Ninth Circuit holds that whistleblower allegations qualify as corrective disclosure in securities class action

In re Bofl Holding, Inc. Securities Litigation [PDF], a decision released on October 8, 2020, the U.S. Court of Appeals for the Ninth Circuit (the “Ninth Circuit”) concluded that allegations in a whistleblower retaliation lawsuit can serve as corrective disclosure in a securities class action.  In doing so, the Ninth Circuit rejected two categorical rules:

  • that allegations in a lawsuit, standing alone, can never qualify as corrective disclosure; and
  • that disclosure based on publicly available information can never constitute corrective disclosure. 

This decision appears to contradict a previous holding by the Eleventh Circuit that allegations made in related civil litigation cannot serve as stand-alone corrective disclosures.

In Ontario, courts have not considered this issue directly, but have held that a “public correction” or “corrective disclosure” under s. 138.3 of the Ontario Securities Act may take a number of forms and need not emanate from the defendant corporation.  It is likely not long until the plaintiffs’ class action bar raise similar arguments in this province that whistleblower allegations ought to serve as corrective disclosure.


The shareholders of Bofl Holding, Inc. (“Bofl”), a holding company for Bofl Federal Bank, filed multiple securities fraud lawsuits against Bofl and several of its officers and directors.  The suits were consolidated into a class action brought on behalf of all Bofl shareholders who purchased publicly traded shares between September 4, 2013 and February 3, 2016. 

The shareholders alleged that Bofl executives committed securities fraud by falsely portraying the company as a safer investment than it actually was.  In particular, the shareholders alleged that the defendants made false or misleading statements touting the bank’s conservative loan underwriting standards, its effective system of internal controls, and its robust compliance infrastructure.  Once the falsity of these statements was disclosed in a whistleblower lawsuit and blog posts offering negative reports about the company’s operations, the market reacted by driving down the price of Bofl’s stock. 

The defendants filed a motion to dismiss the shareholders’ complaint.  At first instance, the district court concluded that the shareholders had adequately pleaded the first five elements of their claim, but failed to adequately plead loss causation, or a causal connection between the defendants’ fraudulent conduct and the shareholders’ economic loss.  One way to prove loss causation is to show that the defendant’s fraud was revealed to the market through one or more “corrective disclosures” and that the company’s stock price declined as a result. 

The district court dismissed the complaint after concluding that neither a whistleblower lawsuit nor a series of blog posts could qualify as corrective disclosures.

The district court reasoned that, because the whistleblower lawsuit contained only “unconfirmed accusations of fraud,” it could not have disclosed to the market that Bofl’s alleged misstatements were actually false.  To qualify as corrective disclosure, the lawsuit had to be followed by “a subsequent confirmation” of the fraud, which the shareholders did not allege.  The district court also rejected the blog posts as corrective disclosures because each of them relied entirely on publicly available information.  The information they disclosed was presumably known to market participants and already reflected in the stock price.

Ninth Circuit decision

The Ninth Circuit reversed the district court’s judgment and held that the shareholders had adequately pleaded a viable claim.

The Ninth Circuit joined the Sixth Circuit in holding that it is not necessary to identify additional disclosure that confirms the truth of whistleblower allegations in order to adequately plead loss causation.  The Panel stated that if the market treats allegations in a lawsuit as sufficiently credible to be acted upon as truth, and the increase in the stock price attributable to the defendant’s misstatements is dissipated as a result, then the allegations can serve as corrective disclosure.

In distinguishing the current case from cases relied on in the district court’s analysis, the Ninth Circuit explained that the whistleblower lawsuit in this case disclosed facts that, if true, rendered false Bofl’s prior statements about its underwriting standards, internal controls, and compliance infrastructure.  The Panel also emphasized that the whistleblower was a former insider of the company who had personal knowledge of the facts alleged.

The Panel agreed with the district court that the blog posts in this case did not constitute corrective disclosure.  However, the Panel clarified that publicly available information can constitute corrective disclosure, but only if it can be plausibly inferred that the alleged corrective disclosure has provided new information that was not yet reflected in the company’s stock price.  The shareholders, however, failed to meet this more flexible standard.

Justice Lee dissented from the majority’s holding that plausible insider whistleblower allegations, standing alone, can qualify as corrective disclosure.  He stated that he would prefer a bright-line rule that requires an external disclosure or evidence that confirms the allegations in a whistleblower lawsuit.  Justice Lee also disagreed with the majority’s analysis about whether the blog posts should be considered corrective disclosures, preferring to base the decision solely on the grounds that the posts contained public information.


There is a trend in securities law, in both the U.S. and Canada, towards incentivizing whistleblower reporting.  There are also similarities between American and Canadian jurisprudence on what constitutes corrective disclosure.  The Bofl decision broadens the scope of how whistleblower reports may be used against public companies, in particular in the context of securities class actions alleging fraud.  

Canadian courts have not yet considered whether whistleblower allegations may constitute “corrective disclosures”.  In Ontario, courts have held that corrective disclosure may take “any number of forms”, including media reports and anonymous internet posts that allege misrepresentation.  In doing so, the courts have specifically referred to U.S. securities class actions.  It is therefore likely that plaintiffs’ class action lawyers will attempt to rely on whistleblower allegations in the future as corrective disclosures.

As previously discussed here, the existence of whistleblower programs incentivize those who might otherwise report conduct within their own companies to provide information to a securities regulator in the hopes of earning a whistleblower reward.  It has therefore become essential for businesses to have in place a strong controls system and corporate culture in order to detect potential problems as early as possible.  It is also critical to ensure that businesses have controls in place to protect employees who come forward to report these problems internally.  In light of the new risks posed by the Ninth Circuit’s decision in relation to whistleblower allegations, these internal controls have become even more important on both sides of the border.