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(Article from Securities Law Alert, September 2017) 

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On August 24, 2017, the Southern District of New York dismissed with prejudice a securities fraud action against a leading hotel chain on the grounds that the company adequately disclosed each of the risks at issue, including the impact of falling oil prices, the need for renovations at certain properties, the transition of the company's call center and the sale of certain hotels. Police and Fire Ret. Sys. of the City of Detroit v. La Quinta Holdings, No. 16-cv-3068 (S.D.N.Y. 2017) (Nathan, J.).[1] The court also dismissed claims in connection with a statement of opinion because the court found the opinion was not misleading when considered in context.

Plaintiffs Cannot Allege Misleading Omissions If the Risks at Issue Were Disclosed by the Company and Publicly Known 

The court began its analysis by underscoring that “a securities fraud claim for misrepresentations or omissions does not lie when the company disclosed the very risks about which a plaintiff claims to have been misled.” “When evaluating whether a company provided sufficient disclosures,” the court explained that it must “consider not only the disclosures the company ma[d]e, but also information already in the public domain and facts known or reasonably available to the shareholders.”

Here, the court found “the total mix of information made available to investors sufficiently disclosed the purported risk[s]” in question. With respect to the effect of declining oil prices on the company’s business, for example, the court noted that the company “made a number of disclosures related to the geographic concentration of its hotels and the impact changing oil prices could have on the company.” The court also deemed it significant that “the drop in oil prices that caused the purported decline in [the company’s] performance was publicly known.”

Plaintiffs Must Allege a Specific Duty to Disclose to Plead an Omission-Based Claim

The court emphasized that “[u]nder federal securities law, liability for failure to disclose certain information exists only if there is an affirmative legal disclosure obligation.” For several of the alleged misstatements, such as the company’s alleged failure to disclose the need for renovations, the court held plaintiffs failed to identify “a specific duty or obligation” requiring disclosure. The court found, for instance, that the company “in fact had no duty to disclose” alleged challenges with the company’s transition to a new call center (even though the court determined the company did in fact disclose these alleged issues).

Allegations That a Company Should Have Made Disclosures Earlier, Standing Alone, Do Not State a Claim for Securities Fraud 

The court also rejected plaintiffs’ contention that the company should have disclosed alleged problems with the call center transition sooner. The court found plaintiffs “fail[ed] to plausibly allege why the disclosures should have been made earlier.” The court explained that under Second Circuit precedent, “‘[m]ere allegations that statements in one report should have been made in earlier reports do not make out a claim of securities fraud.’” Id. (quoting Acito v. IMCERA Grp., 47 F.3d 47 (2d Cir. 1995)). The court stated that “the timing of disclosure is a matter for the business judgment of the corporate officers entrusted with the management of the corporation within the affirmative disclosure requirements promulgated by the exchanges and by the SEC.”

Courts Must Consider the Complete Context of a Statement When Determining Whether It Is Misleading  

Finally, the court found nothing “untrue or misleading” about an executive’s representation that the sale of one of the company’s hotels was a “win-win-win” even though the company allegedly recorded a several-million dollar loss on the property. The court noted that the statement “was not an objective fact, but rather an expression about [the executive’s] expectations for sale.”

The court emphasized that the “‘win-win-win’ comment [was] part of a larger statement.” The court explained that “[w]hen evaluating whether a defendant’s statements would have misl[ed] a reasonable investor, a court should consider the representations together and in context.” The court found the executive “explicitly explained the rationale behind his opinion that the sale constituted a ‘win-win-win’” in statements preceding and following the opinion.  The court concluded that plaintiffs “failed to plausibly allege” that the opinion constituted “a misrepresentation or omission.”