6th Circuit Joins Majority, Accepting "Materialization of the Risk"

Last month, the 6th Circuit joined the majority view recognizing the "materialization of the risk" theory of loss-causation as an alternative to "corrective-disclosure" in securities litigation under Rule 10b-5.

The Public Securities Litigation Reform Act ("PSLRA") and federal jurisprudence (Tw-Iqbal) require pleading specific factual allegations of each element of Rule 10b-5 claim, including loss-causation (a proximate causal relationship between not merely the alleged misrepresentation or omission and the transaction, but also the plaintiffs' loss). Dura-Pharm, Inc. v. Broudo, 544 U.S. 336 (2005).

Under the "corrective disclosure" theory, the causal link between the alleged wrongdoing and the market loss stems from the market's negative reaction to a corrective disclosure, either correcting an earlier misrepresentation or outing an omission.

In omission cases, the "materialization of the risk" theory, alternatively posits that negative investor inferences from a later event or disclosure caused the market losses and were a foreseeable materialization of the risk concealed or omitted. The "materialization of the risk" theory has been recognized by the D.C., 3rd, 4th, 5th, 7th, 8th, 9th and 10th Circuits.

In this case, Freddie Mac's public statements glossed over the true extent of its exposure to the subprime housing market. That risk (and the losses) materialized when that subprime exposure came home to roost. The opinion is Ohio Public Employees Retirement System v. Federal Home Loan Mortg. Corp., No. 14-4189 (6th Cir. July 20, 2016).


Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas and Louisiana. He has over 30 years' experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile. © 2016 by Thomas K. Potter, III (all rights reserved).

Posted in: PSLRA
Jump to Page
Arrow icon Top

Contact Us

We use cookies to improve your website experience, provide additional security, and remember you when you return to the website. This website does not respond to "Do Not Track" signals. By clicking "Accept," you agree to our use of cookies. To learn more about how we use cookies, please see our Privacy Policy.

Necessary Cookies

Necessary cookies enable core functionality such as security, network management, and accessibility. These cookies may only be disabled by changing your browser settings, but this may affect how the website functions.

Analytical Cookies

Analytical cookies help us improve our website by collecting and reporting information on its usage. We access and process information from these cookies at an aggregate level.