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Northern District Of California Pares Claims In Putative Class Action Regarding Purchase Of Social Media Platform
12/19/2023On December 11, 2023, Judge Charles Breyer of the United States District Court for the Northern District of California narrowed a putative class action asserting claims under the Securities Exchange Act of 1934 against the purchaser of a social media company. Pampena v. Musk, — F. Supp. 3d — 2023 WL 8588853 (N.D. Cal. 2023). Plaintiffs alleged that they sold shares in the target company at depressed prices after the purchaser allegedly made material misstatements suggesting that he would not go forward with the acquisition. The Court held that certain of the challenged statements were actionable and granted leave to replead with respect to the others.
With respect to the challenged statement that the “deal [was] temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of users,” the Court explained that the purchaser’s statement—concerning a figure from the target’s SEC filings—would cause a reasonable investor to believe the purchaser was waiting for details from the target. The Court also determined that this statement would cause a reasonable investor to believe that “absent the provision of such information, the deal would not close.” Id. at *10. The Court therefore concluded that the statement was sufficiently alleged to be false because the purchaser had waived due diligence as a condition to closing on the transaction, and thus the target company had no obligation to provide such information. Id. In other words, because the company “did not have an obligation to provide this data … [d]efendant’s representation that [the company] did have this obligation in order for the deal to close was false.” Id. (emphasis in original). Moreover, while the transaction was, in fact, delayed beyond its original expected closing date, the Court reasoned that what made the statement false concerned whether the company “had an obligation to provide the requested information for the deal to close” not whether there would be any delay in actually closing the deal. Id. at *11.
The Court also found actionable the purchaser’s subsequent statements that fake and spam accounts made up at least 20% of the company’s users and that the deal therefore could not “move forward” while the purchaser was further investigating the issue. The Court explained that statements about the volume of spam accounts were actionable because, even if the purchaser had conducted an analysis that supported those statements, it was plausible for “the investing public to believe that [d]efendant received—and was basing his statement on—bot user data from [the company], which was not the case.” Id. at *12. The Court also noted that in conjunction with the prior statement indicating that the deal was “on hold,” “a reasonable investor would likely find [d]efendant’s access to and findings about [the company’s] data to be material to their investment decision-making.” Id. The Court also found the statement that the deal “could not move forward” was actionable for the same reasons as the prior statement asserting that the deal was “on hold.” Id.
The Court also explained why plaintiffs’ allegations were insufficient with respect to other challenged statements. Regarding the purchaser’s statement that the company had complained that he had violated a non-disclosure agreement by revealing certain information about how the company checked for spam accounts, the Court noted plaintiffs alleged nothing to show why this statement was false. Id. at *11. Similarly, the Court noted plaintiffs failed to explain why the purchaser’s statement that information about the use of spam accounts at the company “is fundamental to the financial health of [the company]” was false or misleading. Id. And while the purchaser sent letters to the company demanding data and purporting to terminate the merger agreement, the Court held that statements in these letters were not actionable. The Court noted that plaintiffs failed to specify which portions of the letters were misleading and, moreover, that even if the purchaser intended to create uncertainty in the markets through these letters or to support a legal dispute with the company, this did not necessarily mean that the statements in the letter were false. Id. at *14–15.
Turning to the other elements of plaintiffs’ claims, the Court next held that plaintiffs adequately alleged scienter. The Court noted that the challenged statements concerned the purchaser himself and the merger agreement he negotiated. Id. at *16. In addition, plaintiffs alleged that the purchaser admitted to making certain statements because he did not want to go forward with the transaction, which the Court held created an inference of motive. Id. at *16–17. The Court also noted that the purchaser took positions in litigation relating to the transaction that supported the suggestion that even if the purchaser made statements “that were subjectively consistent with his beliefs,” plaintiffs alleged facts “raising a strong inference that he knew or recklessly disregarded the fact that he had material information (such as the waiver of due diligence) that would render his statements false or misleading.” Id. at *18. Thus, the Court explained that, “viewing all the evidence holistically in the light most favorable to Plaintiffs,” plaintiffs had adequately alleged facts giving rise to a strong inference of scienter. Id.
The Court further held that plaintiffs adequately pleaded loss causation. The Court explained that plaintiffs had generally pleaded loss causation under a corrective disclosure theory, under which the corrective disclosure occurred when the purchaser announced he would go through with the deal, which caused the target company’s stock to rise. Id. The Court determined that the purchaser’s change of heart amounted to disclosing that the company was never obliged to provide the purchaser with the information he claimed was required to move forward. Id. at *19. With respect to the statement that spam accounts made up “at least 20%” of the company’s users, the Court held that while it was questionable whether plaintiffs had pleaded a corrective disclosure occurred in connection with that statement, plaintiffs had adequately alleged this statement itself caused the company’s stock to fall by nearly ten percent on the day it was made and that this direct economic loss was sufficient to plead loss causation. Id. at *19–20.
Finally, the Court rejected the purchaser’s argument that his statements were immune from suit under the Noerr-Pennington doctrine. This doctrine immunizes from suit certain statements made in the course of petitioning the government. Id. at *20. The Court assumed without deciding that certain statements made leading up to the litigation between the purchaser and the company could be protected from suit because the statements were intertwined with a request for judicial relief to not complete the transaction. See id. But the Court explained the Noerr-Pennington doctrine did not apply to the statements the Court held were actionable because they were public statements about the transaction and were not the type of statements that are only made in the context of petitioning a government entity. Id.
