Loos v. Immersion Corp.

A securities fraud claim may be dismissed if the announcement of an investigation, without more, is used to establish the loss causation element.

John Loos appealed the "dismissal of his securities fraud class action [against Immersion Corporation (“Immersion”)] for failure to state a claim." Immersion "develops and licenses 'haptics' technology which . . . allows high-tech electronic devices to produce tactile feedback to the user." Immersion had not turned a profit since it went public, and was pressured by investors to become profitable. In 2007, Immersion reported profitable quarters due to increased revenue in its Medical Division. In 2009, “Immersion disclosed a potential problem with its previously reported revenues.” Immersion announced that an investigation was underway, and in response, its stock price dropped. The investigation later confirmed that revenue recognition errors had occurred. Loos, the representative of the putative class, filed a complaint, which Immersion moved to dismiss for failure to state a claim. The district court granted the motion stating that Loos "failed to adequately plead the scienter and loss causation elements of his claims." The district court allowed Loos to amend his complaint, however, the amended complaint asserted the same claims. Immersion again motioned to dismiss on the same grounds, and the district court granted the dismissal. On appeal, the Ninth Circuit reviewed whether Loos had adequately proven the loss causation element of a securities fraud claim. In the pleading stage, "the plaintiff must plausibly allege that the defendant’s fraud was 'revealed to the market and caused the resulting losses.'" The panel held that "the announcement of an investigation, without more, is insufficient to establish loss causation." An investigation announcement in itself does not reveal to the market that fraud has actually occurred. Loos did "not attempt[] to correlate his losses to anything other than the announcement." The panel therefore affirmed the district court's dismissal since the loss causation element was not adequately established. AFFIRMED.