Salvani v. ADVFN: Second Amended Complaint Dismissed for Failure to State a Claim

Joseph M. Salvani (“Salvani”) and JFS Investments, Inc. (together “Plaintiffs”) brought suit in the United States District Court of the Southern District of New York against InvestorsHub.com, Inc., its parent company ADVFN PLC (“ADVFN”), and John Doe (collectively, the “Defendants”) for violations under Sections 10(b) and 9(a)(4) of the Securities Exchange Act of 1934 (the “Act”) and six state law claims. Salvani v. ADVFN PLC, No. 13 Civ. 7082 (ER)., 2014 BL 263638 (S.D.N.Y. Sept. 23, 2014). The court dismissed Plaintiffs’ Second Amended Complaint sua sponte pursuant to Rule 12(b)(6) for failure to state a claim upon which relief can be granted.

According to the complaint, InvestorsHub was an internet content provider, operating under the control of ADVFN, for traders and other securities professionals who posted messages seeking public review and comment. Salvani’s complaint arose out of a message defendant Doe allegedly posted on September 5, 2013, to an InvestorsHub forum entitled “CodeSmart Holdings, Inc. (ITEN),” which alleged Salvani was a “former broker barred from the financial industry” and was involved in a “pump and dump” scheme with CodeSmart to inflate securities values and profit personally.

Plaintiffs alleged Doe posted the comments with the intention of injuring Salvani and manipulating CodeSmart’s stock price; and, as a result of Doe’s comments, Salvani’s good reputation was damaged, JFS’s ability to perform under contract with CodeSmart was affected, and CodeSmart’s stock price declined. Plaintiffs claimed, shortly before Doe’s statements, CodeSmart stock “began to trade in unanticipated and unexplained volumes experiencing trading at losses and evincing signs of stock manipulation.” CodeSmart stock declined from $4.60 per share on August 30, 2013, to $1.82 per share on November 12, 2013.

Salvani made a written demand to InvestorsHub for the posts removal but InvestorsHub refused, and Salvani filed the suit under the federal securities laws. To state a private civil claim under § 10(b) of the Act and SEC Rule 10b-5, a plaintiff must plead the defendant made a material misrepresentation or omission with scienter in connection with the purchase or sale of a security, and the plaintiff relied on the misrepresentation or omission, subsequently causing economic loss. 

Defendant InvestorsHub argued Plaintiffs failed to plead reliance. Plaintiffs’ claims were not based on their own actual reliance on the false statements but on others reliance on the integrity of the market price. To rely on the integrity of the market theory, however, a plaintiff must allege that the market for shares was efficient. Because Plaintiffs did not allege CodeSmart was traded in an efficient market, they failed to properly plead reliance.

Defendant InvestorsHub also argued Plaintiffs failed to plead loss causation. Loss causation is typically shown by the reaction of the market to a corrective disclosure which reveals a prior misleading statement, or where a “concealed risk comes to light in a series of revealing events that negatively affect stock price over time.” Here, there was no corrective action taken regarding the misstatement. Plaintiffs did not identify a concealed risk that caused the value of the stock to decline when revealed; rather they alleged the false statement itself led to the decline in CodeSmart’s stock price. Because Plaintiffs did not demonstrate there was any corrective action or concealed risk that proximately caused the loss in value of CodeSmart’s stock, the court found Plaintiffs failed to properly plead loss causation.

The court dismissed Plaintiffs’ complaint pursuant to Rule 12(b)(6) for failure to state a claim upon which relief can be granted, and dismissed Plaintiffs’ claims arising under state law without prejudice. 

Primary materials for this case may be found on the DU Corporate Governance website.