Securities Law Alert
In This Edition:• Southern District of New York: Loss Causation Not Adequately Alleged Where a Short Seller Report
Contained “General Accusations” and Did Not Disclose the Information Described in the Complaint• Southern District of New York: Material Information Not Withheld Where Plaintiff Failed to Allege
Defendants Possessed But Withheld More Detailed or More Alarming Information Sufficient to Make
Their Prior Disclosures Deficient• District of Nevada: Denies Dismissal of Claims That Company and its Founder Made
Misrepresentations in the Wake of Sexual Misconduct Allegations
August 2021

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Southern District of New
York: Loss Causation Not
Adequately Alleged Where a
Short Seller Report Contained“General Accusations” and Did
Not Disclose the Information
Described in the Complaint
On July 8, 2021, the Southern District of New
York dismissed a putative securities fraudclass action alleging that a tech company,
certain of its executives and a number ofcompanies involved in underwriting its IPO
failed to disclose related-party transactions in
the company’s registration statement. Boluka
Garment v. Canaan, 2021 WL 2853284(S.D.N.Y. 2021) (Oetken, J.). The court heldthat plaintiffs’ Section 10(b) claim failed toadequately allege loss causation because thecorrective disclosure, a short seller report,
contained “general accusations” and did
not disclose the information the complaintdescribed.

Background andPlaintiffs’ Allegations
Following the company’s 2019 IPO, ashort seller report accused the company ofdeceptive business practices, including failingto disclose related-party transactions. The
day the report was published, the company’s
stock price fell more than 6.8%. Subsequently,
plaintiffs commenced this action alleging thatthe company’s registration statement failed
to disclose: (i) that a stockholder with 8.8%of the company’s total shares (the “8.8%Stockholder”) was also a senior executive of
the company; and (ii) the related-party natureof its dealings with a business controlled inpart by two company directors (the “DirectorControlled Business”), which allegedly
purchased nearly $150,000 worth of company
products.

Loss Causation Not Adequately
Alleged by General Accusations
Defendants argued that plaintiffs’ Section
10(b) claim failed to plead loss causation.
The court noted that plaintiffs’ theory of loss

causation flowed from the short seller report.
Plaintiffs claimed that the report exposed theproblems arising from the company’s relatedparty transactions. However, the court
pointed out that the report said nothing about
the 8.8% Stockholder’s alleged role as a senior
executive and did not include any information
about the alleged purchase of company
products by the Director-Controlled Business.

claim that related-party transactions boosted
sales prior to the company’s previous listing
attempts. The court noted that, in context,
the report’s statement about the relatedparty transactions specifically referred to thecompany’s relationship with two other entities
and did not refer to the 8.8% Stockholder or
the Director-Controlled Business.

Southern District of New
York: Material Information
Not Withheld Where Plaintiff
Failed to Allege Defendants
Possessed But Withheld
More Detailed or MoreAlarming Information
Sufficient to Make Their
Prior Disclosures Deficient

Plaintiffs claimed that the wrongdoing
described in the report, which “accused[the company] very generally of failing todisclose related-party transactions[,]” wasbroad enough to encompass their claims. For
example, the report stated that “[t]ransactions
with related parties and/or sham entities
have been a hallmark of . . . fraudulent
US-listed Chinese companies,” and that thecompany “used related-party transactions
to boost sales prior to its Chinese listingattempts.” However, the court disagreed,
determining that for purposes of establishingloss causation, “these general accusationsfall short.” The court stated that “[a]lthougha plaintiff may plead loss causation without
alleging a disclosure that precisely mirrors
the substance of a prior undisclosed fraud,
the disclosure must nevertheless reveal tothe market some part of the truth regarding
the alleged fraud.” The court reasoned
that “[b]roadly accusing US-listed Chinesecompanies of fraudulent behavior reveals
nothing about [the company’s] alleged
failure to disclose [the 8.8% Stockholder’s]role in the company or the related-party
nature of the company’s dealings with [theDirector-Controlled Business].” The court
found the same to be true of the report’s

On July 19, 2021, the Southern Districtof New York dismissed a securities fraudclass action alleging that a clothingcompany, certain of its executives and its
majority stockholder failed to disclosethat the company’s retail customers werepurchasing products earlier in the year(the so-called “timing shifts”), such that“disproportionately” fewer people would bepurchasing products later, and failed to fully
disclose the negative financial impact of thesetiming shifts. Cheng v. Canada Goose, 2021
WL 3077469 (S.D.N.Y. 2021) (Broderick, J.).
Finding that defendants properly disclosed
the information at issue, the court heldthat “[a]bsent allegations that Defendants
possessed but withheld more detailed or morealarming information related to these timing
shifts sufficient to make their prior disclosureslegally deficient, Plaintiff cannot plausibly
allege that Defendants withheld material
information about these timing shifts.”
The court noted that on several occasions
defendants actually did disclose theinformation at issue, which plaintiff
conceded. For example, in an investor andanalyst conference call following Q1, the CEO
stated that “[o]n the product side . . . people
are buying their parkas early.” The court also
pointed out that after the announcementof the Q3 results, defendants disclosed thatinvestors should “expect a naturally lower rate2

of speed in both [the wholesale and retail]channels through the remainder of the fiscalyear.” Nevertheless, plaintiff alleged that
defendants “failed to disclose the full, negativeimpact” of the timing shifts. In response, thecourt stated that the legal standard did notnecessarily require defendants to disclose thefull, negative impact. The court pointed outthat the burden was on plaintiff to establishthat “any omitted fact was both material andthat its omission would be misleading to areasonable investor.”
The court observed that it was difficult tounderstand what more plaintiff believed thatdefendants should have disclosed about thetiming shifts. The court noted that defendants
acknowledged the precise phenomenon atissue, warned that retail growth would beslowed for the rest of the fiscal year, andplainly disclosed that “the timing shift would
negatively impact the Company’s last twofiscal quarters.” To the extent that plaintiff
wanted defendants to have disclosed “moregranular, empirical, or dire information”
about the precise impact the timing shifts
would have, the court determined that thisargument failed because the complaint did
not allege that defendants possessed or hadaccess to any such information. Without
allegations that defendants “possessed butwithheld more detailed or more alarming
information related to these timing shifts
sufficient to make their prior disclosureslegally deficient,” the court held that plaintiff
could not plausibly allege that defendants
withheld material information about thetiming shifts.

