The Eleventh Circuit recently held that Article III standing is not negated by a failure to state a claim on loss causation grounds. Carpenters Pension Fund of Ill. v. MiMedx Grp., Inc., 73 F.4th 1220 (11th Cir. 2023).
Carpenters, the lead plaintiff in this consolidated securities class action, purchased and sold stock in MiMedx, a global supplier of amniotic issue products, at various points in 2017 and 2018, ultimately selling the last of its stock in February 2018. In its complaint against MiMedx, certain of MiMedx’s executive officers, and MiMedx’s former auditor, Carpenters alleged that MiMedx had reported “explosive growth” in revenue from 2012 to the third quarter of 2017, but that unbeknownst to investors, MiMedx had engaged in “myriad improper and illicit sales and distribution practices, as well as a massive accounting fraud perpetrated at the behest of its executive leadership.” The complaint alleged a number of partial corrective disclosures between December 2014 and December 2018 that caused statistically significant drops in MiMedx’s stock price, culminating in a disclosure by MiMedx in June 2018 that nearly six years of financial statements were materially misstated and required restatement.
Carpenters brought the following claims on behalf of the putative class: (1) Count I for violations of § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated under that Act, 17 C.F.R. § 240.10b-5(b), against the MiMedx defendants; (2) Count II for violations of § 10(b) and Rule 10b-5 against the auditors; and (3) Count III for violations of § 20(a) of the Exchange Act against MiMedx’s former executive officers. Defendants moved to dismiss on grounds of lack of standing and failure to plead loss causation.
Judge William M. Ray, II, of the Northern District of Georgia granted the motion to dismiss, holding that (1) in order to have standing, Carpenters was required to plausibly allege a causal connection between its injury and Defendants’ challenged actions, and (2) Carpenters could not establish loss causation because it sold all of its MiMedx stock in February 2018, before the company’s June 2018 corrective disclosure revealed to the market the falsity of a prior statement.
The Eleventh Circuit, in an opinion written by Judge Barbara Lagoa, vacated the district court’s order relating to standing but affirmed the order dismissing the complaint for failure to plead loss causation.
Under Article III, to have standing, the plaintiff’s injury must be “fairly traceable to the challenged action of the defendant, and not the result of the independent action of some third party not before the court.” Ga. Ass’n of Latino Elected Offs., Inc. v. Gwinnett Cnty. Bd. Of Registration & Elections, 36 F.4th 1100, 1115 (11th Cir. 2022) (quoting Lujan v. Defs. of Wildlife, 504 U.S. 555, 560-61 (1992). The Eleventh Circuit concluded that the district court had erred in its traceability analysis:
The district court appears to have equated a failure to adequately allege an element of a cause of action and thus a failure to state a claim with the nonexistence of a “Case” or “Controversy” for purposes of Article III standing. But they are not the same. And while a plaintiff may both lack standing and fail to state a claim, it is also true that a plaintiff can meet the requirement for constitutional standing but nonetheless fail to state a claim.
Here, the Eleventh Circuit explained, Carpenters had alleged that it had suffered a decrease in the value of its MiMedx shares that was caused by, or fairly traceable to, Defendants’ allegedly misleading statements and actions about MiMedx. “Taken as true,” the court held, “the allegations sufficiently satisfy our test for Article III’s traceability requirement.”
Regarding loss causation, the Eleventh Circuit considered the various categories of alleged partial corrective disclosures and held that the district court had not erred in holding that they failed to establish loss causation. Regarding the first category of disclosures, the Eleventh Circuit held that MiMedx had not “corrected” any “falsehood” because in those disclosures the defendants had “provided misleading statements to conceal the alleged ongoing fraud by the company and, at the time, the market continued to digest this misinformation.” The second category – news articles and analyst reports – likewise fell short because the information disclosed had been gleaned entirely from public filings and other publicly available information. The third category – announcements of lawsuits and investigations into the company’s fraudulent practices – was insufficient because “[t]he announcement of an investigation reveals just that – an investigation – and nothing more.” Meyer v. Greene, 710 F.3d 1189, 1201 (11th Cir. 2013). Carpenters criticized Meyer as taking a more restrictive view of what types of disclosures qualify as corrective relative to other circuits, but the court stated that it is bound to follow Meyer under the prior precedent rule, unless it is overruled by the Eleventh Circuit sitting en banc or by the Supreme Court.
More fundamentally, however, the Eleventh Circuit ruled that loss causation was lacking because Carpenters had sold all of its MiMedx stock in February 2018, months before the later finding of fraud or wrongdoing alleged in the complaint. In doing so, the court stated that it was following Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 342 (2005) (if a purchaser sells its shares “before the relevant truth begins to leak out, the misrepresentation will not have led to any loss”), and FindWhat Investment Group v. FindWhat.com, 658 F.3d 1282, 1315 (11th Cir. 2011) (“When the truth underlying the falsehood is finally revealed, … the market will digest the new information and cease attributing the artificial inflation to the price” and “[a]t that time, investors who purchased at inflated prices (and who still hold their stock) will suffer economic loss.”)