Saturday, January 8, 2022

Corporate scienter: was that so hard?

Edit: After I drafted this post, the Seventh Circuit finally decided Seafarers Pension Plan v. Bradway.  I blogged about the district court decision in that case here, and maybe I will eventually find the strength to draft a full blog post on CA7’s new decision reversing the district court, but in case I don’t because I’m screaming on the inside and nothing matters anymore, here’s my tweet thread on the subject

Meanwhile, back to today's intended post: 


I’ve blogged here a couple of times about courts’ struggles to evaluate allegations of scienter against a corporate defendant in a securities fraud case, and in particular, the problem of conflating pleading standards with the substantive definition of scienter.

Which is why I was so happy to see the court get it right in Acerra v. Trulieve Cannabis Corp., 2021 WL 6197088 (N.D. Fla. Dec. 30, 2021); all the more impressively done because, as far as I can tell from the briefing, the plaintiff didn’t make much of a corporate scienter argument and instead focused on the scienter of individual defendants.

The essence of the plaintiffs’ claim was that a medical marijuana company misled investors about the quality of its grow facilities.  The court dismissed allegations based on certain statements for failure to allege falsity; when that was done, a single actionable statement remained, namely, that Trulieve’s website falsely represented that its products were “hand-grown and specially cultivated in a state-approved, climate-controlled environment to ensure purity and safety. We leave nothing to chance while letting nature do her work.”

At that point, the court turned to the question of scienter, and concluded that plaintiffs failed to show that the individual defendants – the company’s CEO and CFO – drafted or even knew about the website text; thus, the corporate defendant could not be held liable vicariously based on the officers’ misconduct.  But the court did not stop there; it added:

Trulieve could of course be held liable based on acts or omissions not just of the named individual defendants but also based on acts or omissions of another officer or employee, so long as the officer or employee acted with the requisite state of mind. But here, as in Mizzaro [v. Home Depot, Inc., 544 F.3d 1230 (11th Cir. 2008)], the plaintiffs have not alleged scienter of the corporate defendant based on the knowledge or intent of any other officer or employee. The second amended complaint does not allege the existence of any individual, whether known or unknown, who both drafted or approved the website’s “climate-controlled” statement and acted recklessly or with intent to defraud. And it is by no means obvious—there is no “strong inference”—that any such person exists. The second amended complaint gives no reason to believe any single person must both have been aware of the website’s precise language, on the one hand, and aware of precisely what kind of facilities were out in the field.

I don’t have an opinion on whether the court reached the right outcome on these facts, but the analysis is exactly what I’d hoped courts would undertake.  The court asked whether the complaint created a strong inference that any agent of Trulieve, acting with scienter, drafted the false statement; the court entertained the possibility that such an agent might not be a defendant, and might exist even if their identity was unknown to the plaintiffs at pleading; recognized that corporate liability might attach if such an agent did exist; but concluded that the complaint did not raise a strong inference of that possibility.

I’m so pleased.

Ann Lipton | Permalink


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