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Central District Of California Dismisses With Prejudice Putative Class Action Against Canadian Cannabis Manufacturer
12/21/2021On December 8, 2021, Judge Philip S. Gutierrez of the U.S. District Court for the Central District of California dismissed, with prejudice, a suit against a Canadian cannabis manufacturer (the “Company”), alleging that the Company failed to disclose material information about its facilities in Colombia and its transactions with other companies in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. In re Pharmacielo Ltd. Sec. Litig., No. 20-2182-PSG (C.D. Cal. Dec. 8, 2021). Plaintiffs—whose complaint was once dismissed—amended their complaint to bolster their allegations based on an assortment of Company statements regarding its facilities and expansion plans that plaintiffs alleged were designed to artificially inflate the Company’s stock price. The Court dismissed the amended complaint for failure to plead falsity or materiality and did so with prejudice because any amendments would be futile based on their “failed attempt to remedy” the deficiencies of the prior complaint.
Plaintiffs’ allegations were based on several Company statements between June 2019 and March 2020 related to: (i) the soil quality of the Company’s property in Colombia (the “Property”) that housed a cannabis cultivating facility, and the Company’s characterization of that facility and plans for the facility; (ii) third-party transactions that ultimately did not materialize the way that the Company had announced them; and (iii) the Company’s failed attempt to enter the cannabis market in Peru.
The Court rejected the claims for failure to allege materiality or falsity, and further noted that plaintiffs failed to allege any new facts in the amended complaint and instead added largely irrelevant facts, relied on vague references, and repeated arguments that the Court already rejected when dismissing the prior complaint.
Alleged Misstatements and Omissions Regarding the Property: The Court rejected the claims based on the Company’s statements regarding the Property. First, plaintiffs claimed that the Company’s advertisement that the Property “produc[ed] some of the world’s purest cannabis,” “[w]ith fertile soil, perfect equatorial sunlight, and state-of-the-art science and technology” was false because the Property was “far from perfect,” partially situated on a floodplain, and contaminated with mold. But, according to the Court, plaintiffs failed to allege how these issues impacted the Company’s business in any way, particularly because the Company only manufactured cannabis extract oil, not raw cannabis crops (which could potentially be affected by the floodplain and contaminant issues), and plaintiffs offered no allegations suggesting that the issues with the Property impacted the Company’s end product. Second, plaintiffs alleged that the Company’s statement that it was “successfully scaling up its Colombian operation and expanding capacity,” premised in part on the construction of a new Research, Technology, and Processing Centre on the Property by late 2019 was false because the construction faced significant delays. The Court held that statements regarding anticipated construction dates were not actionable as a matter of law because they were forward-looking statements of corporate optimism. Third, plaintiffs claimed that the Company’s statement that the facility on the Property was its “main” facility was materially misleading because that facility was in fact the “only” one in use. The Court disagreed, holding that plaintiffs failed to allege that the distinction between “main” and “only” was material and that it would have changed a reasonable investor’s opinion of the Company’s value.
Alleged Misstatements and Omissions Regarding Third-Party Transactions: The Court also dismissed the claims based on the Company’s statements related to two third-party agreements. First, plaintiffs alleged that the Company’s failure to disclose that an agreement with a third-party multi-state distributor was a related party transaction was per se a material omission. The Court rejected the argument because plaintiffs failed to cite authority that nondisclosure of a related party transaction was per se actionable and noted also that plaintiffs failed to allege that the transaction was a related party transaction under Canadian law that governed the Company’s disclosure obligations. Second, plaintiffs alleged that the Company misled investors to think that an agreement with a third-party distributor was a “significant opportunity” to enter the German market when that third party was “nearly insolvent and led by a CEO with a history of running companies into the ground,” and the agreement ultimately did not result in the benefits advertised by the Company of bringing the Company’s products into Germany. In dismissing the claims based on both third-party agreements at issue, the Court held that allegations that an agreement did not go as planned were insufficient to demonstrate a material misstatement or omission.
Alleged Omissions Regarding Entry to the Peruvian Market: Finally, plaintiffs alleged that the Company’s statement that it had “laid the groundwork” and was “looking forward to expand its presence throughout Latin America” was false because the Company had failed to comply with the bidding process to supply medical cannabis into Peru and knew that it would lose its bid. The Court dismissed this argument because plaintiffs failed to allege how the “loss of one bid in Peru rendered misleading [the Company’s] optimistic statements about then-current or future expansion in Latin America.”
Because the Court believed that any amendment would be futile based on the substance and nature of plaintiffs’ amended allegations, the Court dismissed the action with prejudice.
