On January 2, 2025, Judge Cathy Ann Bencivengo of the United
States District Court for the Southern District of California
granted a motion to dismiss a securities action asserting claims
under Sections 10(b), 20(a), and 18 of the Securities Exchange Act
of 1934 (the "Exchange Act") against a hardware company
(the "Company") and certain of its former and current
officers. HBK Master Fund L.P. v. MaxLinear Inc., et al.,
No. 3:24-cv-01033-CAB-VET (S.D. Cal. Jan. 2, 2025). Plaintiffs also
brought common law fraud claims and one statutory state law claim.
Plaintiffs alleged that defendants participated in a fraudulent
scheme that artificially inflated the share price of a technology
company (the "Target Company") the Company was set to
acquire. The Court dismissed the complaint with leave to amend,
holding that plaintiffs did not adequately allege statutory
standing to sue because they invested in the securities of the
Target Company rather than the Company, and that plaintiffs
otherwise failed to state a securities fraud claim.
Plaintiffs, investment funds that invested in the Target Company
from June 2 to June 26, 2023, alleged that defendants misled
investors about the Company's commitment to merge with the
Target Company and the potential benefits of such a merger.
Specifically, plaintiffs alleged that defendants allegedly made
material misrepresentations and omissions about the Company's
intent regarding the combination with the Target Company, all while
allegedly secretly planning to breach the merger agreement after
the merger no longer appeared to be an attractive business
proposition. Plaintiffs further alleged that when the merger was
approved by the regulatory authorities, defendants fabricated a
breach by the Target Company to avoid liabilities associated with
terminating the transaction.
Applying the Ninth Circuit purchaser-seller rule, the Court held
that a plaintiff has standing under Section 10(b) of the Exchange
Act if the plaintiff purchased or sold the securities about which
the alleged misrepresentations were made. According to the Court,
the Ninth Circuit has set a "bright-line rule that the
security at issue must be one about which the alleged
misrepresentations were made." Because the alleged
misrepresentations were made about the Company's security,
rather than the Target Company's security, and because
plaintiffs did not hold the Company's securities during the
relevant period, the Court held that plaintiffs did not allege
statutory standing to bring their Section 10(b) and 20(a)
claims.
The Court noted it was an "open question" as to whether
plaintiffs must clear the statutory seller rule to as to their
Section 10(b) scheme liability claim, but held that "where the
challenged conduct relies principally on an alleged misstatement to
meet the elements of a scheme claim"—as plaintiffs
alleged here—plaintiffs must allege that they purchased or
sold the securities about which the alleged misstatements were
made, and for that reason the 10(b) scheme claim also fails.
Finally, the Court dismissed plaintiffs' Section 18 claim for
failure to plead actual reliance—as required—as
plaintiffs did not identify which allegedly misleading statement
they relied on and because many of the statements that plaintiffs
could "hypothetically rely on . . . cannot, as a matter of
law, mislead anyone."
Having dismissed the securities law claims, the Court declined to
exert supplemental jurisdiction over plaintiffs' common law and
state law claims.
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