Is “on track” the most dangerous phrase a corporation can use to describe its business? Over the years, there have been a significant number of securities class actions alleging a company’s statement that a regulatory approval process or financial metric was “on track” constituted securities fraud. Defendants typically argue that “on track” is inherently forward-looking (because one cannot know whether something is actually on track until the final results are obtained) and, therefore, protected from liability by the PSLRA’s safe harbor for forward-looking statements. While some courts have held that “on track” cannot be distinguished from the underlying projection and the safe harbor applies, other courts have concluded that “on track” is a statement of present condition.
Another, more recent legal complication, is whether “on track” should actually be assessed as an alleged false opinion subject to the Omnicare standard. In Omnicare, the Supreme Court held (albeit in the context of a non-fraud Section 11 claim) that an opinion is actionable if either (a) the opinion was not genuinely held, or (b) the holder of the opinion omitted material facts about its inquiry into, or knowledge concerning, the opinion.
In Bielousov v. GoPro, Inc., 2017 WL 3168522 (N.D. Cal. July 26, 2017), the court considered whether the CFO’s statement “We believe we’re still on track to make [GoPro’s financial guidance] as well” was a forward-looking statement covered by the PSLRA’s safe harbor. The court held that because the CFO included the phrase “we believe” in his statement, it was a statement of present opinion about “his and GoPro’s existing state of mind.” Accordingly, the PSLRA’s safe harbor did not apply and the statement should be examined under the Omnicare standard.
Holding: Motion to dismiss denied.
If an individual defendant’s stock trading took place pursuant to a pre-determined Rule 10b5-1 trading plan that was entered into before the outset of the alleged fraud, the use of the trading plan may undermine any inference that the trades were “suspicious” for purposes of assessing scienter (i.e., fraudulent intent). As part of this analysis, however, does a court have to accept that the beginning of the class period constitutes the outset of the alleged fraud?
In Harrington v. Tetraphase Pharma., Inc., 2017 WL 1946305 (D. Mass. May 9, 2017), the plaintiffs claimed that the company “knew that the drug they were testing would fail long before that information was released to the public.” The alleged timeline was that the class period began on March 5, 2015, two of the individual defendants entered into Rule 10b5-1 trading plans on March 13, 2015, and the company became aware of the results of its clinical testing as of late April or early May 2015. In assessing the impact of the Rule 10b5-1 trading plans on its scienter analysis, the court noted that the plans “were executed before even Plaintiffs argue that defendants possessed results from the pivotal portion of the [clinical trial].” Accordingly, the court rejected the idea that it was forced to accept, for purposes of analyzing the impact of the trading plans, that the alleged fraud began at the beginning of the class period. Instead, the court concluded that the “reasonable inference from the alleged facts” was that the fraud began after the two individual defendants entered into their trading plans and, as a result, their subsequent trading was not suspicious.
Holding: Motion to dismiss granted (on the basis that the plaintiffs had failed to establish a strong inference of scienter as to any of the defendants).
Can a company face securities fraud liability for describing a lawsuit brought against it as “meritless” if the plaintiff goes on to win a big verdict? In Grobler v. Neovasc, Inc., 2016 WL 6897760 (D. Mass. Nov. 22, 2016), Neovasc was hit with a $70 million verdict in a case alleging that it stole intellectual property, its stock price declined by 75 percent when the verdict was announced, and investors brought a securities class action. The investors alleged that Neovasc had lied when it repeatedly told them that the intellectual property case was “without merit” and “baseless.”
The district court concluded that the PSLRA’s safe harbor for forward-looking statements applied to Neovasc’s statements. First, the statements “were predictions about the future outcome of the pending litigation, and could only be invalidated by reference to the ultimate outcome of the case.” Second, the statements were accompanied by meaningful cautionary language that “included detailed and specific warnings about the possibility and the consequences of losing” the intellectual property case. Finally, whether Neovasc actually believed that it was likely to lose the intellectual property case was irrelevant because “examining an alleged present belief apart from the forward-looking aspects of the statement requires an inquiry into the state of mind of the defendant—something that the first prong of the safe harbor provision is written to ignore.” Accordingly, the court found that the alleged false statements were inactionable.
Holding: Motion to dismiss granted with prejudice.
In securities class actions, plaintiffs sometimes struggle to establish loss causation where the market does not react consistently to the “revelations of the truth.” An interesting recent example can be found in a decision from the District of Nevada involving a gold mining company.
In In re Allied Nevada Gold Corp. Sec. Litig., 2016 WL 4191017 (D. Nev. August 8, 2016), the plaintiffs alleged that the company had misled investors about its operational difficulties, cash position, and projected financial performance. According to the plaintiffs, these problems were slowly revealed to the market in a series of partial disclosures ending in August 2013. All of the alleged partial disclosures, however, did not result in stock price declines.
The July 2013 partial disclosure, for example, led to a stock price increase. The plaintiffs attributed this anomaly to “surging gold prices.” The problem with that position, however, was that the subsequent August 2013 partial disclosure and stock price decline occurred in the midst of a sharp drop in gold prices. The court found that “[p]laintiffs have not offered an adequate explanation as to why Allied’s stock price was tied to the price of gold after one disclosure but not the other.” Accordingly, the court held that “[p]laintiffs have not adequately alleged that the alleged misrepresentations were a substantial cause in the decline in value of their stock.”
