Securities Snapshot
February 12, 2024

In This Issue: Goodwin Again Secures Dismissal of Putative Securities Class Action for Plug Power Inc.; Former Twitter Stockholder Denied Mootness Fees

Goodwin’s Securities and Shareholder Litigation and White Collar Defense lawyers have extensive experience before US federal and state courts, as well as with regulatory and enforcement agencies. We curate this Securities Snapshot to summarize notable developments in securities law, covering litigation and enforcement matters, legislation, and regulatory guidance.

Goodwin Again Secures Dismissal of Putative Securities Class Action for Plug Power Inc.

On August 29, 2023, the Southern District of New York dismissed with prejudice the plaintiff’s second amended complaint (SAC) in a putative securities class action asserting claims against Plug Power Inc. and certain of its executive officers for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the Exchange Act). As detailed in an earlier edition of Securities Snapshot, the court previously dismissed the plaintiff’s first amended complaint for failing to plead scienter, but it granted leave to amend.

Like the previously dismissed complaint, the SAC alleged that the defendants made false and misleading financial statements by misclassifying costs related to Plug Power’s fuel delivery as research and development expenses between 2016 and 2020, resulting in a restatement of previously issued financial statements. The SAC also added a new claim that the defendants allegedly issued false and misleading statements regarding a transaction with Amazon. Once again, however, the court found that the plaintiff failed to adequately plead scienter with respect to any of its claims, notwithstanding the inclusion of additional factual allegations.

First, the court rejected allegations that the defendants had “motive and opportunity” to commit fraud with respect to Plug Power’s restatement. The plaintiff attempted to rehabilitate the theory that the defendants misclassified certain expenses to improve the company’s margins and attract investment from a potential partner, the SK Group. But the court found that the SAC still failed to allege any facts to suggest that this was done for any personal gain “at the expense of [company] shareholders because the shareholders themselves would benefit from a superior transaction.” Moreover, the court noted that this motive theory was undermined by the fact that Plug Power and the SK Group did not enter into a joint venture until five months after the company publicly issued its restatement that reclassified expenses and corrected margins. The court also refused to infer fraudulent intent from allegations concerning SEC comment letters to Plug Power because the company was under no legal duty to disclose the letters or their contents, and the SEC did not suggest that the company engaged in fraud.

Second, the court found that the SAC failed to allege that the defendants engaged in conscious misbehavior or recklessness with respect to either the restatement or the Amazon transaction. In attempting to revive the restatement claim, the plaintiff relied primarily on a presentation that Plug Power’s auditor gave to the company’s audit committee in February 2021 referencing the misclassification of certain fuel delivery costs. Yet the court reasoned that the presentation did not alter its prior ruling because (i) the auditor specifically found “[n]o actual or suspected fraud involving management, employees with significant roles in internal control, or where fraud results in a material misstatement,” and “[n]o significant findings” from its assessment of “significant risks of fraud”; and (ii) the presentation identified only immaterial accounting errors that had a negligible impact on the company’s overall income. This was insufficient to give rise to the requisite strong inference of scienter, i.e., that the defendants had knowledge of but failed to disclose the accounting errors. Meanwhile, as to the Amazon transaction, the court rejected the plaintiff’s claim that the defendants knew of but failed to disclose earlier either the transaction itself or an associated $400 million revenue charge. Rather, the court found, based on the facts alleged, that the defendants timely disclosed both the transaction and the revenue charge, which defeated any inference of scienter. And the court dismissed the plaintiff’s attempt to rely on the “core operations” doctrine, reasoning that the Amazon transaction — which involved the vesting of certain warrants to acquire Plug Power stock held by Amazon — was not a core operation of the company and, in any event, the core operations theory standing alone did not provide a sufficient basis to infer scienter.

In light of the plaintiff’s repeated failures to plausibly allege that the defendants engaged in securities fraud, the court dismissed the SAC, with prejudice.

This case is a reminder that restatements can be based on innocent mistakes and will not necessarily give rise to securities fraud. However, it is wise to seek advice from counsel regarding whether accounting errors and letters from regulators are material and require disclosure. Making the right decision could be the difference between dismissal of a securities class action at the pleading stage and protracted litigation.

