging a failure to disclose the risk. See ibid. These

event-driven lawsuits transform ordinary business

turbulence into hundred-million dollar cases that bear

little resemblance to the historical scope of securities

fraud, much less the common law fraud on which the Rule

10b-5 cause of action is modeled. See Halliburton Co. v.

Erica P. John Fund, Inc., 573 U.S. 258, 284 (2014).

The problems inherent in event-driven litigation are

exacerbated in cases in which the event triggers

regulatory enforcement activity—through congressional

hearings, official enforcement actions, or media “scandal”

blitzes. In many instances, stock drops are caused by

investors’ fear of enforcement penalties rather than

investors’ purported misconceptions of the company’s

value. See, e.g., Matthew C. Turk, Securitization Reform

After the Crisis: Regulation by Rulemaking or

Regulation by Settlement?, 37 Rev. Banking & Fin. L.

861, 892 (Spring 2018) (discussing the prosecution of

Fabrice Tourre following the 2008 housing crash; in that

case, fluctuations in stock prices could have been

attributed to political pressure following the 2008

housing-market crash just as easily as other market

forces).

13

Third, there is an inherent logical flaw in securities

fraud lawsuits based on a drop in stock price that

significantly “lags” behind the alleged corrective

disclosure by weeks or even months, as the July 2018

stock drop did here. See, e.g., In re Nuvelo, Inc., Sec.

Litig., 668 F. Supp. 2d 1217, 1226-1227 (N.D. Cal. 2009)

(“This lag effect, according to the Ninth Circuit, did not

per se render loss causation implausible.” (citing In re

Gilead Scis. Sec. Litig., 536 F.3d 1049 (9th Cir. 2008)));

compare In re Bristol-Myers Squibb Co. CVR Sec. Litig.,

658 F. Supp. 3d 220, 237 (S.D.N.Y. 2023) (noting that In

re Nuvelo is “obviously not binding on this Court and [its]

reasoning has been widely rejected by other courts”).

Specifically, relying on a “lag” in the stock-price drop

is incompatible with the “price inflation” theory of loss

causation. Under that theory, “Plaintiffs typically try to

prove the amount of inflation indirectly: They point to a

negative disclosure about a company and an associated

drop in its stock price; allege that the disclosure corrected

an earlier misrepresentation; and then claim that the

price drop is equal to the amount of inflation maintained

by the earlier misrepresentation.” Goldman Sachs, 594

U.S. at 123. Thus, the lawsuit “is premised on the theory

that investors rely on the market price of a company’s

security, which in an efficient market incorporates all of

the company’s public misrepresentations.” Id. at 117

(emphasis added).

The inference that an efficient market incorporates

all public information is plainly inconsistent with a loss

causation theory that depends on a substantial “lag” in the

stock price drop. In the “impersonal, efficient market”

that Basic envisioned, any corrective disclosure the

company published would be absorbed promptly into the

stock price. See Basic, 485 U.S. at 248. The notion that

an efficient market will perfectly inflate a stock price in

real time but then deflate the stock price on a delayed

14

timeline is logically inconsistent and inherently

speculative.

2. The Ninth Circuit’s lax approach to Rule 10b-5

pleading for loss causation—which effectively treated the

Rule 9(b) and Rule 8 standards as one and the same—

allowed all three problems in securities litigation

discussed above to flourish in this case.

First, this is a half-truth or “partial disclosure” case.

Plaintiffs’ claims are based on the purported failure to

disclose certain “details about Cambridge Analytica’s

data misuse,” while “partially disclosing” other

generalized risk statements. Second, this case falls

squarely within the category of event-driven litigation in

which a business disruption (and corresponding press

attention) led to the drop in stock price rather than the

March 2018 disclosure that forms the basis of Plaintiffs’

causal theory here. See Pet. 33-34. Finally, not only did

Facebook’s drop in stock price “lag” behind the alleged

disclosure, but the court endorsed an implausible “doubledrop” theory in which the same purported disclosure

caused “two stock drops, four months apart.” Pet. 17; cf.

Clark Cnty. Sch. Dist. v. Breeden, 532 U.S. 268, 273 (2001)

(collecting cases holding that “temporal proximity must

be ‘very close’” to satisfy causation in employment context

(quoting O’Neal v. Ferguson Constr. Co., 237 F.3d 1248,

1253 (10th Cir. 2001)).

Rather than engage with the lack of particularity in

Plaintiffs’ allegations, the court below brushed aside the

substantive flaws in Plaintiffs’ loss-causation theory with

a gesture to the case’s early procedural posture.

Pet.App.38 (“We emphasize that this case is at the very

early motion to dismiss stage, and that discovery and

further proceedings are necessary to illuminate the issues

surrounding loss causation.”). But the panel’s reliance on

the motion-to-dismiss context and the possibility of

discovery is misplaced. For loss causation, both the

15

alleged corrective disclosure and the alleged loss are

public and in the plaintiff’s hands at the time the plaintiff

files its complaint. If the plaintiff is unable to articulate a

coherent theory of loss causation with particularity at the

pleading stage, then it almost certainly will not be able to

prove one, regardless of any discovery.

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted.

WILLIAM T. SHARON

ARNOLD & PORTER

KAYE SCHOLER LLP

250 West 55th Street

New York, NY 10019

(212) 836-8000

ARTHUR LUK

ANTHONY J. FRANZE

Counsel of Record

KOLYA D. GLICK

ADRIEN K. ANDERSON

ARNOLD & PORTER

KAYE SCHOLER LLP

601 Massachusetts Ave., NW

Washington, DC 20001

(202) 942-5000

anthony.franze@arnoldporter.com