Category Archives: Motion To Dismiss Monitor

Last year, the U.S. Supreme Court had the opportunity in the Facebook case to address the extent to which corporate risk disclosures can form the basis for securities fraud liability.  After oral argument, however, the Court decided to dismiss the appeal as improvidently granted.  That has left the door open for a wide range of potential decisions from the lower courts.

In Craig v. Target Corp., 2024 WL 4979234 (M.D. Fla. Dec. 4, 2024), the court considered whether Target’s risk disclosures in its 2021 and 2022 annual reports about ESG and DEI initiatives were false and misleading because they failed to disclose that the company would embark on a Pride Month Campaign in May 2023 that could result in customer boycotts and loss of sales. Target generally had disclosed that negative reputational incidents could adversely affect its results and that it faced varied stakeholder expectations regarding how it addressed environmental, social, and governance matters.  In addition, Target previously had been the subject of a customer boycott as the result of its opposition to North Carolina’s 2016 transgender bathroom law. 

The court found, however, that Target had failed “to mention the specific risk of its upcoming 2023 Pride Month Campaign” and that the company knew or should have known that this particular campaign “posed a risk of backlash and financial repercussions.”

Holding: Motion to dismiss denied.

Quote of note: “Target’s plan to enact a new campaign – i.e., placing controversial merchandise at the center of its stores – could be construed as a change to their ESG/DEI campaigns in prior years.  Upon review of the amended complaint and the parties’ briefing, it is unclear whether this information was publicly available and it is further unclear how much information investors and Plaintiffs knew about the plans for the new campaign.  Thus, Plaintiffs have adequately pleaded that information revealed in the 2021 and 2022 risk disclosures may not have been complete.”

In Macquarie, a recent decision from the U.S. Supreme Court, the Court addressed “half truth” liability for securities fraud.  Among other things, the Court noted that “the difference between an omission and a half-truth is the difference between a child not telling his parents he ate a whole cake and telling them he had dessert.  Rule 10b-5(b) does not proscribe pure omissions. . . . Put differently, it requires disclosure of information necessary to ensure that that statements already made are clear and complete (i.e., that the dessert was, in fact, a whole cake.)”  But how does this analogy work in the context of alleged material omissions in a company’s risk disclosures, which by their nature are talking about a dessert that has yet to be eaten (and may never be eaten)?

In Roofers Local N. 149 Pension Fund v. Amgen, Inc. 2024 WL 4358409 (S.D.N.Y. Sept. 30, 2024), the court considered a case involving Amgen’s risk disclosures surrounding its ongoing dispute with the IRS over back taxes.  The risk disclosures stated that the IRS’s proposed adjustments were “significant,” “substantial,” “may result in payments substantially greater than amounts accrued,” and “could have a material impact” on Amgen’s financial statements.  Amgen also disclosed that it did not agree with the adjustments and was contesting them.  What Amgen did not tell the market, however, was that the IRS had indicated to the company that it was seeking a total of $10.7 billion in back taxes.  When Amgen eventually disclosed the exact amounts that the IRS was seeking after receiving notices of deficiency, its stock price declined.  

As recognized in the Amgen decision, companies frequently decline to quantify the risks they face, instead using words like “significant” until the magnitude of the risks becomes more certain.  Nevertheless, the court found that the failure to disclose the $10.7 billion amount rendered Amgen’s risk disclosures materially misleading because investors were “left in the dark” about the magnitude of the potential liability.  While Amgen was “free to vigorously dispute the legal and factual merits of the IRS’s assessments, and to tell investors that it is doing so; what it cannot do consistent with Section 10(b) and Rule 10b-5, however, is present investors with an incomplete, unclear, and thus plausibly misleading picture of the financial risks posed by that dispute.”  Referring to the “whole cake” analogy used in Macquarie, the court noted that it did “not believe that the analogy would have come out differently had the child described his treat as merely ‘significant’ or ‘substantial’ instead.”

Holding: Motion to dismiss denied.

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.”

Securities class actions involving Special Purpose Acquisition Companies (SPACs) can raise interesting issues.  A SPAC is a publicly traded shell company created to merge with an existing privately held business so as to allow the target company to go public without the time, expense, and regulatory scrutiny of an initial public offering.  If the privately held business makes material misstatements that affect the SPAC’s stock price prior to the merger, can that company and its officers be liable for securities fraud?

