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On April 8, 2025, a unanimous Fourth Circuit panel affirmed dismissal of a putative securities class action arising out of a short-seller report for failure to plead loss causation. The appellate court imposed a 鈥渉igh bar鈥� on shareholders seeking to show that a short-seller report revealed a 鈥渘ew truth鈥� to the market, and held that the high bar was not cleared when the report relied on a mixture of public information and statements from anonymous sources for which the authors 鈥渃ould not authenticate their accuracy.鈥� The decision, which echoes a similar result from the Ninth Circuit, provides a valuable defense to public companies subject to inflammatory attacks from short sellers, which have increasingly led to follow-on stock drop lawsuits.听

Background: The Short Report

The lawsuit, Defeo v. IonQ, Inc., No. 24-1709 (4th Cir.), concerned IonQ, Inc., a public company that developed a purportedly cutting-edge quantum computing system. On May 3, 2022, a short-selling activist called Scorpion Capital LLC published a report calling IonQ鈥檚 quantum computing product a 鈥渂razen hoax鈥� and accusing the company of being a 鈥渟cam built on phony statements about nearly all key aspects of its business.鈥� The short-seller report was based on public information and interviews with unnamed former employees, customers, and industry experts. The short-seller report also disclosed, among other things, that (i) Scorpion Capital held a short position in IonQ stock and stood to realize gains if IonQ stock declined in value; (ii) the authors provided no representations regarding the accuracy of statements or opinions attributed to interviewees; and (iii) the quotations in the report 鈥渕ay be paraphrased, truncated, and/or summarized solely at [the authors鈥橾 discretion, and do not always represent a precise transcript of those conversations.鈥� IonQ鈥檚 share price declined in the week following publication of the report, and a putative class of shareholders sued alleging securities fraud based on the contents of the report.听

The district court dismissed the complaint, and subsequently denied plaintiffs鈥� request for leave to amend, holding that the complaint (and proposed amendments) failed to plead loss causation. Plaintiffs appealed to the Fourth Circuit.

The Fourth Circuit Affirms Dismissal

A unanimous three-judge panel of the Fourth Circuit affirmed the dismissal for failure to plead loss causation. The court explained that plaintiffs seeking to plead loss causation based on a short-seller report must clear a 鈥渉igh bar鈥� to show that the report revealed new, empirical facts to the market about the issuer鈥檚 supposed fraud. The allegations in this case failed to clear that bar for several reasons, including the author鈥檚 financial interest in a stock drop, the reliance on anonymous sources for nonpublic information and the disclaimers about the report鈥檚 accuracy, all of which made the report鈥檚 鈥渆videntiary value evaporate.鈥� The court explained that the disclosure about tailoring quotations was particularly troubling because 鈥渋t 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.鈥� Accordingly, the report was not a plausible source for exposing any purported fraud, and failed to plead loss causation.听

Implications

In recent years, plaintiffs鈥� firms have increasingly relied on uncorroborated allegations in short-seller reports as bases for securities fraud lawsuits.[1]听 Issuers facing such lawsuits may take comfort in the Fourth Circuit鈥檚 opinion, which clarifies that such reports cannot 鈥渞eveal any new truth to the market鈥� when they are based on a mixture of public information and descriptions of anonymous interviews of questionable veracity. Defendants facing such lawsuits should carefully review the underlying report鈥檚 disclosures to see if the short-seller鈥檚 statements and disclaimers can be used to undermine the shareholders鈥� theory of loss causation. 听The decision likewise reaffirms that it is not enough for loss causation to plead that new allegations of fraud hit the market鈥攚hether in a short-seller report or otherwise鈥攊f it is implausible to believe that the market perceived the allegations as true.听 The Fourth Circuit鈥檚 decision follows similar rulings out of the Ninth Circuit limiting the ability of shareholders to plead loss causation based on a short-seller report, and may provide momentum for other appellate courts to follow suit.听

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