On September 13, 2024, Judge K. Michael Moore of the United States District Court for the Southern District of Florida dismissed a complaint alleging that an equity fund (the "Company"), its affiliate companies, and several directors and officers violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5. Kosowsky v. Icahn Enterprises L.P., et al., 1:23-cv-21773-KMM (S.D.Fla. Sep 13, 2024). According to plaintiffs, defendants allegedly engaged in a scheme to artificially inflate the Company stock price by issuing dividends while supposedly concealing key financial information from investors to support the Company's majority shareholder's personal borrowing and financial interests. The Court dismissed the complaint without prejudice, holding that plaintiffs failed to allege any material misstatement or omission or facts giving rise to a strong inference of scienter.
The Company is a publicly-traded holding company and equity fund that owns multiple subsidiaries including an automotive group division. Plaintiffs' complaint primarily alleged two misrepresentations. First, plaintiffs alleged that the Company consistently paid dividends from at least 2018 through 2023 in amounts that were higher than what the Company's operating results justified and inaccurately represented to investors that those payments were sustainable. Plaintiffs further alleged that these payments were part of an alleged scheme to artificially inflate the Company's stock price, purportedly to support the personal loans of the controlling shareholder because the shareholder's Company shares were pledged as collateral. Second, plaintiffs alleged that the Company delayed recognizing a $226 million impairment charge related to its automotive group division by a quarter (from Q4 2022 to Q1 2023) and that it did so to maintain the allegedly unsustainable dividends. Plaintiffs further alleged that the truth came to light when a short-seller report detailed the alleged inflation of the Company's indicative net asset value (NAV) and warned that the Company did not disclose basic information about the majority shareholder's personal loans. According to plaintiffs, this revelation purportedly caused the Company stock price to drop, the majority shareholder to restructure his loan so that it was no longer tied to the Company share price but rather to the Company's indicative NAV, and the Company—which, according to plaintiffs, was no longer incentivized to maintain the scheme—to cut its dividend in half.
The Court dismissed the complaint in its entirety for failure to allege a misrepresentation and for failure to adequately plead facts giving rise to a strong inference of scienter. First, the Court found that plaintiffs failed to allege a misstatement regarding the sustainability of the dividends because the Company disclosed in multiple SEC filings that "[t]here can be no assurance as to whether or in what amounts any future distributions might be paid." The Court rejected plaintiffs' argument based on a research analyst's long-view that the Company's dividend payments would effectively continue "in perpetuity" because that was not a statement made by the Company or any individual defendant. Second, the Court found that the complaint failed to adequately allege any misstatements regarding the impairment charges. Specifically, the Court held that plaintiffs' "on information and belief" allegations that the inventory write-down should have been taken in an earlier quarter were insufficient because defendants had already written down the business unit's goodwill in 2019 and disclosed challenges to the business prior to 2023. Third, the Court dismissed plaintiffs' allegations that the Company's use of indicative NAV as a key metric to assess the Company's value was false and misleading. The Court explained that the Company qualified its indicative NAV estimates with cautionary language, including warning investors that indicative NAV was based on assumptions and subject to change based on market conditions and that plaintiffs' quarrel that other calculation methodologies would have more accurately reflected the Company's financial health was not a basis for a federal securities claim. Fourth, the Court rejected plaintiffs' claim that the Company's majority shareholder's financial interest in maintaining the dividends for his loan covenants was not disclosed. The Court found that the shareholder's personal loans—including that his Company shares were pledged as collateral and that there was a covenant tied to the stock price—were fully disclosed and that this was sufficient to alert investors of relevant risks and that the Company had no obligation to detail the specific terms of the personal loans.
Next, the Court held that plaintiffs failed to sufficiently allege facts giving rise to a strong inference of scienter for at least three reasons. First, the complaint did not distinguish how each of the individual defendants acted purposefully or with severe recklessness. The Court held that the complaint instead grouped all defendants together for purposes of alleging scienter and that this was insufficient under the PSLRA. Second, the Company's public disclosures regarding the majority shareholder's loans cut against the inference of fraudulent intent. Lastly, the core operations doctrine—which in some districts might bolster an inference of scienter when the subject of the alleged fraud is a core operation of the company—was "not meant to excuse [p]laintiffs from offering specific facts."
Kosowsky v. Icahn Enterprises L.P., et al.
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