On November 16, 2020, Judge Haywood S. Gilliam, Jr. of the Northern District of California granted a motion to dismiss a Section 10(b) claim under the Securities Exchange Act of 1934 (the “Exchange Act”), as well as a Section 20(a) claim under the Exchange Act as it relates to the Section 10(b) claim, against a lead-acid battery recycler (the “Company”) and three of its senior officers. In re Aqua Metals Inc. Securities Litigation, No. 17-cv-07142 (N.D. Cal. Nov. 16, 2020). Plaintiffs alleged that defendants made materially false and misleading statements concerning the Company’s novel recycling technology and its commercialization process. The Court granted defendants’ motion to dismiss, holding that plaintiffs failed to plead any actionable material misstatements or scienter. Certain claims in the case addressed in connection with a prior motion to dismiss were not the subject of this decision and will survive.
According to plaintiffs’ second amended complaint (“SAC”), defendants misrepresented the Company’s success of the ramping up and commercialization of its novel battery recycling technology. Plaintiffs allege that defendants failed to disclose the problems the Company experienced in attempting to scale up its technology for commercialization, misrepresented the commercialization timeline, misrepresented the production efficacy of its recycling program and related revenues, and issued misleading statements concealing the challenges of the new technology. According to purported confidential witnesses (“CWs”) cited in the SAC, defendants knew of “significant problems” with the Company’s recycling technology, which included issues related to scaling for commercialization, and misleadingly “staged” investor and analyst visits to misrepresent the success of the Company’s commercialization operations.
The Court first addressed plaintiffs’ allegations that defendants misrepresented the success of its commercialization process and technology. The Court held that plaintiffs failed to adequately plead a material misrepresentation, finding that the alleged misstatements were protected under the PSLRA’s safe harbor as forward-looking statements, were not false, or were non-actionable statements of opinion.
With respect to alleged misstatements the Court characterized as forward-looking, the Court emphasized the numerous risk disclosures in the Company’s SEC filings cautioning that various factors in the scaling up process could affect the Company’s success. The Court noted that those disclosures clearly stated while the “testing of [the recycling] process has been successful to date, there can be no assurance that [the Company] will be able to replicate the process. . .on a large commercial scale.” The Court added that certain other Form 10-K and Form 10-Q filings issued throughout the putative class period contained similar disclaimers, reiterating cautionary language that the Company had “tested [its recycling technology] process on a small scale and to a limited degree” and that while it was optimistic, the Company had not “undertaken the processing of used [lead-acid batteries] nor [had it] commenced the production of [recycled] lead in large commercial quantities.” Further, the Court disagreed with plaintiffs’ argument that the cautionary statements were insufficiently precise to trigger PSLRA protections, observing that “the PSLRA does not require that the cautionary statement[s] at issue include the precise particular factor that ultimately causes (or could cause) the forward-looking statement to be untrue.”
The Court then addressed the second category of alleged misstatements, which it characterized as non-forward-looking statements, and held that plaintiffs failed to adequately allege that such statements were false or misleading and were otherwise non-actionable statements of corporate optimism and puffery. The Court initially addressed purported statements by CWs and found that they failed to support that defendants misrepresented the issues and viability of their recycling technology. The Court emphasized that “the critical fact is the Company did not represent that it was producing [recycled] lead in commercial quantities” nor did it represent that its revenue came from recycled lead, and issues raised by the CWs as a result of the Company’s attempts to scale did not make defendants’ statements about operations misleading.
Turning to the allegations that defendants misrepresented the Company’s commercialization process, the Court found that defendants stated numerous times that while the Company was able to produce recycled lead “on a small scale and to a limited degree,” they cautioned that they were not providing assurances that “it would be able to economically” do so in commercial quantities and that the Company’s facility was “not operating at a commercial scale.” The Court determined that although the Company did not ultimately complete the transition to commercialization or successfully commence commercial production of the recycled lead until 2018, this “does not, by itself, make any of its November 2016 statements that it was transitioning to commercialization false or misleading.” The Court also reasoned that the Company consistently provided numerous disclosures describing the issues surrounding scaling of production and emphasized in prior public filings that its testing of the recycling process, while successful, has been at a limited scale. The Court similarly dispensed with statements plaintiffs alleged were misleading, agreeing with defendants that the alleged statements—such as the characterization of its recycling technology as “breakthrough technology” or a “major milestone”—were non-actionable statements of puffery and corporate optimism under the PSLRA because investors would not reasonably rely on such statements when valuing corporations.
Separately, the Court addressed whether the individual defendants were “makers” of the alleged misstatements attributed to them. Citing the Supreme Court’s decision in Janus Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135, 142-43 (2011), the Court observed that the SAC improperly attempted to hold certain individual defendants liable for certain statements that defendants contend they did not “make” personally in the Company’s filings or calls. In particular, the Court noted that there were no allegations that one of the individual defendants signed any of the SEC filings or press releases, and also no allegations that he was responsible for—or had ultimate authority—over their content. The Court also determined that plaintiffs’ allegations against one of the other individual defendants were deficient based on alleged misstatements made on earnings calls and in press releases, as it was only alleged that he attended the calls and was listed as a “Company Contact” in the press releases, and accordingly failed to plead any factual allegations demonstrating he had “ultimate control and authority over these statements.” Moreover, the Court held that an alleged misstatement in a news article regarding a partnership the Company had entered into that plaintiffs sought to attribute to one of the individual defendants was a non-actionable statement of corporate optimism or puffery because there are no allegations “demonstrating that [this defendant] thought the statement was false when he made [them].”
While concluding that none of the alleged misstatements were actionable, the Court nonetheless considered whether plaintiffs adequately alleged scienter. First, with respect to the CWs’ statements, the Court found these statements to be generalized and conclusory, and that they failed to establish that the CWs reporting them have “reliable personal knowledge of the defendants’ mental state.” As to other scienter allegations attributed to CWs regarding the alleged “staged investor shows” and misleading photographs of the recycling process as evidence of defendants’ purported knowledge of purported problems with the technology, the Court held that plaintiffs failed to establish that the CWs—one of whom did not even work at the Company at the relevant time—had personal knowledge and instead relied on speculation or hearsay. Second, the Court addressed plaintiffs’ alternate theory of scienter premised on alleged insider stock sales by the individual defendants. According to plaintiffs, two of the individual defendants each sold 60,000 shares during the putative class period, which plaintiffs alleged was probative of scienter. The Court observed that the SAC, however, failed to include any allegations concerning the percentage of the holdings sold by these individuals, and noted that the relevant Company proxy indicated that those individuals retained more than 90 percent of their holdings. With respect to the other individual defendant, the Court observed that public records confirmed that not only were there no stock sales during the putative class period, but in fact there were stock purchases of approximately $200,000. The Court concluded that these facts “contradict any inference of scienter.”
Having dismissed the Section 10(b) claim, the Court similarly dismissed plaintiffs’ control-person liability claims under Section 20(a) to the extent that claim relates to the Section 10(b) claim, finding no primary violation of the Exchange Act under which the Section 20(a) claim could be established.