On August 4, 2022, the United States District Court for the Middle District of Florida dismissed without prejudice a putative class action asserting claims under the Securities Exchange Act of 1934 against a recycling services company, certain of its officers and directors, and the former CEO of a special purpose acquisition company (SPAC) that acquired the company. Theodore v. PureCycle Tech. Inc., No. 6:21-cv-809-PGB-GJK, slip op. (M.D. Fla. Aug. 4, 2022), ECF No. 112. Plaintiffs alleged that the company made misrepresentations with respect to its management team’s experience, the value of its patented recycling process, and its future production and financial projections, which were allegedly revealed in a short-seller report. The Court held that the complaint on its face failed to state precisely which statements or omissions were at issue and where they were made, that plaintiffs adequately alleged certain misrepresentations but not others, and that plaintiffs adequately alleged loss causation but not scienter.

As an initial matter, the Court observed that plaintiffs’ complaint was “not the picture of clarity,” and that it was “not easily distilled what statements are at issue, who made these statements, and sometimes, what is the proper source of the statement.” Id. at 8. In particular, the Court singled out the complaint’s use of “excessive block quoting and its intermittent incorrect identification of where statements were made,” finding that this failed to meet the heightened pleading standard for a securities fraud claim under Rule 9(b) of the Federal Rules of Civil Procedure. Id. at 9. However, the Court explained that it would nevertheless “continue its analysis” of the claims. Id.

With respect to whether the complaint adequately alleged misstatements or omissions, the Court first determined that the complaint sufficiently alleged that the individual defendants “made, or caused to be made, false statements” and that “because of their positions with the [c]ompany, [they] possessed the power and authority to control the contents” of “press releases, presentations, and SEC filings.” Id. at 17. The Court then identified certain statements as mere puffery, while also examining the challenged statements “holistically to determine whether there are ‘tangible, verifiable’ facts included in the statements despite the use of any flowery language.” Id. at 19. For example, the Court held that the company’s statement that its recycling process was “revolutionary” and “cost-effective” were puffery, while its related claims that the process used “approximately 75% less energy” than “the traditional manufacturing process” was an “objective and verifiable fact and cannot be considered puffery.” Id. at 20-21.

In addition, the Court rejected defendants’ argument that a short-seller report relied on by plaintiffs could not be relied on to show falsity because it in turn depended on anonymous witnesses. Id. at 22-23. The Court noted that the truth of the report was not ripe for resolution on the pleadings. Id. Next, the Court concluded that certain statements were forward-looking and accompanied by meaningful cautionary language and were therefore not actionable under the safe-harbor provision of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). In particular, the Court determined that the company’s statements regarding plans for future production and profits were forward-looking, notwithstanding plaintiffs’ allegation that scarcity in the raw materials needed for production meant that the company would not be able to meet its target. Id. at 25-26. The Court emphasized that, even if plaintiffs’ allegations were true, that was not dispositive as to whether the company’s forward-looking statements were true, particularly in light of the company’s “extensive and meaningful cautionary language.” Id. at 26.

Finally, the Court determined that plaintiffs adequately alleged that the company had a duty to disclose truthfully all material information about its management team’s past business failures, given that the company had “tout[ed]” and “willingly flaunt[ed]” the management team’s claimed experience. Id. at 28-29. Similarly, the Court concluded that, because the company advertised its recycling method as “more cost-efficient and environmentally sustainable than the traditional manufacturing process” and stated that it had been “validated by technical consultants,” the company had a duty to disclose negative information about alleged problems with how the recycling method was actually working at the lab scale, which “[a] reasonable investor would be interested to know … before the method may be scaled up for profitable production.” Id. at 29-30.

Turning to the scienter requirement, the Court held that the complaint “fails to mee the high pleading standard for scienter.” Id. at 30. The Court noted that plaintiffs merely asserted in conclusory fashion that defendants had “control or access to information that would contradict their public statements,” and relied on defendants’ “executive positions” to support that contention — which was insufficient without alleging with specificity the information they actually received. Id. at 31-32. For the same reasons, the Court rejected plaintiffs’ argument — based on the “core operations” doctrine — that knowledge could be imputed to the company’s executives because the company “only has one business focus.” Id. at 32-34. Finally, the Court rejected plaintiffs’ argument that scienter could be inferred for the SPAC’s CEO based on his supposedly “checkered history.” The Court explained that, while such evidence might be part of the scienter analysis for an action based on scheme liability, the Court was unpersuaded that it was sufficient to support a strong inference of scienter for a case based on allegedly false or misleading statements. Id. at 34-35.

With respect to loss causation, the Court explained that plaintiffs had adequately alleged loss causation based on a “fraud on the market” theory and had sufficiently alleged that a short-seller report that allegedly triggered a 40% drop in the company’s stock in one day was a corrective disclosure. Id. at 36-39. The Court also rejected defendants’ argument that the short-seller report merely “repackage[d]” information that was already public, noting that the report’s quotes from certain interviews were not previously available to the public. Id. at 39-40.