Southern District of New York Denies SEC’s Motion to Strike Affirmative Defenses of Former Cannabis Company CFO

Southern District of New York Denies SEC’s Motion to Strike Affirmative Defenses of Former Cannabis Company CFO

The U.S. District Court for the Southern District of New York denied the SEC’s motion to strike certain affirmative defenses of the former CFO of cannabis company Acreage Holdings, Inc. In its complaint, the SEC alleges that the CFO orchestrated a series of fraudulent financial transactions designed to artificially inflate Acreage’s cash balance, in violation of Section 13(b) of the Securities Exchange Act of 1934 (the Exchange Act). In his answer, the CFO asserts (i) a right to “contribution” based on the wrongdoing of other “individuals and entities” and (ii) reliance on the advice of Acreage’s legal counsel. The SEC moved to strike, arguing that these affirmative defenses were not viable.

With respect to the “contribution” defense, the court denied the motion despite expressing doubt that the CFO even had a true contribution defense. Usually, contribution is not an affirmative defense to an existing claim, but a new claim that the defendant brings against other wrongdoers responsible for the alleged misconduct. Procedurally, the SEC argued, defendants are not entitled to bring such third-party claims in an SEC enforcement action. However, the court generously interpreted the CFO’s contribution defense to encompass other doctrines—such as contributory negligence—that seek to excuse the defendant’s actions based on the conduct of others. The court further noted that, if others were at fault, those facts might justify reducing the amount of any penalty to impose on the CFO. Ultimately, the court concluded, the motion was premature because the case was in the early stages of discovery.

The court also declined to strike the CFO’s reliance-on-counsel defense. As the SEC argued, a defendant typically needs to waive privilege to mount a reliance-on-counsel defense. Instead, both Acreage (which controlled the privilege, since the legal advice came from Acreage’s lawyers) and the CFO had asserted privilege during the SEC’s investigation. Moreover, the CFO had not even approached Acreage to request a privilege waiver. But here too, the court found the SEC’s argument premature. Discovery in the civil action had just begun, and the SEC had not yet requested a single document from the CFO. Thus, the CFO still had time to obtain a waiver of privilege from Acreage. However, the court ordered the CFO to provide an update to the SEC within 40 days on the status of his defense and efforts to waive privilege.

The decision highlights the importance of defense counsel vigorously asserting available defenses in SEC enforcement actions, and the willingness of courts to let defendants explore those defenses in discovery even if they may not ultimately prove meritorious.

Second Circuit Affirms Dismissal of Insider Trading Claims Against Nonfiduciary Financial Institutions

The U.S. Court of Appeals for the Second Circuit affirmed the dismissal of coordinated class actions brought by shareholders of seven small-to-mid cap companies against two banks, Morgan Stanley & Co. LLC and Goldman Sachs Group, Inc., for insider trading under Sections 10(b), 20A, and 20(a) of the Exchange Act. The claims related to contracts called total return swaps that the banks had entered into with Archegos Capital Management, LP. 

Under the terms of the swaps, the banks owned stock in several companies while contracting away the economic benefits to Archegos. If the stocks paid dividends or appreciated in value, the banks made payments to Archegos (in exchange for a fee). If the stocks declined in value, the banks issued margin calls to Archegos. Importantly, the banks stood in a purely contractual relationship with Archegos and did not provide fiduciary services to it. To hedge against the risks from this arrangement, the banks separately bought so-called “proprietary hedge stocks” for their own account. In March 2021, Archegos’s swap strategy rapidly failed as the value of one of the stocks precipitously declined. Archegos informed the banks that it could not meet margin calls. The banks defaulted Archegos and began rapidly selling their proprietary hedge stocks to limit their exposure, before news of Archegos’s collapse became widely known. Shareholders in seven of the affected companies sued, alleging that the banks had improperly traded based on nonpublic information (i.e., their knowledge of Archegos’s financial condition).

