Third Circuit scraps 30-year stock-price test in securities fraud case

The Third Circuit threw out a nearly 30-year-old rule that let companies escape securities fraud lawsuits by pointing to a quick stock-price recovery. 

The September 30 decision abrogated what the court called the Oran-Burlington rule - a Third Circuit test that treated a stock price's return to pre-disclosure levels as conclusive proof that a company's false statements were immaterial. The ruling vacated the dismissal of a class action against Ocugen, Inc., a small publicly traded pharmaceutical company, and its chief executive. 

For firms operating in Pennsylvania, New Jersey, or Delaware federal courts, the shift matters: investors can no longer be shut out of securities fraud claims simply because a stock price bounced back within days. 

The underlying facts drove the point home. According to the amended complaint, a financial planning manager and a department head wrote a 20-page report flagging what the complaint described as "manipulated numbers" being shared with the public. The company's chief financial officer allegedly told a colleague he had uncovered "multiple things that were wrong and the Company was misleading the public," according to the complaint, and went to a lawyer because he "learned something that isn't right." 

When the Q2 2023 quarterly report came due, the CFO refused to sign it and was fired, the complaint alleged. The vice president of finance also refused and was also fired. The chief executive then asked a financial reporting manager, appealing to "their shared Indian heritage," according to the complaint. She refused too. The chief executive signed the report himself. 

In April 2024, Ocugen disclosed it would restate 15 quarters of financial statements, admitting they were "materially misstated" and "should no longer be relied on." The complaint alleged the company had understated current liabilities by as much as 45.1% and overstated total stockholders' equity by as much as 18.6% in certain quarters. 

Ocugen's stock dropped 10.38% the day after the announcement - from $1.54 to $1.38 per share - but recovered within two trading days. The district court treated that recovery as dispositive and dismissed the case. 

The Third Circuit reversed. In a panel opinion, the court held the Oran-Burlington rule could not survive the Supreme Court's 2011 decision which rejected categorical approaches to materiality. The correct test, the court reaffirmed, is whether a false statement would have "significantly altered the total mix of information" available to reasonable investors at the time of their decisions. The court partially abrogated four of its own prior decisions and noted that no published Third Circuit opinion had applied the rule in 20 years. 

The court affirmed dismissal on one narrow point - statements about the CFO's departure - finding no duty to disclose the specifics had been alleged. On all other claims, the case returns to the district court for fresh analysis of materiality and scienter.