Saturday, March 27, 2021
This week, I offer brief comments on a couple of different things:
1. I’ve previously blogged about courts that stretch the definition of “forward-looking statement” in order to preclude defendants from claiming the protections of the PSLRA safe harbor. But probably the more common scenario runs in the other direction. Behold Police and Fire Retirement System of Detroit v. Axogen, 2021 WL 1060182 (M.D. Fla. Mar. 19, 2021), where the plaintiffs alleged that Axogen claimed that the potential demand for its medical products was very large because of the sheer number of nerve repair surgeries performed every year in the U.S. As it turned out, far fewer surgeries were performed annually; in effect, the plaintiffs argued that Axogen overstated the size of its market. Here’s what the court said in its dismissal order:
Plaintiff … [focuses] in particular on statements made in Axogen’s offering materials and elsewhere that a certain number of people in the United States “each year...suffer” traumatic PNI [peripheral nerve injuries], which “result in over 700,000 extremity nerve repair procedures,” and that “[t]here are more than 900,000 nerve repair surgeries annually in the U.S.” Plaintiff argues these statements refer to “present existing conditions.” But the number of injuries occurring “each year” reflects an ongoing state of affairs extending from the present into the future, rather than an observable state of affairs in existence at the specific point in time when the statement is made. Such a statement cannot be determined to be true or false by reference to “present existing conditions,” and is therefore analogous to other present tense statements the Eleventh Circuit has held to be forward-looking.
Thus is a representation about ongoing conditions - the number of nerve repair surgeries performed annually - transformed into a projection about future nerve repair surgeries. The court did not even appear to consider whether a reader would interpret Axogen’s statements as implying recent past annual figures in this range (a range that, according to the plaintiffs, was wildly inflated).
The problem here is that, in the Seventh Circuit’s words, “Investors value securities because of beliefs about how firms will do tomorrow, not because of how they did yesterday.” Wielgos v. Commonwealth Edison Co., 892 F.2d 509 (7th Cir. 1989); see also Glassman v. Computervision Corp., 90 F.3d 617 (1st Cir. 1996). Any representation of current conditions is relevant to investors because they will extrapolate from that to predict future conditions, but if that were enough to make the statement “forward-looking,” well, everything would be protected by the safe harbor.
2. Tesla is being sued again, this time by a stockholder who claims that Elon Musk’s … colorful … behavior on Twitter violates his settlement with the SEC, is a threat to corporate value, and that the Board’s failure to rein him in represents a violation of its duty of good faith (and hey, as I was drafting this very post Musk did it again). While I’m sure there are many things one could say about the lawsuit, the part that struck me was where the plaintiff alleged that the Board is dependent on Musk, in part, because Musk is indemnifying its members for any legal liability. As the plaintiff puts it:
the Board is insured, and thus indemnified, by Musk personally for a majority of the harm caused by Musk alleged herein. The Board cannot be considered independent in any way from Musk in these circumstances. Musk could refuse to pay out the ‘insurance policy’ if the Board elected to proceed with an investigation of him, and the Board would have every incentive to abandon that investigation.
It is my understanding from Tesla’s SEC filings that the personal indemnification arrangement ended in 2020 and the Board now has an ordinary insurance policy, but the plaintiff is, as I read it, claiming that Musk still provides the coverage for certain acts that occurred in 2020. The insurance arrangement raised a lot of eyebrows when it was first disclosed, and at the time I wondered what its legal significance would be for Board dependence. I now look forward to finding out.
(I should note that when the indemnification agreement was first disclosed, Tesla claimed that Musk’s performance was nondiscretionary, but that still raises questions about what Musk can and can’t dispute - and how interested the Board is in ensuring his solvency).
3. WeWork! In addition to the news that the plans to go public are back on – this time via SPAC – it’s the subject of another lawsuit, this time by the former shareholders of a private company that WeWork acquired, using its own stock as currency. Unsurprisingly, the former shareholders argue that various WeWork officers, including Adam Neumann, overstated the value of WeWork shares when negotiating the deal. What is surprising, to me anyway, is that the claims are solely brought under Section 10(b) of the Exchange Act. Section 10(b) claims are very difficult to bring – apart from the higher pleading standards of the PSLRA, they are also relatively narrow in terms of the type of conduct that is deemed prohibited. Their only real advantage over state claims – whether common law or even blue sky – is their availability for secondary market purchases, and the fraud-on-the-market presumption of reliance. So I’m wondering why the plaintiffs elected to bring claims solely under Section 10(b), in a case where neither of these advantages are relevant.
4. Insider trading! A guy named Jason Peltz was recently indicted for insider trading and related offenses, arising out of trades in companies rumored to be the subject of takeover interest. What makes this indictment unusual, however, is that it claims that an unnamed Reporter for a “financial news organization” was one of Peltz’s sources, providing Peltz with information about upcoming news stories. (The indictment tactfully declines to name the Reporter or the news organization, but the stories are identified with sufficient particularity that deducing his identity is a relatively simple task). So here’s the thing: Though Peltz is charged under 10b-5 for “misappropriating” confidential information, the indictment makes no reference to fiduciary obligations or the duty of trust and confidence. Meaning, it’s unclear whether the claim is that Peltz misappropriated information from the Reporter, or whether the claim is that the Reporter misappropriated from his publication and intentionally tipped Peltz (echoing the dispute at the heart of United States v. Carpenter, 791 F.2d 1024 (2d Cir. 1986)). On this point, I note that nothing in the indictment suggests any kind of longstanding close friendship between the Reporter and Peltz, but the indictment does mention that the scheme began when Peltz obtained inside information about a takeover bid, purchased the target’s stock, and then tipped the Reporter, who was able to publish a scoop (causing the target’s stock price to rise, and allowing Peltz to cash out).
And ... that’s all!