Enterprising plaintiffs’ attorneys have already begun seeking to take advantage of the stock market declines that have accompanied the COVID-19 outbreak by filing class action lawsuits alleging that these declines were caused, not by an unforeseeable public health crisis, but by the revelation that prior statements made by the company’s directors and officers were fraudulent. While the COVID-19 health crisis is certainly unprecedented, such “stock-drop lawsuits” are not. They follow a familiar formula and will be subject to familiar arguments on both sides at the pivotal motion to dismiss stage.
One such lawsuit, brought against Norwegian Cruise Line, its CEO, and its CFO, challenges a series of statements made by the company in February 2020, including:
- “We place the utmost importance on the safety of our guests and crew”;
- “[O]ur Company has an exemplary track record of demonstrating its resilience in challenging environments and we remain confident in our ability to deliver strong financial performance over the long-term”; and
- “Despite the current known impact from the COVID-19 coronavirus outbreak, as of the week ending February 14, 2020, the Company’s booked position remained ahead of prior year and at higher prices on a comparable basis.”
The complaint alleges that these statements were revealed to be false or misleading in March 2020 when an article was published in the Miami New Times indicating that Norwegian had downplayed COVID-19 in marketing statements and that bookings were slowing as a result of the outbreak.
At least one other lawsuit alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) related to COVID-19 has already been filed, and many more are likely to file suit in the months ahead. While each such lawsuit will pose unique challenges and risks to the named defendants, there are several common themes directors and officers should keep in mind when preparing for a possible defense to such a lawsuit.
- Plaintiffs must identify an actual misstatement, not a mere business downturn or even mismanagement.
The federal securities laws do not “provide investors with broad insurance against market losses.” Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 345 (2005). Following significant stock market declines, plaintiffs often file Section 10(b) lawsuits that “boil down to [an] attempt to chastise as fraud business practices that, in hindsight, might have been more cautious.” Melder v. Morris, 27 F.3d 1097, 1101 n.8 (5th Cir. 1994). Alleged “[m]isjudgments are not, however, fraud.” Id.
Where the statement at issue was included in a registration statement, or other document accompanying a securities offering, plaintiffs may bring a claim under the Securities Act of 1933 (Securities Act) that does not require them to prove that the misstatements were made with a fraudulent state of mind. But, even there, a plaintiff can only prevail by identifying a false or misleading statement. Alleged mismanagement, let alone a mere business downturn, is not sufficient.
- Liability must be based on a statement that was misleading when made, not merely a statement that became misleading in light of subsequent events.
In addition, plaintiffs in stock-drop lawsuits will often allege that past statements became actionably false or misleading following the events that led to the stock decline. But, under the securities laws, “liability cannot be imposed on the basis of subsequent events.” In re NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1330 (3d Cir. 2002). Rather, “[t]o be actionable, a statement or omission must have been misleading at the time it was made.” Id.
In an attempt to capitalize on a stock market decline, plaintiffs will often allege that prior “generalized, positive statements about the company’s competitive strengths, experienced management, [or] future prospects” were actionably misleading. Southland Sec. Corp. v. Inspire Ins. Solutions Inc., 365 F.3d 353, 372 (5th Cir. 2004). But because “analysts rely on facts in determining the value of a security,” these vague statements “are not actionable because they are immaterial.” Id.
- Statements about company-wide policies and programs are not automatically rendered misleading by the existence of discrete incidents at odds with the policies or programs.
Plaintiffs are likely to point to prior statements by directors and officers about their company’s overall priorities, legal compliance, programs or policies, and argue that the impact of COVID-19 shows that these statements were false or misleading. But reasonable investors do not interpret statements of “company-wide” scope as guarantees of perfection in every detail. In re Plains All Am. Pipeline, LP Sec. Litig., 307 F. Supp. 3d 583, 626 (S.D. Tex. 2018), aff’d, 777 Fed. App’x 726 (5th Cir. 2019). Thus, “generalized, top-level statements” about a company in general should not be found misleading based on the existence of an incident involving only one part of the company or its policies. Id. at 621.
- Plaintiffs’ attorneys will closely monitor any statements directors and officers make about the COVID-19 outbreak, so extreme caution should be used when making these statements going forward.
In an attempt to bolster their complaints, plaintiffs inevitably allege that defendants in stock-drop lawsuits engaged in a “cover-up” and that any subsequent stock declines the company experiences can be attributed to the revelation of the truth that the purported cover-up concealed. To minimize the risk of such claims, directors and officers of public companies should exercise extreme caution in making any statements about the COVID-19 outbreak, its impact on the company, or the company’s prospects for a recovery from any related business downturn. Where such statements are necessary, it is best to stick to well-established facts and to highlight the uncertainty of any statements of opinion.
In sum, in times of great disruption in the stock market, investors will inevitably seek to recoup losses by filing stock-drop lawsuits.
