Securities Snapshot
January 17, 2023

Goodwin Wins Dismissal of Putative Securities Class Action for Citrix Systems, Inc.

Goodwin Wins Dismissal of Putative Securities Class Action for Citrix Systems, Inc.; Second Circuit Rules That Shareholders Can Sue for Environmental Impact “Omissions”; Massachusetts Court Dismisses 10(b) Claims Against Majority of Defendants in Shareholder Class Action; AmerisourceBergen Wins Dismissal of Opioid Derivative Suit

In an opinion entered in the case on January 3, 2023, U.S. District Judge Raag Singhal of the Southern District of Florida dismissed with prejudice a putative securities class action complaint against Citrix Systems, Inc. (“Citrix”) and certain of its officers in a case concerning the company’s business model transformation. Plaintiffs brought suit in response to a decline in the company’s stock price, alleging that Citrix and its officers made false and misleading statements about the company’s transition from selling on-premise perpetual licenses to selling cloud-based subscription services. Specifically, Plaintiffs challenged public statements made in 2020 and early 2021 regarding this transition, which preceded the company’s 2021 disclosures of financial results, including missed earnings-per-share targets and revenue projections. Plaintiffs alleged that Citrix and its officers falsely assured investors that the transition was proceeding to plan when, in fact, the transition was beset by myriad problems, including weakened relationships with sales partners, an inability to rapidly transfer large numbers of customers to the cloud without partner help, complications with the company’s sales organization that limited Citrix’s ability to sell the cloud platform, and a failure to convert business continuity license customers to the cloud. 

The court dismissed the entire case, holding that Plaintiffs failed to allege facts sufficient to raise a strong inference of scienter as to Citrix or the officers. The court held that Plaintiffs failed to allege the officers had motive and opportunity to commit securities fraud because the officers’ sales of Citrix common stock were not suspicious in amount or timing in light of the officers’ pre-class period stock sale practices, the amount of equity retained by the officers during the class period, the fact that a substantial percentage of the stock at issue was sold pursuant to Rule 10b5-1 trading plans, and the fact that many sales occurred after negative news was announced. 

The court also held that Plaintiffs did not allege any specific facts showing that any of the officers knew of an impending stock price decline. The court rejected Plaintiffs’ “circular” argument that the officers had scienter because they made false statements about the company’s transition. The court held that Plaintiffs’ allegations that the cloud transition was significant to Citrix and that the officers spoke with specificity about the transition, had access to information in their senior roles, reviewed reports, and were involved in the business model transition were insufficient to show that any officer knew any statement was false when made. The court also held that post-class period restructuring and officer departures failed to raise a strong inference of scienter, rejecting Plaintiffs’ attempt to plead fraud by hindsight.  

Second Circuit Rules That Shareholders Can Sue for Environmental Impact “Omissions” 

On December 20, 2022, the Second Circuit reversed a trial court’s dismissal of a class action against Macquarie Infrastructure Corporation (“Macquarie”), holding that the complaint adequately alleged that the company acted with “conscious recklessness” in withholding the potential impact of pending environmental regulations in its public disclosures. The Second Circuit decision is a warning that issuers should carefully consider whether and when to disclose anticipated significant regulatory impact on the business — a challenge that is particularly great, given the pace and fluidity of environmental and climate regulatory action. 

Specifically, shareholders sued Macquarie for allegedly defrauding investors about its exposure to an International Maritime Organization pending fuel regulation known as IMO 2020, which was adopted in 2008 and set to become effective in 2020. Investors alleged that Macquarie misled them about the potential financial impact of IMO 2020 on its fuel business, which constituted a substantial part of its business overall. Judge Vernon S. Broderick of the Southern District of New York previously dismissed the case because plaintiffs failed to adequately plead fraudulent intent, or scienter, noting the absence of sufficient allegations that defendants had contemporaneous knowledge of facts contrary to their statements regarding the IMO 2020 impact at the time those statements were made. The Second Circuit, however, reversed, ruling that even if defendants did not know with certainty that the regulation would be implemented, they nevertheless had a duty to disclose that, if implemented, IMO 2020 was reasonably likely to trigger a “significant shift” in customer revenue of the sort that would materially impact the business under Item 303 of Securities and Exchange Commission Regulation S-K.  

