On April 29, 2019, the United States Court of Appeals for the Second Circuit affirmed the denial of plaintiffs’ motion for leave to file an amended complaint alleging securities fraud against an international pharmaceutical corporation (the “Company”) and several of its past and present executives. Steamfitters’ Indus. Pension Fund v. Endo Int’l PLC, 18-1669-cv (2d Cir. Apr. 29, 2019). Upon reviewing the district court’s decision de novo, the Second Circuit concluded that an amendment would be futile because the alleged misrepresentations and omissions contained in plaintiffs’ proposed amended complaint (the “Proposed Amended Complaint”) failed to allege any plausible violation of Section 10(b) and 20(a) of the Securities and Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5.
Plaintiffs commenced their securities class action in May 2016, alleging that defendants made material misrepresentations regarding, among other things, the Company’s business strategy, including its strategy in connection with an acquisition of a privately-held pharmaceuticals company. Over the course of the litigation, plaintiffs amended their complaint twice, and the amended complaints each contained allegations that were substantively similar to those alleged in the initial complaint. On January 16, 2018, the district court dismissed plaintiffs’ claims finding that plaintiffs had failed to plead adequately any actionable violation of federal securities laws. After judgment was entered, plaintiffs filed a motion to alter the judgment and for leave to amend, along with the Proposed Amended Complaint and setting forth a different theory of alleged misrepresentations.
In the Proposed Amended Complaint, plaintiffs alleged that defendants made materially false statements that could have reasonably led investors to believe that the Company would not make any drastic changes to its existing generics business after its acquisition of the privately-held pharmaceuticals company when, in reality, defendants were executing “a secret plan to transform the [Company’s] generics business, abandoning [its] business model in favor of” the newly acquired private company’s business model. Plaintiffs further alleged that defendants had an affirmative duty to disclose this change in business strategy. On April 27, 2019, the district court denied plaintiffs’ motion for relief, concluding that leave to amend would be futile in light of plaintiffs’ failure to adequately allege any violation of federal securities laws.
The Second Circuit affirmed the denial after reviewing the decision de novo, and not for abuse of discretion, because the district court’s denial was based on a legal interpretation and a determination that an amendment would be futile. First, the Court found that the alleged statements did not amount to material misrepresentations because defendants’ statements, when taken as a whole, signaled that the Company intended to change their generics business including, for example, statements that the acquisition would “transform its operating model to maximize growth potential and cash flow generation.” Second, the Court found that many of the statements alleged by plaintiffs were misleading—such as that the Company hoped to “maintain the magic” of both entities—and were “nothing more than mere puffery” consisting of the “sort of vague and optimistic ‘statements [that] are too general to cause a reasonable investor to reply upon them.’” Accordingly, the Court held that plaintiffs’ Proposed Amended Complaint failed to raise a plausible Section 10(b) and Rule 10b-5 claim.
The Court also found futile plaintiffs’ claim that defendants failed to make adequate affirmative disclosures pursuant to Item 303 concerning the Company’s business strategy. The Court held that defendants were under no obligation pursuant to Item 303 to announce its internal business strategies. See Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 100 (2d Cir. 2015) (noting that the SEC “has never gone so far as to require a company to announce its internal business strategies”). Finding no “primary violation” of federal securities laws, the Court summarily concluded that plaintiffs failed to adequately plead a violation of Section 20(a) and thus held that permitting plaintiffs to amend their complaint in this respect would be futile.