(Article from Securities Law Alert, January 2016)
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On December 23, 2015, the Southern District of New York dismissed a securities fraud action alleging that China Gerui Advanced Materials Group (“China Gerui”) had made misrepresentations regarding its fiscal strategy. Pehlivanian v. China Gerui Advanced Materials Group, 2015 WL 9462115 (S.D.N.Y. 2015) (Ramos, J.). The court held that a company’s fiscal strategy-related statements are not misleading even if the company was considering a different fiscal strategy at the time, provided the company did not “hype” a specific fiscal strategy and imply that it had ruled out other fiscal strategies.
Background
China Gerui is a China-based steel processing company. Plaintiffs alleged that China Gerui and certain of its current and former directors and officers had “made material misstatements and/or omissions relating to China Gerui’s expenditure of approximately $234 million to purchase antique Chinese porcelain.” According to plaintiffs, the purchase was “shocking” because up until the company’s September 4, 2014 purchase announcement, China Gerui had “consistently and unambiguously stated that its growth strategy consisted of expanding and diversifying its product line, identifying overseas markets, and undertaking strategic mergers and/or acquisitions.”
Defendants moved to dismiss plaintiffs’ claims on the grounds that stockholder disagreements with a company’s investment decisions are “beyond the purview of the federal securities laws.”
Court Holds That China Gerui’s Fiscal Strategy-Related Statements Were Not Necessarily False or Misleading Even Though the Company May Have Been Considering a Different Strategy at the Time
Plaintiffs contended that China Gerui must have been in the process of purchasing the Chinese porcelain on or before May 20, 2014, “and thus, statements made after that date regarding [China Gerui’s] growth and fiscal strategies were false or materially misleading.” The court found that even if China Gerui had decided to purchase the Chinese porcelain collection by May 20, 2014, strategy-related “statements made after that date [were] not inherently false or misleading.”
The court explained that in San Leandro Emergency Medical Group Profit Sharing Plan v. Phillip Morris Companies, 75 F.3d 801 (2d Cir. 1996) (Phillip Morris), the Second Circuit “rejected the argument that a company’s statement discussing one strategy was ‘false because the company had already made the decision, or was actively considering adopting a plan’ to implement a different strategy” (quoting Phillip Morris, 75 F.3d 801). The Second Circuit acknowledged that “‘it may be reasonable to infer that [the company] began to consider changing its marketing strategy at least a couple of weeks before the plan was presented.’” However, the Second Circuit found that plaintiffs had “‘not alleged circumstances indicating how such consideration would have rendered any of the company’s prior statements false’” given that the company had not made “‘any statements or predictions foreclosing the possibility of adopting alternative’ strategies.”
Relying on Philip Morris, the Southern District of New York found that China Gerui’s decision “to pursue another strategy” (the purchase of Chinese porcelain) did not render “its earlier statements false.”
Court Finds China Gerui Had No Duty to Update Its Fiscal Strategy Statements Because It Did Not “Hype” Any Particular Strategy to the Exclusion of Others
The court rejected plaintiffs’ contention that China Gerui “had a duty to update” its fiscal strategy-related statements “once the [c]ompany seriously considered purchasing the [Chinese porcelain] [c]ollection and after the [p]urchase allegedly occurred.”
The court recognized that “‘[a] duty to update may exist when a statement, reasonable at the time it is made, becomes misleading because of a subsequent event’” (quoting In re Intl. Bus. Machines Corporate Sec. Litig., 163 F.3d 102 (2d Cir. 1998) (IBM)). However, the court explained that “[t]here is no duty to update ‘vague statements of optimism or expressions of opinion’ that ‘lack the sort of definite positive projections that might require later correction’” (quoting IBM, 163 F.3d 102). The court further noted that “there is no duty to update non-forward-looking statements unless the statements ‘contain some factual representation that remains ‘alive’ in the minds of investors as a continuing representation’” (quoting IBM, 163 F.3d 102).
In considering the scope of China Gerui’s duty to update, the court found instructive the Second Circuit’s decision in In re Time Warner Securities Litigation, 9 F.3d 259 (2d Cir. 1993). Plaintiffs in the Time Warner case “claimed that the company’s ‘highly publicized campaign to find international ‘strategic partners’ who would infuse billions of dollars of capital into the company’ . . . [was] false and misleading because the company failed to disclose its consideration of an alternative method of raising capital” (quoting Time Warner). The Second Circuit stated that “‘when a corporation is pursuing a specific business goal and announces that goal as well as an intended approach for reaching it, it may come under an obligation to disclose other approaches to reaching the goal when those approaches are under active and serious consideration.’” Given that the company had “‘publicly hyped strategic alliances,’” the Second Circuit concluded that the company “‘may have come under a duty to disclose’” its consideration of alternate strategies “‘that would place the statements concerning strategic alliances in a materially different light.’”
The China Gerui court noted that in Philip Morris, the Second Circuit found that Time Warner “‘went nearly to the outer limit of the line that separates disclosable plans from plans that need not be disclosed’” (quoting Philip Morris, 75 F.3d 801). The Philip Morris court deemed it significant that Time Warner had “‘hyped a specific plan, thereby inducing investors to believe that alternatives were excluded.’”
The Southern District of New York found that China Gerui had not “‘hype[d]’ a specific plan for addressing the declining economy.” Because China Gerui had instead “identified many potential strategies,” the court found it “unlikely that its statements created the impression that other potential strategies were excluded.” The court therefore concluded that China Gerui had no duty to update its fiscal strategy-related statements.
The court further found that statements addressing China Gerui’s fiscal discipline and its careful management of cash reserves were “general pronouncements” that did “not require updating.”