Court Opinion

ID: 6343341
Source: CourtListenerOpinion
Date Created: 2022-05-24 15:00:16.50064+00
Date Added: 2024-06-11T08:41:54.632123
License: Public Domain

21-0347-cv
Noto v. 22nd Century Grp.

                          In the
              United States Court of Appeals
                 For the Second Circuit
                                ________

                            AUGUST TERM 2021

                    ARGUED: SEPTEMBER 2, 2021
                      DECIDED: MAY 24, 2022

                             No. 21-0347-cv

      Joseph Noto, Garden State Tire Corp., Stephens Johnson,
    Individually and on Behalf of All Others Similarly Situated,
                       Plaintiffs-Appellants,

                                   v.

22nd Century Group, Inc., Henry Sicignano, III, John T. Brodfuehrer,
                      Defendants-Appellees.
                            ________

            Appeal from the United States District Court
               for the Western District of New York
                             ________

Before: WALKER, CALABRESI, AND LOHIER, Circuit Judges.
                            ________

      Plaintiffs Joseph Noto, Stephens Johnson, and Garden State
Tire Corporation appeal from a judgment of the United States District
Court for the Western District of New York (Sinatra, J.) dismissing
their complaint against 22nd Century Group and its former CEO and
CFO, Henry Sicignano, III and John T. Brodfuehrer.         Plaintiffs,
2                                                         No. 21-0347-cv

investors in 22nd Century Group, allege on behalf of an investor class
that (1) defendants engaged in an illegal stock promotion scheme in
which they paid authors to write promotional articles about the
company while concealing the fact that they paid the authors for the
articles; and (2) defendants failed to disclose an investigation by the
Securities and Exchange Commission into the company’s financial
control weaknesses. After public articles revealed the promotion
scheme and SEC investigation, the company’s stock price fell, and
plaintiffs allege they were harmed. The complaint was dismissed by
the district court for failing to state a claim upon which relief could be
granted.

      On appeal, plaintiffs argue that (1) they adequately alleged
material misrepresentations and manipulative acts sufficient to
sustain claims under subsections (a), (b), and (c) of SEC Rule 10b-5;
(2) their claim under § 20(a) of the Securities Exchange Act was
premised on a valid predicate violation of § 10(b); and (3) the district
court erred in dismissing the complaint with prejudice. On the first
and second points, we agree that the allegation that defendants failed
to disclose the SEC investigation states a material misrepresentation
and could also support § 20(a) liability. We find no merit in the
remaining challenges. Accordingly, we AFFIRM in part, VACATE
in part, and REMAND for further proceedings consistent with this
opinion.

                                ________

                    JEREMY A. LIEBERMAN, Pomerantz LLP, New York,
                    NY, for Plaintiffs-Appellants

                    JOHN A. TUCKER (Jonathan H. Friedman, on the
                    brief), Foley & Lardner LLP, Jacksonville, FL, New
                    York, NY; Charles C. Ritter, Jr., on the brief, Duke,
3                                                       No. 21-0347-cv

                   Holzman, Photiadis & Gresens LLP, Buffalo, NY,
                   for Defendants-Appellees

                               ________

JOHN M. WALKER, JR., Circuit Judge:

      Plaintiffs Joseph Noto, Stephens Johnson, and Garden State
Tire Corporation appeal from a judgment of the Western District of
New York (Sinatra, J.) dismissing their complaint against 22nd
Century Group and its former CEO and CFO, Henry Sicignano, III
and John T. Brodfuehrer. Plaintiffs, investors in 22nd Century Group,
allege on behalf of an investor class that (1) defendants engaged in an
illegal stock promotion scheme in which they paid authors to write
promotional articles about the company while concealing the fact that
they paid the authors for the articles; and (2) defendants failed to
disclose an investigation by the Securities and Exchange Commission
(“SEC”) into the company’s financial control weaknesses.          After
public articles revealed the promotion scheme and SEC investigation,
the company’s stock price fell, and plaintiffs allege they were harmed.
The complaint was dismissed by the district court for failing to state
a claim upon which relief could be granted.

