Securities Law Alert
In This Edition:• Eighth Circuit: No Strong Inference of Severe Recklessness Where “Confidential Former Employee” andHis Sources Lacked Insight into What, If Anything, Defendant CEO Knew
• Northern District of California: Misleading Statements and Omissions Alleged Where Due Diligence
Fell Short of What an Investor Would Believe Defendants’ Assurances Meant• Southern District of New York: Motive to Defraud Shown by Pointing to Concrete Benefits That Could
Be Realized From the Allegedly Misleading Statements or Nondisclosures, Not “Nominal Boons”
November 2021

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Eighth Circuit: No Strong
Inference of Severe
Recklessness Where“Confidential FormerEmployee” and His Sources
Lacked Insight into What,
If Anything, Defendant
CEO Knew
On October 18, 2021, the Eighth Circuit
affirmed the dismissal of a securities
fraud class action alleging that a media
conglomerate and certain of its executives
made false or misleading statementsconcerning its post-merger integration witha magazine company. City of Plantation
Police Officers Pension Fund v. MeredithCorp., 2021 WL 4823411 (8th Cir. 2021)(Gruender, J.). The court determinedthat “the complaint fails to satisfy theheightened pleading standards with respect
to the misrepresentation and mental-state
requirements of [Section] 10(b) liability.”
The court further determined that, evenassuming arguendo that the CEO’s February

2019 statement that the company had “fullyintegrated its HR, finance, legal and ITfunctions” was false, a confidential former
employee’s allegation that he had heard
otherwise did not “give rise to a strong
inference of severe recklessness.”
In support of its claim that the CEO’sstatement was a material misrepresentation,
plaintiff alleged that a former employee“indicated confidentially that he had heardthat legacy [acquirer] employees and legacy[target] employees operated on different
finance software systems until August 2019.”
The court stated that “severe recklessness”
is enough to establish scienter for nonforward-looking statements, but explainedthat a defendant is severely reckless “only if,
in an extreme departure from the standardsof ordinary care, he disregards a risk so
obvious that he must have been aware of it.”In re K-tel Int’l Sec. Litig., 300 F.3d 881 (8thCir. 2002).
The court found that nothing in the complaintsuggested that either the confidential former
employee or his sources had any insight
into what, if anything, the CEO knew aboutthe software the various legacy employees
were using. The court also noted that thecomplaint did not state with particularity“facts suggesting that it would have been soobvious that two software systems were in
use that it was an extreme departure fromthe standards of ordinary care for [the CEO]to turn a blind eye to this fact[.]” The court
explained that “[t]he more plausible inference
to draw from the allegations is that [the CEO]made the statement because, as is typical foran executive overseeing an ongoing corporate
consolidation, he had limited information
about the inner workings of the legacy firms’
finance departments.” The court concluded
that “[b]ecause the inference of severe
recklessness is not at least as compelling as
any opposing inference one could draw fromthe facts alleged, it is not the strong inference
that [Section] 10(b)’s heightened pleading
standard requires.”
Separately, the court determined that thevarious other statements at issue were “clearly
either (1) statements identified as forward
looking and accompanied by meaningful
cautionary statements, (2) corporate puffery,or (3) forward-looking statements that thecomplaint’s allegations do not imply by strong
inference were made with actual knowledgeof their falsity.” The court characterized
the following statements as “paradigmatic
examples of the kind of vague and optimistic
rhetoric that constitutes corporate puffery[,]”including: “hitting the ground running”;“implementing . . . proven strategies,standards, and discipline”; being “on track”;
being “very pleased with the integration
work so far”; and having an “industryleading position[.]”

Northern District ofCalifornia: Misleading
Statements and Omissions
Alleged Where Due Diligence
Fell Short of What an Investor
Would Believe Defendants’
Assurances Meant
On October 19, 2021, the Northern Districtof California denied dismissal of a putative
securities fraud class action alleging that a
pharmaceutical company and certain current
or former executives made misstatements
and omissions concerning the company’s
due diligence efforts prior to acquiring themanufacturer of a herbicide alleged to cause
cancer. Sheet Metal Workers Nat’l Pension
Fund v. Bayer, 2021 WL 4864421 (N.D.
Cal. 2021) (Seeborg, J.). The court held thatplaintiffs adequately pled that defendants
made misleading statements and omissions
concerning the acquirer’s pre-acquisition due
diligence efforts.

Background
Before, during, and after the acquisition, thetarget faced litigation alleging that the active
ingredient in its herbicide causes cancer.
After the acquisition, lawsuits against thetarget concerning the herbicide reached trial,resulting in verdicts against it and tens of
millions of dollars in damages in the first twotrials. Subsequently, more lawsuits were filed
and consolidated in the Northern District ofCalifornia. In response to the acquirer’s 2020
offer to pay up to $10.9 billion in a global
settlement for current and future claims, thepresiding judge indicated that he was unlikely
to approve the settlement as to future claims.
The instant complaint was filed soon after,
asserting that defendants deceived investors
about lapses in the acquirer’s due diligence
before pursuing the merger.

