Southern District Of New York Denies Motion To Dismiss Putative Class Action Against Sports Entertainment Company
On August 6, 2020, Judge Jed S. Rakoff of the United States District Court for the Southern District of New York denied a motion to dismiss a putative class action asserting claims under the Securities Exchange Act of 1934 against a sports entertainment company and certain of its executives. City of Warren Police & Fire Ret. Sys., v. World Wrestling Ent. Inc., No. 20-CV-2031 (JSR), 2020 WL 4547217, at *1 (S.D.N.Y. Aug. 6, 2020). Plaintiff alleged that the company made misrepresentations about its media contracts in the Middle East and North Africa (“MENA”). The Court held that the complaint, “while not a model of clarity, adequately alleges an overall claim of securities fraud,” including with respect to actionable misrepresentations, scienter, and loss causation.
Plaintiff alleged that the company misleadingly assured investors that its international media rights agreements, a number of which were nearing expiration, would be renewed on favorable terms. In particular, plaintiff alleged that although the company told investors that it was working on “renewing” its MENA region media rights agreement, in fact the company’s counterparty had terminated the agreement nine months early and had informed the company that it would not renew it. Id. at *1. Plaintiff further alleged that, when the company disclosed the termination of this agreement three months after it occurred, the company sought to downplay the impact of the termination by simultaneously announcing that it had reached an agreement “in principle” with the Saudi government for a media rights agreement in the MENA region that would be finalized “very soon.” Id. at *2. But plaintiff alleged that this too was false, because “strong circumstantial evidence” showed that the parties were actually far apart in their negotiations at the time and ultimately failed to reach an agreement. Id.
The company argued that statements that it was “working on” the “rights renewal process outside the U.S.” in “key markets” including “the Middle East,” and that “[w]e want to get the international renewals completed,” were not actionable because the term “renewals” was a term of art in the broadcasting industry and referred to distribution rights in a particular market, but not necessarily with any particular counterparty. Id. at *3. The Court rejected this argument, finding it “extraordinary” and facially implausible. Id. Moreover, the Court explained that, notwithstanding the heightened pleading standard under Rule 9(b) and the PSLRA, the Court was still bound to accept as true the complaint’s well-pleaded allegations of fact and draw reasonable inferences in plaintiff’s favor. Thus, the Court held that it “must assume, as the complaint asserts, that [the term ‘renewal’] carries its ordinary meaning” and that therefore a reasonable investor could have interpreted the company’s statement to mean that it was working to renew its preexisting distribution agreement, which was its only such agreement in the Middle East. Id. at *4.
The complaint also alleged that a disclosure in one of the company’s SEC filings about the risk to the company’s “financial outlook” if it failed to renew its distribution agreements was misleading because the MENA agreement had already been terminated. Id. While defendants argued that the disclosure related to the “potential effect” of the termination of an agreement, not the risk of the failure to maintain an agreement itself, the Court rejected this argument, noting that the complaint adequately alleged that the failure to reveal the termination of the agreement adversely affected the company’s business and left the company “scrambling to find a replacement partner,” putting in “serious jeopardy” its ability to finalize a media rights agreement for the MENA region that year. Id. Moreover, the Court rejected the company’s argument that the statements were not material, concluding that the MENA agreement was not “so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of [its] importance.” Id.
With respect to the company’s statements that it “believe[d] it ha[d] agreements in principle” with the Saudi government regarding the “broad terms” for a “media rights deal in the MENA region,” and would be “announcing [the] deal very soon,” plaintiff alleged these statements could not have been true in light of statements from a confidential witness that the company and the Saudi government were very far apart in their negotiations at the time these statements were made. Id. at *5. While the company argued that the witness’s statements were based on hearsay and indirect knowledge, the Court held that they nevertheless could be taken into account because the witness was adequately described in the complaint to support the probability that a person in that position would possess the information alleged—including that, several months after defendants’ alleged misstatements, the witness joined a company negotiating on Saudi Arabia’s behalf, did analysis specifically related to the value of the prospective agreement, and spoke with others about the deal. Id. at *6. The Court agreed that the witness’s allegations supported the conclusion that the company’s belief that it had an “agreement in principle” was false and misleading, and that the fact that the parties had not agreed on fundamental terms of a contract months after defendants’ statement “strongly support[ed] the inference that the defendants could not have had a near-final agreement a few months earlier.” Id.
Defendants also argued that statements with respect to both agreements were non-actionable expressions of opinion. Id. at *7. The Court acknowledged that certain alleged misstatements, at least in part, were opinions, but nevertheless determined that they were still actionable. With respect to the preexisting MENA agreement, while the company noted that the parties were still “working on” the agreement, the Court noted that this language didn’t strongly indicate that the company was offering an opinion and that the statement plaintiff challenged contained an embedded factual statement, suggesting the agreement was still in place. Id. With respect to the prospective agreement with the Saudi government, the Court similarly explained that the company had stated that it “believed” it had an agreement in principle in place, but that this belief did not fairly align with information the company possessed about the status of these negotiations at the time. Id. The Court also summarily rejected that any of these statements were forward-looking, and thus found that they were not subject to the “safe harbor” provision in the PSLRA for certain forward-looking statements accompanied by meaningful risk disclosures. Id. at *8.
With respect to scienter, the Court concluded that a declaration the company submitted in support of its motion to dismiss acknowledging the preexisting agreement had been terminated constituted an admission that the company’s statements regarding the renewal of that agreement were knowingly or recklessly false. Id. The Court also concluded the individual defendants’ senior positions, the alleged importance of the agreement to the company’s financials, and their statements themselves about the status of the negotiations also led to an inference of scienter. Id. The Court further determined that with respect to one executive, the complaint sufficiently alleged scienter based on “motive and opportunity” in the form of alleged stock sales that were substantial and unusual compared to the executive’s past trading practices. Id. Moreover, with respect to the prospective agreement with the Saudi government, the Court determined that circumstantial evidence based on confidential witness statements, combined with allegations of motive that defendants made their statement regarding the negotiations in an attempt to minimize the damage from the termination of the prior MENA agreement, “plausibly supports an inference of scienter embracing the entire alleged scheme.” Id. at 10.
Finally, the Court held that loss causation was also adequately pleaded. Id. The Court found that plaintiff adequately alleged that the disclosure of the company’s failure to reach an agreement with the Saudi government caused the company’s stock price to decline, and that when the company announced lower-than-expected income projections, this reflected a materialization of risks unknown to investors that the company would not receive revenues for MENA distribution rights as it had under the preexisting agreement. Id.