On July 20, 2016, in Ohio Pub. Employees Ret. Sys. v. Fed. Home Loan Mortgage Corp., the US Court of Appeals for the Sixth Circuit joined the majority of circuits that have recognized the viability of alternative theories of loss causation in actions alleging securities fraud by allowing Plaintiff to plead the materialization of the risk theory ( (6th Cir. July 20, 2016)).

The Ohio Public Employees Retirement System (OPERS), a state pension fund serving Ohio public employees, lost significant value when the price of its shares of Freddie Mac's stock plummeted in late 2007 after Freddie Mac's investments, risk management system, and financial condition and status were revealed. OPERS filed a securities fraud class action on behalf of purchasers of Freddie Mac common stock in January 2008, alleging that Freddie Mac violated §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission (SEC) Rule 10b-5 by concealing its overextension in the subprime mortgage market and making other material misrepresentations and omissions to investors. OPERS served first, second, and third amended complaints, all of which survived motions to dismiss. In April 2013, the presiding judge recused himself and the case was reassigned, at which time Freddie Mac was granted leave to file a renewed motion to dismiss. The district court granted that motion and concluded that OPERS had failed to adequately plead the loss causation element of its securities fraud claim because OPERS pled the materialization of the risk argument, which had not been adopted by the Sixth Circuit. On appeal, OPERS argued that the district court erred when it rejected the materialization of the risk theory of loss causation. The Sixth Circuit agreed.

Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation reform Act of 1995 (PSLRA) heightened the pleading standards for a complaint alleging fraud or mistake. The Sixth Circuit explained that, to make out a prima facie securities fraud action under §10(b) and SEC Rule 10b-5, a plaintiff must allege:

Loss causation is "the causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff." Lentell v. Merrill Lynch Co., 396 F.3d 161, 172 (2d Cir. 2005). In the securities fraud context, "a misstatement or omission is the 'proximate cause' of an investment loss if the risk that caused the loss was within the zone of risk concealed by the misrepresentations and omissions alleged by a disappointed investor." Id.

The Sixth Circuit had previously ruled in an unpublished decision that loss causation could be shown through a corrective disclosure theory. Under that theory, a plaintiff may allege loss causation on the ground that the market reacted negatively to a corrective disclosure of fraud made by a defendant. The court acknowledged, however, that a decisive majority of circuits have also recognized the alternative theory of materialization of the risk, where a plaintiff may allege "'proximate cause on the ground that negative investor inferences,' drawn from a particular event or disclosure, 'caused the loss and were a foreseeable materialization of the risk concealed by the fraudulent statement.'" In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501, 511 (2d Cir. 2010) (citing ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 107 (2d Cir.2007)).

The Sixth Circuit joined the majority of its sister circuits in formally adopting the materialization of the risk theory, recognizing that defendants accused of securities fraud should not escape liability by simply avoiding a corrective disclosure. The court reversed the district court's rejection of OPERS' materialization of the risk argument in response to Freddie Mac's motion to dismiss and remanded for further proceedings.