      On appeal, plaintiffs argue that (1) they adequately alleged
material misrepresentations and manipulative acts sufficient to
sustain claims under subsections (a), (b), and (c) of SEC Rule 10b-5;
(2) their claim under § 20(a) of the Securities Exchange Act was
premised on a valid predicate violation of § 10(b); and (3) the district
court erred in dismissing the complaint with prejudice. On the first
and second points, we agree that the allegation that defendants failed
to disclose the SEC investigation states a material misrepresentation
and could also support § 20(a) liability. We find no merit in the
remaining challenges. Accordingly, we AFFIRM in part, VACATE
4                                                              No. 21-0347-cv

in part, and REMAND for further proceedings consistent with this
opinion.

                              BACKGROUND

         The corporate defendant, 22nd Century Group, Inc. (“22nd
Century” or “the Company”), is a publicly traded company that
strives to genetically engineer tobacco and cannabis plants to regulate
their nicotine levels or cannabinoids. From 2015 to 2019, Henry
Sicignano, III was the Company’s CEO, and from 2013 to 2019, John
T. Brodfuehrer was the Company’s CFO. Shortly after Sicignano
became CEO, he engaged the consulting firm IRTH Communications
(“IRTH”) to handle 22nd Century’s investor relations. For purposes
of this appeal, we accept as true the following allegations in the
complaint. 1

    I.     Stock Promotion Scheme

         Confidential Witness 1 (“CW1”), Sicignano’s executive
assistant from January 2016 to February 2018, worked directly with
Sicignano and interacted frequently with Brodfuehrer. CW1 saw
Sicignano review and approve the Company’s press releases. In
February and March 2017, Sicignano told CW1 several times that he
was “working behind the scenes” to prop up 22nd Century’s stock
price because the Company “did not have enough cash to operate for
much longer.” 2 The same year, Brodfuehrer repeatedly told CW1
that, because he had concerns about Sicignano’s conduct, he was not
comfortable signing the Company’s SEC filings.

         From February 2017 through October 2017, various writers
published positive online articles about the prospects for 22nd

    1
      Palin v. N.Y. Times Co., 940 F.3d 804, 809 (2d Cir. 2019).
    2 Joint App. at 32–33.
5                                                       No. 21-0347-cv

Century’s stock.       Many articles repeated statements from the
Company’s press releases, the FDA’s press releases, and Sicignano on
earnings calls, in presentations, and at conferences. Defendants paid
the writers directly, or indirectly through IRTH, to publish the
articles.    The articles did not reveal that the Company was
compensating the writers.

        Based on his conversations with Sicignano, CW1 “came to
understand that Sicignano and the Company were paying for writers
to write articles disguised as [] legitimate articles that just promoted
[the Company’s] stock” but which were not identified as stock
promotion articles. 3 Based on Sicignano’s comments, it was “clear”
to CW1 that Sicignano knew that paying third parties to write
promotional articles without disclosing that the Company had paid
for them was inappropriate. 4 CW1 stated that he was “sure” that
Sicignano “reviewed, edit[ed], and/or approv[ed]” the paid stock
promotion articles “because Sicignano was intensely focused on
everything that was said publicly about the Company and ‘went over
every Company press release with a fine-toothed comb.’” 5

        On multiple occasions, after the articles were published, 22nd
Century’s stock price rose. From February 2017 until October 2017,
the stock price more than tripled. On October 10, 2017, the Company
closed a registered direct common stock offering that yielded $50.7
million in net proceeds.

