On
As a threshold matter, defendants argued that plaintiffs' allegations amounted to improper "puzzle pleading" by quoting at length from defendants' statements without "explain[ing] with particularity why each statement is false." Id.at 27. The Court disagreed, however, holding that the complaint sufficiently alleged how challenged portions of each quotation were rendered false or misleading. Id.at 28-29. The Court divided the challenged statements into three categories: pre-merger statements, post-merger statements regarding the company's finances and post-merger statements regarding regulatory compliance and controls.
The Court concluded that plaintiffs failed to allege any actionable statement or omission prior to the merger. The Court noted that statements noting the target company's work with regulators amounted to non-actionable puffery because they were "too general to cause a reasonable investor to rely upon them." Id.at 31. The Court further determined that financial projections contained in the Proxy were protected by the bespeaks‑caution doctrine as "forward-looking statement[s] accompanied by sufficient cautionary language." Id.at 34-35. The Court noted that statements were forward-looking if their "truth cannot be ascertained until some time after," and the Proxy's projections were made in
In addition, the Court rejected plaintiffs' allegations that the Proxy omitted "known trends or uncertainties" required to be disclosed under Item 303 of Regulation S-K. While plaintiffs argued that the Proxy failed to disclose that the company "was not complying with state and federal laws and overstating its cash and revenue," the Court concluded that plaintiffs failed to sufficiently allege that the company's management "actually kn[ew]" about the alleged noncompliance. Id.at 37. Moreover, the Court concluded that risk disclosures relating to cash and revenue statements in the Proxy were sufficient and therefore no further disclosure was necessary under Item 303. Id.at 38.
With respect to post-merger statements relating to the company's financial performance, however, the Court held that plaintiffs had plausibly alleged that the statements were false or misleading at the time they were made, based on plaintiffs' allegation that the figures included
Finally, the Court declined to dismiss allegations that the company's post-closing quarterly and annual reports failed to disclose that the purported
Turning to the requirement of scienter, the Court rejected plaintiffs' argument for scienter under a "motive and opportunity" theory, concluding that simply because defendants' compensation stood to increase based on a successful merger was not enough to support a strong inference of scienter. Id.at 63. While the Court suggested some receptiveness to the argument that SPACs should be closely scrutinized in this regard, the Court nevertheless concluded that there was no SPAC "exception" to the general rule that the prospect of a public offering was not enough to infer scienter, and that, in any event, the only statements adequately alleged to be false occurred after the merger, when no SPAC-related motive existed. Id.at 65‑66.
The Court also rejected plaintiffs' argument for scienter under a "conscious misbehavior or recklessness" theory. While plaintiffs argued that the errors in the company's financial statements were enough to infer scienter, the Court noted that "plaintiffs may not plead fraud by hindsight" and that it was not enough to argue that defendants "must have known that their statements were false or misleading given the magnitude of the restatement of revenue of a core operation of the company ... and [defendants'] respective roles at the company." Id.at 68. Indeed, the Court explained that, within the
In addition, the Court dismissed plaintiffs' claim under Section 14(a) with respect to the pre-merger Proxy, noting that the challenged statements in the Proxy were non-actionable for the same reasons noted in connection with the Section 10(b) claim.
- In re
Lottery.com, Inc. Securities Litigation
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
10022
Tel: 2128484000
Fax: 2128487179
E-mail: virginia.goebel@shearman.com
URL: www.shearman.com
© Mondaq Ltd, 2024 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com, source