Securities Snapshot August 11, 2020

Securities Class Action Against Swiss-Based Company Dismissed On Forum Non Conveniens Grounds

Summary

Securities Class Action Against Swiss-Based Company Dismissed On Forum Non Conveniens Grounds; Second Circuit Finds Strong Inference of “Conscious Recklessness” In Allegations And Reverses Dismissal of Securities Suit Against Real Estate Investment Trust; SEC Settles With Valeant Pharmaceuticals For $45M To End Accounting Probe; Securities Claims Defeated by Pharmaceutical Company’s Explicit Warnings As To Clinical Trials

On July 31, 2020, the District of New Jersey dismissed a putative securities class action against Glencore PLC, a natural resource company, on forum non conveniens grounds. The lawsuit asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5, alleging that Glencore made false and misleading statements and/or material omissions relating to purported bribe payments in the Democratic Republic of Congo, Venezuela, and Nigeria. The investors alleged that Glencore’s stock declined in value following announcements of several government investigations into the bribery scheme, including an investigation by the U.S. Department of Justice, which had issued a subpoena with respect to Glencore’s compliance with the Foreign Corrupt Practices Act and United States money laundering statutes. While the court acknowledged that a plaintiff’s choice of forum is typically afforded significant deference, it held that less deference was appropriate in this case because there was no indication that the investors had any connection to New Jersey or that Swiss-based Glencore had any offices or subsidiaries in the state. The court held that the plaintiffs’ choice of forum was inappropriate, warranting dismissal of the action, because the alleged fraudulent statements were made in Switzerland and concerned other foreign countries, and because defendants submitted expert opinions that Switzerland’s judicial system provided an adequate alternate forum for adjudicating the subject matter of the claims. This case provides some relief to foreign companies whose shares are traded in the United States only by virtue of unsponsored, over the counter (OTC) securities (as was the case with Glencore), where those companies take no active steps to engage with the United States’ securities markets.

SECOND CIRCUIT FINDS STRONG INFERENCE OF “CONSCIOUS RECKLESSNESS” IN ALLEGATIONS AND REVERSES DISMISSAL OF SECURITIES SUIT AGAINST REAL ESTATE INVESTMENT TRUST

The Second Circuit recently reversed the dismissal of a securities class action against Omega Healthcare Investors Inc., a real estate investment trust, alleging that Omega misled investors by failing to disclose a $15 million working capital loan it made to one of its major tenants, Orianna Health Systems. Omega invests in healthcare facilities and primarily reports its financial performance based on rent it receives from the facilities it funds. According to the complaint, in 2017, Omega loaned its second largest operator, Orianna, $15 million after Orianna began experiencing severe financial difficulties and became delinquent on rent it owed to Omega. The investor plaintiffs filed suit against Omega, alleging that its failure to disclose the loan to Orianna gave rise to claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b–5, because it concealed the magnitude of Orianna’s solvency problems from investors.

Last year, a New York district court dismissed the action, holding that, while the failure to disclose the loan was a material omission, the plaintiffs failed to plead a strong inference that Omega had acted with the requisite intent. On August 3, 2020, the Second Circuit disagreed, finding that Omega’s alleged omissions regarding Orianna rose to the level of “conscious recklessness” given that Orianna represented 7% of Omega’s portfolio and was a significant source of income through rental payments. The court held that because, based on the pleadings, Orianna’s performance impacted Omega’s overall financial health, Omega had to know that disclosing the full extent of Orianna’s performance problems would have been troubling news to its investors. The complaint also alleged that Omega loaned money to Orianna for the purpose of paying that money straight back to Omega, while telling the market that those payments were evidence that Orianna was on the “road to recovery.” The Second Circuit concluded that those allegations “create[d] a compelling inference that Defendants made a conscious decision to not disclose the Loan in order to understate the extent of Orianna’s financial difficulties.”

SEC SETTLES WITH VALEANT PHARMACEUTICALS FOR $45M TO END ACCOUNTING PROBE

The U.S. Securities and Exchange Commission recently struck a $45 million settlement with Bausch Health, formerly known as Valeant Pharmaceuticals, to resolve charges of misleading disclosures in SEC filings and earnings and investor presentations related to Philidor Rx Services LLC, a mail-order pharmacy. Valeant helped establish Philidor in 2013 and entered into agreements with Philidor to dispense Valeant’s products. The wholesaler agreements between Valeant and Philidor specifically contemplated that Valeant would play a significant role in managing Philidor’s business, including by setting up Philador’s infrastructure, hiring key employees, and advising Philidor on its launch and expansion to other states. Approximately 95% of the products Philidor dispensed were Valeant drugs and, consequently, Philidor was a significant driver of Valeant’s sales growth for dermatology products. Valeant announced substantial organic growth and a significant increase in revenue for its dermatology unit in certain 2014 and 2015 disclosures, but Valeant failed to mention that those financial successes were largely attributable to Valeant’s sales to Philidor. Valeant also failed to disclose its unique relationship with Philidor, even though Valeant helped create, fund, and subsidize the pharmacy. Valeant’s disclosures were also silent as to certain risks related to Philidor, including that three pharmacy benefit managers informed Philidor in 2015 that it had violated certain terms in their pharmacy network agreements.

The settlement also settles claims that Valeant misleadingly attributed over $110 million in revenue from a price hike on diabetes drug Glumetza to more than 100 unrelated products. The SEC credited Bausch Health for undertaking extensive remedial efforts, including replacing executives, revising policies and accounting controls, and providing additional accounting training to employees.

Valeant’s former Chief Executive Officer J. Michael Pearson, Chief Financial Officer Howard B. Schiller, and controller Tanya R. Carro also settled with the SEC over their roles in the alleged scheme. Pearson and Schiller agreed to pay civil penalties of $250,000 and $100,000, respectively, and to reimburse Valeant $450,000 and $110,000, respectively, in compensation. Carro was penalized $75,000 and barred from auditing public companies.

SECURITIES CLAIMS DEFEATED BY PHARMACEUTICAL COMPANY’S EXPLICIT WARNINGS AS TO CLINICAL TRIALS 

On July 27, 2020, a Massachusetts federal judge dismissed a securities class action lawsuit against Aveo Pharmaceuticals, Inc., finding that the biopharmaceutical company’s explicit warnings regarding the uncertainty of a clinical trial of a cancer drug were sufficient to defeat allegations that it had misled investors. The investor plaintiffs alleged that the company’s press releases and SEC filings were misleading as to the estimated timing for the clinical trial results of Tivozanib, Aveo’s once-daily oral medication to treat kidney cancer. The court held that the defendants’ statements as to the projected timeline for the clinical results were “clearly forward-looking,” and the court highlighted the company’s use of cautionary language in connection with the “expected” or “anticipated” timeline, including Aveo’s explicit representation that the timeline was “uncertain.” This decision is a reminder that any public statement that can be second-guessed will be second-guessed by future securities plaintiffs, and to craft public statements accordingly, including by incorporating cautionary language as appropriate.