On April 8, 2025, the United States Court of Appeals for the Fourth Circuit affirmed the district court’s denial of a motion to amend a class action complaint against a quantum computing company (the “Company”) and the special purpose acquisition company (“SPAC”) that acquired it alleging violations of Sections 10(b) and 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5. DeFeo et al. v. IonQ, Inc., No. 24-1709 (4th Cir. Apr. 8, 2025). Plaintiffs’ allegations were based on a short seller report that claimed the Company misrepresented progress on a quantum computer. The Court, in a decision highlighting the limited value of short seller reports in pleading securities claims, affirmed the district court’s decision denying plaintiffs’ motion to amend as futile because the proposed amended complaint failed to plead loss causation adequately.
The Company developed quantum computers. In October 2021, the Company was acquired by a SPAC and began trading publicly on October 1, 2021. On May 3, 2022, a short seller published an online report (the “Report”) claiming that the Company was “[a] scam built on phony statements about nearly all key aspects of the technology and business” and that the Company was running a “quantum Ponzi scheme.” The Report also disclosed that its publisher was short on the Company stock, that it “stands to realize significant gains” if the stock price declined, and that it “cannot and does not provide any representations or warranties with respect to” the materials in the report. On May 4, 2022, the Company issued a press release stating that the Report contained “important inaccuracies and mischaracterizations.” The Company stock price, which closed at $7.86 on May 2 (before the Report), closed at $7.15 on May 4 (the day of the Report), and by May 12, dropped to $4.34.
Plaintiffs’ complaint drew on the claims in the Report. The district court dismissed plaintiffs’ first amended complaint, holding that plaintiffs failed to allege reliable sources of information or to adequately plead loss causation. Plaintiffs moved to amend their complaint, which the district court denied because the proposed amended complaint still failed to plead loss causation, rendering the amendment futile. Plaintiffs appealed. The Court limited its review to whether the district court’s finding of futility for failure to state a claim was erroneous, and accordingly, whether plaintiffs adequately pleaded loss causation in their proposed second amended complaint. The Court held that they did not.
First, the Court found persuasive Ninth Circuit decisions holding that plaintiffs must clear a “high bar” when they rely on a self-interested and anonymous short seller report as the alleged corrective disclosure. Although the Court acknowledged that a short seller’s financial motivation may not disqualify its usage in a litigation, it found it “implausible” that a short seller report with the type of disclaimer in the Report—including that quotations attributed to its sources “may be paraphrased, truncated, and/or summarized solely at our discretion, and do not always represent a precise transcript of those conversations”—“would reveal some new truth to the market.”
Second, the Court found implausible plaintiffs’ claim that market reports attributed the decline in Company stock price to alleged revelations in the Report. The Court found that market commentary attributed price declines to the Report’s “inflammatory allegations” rather than to an alleged revelation for fraud. At most, this showed a correlation between the Report and the stock drop, but not causation.
Finally, the Court rejected plaintiffs’ attempt to rely on the Company’s first response to the Report as a corrective disclosure. Plaintiffs alleged that the Company’s May 4 press release did not dispute or address the claims in the Report and instead merely quoted the Chairman, stating that it had “the utmost confidence in the [Company] team and their integrity.” The Court found plaintiffs’ characterizations of the press release “inaccurate at best,” and that to the contrary, the press release pointed out that the Report contained “important inaccuracies and mischaracterizations,” noted the author’s financial interest in the event of the Company’s stock price decline, and cautioned investors not to make decisions based on the Report.
For these reasons, the Court affirmed the district court’s denial of plaintiffs’ motion to amend as futile.
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