District Of New Jersey Dismisses Putative Class Action Against Cannabis Company For Failure To Adequately Allege Misrepresentations
On July 6, 2021, Judge John Michael Vazquez of the U.S. District Court for the District of New Jersey dismissed a putative class action asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against a Canadian company that manufactures and distributes cannabis products (the “Company”) and certain of its executives. In re Aurora Cannabis, Inc. Sec. Litig., No. 19-cv-20588 (JMV) (JBC), slip op. (D.N.J. July 6, 2021). Plaintiffs alleged that defendants made material misstatements and omissions relating to the Company’s earnings projections that allegedly failed to disclose certain headwinds in the industry. The Court held that plaintiffs failed to identify any materially false or misleading statements, and also noted weaknesses in plaintiffs’ allegations with respect to the scienter and loss causation requirements. Accordingly, the Court dismissed the first amended complaint in its entirety, but granted plaintiffs leave to replead to cure the identified defects.
The Court addressed various categories of alleged misstatements contained in the Company’s press releases, earnings calls, and press interviews, which plaintiffs alleged were misleading because they were unrealistically optimistic about the Company’s projected earnings while failing to disclose that the Company’s sales were hindered by (i) an oversupplied market, (ii) insufficient retail stores in Canada, and (iii) the widespread availability of cannabis on the black market. In each instance, the Court agreed that the challenged statements were not, in fact, misleading, in light of the Company’s risk disclosures. For example, while plaintiffs asserted that the risk of an oversupplied market should have been disclosed, the Court explained that the Company’s filings warned that the “price of production, sale, and distribution of marijuana will fluctuate widely due to how young the marijuana industry is and is affected by numerous factors beyond the Company’s control,” including “increased production due to new production and distribution developments and improved distribution methods.”
With respect to plaintiffs’ assertion concerning the risk of insufficient retail stores throughout Canada, the Court noted that the Company’s filings disclosed regulatory risks associated with the Canadian cannabis market, and had also specifically warned during a conference call that the Company would “have to see a better retail infrastructure in provinces across the country, in order to see the kind, the level of sales that I think everybody is anticipating.” The Court also emphasized that plaintiffs merely argued that the disclosures were boilerplate but did not “adequately address the sufficiency of Defendants’ disclosures.” Further, with respect to the Company’s alleged failure to disclose the availability of cannabis on the black market, the Court first observed that the Company had disclosed the risk on a certain earnings call and subsequent earnings statement, and plaintiffs had not challenged the sufficiency of those disclosures. Regarding the time period prior to the earnings call, the Court noted that plaintiffs contended that statements regarding the global demand for cannabis were misleading, but the news articles plaintiffs pointed to as revealing the extent of black market demand only discussed demand within Canada. The Court concluded that plaintiffs failed to allege how omissions about the Canadian black market for cannabis rendered statements about global demand misleading. The Court further determined that other statements plaintiffs challenged concerning the Company’s ability to grow, its operating capacity, and its earnings potential were not rendered misleading by the alleged failure to disclose demand for cannabis on the black market.
Although the Court emphasized that it “need not reach the issue of scienter” given the deficiencies in plaintiffs’ claims regarding alleged misrepresentations, the Court went on to observe that it agreed with plaintiffs that the timing of certain optimistic statements—shortly before less positive results were reported—was “suspicious.” However, the Court further noted that plaintiffs’ allegations of scienter depended on the theory that defendants either knew of or consciously disregarded risks that were published in the news media, and plaintiffs had not made any allegations showing that the Company’s management relied on such articles or provided information that was materially inconsistent with the Company’s own internal information.
Similarly, the Court observed with respect to loss causation—which the Court also emphasized was not necessary to reach given the amended complaint’s failure to identify a materially misleading statement or omission—plaintiffs relied on both a “materialization of the risk” theory (which required proof that the undisclosed risk was the “proximate cause” of the alleged loss) and a corrective disclosure approach (which requires proof that a later disclosure both reveal the truth of the alleged misrepresentation and introduce “new information” into the market). Defendants argued that if the large volume of press reports about headwinds in the Canadian cannabis market and the Company’s growth strategy were widely known—as plaintiffs argued in support of their scienter argument—then there were no “new facts” to support plaintiffs’ loss causation theories. The Court agreed that plaintiffs “should have addressed the legal impact, if any, third-party information had vis-à-vis proximate cause.” However, because the Court granted leave to amend, it emphasized that it was not making a “definitive finding” on either scienter or loss causation.
Lastly, because the Court dismissed the Section 10(b) claim for failure to state a claim, it dismissed the Section 20(a) claim against the individual defendants as well.