On February 4, 2020, Judge Catherine C. Blake of the United States District Court for the District of Maryland dismissed certain claims in a putative class action asserting claims under Section 10(b) of the Securities Exchange Act of 1934 against a media company and certain of its executives. In re Sinclair Broadcast Group, Inc. Sec. Litig., slip op., No. 18-cv-2445 (D. Md. Feb. 4, 2020). Plaintiffs alleged that the company made various misstatements to the FCC in connection with an ultimately unsuccessful merger with another media company, and that the company had engaged in an illegal price-fixing conspiracy regarding advertising rates. The Court dismissed most of plaintiffs’ claims, but held that plaintiffs had sufficiently alleged falsity and scienter with respect to certain specific statements concerning proposed divestitures in connection with the merger.
As a threshold matter, the Court rejected the company’s argument that alleged misstatements in submissions to the FCC constituted “legal advocacy” and therefore were not made “in connection with the purchase or sale of any security,” as required for liability to attach under Section 10(b). Id. at 9. The challenged statements were contained in public filings, the Court noted, and the company offered no reason why a reasonable investor might not have relied on those statements. Id. at 10.
The Court then proceeded to analyze various categories of alleged misstatements regarding the merger and potential divestitures required by the FCC in connection with the merger. The Court determined that a number of such statements were insufficient to support a claim, holding that the statements were either of historical fact, were non-actionable opinions, or were forward-looking statements accompanied by meaningful cautionary language. In particular, the Court held that alleged misrepresentations regarding the company’s intent to comply with divestiture requirements failed to establish scienter because plaintiffs’ only specific allegation that at the time of the challenged statement the company secretly intended not to comply with its divestiture obligations was based on the company’s subsequent conduct. Id. at 13, 15. Similarly, a statement that the company had “agreed to divest” certain holdings merely reflected the historical fact of the agreement and, to the extent it might be understood to relate to future events, plaintiffs alleged no facts supporting an inference that this statement was knowingly false when made. Id. at 14-15.
The Court concluded, however, that plaintiffs sufficiently alleged misrepresentations as to two statements regarding the company’s proposed divestitures. Plaintiffs alleged that the company falsely stated to the FCC that the second company to which it would divest certain holdings was “operated completely separately” and that the company did not “control or hold any attributable interest” in the second company. The Court held that these allegations concerned statements of fact, not opinion, and they would have been material to a reasonable investor, especially in light of media reports questioning the legitimacy of the proposed divestitures. Id. at 30-31. Moreover, the Court credited allegations by confidential witnesses that the second company was a “shell” or “shadow” company and was “effectively the same entity,” further noting that plaintiffs met their burden to describe these sources with particularity to support an inference that the persons would possess the information alleged. Id. at 30.
The Court rejected plaintiffs’ allegations that the company engaged in an illegal conspiracy with competitors to fix advertising rates. Plaintiffs alleged that statements that the company was “beating [its] peer group” and that it “aim[ed] to succeed through fair and honest competition” and “never through unethical or illegal business practices” were false and misleading in light of confidential witness statements and allegations in a Department of Justice complaint. Id. at 37. The Court held that these allegations were insufficient because plaintiffs failed to allege with particularity the basis of the illegality. In particular, allegations from the Department of Justice complaint were unproven and could not establish illegality, while the confidential witness statements failed to describe “any concrete examples of conduct consistent with an illegal price-fixing scheme.” Id. at 38.
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