On April 23, 2020, Judge Cormac J. Carney of the United States District Court for the Central District of California dismissed with prejudice a putative class action asserting claims under Sections 11 and 12(a)(2) of the Securities Act of 1933 against a yoga instruction company, certain of its officers, and the underwriters for the company's initial public offering. In re YogaWorks, Inc. Sec. Litig., No. CV 18-10696, slip op. (C.D. Cal. Apr. 23, 2020), ECF No. 70. The Court had dismissed plaintiff's prior complaint as time-barred under the Securities Act because plaintiff had alleged that the truth about purported misrepresentations regarding the company's financial metrics had been disclosed no later than the publication of the company's disclosures for the second quarter of 2017 (the "Q2 2017 Disclosures"), which occurred more than one year before the suit was filed. Although plaintiff's amended complaint removed references to those Q2 2017 Disclosures, the Court held that this did not cure the statute of limitations issue and dismissed the action with prejudice.
Under the Securities Act, claims must be brought within one year after an allegedly untrue statement or omission is discovered or should have been discovered by the exercise of reasonable diligence. Id. at 4. In its first complaint, plaintiff had alleged that the Q2 2017 Disclosures had demonstrated that earlier statements had been false or misleading. Id. at 6–8. Plaintiff argued that the amended complaint was not time-barred, however, because it "no longer allege[d] misleading statements based on omission" of facts later disclosed in the Q2 2017 Disclosures. That was not sufficient for the Court, which explained that "courts may consider prior allegations in determining the plausibility of later pleadings," and that removing those prior allegations did not "simply erase those allegations from the case." Id. at 5. In addition, the Court emphasized that plaintiff's amended complaint did not add any further alleged misstatements, but simply attempted to change the reason why those statements were allegedly false or misleading. Thus, the Court held that there was no reason to disturb its prior determination that a "reasonably diligent plaintiff would have had enough information to plead a plausible complaint" based on the Q2 2017 Disclosures. Id. at 6.
The Court also rejected plaintiff's attempt to plead around the statute of limitations by arguing that "damages did not accrue" until the company announced "fatally grim" financial results at a later date less than one year before the filing of the action. Id. at 8. The company's stock price had declined more than 50% following the earlier Q2 2017 Disclosures that were the focus of plaintiff's prior complaint, id. at 9, and the Court noted that the prior complaint had painted a picture of a longer-term trend of declines in the company's metrics, such that a new assertion that later results "were somehow significant on their own is unpersuasive." Id.
The Court denied further leave to amend, finding that amendment would be futile in light of the fact that the Court had already provided plaintiff an opportunity to cure the same deficiency and it failed to do so. Id. at 11.
The decision is a good reminder that, although pleadings are not necessarily binding concessions, plaintiffs can have difficulties running away from them through later amendments.
Originally published May 5, 2020.
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