On September 21, 2021, Judge Michael A. Shipp of the District of New Jersey overruled an objection to a special master's report and recommendation to deny a motion for judgment on the pleadings concerning claims under Section 11 of the Securities Act of 1933 (the "Securities Act") against an accounting firm (the "Firm").  In re Valeant Pharmaceuticals Intl., Inc. Securities Litigation, No. 15-7658 (MAS) (LHG) (D. N.J. Sept. 21, 2021).  We previously covered the district court's decision denying a motion to dismiss by other defendants in this action.  The Firm is the only defendant left in a purported class action lawsuit related to a pharmaceutical company's public offering in 2015.  The Court agreed with the special master's findings, among other things, that plaintiff was not required to plead damages for a Section 11 claim at the pleading stage.

Plaintiff alleged that it purchased 300 shares of the pharmaceutical company's stock in the public offering.  Plaintiff further alleged that in connection with the public offering the Firm issued and certified an audit report on the company's 2014 financial statement that contained false and misleading statements that, once revealed, caused the company's stock price to drop at ranges below plaintiff's original purchase price.  In its motion, the Firm argued that plaintiff had no viable Section 11 claim because plaintiff sold its stock for profit and, therefore, had no damages.  The Firm's argument was based on the application of the "last-in, first-out method ('LIFO')"-whereby shares acquired most recently are assumed to have been the first sold.

In opposing the motion, plaintiff argued that damages are an affirmative defense to, not an essential element of, a Section 11 claim, and that applying a specific stock-sale matching methodology at the pleading stage in the litigation was improper.  In any event, plaintiff maintained that the appropriate matching methodology should be the first-in, first-out method ("FIFO")-whereby shares acquired first are assumed to have been sold first in the calculation of losses.  Notably, the Firm did not dispute that plaintiff would have recoverable damages under the FIFO method.  In recommending denial of the motion, the special master rejected the Firm's argument that damages are an essential element of a Section 11 claim and agreed with plaintiff that it was premature to employ a matching methodology at the pleading stage.

The Court similarly assessed "(1) whether damages is an element of a Section 11 claim and (2) whether any specific matching methodology must be applied at this stage of litigation."  Addressing the first issue, the Court cited the Supreme Court's conclusion in Herman & MacLean v. Huddleston and held that "a Section 11 plaintiff 'need only show a material misstatement or omission to establish his [or her] prima facie case.'"  459 U.S. 375 (1983).  While the Court acknowledged that the Third Circuit has expressly listed economic loss as an element when addressing other securities claims, such as Section 10(b) of the Securities and Exchange Act of 1934, it found that the Firm did not cite any authority holding that damages must be pled in a Section 11 claim and noted that even the cases the Firm cited contained string cites that support the principle that Section 11 plaintiffs need not plead damages.

With respect to the second issue, the Firm argued that in contrast to the FIFO methodology, the LIFO methodology factors in gains that may have accrued as a result of artificially inflated stock.  In rejecting this argument, however, the Court held that none of the authority cited by the Firm required the Court to adopt the LIFO method at this stage of the litigation.  Accordingly, it would be premature for the Court to endorse any particular methodology.  The Court therefore adopted the special master's report and recommendation to deny the Firm's motion.

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