- within Law Department Performance, Insolvency/Bankruptcy/Re-Structuring and Criminal Law topic(s)
On September 29, 2023, Judge Andrew L. Carter, Jr. of the United
States District Court for the Southern District of New York denied
in part and granted in part a motion to dismiss a putative
securities class action against the owner of a social media company
and his beneficial trust. Oklahoma Firefighters Pension and
Retirement System v. Musk, No. 22-cv-03026 (ALC) (S.D.N.Y.
Sept. 29, 2023). Plaintiff alleged that defendants violated
Sections 10(b), 20A, and 20(a) of the Securities and Exchange Act
of 1934 by allegedly concealing the Owner's ownership interests
in the Company to investors who sold shares of the Company between
March 25, 2022, and April 4, 2022, the putative class period.
According to the complaint, the Owner became the owner of the
Company following a $44 billion takeover transaction that closed on
October 27, 2022. The Trust is a revocable trust of which the Owner
is the sole trustee, and the Owner's common stock in the
Company is held by the Trust. Plaintiff alleged that during the
purported class period, the Owner deliberately concealed his
acquisition of more than 5% of the Company's stock by failing
to file disclosures required by the SEC, and that the Owner hid and
misrepresented his intent to change or influence control of the
Company. Plaintiff contends that this alleged concealment deprived
investors of material information regarding the true value of their
securities.
On March 14, 2022, the Owner's acquisitions of the
Company's stock allegedly crossed the 5% ownership threshold,
triggering the start of a 10-day window to satisfy disclosure
obligations under SEC Rule 13d-1, promulgated under Section 13(d)
of the Exchange Act. Plaintiff alleged that Schedule 13 filings are
carefully tracked by investors because they represent a "red
flag" that a company is in play for a potential takeover. On
March 22, 2022, the last day of the alleged disclosure window, the
Owner did not file the requisite Schedule 10D, allegedly violating
his disclosure obligations. The purported class period began on the
next day, March 25, 2022. Plaintiff alleged that, over the next 10
days, the Owner amassed over 13 million additional shares in the
Company at a cost of half a billion dollars.
As a threshold matter, the Court rejected defendants' argument
that plaintiff could not seek damages under Section 10(b) or Rule
10b-5 for a breach of Section 13(d). The Court held that, to state
a Rule 10b-5 claim for a misrepresentation, one need only allege
that a defendant made a materially false statement in connection
with the purchase or sale of a security, and that plaintiff
adequately alleged material omissions and misstatements with
respect to the Owner's Form 13D filings. The Court observed
that the fact that some violations of Section 13(d) may also be
actionable under Section 18(a) of the Exchange Act does not
preclude a claim under Section 10(b), citing Puddu v. 6D Glob.
Techs., Inc, 742 Fed. App'x 553, 555-56 (2d Cir. 2018), in
which the Second Circuit reversed the dismissal of a Section 10(b)
claim predicated on an alleged violation of Section 13(d). The
Court also noted that in Kamerman v. Steinberg, 891 F.2d
424, 430-31 (2d Cir. 1989), the Second Circuit did not explicitly
hold that a Section 10(b) claim could not be predicated on a
violation of 13(d)—it instead held that Section 13(d) itself
does not contain a private right of actions for damages.
Accordingly, while noting that the question of whether a Section
10(b) damages claim can be based on a disclosure violation
"has not been squarely addressed" by the Second Circuit,
the Court was persuaded by the relevant caselaw to sustain
plaintiff's 10(b) claim at the pleading stage.
With respect to defendants' opposing inferences, the Court
rejected defendants' argument that deleting the 13G language
about control intentions should have alerted the market to the
Owner's control intentions, finding that filing the form was
inherently misleading because it signaled his intention to be a
passive investor. The Court further noted that although the
Owner's past compliance with Section 13(d) as an isolated
allegation may support an opposing inference that his failure to
disclose was inadvertent, a reasonable person would deem the
inference of scienter "cogent" and at least as compelling
as any opposing inference one could draw.
The Court next held that plaintiff had adequately alleged loss
causation. The Court found that, at the pleading stage, plaintiff
adequately alleged that had the Owner not hidden his ownership,
investors would have traded at a higher price during the purported
class period. Having found that plaintiff sufficiently pled each
element of a Section 10(b) claim, the Court denied defendants'
motion to dismiss that claim.
Turning to the other claims, the Court denied defendants'
motion to dismiss the Section 20(a) claim, finding that
defendants' only argument—that a private right of action
for damages under Section 10(b)—could not be maintained on
the basis of an alleged breach of Section 13(d), which the Court
had already rejected. Concerning plaintiff's insider trading
claim under Section 20A, the Court evaluated plaintiff's
allegation that the Owner purchased shares of the Company while in
possession of material, nonpublic information concerning his
ownership of the Company's stock and intentions for the
Company, which he allegedly omitted to disclose. The Court rejected
plaintiff's allegations that the Owner acted as a temporary
insider, finding that plaintiff's allegations that the Owner
met with executives to discuss his ownership stake and his plan to
join the Board were not enough to properly allege he was a
temporary insider. As such, the Court granted defendants'
motion to dismiss the Section 20A claim.
Originally published October 11, 2023.
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