Saturday, October 10, 2015

You Can't Rely on a False Statement About Yourself

By Rodney F. Tonkovic, J.D.

A Second Circuit panel affirmed the dismissal of a complaint alleging that a false statement posted on an online message board led to a decline in a company's stock price. A shareholder sold his shares after reading a forum post describing him as him as having been barred from the financial industry. It made no sense to the court that the shareholder would sell his shares in reliance on statements about himself that he knew were false (Salvani v., October 9, 2015, per curiam).

Joseph M. Salvani was a consultant to CodeSmart Holdings, Inc. In return for his advice in dealing with institutions and investors, Salvani received cash and CodeSmart securities. Defendant-appellee operates a subscription website including a forum for sharing investment advice.

In September 2013, an forum user posted a message stating that Salvani had been barred from the financial industry and accusing CodeSmart of being a pump-and-dump scheme. Salvani read this after it was posted. Afterwards, CodeSmart's stock prices dropped sharply and during that drop, Salvani sold his shares.

Salvani argued that the poster's statements were a type of market manipulation and that InvestorsHub was behind it. Before the district court, Salvani brought claims under the federal securities laws, as well as state law claims including defamation, libel, and tortious interference with contract. The court dismissed the complaint without prejudice for failure to plead reliance or loss causation.

The post was about himself. The panel affirmed, finding that Salvani failed to plead reliance. Because the post was about himself, it made no sense for Salvani to argue he relied on statements that he knew to be false, the court said. Salvani also could not have relied on the integrity of CodeSmart's stock price if he knew the market was being manipulated. The panel then affirmed the district court's declining to exercise jurisdiction over state law claims and concluded that Salvani's remaining arguments were without merit.

The case is No. 14-3994-cv.