On Sept. 29, 2023, Southern District of New York Judge Andrew L. Carter issued a decision denying Elon Musk’s motion to dismiss a securities fraud class action brought against him. [1] The gravamen of the claim was that Musk violated Section 10(b) of the Securities Exchange Act (Exchange Act) when he failed to file timely a Schedule 13D publicly reporting that on March 14, 2022, he had acquired greater than 5% ownership of Twitter Inc. Securities and Exchange Commission (SEC) rules require investors to file a Schedule 13D within 10 days of obtaining more than a 5% ownership interest of a public company’s shares, but the suit alleges that Musk did not file any disclosures until April 4, 2022, 21 days after crossing the 5% threshold and 11 days after his March 24 disclosure deadline, by which point he had acquired 9.1% of Twitter.[2] The lead plaintiffs, representing a class of shareholders who sold their shares between March 24 and April 4, allege that Musk’s failure to file the required disclosure damaged them by artificially depressing the price of Twitter’s shares for those 11 days, which delay also allegedly saved Musk nearly $200 million on his additional share purchases.
Musk sought dismissal of the claim on the grounds that Section 13(d) of the Exchange Act, which sets out an investor’s obligation to disclose it had exceeded the 5% threshold, does not give plaintiffs a private right of action for damages, nor could a 13(d) violation be the basis for a Section 10(b) claim. In denying the motion to dismiss, Judge Carter held that a 13(d) violation could support a 10(b) claim, observing that no Second Circuit case has yet addressed this specific issue, and permitted the plaintiffs to move forward with their complaint. This decision, which conflicts with a New Jersey federal district court decision,[3] is one of the few to address whether a 13(d) violation can form the basis of a private 10(b) civil damages claim.
No Private Right of Action Under Section 13(d) Itself
Although the SEC can bring enforcement actions for Section 13(d) violations, Section 13(d) does not itself provide for a private right to sue for damages. Plaintiffs have therefore looked to other parts of the securities laws to remedy alleged Section 13(d) violations. One such provision is Section 18(a), which imposes liability for any false or misleading statements in Exchange Act documents. However, Section 18(a) requires that the plaintiff demonstrate actual reliance, that is, the plaintiff must have read and relied on the misleading document, and not just relied on information derived from it, making it difficult to recover on claims brought under Section 18(a) or to assert class claims.
The Court’s Section 10(b) Analysis and Recent Case Law
In turn, plaintiffs — like those here — have asserted that Section 13(d) violations can be the predicate for a private right of action under Section 10(b), the Exchange Act’s general antifraud provision. Musk, in response, moved to dismiss, arguing that Section 10(b) provides no private civil remedy for a failure to file a timely Schedule 13D and that plaintiffs’ sole remedy was to sue under Section 18(a).[4]
In their briefing, both sides invoked the Second Circuit’s decision in Kamerman v. Steinberg. In Kamerman, plaintiff alleged defendants there had filed false and misleading Schedule 13Ds and brought claims under Section 13(d) and Section 10(b). The Second Circuit upheld the dismissal of the Section 13(d) claim, holding that damages for false or misleading statements in a Schedule 13D were available only under Section 18(a). And it affirmed the dismissal of the Section 10(b) claim because the plaintiff had admitted it was not deceived by the defendants’ misrepresentation, and therefore failed to sufficiently allege the reliance necessary to succeed on a 10(b) claim.[5]
Musk pointed to the Kamerman court’s statement that “only” Section 18(a) is available to seek damages for 13(d) violations, as well as its dismissal of the Section 10(b) claim, to argue that Kamerman foreclosed a plaintiff’s ability to bring a Section 10(b) claim to recover for a breach of Section 13(d). At the same time, plaintiffs contended that while Kamerman may have denied a damages claim brought pursuant to Section 13(d) itself, it supported the conclusion that a Section 13(d) violation can be the predicate to a Section 10(b) claim.
