Curaleaf gotten some news that is good 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 Curaleaf that is involving in articles (see links below). Your decision by Judge Cogan of this Eastern District of the latest York reflects the value for businesses attempting to sell CBD items in order to make fulsome, appropriate, and disclosures that are timely 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 matter that is factual, if real, states a claim that could enable a court to fairly infer that the defendant is likely. A motion to dismiss a complaint then, in essence, contends to your court that even though the facts alleged into the grievance had been real, the plaintiff hasn’t founded a ground that is legal liability and so the complaint should be dismissed.
With that bit of background let’s review a few facts that are salient. Curaleaf is made in 2018 through a takeover that is reverse a Canadian company and Delaware company and is listed on the Canadian Stock Exchange. On 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”) october. SEDAR may be the Canadian exact carbon copy of the Electronic Data Gathering, review, and system that is retrieval“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 potential that is high punishment , no accepted medical use,
- that the Food And Drug Administration hasn’t authorized cannabis as a safe and effective medication for almost any indicator, and
- the business’s items are perhaps not authorized by the FDA.
The Detailing Statement proceeded to explain the appropriate dangers of taking part in the cannabis industry together with possibly “material unfavorable impact” such danger could have in the business as well as its share cost.
Not very long after filing the Listing Statement, Curaleaf started dealing in the Canadian Stock Exchange as well as on 21, 2018, Cureleaf issued a press release describing its “premium hemp-based CBD products. november” 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 26 and 28 and December 4, 5, and 14 also were silent on FDA approval.
To november state a reason of action for securities fraudulence under federal legislation, a plaintiff must plead facts that the defendant made a statement that is false 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 good explanations why the declaration is misleading. This is certainly no task that is easy
Here, plaintiffs alleged that public statements made by the Company were false and misleading because defendants failed to disclose the illegality fully of this purchase of CBD services and products under federal law as a result of the not enough Food And Drug Administration approval.
The issue for plaintiffs, explained the Court, is the fact that Listing Statement “publicly and over and over acknowledged the information that is very 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 have noted the also business’s items had been unlawful. But depending on longstanding precedent, the Court ruled that its not all statement that is public 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 securities disclosures that are accurate. That, in essence, won the for Curaleaf here.
For day 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 party that is third(*)