On September 14, 2020, Judge Pamela K. Chen of the Eastern District of New York granted in full a motion to dismiss a putative securities class action asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) against a steel products manufacturer (the “Company”) and certain of its executives and former employees. Ulbricht v. Ternium S.A. et al., No. 18-cv-06801-PKC (E.D.N.Y. Sept. 14, 2020). Plaintiffs, investors of the Company's American Depository Shares (“ADSs”), alleged that defendants made materially false and misleading statements and omissions in connection with the purchase of the Company's subsidiary by the Venezuelan government by failing to disclose the alleged bribery scheme that helped facilitate the transaction. The Court granted defendants' motion to dismiss plaintiffs' consolidated amended complaint, and—although “skeptical” of plaintiffs' likelihood of success—the Court granted plaintiffs leave to amend.
According to the amended complaint, the Company and its parent company offered bribes to Argentinian government officials for their assistance in the expropriation of the Company's Venezuelan subsidiary to the Venezuelan government in 2008. This bribery scheme was discovered in the “Notebooks Case,” a wide-ranging investigation into business leaders' alleged bribery of Argentine government officials. Plaintiffs allege that defendants were aware of the purported bribery during the putative class period of May 1, 2014 through November 27, 2018, and made false statements about the Company's business, compliance policies, and the expropriation transaction in its Form 20-F filings. Plaintiffs also allege that defendants failed to disclose violations of the Company's own anti-corruption and anti-bribery codes (the “Codes of Conduct”) referenced in the at-issue Form 20-Fs, and failed to adequately disclose risks under Item 3.D in its Form 20-F—instead providing only “generalized disclosures” regarding the “economic and political instability in Argentina” and risks stemming from the Lava Jato corruption and bribery scandal in Brazil. Finally, plaintiffs allege that certain of the individual defendants provided inaccurate Sarbanes-Oxley (“SOX”) certifications in the Company's Form 20-Fs, which represented that the certifying individuals reviewed the accuracy of the Form 20-Fs filed and that they “had disclosed to the Company's auditors and board any fraud, whether or not material, that involved management.”
The Court first addressed plaintiffs' allegations that the Form 20-Fs misleadingly described the transaction concerning the subsidiary, thereby putting the transaction “at issue” so as to trigger a duty of the Company to disclose the bribery scheme that allegedly enabled the transaction. Defendants countered that their statements “did not trigger a duty to disclose the bribery because such statements did not ‘attribute [the Company's] success to a particular cause' . . . or address ‘how' Venezuela's initial nationalization of [the subsidiary] was resolved.” The Court agreed with defendants' argument which emphasized the Southern District of New York's holding that “[d]isclosure is not a rite of confession, and companies do not have a duty to disclose uncharged, unadjudicated wrongdoing.” Das v. Rio Tinto PLC, 332 F. Supp. 3d 776 (S.D.N.Y. 2018). The Court further cited other SDNY decisions which held “securities laws . . . do not impose a ‘freestanding legal duty' to disclose uncharged wrongdoing” and moreover the revelation of “one fact about a subject does not trigger a duty to reveal all facts on the subject, so long as what was revealed would not be so incomplete as to mislead.” In particular, the Court observed that defendants “accurately note the 20-Fs do not describe the negotiation process or the reasons for the transaction” and simply described the transaction, the compensation received, and “the fact that that compensation was reflected in the Company's cash flows for 2011 and 2012.” Although the “income [was] derived from illegal sources,” the Form 20-Fs' descriptions of the transaction accurately reported that income “without ‘attributing . . . [its] success to a particular cause,'. . . thereby relieving [the Company] of any obligation to disclose the bribery scheme between the Company and the Argentine government.” The Court, however, also clarified that “truth is not a perfect defense to a Section 10(b) claim,” noting that true factual statements may still be actionable “if they are literally true but misleading through their context and manner of presentation or if they omit information without which they are misleading.”
The Court similarly dismissed plaintiffs' claim that the Company's Form 20-Fs contained misleading statements about the Company's Code of Conduct, finding they were non-actionable “aspirational language characteristics of puffery.” The Court agreed with defendants that the statements describing the Codes of Conduct “did not guarantee any degree of compliance with those codes and policies during the years in which they were made,” and further noted that the Company had not made “historical representations. . . to the effect that its officers had uniformly abided by the rules” and were therefore not misleading.
Turning next to plaintiffs' allegations regarding the risk disclosures, the Court held that plaintiffs failed to sufficiently allege falsity. According to the amended complaint, plaintiffs alleged that the disclosures were misleading because the risks cited were “not just possible, but in fact had already materialized.” However, the Court noted that there is no “affirmative duty to speculate or disclose uncharged, unadjudicated wrongdoing or mismanagement” and highlighted that the Company's “references to future ‘economic and political instability' in Argentina and to the Lava Jato investigation are insufficient to trigger a duty to disclose the  uncharged bribery.” According to the Court, to require disclosure of uncharged past bribery “would void the principle that companies do not have a duty to disclose” wrongdoings of this nature.
Finally, with respect to the claims involving the SOX certifications, the Court held that plaintiffs failed to sufficiently plead facts regarding the structure of the Company's internal controls that were sufficient to support a claim under the heightened pleading standards of the FRCP and PSLRA. To the extent plaintiffs were attempting to argue that the controls were demonstrably insufficient because they failed to catch the alleged bribery, the Court found that such an argument was “legally foreclosed.” The Court similarly rejected plaintiffs' allegations that the certifications were false and misleading, agreeing with defendants that the “bribery scheme as alleged . . . did not involve management,” and further did not find the certifications actionable because the “alleged fraud occurred years before the period covered by the filing.” Thus, the “present-tense nature” of the SOX certifications “only reinforces the temporal limits of the certification at issue and thus its inability to give rise to a cause of action for fraud.”
Having found that plaintiffs failed to allege an actionable misstatement or omission, the Court dismissed the Section 10(b) claims without addressing defendants' additional arguments that plaintiffs failed to allege scienter or loss causation. Consequently, the Court similarly dismissed plaintiffs' control-person liability claims under Section 20(a), finding no predicate violations of the Exchange Act under which such claims could be established. While the Court granted plaintiffs leave to further amend their complaint to allow them the opportunity to respond to the deficiencies raised, it noted that the current pleading's scienter allegations likely would not survive a motion to dismiss and cautioned plaintiffs to plead such allegations with particularity as to each defendant in order to alert each defendant as to the alleged misconduct.
Originally published by Shearman & Sterling, September 2020
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