The Fourth Circuit ruled yesterday that a plaintiff can sufficiently plead loss causation to establish a securities-fraud claim based on an “amalgam” of two theories:  corrective disclosure, and materialization of a concealed risk.  In so holding, the court concluded in Singer v. Reali that the issuer’s disclosure of a government subpoena and an analyst’s report discussing that subpoena collectively revealed sufficient additional information to connect the company’s alleged misstatements and omissions to the subsequent 40% stock-price drop.

Because of the Fourth Circuit’s “amalgam” analysis, it is unclear whether and, if so, to what extent the Singer decision is in tension with decisions by other Courts of Appeals holding that disclosures of governmental investigations or internal investigations do not, without more, sufficiently establish loss causation for pleading purposes.  Various appellate courts appear to be putting their own refinements on the analysis, and the law might not be entirely settled on this issue.


Singer is a securities class action against a medical-device company (TranS1, Inc.) and its officers.  The company derived its revenues almost entirely from the sale of a new system for spinal surgery and from a share of the reimbursements paid to physicians by health insurers and government-funded healthcare programs.  The company’s spinal-surgery system was unlike traditional procedures (which are coded as Category I for reimbursement purposes), so physicians who used the system were required to code it as Category III – a code that allegedly makes reimbursement less likely.

The plaintiff alleged that the defendants had engaged in a scheme to encourage physicians to avoid the Category III coding, thereby increasing the likelihood of reimbursement – and enhancing doctors’ willingness to use the company’s system.  The complaint also alleged that the company had failed to disclose to investors that it had engaged in this scheme and that its financial performance therefore depended on purportedly fraudulent conduct.

On October 17, 2011, after the market closed, the company filed a Form 8-K with the SEC reporting that it had received a subpoena issued by the Department of Health and Human Services “‘under the authority of the federal healthcare fraud and false claims statutes.’”  The next day, an analyst report opined that the subpoena “‘could be due to reimbursement communications’” and noted that half of the company’s revenues came from physicians still using a Category I rather than a Category III code.  The company’s stock price fell 40.7% that day.

The District Court dismissed the case based on the plaintiff’s failure to plead a material misrepresentation or omission and scienter, although the court held that the plaintiff had adequately pled loss causation.  Both sides appealed.  The Fourth Circuit, in a split opinion, reversed the dismissal, concluding that the plaintiff had adequately pled a securities-fraud claim.

Fourth Circuit’s Decision

The majority first held that the plaintiff had adequately alleged a material omission.  The company had chosen to discuss its reimbursement practices, so it therefore “possessed a duty to disclose its alleged illegal conduct.”  The company had violated that duty and acted deceptively by “omitt[ing] the fraudulent reimbursement scheme.”  The majority also concluded that the defendants had acted with scienter.

Perhaps more interesting is the court’s loss-causation analysis.  The court began by setting out the two theories of loss causation:  (i) the “corrective disclosure theory,” under which a plaintiff may allege that the “company itself made a disclosure that publicly revealed for the first time that the company perpetrated a fraud on the market by way of a material misrepresentation or omission,” and (ii) the “materialization of a concealed risk theory,” under which a plaintiff may plead that “news from another source revealed the company’s fraud” even if the company itself never made a corrective disclosure.

The majority held that, “pursuant to an amalgam of the corrective disclosure and materialization of the concealed risk theories, the facts revealed in the Form 8-K and the analyst report were sufficient to establish exposure for purposes of the loss causation element, because those facts collectively suggest[] [the Company] perpetrated a fraud on the market.”  The Form 8-K and the analyst report had collectively informed the market that (i) the company had received a subpoena under the “‘federal healthcare fraud and false claims statutes,’” (ii) the subpoena sought “‘reimbursement communications with physicians,’” and (iii) “approximately ‘half of TranS1’s revenues [were coming] from physicians still using [a Category I] code’” rather than the appropriate Category III code.

The majority did not discuss decisions from other Circuits rejecting or at least questioning the proposition that mere disclosure of a government investigation – without more – can establish loss causation at the pleading stage.  But the dissent cited two of those decisions and opined that the plaintiff had failed to establish loss causation (as well as a material omission and scienter).


The Fourth Circuit’s decision adds to the debate about whether and the extent to which disclosures of governmental or internal investigations can establish loss causation.  Some courts have expressed discomfort with this proposition, reasoning that the mere existence of an investigation or subpoena does not prove that any wrongdoing actually occurred – and that anyone who jumps to that conclusion is just speculating.  A number of courts have therefore sought to cabin the use of investigations as evidence of loss causation.

For example, the Eleventh Circuit held in Meyer v. Greene, that the announcement of an SEC investigation is not a corrective disclosure, at least without a later disclosure of actual wrongdoing.  The Fifth Circuit held in Public Employees’ Retirement System of Mississippi v. Amedisys, Inc., that the commencement of a governmental investigation usually is not evidence of loss causation, but can be considered as a factor.  And although it had previously held that simple disclosures of investigations are not corrective disclosures, the Ninth Circuit later clarified in Lloyd v. CVB Financial Corp., that the announcement of an SEC investigation can show loss causation if coupled with subsequent corrective disclosures.

The Singer decision’s loss-causation analysis is not necessarily out of step with the rulings in other appellate cases, because the majority’s “amalgam” approach arguably relied on more than the mere disclosure of the government subpoena.

First, the majority noted that the analyst report had disclosed the purportedly new information that, “despite the . . . nearly three-year-old Category III coding requirement and the Company’s purported ‘strong efforts to educate physicians about correct coding,’” approximately “‘half of TranS1’s revenues [were coming] from physicians still using [a Category I] code.’”

Second, the company had settled a qui tam suit under the False Claims Act based on the same underlying allegations and had paid the government $6 million to resolve allegations of fraud concerning federal government programs (although the company had denied liability in the settlement).  The qui tam settlement thus might have brought the case within the ambit of other appellate decisions holding that disclosure of a government investigation can constitute evidence of loss causation if coupled with subsequent corrective disclosures or findings of misconduct.  But the majority did not grapple with those other cases and did not try to align its decision with them on that basis.

We will see whether the Singer decision is construed as an expansion of the circumstances in which disclosure of a government investigation can suffice to establish loss causation – or whether it is read as just another variant of the emerging principle that disclosures of governmental investigations, without anything more, are not enough.