The district court dismissed the insider trading claims, and the Second Circuit affirmed. The Second Circuit started with the shareholders’ theory of “tipper/tippee” liability: that Archegos had improperly “tipped” the banks to nonpublic information, and the banks, in turn, traded on that ill-gotten information. This theory failed because Archegos itself was not a corporate insider: It did not have any fiduciary role (for example, as an officer or director) at any of the seven companies. The Second Circuit then evaluated the shareholders’ “misappropriation” theory: that the banks owed a duty to Archegos to keep certain information confidential, but instead improperly traded on that information. The flaw in this theory was that the banks did not stand in a fiduciary or “fiduciary-like” relationship with Archegos: The swaps were contractual entitlements negotiated at arm’s length, not fiduciary relationships of trust or confidence. Thus, the insider trading laws did not restrict the banks from selling based on their knowledge of Archegos’s financial position.

The Second Circuit’s opinion reinforces that, when financial institutions serve in a nonfiduciary capacity, their nonfiduciary status not only limits their obligations to their direct counterparties but can also serve as a valuable defense in insider trading cases.

Ninth Circuit Affirms Class Certification in Securities Fraud Case Related to Zillow’s Algorithmic Pricing in the Real Estate Market

On September 26, 2025, the U.S. Court of Appeals for the Ninth Circuit affirmed a decision to grant class certification in a securities fraud case against Zillow, in which the plaintiff brought claims under Section 10(b) of the Exchange Act. The case concerns Zillow’s iBuyer business, called “Zillow Offers,” which Zillow launched in 2018 to buy, renovate, and resell homes based on an algorithmic pricing model.

By late 2020 and early 2021, the performance of Zillow Offers began to lag behind competitors, and Zillow launched a program to accelerate home purchases. The program allowed purchasing managers to use “overlays” to increase offer prices generated by the algorithmic pricing model. The plaintiff alleged that Zillow defrauded investors by failing to promptly disclose the use of the overlays to the market. The plaintiff alleged that the truth came out in a series of company disclosures and news reports from October to November 2021, which culminated in Zillow’s announcements that it had had overpaid for almost 18,000 homes, was shutting down its Zillow Offers service, and was laying off 25% of its workforce.

The plaintiff moved for class certification and, like most securities plaintiffs, relied on the fraud-on-the-market presumption to avoid individualized issues that would preclude a single, classwide liability determination. In response, Zillow relied on the Supreme Court’s 2021 decision in Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System. The Goldman decision held that defendants can, in appropriate cases, rebut the presumption by showing that the “corrective” disclosures did not actually match up with the allegedly fraudulent statements. Zillow pointed out that the alleged corrective disclosures did not say anything about “overlays,” which were what the fraud supposedly hid from investors.

The district court rejected Zillow’s argument and granted class certification, and the Ninth Circuit affirmed. The Ninth Circuit agreed with the district court that, to be “corrective,” a disclosure need only “render some aspect of the defendant’s prior statements false or misleading.” Here, the district court found that the alleged corrective disclosures included statements that Zillow’s algorithm did not accurately forecast future home prices, that Zillow had overpaid for homes, and that it had done so at levels of 5% to 7%—roughly the size of the alleged “overlays.” This record, the Ninth Circuit held, adequately supported the district court’s finding of a connection between the alleged misleading statements to the alleged corrective disclosure. Zillow has sought en banc review of the decision.

The decision highlights that, while the Supreme Court’s Goldman decision gave defendants a powerful tool for opposing class certification, it will not prevail in every case.

Third Circuit Affirms Dismissal of Securities Fraud Class Action Against Retailer Relating to Government Opioid Investigations

On August 29, 2025, the U.S. Court of Appeals for the Third Circuit affirmed the dismissal of a securities class action against a national retailer. The lawsuit centered on the retailer’s potential exposure to a government opioid investigation from 2016 through 2020. The plaintiffs claimed that the retailer and its executives committed securities fraud, including violations of Section 10(b) of the Exchange Act, by failing to disclose the investigation as one of its “reasonably possible” material liabilities.

