On July 11, 2018, Judge John E. Jones III of the United States District Court for the Middle District of Pennsylvania dismissed certain claims in a putative securities fraud class action against Rite Aid Corporation and Walgreens Boots Alliance, Inc. Plaintiff brought claims under Sections 10(b) and 20(a) of the Securities Exchange Act, alleging that Rite Aid, Walgreens, and certain executives at each company made various misstatements over the course of the failed merger between the two companies, which was announced in October 2015 and ultimately terminated in June 2017. Hering v. Rite Aid Corp., —F. Supp. 3d—, 2018 WL 3373033 (M.D. Pa. July 11, 2018). The Court held that the majority of the alleged misstatements were optimistic forward-looking statements that were immaterial and/or protected by the safe harbor provided by the Private Securities Litigation Reform Act of 1995, but that certain statements by the Walgreens defendants expressing confidence that the transaction would close based on purported inside information, made in response to negative reports in the press, were sufficiently pleaded with respect to falsity and scienter to state a claim for fraud.
Examples of non-fraudulent statements included statements regarding the expected value or timing of the merger or potential regulatory concerns, which the Court held to be forward-looking and accompanied by meaningful cautionary statements. Id. at *7—8. In one instance, the Court held that it could not evaluate whether statements that the merger would provide “significant value” and that the companies expected to close the transaction “in the second half of calendar year 2016” were accompanied by meaningful cautionary language because neither party had put the relevant press release in the record; however, the Court held that plaintiff had failed to allege facts suggesting intent or recklessness as to the truth of the statements. Id. at *8—9. The Court also held that numerous statements of optimism or opinion could not have created a false impression in the mind of a reasonable investor. Id. at *11. For example, the Court held that statements regarding store divestitures or the closing timeframe would have been understood by reasonable investors to be estimates based on evolving information, and general statements regarding the general progress of the FTC review were not concrete enough for a reasonable investor to rely on.
The Court also held, however, that plaintiff had adequately alleged that statements Walgreens made expressing confidence that the deal would be completed and questioning media accounts to the contrary, were fraudulent. Id. at *11. In particular, the Court focused on the facts that the speakers had expressly alluded to “inside knowledge” of the FTC review and close collaboration with the FTC as a basis for dismissing newspaper reports of regulatory turbulence. Id. The Court held that a reasonable investor could have been misled into thinking that the review process was going better than it in fact was based on such statements by Walgreens. The Court also held that Walgreens’s decision to “openly contradict news reports of regulatory trouble by alluding to their non-public ‘inside’ knowledge of the FTC’s review” to be “reckless” and therefore supported an inference of scienter. Id.
The Court’s decision is a reminder of the importance of providing significant cautionary language when making forward-looking statements and the dangers of referring to undisclosed “inside” information as support for public statements.