Many companies are reluctant to disclose early-stage governmental investigations, and they frequently have good reasons for thar reluctance.  However, a recent California federal judge’s decision in Cai v. Visa, (ND Cal.; 12/25) highlights the potential benefits of a decision to disclose governmental investigations at an early stage in the process.

The case involved allegations that the company misled investors by concealing anticompetitive practices in its debit card business and downplaying the risk of an antitrust enforcement action by the DOJ. The plaintiffs alleged that media reports about a potential lawsuit by the DOJ and the lawsuit’s subsequent filing allegedly caused a stock price drop. The Court granted the defendants motion to dismiss on the basis that the plaintiffs failed to plausibly plead loss causation. In reaching this conclusion, the Court pointed to the fact that the company had disclosed the antitrust investigation years prior to the lawsuit, and that the stock rebounded quickly after the lawsuit was announced.

The court granted the defendants’ motion to dismiss, finding that the plaintiffs failed to adequately plead loss causation, because they did not plausibly connect the alleged misstatements to the stock price decline, particularly since the antitrust investigation had been disclosed years earlier and the stock price rebounded quickly after the drop.

Holland & Knight’s blog on the case says that the company’s decision to disclose the investigation early on provides a couple of key takeaways from the decision for other public companies:

– Early, Robust Risk Disclosures Can Provide Meaningful Defensive Value. Visa’s decision to disclose the DOJ investigation years before a complaint was filed proved strategically beneficial, illustrating that early warnings – when material and appropriately framed – may blunt later loss‑causation theories.

– Voluntary Disclosure of Informal Regulatory Inquiries May Be Advantageous. Cai shows that early disclosure of government investigations can help defeat later securities fraud allegations by preventing plaintiffs from claiming that subsequent developments revealed any “new” corrective truth.

– John Jenkins