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Southern District Of New York Denies In Part And Grants In Part Motion To Dismiss Securities Class Action Against Social Media Company Owner
10/11/2023On September 29, 2023, Judge Andrew L. Carter, Jr. of the United States District Court for the Southern District of New York denied in part and granted in part a motion to dismiss a putative securities class action against the owner of a social media company and his beneficial trust. Oklahoma Firefighters Pension and Retirement System v. Musk, No. 22-cv-03026 (ALC) (S.D.N.Y. Sept. 29, 2023). Plaintiff alleged that defendants violated Sections 10(b), 20A, and 20(a) of the Securities and Exchange Act of 1934 by allegedly concealing the owner’s ownership interests in the Company to investors who sold shares of the Company between March 25, 2022, and April 4, 2022, the putative class period.
According to the complaint, the owner became the owner of the Company following a $44 billion takeover transaction that closed on October 27, 2022. The trust is a revocable trust of which the owner is the sole trustee, and the owner’s common stock in the Company is held by the trust. Plaintiff alleged that during the purported class period, the owner deliberately concealed his acquisition of more than 5% of the Company’s stock by failing to file disclosures required by the SEC, and that the owner hid and misrepresented his intent to change or influence control of the Company. Plaintiff contends that this alleged concealment deprived investors of material information regarding the true value of their securities.
On March 14, 2022, the owner’s acquisitions of the Company’s stock allegedly crossed the 5% ownership threshold, triggering the start of a 10-day window to satisfy disclosure obligations under SEC Rule 13d-1, promulgated under Section 13(d) of the Exchange Act. Plaintiff alleged that Schedule 13 filings are carefully tracked by investors because they represent a “red flag” that a company is in play for a potential takeover. On March 22, 2022, the last day of the alleged disclosure window, the owner did not file the requisite Schedule 10D, allegedly violating his disclosure obligations. The purported class period began on the next day, March 25, 2022. Plaintiff alleged that, over the next 10 days, the owner amassed over 13 million additional shares in the Company at a cost of half a billion dollars.
As a threshold matter, the Court rejected defendants’ argument that plaintiff could not seek damages under Section 10(b) or Rule 10b-5 for a breach of Section 13(d). The Court held that, to state a Rule 10b-5 claim for a misrepresentation, one need only allege that a defendant made a materially false statement in connection with the purchase or sale of a security, and that plaintiff adequately alleged material omissions and misstatements with respect to the Owner’s Form 13D filings. The Court observed that the fact that some violations of Section 13(d) may also be actionable under Section 18(a) of the Exchange Act does not preclude a claim under Section 10(b), citing Puddu v. 6D Glob. Techs., Inc, 742 Fed. App’x 553, 555-56 (2d Cir. 2018), in which the Second Circuit reversed the dismissal of a Section 10(b) claim predicated on an alleged violation of Section 13(d). The Court also noted that in Kamerman v. Steinberg, 891 F.2d 424, 430-31 (2d Cir. 1989), the Second Circuit did not explicitly hold that a Section 10(b) claim could not be predicated on a violation of 13(d)—it instead held that Section 13(d) itself does not contain a private right of actions for damages. Accordingly, while pointing out that the question of whether a Section 10(b) damages claim can be based on a Section 13(d) disclosure violation “has not been squarely addressed” by the Second Circuit, the Court was persuaded to sustain plaintiff’s 10(b) claim at the pleading stage.
With respect to defendants’ opposing inferences, the Court rejected defendants’ argument that deleting the 13G language about control intentions should have alerted the market to the owner’s control intentions, finding that filing the form was inherently misleading because it signaled his intention to be a passive investor. The Court further noted that although the owner’s past compliance with Section 13(d) as an isolated allegation may support an opposing inference that his failure to disclose was inadvertent, a reasonable person would deem the inference of scienter “cogent” and at least as compelling as any opposing inference one could draw.
The Court next held that plaintiff had adequately alleged loss causation. The Court found that, at the pleading stage, plaintiff adequately alleged that had the owner not hidden his ownership, investors would have traded at a higher price during the purported class period. Having found that plaintiff sufficiently pled each element of a Section 10(b) claim, the Court denied defendants’ motion to dismiss that claim.
Turning to the other claims, the Court denied defendants’ motion to dismiss the Section 20(a) claim, finding that defendants’ only argument—that a private right of action for damages under Section 10(b)—could not be maintained on the basis of an alleged breach of Section 13(d), which the Court had already rejected. Concerning plaintiff’s insider trading claim under Section 20A, the Court evaluated plaintiff’s allegation that the owner purchased shares of the Company while in possession of material, nonpublic information concerning his ownership of the Company’s stock and intentions for the Company, which he allegedly omitted to disclose. The Court rejected plaintiff’s allegations that the owner acted as a temporary insider, finding that plaintiff’s allegations that the owner met with executives to discuss his ownership stake and his plan to join the Board were not enough to properly allege he was a temporary insider. As such, the Court granted defendants’ motion to dismiss the Section 20A claim.