Former Twitter Stockholder Denied Mootness Fees

On October 31, 2023, the Delaware Chancery Court denied a motion for mootness fees brought by a Twitter shareholder, Luigi Crispo, in connection with a stockholder class action brought by Crispo against Elon Musk and affiliated entities (collectively, Musk) for Musk’s failure to close his proposed acquisition of Twitter Inc. (now known as X Corp.).

Crispo’s suit sought specific performance and damages for alleged breaches of fiduciary duties and breach of the merger agreement. The court largely dismissed the suit on October 11, 2022, finding that Crispo failed to allege Musk owed fiduciary duties to Twitter’s stockholders, and that Crispo lacked standing to seek specific performance. The court left open the issue of whether Crispo, as a Twitter stockholder, could bring claims against Musk as a third-party beneficiary. That issue was never resolved, however, because Crispo’s claims became moot when the deal closed on October 27, 2022. 

Approximately nine months later, Crispo petitioned the Chancery Court for $3 million in mootness fees as compensation for purported benefits conferred on Twitter by his lawsuit. The court ultimately denied Crispo’s fee petition on the grounds that Crispo’s claims were not meritorious when filed. In so ruling, the Court noted that Delaware courts are “reticent” to confer third-party beneficiary status on seller stockholders to bring claims under a merger agreement against buyers. This was especially pertinent here where a provision in the merger agreement disclaiming third-party beneficiaries foreclosed Crispo from pursuing claims as a third-party beneficiary while Twitter was seeking specific performance. Thus, the court concluded that the stockholders lacked standing to seek lost-premium damages while the company was pursuing a claim for specific performance and could bring claims for such damages only if the merger was ultimately abandoned, which it was not.

This case is instructive for limiting potential exposure to third parties in connection with a merger. In drafting the merger agreement, a buyer should consider including a provision disclaiming third-party beneficiaries to such agreement.

Court Declines to Dismiss SEC Enforcement Action Against Former MoviePass Executives

On September 13, 2023, the US District Court for the Southern District of New York denied in part and granted in part motions by former MoviePass, Inc., CEO Theodore J. Farnsworth and the CEO of MoviePass’s parent company, J. Mitchell Lowe, to dismiss a complaint brought by the SEC.

The SEC alleged that Farnsworth and Lowe made false and misleading statements regarding Movie Pass’s profitability, including that Farnsworth believed the company could be profitable or break even at a $9.95 monthly price point for its service, despite lacking data or market testing to support this assertion. The SEC also challenged statements aimed at mollifying investor concerns that high ticket usage rates of subscribers would render the company unprofitable by suggesting that usage rates would drop naturally. In fact, the SEC claimed the company was engaged in a campaign to suppress subscribers’ ticket usage rates with various restrictions.

Farnsworth and Lowe moved to dismiss the SEC’s claims, arguing that the statements were non-actionable puffery, and that the SEC failed to plead that the statements were material, made with scienter, or “in connection with purchase, offer, or sale of securities.” In large part, the court rejected these arguments and denied the motions to dismiss. The court found that the SEC adequately alleged materiality, noting that “misrepresentations about whether a company is in fact profitable or likely to become so . . . are almost always material to investors.” The court similarly rejected the contention that the statements were puffery, finding that they “address concerns about specific elements of the Company’s business model, rather than general boasting of generic characteristics about the business,” and “respond[ed] to a specific criticism.”

The court also found the SEC successfully pleaded scienter by showing the defendants knew or had access to non-public information contradicting their statements. Specifically, it held that the SEC adequately alleged that Movie Pass possessed “critical and conflicting information” that the defendants had a duty to familiarize themselves with before making statements “about core aspects of MoviePass’s business and its current or future profitability.” In addition, the court found that the SEC sufficiently alleged facts to support an inference that Farnsworth and Lowe were aware that the stock of Movie Pass’s parent company was being sold on the secondary market, and thus the statements were part of the “selling process,” and made in connection with the offer or sale of a security.