Plaintiffs also argued that two other recent cases provided “tacit endorsement” for a Section 10(b) claim predicated on Section 13(d) violations. In Puddu v. 6D Global Technologies (“Puddu I”), the Second Circuit reversed a dismissal of a Section 10(b) claim, holding that plaintiffs adequately alleged that the defendant was required to but failed to disclose its ownership of more than 5% of a company’s securities.[6] On remand to the Southern District of New York in Puddu II, Judge Alison Nathan held that since the purpose of Section 13(d) is to alert investors to potential changes in corporate control, a failure to file a Schedule 13D when disclosure is expressly required “signals falsely to investors that there is no such ownership to disclose,” and therefore “the allegation that [defendant] was obligated to file the Schedule 13D — and opted not to do so — is enough to adequately plead a material omission for purposes of Plaintiffs’ 10(b) claim.”[7]
Siding with plaintiffs, Judge Carter held that the fact that Section 18(a) may provide a remedy for 13(d) violations does not preclude Section 10(b) from also providing a remedy for 13(d) violations. Judge Carter further explained that while in Kamerman the Second Circuit commented that 18(a) was the “only” remedy for a 13(d) violation, its comment did not apply in the 10(b) context, because the appellate court was looking solely at a district court’s decision not to imply a private right of action for damages under 13(d) in light of Congress’ provision of an express remedy in Section 18(a).[8]
Judge Carter further observed that the fact that the Second Circuit had examined the merits of the plaintiff’s Section 10(b) claim based on violations of Section 13(d)’s disclosure obligations, even after dismissing the claim brought under Section 13(d), actually supported the notion that a Section 10(b) claim based on a Section 13(d) violation was viable. Had the Second Circuit not considered it possible to provide a damages remedy under Section 10(b) for a violation of 13(d), it would not have needed to make a separate evaluation of that claim.[9]
Judge Carter did not find persuasive a District of New Jersey case, Takata v. Riot Blockchain Inc., that dismissed a 10(b) claim based on an alleged 13(d) violation. Judge Carter observed that he was not bound by the Third Circuit law cited in Takata and that, in his view, the Takata decision did not meaningfully address the question of whether false statements in 13D filings could serve as the premise for Section 10(b) claims.
What’s Next
In addition to allowing the plaintiffs’ 10(b) claim to go forward, the court also held that the plaintiffs adequately alleged Musk knew of his duty to disclose when he reached 5% ownership of Twitter’s shares on March 14, 2022, based on previous deposition testimony he gave before the SEC where he admitted to knowing the reporting requirements. Meanwhile, the SEC continues to investigate Musk’s allegedly late Schedule 13D. On Oct. 5, it filed an application in the Northern District of California to compel Musk to testify for a third time in its ongoing investigation.[10]
[1]Oklahoma Firefighters Pension & Ret. Sys. v. Musk, No. 22-cv-03026 (ALC) (S.D.N.Y. Sept. 29, 2023).
[2] The SEC recently amended the beneficial ownership reporting requirements to shorten this deadline to 5 business days, to become effective 90 days after publication in the Federal Register. Modernization of Beneficial Ownership Reporting, SEC Release No. 34-98704 (Oct. 10, 2023), https://www.sec.gov/files/rules/final/2023/33-11253.pdf.
[3] Takata v. Riot Blockchain, Inc., No. 18-02293 (ZNQ) (TJB), 2022 WL 1058389, at *10 (D.N.J. Apr. 8, 2022).
[4] Musk argued that the exclusive remedy for a 13(d) violation was an action under Section 18(a) and that plaintiffs would need to plead that each individual class member relied on the alleged omission to file a Schedule 13D. Plaintiffs in turn contended that it is not clear that Section 18(a) claims can be premised on a failure to file documents with the SEC, as opposed to the making of material misstatements in filed documents, and for that reason it was even more important to allow a claim under Section 10(b).
[5] Kamerman v. Steinberg, 891 F.2d 424 (2d Cir. 1989).
[6] Puddu v. 6D Glob. Techs., Inc. (“Puddu I”), 742 Fed. App’x 553, 555-56 (2d Cir. 2018) (summary order).
[7] Puddu II, No. 14-CV-8061 (AJN), 2021 WL 1198566, at *6 (S.D.N.Y. Mar. 30, 2021).
[8] Sanders v. Thrall Car Mfg. Co., 582 F.Supp. 945, 960 (S.D.N.Y. 1983), aff’d, 730 F.2d 910 (2d Cir. 1984).
[9] Judge Carter cited to other district court cases he believed supported his analysis. See Gruber v. Gilbertson, No. 16CV9727, 2018 WL 1418188, at *8 (S.D.N.Y. Mar. 20, 2018) (holding that an omission to disclose the defendants’ ownership as required by Section 13(d) was actionable under Section 10(b)); Vladimir v. Bioenvision Inc., 606 F. Supp. 2d 473, 490-91 (S.D.N.Y. 2009), aff’d sub nom. Thesling v. Bioenvision, Inc., 374 F. App’x 141 (2d Cir. 2010) (summary order) (holding that a plaintiff can point to a violation of Section 13(d) as a predicate for a 10(b) claim); In re Bed Bath & Beyond Corp. Sec. Litig., No. 22-CV-2541 (TNM), 2023 WL 4824734, at *6 (D.D.C. July 27, 2023) (holding that even if no private right of action for damages exists under Section 13(d), “it does not follow that 10(b) claims may not be based on misleading 13D filings”).
[10] https://www.sec.gov/litigation/litreleases/lr-25880.
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