Hoang v. ContextLogic, Inc.

Background

This proposed class action concerns claims under Sections 11 and 15 of the Securities Act of 1933 against ContextLogic, Inc., referred to in the opinion as Wish, certain of its officers and directors, and the underwriters of Wish’s initial public offering. Plaintiffs alleged that Wish’s December 15, 2020 registration statement omitted information about reduced advertising spending and user-acquisition efforts in certain emerging markets during the fourth quarter of 2020. They alleged that Wish’s stock price later fell by more than 29% after a May 2021 disclosure about continued reductions in advertising and user acquisition and a decline in monthly active users.

The court had previously granted motions to dismiss earlier versions of the complaint, allowing amendment. Plaintiffs abandoned their Exchange Act claims in their Second Amended Complaint and narrowed their Securities Act claims. On August 22, 2024, the court dismissed the Third Amended Complaint without leave to amend.

In that earlier ruling, the court found that the defendants had established a negative-causation defense. This defense allows defendants in a Securities Act case to show that the loss in the value of the stock resulted from factors other than the alleged omission or misstatement. The court relied in part on plaintiffs’ allegation that Wish’s stock price increased after the March 8, 2021 disclosure revealed the alleged pre-initial-public-offering conduct and remained above its March 8 closing price for two weeks. The court also found that the May 2021 disclosure concerned post-initial-public-offering activity and did not show that the alleged pre-offering omission had contributed to the later decline.

Motion to Alter the Judgment

Plaintiffs moved under Federal Rule of Civil Procedure 59(e) to alter the judgment. They argued that the court had committed a clear legal error by failing to apply what they described as a “but for” causation standard. They also argued that the court had improperly extended the Supreme Court’s decision in Dura Pharmaceuticals, Inc. v. Broudo, which addressed causation under Section 10(b) of the Exchange Act, to their Section 11 claims.

The defendants argued that the motion improperly raised arguments that could have been made before judgment and that the court had correctly applied controlling precedent. The court first found that the motion was procedurally proper because the parties had raised the negative-causation issue during the earlier motion-to-dismiss proceedings. The court therefore considered the motion’s merits.

Court’s Analysis

The court held that it had applied the correct legal standard. Under Ninth Circuit precedent, a defendant seeking to establish negative causation in a Section 11 case must show that the stock’s depreciation resulted from factors other than the alleged material misstatement. The defendant bears the burden of proof and a heavy burden. The Ninth Circuit’s “touches upon” standard provides that a plaintiff can overcome the defense when the alleged misrepresentation touches upon the reasons for the investment’s decline in value.

The court rejected plaintiffs’ argument that it had applied a proximate-causation standard from Dura. It explained that its earlier order had rejected the defendants’ invitation to extend Dura to Section 11 claims and had instead applied the Ninth Circuit’s “touches upon” standard.

Applying that standard again, the court found no basis to alter the judgment. The court reasoned that the market had reacted positively, rather than negatively, when the March 2021 disclosure revealed the alleged pre-offering conduct. The later stock-price decline followed the May 2021 disclosure concerning post-offering marketing activities. Based on the allegations in the complaint, the court concluded that the alleged omission in Wish’s registration statement did not touch upon the reasons for the May 2021 decline.

Disposition

The court found no clear error in its conclusion that the defendants had established negative causation and denied plaintiffs’ request to set aside the judgment. The order states: “Plaintiffs’ Motion to Alter the Judgment is DENIED.”