Is paying someone else to make a misstatement to investors the same as making the misstatement yourself for purposes of securities fraud liability? Two recent appellate decisions address this question and come to different conclusions based on the specific type of liability alleged.
In In re Galectin Therapeutics, Inc. Sec. Litig., 843 F.3d 1257 (11th Cir. 2016), the corporate defendants retained promoters to “recommend or tout” the company’s stock by writing favorable articles. These articles allegedly contained misstatements that misled the company’s investors. While the defendants “worked in conjunction with the stock promoters,” there were no allegations showing that any defendant told the stock promoters what to say. Under the Supreme Court’s Janus decision, a defendant is only subject to primary securities fraud liability if it has “ultimate authority” over the alleged misstatement. The Eleventh Circuit concluded that merely paying for the articles did not demonstrate ultimately authority over any alleged misstatements made by the promoters and, as a result, the claims against the defendants based on those alleged misstatements must be dismissed.
In West Virginia Pipe Trades Health & Welfare Fund v. Medtronic, 845 F.3d 384 (8th Cir. 2016), the corporate defendants subsidized a number of medical journal articles that allegedly overstated the efficacy and safety of a treatment sold by the company. Rather than assert primary liability for these alleged misstatements, the plaintiffs argued that the corporate defendants were liable as participants in a scheme to mislead investors. Under the Supreme Court’s Stoneridge decision, a plaintiff cannot bring a scheme liability claim based on deceptive conduct that makes its way to investors through a third party’s statements because investors cannot demonstrate that they relied on any acts taken by the company.
Nevertheless, the Eighth Circuit found that the scheme liability claims against Medtronic were adequately plead because, among other reasons, the company had “instructed” the authors of the articles to make the alleged misstatements. According to the court, the plaintiffs would be able to demonstrate that investors had relied upon statements – even though they were made by third parties – because a “company cannot instruct individuals to take a certain action, pay to induce them to do it, and then claim that any casual connection is too remote when they follow through.”
The Galectin and Medtronic decisions are difficult to reconcile. The Supreme Court has made it clear that it wants to severely restrict the ability of private plaintiffs to bring what amounts to aiding and abetting claims for securities fraud. So if the alleged facts are insufficient to establish that the corporate defendant is the maker of the third party statements, should plaintiffs be allowed to use scheme liability to circumvent that restriction? Stay tuned.