Extracted from Law360
Frequently, a short seller issues a public report claiming that a public company has engaged in some type of wrongdoing, with the deliberate purpose of causing the public company's stock price to decline. The short seller issuing the report profits from the decline in the public company's stock because it has taken a short position on the stock, and their reports trade mostly in gossip and innuendo, rather than fact.
These reports frequently produce their intended effect, causing a public company's stock price to decline. In turn, plaintiffs in securities class actions attempt to rely on stock drops after these short-seller reports are issued as the basis for claims under the federal securities laws.
In recent years, federal courts have begun curtailing plaintiffs' ability to rely on short-seller reports as corrective disclosures for pleading the loss causation element of a federal securities law claim. On April 8, the U.S. Court of Appeals for the Fourth Circuit in Defeo v. IonQ Inc. joined the U.S. Court of Appeals for the Ninth Circuit in restricting this pleading tactic by securities class action plaintiffs.[1]
The Fourth Circuit's Decision on Short-Seller Reports
In October 2020, IonQ, a publicly traded company that develops quantum computers,[2] announced a new product, a 32-qubit quantum computing system, that would have been the most powerful quantum computer available to date.[3] In May 2022, Scorpion Capital LLC published a short-seller report purporting to rely on public information and interviews with unnamed former IonQ employees, customers and quantum computing experts.[4]
Typical of these types of reports, Scorpion Capital claimed "IonQ was running a 'quantum Ponzi scheme.'"[5] It asserted that IonQ's claims about the quantum computer's technical specifications were "completely outrageous" and "fraudulent," and that IonQ's revenue was driven by related party deals that only "creat[ed] the illusion of commercial momentum."[6]
Critically, however, the report also included "a long set of prefatory disclosures" that revealed: (1) Scorpion Capital "is short on IonQ stock," i.e., it stood to profit if IonQ's stock price declined in response to the report; (2) "the nonpublic information in the Report may be inaccurate"; and (3) the report did not "reflect all information" Scorpion Capital learned from the alleged former employees and experts, and Scorpion Capital may have excluded "certain positive comments and experiences with respect to IonQ."[7]
Although IonQ's stock was largely stable immediately after the report was issued, it declined by almost 50% within two weeks.[8] Following the sharp decline in IonQ's price, IonQ shareholders filed a securities class action containing allegations closely tracking those from Scorpion Capital's short-seller report.[9]
The shareholders tried to rely on the short-seller report as a corrective disclosure to plead the loss causation element of a federal securities law claim.[10] The U.S. District Court for the District of Maryland, however, rejected their theory and dismissed the case.[11]
Now, the Fourth Circuit has affirmed the district court's decision granting the defendant's motion to dismiss because the short-seller report the plaintiffs relied on to plead their claim wasn't a corrective disclosure for purposes of loss causation.[12]
The Fourth Circuit hadn't previously "had occasion to consider whether a short-seller publication ... can plausibly expose the truth of a company's fraud as needed to plead loss causation."[13] The Fourth Circuit, however, noted that in 2020, the Ninth Circuit, in In re: Bofl, "considered this precise circumstance, and concluded that similar publications cannot meet the pleading standard."[14]
The Ninth Circuit in that case examined whether a series of blog posts analyzing a company's public statements, which were anonymously published and acknowledged that the authors held short positions in the relevant company, could be considered corrective disclosures.[15]
The Ninth Circuit found that it wasn't plausible that the market reasonably perceived anonymous blog posts from short sellers as revealing the falsity of prior misstatements.[16] The court noted that a reasonable investor reading the posts would have taken the content with a "healthy grain of salt," since the short sellers included a disclaimer that they have made "no representation as to the accuracy or completeness of the information set forth" in the posts.[17]
The Fourth Circuit also could have looked to similarly persuasive precedent from the U.S. Court of Appeals for the Eleventh Circuit, which the Ninth Circuit relied upon in reaching its conclusions.[18] The Eleventh Circuit took a slightly different route to finding that a short-seller report was not a corrective disclosure for purposes of loss causation.
In 2013, the Eleventh Circuit held in Meyer v. Greene that a short-seller report containing only a short seller's opinion based on already-public information couldn't be a corrective disclosure since the only information new to the market was the short seller's opinion, which could not reveal the falsity of any prior statements.[19]
And in 2023, in Carpenters Pension Fund of Illinois v. MiMedx Group Inc., the Eleventh Circuit reaffirmed the view that an analyst report couldn't serve as a corrective disclosure when the report only repeated information already in the public domain.[20]
In its April decision, the Fourth Circuit found "the Ninth Circuit's jurisprudence [on this issue] persuasive."[21] As the Fourth Circuit explained, "[b]orrowing the Ninth Circuit's language," the plaintiffs "fail to clear the high bar of showing that the [Scorpion Capital] Report revealed the truth of IonQ's alleged fraud to the market."[22]
In particular, the Fourth Circuit noted that the Scorpion Capital report "relies on anonymous sources for its nonpublic information and disclaims its accuracy."[23] The appeals court also found it "particularly troubling" that Scorpion Capital "admits some quotations" in the report "may be paraphrased, truncated, and/or summarized solely at our discretion, and do not always represent a precise transcript of those conversations."[24]
This disclaimer, the Fourth Circuit explained, "gives Scorpion Capital the kind of editorial license that could allow it to say just about anything and cloak it in the imprimatur of truth in order to make a buck."[25] In all, the Fourth Circuit held that these "disclosures lead to the conclusion that 'the character of the' [Scorpion Capital] Report 'rendered it inadequate' to reveal any alleged truth to the market."[26]
Although the Fourth Circuit, like the Ninth Circuit, left open the possibility that "[i]n appropriate circumstances, a short-seller report's financial motivation may not disqualify it from use in litigation as alleging that it exposed a company's fraud to the market," many reports by short sellers feature the disclaimers that disqualified the Scorpion Capital report from serving as a corrective disclosure in a securities class action.[27]
The Fourth Circuit's decision will serve as a powerful and persuasive new precedent for defendants as courts continue curtailing securities class action plaintiffs' use of short-seller reports to plead federal securities law claims.
[1] No. 24-1709, 2025 U.S. App. LEXIS 8216 (4th Cir. Apr. 8, 2025).
[2] Id. at *3.
[3] Id.
[4] Id. at *4.
[5] Id.
[6] Id. at *5.
[7] Id. at *6-7.
[8] Id. at *8.
[9] Id. at *8-9.
[10] Id. at *15-16.
[11] Id. at *16.
[12] Id.
[13] Id.
[14] In re: Nektar Therapeutics Secs. Litig. , 34 F.4th 828, 839 (9th Cir. 2022); In re: BofI Holding Inc. at 794.
[15] In re: BofI Holding, Inc. Sec. Litig. , 977 F.3d 781, 796-97 (9th Cir. 2020).
[16] Id. at 797.
[17] Id.
[18] See Carpenters Pension Fund of Ill. v. MiMedx Grp., Inc., 73 F.4th 1220, 1246 (11th Cir. 2023); Meyer v. Greene , 710 F.3d 1189, 1198 (11th Cir. 2013).
[19] 710 F.3d at 1199.
[20] 73 F.4th at 1246.
[21] 2025 U.S. App. LEXIS 8216, at *16.
[22] Id. at *18.
[23] Id.