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(Article from Securities Law Alert, January 2018) 

For more information, please visit the Securities Law Alert Resource Center

On January 8, 2018, the Central District of California held that plaintiffs could not assert a securities fraud claim concerning a preliminary purchase price allocation (“PPA”) for an acquisition merely through hindsight pleading that the company had subsequently revised the PPA. M&M Hart Living Trust v. Global Eagle Entertainment, 2018 WL ____ (C.D. Cal. 2018) (Anderson, J.).[1]

Following the acquisition in question, the company announced a delay to its annual report and disclosed material weaknesses in its internal controls. Plaintiffs’ initial allegations were dismissed without leave to amend. After the company filed its annual report, plaintiffs moved to amend the judgment, and obtain leave to file an amended complaint, on the grounds that the company’s annual report disclosed, for the first time, a revised PPA for the acquisition.

Although plaintiffs conceded that the preliminary PPA “constituted an opinion,” plaintiffs argued that the preliminary PPA “was false because it was later revised” and claimed that the extent of the revisions demonstrated that the opinion was false when made. The court rejected this contention, and held that “later adjustments do not inherently make the earlier statement false under Rule 10(b).”

The court explained that in order to state a securities fraud claim based on an alleged misstatement of opinion, plaintiffs must satisfy one of the three prongs of the test the Ninth Circuit adopted in City of Dearborn Heights Act 345 Police & Fire Retirement System v. Align Technology, 856 F.3d 605 (9th Cir. 2017).[2] If a plaintiff “relies on a theory of material misrepresentation” under the first prong, “the plaintiff must allege both that the speaker did not hold the belief she professed and that the belief is objectively untrue.” City of Dearborn Heights, 856 F.3d 605. If the “plaintiff relies on a theory that a statement of fact contained within an opinion statement is materially misleading” under the second prong of the test, the plaintiff “must allege that the supporting fact the speaker supplied is untrue.” Finally, if the “plaintiff relies on a theory of omission” under the third prong, “the plaintiff must allege facts going to the basis for the issuer’s opinion whose omission makes the statement at issue misleading to a reasonable person reading the statement fairly and in context.”

Here, the court found plaintiffs “offer[ed] only a post hoc assessment” that the preliminary PPA was “‘grossly incorrect.’” The court held these allegations “insufficient to allege falsity under the Ninth Circuit’s standard.” M&M Hart Living Trust, 2018 WL ____. The court found plaintiffs did not “allege that the preliminary PPA was not actually believed by [d]efendants or that [d]efendants were aware of undisclosed facts that tended to seriously undermine the preliminary PPA’s accuracy at the time the statement was made” as required under the first prong of the City of Dearborn Heights test.

The court further determined that plaintiffs did not “identify facts going to the basis of the preliminary PPA that rendered it misleading to a reasonable person” under the second prong of the City of Dearborn Heights test. The court found it significant that the company had expressly cautioned investors that the final PPA could be materially different from the preliminary PPA based on several factors, some of which could not be “predicted with certainty.”

The court concluded that “[o]n these facts, [p]laintiffs cannot adequately allege that the preliminary PPA was false.” Based on its finding that plaintiffs’ proffered new evidence would not have “changed the outcome of the case,” the court denied plaintiffs’ motion to amend the judgment and for leave to file an amended complaint.