CALIFORNIA: An Introduction to Litigation: Securities

Issuers suffering stock price drops after reporting negative news often become the targets of class action lawsuits alleging violations of Sections 10(b) and 20(a) of the Exchange Act. Historically, issuers embroiled in such “strike suits” were faced with a difficult choice: engage in costly and resource-consuming discovery or quickly settle a meritless lawsuit—often at a premium. This changed in 1995, when Congress passed the Private Securities Litigation Reform Act (PSLRA), which imposed two features aimed at curtailing baseless securities class actions: (i) a heightened pleading standard, and (ii) an automatic stay of discovery pending the outcome of any motion to dismiss filed by defendants.

While the PSLRA has considerably leveled the playing field among litigants, it has not stemmed the tide of securities class action filings, which have risen steadily in recent years. In 2024 alone, plaintiffs filed 225 new securities class actions, a 4.8% increase over filings in 2023. This uptick has been accompanied by a shift from cases concerning cryptocurrency and de-SPAC transactions to filings targeting companies in the AI space, among other industries.

Although the nature and number of filings has changed and will continue to change, the one constant is the critical role the courts play in reframing the application and enforcement of the securities laws, both to clarify ambiguous standards and to “course correct” when confronted with novel substantive issues. While securities litigation remains a dynamic area of the law, recent jurisprudence has trended toward clarifying and strengthening elements of the litigation pleading and class certification process in ways that could prove beneficial for defendants.

The Supreme Court’s Rejection of “Pure Omissions” Liability

One of the most significant rulings in recent years was the Supreme Court’s decision in Macquarie Infrastructure Corp. v. Moab Partners (2024). Issuers have long been allowed to remain silent without violating the federal securities laws, even as to issues that investors consider material. Plaintiffs, though, have repeatedly challenged this principle, attempting to plead violations of Section 10(b) and Rule 10b-5 when issuers omit information about “known” trends and uncertainties. The Supreme Court’s Moab decision rejected that “pure omissions” theory of liability, ostensibly narrowing the grounds for Section 10(b) litigation. Lower courts, including the First and Second Circuits, have been quick to react, dismissing claims predicated on a “pure omissions” theory of liability.

Recent Case Law on Shareholder Standing

Another key development concerns shareholder standing. In a groundbreaking 2022 decision, Menora Mivtachim Insurance Ltd. v. Frutarom Industries Ltd., 54 F.4th 82 (2d Cir. 2022), the Second Circuit issued a bright-line rule, limiting standing in securities class actions to purchasers or sellers of securities “about which a misstatement was made.” This decision poses significant implications for investors in the M&A and de-SPAC context, because it denies shareholders of the buyer standing to sue the seller—and the sellers’ officers and directors—on the basis of materially false or misleading public statements about the seller prior to the transaction. While the full import of the Second Circuit’s reasoning remains to be seen, it has quickly gained traction, having already been adopted by the Ninth Circuit.

Evaluating Short Seller Reports

An equally noteworthy development involves cases filed on the basis of financially motivated short seller reports. Although short sellers run the gamut from well-known and well-resourced firms to anonymous bloggers, all have one thing in common: they seek to expose perceived corporate mismanagement in the hopes of taking a short position against the company’s share price. To do so, the short seller will publish its findings—the accuracy of which is often suspect—to exert negative pressure on the share price that it can then use to capitalize on its short position.

Traditionally, motions to dismiss in suits catalyzed by short seller reports have attacked the reliability of those reports. More recently, though, defendants have tried a different tactic: arguing that losses suffered from a company’s share price drop cannot be attributed to alleged fraudulent activity when a short seller is involved.

Certain courts have adopted this reasoning. In April 2025, the Fourth Circuit considered, as a matter of first impression, whether a plaintiff could plead loss causation based on revelations in a short seller report. Defeo v. IonQ, Inc., 134 F.4th 153, 163-64 (4th Cir. 2025). The court’s analysis examined recent Ninth Circuit precedent, which sets a “high” pleading bar for loss causation when the report’s authors are self-interested and anonymous. Specifically, it requires plaintiffs to plead both that the reports contained “new” information and that the market reasonably perceived the reports as revealing the falsity of the defendant’s prior statements. The Fourth Circuit adopted this approach, finding that the information conveyed in the underlying short seller report failed this test because it cited anonymous sources, disclaimed its own accuracy, and admitted that various quotations may have been “paraphrased, truncated, and/or summarized solely at [the author’s] discretion.” These features made it implausible that the report would reveal “new” truths that “caused” the issuer’s ensuing stock price drop.

Class Certification – Linking Corrective Disclosures to Alleged Misrepresentations

Class certification has also reached an inflection point. Opposing class certification has, historically, proven difficult for defendants tasked with refuting an assumption that alleged misstatements impacted the price of the at-issue securities. The jurisprudence, however, appears to be shifting to a more issuer-friendly stance. While the shift is small, not seismic, it creates a potential foothold for change.

The shift began with the Supreme Court’s 2021 decision in Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System, 595 U.S. 113 (2021). Countering what had become a rote assumption that any purported misstatement could potentially impact an issuer’s stock price, the Court implemented a higher level of scrutiny, holding that trial courts must consider whether alleged misstatements are too generic to have impacted a company’s stock price. This means that trial courts must consider the relationship between the purported misstatement and the “corrective disclosure” in determining whether there was sufficient parity to support an inference of price impact.

Goldman’s new standard has reinvigorated class certification opposition in securities cases. By way of example, a court in the Eastern District of Michigan applied Goldman’s analysis, concluding that a CEO’s references to “strong consumer demand” and a belief that interest rates would not have a material impact on the company’s business “one way or the other” were too generic when compared to later “corrective disclosures” to support an inference of price impact. Shupe v. Rocket Cos., Inc., 752 F.Supp.3d 735, 778–79 (E.D. Mich. 2024).

While Goldman’sfull impact will take years to manifest, it remains, in the short term, an important development for defendants seeking to defeat or overturn class certification.

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In conclusion, the recent trends confirm a perennial truth: securities class action litigation is anything but static. Just as the targets, filings, and metrics continue to shift, so too has the jurisprudence, which continues to evolve in ways that will impact issuers for decades to come.