On January 10, 2025, the United States Court of Appeals for the
Ninth Circuit Court affirmed the dismissal of a putative securities
class action brought by a pension plan alleging that a hearing aid
manufacturer (the "Company") violated the Securities Act
of 1933 (the "Securities Act") by issuing a prospectus
for its initial public offering ("IPO") that allegedly
included false and misleading statements regarding revenue
recognition, risk factors, and potential growth. Cai v. Eargo,
Inc., No. 23-3470, 3:21-cv-08597-CRB (9th Cir. Jan. 10, 2025).
Plaintiffs also alleged violations of the Securities Exchange Act
of 1934 (the "Exchange Act") based on certain post-IPO
statements concerning an audit by an insurance carrier, revenue
recognition, risk factors, and the Company's growth. The Court,
in an unpublished opinion, affirmed the district court's
decision dismissing the complaint (which we previously covered here) holding that the alleged misstatements
were not misleading or were puffery and thus not actionable under
the securities laws and that plaintiffs failed to plead facts
giving rise to a strong inference of scienter.
Plaintiffs' claim under the Securities Act was based on
allegations that the Company's IPO prospectus contained
misstatements concerning the Company's assessment of insurance
eligibility and that the Company should not have recognized
insurance revenue because the insurance claims were ultimately
non-reimbursable. The Court affirmed dismissal given that insurers
had reimbursed the Company's claims for many years prior to the
allegedly misleading statements and fraud by hindsight is not
actionable. The Court also dismissed claims based on statements in
the prospectus that the Company "assesses" insurance
eligibility because, in context, the prospectus "made
clear" that the Company in fact was merely evaluating customer
insurance policies and payouts. Further, the Court held that the
Company sufficiently "disclosed a wide range of potential
risks," including its new market-disrupting business model,
the existence of varying degrees of insurance coverage, and certain
legal risks. Finally, the Company's statements about potential
growth were held to be inactionable puffery.
Plaintiffs' Exchange Act claim fared no better. Plaintiffs
alleged, for example, that the Company's statements about the
insurer's audit being "routine" and "not
questioning claims" misled investors about revenue recognition
and risks that had already materialized. In affirming the dismissal
of the claims, the Court reasoned that the Company disclosed the
audit and the fact that the insurer was questioning the
Company's process for establishing medical necessity rather
than whether there was an underlying medical necessity. The Court
also found that many of the statements about the Company's
growth were projections and thus inactionable statements of
corporate optimism.
Finally, the Court held that plaintiffs failed to plead facts
giving rise to a strong inference of scienter as is required to
assert a claim under the Exchange Act. The Court explained that
plaintiffs failed to plead facts giving rise to a strong inference
of scienter given that the Company's CEO and CFO increased
their Company stock holdings during the class period.
Links & Downloads
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