        Then, in the Company’s annual 2017 Form 10-K submitted in
March 2018 to the SEC, the Company reported that it had sufficient
cash on hand to sustain normal operations for several years. The 2017
10-K, as well as the other 10-Ks filed in the class period, also stated

    3
      Joint App. at 33–34.
    4 Joint App. at 34.

    5 Joint App. at 34.
6                                                         No. 21-0347-cv

that the Company’s stock price was subject to volatility and listed 19
factors that, “in addition to other risk factors . . . may have a
significant impact on” its stock price. 6

    II.     SEC Investigation

          In February 2016, defendants filed the Company’s 2015 10-K.
That 10-K disclosed that the Company’s management had concluded
that its “internal controls over financial reporting were not effective
and that material weaknesses exist[ed] in [its] internal control over
financial reporting” as it related to segregation of duties. 7         To
ameliorate these weaknesses, defendants hired an accounting
manager, Confidential Witness 2 (“CW2”), who reported directly to
CFO Brodfuehrer. In its SEC Forms 10-Q for the first, second, and
third quarters of 2016, as well as its 2016 10-K, the Company repeated
that its financial reporting controls and procedures were not effective
and noted that it was undertaking remediation efforts. 8 Ultimately,
in its Form 10-Q for the second quarter of 2018, the Company stated
that it had “completed the implementation and testing of a
remediation plan that was targeted at eliminating our previously
reported material weakness in our internal controls over financial
reporting primarily resulting from a lack of segregation of duties.” 9

          According to CW2, the SEC was investigating the Company at
the time he was hired in 2016. CW2 stated that the investigation
continued throughout 2016, and that, by the time he left in 2019, he
had not seen any statement from the SEC formally closing the
investigation.     The Company retained counsel to represent it in

    Joint App. at 62–65.
    6

  7 Joint App. at 27.

  8 The complaint makes no mention here of SEC filings for 2017. See Joint

App. at 76–77.
  9 Joint App. at 27.
7                                                     No. 21-0347-cv

connection with the investigation, and, in 2016, Brodfuehrer traveled
to Washington, D.C. to meet with the SEC. Brodfuehrer told CW2
that he feared that the investigation could cost Brodfuehrer his CPA
license or lead to his imprisonment. The SEC investigation was
underway throughout the time that the Company was disclosing its
ineffective financial reporting controls.

         On July 16, 2018, the SEC received a nonpublic Freedom of
Information Act (“FOIA”) request seeking “all documents in the
[SEC’s] possession . . . pertaining to investigations regarding [the
Company] for the time period January 1, 2016 through July 16,
2018.” 10 On August 13, 2018, a FOIA Officer denied the request
pursuant to the FOIA exemption that authorizes the withholding of
“records or information compiled for law enforcement purposes, but
only to the extent that production of such law enforcement records or
information . . . could reasonably be expected to interfere with
enforcement proceedings.” 11 The SEC Office of the General Counsel
affirmed the denial.

    III.   The Public Revelations

         On February 2, 2018, an online commentator, “Fuzzy Panda”
posted an online article that claimed that 22nd Century engaged in a
paid stock promotion scheme to illegally inflate its share price. The
Company’s stock price fell by 16.9%. On October 25, 2018, Fuzzy
Panda posted a second article that disclosed the FOIA request denial
and suggested that the SEC was investigating the Company. The
article also suggested that the Company had paid undisclosed
promoters to pump up its stock price in advance of the October 2017
stock offering. The next day, the Company’s stock price fell by 4.3%.

    10
       Joint App. at 55.
    11 Joint App. at 55–56 (ellipses in original).
8                                                        No. 21-0347-cv

         In response, on October 26, 2018, the Company, for the first
time, broke its silence about the SEC investigation. But it did so by
denying any knowledge of an “enforcement proceeding.”                The
Company issued a press release saying the October 25 article was
“highly deceptive” and that the Company “has not received any
notice of, and the Company has no knowledge of, any enforcement
proceeding against [the Company] by the SEC or any other
regulator.” 12

         On April 17, 2019, Fuzzy Panda posted a third article, repeating
the undisclosed stock promoters and SEC investigation allegations.
The Company’s stock price fell again. The next day, the Company
issued another statement denying both the illegal stock promotion
and SEC investigation claims, stating that the article “falsely alleges
that [the Company] is supposedly under SEC investigation.” 13

         On July 26, 2019, the Company announced that Sicignano had
resigned as CEO for “personal reasons” but would continue to act as
a consultant to the Company. 14 The Company’s stock price fell in the
days following the announcement.          On December 3, 2019, CFO
Brodfuehrer retired.

