Central District Of California Grants In Part And Denies In Part Motion To Dismiss Proposed Securities Class Action Against Financial Services Firm

On December 12, 2025, Judge Sherilyn Peace Garnett of the United States District Court for the Central District of California granted in part and denied in part a motion to dismiss a proposed investor class action against a large financial services firm (the “Company”) and several of its officers (the “Officers” and, collectively, the “Defendants”).  In re B. Riley Financial, Inc. Securities Litigation, No. 24-cv-00662-SPG-AJR (C.D. Cal. Dec. 12, 2025).  Plaintiffs alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder based on claims that Defendants made twenty-four false or misleading statements by understating the Company’s exposure to a convicted investment manager (the “Investment Manager”) and omitting from disclosures a roughly $200 million margin loan to his affiliate (the “Affiliate”).

The Company allegedly built a close, multi-year business relationship with the Affiliate, who is a well-known investor.  Initially, the Affiliate was a brokerage client of the Company, but in 2017 the Company allegedly partnered with the Affiliate to buy a large stake in a target company (the “Target”), which the Affiliate allegedly became the CEO of.  The Company allegedly extended loans to the Affiliate secured by the Affiliate’s shares of the Target.  In 2023, the Company’s loans to the Affiliate allegedly totaled $154 million and were backed by the entirety of the Affiliate’s stock in the Target.  In August 2023, a management buyout allegedly took the Target private, and the Company allegedly then invested an additional $280 million in the Target’s new parent entity (the “New Parent”).  On the same day, the Company allegedly then restructured and increased the Company’s loan to the Affiliate to approximately $200 million secured by the equity in the New Parent (the “$200 Million Loan”).

Separately from the Affiliate’s position as CEO of the Target, the Affiliate allegedly began working as a “sub-advisor” for an asset management company (the “Asset Management Company”).  Shortly after the Affiliate began this advisory role, the Asset Management Company allegedly began sustaining substantial trading losses. The Affiliate and the Investment Manager—who was an officer of the Asset Management Company—then allegedly began obscuring the Asset Management Company’s losses through a series of allegedly fraudulent transactions.  In 2020, the Asset Management Company’s auditor allegedly uncovered the fraud, and subsequently the Asset Management Company filed an arbitration claim against the Affiliate and the Investment Manager pled guilty to a criminal charge of conspiracy to commit securities fraud.  The market allegedly quickly realized that the Affiliate was an unindicted co-conspirator.  After the Investment Manager pleaded guilty, the Company allegedly issued a press release disclosing a net loss of $75 million for the quarter.  The Company allegedly disclosed that it would have to write down its remaining investments in the Target, including the $200 Million Loan, a year later.  The Company’s stock price then allegedly dropped precipitously.

The Court did not parse through each of the alleged misstatements in plaintiffs’ complaint.  Instead, the Court concluded that plaintiffs plausibly pleaded falsity through omission—specifically as to statements about the Company’s exposure to the New Parent.  In SEC filings, the Company only disclosed that it had increased its investment in the New Parent to a total of $280 million—but the Court found that, in making no mention of the $200 Million Loan secured by the equity in the New Parent, the Company understated its exposure to the New Parent, while in reality the Company had extended $480 million from its balance sheet toward the success of the New Parent.

The Court next turned to scienter.  The Court found a strong inference existed as to one of the Officers, because this Officer had a close relationship with the Affiliate, played a significant role in the underlying transactions, and was aware of the “highly favorable” terms of the $200 Million Loan.  However, the Court declined to extend the same inference to the other Officers who allegedly only knew of the $200 Million Loan.  The Court determined that these Officer Defendants’ knowledge of the $200 Million Loan and the signing of some financial disclosures alone were not enough to meet the PSLRA’s pleading standard.

Finally, the Court concluded that plaintiffs adequately pleaded loss causation through stock drops following corrective disclosures, including an Investor Day Presentation that revealed the $200 Million Loan.  The Court also permitted the Section 20(a) claims to proceed, finding sufficient at the pleading stage the fact that the Officers signed the Company’s financial statement while omitting the $200 Million Loan, among other things.  The Court granted the motion to dismiss with leave to amend the claims against the Officers for whom plaintiffs failed to adequately plead scienter.