Securities Law Alert
In This Edition:• Eleventh Circuit: Statements About Performance “Each Year” Held to Be Forward Looking; Actual
Knowledge of Falsity Required• Northern District of California: Plaintiffs Failed to Allege That Fintech Company Made False or
Misleading Statements About Its Regulatory Compliance• Middle District of Florida: Statements Including an Objective and Verifiable Fact Were Not Puffery
September 2022

Eleventh Circuit: Statements
About Performance “EachYear” Held to Be Forward
Looking; Actual Knowledgeof Falsity Required

Simpson Thacher“has a very experienced
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team for securities classaction defense.”– The Legal 500

On August 1, 2022, the Eleventh Circuit
affirmed a district court’s dismissal of aputative securities class action alleging thata company that manufactures human nerve
repair products had overstated the market forthe company’s products. Einhorn v. Axogen,
42 F.4th 1218 (11th Cir. 2022) (Brasher, J.).
The court held that the company’s statements
about the number of nerve injuries and nerve
repair procedures performed in the U.S. “eachyear” fell within the safe-harbor provisionof the Securities Act for forward-lookingstatements.

Background andProcedural History
The company released various offering
documents related to two public offerings ofcommon stock. These offering documents
addressed the company’s purported growthpotential and incorporated statements from
Simpson Thacher & Bartlett LLP

the company’s Form 10-Ks. For example, thecompany’s 2017 10-K stated that: “We believethat each year in the U.S., more than 1.4
million people suffer damage or discontinuity
to peripheral nerves resulting in over 700,000
extremity nerve repair procedures.”
Subsequently, a short seller report concluded
that there were only 28,000 peripheral nerve
injury repair procedures each year in theU.S. The report was followed by a stock drop
and plaintiff’s class action alleging violationsof the Securities Act and the ExchangeAct. The U.S. district court for the Middle
District of Florida dismissed the complaint
with prejudice holding that the challenged
statements were forward looking andprotected by the safe-harbor provision.

The Securities Act Recognizes
a Safe Harbor for ForwardLooking Statements
While the Securities Act creates a cause ofaction against persons or entities that makean “untrue statement of a material fact” ormaterial omissions from a public filing related
to an offering of securities, it also recognizes asafe harbor for “forward-looking” statements.
The Eleventh Circuit has “held that the key

characteristic of a forward-looking statement
is that its ‘truth or falsity is discernible only
after it is made.’” Harris v. Ivax Corp., 182
F.3d 799 (11th Cir. 1999). Under Harris, acourt is to look to the statement’s context toevaluate whether it is forward looking or not.

The Phrase “Each Year” Is Forward
Looking As It Is In Part a Prediction
The court concluded that the challenged
statements were forward looking. The court
explained that the “critical phrase” in thechallenged statements is the company’sassertion that a certain number of nerve
injuries and procedures occur “each year.”
The court found that while “there is certainly
an element of present or historical fact in thephrase ‘each year,’ the phrase is also forwardlooking” because the statement is in part aprediction about the number of injuries thatwill require repair. As found by the court,“[f]orward-looking statements ‘often rest bothon historical observations and assumptions
about future events.’” (quoting Harris, 182
F.3d 799). Because the statements wereused to support the company’s marketsize predictions, which were about “futureeconomic performance,” the court concluded
that the predictions were forward-looking
statements under the statute.
Plaintiff also argued that Omnicare v.
Laborers District Council Construction
Industry Pension Fund, 575 U.S. 175 (2015),
relieved it of the burden to prove that thecompany made the statements with actual
knowledge they were false or misleading. Thecourt rejected this argument, holding thatthe safe-harbor provision “expressly requires

a plaintiff to prove that a forward-looking
statement was made with ‘actual knowledge
that the statement was false or misleading,’”
while Omnicare ruled on whether an opinion
can be actionable as a statement of fact anddid not address the safe-harbor provision orremove the “actual knowledge” requirement.
The Eleventh Circuit held that plaintiff’s
failure to plausibly allege the company’s
actual knowledge that the statements werefalse or misleading doomed its Securities
Act claims.

