Pomerantz Wins 11th Circuit Reversal in National Beverage Corp.
On May 4, 2020, the 11th Circuit reversed, in part, the district court’s decision in dismissing the Complaint in Luczak v. National Beverage.
The Complaint asserts claims under Sections 10(b) and 20(a) of the Exchange Act charging that Defendants engaged in fraud by misrepresenting alleged “proprietary” metrics “that were key performance indicators” and created National Beverage’s growth.
The district court, applying Meyer v. Greene, 710 F.3d 1189, 1202 (11th Cir. 2013), and Sapssov v. Health Management Associates, Inc., 608 F. App’x 855 (11th Cir. 2015), held that the Complaint failed to plausibly allege loss causation, finding no new information was disclosed, since the disclosure related to prior published SEC letters.
The disclosure for loss causation purposes stemmed from a Wall Street Journal article which basically summarized the SEC letter. Pomerantz argued that the article was not a “mere repackaging” of information because the SEC was clearly still confused about the issue even after defendants’ response to their letters. The district court did not consider that the new information disclosed was the confusing and conflicting statements National Beverage provided the SEC. Pomerantz alleged that the article provided the market with a full realization of the misleading nature of Defendants’ statements about the propriety metrics.
The district court did not analyze falsity and scienter for this category of statements, stopping at the failure to allege loss causation.
On appeal, the 11th Circuit accepted these arguments, and went even further, holding that falsity and scienter were properly alleged.
On falsity, the 11th Circuit’s decision stated:
“The defendants also say Luczak’s complaint is deficient because his allegations of falsity as to the VPO/VPC claim are based in part on statements by confidential witnesses. In Mizzaro, this Court recognized that a court can give less weight “to allegations based on statements proffered by a confidential source depend[ing] on the particularity of the allegations made in each case.” 544 F.3d at 1240. The Court went on to say that confidentiality “should not eviscerate the weight given if the complaint otherwise fully describes the foundation or basis of the confidential witness’s knowledge, including the position(s) held, the proximity to the offending conduct, and the relevant time frame.” Id. Luczak’s complaint satisfies this standard. It identifies each confidential witness’s job, the time the witness spent in that job, and the relevance of the witness’s job to the VPO/VPC allegations. The defendants offer a number of reasons to doubt the credibility of the allegations supported by these confidential witnesses. Again, the defendants may well turn out to be right, but it is improper to weigh the evidence in this way on a motion to dismiss.”
On scienter, the decision added:
“The complaint also satisfies the “indicative of scienter” requirement because the statements by confidential witnesses regarding VPO and VPC make it at least as likely as not that the defendants acted with scienter in discussing these metrics in 2017. Confidential Witness (“CW”) 1 said “the VPC and VPO metrics were not used at National Beverage” and that they were “likely. . . made up by Defendant Caporella.” Similarly, CW2 said National Beverage’s management never discussed VPO or VPC during conference calls or meetings and that none of the Company’s annual and quarterly reports contained information about VPO or VPC. Finally, CW4 said that “never once during CW4’s tenure working exclusively with LaCroix did anyone mention the VPC metric.” If these allegations are true, they would provide evidence of the defendants’ recklessness or knowing falsity in saying National Beverage’s positive financial results were confirmed by VPO and VPC. See Institutional Inv’rs Grp. v. Avaya, Inc., 564 F.3d 242, 270 (3d Cir. 2009) (concluding plaintiffs alleged scienter where allegations from confidential witnesses contradict statements “directly and repeatedly” made by corporate officer defendant).”
Loss Causation was a very difficult issue to appeal before the 11th Circuit, given the law under Meyer v. Greene that already existed, however Pomerantz was able to work around Meyer.
“Although a disclosure “need not precisely mirror the earlier misrepresentation” in order to have a corrective effect, “it must at least relate back to the misrepresentation and not to some other negative information about the company.” Meyer, 710 F.3d at 1197 (quotation marks omitted). A corrective disclosure can be established by a single disclosure or a series of partial disclosures. Id.; see also Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 342–43, 125 S. Ct. 1627, 1631–32 (2005) (allowing for the possibility that the “relevant truth” regarding the defendant’s actions could “leak out” through partial disclosures). In order to plead loss causation premised on a series of partial disclosures, the complaint “must state facts that show (1) those disclosures gradually revealed to the market the undisclosed truth about [the defendant’s fraudulent practice], and (2) such disclosures resulted in the decline of [the defendant’s] share price.” Katyle v. Penn Nat’l Gaming, Inc., 637 F.3d 462, 472–73 (4th Cir. 2011); see Meyer, 710 F.3d at 1197. We conclude Luczak has sufficiently alleged loss causation…”
Partner Leigh Handelman Smollar is Co-Lead Counsel for Pomerantz LLP in Luczak v. National Beverage Corp. et al.