    IV.     Procedural History

         In November 2019, after this case was transferred to the
Western District of New York, plaintiffs filed the amended class
action complaint at issue in this appeal. The class consisted of any
person or entity that acquired 22nd Century securities between
February 18, 2016, and July 31, 2019.

         On May 1, 2020, defendants moved to dismiss the amended

    12
       Joint App. at 57.
    13 Joint App. at 59.

    14 Joint App. at 60.
9                                                           No. 21-0347-cv

complaint for failure to state a claim. Plaintiffs asked the district court
for an opportunity to further amend the complaint should the court
grant any part of defendants’ motion. On January 14, 2021, the district
court dismissed the entirety of the amended complaint with prejudice
and denied plaintiffs’ request for leave to amend as futile.

         This appeal followed.

                              DISCUSSION

         We review the grant of a motion to dismiss de novo. 15 To
survive a motion to dismiss under Federal Rule of Civil Procedure
12(b)(6), the complaint must contain sufficient factual matter,
accepted as true, to “state a claim to relief that is plausible on its
face.” 16   “The plausibility standard is not akin to a probability
requirement, but it asks for more than a sheer possibility that a
defendant has acted unlawfully.” 17 In evaluating a complaint, the
court draws all reasonable inferences in the plaintiff’s favor. 18 But the
court is free to disregard conclusory allegations or legal conclusions
couched as factual allegations. 19

         We also review de novo a district court’s denial of leave to
amend when denial is based on a legal interpretation, such as the
conclusion that amendment would be futile. 20

    15
      Ganino v. Citizens Utils. Co., 228 F.3d 154, 161 (2d Cir. 2000).
    16
      Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks
omitted).
   17 Id. (internal quotation marks omitted).

   18 Palin, 940 F.3d at 809.

   19 Dixon v. von Blanckensee, 994 F.3d 95, 101 (2d Cir. 2021) (internal

quotation marks omitted).
   20 Hutchison v. Deutsche Bank Sec. Inc., 647 F.3d 479, 490 (2d Cir. 2011).
10                                                           No. 21-0347-cv

     I.        Rule 10b-5(b) Claims

          The complaint alleges that defendants violated § 10(b) of the
Exchange Act 21 and SEC Rule 10b-5(b). 22            Plaintiffs claim that
defendants unlawfully published promotional articles and concealed
an SEC investigation, all in an effort to artificially inflate the
Company’s stock price. Plaintiffs contend that when these infractions
were brought to light, the stock price fell.

          Under Rule 10b-5(b), it is “unlawful for any person, directly or
indirectly, . . . [t]o make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make the statements
made, in light of the circumstances under which they were made, not
misleading” in connection with the purchase or sale of securities. 23 To
support a claim for material misrepresentation under that rule, a
plaintiff must plead: (1) a material misrepresentation or omission, (2)
scienter, (3) a connection between the misrepresentation or omission
and the purchase or sale of a security, (4) reliance on the
misrepresentation or omission, (5) economic loss, and (6) loss
causation. 24 The first two elements must be pled with heightened
specificity pursuant to the Private Securities Litigation Reform Act of
1995 and Federal Rule of Civil Procedure 9(b). 25

          A.     Stock Promotion Scheme

          The complaint alleges that defendants omitted the material fact
that they were paying authors to promote the Company’s stock. The

      15 U.S.C. § 78j.
     21

      17 C.F.R. § 240.10b-5.
     22

   23 Id.

   24 Janus Cap. Grp., Inc. v. First Derivative Traders, 564 U.S. 135, 140 n.3

(2011).
   25 See 15 U.S.C. § 78u-4(b); Rombach v. Chang, 355 F.3d 164, 170 (2d Cir.

2004).
11                                                              No. 21-0347-cv

district court found that defendants had no duty to disclose that fact
and therefore made no material omission.

