## Facts

- Corinthian Colleges, Inc. operated for-profit vocational schools that derived substantial revenue from federal student aid programs.
- An institutional investor brought a putative class action alleging a company-wide scheme to falsify enrollment and financial-aid information to increase federal funding and inflate reported performance and stock price.
- The complaint alleged Corinthian was investigated by the U.S. Department of Education and the California Attorney General, and that the company failed to disclose those investigations and related misconduct.
- The complaint alleged corporate officers sold stock while possessing adverse nonpublic information.
- Plaintiffs identified two asserted corrective disclosures: (1) a media report of a Department of Education investigation at one campus, followed by a stock drop and a quick rebound; and (2) a company earnings guidance reduction followed by a stock decline.
- The district court dismissed the consolidated complaint with prejudice under Rule 12(b)(6) for failure to satisfy the PSLRA’s heightened pleading requirements, and plaintiffs appealed.

## Issues

1. Whether the complaint adequately pleaded loss causation by plausibly linking an economic loss to disclosures that revealed the alleged fraud to the market.
2. Whether the complaint pleaded a strong inference of scienter as required by the PSLRA.
3. Whether the complaint pleaded material falsity or misleading omissions with particularity, including whether the company had a duty to disclose ongoing governmental investigations.
4. Whether a control-person claim under Exchange Act § 20(a) could proceed absent a viable primary violation.

## Decision

- The Ninth Circuit affirmed dismissal with prejudice.
- The court held loss causation was not adequately pleaded because neither alleged disclosure revealed the previously concealed, company-wide fraud claimed in the complaint.
- The court held scienter was not pleaded with a strong inference; insider sales, generalized allegations of access to internal information, and confidential-witness accounts did not particularize knowledge or intent attributable to the defendants.
- The court held falsity was not pleaded with the required specificity; many challenged statements were nonactionable generalities or were not shown false when made.
- The court held the existence of governmental investigations, without more, did not create an automatic immediate duty to disclose on these allegations.
- The § 20(a) claim failed because the complaint did not plead a primary § 10(b) / Rule 10b-5 violation.

## Legal Principles

- To plead loss causation in a fraud-on-the-market case, a plaintiff must plausibly allege that a disclosure revealed a previously concealed truth about the alleged fraud and that the revelation substantially caused the stock-price decline; a price drop after bad news, standing alone, is insufficient.
- A negative earnings announcement does not itself establish corrective disclosure absent allegations tying the earnings decline to revelation of earlier misrepresentations or fraudulent conduct.
- Under the PSLRA, scienter must be supported by particularized facts yielding an inference of intent or deliberate recklessness that is at least as compelling as nonfraudulent explanations.
- Insider trading allegations support scienter only when sales are unusual or suspicious in timing or amount when viewed in context.
- Allegations that executives “must have known” based on access to internal systems are inadequate without identification of specific reports or data, their contents, and how they contradict public statements.
- Confidential-witness allegations must describe the witnesses’ roles and bases of knowledge with enough detail to support the pleaded inferences.
- An issuer generally has no automatic duty to disclose the mere fact of a governmental investigation; nondisclosure is actionable only if it renders existing statements materially misleading in context.

## Conclusion

The Ninth Circuit ended the case at the pleading stage, holding that the complaint did not meet the PSLRA’s heightened standards because it failed to connect stock-price declines to disclosures revealing the alleged fraud, failed to plead a strong inference of scienter, and failed to plead actionable falsity or a disclosure duty based solely on the existence of investigations.


Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049 (9th Cir. 2008)