Appeals Court Rules on Securities Fraud Claim

by Doug Chartier

A blogger’s opinion could conceivably drive down a company’s stock price. But it might not be “factual” enough to prove the company’s disclosures were false or misleading, according to a new federal appellate ruling.

On July 30, the 10th Circuit Court of Appeals held that blog posts — albeit prominent ones that might have triggered a drop in the company’s share price — weren’t enough to buoy a lawsuit that a cybersecurity company misled investors to inflate its stock value. The appellate court upheld the district court’s dismissal of securities fraud claims against root9B Technologies, finding that the plaintiffs didn’t plead sufficient facts to support their fraud allegations. While the ruling might not get much mileage in other securities cases, it highlights the issue of a company’s vulnerability to critical online content, even if that content is unlikely to drive a successful fraud claim against the company.

Plaintiff David Hampton claimed root9b violated the Securities and Exchange Act section 10b by making two sets of misleading statements:that it claimed to have proprietary technology that it didn’t, and that a hacking attempt it thwarted was carried out by the Russian government. To support his fraud claims, Hampton pointed to online posts that he said contradicted root9B’s declarations to investors.

Root9B gained notoriety in 2015 when it claimed to have foiled a Russian state-sponsored hacking attempt on several international banks. The company issued a press release May 12, 2015, saying it “discovered, identified, and reported” a pending cyber attack that it attributed to the hacker group Sofacy. CEO Joseph Grano repeated those claims in interviews on Fox Business, and root9b’s stock shot up 42 percent in about a week.

To read this story and other complete articles featured in the August 6, 2018 print edition of Law Week Colorado, copies are available for purchase online.