Southern District Of New York Dismisses Securities Fraud Claims, Finding There Was No Material Omission Regarding Association With Individual Indicted For Stock Manipulation Scheme
03/14/2017On March 6, 2017, Judge Robert Sweet of the United States District Court for the Southern District of New York dismissed a putative class action against 6D Global Technologies, Inc. (“6D” or the “Company”) and certain of its officers and directors. Puddu v. 6D Glob. Techs., Inc., No. 15-cv-8061 (RWS) (S.D.N.Y. Mar. 6, 2017). Plaintiffs—purported shareholders of 6D—alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 when they failed to disclose the Company’s association with an individual whom United States regulators have charged in connection with stock manipulation schemes. The decision illustrates the challenges plaintiffs face when making claims based on alleged omissions because often there is no duty to disclose the omitted information.
6D is a Delaware company that offers software and technology consulting. Its largest shareholder is NYGG (Asia), an affiliate of New York Global Group (“NYGG”). In September 2015, the United States Department of Justice indicted the principal of NYGG, Benjamin Wey, for allegedly engaging in manipulative stock schemes, the Securities Exchange Commission filed a complaint against Wey based on the same alleged conduct, and the accompanying press releases revealed that Wey was the controlling shareholder of NYGG (Asia). Soon thereafter, NASDAQ temporarily halted trading 6D’s stock; trading resumed approximately six months later, and the stock price subsequently declined. Plaintiffs brought a securities fraud class action alleging Wey controlled and was involved in the day-to-day management of the 6D, including securing financing, interviewing candidates for leadership positions, revising the Company’s SEC filings, and selecting the Company’s auditors and outside counsel, but that this was not disclosed. Plaintiffs also alleged 6D did not disclose Wey’s beneficial ownership of 6D through his control of NYGG (Asia).
The Court rejected these claims, largely because plaintiffs could not establish a duty requiring 6D to disclose the allegedly omitted information. First, the Court held 6D’s filings sufficiently disclosed that Wey was a representative of NYGG (Asia) and that NYGG (Asia), as 6D’s largest shareholder, had the ability to “substantially influence” and, in some cases, “effectively control” 6D. The Court then found that the Company’s failure to identify Wey as a beneficial owner was not material, because there were no allegations that Wey beneficially owned more than five percent of 6D shares, which is the threshold requirement for disclosure under SEC rules. The Court added that plaintiffs could not rely on allegations in an SEC complaint suggesting such beneficial ownership, because “there had been no ‘actual adjudication of any of the issues.’” The Court also found that the Company had no duty to disclose that Wey was its “unofficial CEO,” because plaintiffs failed to plead any facts showing that Wey “somehow managed to usurp the board’s ultimate authority to manage 6D” or that he had any influence over the board. The Court also found that plaintiffs failed to plead scienter and loss causation.
The Court’s decision underscores that companies are not required to disclose all information, even in cases where the information might arguably be considered material, in the absence of some duty of disclosure. In this case, plaintiffs failed to identify a basis for such a duty.