Below, we outline key facts from the underlying action and First Circuit opinion, along with some key takeaways.
Background
In 2018, the
The
- Promacta Statement: In June of 2014, Lemelson published a report in Seeking Alpha stating that Ligand "face[d] it[s] biggest existential threat" from "what is likely to be a momentous impairment of its largest royalty generating asset, Promacta," due largely to a competitive threat from a new drug called Sovaldi. Two days later, Lemelson discussed Promacta with Ligand's investor relations representative. The day after that, Lemelson gave a radio interview on Benzinga where Lemelson said:
- Viking Statements: Two weeks later, Lemelson made two statements respecting Ligand's relationship with another company,
Viking Therapeutics . In 2014, Ligand and Viking signed a Master License Agreement in which Ligand would become the owner of 49.8 percent of Viking's common stock when Viking went public. Lemelson made two key statements concerning Viking's relationship with Ligand:- "Viking does not intend to conduct any preclinical studies or trials. ..."5
- "The financial statements provided on the [Viking S-1] accordingly are unaudited."6
Promacta accounted for 72 percent of [Ligand's] royalty revenues ... [and] is literally going to go away ... I mean I had discussions with management just yesterday - excuse me, their [investor relations] firm, and they basically agreed. And they said, look, we understand Promacta is going away.4
After the jury's verdict, U.S. District Judge
The First Amendment/Fact or Opinion
Under Rule 10b-5, a violation necessarily requires a false or misleading statement of fact.9 Lemelson cited a series of First Circuit defamation cases to argue that the First Amendment precludes liability "when the speaker outlines the facts available to him, thus making it clear that the challenged statements represent his own interpretation of those facts and leave[] the reader to draw his own conclusions."10 According to Lemelson, his Viking Statements interpreted facts in the Viking S-1 and were protected opinions and, thus, not actionable for purposes of 10b-5. The
The Court found that a jury had ample reasons to find that Lemelson's statements were statements of fact, affirming the precedent that a statement of fact expresses certainty about a thing, whereas a statement of opinion does not. 12 Drawing on the
As to the First Amendment/defamation argument, the First Circuit panel largely sidestepped the issue, finding:
Because we determine the Viking Statements to be statements of fact, we need not decide whether the cases cited by Lemelson reach beyond defamation law. Even were we to consider these cases and apply de novo review, Lemelson's argument fails because the Viking Statements reasonably would be understood to declare or imply provable assertions of fact. Far from presenting interpretation of the facts contained in the Viking S-1, the Viking Statements are flatly inconsistent with those facts.16
Materiality
Next, Lemelson argued that even if all his statements were untrue statements of fact, no reasonable jury could have concluded that the statements were material. To prove materiality, the
The Court found that a reasonable jury could find the statements material. Concerning the Promacta Statement, Promacta was critical for Ligand's business and, if it were "going away," that would be a severe blow to the company's revenue. Additionally, Lemelson himself took credit for the decline in Ligand's stock value, emailing his investors that his "multi-month battle with [Ligand]" was "paying off" because Ligand's shares were "down ~40% since [Lemelson] published."18 The Court found that a reasonable jury could infer that Lemelson believed that the Promacta Statement was material to investors.
Regarding the Viking Statements, Lemelson argued that the Viking S-1 provided information that contradicted his statements and detailed Viking's intentions around the preclinical studies, thereby precluding a jury from finding his statements material. The Court disagreed, finding that "[w]e have never held that it cannot be a material misstatement to flatly contradict publicly available facts."19 To hold otherwise, the Court noted, "would risk foreclosing Rule 10b-5 liability for all untrue statements belied by public securities filings."20
Scienter
Violations of Section 10(b) and Rule 10b-5 require the
The Court highlighted several reasons why a jury could have found Lemelson acted with scienter. First, concerning the Promacta Statement, the jury could have found the testimony of the investor relations contact - who disputed Lemelson's version of events - credible. Notably, investor relations personnel emailed Lemelson after he made the Promacta Statement, disputing Lemelson's account. Lemelson never corrected his statement. Second, concerning the Viking Statements, Lemelson held himself out as a sophisticated investor and adviser and claimed he "carefully researched" the Viking S-1. Yet, the plain language of the S-1 contradicted his statements about the audited financials and, at a minimum, presented a different light around his statement about the studies. Regardless of whether the jury found Lemelson's Viking Statements intentional misstatements, a rational jury could find that such statements were made with a high degree of recklessness.
Key Takeaways
Overall, Lemelson offers several key takeaways for both short-sellers and companies.
First, short-sellers will often claim First Amendment protections for their statements. Generally speaking, as the Supreme Court ruled in the doctrinal case Central Hudson, commercial speech is analyzed under a form of intermediate scrutiny.22 As Justice
Second, the fact that there may be other information available to investors that contradicts the short-seller's misstatements will not, in and of itself, shield the short-seller from misstatement liability. Although within the First Circuit, it is generally true that it is not a violation of 10b-5(b) to "fail to point out information of which the market is already aware," this does not apply to misstatement liability.
Third, the First Circuit hid a key point in a footnote. Lemelson argued that his statements were rendered "categorically immaterial" by virtue of his self-identification as a short-seller. The Court rejected this contention.24 Although rules exist concerning required disclosures for those promoting or "touting" securities when they have received payment for such touts,25 there are not any rules - whether investors have been paid for such disclosures or not - concerning short-seller disclosure. But, as the First Circuit held, even if a short-seller discloses his or her position as a short-seller, this alone will not immunize the short-seller.
Finally, the
Footnotes
1. Sec. & Exch. Comm'n v. Lemelson et al, No. 22-1630, 2023 WL 21546 (1st Cir.
2.
3. Sec. & Exch. Comm'n v. Lemelson, 596 F. Supp. 3d 227, 236 (
4. Lemelson, 2023 WL 21546 at *2 (1st Cir.).
5. Id. at *2-3 (emphasis removed).
6. Id. (Court's emphasis).
7. See generally
8. Lemelson, 2023 WL 21546 at *4 (1st Cir.).
9. Lemelson, 2023 WL 21546 at *4 (1st Cir.).
10. Id. at *5 (quoting McKee v. Cosby, 874 F.3d 54, 61 (1st Cir. 2017)).
11. Id.
12. Id. (quoting Constr. Indus. & Laborers Joint Pension Tr. v.
13. Id. at *5 (quoting
14. Id. at *5 (emphasis added).
15. Id.
16. Id. (citations removed).
17. Id. at *5-6 (quoting
18. Id. at *7.
19. Id.
20. Id.
21. Id. at *8.
22. Cent.
23. Id. at 566 (emphasis added).
24. Id. at *7 n.9.
25. See Securities Act of 1933, ch. 38, 48 Stat. 74 (codified as amended at 15 U.S.C.A. Section 77q).
26. Short Position and Short Activity Reporting by Institutional Investment Managers, (Release No. 34-94313; File No. S7-08-22),
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.
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