On October 24, 2019, Judge Charles T. Lee of the Connecticut Superior Court granted a motion to strike claims alleging violations of Sections 11, 12(a) and 15 of the Securities Act of 1933 (the “Securities Act”) in connection with an initial public offering brought against the issuer, certain of its officers, and the underwriters of the offering. City of Livonia Retiree Health & Disability Benefits Plan v. Pitney Bowes Inc.
, No. X08 FST CV 18 6038160 S (Conn. Super. Ct. Oct. 24, 2019). The Court had previously granted a protective order staying discovery pending the disposition of the motion to strike pursuant to the discovery stay provided in the Private Securities Litigation Reform Act, in one of the first state court decisions after the Supreme Court’s decision in Cyan Inc. v. Beaver Cty. Employees Ret. Fund
, 138 S. Ct. 1061 (2018). See
State Court Stays Discovery Under the PSLRA During Pendency of Motion to Strike, Need to Know Litigation Newsletter (May 29, 2019), https://www.lit-sl.shearman.com/State-Court-Stays-Discovery-Under-The-PSLRA-During-Pendency
. In granting the motion to strike, the Court held that plaintiffs had failed to plead violations of the Securities Act because they did not identify any actionable misstatements or omissions from the relevant offering documents.
The lawsuit was brought by purchasers of two series of notes offered in connection with the initial public offering. Plaintiffs claimed that various financial documents incorporated by reference in the prospectus of the IPO contained misleading statements concerning the company’s third quarter performance during 2017, which quarter was ongoing at the time of the IPO. Slip op. at 2-3. More specifically, Plaintiffs alleged that defendants failed to disclose that the company had, over the course of the third quarter, experienced decreasing revenues and sales for several of its services, and that the decrease affected the company’s net income and earnings before interest and taxation. Id.
at 5. Plaintiffs also alleged that the declines were “‘trends’ or ‘uncertainties’ that triggered” an obligation to make additional disclosures pursuant to Item 303 of Regulation S-K (“Item 303”). Id.
at 6. Plaintiffs further alleged that defendants were aware of these issues at the time of the IPO, and that the securities issued through the IPO were trading well below their offering price at the time the litigation was initiated. Id.
Noting that the Securities Act does not require that every interesting fact be disclosed, id.
at 9, the Court first considered plaintiffs’ allegation that defendants violated an affirmative disclosure obligation under Item 303 by “failing to disclose that lower equipment sales and margins” in the company’s largest business segment would reduce the company’s net income and earnings before interest and taxes in 2017. Id.
Based on the SEC’s interpretative guidance concerning what constitutes an “uncertainty” or “trend” under Item 303, the Court held that plaintiffs’ allegations of known intra-quarter decreases in sales and margins constituted neither uncertainties nor a trend because they did not occur over the duration of multiple quarters. Id.
at 14. Further, in analyzing relevant case law on the interpretation of “trend,” the Court concluded that “[c]ourts have been notably reluctant to impose disclosure obligations on mid-quarter company financial results absent allegations of broader factors driving these fluctuations” and that there is an “implicit distinction in Item 303 between trends themselves and their financial impact.” Id.
at 13. Because plaintiffs alleged that the declines in overall equipment sales and margins occurred only during the third quarter of 2017—during which the IPO occurred—the Court held that plaintiffs failed to sufficiently allege a “trend” requiring disclosure under Item 303. The Court thus found that plaintiffs’ failed to sufficiently plead that defendants had an independent duty to disclose the alleged declines in sales and margins pursuant to Item 303.
The Court next assessed whether statements included in the company’s registration statement that its largest business segment was “characterized by a high level of recurring revenue,” id.
at 17, and that the company experienced improvements in equipment sales and margins during the second quarter of 2017, id.
at 18, were rendered misleading due to the omission of information regarding the purported decline in revenue and sales for that segment during the third quarter of 2017. The Court held that such statements were not misleading, noting that “a plain reading” of these statements makes clear that the company was not making a “promise that the … segment would generate consistently high levels of overall revenue in the future,” and that in “full context” the notion of “recurring revenue” is a specific type of revenue, rather than an assertion as to the overall amount of revenue. Id.
at 17. As to the statements concerning the improvements in equipment sales and margins during the second quarter of 2017, the Court further held that such statements were “unequivocally in the past tense and do nothing besides offer further explanation as to various aspects of the … segment’s second quarter performance.” Id.
at 18. As such, the Court held that defendants were “under no obligation to disclose these alleged declines” prior to or contemporaneously with the IPO, and granted defendants’ motion to strike in its entirety. Id.