          On appeal, plaintiffs first argue that defendants had a duty to
disclose that the Company and IRTH paid the authors of the
promotional articles because defendants provided content for, edited,
reviewed, and/or approved those articles. But only an article’s maker,
not its benefactor, has a duty to disclose that it was paid for. 26 And
the Supreme Court has made clear that neither the Company nor the
individual defendants qualify as a maker here. In Janus Capital Group
v. First Derivative Traders, the Court held that a mutual fund
investment advisor could not be held liable for misstatements
included in its client mutual funds’ prospectuses. 27 “For purposes of
Rule 10b-5, the maker of a statement is the person or entity with
ultimate authority over the statement, including its content and
whether and how to communicate it.” 28 Thus, because the mutual
funds filed the prospectuses with the SEC and had ultimate control
over their content, they were the makers of the statements in the
prospectuses. The investment advisor, even if he was involved in the
preparation of the prospectuses, was not. 29

     26Janus, 564 U.S. at 141 (“Under Rule 10b-5, it is unlawful for any person,
directly or indirectly, to make any untrue statement of a material
fact . . . . To be liable, therefore, [a defendant] must have ‘made’ the material
misstatements . . . .” (internal quotation marks and alterations omitted)).
    27 Id. at 137–38.

    28 Id. at 142.

    29 Id. at 147–48.
                            This finding is buttressed by Section 17(b) of the
Securities Act, which provides that “[i]t shall be unlawful for any
person . . . to         publish,      give    publicity    to,   or      circulate
any . . . article . . . which . . . describes [a] security for a consideration
received or to be received, directly or indirectly, from an issuer . . . without
fully disclosing the receipt . . . of such consideration.” 15 U.S.C. § 77q(b)
(emphasis added). Again, only the publisher or author—the maker—of
12                                                          No. 21-0347-cv

       The complaint does not adequately allege that defendants had
ultimate control over the articles. It contains conclusory statements
that “[d]efendants furnished information and language for, prepared,
reviewed, approved, and/or ratified the articles,” 30 but does not
contain sufficient factual allegations to support that contention. To be
sure, the complaint alleges that Sicignano reviewed and approved
statements in the Company’s press releases, 31 which were then often
copied and repeated by the promotional articles. 32 But a person’s
preparation of a press release that is then repeated in a separate article
by a different author does not qualify that person as the “maker” of
the separate article’s statements. The Supreme Court specifically
rejected a holding that would allow plaintiffs “to sue a person who
‘provides the false or misleading information that another person
then puts into [a] statement.’” 33 The complaint does not adequately
allege that Sicignano directly wrote the articles, controlled what the
authors put into the articles, or even saw them before their
publication. “Threadbare recitals of the elements of a cause of action,
supported by mere conclusory statements,” are insufficient to state a
claim. 34

       Moreover, even if Sicignano had provided some input on the
content of the articles, the complaint does not support the conclusion
that Sicignano had the “ultimate authority” necessary to brand him

such articles can be liable under § 17(b) for failing to disclose that he has
been paid for the article.
   30 Joint App. at 35.

   31 Joint App. at 35.

   32 See, e.g., Joint App. 46–47.

   33 Janus, 564 U.S. at 144–45 (internal quotation marks omitted).

   34 Iqbal, 556 U.S. at 678.
13                                                               No. 21-0347-cv

the articles’ maker. 35      The complaint made no sufficient factual
allegation that the articles were published by anyone except the
authors. Nor did it sufficiently allege that those authors lacked final
control over the articles’ contents or did not make the ultimate
decision as to what specific information to include. The complaint
also does not contain sufficient factual allegations that defendants
collaborated with the authors to such an extent that they controlled
the articles’ publication. 36        Here, any such inference is pure
speculation.

          Plaintiffs next contend that defendants had a duty to disclose
the article payments because defendants, in their SEC filings,
affirmatively warned investors of the volatility of the Company’s
stock price. This argument also fails.