District of Nevada: Denies
Dismissal of Claims That
Company and its Founder
Made Misrepresentationsin the Wake of Sexual
Misconduct Allegations
On July 28, 2021, the District of Nevada
denied in part the dismissal of a securities
fraud class action alleging that a casino
resort company, its founder/former CEOand certain officers and directors concealed
alleged misconduct by the founder and madematerial misrepresentations or omissions inconcealing the alleged misconduct. Ferris
v. Wynn Resorts, 2021 WL 3216462 (D.
Nev. 2021) (Gordon, J.). The court held thatplaintiffs adequately alleged that two sets ofstatements were actionable: (i) the founder’sand the company’s responses to a Wall Street
Journal article revealing allegations against
the founder of a decades-long pattern ofsexual misconduct and sexual harassment;and (ii) company press releases responding toa cross claim made by the founder’s ex-wife ina separate litigation alleging that the founderengaged in serious misconduct and misusedcompany resources to support his lifestylewithout effective board oversight.

Founder Statement Calling
Allegations “Preposterous”
Sufficiently Pleaded as False
Where Complaint Alleged Multiple
Instances of Misconduct
In response to the WSJ article, the founderstated that, “The idea that I ever assaulted any
woman is preposterous.” The founder argued
that his statement was not false because he is
not required to admit wrongdoing and noneof the accusations against him have been
proven true. The court disagreed, determiningthat “the statement would give a reasonableinvestor the impression that the allegations
against [the founder] were preposterous,
when the [complaint] alleges several instancesof sexual assault by [the founder].” Thecourt held that plaintiffs sufficiently alleged
the falsity of the statement at this stage anddenied the founder’s motion to dismiss on
this basis.

Response Casting Allegations as
Fabricated Sufficiently Pleaded as
False Where Company Received
Multiple Misconduct Complaints
The company’s response to the WSJ article
cast the allegations as part of a “negativepublic relations campaign” against thefounder by his ex-wife.1 Defendants argued
that the statement was puffery, not capable
1. The statement read, “The recent allegations about [thefounder] reflect allegations made in court hearings by [thefounder’s] ex-wife [] in her legal battle with him and thecompany. It is clear that [the founder’s] ex-wife has sought touse a negative public relations campaign to achieve what she
has been unable to do in the courtroom: tarnish the reputationof [the founder] in an attempt to pressure a revised divorce
settlement from him.”3

of objective verification, and that it was not
false because it did not deny the misconduct
described in the WSJ article. The court
disagreed, denying the motion to dismissand determining that plaintiffs sufficiently
alleged the falsity of this statement because“a reasonable investor would get theimpression that the allegations are false andfabricated by [the founder’s ex-wife] as partof her negative public relations campaign totarnish [the founder]” and force a revised
divorce settlement. The court noted that thecomplaint alleged that “a materially different
state of affairs existed because the Companyhad received multiple complaints about [thefounder’s] sexual misconduct by that point
and various Company executives were awareof that.”

Responses to the Cross Claim
Allegations Sufficiently Pleaded
as False Where Court InterpretedStatements as Broad Denials
and Company Received Multiple
Misconduct Complaints
Plaintiffs alleged that defendants madematerial misrepresentations in response
to a cross claim by the founder’s ex-wife ina separate litigation and her press release
regarding the same. The court characterized

defendants’ statements2 as including “broaddenials” of the cross claim allegations.
Defendants contended that the statements
were too vague to be false and did not
explicitly address the founder’s misconduct.
However, the court denied dismissal withrespect to these statements and held thatplaintiffs sufficiently pleaded the falsity ofthese statements. The court explained thatwhile the statements did not explicitly refer tothe alleged sexual misconduct, they referred
generally to the ex-wife’s allegations regarding
the board, of which the founder was thechairman. The court determined that these“statements would give a reasonable investor
the impression that the Company denied allof [the] allegations, which addressed [thefounder’s] serious misconduct against an
employee and a resultant multi-million dollarsettlement.” The court noted that plaintiffs
alleged that by the time this statement was
made, the company had received multiple
sexual misconduct complaints and thatmultiple executives were aware.

2. For example, “[The ex-wife’s] allegations regarding our Board,
its composition and its independence are simply not true
and are rehashed from her previous, unfounded statements
made during her proxy campaign.” And, “Neither her nor thecompany’s recent filings contain any new facts or revelations,as she so passionately claims. [The ex-wife’s] comments
regarding our Board of Directors, their independence andtheir actions in this matter are false.”

This edition of theSecurities Law Alert was edited by
Meaghan A. Kelly / +1-202-636-5542
mkelly@stblaw.com
Cheryl J. Scarboro / +1-202-636-5529
cscarboro@stblaw.com andGeorge S. Wang / +1-212-455-2228
gwang@stblaw.com

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