The retailer’s business includes operating pharmacies, and like many other pharmacy providers, the retailer was caught up in the multiple government investigations related to the opioid epidemic. In late 2016, federal agents raided one of the retailer’s stores in Texas as part of the investigation of two Texas doctors. In March 2017, federal prosecutors in Texas issued a warrant seeking documents from the retailer. In March 2018, a prosecutor from the same office informed the retailer of her intention to indict the company unless it agreed to a billion-dollar settlement. After further negotiations, however, prosecutors declined to bring criminal charges in August 2018. In March 2020—over 18 months later—news of the investigation leaked to the press, and the retailer’s stock price declined somewhat. Shareholders brought suit, alleging that the “Contingencies” section in the retailer’s Forms 10-Q and 10-K from 2016 to 2020 should have disclosed the investigation as potential source of liability.

The trial court granted the retailer’s motion to dismiss, and the Third Circuit affirmed. The Third Circuit divided its analysis into two time periods. It started with the time period from 2016 until June 2018. During that time, the retailer’s “Contingencies” disclosure reflected ongoing civil litigation in a multidistrict litigation in Ohio federal court but said nothing about other government investigations. The Third Circuit concluded that the retailer had no obligation to say more. The retailer did not tell investors misleading “half-truths” about the existence of government investigations but chose to stay silent. Moreover, the mere fact the retailer was under investigation did not give rise to “reasonably possible” and “material” liability. The Third Circuit noted that this was a closer call starting in March 2018, when the federal prosecutor made her threat of potential indictment. However, the retailer “immediately requested a meeting” with prosecutors in March 2018, and until that meeting occurred, the threat of liability was too inchoate. During the next time period, from June 2018 onward, the retailer made broader disclosures that it was subject to government investigations that might lead to liability. The plaintiffs argued that this disclosure was too general and should have specifically disclose the federal investigation in Texas, but the Third Circuit disagreed, concluding that such granular disclosure was not required.

This case demonstrates that, while a company’s disclosure must always be evaluated based on specific circumstances, detailed disclosure about government investigations is not always required, and sometimes saying nothing may be the better approach.

Northern District of California Grants Battery Maker’s Partial Judgment on Pleadings Based on ‘Full Context’ Analysis

On October 7, 2025, the U.S. District Court for the Northern District of California granted the defendants’ motion for partial judgment on the pleadings in a securities fraud class action alleging violations of Sections 10(b) and 20(a) of the Exchange Act against Enovix Corporation—an early-stage maker of lithium-ion batteries—its former CEO, and its board chairman. The court dismissed two of the three alleged misstatements (the defendants did not move on the other statement), which allegedly implied that its equipment passed certain testing requirements when it did not.

The plaintiffs alleged that Enovix outsourced development of a large portion of the equipment for its first production factory to a Chinese vendor and initially required that the equipment pass a Factory Acceptance Test (FAT) at the vendor’s facility before delivery. But, according to the plaintiffs, the equipment failed multiple FAT attempts. The plaintiffs allege that, despite knowing that the equipment failed to pass the required tests, the defendants waived the FAT requirement and had the equipment flown to the United States. Then, when the equipment arrived in the United States, it did not work. Ultimately, Enovix announced that it was discontinuing operations at its first production factory entirely, and its stock price dropped 41%, from $12.12 on January 3, 2023, to $7.15 on January 4, 2023.

The court dismissed two alleged misstatements based on these facts. First, the court found that a statement that there were “no red flags” was not false or misleading because, in context, it was clear that the statement did not refer to the equipment at issue in the case. Second, the court found that it was not misleading to say that “testing out of each piece of equipment” was “going on quite well,” even though Enovix did not affirmatively disclose that the equipment at issue had previously failed FAT. The court stated that, in context, this statement was about testing taking place at Enovix’s facilities (in contrast to the FAT, which took place at the vendor’s facilities), and the defendants were not required to disclose the FAT failures when responding to questions about different aspects of the manufacturing process.

This decision underscores the importance of precise language in public statements. Courts will examine the full context of challenged statements, including the specific questions asked, contemporaneous disclosures, and defined terms, rather than isolated excerpts. This case also serves as a reminder that absent an affirmative duty to disclose, companies are not always required to volunteer negative information when discussing unrelated positive developments, even if both relate to the same general project or product line.