          “Silence, absent a duty to disclose, is not misleading under Rule
10b-5.” 37 Rule 10b-5(b), however, makes unlawful the omission of a
material fact “necessary in order to make the statements made, in the
light of the circumstances under which they were made, not
misleading.” 38      Thus, disclosure is required when a corporate
statement       would    otherwise      be   “inaccurate,      incomplete,      or

     35
       See Janus, 564 U.S. at 142–43 (noting that “[e]ven when a speechwriter
drafts a speech, the content is entirely within the control of the person who
delivers it,” and so the speaker, but not the speechwriter, is its maker).
    36 Cf. In re Pfizer Inc. Sec. Litig., 819 F.3d 642, 657 (2d Cir. 2016) (finding

that there was a genuine dispute as to whether Pfizer had ultimate
authority over statements given by another company’s employees because
of a fax that stated that Pfizer and the other company each had to give final
sign-off on statements given by those employees).
    37 Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988); see also Stratte-

McClure v. Morgan Stanley, 776 F.3d 94, 101 (2d Cir. 2015) (“[A]n omission
is actionable under the securities laws only when the corporation is subject
to a duty to disclose the omitted facts.” (quotation omitted)).
    38 17 C.F.R. § 240.10b-5(b).
14                                                                No. 21-0347-cv

misleading.” 39      In the Company’s 2015-2017 10-Ks, defendants
disclosed 19 different factors that could lead to stock price volatility
but did not include its paid stock promotion scheme on the list. 40

          Notably, under § 17(b) of the Securities Act of 1933, an issuer
who merely pays an author to write positive articles on a stock does
not, without more, violate the Act. 41 The articles themselves did little
more than republish publicly-available content. Moreover, there is no
allegation that the press releases, the content of which was captured
in the articles themselves, were false or misleading.

          Because the complaint does not adequately allege that
defendants had a duty to disclose that they paid for the articles’
publication, plaintiffs fail to state a claim that the existence of the stock
promotion scheme constituted a materially misleading omission.

          B.    SEC Investigation

          The complaint next alleges that defendants violated Rule 10b-
5(b) by failing to disclose the SEC investigation into the Company’s
accounting controls. The district court found that defendants had no
duty to disclose the investigation. Plaintiffs contend that defendants
had such a duty because, by not mentioning the investigation, their
disclosures of the accounting deficiencies were misleading. Here we
agree with plaintiffs.

          According to the complaint, throughout 2016 to 2018, the
Company’s 10-Ks and 10-Qs reported material weaknesses in its
internal financial controls, until one 2018 10-Q reported that the
Company had completed the implementation and testing of a

      Glazer v. Formica Corp., 964 F.2d 149, 157 (2d Cir. 1992).
     39

   40 See, e.g., Joint App. at 62–65.

   41 See 15 U.S.C. § 77q(b); In re Galectin Therapeutics, Inc. Sec. Litig., 843 F.3d

1257, 1272–73 (11th Cir. 2016).
15                                                             No. 21-0347-cv

remediation plan targeted at eliminating those weaknesses.42
Relatedly, at some point prior to CW2’s hiring in 2016, the SEC
opened an investigation into the Company. 43 The Company retained
counsel and CFO Brodfuehrer traveled to Washington, D.C. to meet
with the SEC. 44 Then, in 2018, the SEC responded to a FOIA request
by stating that its disclosure of information about any investigations
into the Company from 2016 to 2018 “could reasonably be expected
to interfere with enforcement proceedings.” 45 After Fuzzy Panda
published the SEC’s response, the Company publicly denied any
notice of an investigation or enforcement proceeding against it.

          Defendants had a duty to disclose the SEC investigation in light
of the specific statements they made about the Company’s accounting
weaknesses. 46 “Even when there is no existing independent duty to
disclose information, once a company speaks on an issue or topic,
there is a duty to tell the whole truth.” 47 An omission is material when
a reasonable investor would attach importance to it when making a
decision. 48 Here, the fact of the SEC investigation would directly bear
on the reasonable investor’s assessment of the severity of the reported
accounting weaknesses. Thus, the Company had a duty to disclose
the SEC investigation into the weaknesses throughout the class
period. 49 Because defendants here specifically noted the deficiencies

      Joint App. at 27, 78–79.
     42

      Joint App. at 27–28.
     43

   44 Joint App. at 28.

   45 Joint App. at 55–56.

   46 See Setzer v. Omega Healthcare Invs., Inc., 968 F.3d 204, 214 n.15 (2d Cir.

2020) (noting that Rule 10b-5 imposes a duty to disclose not “all the facts
that pertain to a subject,” but rather only material facts).
   47 Meyer v. Jinkosolar Holdings Co., 761 F.3d 245, 250 (2d Cir. 2014).

