Southern District Of New York Dismisses Action Against Cannabis Company For Failure To Sufficiently Allege Misrepresentations, Scienter
On September 30, 2021, Judge Andrew L. Carter, Jr. of the Southern District of New York dismissed an action asserting claims under the Securities Act of 1933, the Securities Exchange Act of 1934, and common law claims for breach of contract, fraud in the inducement, and negligent misrepresentation against a cannabis company and certain of its executives. SUN, A Series Of E Squared Investment Fund, LLC, et al. v. Sundial Growers Inc., et al., No. 1:20-cv-03579 (ALC), slip op. (Sept. 30, 2021). Plaintiffs were investors that allegedly acquired convertible notes prior to the company’s initial public offering (“IPO”) and later converted those notes into shares shortly after the IPO, with one also purporting to receive shares in the IPO itself. Plaintiffs alleged that defendants provided misleading information about a target entity that the company was on the verge of acquiring. The Court dismissed the action, holding that plaintiffs failed to adequately allege that the challenged statements were materially misleading in context at the time they were made, and that plaintiffs also failed to adequately allege scienter.
Plaintiffs alleged that defendants provided misleading information in investor presentations regarding a target entity in the UK, allegedly in connection with a plan to launch sales of hemp-derived cannabidiol (“CBD”) throughout Europe. In particular, plaintiffs challenged statements with respect to revenue projections and the target entity’s hemp cultivation license. Plaintiffs also asserted that these investor presentations were the subject of contractual representations in their purchase agreements for the convertible notes, and further claimed that the offering documents for the IPO were misleading for failing to correct the allegedly misleading information from the investor presentations.
The Court dismissed plaintiffs’ claims under the Securities Act and Exchange Act with prejudice, holding that the complaint did not adequately allege that the challenged statements in the investor presentations were materially misleading in context at the time they were made. In particular, the Court explained that plaintiffs did not adequately allege that the target entity did not possess a hemp cultivation license or that the company did not actually believe that it would be able to cultivate, process, and export product from the UK and do so at scale more quickly than its competitors. Id. at 14-15. The Court determined that certain statements, including revenue projections, also could not support a claim because they were forward-looking statements accompanied by meaningful cautionary language. Id. at 15-17. The Court also rejected plaintiffs’ challenge with respect to the IPO offering documents, holding that the supposedly uncorrected statements were not misleading at the time in context, as well as in light of additional cautionary disclosures in the offering documents. Id. at 17-18.
With respect to the Exchange Act claims, the Court further concluded that plaintiffs’ assertions that defendants “knew (or should have known)” of alleged misstatements were “conclusor[y]” and failed to raise a strong inference of scienter. Id. at 19. The Court explained that the allegation that defendants had a motive to commit fraud in order to conduct the IPO sooner failed to show that any defendant stood to benefit in a “concrete and personal way,” as there was no allegation that defendants sold their shares or did anything deliberately illegal. Id.
Having dismissed the Securities Act and Exchange Act claims with prejudice, the Court declined to exercise supplemental jurisdiction over the remaining non-federal claims for breach of contract, fraudulent inducement, and negligent misrepresentation, dismissing those claims without prejudice. Id. at 21.