Section 10(b) Claim Adequately
Pled Where Plaintiff Alleged
Assurances as to Due Diligence
Were Misleading
The acquirer’s CEO stated before theacquisition closed that the acquirer had“confirmed in due diligence” the deal’s“significant potential for sales and cost2

synergies” of $1.5 billion. The CEO also
stated before the closing that “the [target’s]
people went out of their way to provide us
with transparency, data and visibility to themost critical questions we had.” Plaintiffs
alleged that these statements were misleading
because the acquirer had not reviewed any of
the target’s internal documents and accepted
at face value the target’s characterization of its
litigation risks.
The court determined that defendants’statements concerning its due diligence
could have “given a reasonable investor
the impression of a state of affairs thatdiffers in a material way from the one that
actually exists, namely that [the acquirer]
had assessed [the target’s] litigation risks,and had reviewed non-public information
to inform that review.” The court notedthat while merely failing to conduct due
diligence is a claim of mismanagement thatalone is not an actionable securities fraudclaim, that plaintiffs did “more than justaver that Defendants did not fully conduct
due diligence; instead, they aver that
Defendants assured investors about theirdiligence, even though their diligence wasless than what an investor would believe theirstatement meant.” The court then stated that“[d]eception concerning mismanagement
is actionable under [Section] 10(b) . . . andmisleading statements concerning due
diligence may be actionable in securities
fraud litigation[.]”Southern District of New York:
Motive to Defraud Shown by
Pointing to Concrete Benefits
That Could Be Realized From
the Allegedly Misleading
Statements or Nondisclosures,Not “Nominal Boons”
On September 27, 2021, the Southern
District of New York dismissed without
prejudice a putative securities fraud classaction alleging that a pharmaceutical/
cannabis company, its CEO and its CFO madematerially false and misleading statements toartificially inflate the company’s stock price.
Kasilingam v. Tilray, 2021 WL 4429788(S.D.N.Y. 2021) (Crotty, J.). The court heldthat plaintiffs failed to adequately allege
scienter through the CEO’s purported motive
to defraud investors, pointing to plaintiffs’
failure to allege concrete benefits that theCEO could have realized from one or moreof the allegedly misleading statements
or nondisclosures.

Background andPlaintiffs’ Allegations
After the company’s 2018 IPO, the defendant
CEO and his partners had an 82% ownershipstake in the company and 93% voting powerover the company’s management througha corporation they formed to invest in thecannabis industry. In 2019, the company
executed a downstream merger1 with theCEO’s corporation (the “Share Exchange”).
Plaintiffs alleged that defendants madematerially false and misleading statements
to inflate the company’s stock price until theShare Exchange closed. Plaintiffs further
alleged that the Share Exchange was part of ascheme intended to provide the CEO and his
partners with: (i) ongoing voting control ofthe company; and (ii) a reduced tax burden
if they later sold their shares. Plaintiffs
also alleged that after the Share Exchange
closed, the CEO engineered various company
announcements prompting a stock pricecollapse.

Scienter Not Adequately Alleged byMere “Nominal Boon”
Beginning with the standard for scienter, thecourt explained that “[t]o survive a motion
to dismiss, a plaintiff must demonstratescienter by pleading facts (1) showing that thedefendants had both motive and opportunity
to commit the fraud or (2) constituting
1. A downstream merger is a merger of a parent into itssubsidiary where the subsidiary survives and the parent
disappears.
3strong circumstantial evidence of conscious
misbehavior or recklessness.” ATSI Commc’nsv. Shaar Fund, 493 F.3d 87 (2d Cir. 2007).
The court further explained that “[m]otive
can be shown by pointing to the concrete
benefits that could be realized from one ormore of the allegedly misleading statements
or nondisclosures; opportunity can be shownby alleging the means used and the likely
prospect of achieving concrete benefits by themeans alleged.” In re Agnico-Eagle MinesLtd. Sec. Litig., 2013 WL 144041 (S.D.N.Y.
Jan. 14, 2013).
Concluding that plaintiffs failed to adequately
allege scienter through the CEO’s purported
motive to defraud investors, the court statedthat “[w]hile [plaintiffs’] narrative is perhaps
not implausible, it raises as many questions
as it answers.” The court emphasized thatplaintiffs did not allege that the CEO had
sold any of his own stock during the relevant
period, or that he received any direct financial
benefit from the alleged scheme prior tothe company announcements, “whichimmediately, dramatically, and foreseeably
tanked [the company’s] stock price.” Thecourt noted plaintiffs’ position was “that theplan’s aim was to allow [the CEO and hispartners] to offload [company] shares free ofa hefty tax bill, while hoarding voting controlof the company.” However, the court statedthat plaintiffs conceded that the CEO andhis partners already controlled the company
prior to the Share Exchange, and that the tax
advantages the Share Exchange unlocked
were shared by all the shareholders, not justthe CEO and his partners.
The court then stated, “without articulating
any theory for how these nominal boons
would have been to [the CEO’s] actual benefit
after [the company’s] share price foreseeably
plummeted, Plaintiffs leave their motive
narrative unfinished. They fail to explain
how, when [the CEO] was forming his plan,
there was any ‘likely prospect’ that the future
post-collapse tax benefits would outweigh theforeseeable post-collapse loss in value of thestock he apparently intended to hold onto.”
The court stated that plaintiffs’ “pleadings
suggest that among those most harmed by
the natural and intentional consequencesof this purported scheme was the schemer
himself.” The court observed that “[w]hen
the purported fraudster ‘miss[es] the boat
this dramatically,’ or in this case, opts to go
down with the ship, the fraud inference isweakened.” Quoting Ronconi v. Larkin, 253
F.3d 423 (9th Cir. 2001).

This edition of theSecurities Law Alert was edited byPeter E. Kazanoff / +1-212-455-3525
pkazanoff@stblaw.com
Cheryl J. Scarboro / +1-202-636-5529
cscarboro@stblaw.com andJonathan K. Youngwood / +1-212-455-3539
jyoungwood@stblaw.com

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