The Second Circuit’s broad reading of Item 303 is not yet cast in stone. On January 3, 2023, Macquarie petitioned the Second Circuit  to rehear the case en banc, arguing that the ruling “greatly expanded” required disclosures under Item 303 in a way that was not only contrary to other precedent but also would trigger still more opportunistic investor “fraud” litigation of the sort that harms corporations and their shareholder owners. 

Massachusetts Court Dismisses 10(b) Claims Against Majority of Defendants in Shareholder Class Action

On December 21, 2022, Judge Douglas P. Woodlock of the District of Massachusetts dismissed six of seven Boston Scientific executives from Section 10(b) securities fraud claims (leaving only Section 20(a) “control person” claims against them) and sustained only a small subset of the underlying Section 10(b) claims against Boston Scientific and its CEO. 

In a nearly 100-page opinion — itself a textbook example of the statement-by-statement, defendant-by-defendant analysis long favored by the federal courts — the court dismissed the Section 10(b) fraud claims concerning 61 of the 63 allegedly false corporate statements about a new medical device, finding that each of those statements were immaterial “puffery” of the sort that can never give rise to liability. The court also dismissed all “primary” Section 10(b) claims against six of the seven individual defendants for failure to plead their scienter, or fraudulent intent, having rejected plaintiffs’ theory that those individuals (1) intentionally concealed poor sales of the device, (2) engaged in insider trading of the sort that can give rise to an inference of scienter, and (3) that the resignation of two executives was indicative of fraud. These diverse allegations, the court found, were themselves “largely devoid of the facts necessary to raise a strong inference of scienter.” 

At the same time, the court denied the motion to dismiss with respect to a subset of statements made by Boston Scientific’s CEO about the device’s prospects and potential to drive business growth, ruling that the facts before the CEO at the time he made the statements indicated that there was a limited market for the product. The court also sustained the Section 20(a) secondary liability claims against the other defendants based on those statements, because plaintiffs’ allegations about those individuals’ organizational positions of authority were enough to satisfy the lower pleading burden for “control person” claims. 

AmerisourceBergen Wins Dismissal of Opioid Derivative Suit

On December 22, 2022, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery dismissed  a derivative action brought by shareholders of AmerisourceBergen Corporation for failure to make a pre-suit litigation demand that the AmerisourceBergen board of directors commence fiduciary duty litigation against certain directors for allegedly exposing the business to liability from an onslaught of opioid-related litigation. The complaint alleged that defendants knowingly prioritized profits over compliance with federal opioid distribution regulations — itself more of a theme than a pleading — and ignored a “steady stream of red flags” that indicated the company was allowing opioids to be diverted into illegal channels. Plaintiffs claimed that any demand on the board would have been futile, with the familiar theory that the entire board allegedly faced liability for violating these regulations, and thus was conflicted. The court rejected that demand futility theory, ruling that because prior courts had held that there was no underlying regulatory violation, there was no pleaded basis to conclude that the board was acting out of its self-interest to avoid liability for the (nonexistent) violation. 

The longevity of the defense win has since been thrown into doubt — in fact, AmerisourceBergen is now under a legal threat greater than a run-rate derivative lawsuit. On December 29, 2022, the U.S. Department of Justice lodged a civil complaint  against AmerisourceBergen and two of its subsidiaries for allegedly diverting the opioids in violation of the Controlled Substances Act (21 U.S.C. §§ 801 et seq). And, predictably, the plaintiffs behind the failed derivative lawsuit are now asking the court to vacate the judgment so that they can refile by cutting and pasting the government’s allegations into what could be a much more substantial contingency-free derivative action.

Editorial Board: 
Jennifer Burns Luz
Jonathan Shapiro

Contributing Authors: 
Angela Berkowitz 
Dorothy Hazan
Ilana Saltz
Maria Massimo