   48 See Ganino, 228 F.3d at 161–62.

   49 See Caiola v. Citibank, N.A., 295 F.3d 312, 331 (2d Cir. 2002) (“[U]pon

choosing to speak, one must speak truthfully about material issues. Once
16                                                            No. 21-0347-cv

and that they were working on the problem, and then stated that they
had solved the issue, “the failure to disclose [the investigation] would
cause a reasonable investor to make an overly optimistic assessment
of the risk.” 50

       Throughout this period, the existence of an SEC investigation
related to the accounting weaknesses was material information that a
reasonable investor would have wanted to know.                   Indeed, the
nondisclosure remained a material omission even after the Company
represented that it had rectified the problem because the SEC
investigation was ongoing.         By not disclosing that the SEC was
investigating      the   Company’s      specific    accounting      weakness,
defendants’ statements about that weakness were not accurate and
complete.

       Finally, defendants’ false public denial of any knowledge of the
SEC investigation amounts to an admission of the materiality of its
nondisclosure. Otherwise, the Company would not have tried to hide
it. Moreover, these denials were affirmatively misleading in their
own right. Thus, we easily find that the complaint adequately alleged
that defendants violated Rule 10b-5(b) both by first omitting mention
of the SEC investigation and then by affirmatively denying its
existence. 51

Citibank chose to discuss its hedging strategy, it had a duty to be both
accurate and complete.” (internal citations omitted)).
    50 Jinkosolar, 761 F.3d at 251.

    51 Defendants argue that plaintiffs’ § 10(b) material misrepresentation

claims also should be dismissed for the additional reasons that the
complaint fails to adequately plead scienter and loss causation. But the
district court declined to consider those arguments. Noto v. 22nd Century
Grp., Inc., 2021 WL 131050, at *2 n.1 (W.D.N.Y. Jan. 14, 2021). “It is this
Court’s usual practice to allow the district court to address arguments in
the first instance.” Eric M. Berman, P.C. v. City of New York, 796 F.3d 171, 175
17                                                           No. 21-0347-cv

     II.      Rule 10b-5(a) and (c) Claims

           The complaint next alleges that defendants violated Rule 10b-
5, specifically subsections (a) and (c), by illegally manipulating the
market through the stock promotion scheme. 52 The district court
found that the complaint did not adequately allege a manipulative act
or market activity sufficient to state a claim under those rules. We
agree.

           To state a claim for market manipulation under § 10(b) and
Rules 10b-5(a) and (c), a plaintiff must allege: “(1) manipulative acts;
(2) damage (3) caused by reliance on an assumption of an efficient
market free of manipulation; (4) scienter; (5) in connection with the
purchase or sale of securities; (6) furthered by the defendant’s use of
the mails or any facility of a national securities exchange.”53
Manipulation “connotes intentional or willful conduct designed to
deceive or defraud investors by controlling or artificially affecting the
price of securities.” 54 Accordingly, “[t]he critical question [is] what
activity ‘artificially’ affects a security’s price in a deceptive manner.”55
A court must ask whether a defendant injected inaccurate information
into the marketplace. 56

           The complaint fails to support a claim that defendants
manipulated the market. It does not allege that the market was
manipulated by either the information in the articles, the payments to
the writers, or the non-disclosure of the payments.             There is no

(2d Cir. 2015) (per curiam) (quotation and alteration omitted). Accordingly,
we do not address them here.
   52 The complaint does not base this claim on the non-disclosure of the

SEC investigation.
   53 ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 101 (2d Cir. 2007).

