Securities Fraud Claims Based on Short Reports

Is a report by a short seller followed by a stock decline enough to plead securities fraud? This month, the Fourth Circuit considered this issue. In Defeo v. IonQ, Inc., a group of investors sued IonQ, a developer of quantum computers, alleging violations of Sections 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934. The plaintiffs alleged that a short-seller report exposed that IonQ was a “scam built on phony statements about nearly all key aspects of the technology and business,” causing IonQ’s stock price to drop and resulting in plaintiffs’ financial loss. Affirming the district court’s ruling, and agreeing with Ninth Circuit precedent, the Fourth Circuit held that the shareholder plaintiffs failed to adequately plead loss causation because they did not plausibly allege that either the short-seller report or IonQ’s response to it revealed any new truth to the market.[1] 

Takeaways

• At least in the Fourth and Ninth Circuits, plaintiffs must meet a high bar in relying on self-interested short-seller reports when attempting to plead loss causation.
• Nonetheless, in “appropriate circumstances,” a short-seller report, even if financially motivated, may still support allegations of loss causation. Plaintiffs are, however, unlikely to succeed in relying on reports that are based entirely on anonymous sources, disclaim the accuracy of their opinions and their source material, and admit to curating information provided by sources to fit the short-seller’s narrative.
• In the wake of a critical short-seller report, a company need not respond with “a point-by-point rebuttal” of the report’s allegations but should be wary of issuing a statement that might be misconstrued as a “tacit mea culpa” for some of those criticisms.

Background

In May 2022, activist investor Scorpion Capital LLC published a short-seller report detailing “findings” that IonQ, a company that develops quantum computers, had purportedly misrepresented nearly all aspects of its technology and business. Scorpion Capital claimed that the report was “the most in-depth due diligence to date on IonQ.” The report stated that it was based on both public information and interviews of unnamed former IonQ employees, customers, and experts. The report contended that IonQ misrepresented the power of its quantum computer and misled investors about the computer’s accuracy and the company’s revenue and bookings. The report also contained several disclaimers regarding the report’s accuracy and Scorpion Capital’s potential conflicts of interest, including that Scorpion Capital was short on IonQ stock, stood to realize significant gains if IonQ’s stock price declined, and could not authenticate the accuracy of the information used to write the report.

The day after Scorpion Capital’s report was published, IonQ released a short press release rebuking the report for its mischaracterizations. A week later, IonQ released a longer statement pointing out inaccuracies in the report. In the nine days after Scorpion Capital published the report, IonQ’s stock price dropped by approximately 45%. Within days after the stock decline, plaintiffs filed a securities class action complaint alleging violations of Sections 10(b), 14(a), and 20(a) of the Exchange Act. The district court dismissed the case and held, among other things, that plaintiffs failed to plead loss causation, because the complaint did not sufficiently allege that the short-seller report was a “reliable source[]” of information. 

The Fourth Circuit’s Decision

The Fourth Circuit affirmed the district court’s dismissal. The Fourth Circuit’s opinion focused on plaintiffs’ ability to plead loss causation, an element of claims under both Sections 10(b) and 14(a). Applying established Fourth Circuit law, the court explained that, to plead loss causation, a plaintiff must plausibly allege that new facts were revealed, exposing the defendant’s misrepresentation or omission, and that this revelation resulted in the decline of the defendant’s share price.

As a matter of first impression in the Fourth Circuit, the court considered whether a plaintiff could show such a revelation and sufficiently plead loss causation by relying on a short-seller report. The court observed that other courts, including the Ninth Circuit, have viewed short-seller reports with skepticism. The Ninth Circuit does not impose a categorical ban on using short-seller reports to plead loss causation, but it sets a “high bar” where authors are “self-interested and anonymous,”[2] requiring that plaintiffs plead both that the reports provided new information to the market and that the market reasonably perceived the reports as revealing the falsity of the defendant’s prior misstatements. 

The Fourth Circuit adopted the Ninth Circuit’s approach and found that the IonQ shareholder plaintiffs failed to show that the Scorpion Capital report revealed the truth of IonQ’s alleged fraud to the market. The court reasoned that the report’s express disclaimers (for example, that some quotations “may be paraphrased, truncated, and/or summarized solely at our discretion, and do not always represent a precise transcript of those conversations”) “give[] Scorpion Capital the kind of editorial license that could allow it to say just about anything and cloak it in the imprimatur of truth in order to make a buck.” Such editorializing from an activist short seller, the Fourth Circuit found, along with the report’s reliance on entirely anonymous sources and numerous disclaimers of its accuracy, made it implausible that the report would reveal any new truths to the market. 

The court also found that IonQ’s press releases in response to the report could not be reasonably read to concede the report’s accuracy. In doing so, the Fourth Circuit rejected plaintiffs’ suggestion that a defendant company’s blanket denial of a public allegation of fraud is equivalent to an acknowledgment of its truth. The court reasoned that, though a “tacit mea culpa could function as a verification” of a report in some circumstances, requiring “a point-by-point rebuttal . . . would impose an impossible standard on companies that likely have more important things to do than address every single public and anonymous allegation.”

[1] Defeo v. IonQ, Inc., No. 24-1709, 2025 WL 1035292 (4th Cir. Apr. 8, 2025).

[2] In re Nektar Therapeutics Sec. Litig., 34 F.4th 828, 839–40 (9th Cir. 2022); see also In re BofI Holding, Inc. Sec. Litig., 977 F.3d 781 (9th Cir. 2020).