On April 21, 2026, Judge Susan Illston of the United States District Court for the Northern District of California denied class certification in a putative class action brought under the Securities Exchange Act of 1934 (the “Exchange Act”) against a battery technology company (“Company”) and its directors and officers. The Court denied class certification, holding that plaintiffs were not entitled to a presumption of reliance under
Basic Inc. v. Levinson, 485 U.S. 224 (1988) (“
Basic”), because defendants proved the alleged misstatement did not impact the price of the Company’s stock.
We covered the gravamen of plaintiffs’ claims in
a prior article addressing the Court’s decision granting defendants’ first motion to dismiss in February 2024. The action arose from the Company’s alleged concealment that it did not follow a two-step quality assurance protocol for certifying new, customized manufacturing equipment, which included a Factory Acceptance Test (“FAT”) at the vendor’s facility in China, followed by a Site Acceptance Test (“SAT”) at the Company’s U.S. facility.
The Court ultimately denied defendants’ motion to dismiss with respect to a single passage in an August 2021 shareholder letter stating that SAT would “confirm” the equipment was meeting performance requirements, “[f]ollowing factory acceptance testing already performed at the vendor’s facility before taking delivery,”
i.e., FAT, when, in fact, plaintiffs alleged the equipment had never passed FAT. At class certification, defendants argued that plaintiffs were not entitled to a presumption of reliance under
Basic because the alleged misstatement had no statistically significant “front-end” price impact, and that plaintiffs could not establish any “back-end” impact because no alleged corrective disclosure matched the misstatement.
The Court first agreed that the alleged misstatement did not inflate the Company’s stock price when made, a conclusion by defendants’ expert that plaintiffs did not dispute. Plaintiffs instead sought to rely on an “inflation-maintenance” theory, which requires showing that the stock price would have fallen absent the misstatement and that the back-end price drop,
i.e., the price change after the alleged corrective disclosure, equals the inflation maintained by the front-end misstatement.
Finding that plaintiffs failed in making this showing under
Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement Systems, 594 U.S. 113, 123 (2021), the Court observed that the inflation-maintenance theory “starts to break down when there is a mismatch between the contents of the misrepresentation and the corrective disclosure” because, under those circumstances, “it is less likely that the specific disclosure actually corrected the . . . misrepresentation.” This in turn means there “is less reason to infer front-end price inflation—that is, price impact—from the back-end price drop.” The Court found there was such a mismatch because none of the three alleged corrective disclosures revealed the contents of the alleged misstatement in the Company’s August 2021 letter: that the Company waived FAT. Instead, the Court found that all three corrective disclosures pertained to failures at the Company’s manufacturing facility more broadly.
In so holding, the Court distinguished the case from
Jaeger v. Zillow Grp., Inc., 746 F. Supp. 3d 1025 (W.D. Wash. 2024), aff’d, 2025 WL 2741642 (9th Cir. Sept. 26, 2025), where a Washington district court found a sufficient match under an inflation-maintenance theory. While the Court agreed with
Jaeger’s general principle that a corrective disclosure may “merely disclose[] a consequence of concealed information,” the Court found
Jaeger distinguishable because, there, the corrective disclosures also revealed the very information that was allegedly hidden. In the instant case, plaintiffs neither identified a corrective disclosure pertaining to the alleged FAT waiver nor that the problems with production at the Company’s facility were a consequence of that waiver.
Finally, the Court identified one alleged disclosure that did match the alleged misstatement—a November 2022 statement by the Company’s CEO, in which he explained that the Company had waived “a key milestone called [FAT]” and was “still paying for the months [the Company] gained and then gave back due to equipment problems.” However, the Court found that this disclosure did not support plaintiffs’ inflation-maintenance theory because the Company’s stock price increased following the announcement. Accordingly, the Court denied plaintiffs’ motion for class certification.
