United States: When Does "Puffery" Constitute Investor Fraud?

For many companies seeking to raise capital, an important 9th circuit case is illustrative of what exactly constitutes actionable puffery, which would generally constitute a false and misleading material statement to prospective investors.

In Macomb County Employees' Retirement System et. al. v. Align Technology Inc. et al (21-15823, Ninth Circuit Court of Appeals), the Court (in evaluating the propriety of a District Court dismissal and its analysis of 6 statements to investors from Align), affirmed a District Court ruling which essentially held that “vague, generically positive terms” on their own do does not constitute actionable “puffery”. The case was a class-action which involved the Align Technology (that manufactures Invisalign braces), and its executives' statements to investors regarding sales in China (which were ultimately misleading). Instead, courts should look to specific and material statements made by companies to prospective investors, not just “vague, generically positive terms”. According to the ruling, Courts should look to the sophistication of the investors and the materiality of the statements themselves when determining whether Puffery is actionable.

First DOJ Insider-Trading Case Related to Nonfungible tokens (NFT) – For the first time, the USDOJ (Southern District of New York) has brought a criminal indictment against a former employee of OpenSea (the largest online marketplace for NFT(s)). Notably the indictment does not allege that the NFTs at issue constituted commodities or securities.

Directors' Rights to review Company books and records Re-affirmed – In Fowler v. Golden Pacific Bancorp, Inc., (2022 Cal. App. Lexis 548), the California Court of Appeal recently re-affirmed the right of Directors (even those involving in litigation or having an actual conflict of interest) to inspect company books and records. This right was codified in California Corporations Code Section 1602 which states in relevant part that directors have the absolute right at any reasonable time to examine and copy corporate records and documents of “every kind”. The only notable exception is for “extreme” cases such as when a director intends to directly harm the corporation directly.

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