Middle District of Tennessee Grants Plaintiffs Summary Judgment on Reliance in Securities Fraud Class Action Against Healthcare Company Relating to Purportedly Inaccurate Financial Projections

On October 16, 2025, the U.S. District Court for the Middle District of Tennessee granted a motion for partial summary judgment in favor of the plaintiffs on the element of reliance for claims brought under Sections 10(b) and 20(a) of the Exchange Act against Acadia Healthcare Company, Inc., a healthcare company that operates inpatient and outpatient treatment centers and facilities for psychiatric and behavioral health, and certain of its officers. The court also denied the defendants’ motion for summary judgment based on the safe harbor for forward-looking statements and loss causation.

Plaintiffs claim that the defendants made misstatements and omissions regarding patient care, staffing levels, and regulatory compliance at its U.S. facilities, and misled investors about the financial performance of its UK facilities. In October 2017, Acadia reported third quarter 2017 revenue that missed earnings targets and reduced its guidance. The stock price dropped by 30%, from $44.12 to $30.91. A year later, in October 2018, a third-party published a report documenting systemic patient abuse and neglect at Acadia facilities. With this news, the stock dropped 11%, from $36.55 to $32.37. This was followed a month later by a news article attributing Acadia’s recent revenue bump to cost-cutting and reduction in quality of care. Acadia’s stock, which had recovered, dropped again, from $37.86 to $28.02.

The court presumed that Acadia shareholders relied on Acadia’s statements when purchasing Acadia stock because the alleged misstatements and omissions were public, and thus the fraudulent information was reflected in the market price (i.e., the efficient market theory). The court found that the defendants failed to rebut this presumption because their expert testified only that there was no “statistically significant” stock price decline when the purportedly hidden information was disclosed, not that there was no decline at all.

In the same decision, the court rejected both of the defendants’ arguments: (i) that the safe harbor provision for forward-looking statements bars the plaintiffs’ claims based on projected earnings at Acadia’s UK facilities in 2017 (the defendants limited their motion to these statements), and (ii) the lack of loss causation based on critiques of the plaintiffs’ expert and that disclosures in the third-party report and news article were not new information. The court held that the defendants’ cautionary language in its risk disclosures, which said only that a decline in earnings “might” occur, was too generic to invoke the safe harbor’s protections in the face of circumstantial evidence (e.g., unreasonable performance expectations, ignoring monthly results, unfavorable forecasts, and the defendants’ stock sales) that created a factual dispute concerning whether the defendants knew earnings would be lower. The court also rejected the defendants’ loss causation arguments, holding that (i) the absence of a statistically significant price decline following a corrective disclosure was not evidence of the absence of price impact, and (ii) the defendants’ argument that the stock price did not quickly fall after the corrective disclosures was unpersuasive because the amount of time it took for the market to reflect the price was not dispositive.

This ruling reinforces that while the statutory safe harbor is a powerful tool to shield liability for forward-looking statements, such statements must be accompanied by specific risk factors that genuinely address unknown future risks. Moreover, such risk factors addressing future risks are not a substitute for timely disclosure of known present problems, which should be discussed with legal counsel.

Middle District of Florida Allows Claims to Proceed Against Hertz for Allegedly Fraudulent Forecasts and Statements About Demand for Electronic Vehicles

On October 10, 2025, the U.S. District Court for the Middle District of Florida granted in part and denied in part a motion to dismiss a securities class action brought by a stockholder of Hertz, a rental car company, alleging violations of Sections 10(b) and 20(a) of the Exchange Act against the company and two former executives for allegedly false statements touting demand for its electric vehicles (EVs).

In 2021, Hertz announced a significant investment into EVs, purchasing 100,000 Tesla vehicles and agreeing to buy an additional 240,000 EVs. By 2023, EV rental demand proved to be less than Hertz expected, leading the company to sell half of its EV fleet and take large write-offs on the EVs.

The plaintiff alleged that despite lack of demand for EVs, the defendants misrepresented that EV rental demand was generally strong. The court dismissed this claim because the plaintiff did not explain how those statements were false, and the facts that supposedly undermined those sentiments were “at best tangential (and at worst irrelevant) to what Defendants said.” The court also held that several “lofty, aspirational comments” about attention to customer preference and serving customer demand were inactionable puffery.