The U.S. District Court for the Northern District of California recently considered that question in In re CCIV/Lucid Motors Sec. Litig., 2023 WL 325252 (N.D. Cal. Jan. 11, 2023).  CCIV is a SPAC that acquired Lucid Motors, an electric car manufacturer, in February 2021.  CCIV’s shareholders brought a securities class action alleging that in the weeks prior to the announcement of the merger, Lucid had made false and misleading statements about its production capacity and production start date that caused CCIV’s stock price to artificially increase because there were market rumors about a possible merger.  Once the merger was entered into, Lucid disclosed that its factory was not yet built and production would not begin in spring 2021, leading to a 36% decline in CCIV’s stock price.

In their motion to dismiss, the defendants argued that CCIV’s shareholders did not have standing to sue Lucid and its officers because the alleged misstatements were about Lucid, not CCIV.  The defendants relied heavily on a pair of Second Circuit decisions (Nortel and Menora) holding that stockholders do not have standing when the company whose stock they purchased is negatively impacted by the material misstatements of another company.  The district court did not find those decisions persuasive, noting that they appeared to rely on an overly restrictive reading of Supreme Court precedent.  Moreover, while other courts outside the Second Circuit have adopted the same approach, some decisions have suggested that there might be an exception to the general rule if the two companies have a direct relationship, as in a merger.  Nor did the district court find that there was any public policy rationale for limiting standing in this situation, noting that the Supreme Court has rejected proposed limitations on the Section 10(b) private right of action in the past.

Despite finding that standing existed, the district court ultimately dismissed the claims for lack of materiality.  In particular, the district court found that “[t]o show information regarding a potential merger is material plaintiffs must be able to allege that the merger was likely to occur at the time they relied on defendants’ misrepresentations.”  In this case, however, the alleged misrepresentations were made at a time “when Lucid and CCIV had not even publicly acknowledged that a merger was being considered.”  Under these circumstances, the district court held, alleged misstatements about Lucid could not have been material to CCIV’s investors.

Holding: Motion to dismiss granted with leave to amend.

Quote of note:  “Here, plaintiffs purchased securities in CCIV and seek to hold Lucid and its CEO Rawlinson liable for inducing them to make those purchases through misrepresentations and omissions about the value of Lucid itself which CCIV then acquired.  Thus, plaintiffs purchased securities, have identified specific alleged misconduct, and the alleged loss is discernible.  The Court finds plaintiffs have standing.”

Investors frequently bring securities class actions against drug development companies, typically asserting that the company failed to adequately disclose information about its clinical trials.  In Lehmann v OHR Pharmaceutical, Inc.,  2019 WL 452765 (S.D.N.Y. Sept. 20, 2019), the company was developing a drug for the treatment of a degenerative eye disease called Wet Age-Related Macular Degeneration (“Wet AMD”).  The plaintiffs claimed that OHR, in disclosing the results of its Phase II clinical trial, failed to disclose that its control arm results were inconsistent with previous trials (which allegedly made the Phase II trial appear more successful than it really was).  Ultimately, the company announced disappointing results for its subsequent Phase III clinical trial and the stock price declined 81%.

The court found that OHR’s disclosures were accurate and the company was not required to provide more context around its Phase II trial results.  Indeed, the court questioned the entire premise of the case, noting that “[o]n Plaintiffs’ account, it is unclear whether the Company should have embarked on the phase III study after the success of the phase II study – should the Company have ignored what Plaintiffs say were aberrant results, or should it have investigated further?”  The court came down firmly on the side of further investigation, noting “that the law does not abide attempts at using the judiciary to stifle the risk-taking that undergirds scientific achievement and human progress.”

Holding: Motion to dismiss granted (also based on the plaintiffs’ failure to adequately plead scienter).

Quote of note:  “This Court will not adopt a rule that discourages free scientific inquiry in the name of shielding investors from the risks of failure.  Science is risky.  Science advances through those willing to take those risks and break with consensus.  With science suffering from a replication crisis, this Court is happy to report that the law does not abide attempts to use the judiciary to stifle the risk-taking that undergirds scientific advancement and human progress.  The answer to bad science is more science, not this Court’s acting as the Southern District for the Inquisition.”

To what extent can plaintiffs use allegations from a retained expert in a securities fraud complaint?  In Sgarlata v. Paypal Holdings, Inc., 2019 WL 4479562 (N.D. Cal. Sept. 18, 2019), the plaintiffs claimed that PayPal had failed to adequately disclose a cybersecurity breach.  To bolster their scienter (i.e., fraudulent intent) allegations, the plaintiffs engaged a cybersecurity expert to determine what information about the breach likely was available to the company at the time the breach was discovered and provided the expert’s opinions in the complaint.

