## Facts

- Omnicom Group, Inc., through its subsidiary Communicade, invested in internet marketing companies in the late 1990s.
- By 2000, the investments declined substantially; Omnicom concluded the declines were not required to be written down as “other-than-temporary impairments,” and its auditor reviewed that position.
- In early 2001, Omnicom formed Seneca with Pegasus Partners II, L.P., transferring $47.5 million in cash and Communicade (holding the internet investments) to Seneca; Pegasus agreed to provide $25 million in cash.
- Omnicom publicly described the transaction as aimed at consolidating and pursuing opportunities in a depressed e-services market.
- Media outlets questioned whether Seneca was used to remove deteriorating assets from Omnicom’s balance sheet and avoid recognizing losses.
- In June 2002, Omnicom disclosed by Form 8-K that audit committee chair Robert Callander resigned.
- The same day, a Wall Street Journal article and other coverage reported on the resignation, discussed Callander’s concerns about accounting and disclosure, and renewed criticism of Seneca and internet-loss accounting.
- Omnicom’s stock price fell about 25% following this coverage.
- Shareholders filed a class action alleging violations of Exchange Act § 10(b) and Rule 10b-5 and control-person liability under § 20(a), claiming the June 2002 drop occurred when the “truth” about Seneca and related accounting emerged.

## Issues

1. Whether plaintiffs produced sufficient evidence of loss causation linking the June 2002 stock decline to alleged misstatements or omissions concerning Seneca and Omnicom’s internet-investment accounting.
2. Whether the Form 8-K, the Wall Street Journal article, and related media coverage constituted a corrective disclosure of previously concealed fraud or the materialization of a concealed risk.
3. Whether § 20(a) control-person claims can proceed absent a proven primary violation under § 10(b) and Rule 10b-5.

## Decision

- The Second Circuit affirmed summary judgment for defendants.
- Plaintiff failed to raise a genuine dispute of material fact on loss causation because the June 2002 price decline was not shown to result from a corrective disclosure or the materialization of a concealed risk tied to the alleged fraud.
- Because the § 10(b)/Rule 10b-5 claim failed, the § 20(a) control-person claim also failed for lack of an underlying primary violation.

## Legal Principles

- A private § 10(b)/Rule 10b-5 plaintiff must prove both transaction causation and loss causation: a causal connection between the alleged misrepresentation (or omission) and the economic loss.
- Loss causation may be shown through (1) a corrective disclosure revealing previously concealed facts showing the earlier statement was false, or (2) the materialization of a risk that was concealed by the fraud and later caused the loss.
- Media reports that repackage or negatively characterize information already available to the market, without adding new facts revealing falsity, do not qualify as corrective disclosures.
- The “materialization of risk” theory fails where the asserted risk (e.g., market criticism of disclosed accounting judgments) was not actually concealed from the market.
- An event study may show price movement associated with an event, but it cannot establish loss causation if the event did not, as a matter of law, reveal new fraud-related information.
- A § 20(a) control-person claim requires a primary securities-law violation; without it, the control-person claim must be dismissed.

## Conclusion

The court held that plaintiffs could not prove loss causation where the alleged “corrective” events consisted of a director’s resignation disclosure and press coverage that offered criticism and speculation based on already public information, rather than new facts revealing fraud or a concealed risk coming to fruition.


In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501 (2d Cir. 2010)