Defamation Claim Over Stock Board Discussion Easily Dismissed–Desai v. Clark

By Eric Goldman

Desai v. Clark, 2011 WL 3359971 (N.D.Cal. August 2, 2011)

I’ve been seeing a steady stream of defamation and related claims over discussions in stock message boards. This case is representative of what I’m seeing.

Ketan Desai is a consultant in the biotech space and a contributor on the financial news site SeekingAlpha. In 2008, he wrote two posts predicting bad business developments for a publicly traded company, Myriad Genetics. (Post 1; Post 2). His first post disclosed that he shorted the stock at $55, and his second post says he covered the put (apparently profitably).

Christopher Clark, who works as “an analyst in the RS Growth Team” for investment bank RS Investments, posted the following comment under the pseudonym “Seadog“:

Being right or making money. On May 13th (when you told us so) the stock closed at $41.25. After the negative news it never broke below $45. How exactly did you make money on this put trade again? And you doubt the rationale that they will be profitable in FY09? They are roughly break even right now and have substantial net outstanding losses. The diagnostics business is hugely profitable (45% operating margins when not spending on their DTC campaign, 40% when they are) and growing rapidly. When you have sustainable revenue, cut spending on dead programs and pay no taxes, that falls to the bottom line. $60mm/45mm shares = $1.33 from cutting that program alone. Nothing in their pipeline warrants a trial near the scale that they undertook with Flurizan—that spend level is not coming back. Stick with collecting degrees, Doc. May try English next—one datum leads but many data lead.

Desai objected to several aspects of this post (including the snarky personal attack–there’s a grammar nazi in every crowd), but the allegedly false factual assertions by Clark/Seadog were (1) the implied price of his put (he put at $55, not at $41.25) and (2) implying that Desai was skeptical about the company’s profitability when Desai had expressed skepticism about the company’s burn rate. Desai also complained about an internal email circulated by RS Investment’s general counsel calling him a “delusional egomaniac.”

The judge only needed 1 paragraph to explain why they statements weren’t actionable opinions, and she dismisses without leave to amend. The opinion doesn’t say it expressly, but the judge seems to understand the nature of stock discussion boards and the sometimes overheated discussion that takes place there. By those standards, this exchange was unusually erudite. The opinion doesn’t acknowledge that another reader pointed out Seadog’s alleged mistake on the put pricing in a subsequent comment, so perhaps any errors were sufficiently corrected by the community on the spot.

The judge ruled on the defendant’s motion to dismiss, not an anti-SLAPP motion. This perplexed me because this case looked like a SLAPP and the easy dismissal suggests that an anti-SLAPP motion also would have easily prevailed–with the benefit that Desai would be on the hook for defense counsel fees. It looks like an implicit failing of anti-SLAPP doctrine that defense counsel apparently bypassed an anti-SLAPP motion even when facing what looked to me like a SLAPP.

Interestingly, the court sidesteps the possibility that one or both of the litigants had conflicts of interests in their discussion about Myriad Genetics. SeekingAlpha had a field for conflicts disclosures on main posts, and Desai looks like he appropriately disclosed his put. I don’t know if Clark or RS Investment had any interests in Myriad Genetics, but “Seadog” didn’t provide any identifying information on the site or disclose any conflicts in the comment. A defamation lawsuit isn’t the right vehicle to hammer conflicts of interest, and the FTC and SEC have been remarkably laissez-faire about that as well–especially interesting in the FTC’s case given its overall push against inauthetic content online.