Without Merit

When faced with litigation, companies often publicly opine that the case is “without merit.”  But if the company loses the litigation, can investors then bring a securities class action alleging that opinion was false?

In City of Fort Lauderdale Police and Firefighters’ Retirement Sys. v. Pegasystems, Inc., 2023 WL 4706741 (D. Mass. July 24, 2023), the court considered a securities class action brought in the wake of a civil decision requiring Pegasystems to pay $2 billion for willfully and maliciously misappropriating trade secrets.  The decision led to a stock price decline.  The plaintiffs in the securities case alleged that Pegasystems deceived investors when it previously stated (a) it would “[n]ever use illegal or questionable means to acquire a competitor’s trade secrets,” and (b) that the trade secrets case was “without merit.”

The court held that the plaintiffs had adequately plead falsity as to both statements.  While the  “never use illegal or questionable means” statement was contained in the company’s Code of Conduct, the court concluded that it was not “aspirational,” but instead described “with specificity a course of conduct that Pega promised to abjure.”  Given that the espionage campaign against its competitor allegedly was “orchestrated and directed” by the company’s senior executives, the statement was misleading to investors.

As to the opinion that the trade secrets litigation was “without merit,” the court found that the statement did not “fairly align” with the CEO’s “awareness of, involvement in, and direction of Pega’s espionage campaign.”  Moreover, “a reasonable investor could justifiably have understood [the CEO’s] message that [the] claims were ‘without merit’ as a denial of the facts underlying [the] claims – as opposed to a mere statement that Pega had legal defenses against those claims.”

Holding: Motion to dismiss denied.

Quote of note: “An issuer may legitimately oppose a claim against it, even when it possesses subjective knowledge that the facts underlying the complaint are true.  When it decides to do so, however, it must do so with exceptional care, so as not to mislead investors.  For example, an issuer may validly assert its intention to oppose the lawsuit.  It may also state that it has ‘substantial defenses’ against it, if it reasonably believes that to be true.  An issuer may not, however, make misleading substantive declarations regarding its beliefs about the merits of the litigation.”