Brown Vs Cerberus Capital Case Study
In Brown v. Cerberus Capital Mgmt., L.P., No. 17-63, Doc. 49-1 (2d Cir. N.Y. July 11, 2017), the United States Court of Appeals for the Second Circuit (the “Court of Appeals”) affirmed the District Court’s holding, which dismissed under Rule 12(b)(6) the former employees (“Plaintiffs”) of Covis Pharmaceuticals Inc. (“Defendants”) federal securities fraud claims.
According to the factual allegations, Plaintiffs’ grievances arose out of a 2013 reorganization of the “Covis enterprise”. Plaintiffs argue that, before the reorganization, they held valuable profits interests in Covis Holdings LP (“CLP”). But, as part of the reorganization hey exchanged those interests for less valuable profits interests in Covis US Holdings, LLC (“C-US”), in reliance on Defendants’ actions.
In District Court, Plaintiffs alleged securities fraud by claiming that Defendants violated Rule 10b-5 by making material misstatements about the value of the C-US profits interests and a tax “gross up” to induce Plaintiffs’ continued employment at Covis Pharmaceuticals, Am. Compl. ¶ 23. By the failure to pursue it in their opening brief, the plaintiffs abandoned the theory of securities fraud. Regardless, under the Private Securities Litigation Reform Act …show more content…
(“PSLRA”), a plaintiff must plead facts “giving rise to a strong inference” of scienter and cannot rely on “motives possessed by virtually all corporate insiders,” to support their facts.
In the Court of Appeals, the plaintiffs assert for the first time, the claim that defendants engaged in “insider trading” by inducing Plaintiffs—through material misrepresentations and omissions—to swap their more valuable profits interests in the pre-reorganization CLP for less valuable profits interests the post-reorganization C-US. The Court of Appeals determined that because this issue was not raised previously in District Court, they would not consider it.
The next issue the Plaintiffs argue, is regarding the District Court improperly relying on documents outside the complaint in dismissing Plaintiffs’ securities fraud claim. The Plaintiffs point out a letter the Defendants sent to them on November 10, 2015 in which, Defendants characterize the relevant merger negotiations as “fruitless”.
The Court of Appeals held that even if the district court erred in making reference to documents outside the complaint, Plaintiffs' securities fraud claim failed because the amended complaint failed to plead facts from which the materiality of those negotiations could be inferred. By attempting to determine if a misrepresentation is material, the court looks to “whether there is ‘a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.’”
The allegations that the Plaintiffs made, including one of a Plaintiff, who resigned his position in August 2014, who Defendants failed to disclose that Covis had recently received a merger proposal and that negotiations were ongoing, were insufficient to support an inference that the negotiations were material.
The complaint alleged that the business plan of Covis enterprise was that it would try to sell itself or its assets soon after developing a market in the pharmaceuticals that it acquired. Based on that description, merger discussions and negotiations were to be expected by Plaintiffs. Therefore, the pendency of merger negotiations thus signaled no more than the Covis enterprise’s continued adherence to its announced corporate
strategy.
The Court of Appeals lastly evaluated if the Plaintiffs could amend their already once-amended complaint. The court mentions that it is “within the court’s discretion to deny leave to amend implicitly by not addressing the request when leave is requested informally in a brief filed in opposition to a motion to dismiss.” The Court of Appeals declared that based on Plaintiffs having previously had a full opportunity to amend and having not identified any way in which a further amendment of its factual allegations would cure the amended complaint’s shortcomings, they would deny leave to amend the Plaintiffs complaint.
For the above reasons, the Court of Appeals concluded that the Plaintiffs’ remaining arguments are without merit, thus affirming the District Courts holding.
According to the factual allegations, Plaintiffs’ grievances arose out of a 2013 reorganization of the “Covis enterprise”. Plaintiffs argue that, before the reorganization, they held valuable profits interests in Covis Holdings LP (“CLP”). But, as part of the reorganization hey exchanged those interests for less valuable profits interests in Covis US Holdings, LLC (“C-US”), in reliance on Defendants’ actions.
In District Court, Plaintiffs alleged securities fraud by claiming that Defendants violated Rule 10b-5 by making material misstatements about the value of the C-US profits interests and a tax “gross up” to induce Plaintiffs’ continued employment at Covis Pharmaceuticals, Am. Compl. ¶ 23. By the failure to pursue it in their opening brief, the plaintiffs abandoned the theory of securities fraud. Regardless, under the Private Securities Litigation Reform Act …show more content…
(“PSLRA”), a plaintiff must plead facts “giving rise to a strong inference” of scienter and cannot rely on “motives possessed by virtually all corporate insiders,” to support their facts.
In the Court of Appeals, the plaintiffs assert for the first time, the claim that defendants engaged in “insider trading” by inducing Plaintiffs—through material misrepresentations and omissions—to swap their more valuable profits interests in the pre-reorganization CLP for less valuable profits interests the post-reorganization C-US. The Court of Appeals determined that because this issue was not raised previously in District Court, they would not consider it.
The next issue the Plaintiffs argue, is regarding the District Court improperly relying on documents outside the complaint in dismissing Plaintiffs’ securities fraud claim. The Plaintiffs point out a letter the Defendants sent to them on November 10, 2015 in which, Defendants characterize the relevant merger negotiations as “fruitless”.
The Court of Appeals held that even if the district court erred in making reference to documents outside the complaint, Plaintiffs' securities fraud claim failed because the amended complaint failed to plead facts from which the materiality of those negotiations could be inferred. By attempting to determine if a misrepresentation is material, the court looks to “whether there is ‘a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.’”
The allegations that the Plaintiffs made, including one of a Plaintiff, who resigned his position in August 2014, who Defendants failed to disclose that Covis had recently received a merger proposal and that negotiations were ongoing, were insufficient to support an inference that the negotiations were material.
The complaint alleged that the business plan of Covis enterprise was that it would try to sell itself or its assets soon after developing a market in the pharmaceuticals that it acquired. Based on that description, merger discussions and negotiations were to be expected by Plaintiffs. Therefore, the pendency of merger negotiations thus signaled no more than the Covis enterprise’s continued adherence to its announced corporate
strategy.
The Court of Appeals lastly evaluated if the Plaintiffs could amend their already once-amended complaint. The court mentions that it is “within the court’s discretion to deny leave to amend implicitly by not addressing the request when leave is requested informally in a brief filed in opposition to a motion to dismiss.” The Court of Appeals declared that based on Plaintiffs having previously had a full opportunity to amend and having not identified any way in which a further amendment of its factual allegations would cure the amended complaint’s shortcomings, they would deny leave to amend the Plaintiffs complaint.
For the above reasons, the Court of Appeals concluded that the Plaintiffs’ remaining arguments are without merit, thus affirming the District Courts holding.