Northern District ofCalifornia: Plaintiffs Failed
to Allege That Fintech
Company Made False orMisleading Statements About
Its Regulatory Compliance
On August 8, 2022, the Northern District ofCalifornia dismissed with leave to amend asecurities fraud class action alleging that afinancial technology company and certainof its executives made false or misleadingstatements about the company’s regulatorycompliance. Kang v. PayPal, 2022 WL
3155241 (N.D. Cal. 2022) (Breyer, J.).
Plaintiffs’ core allegation concerned thecompany’s statements that it had compliedwith a Consumer Financial Protection Bureau(“CFPB”) consent order (the “ConsentOrder”). The court held that plaintiffs failed
to plausibly allege a material false statement
or omission because none of the company’s
alleged conduct violated the Consent Order.

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The CFPB Complaint and theConsent Order
The company offers credit and debit products
and allows consumers and merchants tosend and receive digital payments. In 2015,
the CFPB filed a complaint alleging that thecompany violated the Consumer Financial
Protection Act by deceptively advertisingpromotional benefits, misleading customers
about deferred interest, and enrolling
customers in its credit product without theirconsent. The subsequent Consent Orderenjoined the company from misrepresenting
the terms and conditions of any promotion(such as deferred interest or money-backoffers), required it to ensure that consumers
receive the benefit of merchants’ promotional
offers, and prohibited the company fromenrolling customers in its credit productwithout affirmative consent.

Purported Corrective Disclosures
In 2020, a nonprofit focused on alleviating
student debt announced in a press releasethat for-profit colleges had misleadinglydescribed the company’s credit promotion.
In 2021, Bloomberg News reported thatthe company faced a probe from the CFPB
regarding the marketing of its credit
product, and the company disclosed in aquarterly report that it had received a civil
investigative demand from the CFPB “relatedto the marketing and use of [the company’s]
Credit [product] in connection with certain
merchants that provide educational services.”

Plaintiffs’ Allegations
Plaintiffs commenced a lawsuit alleging that
defendants made misleading statements
in violation of Section 10(b) and Rule 10b5(b) and for scheme liability in violationof Rule 10b-5(a). Among other things,
plaintiffs alleged that the company was notcomplying with the Consent Order because it“knowingly enabled” educational institutions
to deceptively market the terms of thecompany’s credit product and continued toenroll customers in its credit product without
their consent. Plaintiffs further alleged that
defendants made false statements whendescribing the company’s compliance efforts.
For example, the company’s Form 10-Q for
Q1 of 2016 stated that the company monitors
changes in laws and regulations “closely toensure compliant solutions for our customers
who depend on us,” and the company’s Form
10-Q for Q2 of 2016 stated, “We continue
to cooperate and engage with the CFPB andwork to ensure compliance with the ConsentOrder, which may result in us incurring
additional costs associated with complianceor redress.”

As No Alleged Conduct Violated
the Consent Order, the Company’sCompliance Statements Were
Truthful
The court granted the company’s motion todismiss all claims because plaintiffs did notplausibly plead that the company made any
misrepresentations. The court observed that astatement about compliance, such as with theConsent Order, is not made misleading justbecause a later regulatory inquiry occurs. The
court pointed out that when the statements
were made the company “had no obligation
or requirement to elaborate on any alleged
non-compliance because it had not yet beenfound to be non-compliant.” (quoting In re
Facebook Sec. Litig., 477 F. Supp. 3d 980(N.D. Cal. 2020)).
The court further determined that plaintiffs
failed to plausibly allege that the company
in fact violated any regulatory obligation.
The Consent Order forbade the company
from misrepresenting “any materialaspect” of its credit product including “theterms and conditions of any promotionaloffer.” However, the court noted thatplaintiffs alleged that the merchants had
misrepresented the credit product, notthe company, and found that plaintiffs’
alleged “mutual understanding” between
the company and its merchants that both“were responsible for” adhering to theConsent Order did not impose additional
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legal obligations on the company. The court
concluded that because no alleged conduct
violated the Consent Order, the company wastruthful when it stated that it complied with
the Consent Order. The court also pointed outthat plaintiffs did not plausibly allege that thecompany violated its obligation not to enroll
customers without their consent because
plaintiffs only included a bare allegationthat a confidential witness spoke to somecustomers who “did not recall” giving consent,
and that general statements about compliancewere quintessential corporate puffery notactionable under the securities laws.
Separately, the court also concluded that“[e]ven assuming the existence of one ormore misleading statements, Plaintiffs failto plead a strong inference of scienter.” Thecourt pointed out that plaintiffs failed toallege that any officer acted intentionally orwith conscious recklessness because—evenassuming that the company was in serious
noncompliance that rendered its statements
misleading—there was no plausible allegationthat any of the officers knew this fact.
Contrasting this case with Oklahoma Police
Pension & Retirement System v. LifeLock,
780 F. App’x 480 (9th Cir. 2019), the court
stated that even assuming that significant
noncompliance occurred here, there wereno allegations that any defendant was everaware of it.

