On August 7, 2014, the US Court of Appeals for the Ninth Circuit in Loos v. Immersion Corporation squarely addressed for the first time whether the announcement of an investigation establishes loss causation when pleading securities fraud and held that it does not (No. 12-15100, (9th Cir. Aug. 7, 2014)).

Immersion Corporation is a publicly-traded company listed on the NASDAQ stock exchange. While it reported profits in 2007, Immersion suffered from a series of quarterly losses from 2008 through 2009. On July 1, 2009, the company disclosed a potential problem with its previously reported revenues and announced an internal investigation. On August 10, 2009, it advised investors that its prior financial statements should not be relied upon due to irregularities in the Medical Division. Finally on February 8, 2010, Immersion disclosed its findings and admitted to making various reporting errors.

John Loos and several other stock purchasers filed class actions against Immersion in late 2009. After the cases were consolidated, Loos was designated as class representative. Loos then filed a consolidated complaint on behalf of himself and a class of shareholders during the relevant class period, alleging violations of the Securities Exchange Act of 1934 and Rule 10b-5 of the SEC's implementing regulations. The defendants moved to dismiss the complaint for failure to state a claim. The district court granted the motion, finding that the plaintiff failed to adequately plead the scienter and loss causation elements of the securities fraud claims. Loos amended the complaint but the district court once again dismissed the complaint for the same deficiencies. Loos appealed.

The Ninth Circuit affirmed the district court's decision. The court found that the announcement of the internal investigation was insufficient to establish loss causation. While the investigation was relevant to establishing loss causation, the mere risk or potential for fraud was insufficient. Rather, the standard requires the market to learn of and react to the fraud, as opposed to reacting to a company's poor financial health. In this case, the plaintiff failed to correlate his losses to anything other than the internal investigation announcement. His theory relied on Immersion's financial results and not the existence of an actual fraud. As a result, the court found that fraud could not be reasonably inferred from Immersion's poor financial earnings.

The court agreed with the US Court of Appeals for the Eleventh Circuit's reasoning in Meyer v. Greene (710 F.3d 1189 (11th Cir. 2013)). There, the Eleventh Circuit found that the announcement of an SEC investigation, without more, did not reveal fraudulent practices to the market because the market could not know what the results of the investigation would ultimately be.

The Ninth Circuit also found no abuse of discretion in dismissing the plaintiff's amended complaint with prejudice because he re-pled the same facts and legal theories. The court declined to address the plaintiff's scienter arguments.