The Covid-19 pandemic has prompted a great deal of litigation, including class action lawsuits charging violations of the securities laws. But plaintiffs in those cases will face numerous challenges.
Given the tremendous unknowns surrounding the new Covid-19 virus and the evolution of scientific and governmental guidance since 2019, many of the counts in the securities class action lawsuits are vulnerable to dismissal. Plaintiffs cannot argue “fraud by hindsight.” And, as we all know, information from federal, state, and local governments and from health authorities regarding Covid-19 has been in flux.
Defendants will have other arguments where their forward-looking statements were accompanied by meaningful cautionary language; where challenged statements cannot be shown to be false at the time, or were mere puffery or statements of opinion; and where plaintiffs cannot demonstrate scienter.
California Case Shows the Problem
A recently decided case illustrates the problem. In Berg v. Velocity Financial Inc., the plaintiffs alleged the defendants’ statements violated Sections 11 and 15 of the Securities Act of 1933 because they failed to address the uncertainty in the real estate market caused by the Covid-19 pandemic.
In granting the motion to dismiss, the court observed that the plaintiff “does not allege that Defendants would or could have known the extent of the coronavirus pandemic, or even the presence of the disease in America, at the time of the IPO. Thus, there would have been no need for Defendants to include any disclosure about the pandemic in its offering materials.”
The court added that at a minimum, the defendants “disclosed that its business may be affected by ‘changes in national, regional or local economic conditions or specific industry segments,’ which may be caused by ‘acts of God.’”
This cautionary language, in the court’s view, was sufficient. Other traditional securities defenses may prove powerful in responding allegations arising from the Covid-19 pandemic.
Pleading Misrepresentations or Scienter Is Challenging
Complaints alleging securities fraud must meet the heightened pleading standards of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act (PSLRA), which require pleading fraud with specificity.
Additionally, the PSLRA requires that a complaint state with particularity facts giving rise to a “strong inference” that the defendant acted with the required state of mind. A strong inference is “more than merely plausible or reasonable—it must be cogent and at least as compelling as any opposing inference of non-fraudulent intent.”
The changing advice from health authorities and governments regarding Covid-19 can support a defendant’s arguments rebutting allegations of scienter.
For example, in In re Carnival Corp. Securities Litigation, the plaintiff alleges the defendants made a series of false and misleading statements and omissions concerning the company’s conduct with respect to Covid-19 and Carnival’s role in facilitating the transmission of the virus.
In arguing lack of scienter under the PSLRA, the still-pending motion to dismiss contends the complaint alleges no facts raising a strong inference of knowledge given the lack of consensus in the medical field about how to address the pandemic. Carnival has been able to point to resistance from public health experts and government officials at the relevant time to restricting foreign travel or large gatherings.
Framing allegations that meet these strict pleading requirements may prove very difficult against a backdrop where even the medical and government experts could not agree on what facts or guidelines were true and accurate.
Safe Harbor for Forward-Looking Statements
The PSLRA contains a safe harbor provision that protects the makers of forward-looking statements from liability where either: (1) the statements were not material; (2) the plaintiff cannot demonstrate that the defendant had actual knowledge that the statements were false or misleading when made; or (3) the statements were identified as forward-looking and accompanied by meaningful cautionary language identifying important factors that could cause actual results to differ materially from those in the forward-looking statement.
In Douglas v. Norwegian Cruise Lines, defendants have observed that the challenged forward-looking statements were accompanied by this cautionary warning. Indeed, the company’s statement also pointed to current losses the company was suffering because of travel changes brought about by the pandemic. Defendants made a similar argument in Hartel v. The GEO Group Inc.
Aspirational, Vague Statements May Not Be Actionable
Statements that are “vague, soft, puffing statements or obvious hyperbole,” such as statements concerning a company’s commitment to safety, and future development of safety-related processes may not be not actionable, because “a reasonable investor would not rely” on them.
Some defendants in Covid-19 litigation are arguing that alleged misstatements were too aspirational or “soft” to be actionable. To the extent that plaintiffs try to base liability on general statements about a company’s commitment to safety or transparency, or its efforts to monitor the pandemic, those are all categories of statements that could be deemed too aspirational or generic to give rise to a claim.
Proving Loss Causation May Be Challenging
The PSLRA requires a plaintiff to prove that the alleged misrepresentation actually caused the loss plaintiff seeks to recover. Loss causation is not adequately pled simply by allegations of a drop in stock price following an announcement of bad news if the news did not correct the prior misrepresentation.
This type of argument could have salience in securities cases arising from the Covid-19 pandemic. The fast pace of news during this period should give rise to arguments about whether a stock drop was actually related to a revelation about a particular company, or instead was the result of market-wide, industry-wide, or even geographically-pertinent information.
These issues will be complicated by some defendants being able to point to prior disclosures that they made before the drop on which plaintiffs focus.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Edward J. “Ted” Bennett serves as co-chair of Williams & Connolly’s Complex Commercial Litigation practice group.
Amanda M. MacDonald co-chairs Williams & Connolly’s Securities Litigation and Enforcement practice groups and is a leader in the firm’s investigations practice.
John S. Williams practices in the area of complex civil litigation with a particular focus on securities litigation, professional liability defense, and appellate work.