Curaleaf received some good news in mid-February when a federal court dismissed a class action lawsuit alleging it violated federal securities laws. We wrote about this lawsuit when it was first filed in August 2019 and have tracked various issues involving Curaleaf in other posts (see links below). The decision by Judge Cogan of the Eastern District of New York reflects the importance for companies selling CBD products to make fulsome, appropriate, and timely disclosures in their securities filings.
A motion tests the sufficiency of a complaint, as my colleague Jihee Ahn recently explained. This means a complaint must contain enough factual matter that, if true, states a claim that would allow a court to reasonably infer that the defendant is liable. A motion to dismiss a complaint then, in essence, argues to the court that even if the facts alleged in the complaint were true, the plaintiff has not established a legal ground for liability and so the complaint should be dismissed.
With that bit of background let’s review a few salient facts. Curaleaf was created in 2018 through a reverse takeover between a Canadian company and Delaware company and is listed on the Canadian Stock Exchange. On October 26, 2018, Curaleaf announced the completion of the business combination and it filed a “Listing Statement” with the System for Electronic Document Analysis and Retrieval (“SEDAR”). SEDAR is the Canadian equivalent of the Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”) in the United States and serves to facilities the electronic filing of securities information and allow for the dissemination of information.
The Listing Statement filed with SEDAR significantly affected the motion to dismiss. The Listing Statement stated, in part:
- the company would derive a substantial portion of revenue from cannabis in the United States, which industry is illegal under federal law,
- cannabis is classified as a Schedule I drug which under federal law means it is a substance with a high potential for abuse , no accepted medical use,
- that the FDA has not approved marijuana as a safe and effective drug for any indication, and
- the company’s products are not approved by the FDA.
The Listing Statement went on to explain the legal risks of participating in the cannabis industry and the potentially “material adverse effect” such risk may have on the company and its share price.
Not long after filing the Listing Statement, Curaleaf began trading on the Canadian Stock Exchange and on November 21, 2018, Cureleaf issued a press release describing its “premium hemp-based CBD products.” The press release advertised the products as treating a variety of illnesses (chronic pain, depression, PTSD, Parkinson’s disease, Alzheimer’s disease) but did not discuss FDA approval. Press releases issued on November 26 and 28 and December 4, 5, and 14 also were silent on FDA approval.
To state a cause of action for securities fraud under federal law, a plaintiff must plead facts that the defendant made a false statement or omitted a material fact, with scienter (i.e. a culpable state of mind), and that plaintiff’s reliance on defendant’s action caused the plaintiff injury. And, under federal law, the complaint must specify each statement alleged to have been misleading and the reasons why the statement is misleading. This is no easy task.
Here, plaintiffs alleged that public statements made by the Company were false and misleading because defendants failed to fully disclose the illegality of the sale of CBD products under federal law due to the lack of FDA approval.
The problem for plaintiffs, explained the Court, is that the Listing Statement “publicly and repeatedly acknowledged the very information that plaintiffs contend it concealed: its cannabis-based products are not approved by the FDA and thus the FDA may regard their promotion as violating established law.” Consequently, the Court ruled there was no omission of a material fact with respect to defendants’ claimed injury. Plaintiffs argued that Curaleaf’s press releases “should also” have noted the company’s products were illegal. But relying on longstanding precedent, the Court ruled that not every public statement made by Curaleaf must contain the full roster of disclosures found in the securities filings.
The ruling contains several other “ins and outs” related to pleading and securities lawsuits. But for present purposes the ruling demonstrates the importance of filing timely and accurate securities disclosures. That, in essence, won the day for Curaleaf here.
For more reading on Curaleaf and cannabis securities, see:
Full disclosure: My colleague Vince Sliwoski papered a $5 million mezzanine loan to a Curaleaf acquisition a while back, on behalf of a third party.