   54 Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 (1976).

   55 ATSI, 493 F.3d at 100.

   56 Id. at 101.
18                                                          No. 21-0347-cv

allegation that the articles themselves, which consisted of analysis
and information derived from public filings, press releases, and
statements by management, manipulated the market.                Relatedly,
there is no claim that defendants paying the articles’ authors
somehow manipulated the market or was intentionally designed to
do so. While plaintiffs argue that the non-disclosure of defendants’
payments to the authors was materially misleading to investors (the
point addressed—and rejected in Part I), that, in and of itself, does not
equate to market manipulation. 57 There is therefore no allegation that
defendants affirmatively “injected” inaccurate information into the
market:       even if the payments were material, which we have
determined not to be the case, because defendants were not the
articles’ “makers,” they had no responsibility for the payments’
disclosure. And there is no allegation that defendants directed the
authors not to disclose the payments, or that defendants were
anything but indifferent as to whether the authors did so. Thus,
plaintiffs fail to plead that defendants engaged in any manipulative act
sufficient to sustain a market manipulation claim based on the
undisclosed payments.

     III.    Section 20(a) Claim

          The complaint also alleges that Sicignano and Brodfuehrer are
liable under the control person provision of § 20(a) of the Exchange
Act. To state a claim under § 20(a), a plaintiff must demonstrate, inter
alia, a primary violation by the controlled person. 58

          The district court held that, because plaintiffs failed to plead a
primary violation under § 10(b) and Rule 10b-5, the dependent § 20(a)
claims must necessarily fail. Because we remand the § 10(b) material

      Id. (“A market manipulation claim [] cannot be based solely upon
     57

misrepresentations or omissions.”).
   58 Id. at 108.
19                                                              No. 21-0347-cv

misrepresentation claim based on the non-disclosure of the SEC
investigation, we also vacate the § 20(a) claim dismissal solely as it
pertains to that particular non-disclosure.

     IV.     Leave to Amend

          At the conclusion of their opposition to the motion to dismiss,
plaintiffs requested an opportunity to amend their complaint should
any part of defendants’ motion be granted. The district court denied
the request. 59      While we remand on the dismissal of the SEC
investigation non-disclosure aspect of plaintiffs’ Rule 10b-5(b) claim,
we agree that plaintiffs should not be permitted to amend their
complaint to reallege any violations stemming from the non-
disclosure of the article promotion scheme.

          “[T]his circuit strongly favors liberal grant of an opportunity to
replead after dismissal of a complaint under Rule 12(b)(6).” 60 But a
court need not always allow a party to replead simply because it
asked. In particular, denial of leave to amend is proper “where the
request gives no clue as to how the complaint’s defects would be
cured.” 61 That is the situation here. In their briefing on appeal,
plaintiffs contend that they could “cure any deficiencies with
additional testimony . . . about [d]efendants’ editing, review, and
approval” of the promotional articles, but do not allege what specific
facts they would include to demonstrate the level of control needed
for Rule 10b-5(b) liability. 62 And, at oral argument, plaintiffs’ counsel
conceded that plaintiffs did not presently have any additional facts

      Noto, 2021 WL 131050, at *2 n.2.
     59

      Porat v. Lincoln Towers Cmty. Ass’n, 464 F.3d 274, 276 (2d Cir. 2006) (per
     60

curiam).
   61 Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d 160, 190

(2d Cir. 2015) (internal quotation marks omitted).
   62 Appellants’ Br. at 54.
20                                                           No. 21-0347-cv

regarding defendants’ control not already included in the
complaint. 63 Plaintiffs also did not explain what they would add to
demonstrate how defendants engaged in market manipulation
related to the articles.            The district court thus properly denied
plaintiffs’ request to replead their allegations stemming from the
stock promotion scheme.

                                      CONCLUSION

           For the foregoing reasons, we AFFIRM in part and VACATE in
part the judgment of the district court and REMAND for further
proceedings consistent with this opinion.

     63   Oral Arg. Tr. at 31–32.