Corporate Counsel Daily, Appellate court confirms short-seller report wasn't enough for loss causation, (Apr 9, 2025)

By Rodney F. Tonkovic, J.D.

The report's publisher admitted that quotations were not precise transcripts, giving it license to "say just about anything and cloak it in the imprimatur of truth in order to make a buck."

A Fourth Circuit panel affirmed the dismissal of a complaint alleging that a short-seller report spilled the beans on a quantum computing company's alleged "brazen hoax." The report, published by an anonymous short-seller, asserted that the company had perpetrated a fraud on the market as to the company's value. The panel concluded that the shareholders failed to clear the high bar of showing that an anonymous report by a self-interested party that disclaimed its own accuracy revealed the truth of the company's alleged fraud on the market (DeFeo v. IonQ, Inc., No. 24-1709 (4th Cir. Apr. 8, 2025)).

Defendant IonQ, Inc. makes quantum computing hardware and software. In September 2021, after a months-long campaign encouraging the vote, the shareholders of dMY Technology Group, a technology-focused SPAC, approved a merger with IonQ (the new company was called IonQ).

Stinging report. In May 2022, Scorpion Capital LLC published a report indicating that IonQ was a "quantum Ponzi scheme." Among other findings, the report said that IonQ's claim to have developed the most powerful quantum computer was a "brazen hoax" and that its revenue was driven by phony related-party deals.

All that said, the report also revealed that Scorpion capital was short on IonQ stock and that the nonpublic information in the report could be inaccurate. Plus, the quotes appearing within might not be credible in part due to the fact that those quoted received compensation for their conversations and could have conflicts of interest or biases with respect to IonQ.

IonQ issued a statement that the report was intended to manipulate IonQ's stock price and encouraged investors to ignore it. Despite this, IonQ's stock price fluctuated and dropped significantly within several days.

District court. A securities class action was filed soon after the report's release alleging that IonQ failed to disclose material facts in an effort to induce approval of the merger and inflate its share price. The complaint was dismissed with prejudice after the district court concluded that it was implausible that investors would believe the truth was revealed by an anonymously sourced short-seller report that would not guarantee its own accuracy.

The plaintiffs then moved for reconsideration, and the court found that granting leave to amend would be futile and denied a motion for reconsideration. As before, the plaintiffs' proxy claims were based on losses attributed to the Scorpion report and the defendants' response to it, but there were no new allegations as to any truth in the report or indicating that investors believed the report. The complaint's fraud claims failed for the same reasons.

No loss causation. On appeal, the shareholders asked to vacate the order granting IonQ's motion to dismiss. At issue was whether loss causation was pleaded, and the panel's answer was "No."

The panel was persuaded by a Ninth Circuit case concluding that short-seller publications—like the Scorpion report here—cannot plausibly expose the truth of a company's fraud. The Ninth Circuit said that an anonymous report authored by self-interested short sellers who disavow accuracy is not adequate to plead loss causation, while pointing out that this is not a categorical ban on using short-seller reports to plead loss causation.

In this case, the report relied on anonymous sources for its nonpublic information and disclaimed its accuracy. As the court put it, Scorpion had editorial license to "say just about anything and cloak it in the imprimatur of truth in order to make a buck." It was implausible, the court said, that these statements accompanied by those kinds of disclosures, published by an activist short seller, would reveal some new truth to the market. As a result, the shareholders failed to clear the high bar of showing that the report revealed the truth of IonQ’s alleged fraud to the market.

The case is No. 24-1709.

Attorneys: Brian Peter Calandra (Pomerantz LLP) for Anthony DeFeo, Cheon Jong Ku and Ng Yu. Ryan Edward Blair (Cooley LLP) for IonQ, Inc., Peter Chapman and Thomas Kramer. James R. Carroll (Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates) for Niccolo De Masi, Harry You, Darla Anderson, Francesca Luthi and Charles Wert.

Companies: IonQ, Inc.

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