In private securities fraud action, while review of the sufficiency of the complaint is normally limited to the four corners of the complaint, the Fourth Circuit notes that it may take judicial notice of facts "capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned," under FRE 201, including the stock prices, in Katyle v. Penn Nat. Gaming, Inc., _ F.3d _ (4th Cir. March 14, 2011) (No. 09-2272)
Judicial notice can be used for a variety of matters that are “not subject to reasonable dispute” under FRE 201. A recent Fourth Circuit case shows how judicial notice can be used to consider the sufficiency of a claim alleged in a complaint.
The case involved a private securities fraud action brought by a group of investors against Penn National Gaming, a publicly corporation traded on the NASDAQ. After the company announced a leveraged buyout agreement, the stock price traded up toward the announced price. The company then made a series of corrective disclosures. The stock price then traded down. Ultimately, the leveraged buyout was terminated. The investors alleged securities fraud. The district court dismissed a second amended complaint for failure to allege loss causation, an essential element. The court also denied the plaintiffs’ motion for reconsideration:
Under the Supreme Court’s decision in Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 347 (2005), in order to plead loss causation with particularity, Plaintiffs must allege that Penn’s "share price fell significantly after the truth became known." They remain unable to meet this standard because none of the events Plaintiffs now raise constitutes a "corrective disclosure" under the Supreme Court’s decision in Dura and its progeny; furthermore, none of the events Plaintiffs cite can be said to have caused any significant fall in [Penn’s] stock price.Katyle, _ F.3d at _ (quoting district court ruling denying motion for reconsideration). Since a proposed amended complaint would not cure the deficiency, the action was dismissed and the plaintiffs appealed.
On appeal, the circuit framed the issue:
The sole issue presented here is whether Plaintiffs’ TAC [third amended complaint] sufficiently alleges loss causation based upon a purported series of partially corrective disclosures of a recurring material omission, such that the district court abused its discretion in refusing to vacate its judgment of dismissal and grant Plaintiffs leave to amend.Katyle, _ F.3d at _. As a general rule, on a motion to dismiss review is normally limited to the sufficiency of the allegations in the complaint. The circuit noted the scope of its review:
We may consider as well other sources that courts ordinarily examine when ruling on a Rule 12(b)(6) motion to dismiss a securities fraud complaint, "in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). Facts recited herein that are not contained within the four corners of the TAC are either found in documents referred to in the TAC or "capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned," and thus properly subject to judicial notice under Fed. R. Evid. 201. See, e.g., Cozzarelli v. Inspire Pharm. Inc., 549 F.3d 618, 625 (4th Cir. 2008) (considering stock analyst reports cited in the complaint in the context of a motion to dismiss); Greenhouse v. MCG Capital Corp., 392 F.3d 650, 655 n.4 (4th Cir. 2004) (taking judicial notice of published stock prices in the context of a motion to dismiss).
In its decision, the circuit considered the stock price at key junctures. Ultimately, the circuit affirmed the dismissal of the action: “Because the series of six partially ‘corrective’ disclosures alleged in the TAC did not, gradually or otherwise, reveal to the market any undisclosed truth about Penn’s undisclosed knowledge and resulting fraudulent omissions, any subsequent decline in Penn’s share price cannot be attributed to those omissions.” Katyle, _ F.3d at _.
The Katyle case provides an example of considering information outside the “four corners of the complaint” through judicial notice. For another example, see Taking Judicial Notice Of Stock Prices (Part I).