To what extent should courts rely upon market analysts in determining the meaning of corporate statements? In Boykin v. K12, Inc., 2022 WL 17097453 (4th Cir. Nov. 22, 2022), the U.S. Court of Appeals for the Fourth Circuit considered this question in a case alleging that K12, a provider of educational software and support, falsely told investors in 2020 that the Miami-Dade public school district had entered into a lucrative deal to purchase the company’s platform and content.
In August 2020, K12 confirmed that it was entering into a partnership with Miami-Dade where it would “provide customized services, including curriculum, assessment tools, teacher training and data management.” The CEO also stated that the company was seeing an increase in school districts who wanted to use the company’s content and curriculum, “with more of those contracts this year than we’ve ever had in any one year before,” and specifically mentioned Miami-Dade. Two financial analysts covering K12 “applauded the company, respectively, for having a ‘contract signed’ and a ‘contract win.'” A couple of weeks later, however, news reports came out suggesting that Miami-Dade was not going to enter into the contract due to issues it was experiencing with the platform. Ultimately, on September 10, 2020, Miami-Dade’s board voted to terminate the partnership.
On appeal from the district court’s dismissal of the complaint, the Fourth Circuit found that the company’s statements about the Miami-Dade deal “could well have factored into the run-up of K12 shares during the summer of 2020.” As to the falsity of the statements and the defendants’ scienter (i.e., fraudulent intent), however, the court was less convinced.
First, the falsity element is based on a reasonable investor’s view of the company’s statements, “not any individual investor’s reaction.” If the analysts believed that the CEO had confirmed the existence of a done deal, they were simply incorrect given that the CEO never “attested unambiguously to having a signed agreement.” And to the extent that the CEO “was gesturing to an extensive working relationship between K12 and Miami-Dade,” that was factually accurate at the time. Indeed, Miami-Dade’s superintendent even signed the completed contract in mid-August, but it was never returned to K12.
Second, the court held that “[j]ust as certain statements are such that, to show them false is normally to show scienter as well, the inverse is also true.” The timeline was consistent with the CEO’s “anticipation in mid-August of a consummated deal with Miami-Dade.” Moreover, if the CEO’s goal had been to inflate K12’s stock price, “he could have chosen far less ambiguous language than he did.” Nor did the plaintiffs provide any facts, such as insider trading, that would support a motive for fraud.
Holding: Dismissal affirmed.
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