In a recent decision, the Eleventh Circuit Court of Appeals dispelled any notion that motions to dismiss are less likely to be granted when plaintiffs choose to assert claims based solely on the Securities Act of 1933 and thereby avoid those provisions of the federal securities laws that automatically impose heightened pleading requirements. In Andrea Miyahira et al. v. Vitacost, Inc. et al., Case No. 12-14065, 2013 WL 1859406 (11th Cir. May 6, 2013), the Court of Appeals affirmed the lower court’s dismissal with prejudice of 1933 Act claims based on the plaintiffs’ failure to assert plausible allegations of false statements by defendants and plaintiffs’ failure to identify any undisclosed facts that would have been material to a reasonable investor. Id. at *7-*9.
Plaintiffs in Vitacost alleged that the company (a manufacturer and retailer of vitamins and nutritional supplements) and certain of its executives made false and misleading statements in the registration statement and prospectus for the company's initial public offering. Id. at *1. Plaintiffs claimed that defendants made four categories of alleged misstatements: (1) they concealed an intention post-IPO to fire the company’s founder and current chief operations architect and another executive purportedly responsible for past manufacturing successes; (2) they did not disclose a plan to relocate the company’s distribution facility; (3) the company had ongoing violations of FDA regulations that were not disclosed; and (4) the company made certain falsely optimistic statements about its future prospects and growth strategies. Id. at *6. As explained below, the Court of Appeals determined that the District Court properly dismissed all of these claims.
The Eleventh Circuit first addressed the departure of the two executives identified by plaintiffs. The Court agreed with the District Court that, assuming plaintiffs had plausibly alleged a plan to terminate the two executives prior to the IPO, any claims based on the supposed failure to disclose this plan must fail because the omission at issue was immaterial as a matter of law. Id. at *7. The Court reasoned that the materiality argument offered by plaintiffs -- based on the opinions of insiders to the effect that these individuals were “critical” to the company’s success -- was misguided. Id. The Court explained that, for purposes of assessing materiality, it was required to examine what had in fact been disclosed publicly about these individuals. Id.
The company had disclosed in the offering materials that, under NASDAQ restrictions, the founder could no longer serve in a policy-making role and, as a result, had been forced to resign his position as CEO. Id. In light of these disclosures, no reasonable investor could have viewed his later departure as significantly altering the total mix of information available. Id. In other words, any loss to the company in the future due to the lack of input from this individual had occurred when he stepped down as CEO and investors had already adjusted their expectations accordingly. Id. As to the other executive in charge of manufacturing, there was nothing in the prospectus to suggest he was critical to the company’s ongoing operations and, thus, investors had no reason to think that the company could not continue to be successful without him. Id.
The Court similarly rejected plaintiffs’ claims of false and misleading statements concerning the company’s move to a new distribution facility and purported ongoing FDA violations. Id. at *8. The Eleventh Circuit ruled that there were no guarantees made in conjunction with the offering that the company would remain in its existing distribution facility for any set period of time and the fact that confidential informants reported a search for a new facility began prior to the offering showed the company’s foresight and not that its prior disclosures were misleading in any respect. Id. The Court also held that plaintiffs failed to plead any plausible link between prior concerns raised by the FDA in 2005 with respect to four specific products and the FDA’s instructions received in 2009 to review product labels to ensure FDA compliance. Id. The Court concluded that plaintiffs’ argument rested on the faulty premise that, by virtue of having been notified that four specific products needed to be re-labeled in 2005, the company “must have known” that it was not in compliance at the time of the IPO as to other unrelated products. Id. This “stretch in logic” could not plausibly plead facts demonstrating that any statements made in the prospectus on compliance with FDA regulations were false or misleading when made. Id.
And, finally, the Eleventh Circuit ruled that the remainder of the alleged misstatements raised in the complaint were “forward-looking statements” that qualified for protection from liability under the “safe harbor” for such communications established in the Private Securities Litigation Reform Act. Id. at *9. The Court concluded that any forward-looking statements about the company’s growth projections and growth strategy were accompanied by “appropriate cautionary language about the risks and uncertain variables that could impact [the company’s] projections, including the impact of moving its facilities and the departure of key personnel.” Id. Accordingly, these statements qualified for protection under the Reform Act’s safe harbor provision and, thus, plaintiffs’ claims regarding these statements failed as a matter of law. Id.