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(Article from Securities Law Alert, January 2017) 

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On December 15, 2016, the Eleventh Circuit affirmed dismissal of securities fraud claims arising out of a company’s retention of stock promoters “to write flattering articles” about the company and “tout” its stock. In re Galectin Therapeutics, Inc. Sec. Litig., 2016 WL 7240146 (11th Cir. 2016) (Hull, J.). The Eleventh Circuit held the company could not be liable under Section 10(b) and Rule 10b-5 for the stock promoters’ statements because plaintiffs did not allege the company was the “maker” of those statements within the meaning of the Supreme Court’s decision in Janus Capital Group v. First Derivative Traders, 564 U.S. 135 (2011).[1] The court further held the company had no duty to disclose payments to stock price promoters, and also ruled that engaging the services of stock promoters “is not stock price ‘manipulation’ as a matter of law.”

Plaintiffs Did Not Allege the Company Had “Ultimate Authority” Over the Stock Promoters’ Statements As Required Under Janus  

In Janus, the Supreme Court held that “[f]or purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” 564 U.S. 135. The Court stated that “[w]ithout control, a person or entity can merely suggest what to say, not ‘make’ a statement in its own right.”

The Eleventh Circuit held that “[t]o the extent that [plaintiffs] base[d] [their] Rule 10b-5(b) claim on the content of, or the omissions in, the articles by the stock promoters, the Supreme Court has foreclosed that claim.” Galectin, 2016 WL 7240146. The court found that while plaintiffs “set forth allegations that the defendants worked in conjunction with stock promoters to promote [the company’s] stock,” the complaint did not “include[ ] sufficient allegations to support a finding that [the company] had ‘ultimate authority’ or ‘control’ over the stock promoters’ statements.” Significantly, the Eleventh Circuit found the company’s payment for the promotional articles, standing alone, insufficient for liability under Section 10(b) and Rule 10b-5. The court underscored that “[p]ayment for the promotional articles does not mean that [the company] is the maker of the statements in the articles.”

Company Had No Duty to Disclose Its Retention of Stock Promoters 

With respect to plaintiffs’ claim that the company had a duty to disclose its retention of stock promoters, the Eleventh Circuit explained that “[t]here is no statutory duty to disclose imposed on the issuer” to inform investors that it paid stock promoters for “promotional articles or activities.” Rather, Section 17(b) of the Securities Act puts the onus on stock promoters to disclose any payments received for their “promotional activities.” While the court acknowledged that the statutory scheme may “seem odd to the uninitiated,” the court stated that it reflects a “practical recognition of the fact that most market research is performed by analysts who are paid by brokerage firms, investments banks, and other marketers of securities.”

Because “the securities laws . . . place the duty to disclose payments only on the stock promoters,” the Eleventh Circuit held defendants “had no additional duty to disclose their payments to the stock promoters.”

Paying for Promotional Articles Is Not Stock Price Manipulation 

The Eleventh Circuit also rejected plaintiffs’ contention that the company’s retention of stock price promoters constituted stock price manipulation.[2] The court explained that “nothing in the securities laws prohibits” a company from “hiring analysts to promote” the company by “circulating positive articles” about the company’s initiatives or “recommending the purchase” of company stock. Rather, engaging stock promoters “is both contemplated and permitted under the securities laws.”