The Eleventh Circuit recently affirmed a Northern District of Georgia decision dismissing claims against Galectin Therapeutics (“Galectin”), a hedge fund, and five Galectin directors and officers, in In re Galectin Therapeutics, Inc. Securities Litigation, — F.3d —, 2016 WL 7240146 (7th Cir. Dec. 15, 2016). The litigation focused on Galectin’s payments to four stock promoters in exchange for their publication of favorable reports about the company and its stock, and Galectin’s non-disclosure of the payments. After news of the company’s payments to the stock promoters came to light, Galectin’s stock price fell precipitously. The Eleventh Circuit, following the Supreme Court’s Janus decision, held that the defendants could not be liable for the stock promoters’ statements or omissions, because the defendants were not the “makers” of any such statements or omissions. The court also held that Galectin’s payments to stock promoters did not violate the securities laws, and the company’s disclosures that they did not and would not take any actions to manipulate its stock price was not actionable.

Galectin is a small biopharmaceutical company headquartered in Georgia that conducts research to develop drugs to treat cancer and fatty liver disease. In 2009, defendant 10X Fund took over and restructured Galectin’s predecessor company. The five individual defendants are all directors and/or senior officers of Galectin, and held stock in the company. Id. at *1.

In 2013 and 2014, Galectin issued two rounds of stock in “at the market” (“ATM”) offerings. Id. at *2. Around the same time, Galectin retained four separate stock promoters and paid them to publish articles in order to recommend or tout Galectin’s stock. SEC rules do not prohibit such arrangements, and do not require the issuer to disclose that it paid the stock promoter for its services. Instead, the SEC requires the stock promoters themselves to disclose the relationship with the company they are promoting so that the disclosure can be found in the actual promotional materials. Two of Galectin’s paid promoters failed to make any disclosure. A third promoter disclosed its relationship with Galectin, but plaintiffs claimed that the disclosure was inadequate. With respect to the fourth promoter, Galectin disclosed in its 10-Q that it had paid the promoter as part of a “consulting agreement.” The plaintiffs claimed this disclosure was inadequate because it was untimely, appearing two months after the promotional material was published, and vague because it only referred to a consulting agreement without being more specific. Id. at *3-4.

The plaintiffs further alleged that the stock promoters’ publications were manipulative, because the defendants timed them to coincide with the ATM offerings in order to pump up Galectin’s stock price artificially. Plaintiffs did not allege a pump-and-dump scheme; instead they alleged that the defendants pumped the stock price to avoid dilution of their own stock holdings following the ATM offerings. Id. at *4. The plaintiffs also claimed that the ATM offerings filed with the SEC were materially misleading, because Galectin stated that it had not taken any action that caused or resulted in the “manipulation” of its stock price, and that it would not “directly or indirectly” manipulate its stock price in the future. The district court dismissed the claims. Id. at *5.

On appeal, the Eleventh Circuit affirmed the district court’s dismissal. The court first addressed plaintiffs’ claim that because Galectin paid the promoters, the promoters became agents of the company and the company assumed the stock promoters’ disclosure responsibilities. According to plaintiffs, because the promoters did not disclose (or adequately disclose) that Galectin paid for the publications, the defendants should be held liable for the materially misleading publications, which violated Section 10(b) and Rule 10b-5.

The court examined the Supreme Court’s decision in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011). In Janus, the Supreme Court held that “[f]or 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.” Id. at 142. Applying that holding, the court quickly concluded that plaintiffs had not sufficiently alleged that Galectin had “ultimate authority” over the stock promoters’ statements. Galectin’s payments to the promoters was not sufficient to support the claim. In re Galectin, 2016 WL 7240146, at *9-11.

Second, the court rejected plaintiffs’ argument that Galectin’s representations in its SEC filings that it had not and would not take actions to manipulate its stock price was an untrue statement of fact. There is no prohibition in the securities laws against a company hiring a stock promoter. Moreover, the word “manipulation” is “‘virtually a term of art when used in connection with securities markets,’ generally referring ‘to practices, such as wash sales, matched orders or rigged prices, that are intended to mislead investors by artificially affecting market activity.’” Id. at *11 (quoting Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 476 (1977)). Manipulation “connotes intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities.” Id. (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 (1976)). The court concluded that plaintiffs had not alleged the kind of conduct by the defendants necessary to amount to “manipulation.” Id. at *12.

Finally, the court rejected plaintiffs’ argument that Galectin’s 10-K and 10-Qs contained material omissions of fact because they failed to disclose that the number of new shares issued in the ATM, the price per share, and the net proceeds were impacted by the stock promoters’ activity. The court ruled that the 10-K and 10-Qs simply reported those figures accurately, and the disclosures did not create a duty to disclose that the company had paid the promoters to promote its stock. Id. at *13.

After affirming the dismissal of the Section 10(b) and Rule 10b-5 claims, the court also affirmed dismissal of the Section 20(a) claims, noting that there were no remaining primary violations remaining that could form the basis of a control person liability claim. Id. at *14.