Second Circuit Upholds Dismissal of AstraZeneca Investor Suit; Southern District of New York Dismisses Stockholder Suit Against Array Technologies; Eastern District of New York Tosses Stockholder Class Action Based on Ericsson Bribery Investigation
Second Circuit Upholds Dismissal of AstraZeneca Investor Suit
On May 16, 2023, the US Court of Appeals for the Second Circuit
affirmed the Southern District of New
York's order dismissing an action brought by investors
of AstraZeneca PLC (AstraZeneca) attempting to hold the company
liable for alleged misstatements regarding enrollment in its
clinical trials for a COVID-19 vaccine candidate. The group of
investors brought claims against AstraZeneca under Section 10(b) of
the Securities Exchange Act of 1934 (the Exchange Act).
On appeal, the investors argued that the company failed to disclose
that an insufficient number of patients older than 55 were enrolled
in the studies, rendering the studies unable to determine whether
the vaccine was effective in this age group. The investors claimed
the omission of this information rendered statements regarding the
progress of the studies and interim results false and misleading
because they created the "impression that their trials were
proceeding as expected, [and] producing positive results, . . .
with no significant setbacks or unusual issues."
AstraZeneca's stock price dropped in late 2020 and early 2021
after these and other issues were disclosed to the market.
The Second Circuit ruled that, even if true, the supposed omission
of details regarding the enrollment of older patients did not
render the challenged statements regarding the progress of the
studies false or misleading because those statements did not
address the topic of the age of enrolled patients. The court also
rejected the investors' argument that the defendants were
motivated to fraudulently conceal patient ages to inflate
AstraZeneca's stock price to fund its December 2020 acquisition
of Alexion Pharmaceuticals, finding that the investors failed to
draw a sufficient link between the challenged statements and this
acquisition. The court further found that AstraZeneca's
voluntary disclosure of other issues regarding the studies to
regulators well before the public disclosure of negative
information regarding the studies undermined any inference of
fraudulent intent.
This case demonstrates that courts may be skeptical of Section
10(b) claims based on the alleged omission of specific negative
information from more generalized public statements, at least where
the allegedly omitted information does not directly contradict the
public statements.
Southern District of New York Dismisses Stockholder Suit Against Array Technologies
On May 19, 2023, US District Judge Victor Marrero of the
Southern District of New York dismissed a putative class action against solar
panel infrastructure company Array Technologies, Inc. (Array),
finding that investors failed to allege any actionable
misstatements in Array's disclosures about how rising steel
prices during the COVID-19 pandemic would impact its business. The
investors alleged that Array misled investors in prospectus
documents and earnings calls in violation of Section 10(b) of the
Exchange Act, and Sections 11 and 12(a)(2) of the Securities Act of
1933 (the Securities Act).
According to the complaint, Array — whose principal product
is an integrated system of steel supports and electric motors that
move solar panels throughout the day to maintain an optimal
orientation to the sun and enhance energy production —
knowingly used outdated steel and logistics costs in its financial
models, painting a false picture of Array's margins and
business prospects. The complaint alleges that, ultimately, when
Array disclosed that increases in steel prices and logistics costs
were having and would continue to have a material impact on its
margins for the foreseeable future, this caused Array to miss
profit expectations and withdraw its full-year outlook, resulting
in a 46% drop in its stock price.
In dismissing these claims, the court found that Array's
optimism about its past ability to reduce costs and leverage its
supply chain was inactionable puffery, given that Array was
"not required to take a gloomy, fearful or defeatist view of
the future." To the extent that ultimately Array was not able
to meet its projections given the unprecedented rise in commodities
prices during the COVID-19 pandemic, "such circumstances
constitute classic fraud by hindsight and not actionable." As
the court held, "[t]he securities laws do not require any
issuer, including Array, to have such prescience for divining
market volatility with the precision that the investors seek,
especially not in the context of all the financial market
challenges, uncertainties, and volatility engendered by the
COVID-19 pandemic."
Eastern District of New York Tosses Stockholder Class Action Based on Ericsson Bribery Investigation
On May 24, 2023, US District Judge William Kuntz of the Eastern
District of New York dismissed with prejudice a putative class
action against Telefonaktiebolaget LM Ericsson (Ericsson), finding
that investors failed to allege any actionable misstatements in
Ericsson's disclosures about its growth in the Middle East. The
investors alleged that Ericsson misled investors with various
public statements in violation of Section 10(b) of the Exchange
Act.
The complaint alleges that Ericsson, which constructs and manages
telecommunications infrastructure, misled investors by failing to
disclose its "rampant" corrupt practices in Iraq (which
were the subject of two highly publicized Department of Justice and
Securities and Exchange Commission investigations) in
statements concerning its burgeoning growth in the Middle East.
Specifically, the investors claim that Ericsson should have
disclosed that its success was due in large part to illegal bribes
paid to secure contracts in Iraq, and illicit payments made to
terrorists to ensure safe passage across transportation routes
necessary to access markets in Jordan, Syria, and Turkey. According
to the complaint, the "truth" of the overseas illegality
was concealed for more than a decade, until Ericsson disclosed that
an internal investigation found, among other things, "serious
breaches of compliance rules" and "evidence of
corruption-related misconduct."
In dismissing these claims, the court ruled that truthful
statements regarding Middle East sales growth did not trigger an
additional duty to disclose the contribution of alleged corruption
to the company's financial performance. According to the court,
the company's statements were "too general" and thus
did not "put the source of Ericsson's growth in Iraq in
particular at issue." The court found that Ericsson's
statements touting its commitment to regulatory compliance were
similarly too general to be actionable and were "far from the
detailed 'assurances of actual compliance' required to
trigger further disclosure" and that Ericsson "never
promised perfect compliance." To the contrary, the court held
that the highly publicized nature of the internal investigations
made investors "even less likely to rely on generic
compliance-related statements in making investment decisions."
In sum, the challenged statements were simply "too general to
require further disclosure" under Section 10(b).
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