On September 7, 2021, Judge Vernon S. Broderick of the United States District Court for the Southern District of New York dismissed a putative class action asserting claims under the Securities Act of 1933 and the Securities Exchange Act of 1934 against an infrastructure management company, certain of its executives, and the underwriter of its stock offering. City of Riviera Beach Gen. Emps. Ret. Sys. v. Macquarie Infrastructure Corp., et al., 2021 WL 4084572 (S.D.N.Y. Sept. 7, 2021). Plaintiff alleged that the company made misstatements and omissions concerning decreased demand for a particular form of fuel oil that the company stored for customers, which plaintiff alleged allowed the company to maintain an artificially high stock price while the company completed a secondary stock offering and acquired a competitor. The Court held that plaintiff failed to adequately allege any misrepresentation or scienter and, therefore, dismissed the action.
With respect to the alleged misleading statements, the Court explained that plaintiff failed to identify any statements that were actionable as half-truths due to defendants' alleged failure to disclose its reliance on storing the fuel oil. Id. at *7. The Court emphasized that none of the challenged statements were literally true but misleading; nor did any of the statements provide, with a reasonable level of specificity, a breakdown of how much of the fuel oil the company stored or what other uses could be made of the company's storage tanks. Id. at *7. For example, with respect to the company's statements that its performance had been "boringly predictable" and reflected an "unsexy business model," the Court explained these were non-specific, generic statements that constituted "milquetoast corporate-speak" and did not create a duty to disclose additional information. Id. Furthermore, the Court explained that many challenged statements, such as that the company had experienced "continued strong demand" for storing fuel products, were "backward-looking explanations of 'historical fact[s]'" and therefore not actionable without sufficient allegations that the statements were false when made or that defendants later learned the statements to be untrue but failed to correct them. Id.
The Court further rejected plaintiff's theory that the company had "a duty to be forthright about the present facts, risks, and threats facing [the company] when affirmatively disclosing its business and environment," explaining that there was no such duty as a general matter. Id. at *9. The Court noted that, while such a duty to disclose could be triggered if a defendant speaks with specificity "while omitting information that one would normally expect the defendant to have included had the defendant known it" or makes a "comforting" statement about present performance when the defendant already knows facts contradicting that statement, no such allegations were present here. Id. Although plaintiff argued that statements by a company executive, including that the company did "very little [business storing] crude" petroleum products, were misleading with respect to the company's reliance on the fuel oil, the Court explained that the fuel oil was a refined petroleum product, not a crude oil product, and was therefore not implicated by such statements. Id.
In addition, the Court rejected plaintiff's theory that, regardless of whether any statement was misleading, the company had a duty to disclose the allegedly omitted information as a material trend or uncertainty under Item 303 of Regulation S-K. While plaintiff argued that changing regulations impacting the company's business storing fuel oil required additional disclosures, the Court noted that plaintiff had also alleged that the changing regulatory rules were "widely understood" as threatening the business of anyone involved with the fuel oil, and that plaintiff therefore needed to show that in the face of this widespread knowledge there was still "a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available." Id. The Court also observed that plaintiff failed to allege when defendants knew of any uncertainty that rose to the level requiring disclosure under Item 303; nor did plaintiff allege the company had already taken losses on its business or knew of a specific liability it could be obligated to repay. Id.
The Court next analyzed plaintiff's theories regarding scienter. For the same reasons that the Court rejected plaintiff's arguments regarding alleged misrepresentations, the Court rejected an inference of scienter based on reckless or conscious misbehavior. Id. at *11. The Court also concluded that plaintiff failed to establish a strong inference of scienter based on alleged motive and opportunity. While plaintiff pointed to executives' compensation being tied to the company's market capitalization, the Court explained that a motive to keep stock prices high was shared by all corporate officers and was therefore too generalized. The Court also rejected plaintiff's suggestion that defendants wanted to artificially maintain the company's stock price in order to facilitate the acquisition of another fuel storage company, given that the acquisition target was much smaller than the company. And while plaintiff argued the company's secondary offering provided yet another motive to engage in fraud, the Court noted that no individual defendant was alleged to have sold any stock, and there was a lengthy 15-month gap between the secondary offering and the drop in the company's stock price following an alleged corrective disclosure. Id. at *12. The Court concluded that all the facts collectively at most demonstrated negligence and were therefore not sufficient to allege scienter.
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