Middle District of Florida:
Statements Including an
Objective and Verifiable
Fact Were Not Puffery
On August 4, 2022, the Middle Districtof Florida dismissed without prejudice aputative securities fraud class action alleging
that a recycling company had made false andmisleading statements about the company
to investors. Theodore v. PureCycle Techs.,
No. 6:21-cv-809 (M.D. Fla. 2022) (Byron, J.).
The court held that the complaint failed tomeet the standard of Federal Rule of Civil
Procedure 9(b) as required for a securities
fraud claim and must be dismissed because it
failed to “precisely plead what statements oromissions were made in which documents ororal representations.”
The company uses a patented process torecycle a particular type of plastic intoa recycled resin suitable for food-grade
consumer products. Plaintiffs alleged that
defendants made various false and misleadingstatements, which were allegedly revealed bya May 6, 2021 short seller report. Plaintiffs
initiated this action alleging a violation ofSection 10(b) and Rule 10b-5.
Despite dismissing the complaint on thebasis that it did not meet the standard ofFederal Rule of Civil Procedure 9(b), thecourt went on to organize the alleged false
and misleading statements into discrete
categories. The court then addressed
defendants’ argument that certain of thealleged false statements were mere puffery
and, therefore, not material. The court
explained that “[t]he test for materiality inthe securities fraud context is whether areasonable man would attach importanceto the fact misrepresented or omitted indetermining his course of action.” SEC
v. Merch. Cap., 483 F.3d 747 (11th Cir.
2007). Defendants argued that statements
concerning the value of the patent—suchas that the patented recycling method was“revolutionary,” “transformative,” and“unique”—were puffery. The court explainedthat the “mere use of words such as . . .
‘transformative’ does not change a statementfrom being objectively verifiable to one that is
so vague and generalized that any reasonable
investor would know it is mere puffery.”
The court stated that it must consider the4statements “holistically to determine whether
there are tangible, verifiable facts includedin the statements despite the use of any
flowery language.”
Applying this holistic approach, the court
determined that statements describing
the company’s recycling process as“revolutionary” were puffery. However,the court determined that several otherstatements could not be considered puffery,
such as the company’s statement that its
process uses “approximately 75% less energy”

than “the traditional manufacturing process.”
The court concluded that “[b]y including
a quantifiable comparison between thetraditional manufacturing process and [thecompany’s] process, it includes an objective
and verifiable fact and cannot be consideredpuffery.” While the court determined thatcertain of the statements were not puffery,
nonetheless, the court dismissed the entire
complaint because plaintiffs failed to identify
the particular statements or omissions at
issue with sufficient specificity and failed toproperly plead scienter.

This edition of theSecurities Law Alert was edited byLynn K. Neuner / +1-212-455-2696
lneuner@stblaw.com
Joshua Polster / +1-212-455-2266
joshua.polster@stblaw.com andKaren Porter / +1-202-636-5539
karen.porter@stblaw.com

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