In its motion to dismiss decision, the court found that it could consider the expert’s statements, but only if they satisfied the same standard applied to confidential witnesses, i.e., (1) the statements must be described with sufficient particularity to establish the expert’s reliability and personal knowledge; and (2) the statements must themselves be indicative of scienter.  The cybersecurity expert had extensive experience in the field and opined that the company must have known more about the breach than it disclosed.

The court noted, however, that there was no allegation in the complaint that the expert “was familiar with, much less had knowledge of, the specific security architecture of Defendants’ privacy network.”  Moreover, the expert “did not actually talk to employees . . . nor did he review documents that – in and of themselves – demonstrate inconsistencies that were available” to the company at the time of its disclosure.  Even considered holistically with the entire complaint, the court found that the expert’s opinions did not support a finding of scienter.

Holding: Motion to dismiss granted.

It is common for a securities class action to follow an announcement that a company has engaged in Foreign Corrupt Practices Act (FCPA) violations.  Plaintiffs typically allege that the company’s statements about its legal compliance, internal controls, and/or financial results were rendered false or misleading by the failure to disclose that certain revenues were obtained through corruption.

In Doshi v. General Cable Corp., 2019 WL 1965159 (E.D. Ky. April 30, 2019), General Cable entered into settlements with the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) over FCPA violations.  As part of a non-prosecution agreement with the DOJ, the company admitted that it knew about certain corrupt payments and “knowingly and willfully failed to implement and maintain an adequate system of internal accounting controls designed to detect and prevent corruption or other illegal payments by its agents.”  The court’s motion to dismiss ruling contains three interesting holdings.

First, there is a two-year statute of limitations for federal securities fraud claims, which begins to run when the “plaintiff did discover or a reasonably diligent plaintiff would have discovered the the facts constituting the violation.”  Although the complaint was filed more than two years after General Cable first disclosed the possibility of FCPA violations, the court held that the claims were not barred by the statute of limitations because there was no available evidence of scienter (i.e., fraudulent intent) until the company entered into the government settlements.

Second, the court found that the only actionable misstatements made by General Cable related to its statements concerning the effectiveness of its internal controls over financial reporting (including SOX certifications).  The company’s disclosure that it had a FCPA compliance program was not rendered false or misleading by the fact that the program was not effective.  The company also had no obligation to disclose a theoretical risk that its overseas operations might fail if it could not rely on corrupt business practices.

Finally, despite its holdings regarding the statute of limitations and the existence of actionable misstatements, the court concluded that the plaintiffs had failed to adequately plead scienter.  The company’s settlements with the government established that “GC knew it did not have controls that provided a sufficient framework for dealing with third-parties in the identified subsidiaries and GC knew that this allowed it to violate the FCPA in particular countries.”  However, the court held, “this does not mean that GC knew its overall internal controls over financial reporting were not effective, nor does it mean that GC knew its SOX certifications – which do not specifically relate to the FCPA – were false.”  In other words, the court found that the “most plausible inference” was that GC believed that its overall financial reporting system was “sound despite a specific FCPA-related issue.”

Holding: Motion to dismiss granted.

Among other reforms, the Private Securities Litigation Reform Act of 1995 (“PSLRA”) requires that upon “final adjudication” of a federal securities action, the court shall include in the record “specific findings regarding compliance” with the federal rule providing that attorneys’ must present accurate and non-frivolous pleadings to the court.  If the court finds the rule has been violated, it must impose sanctions on the offending party or attorney.

The PSLRA’s required sanctions review is more honored in the breach than the observance, with federal judges generally declining to provide the specific findings unless prompted by a party.  In turn, parties rarely make these requests because they believe there is a slim likelihood of sanctions being imposed.

That said, if a plaintiff is worried about a possible sanction, can it avoid the mandatory review by voluntarily dismissing its claim?  In Rezvani v. Jones, 2019 WL 1100149 (C.D. Cal. March 6, 2019), the plaintiff voluntarily dismissed his case with prejudice after he failed to amend his complaint and the court indicated that it found dismissal with prejudice appropriate.  The court held that for purposes of determining whether the dismissal was a “final adjudication” under the PSLRA, the key factor was that the dismissal was with prejudice (not whether it was voluntary or involuntary).  A dismissal with prejudice – no matter the exact circumstances – closes the district court case file, constitutes a “final adjudication,” and leads to the required sanctions review.

However, the court also found that sanctions against the plaintiff were not warranted.  The securities claim had “little merit,” but the court accepted counsel’s representation that he had researched his client’s claims and the case had been brought in good faith.  In addition, the court credited the plaintiff for dropping his securities claim “once the Court identified its deficiencies.”

Holding: Defendant’s motion for sanctions denied.