However, the court did dismiss the SEC’s claim under Section 17(a)(2), with leave to amend, which requires that the misstatements were made to “obtain money or property,” as the SEC failed to draw any connection between the alleged fraud and the defendants’ “bonus payments” or “increased compensation.”

The case has since been stayed by the US Department of Justice in light of a now-pending related criminal case, but it demonstrates that courts may be hesitant to find that executives did not have access to current and accurate information regarding key aspects of a company’s business.

Court Dismisses Securities Class Action Against 3D-Printing Company

On September 20, 2023, the US District Court for the District of Massachusetts dismissed consolidated class actions asserting putative claims for violations of Sections 10(b) and 20(a) of the Exchange Act against Desktop Metal, Inc., and certain of its executive officers on the grounds that the plaintiffs (i) failed to allege any actionable misstatements or omissions and (ii) failed to adequately plead scienter.

The lawsuit alleged that Desktop Metal, a Massachusetts-based 3D-printing company, misled investors regarding the company’s compliance with FDA regulations relating to the manufacture, quality, and performance of two products manufactured and sold by Desktop Metal’s subsidiary EnvisionTEC. According to the complaint, Desktop Metal’s stock price fell following its public disclosures of an independent internal investigation as a result of a whistleblower complaint about its manufacturing and product compliance practices and procedures, and that it would be notifying and consulting with the FDA regarding the appropriate voluntary market action.

In dismissing the plaintiffs’ claims, the court found that none of the alleged false and misleading statements were actionable. The court held that the defendants’ “generalized” optimistic public statements about the company’s “impending acquisition of EnvisionTEC d[id] not impose upon the company an obligat[ion] to disclose all potentially interesting information about that acquisition” and, in any event, none of the alleged “deficiencies” had materialized when the statements were made. The court further held that post-acquisition statements concerning FDA approval status, EnvisionTEC’s regulatory compliance program, and product capabilities were not false and misleading, finding it notable that Desktop Metal repeatedly warned of the potential costs and consequences of FDA regulation. Moreover, the court found that statements about the product’s “superior characteristics are best characterized as ‘immaterial expressions of corporate optimism or puffery,’ which cannot serve as the basis for securities fraud.”

The court also held that the complaint failed to plead scienter, first rejecting the plaintiffs’ arguments based on the “core operations” theory, which the First Circuit has never formally adopted. Next, the court found that the complaint failed to allege that the executive officers had actual control or authority over the alleged false and misleading statements or sufficient firsthand knowledge of the FDA compliance issues to establish scienter. Finally, the court held that the plaintiffs’ allegations failed give rise to a plausible inference of scienter under the mandatory Tellabs balancing inquiry because the plaintiffs’ narrative “relie[d] more heavily on speculation than on plausible factual allegations” and the competing inference put forth by the defendants — that they reacted quickly upon learning of the whistleblower complaint, voluntarily engaged with the FDA, and recalled the affected products — was more compelling, supported by the plaintiffs’ allegations, and free of inferential guesswork.

This case puts on full display that generalized statements of corporate optimism cannot serve as a basis for securities fraud under Sections 10(b) and 20(a), particularly when a company makes risk disclosures that speak to the specific allegedly false or misleading information.

First Circuit Affirms Dismissal of Biogen Securities Class Action Except for Single Claim

The plaintiffs brought a putative securities fraud class action against Biogen, Inc., and three of its executives for alleged violations of the Exchange Act. The plaintiffs alleged that statements about clinical trials of an Alzheimer’s disease drug were misleading in light of allegedly negative data.

The trial court dismissed all claims against the defendants, and the First Circuit largely affirmed, concluding there was no glaring incongruity between the data and Biogen’s overall conclusions about the drug’s effectiveness, in part because it involved the “interpretation of significant amounts of data through complex statistical analysis.” The First Circuit also noted the absence of allegations that the defendants had been specifically warned that the data undermined the company’s overall conclusion regarding efficacy.

However, the First Circuit permitted the plaintiffs’ claims to proceed as to one statement, made during an earnings call, that it characterized as stating that the clinical trial data was all consistent with needing a higher dose to achieve efficacy, concluding that the plaintiffs had adequately alleged that at least some trial data did not support that correlation.


This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.