However, the court found a statement touting EV demand as “very strong and strong across all aspects of our business” was actionable because, in the context of Hertz’s ad campaign and rollout of its EV fleet, it was concrete enough to give the impression that Hertz’s strategy around EVs was paying off. That was not the case according to alleged statements by a confidential witness with access to Hertz’s rental data. Similarly, the court found that statements about a specific, quantified demand forecast were actionable because EV demand had been lagging when the forecast was made. None of the cautionary language accompanying the forecast was sufficient to insulate Hertz from liability because the facts pled by the plaintiff based on the confidential witness’s account showed that the risk already materialized.

The court found scienter adequately pleaded based on detailed allegations about Hertz’s internal monitoring systems that reported real-time data about the rental fleet that showed low EV utilization. Hertz’s leadership had access to these systems, “which they acknowledged generated crucial data.” In light of this access alone, even without allegations that executives actually reviewed reports or data, the court found the inference of scienter based on the likelihood that the defendants learned EV demand was low.

This decision demonstrates that some statements that may seem like generic characterizations of business performance can give rise to securities fraud when those statements are made against the backdrop of specific, highly publicized strategic initiatives. Additionally, this case reinforces that public companies should ensure that public statements align with data available through company reporting systems.

Third Circuit Affirms Dismissal of Claims Against Cannabis REIT as Inactionable or Lacking Scienter Notwithstanding Tenant’s Fraud

On October 15, 2025, the U.S. Court of Appeals for the Third Circuit affirmed a decision from the U.S. District Court for the District of New Jersey dismissing a class action alleging violations of Section 10(b) of the Exchange Act against a real estate investment trust, Innovative Industrial Properties, Inc., and several of its officers.

Innovative purchases real estate from cannabis companies, then leases it back to them. As part of these sale–leaseback transactions, Innovative sometimes reimburses a tenant’s capital improvements based on documents certifying the work that needs to be performed. Innovative discovered that one tenant received millions in fraudulent reimbursements, sued the tenant, and disclosed the lawsuit to shareholders. The plaintiffs claimed that various statements made about Innovative’s reimbursement arrangements—including its evaluation and diligence of potential tenants, ongoing monitoring of existing tenants, and praise for the fraudulent tenant and its executives—were rendered false or misleading by the tenant’s fraud and Innovative’s failure to detect it.

In affirming dismissal by the district court, the Third Circuit carefully analyzed each of the alleged misstatements, finding all but one inactionable. In particular, the Third Circuit considered statements praising the fraudulent tenant in the context of the information that Innovative had at the time the statements were made, concluding that the speakers were unaware of contradictory information prior to the company’s investigation into the tenant. Although Innovative’s opinions about the tenant turned out to be demonstrably false, such hindsight did not render the opinions actionable where Innovative genuinely believed them at the time. Other statements were not false or misleading based on the facts alleged. For example, statements about Innovative’s due diligence processes were inactionable because Innovative never promised that its diligence would meet any particular standard of thoroughness; it only represented that it relied on management and typically subjected deals to closing conditions, which was true.

The only statement that the court deemed to be plausibly false when made was a statement of fact expressing unqualified certainty that “any [Innovative] reimbursements relate only to verified, qualified improvements,” because the reimbursements to the fraudulent tenant did not meet that standard. But the Third Circuit concluded that there could be no fraud claim based on this statement because the plaintiffs failed to plead scienter. Perhaps it was true that Innovative should have discovered the tenant’s fraud earlier, and reasonable investors might be dissatisfied that Innovative did not. But mere negligence is not enough for scienter under Section 10(b). The court explained that in the absence of allegations that any individual perceived a problem and failed to investigate, or that anyone at Innovative knew or suspected the company was being defrauded prior to the investigation, no individual had scienter that could be imputed to the company.

This decision reinforces that, when companies describe their processes in general terms, such descriptions are not fraudulent merely because the processes prove inadequate in hindsight. Similarly, vague, optimistic statements about business partners or prospects, even if they later prove incorrect, can receive substantial protection under securities laws.