Eastern District Of New York Dismisses Putative Class Action Against Cannabis Operator For Failure To Plead Misrepresentation And Loss Causation
On February 16, 2021, Judge Brian M. Cogan of the United States District Court for the Eastern District of New York dismissed a putative securities class action against a medical and wellness cannabis operator and certain of its officers alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. In re Curaleaf Holdings Inc. Securities Litigation, No. 19-cv-04486 (E.D.N.Y. 2021). Plaintiffs alleged the Company made false and misleading statements regarding the benefits and legality of its cannabinol (“CBD”) products. The Court dismissed the complaint, holding that the Company disclosed what plaintiffs claimed was not disclosed and that plaintiffs thus failed to plead falsity or, with respect to certain alleged misstatements, loss causation.
The Company is a U.S. cannabis operator listed on the Canadian Stock Exchange. In November 2018, the Company announced the launch of “a line of premium hemp-based CBD products” to support “overall wellness.” It marketed the products as treatments for a variety of health and medical conditions. In the initial announcement, as well as subsequent press releases, the Company stated that its products were of “highest standard for safety [and] effectiveness.” On July 22, 2019, the Food and Drug Administration (“FDA”) issued a letter warning the Company that several of its CBD products were unapproved and/or misbranded drugs sold in violation of federal law. Plaintiffs claimed the Company failed to warn investors of the lack of FDA approval and that potential regulatory issues would stymie Company sales. Plaintiffs also claimed the Company misleadingly touted the health benefits of its CBD products.
Several claims were dismissed for failure to plead falsity based on disclosures and warnings contained in a listing statement that the Company filed with the Canadian securities regulatory authorities in October 2018. For example, the Court dismissed plaintiffs’ claims that the Company failed to fully disclose the illegality of the sale of CBD products under federal law due to lack of FDA approval. Agreeing with defendants, the Court held that “the Company publicly and repeatedly acknowledged the very information that plaintiffs contend it concealed”—namely, that its CBD products were not approved by the FDA and that marketing them as having health benefits may violate federal law. The Court rejected plaintiffs’ argument that the Company did not disclose that the products were “illegal” but instead only disclosed that the products could be “in violation” of federal law, holding that there is “no requirement that a Company disclose its risk in any magic words preferred by plaintiffs.” The Court also rejected plaintiffs’ claim that the warnings were misleading because they only disclosed the “potential” for regulatory action” when such action was, according to plaintiffs, a certainty, concluding that “[d]escribing this risk in terms of potentiality rather than certainty – when certainty of enforcement could not be known anyway – does not violate securities law.”
The Court also dismissed plaintiffs’ claim that the Company mispresented its CBD products as being “safe” and “effective” for failure to allege loss causation. Plaintiffs claimed that the FDA letter “revealed” the “truth” that the Company’s products did not have the touted health benefits. However, the Court held that the FDA letter offered no opinion regarding the truth or falsity of the Company’s statements, but instead admonished the Company for making such statements without FDA approval. As such, the letter was simply a materialization of disclosed risks with respect to FDA approval and not a corrective disclosure as to the Company’s prior statements.