Held: Motion to dismiss granted (plaintiffs also failed to adequately allege falsity and scienter).
A number of years ago, the U. S. Court of Appeals for the Fourth Circuit addressed whether a company’s false statement about its CEO’s educational background was material. The court found that the statement was immaterial as a matter of law, even though the company’s stock price dropped significantly once the truth about the CEO’s lack of an undergraduate economics degree was revealed to the market. But is that true of any false statement in a corporate biography?
In Kelsey v. Textura Corp., 2016 WL 825236 (N.D. Illinois March 2, 2016), the court confronted a similar situation. As part of Textura’s initial public offering, the company issued a prospectus and registration statement containing its CEO’s biography. The biography provided a number of details about the CEO’s prior work history, but failed to disclose that the CEO previously had been the CEO of another company and, in that position, had been accused by an auditor of providing the auditor with false information. Indeed, the auditor later announced that it could no longer rely upon the CEO’s representations.
Textura argued that under the applicable SEC regulation, it was only required to provide investors with the last five years of the CEO’s business experience. During that period of time, the CEO had worked at Textura. The court found, however, that once Textura chose to speak about the CEO’s prior work history, it “had a duty to do so in a manner that was not misleading.” Indeed, the court concluded that the CEO’s prior work history clearly was material because Textura chose to include it even though it was not required to do so. The court therefore denied the defendants’ motion to dismiss as to the alleged omission in the CEO’s biography.
Holding: Denying in part and granting in part the motion to dismiss.
Quote of note: “The court rejects defendants’ argument that they did not ‘tout’ [the CEO’s] prior experience. Having convincingly argued that it was not required to include any of [the CEO’s] prior experience, there could be no other reason from them deciding to do so.”
Yelp is an online networking platform that hosts user-generated reviews of local businesses. In a recent securities class action (Curry v. Yelp, Inc., 2015 WL 7454137 (N.D. Cal. Nov. 24, 2015)), the court considered claims that Yelp made misstatements about the authenticity of the reviews hosted on the company’s website and whether the company manipulated reviews in favor of businesses that advertised on the website.
In its original motion to dismiss order, the court held that the disclosure of the existence of FTC complaints in a WSJ article about Yelp could not demonstrate either materiality or loss causation. The company previously had disclosed the existence of media reports and lawsuits about review manipulation, leading the court to conclude that the article did not alter the total mix of information available to the market. Moreover, the article could not support the existence of loss causation because the FTC complaints merely alerted the market to the possibility that further investigations by the FTC could establish at some later time that the company had made false statements.
In their amended complaint, Plaintiffs responded to these holdings by including the results of an event study purporting to show that the decline in Yelp’s stock price on the day of the WSJ article “was statistically significant and the direct result of the new information contained within The Wall Street Journal’s article.” According to the court, however, a key problem with this event study was that the WSJ article had been published after the close of the market that day and itself stated that “Yelp was down 6% . . . in Wednesday afternoon trading in the wake of the [FTC] disclosure.” The WSJ article therefore could not have revealed material information or caused the stock price decline. Moreover, the amended complaint failed to specify when the FTC disclosure was made or whether it did anything other than disclose that the FTC had received a certain number of complaints about Yelp. Under these circumstances, the court also could not find that the FTC disclosure itself demonstrated either materiality or loss causation.
Holding: Motion to dismiss granted with prejudice.
In its Omnicare decision issued earlier this year, the U.S. Supreme Court held that opinions presented in registration statements can be subject to liability under Section 11 of the Securities Act of 1933 if either (a) the opinion was not genuinely held, or (b) the registration statement omitted material facts about the issuer’s inquiry into, or knowledge concerning, the opinion. In Firefighters Pension & Relief Fund of The City of New Orleans v. Buhlman, 2015 WL 7454598 (E.D. La. Nov. 23, 2015), the court had the opportunity to address two interesting questions about Omnicare‘s scope.
First, does Omnicare‘s reasoning extend to securities fraud claims brought under Section 10(b) of the Securities Exchange Act of 1934? A handful of district courts have found that it does. See., e.g., In re Genworth Fin. Inc. Sec. Litig., 2015 WL 2061989 (E.D. Va. Mar. 1, 2015). The Firefighters Pension court, however, went the other way. In particular, the court concluded that Omnicare‘s creation of “liability for statements of opinions that are genuinely held but misleading to a reasonable investor” could not be reconciled with the scienter requirement for securities fraud. Accordingly, the court held that Omnicare “does not directly apply” to Section 10(b) claims.
Second, does Omnicare apply to forward-looking statements of opinions (e.g., financial projections) and thereby modify the PSLRA’s safe harbor for forward-looking statements? The Firefighters Pension court noted that “the opinion statements at issue in Omnicare centered on the lawfulness of the issuer’s existing contracts” and were not forward-looking. Omnicare therefore did not address or purport to modify the PSLRA’s safe harbor.
Holding: Motion to dismiss granted.