Central District Of California Dismisses Putative Class Action Against Medical Apparel Company For Failure To Adequately Allege Scienter And Falsity
Securities Litigation
This links to the home page
  • Central District Of California Dismisses Putative Class Action Against Medical Apparel Company For Failure To Adequately Allege Scienter And Falsity


    On January 17, 2024, Judge Otis D. Wright, II of the United States District Court for the Central District of California dismissed a putative class action asserting claims under Section 10(b) of the Exchange Act and Sections 11 and 12(a)(2) of the Securities Act against a medical apparel company, certain of its officers, and the underwriters of its stock offerings.  Ryan v. FIGS, Inc., 2024 WL 187001 (C.D. Cal. Jan. 17, 2024).  Plaintiffs alleged that defendants made misrepresentations about the company’s performance and capabilities.  The Court dismissed the Exchange Act claims for failure to plead scienter and dismissed the Securities Act claims for failure to plead falsity, while also granting leave to replead those claims.

    With respect to the Exchange Act claims, the Court assessed five theories plaintiffs offered regarding:  (a) the “core operations” theory, (b) access to contradictory data, (c) misleading statements made on two earnings calls, (d) defendants’ stock sales, and (e) executive departures. The Court determined that each theory failed to adequately support a strong inference of scienter.  Id. at *8.

    With respect to the “core operations” theory—which can in some circumstances allow an inference of scienter based on an individual defendant’s role in the company—the Court noted that plaintiffs only alleged two of the individual defendants had stated they were “deeply involved” in or otherwise managed the day-to-day operations of the company.  Id. *8.  The Court held that these amounted to “blanket public statements of involvement” that did “not rise to the level of specificity required to establish a strong inference of scienter.”  Id.  The Court further concluded that the “core operations” theory did not apply to the remaining defendants, for whom plaintiffs failed to allege that they had responsibility for or control over the company’s day-to-day operations.  Id. at *9.

    The Court further rejected plaintiffs’ attempt to allege scienter based on the allegation that defendants had access to data analyses that allegedly were inconsistent with the company’s public statements.  The Court explained that plaintiffs only alleged that certain of the individual defendants were alleged to have made statements suggesting knowledge of those analyses, and that even for those defendants, plaintiffs failed to identify any data that they supposedly learned that was inconsistent with the company’s public statements.  Id. at *10.

    With respect to certain challenged statements the company’s CEO and CFO made on an earnings call—which plaintiffs argued were misleadingly positive—the Court reviewed the call transcript and concluded that defendants had provided risk disclosures, the “existence [of which] negates any strong inference of fraudulent intent or deliberate recklessness.”  Id. at *10.

    As for defendants’ alleged stock sales, the Court found that allegations about two defendants who sold shares for approximately $97 million and $60 million did not raise a strong inference of scienter because the total amounts were not “astronomical figures” and were less than 15% of their total holdings.  Id. at *11.  The Court concluded, however, that as to two other defendants, who allegedly sold stock worth a combined $821 million, their sales were on their face “suspicious.”  Id.  Nevertheless, the Court noted that this suspicion alone was not enough to raise a strong inference of scienter because plaintiffs alleged only the combined stock sales by these two defendants, rather than the amount each sold individually.  Id.  The Court further explained that the timing of a certain defendant’s stock sales was not suspicious because the sales were “tax related.”  Id.  For another defendant, the Court noted that the timing was suspicious because the sale occurred near the date of an alleged corrective disclosure; however, the Court explained that this factor alone was not enough to plead a strong inference of scienter.  Id. at *12.  Moreover, the Court observed that stock sales can be suspicious only when “dramatically out of line with prior trading practices,” but plaintiffs had not alleged that information for certain defendants, and that certain other defendants’ sales were not suspicious where they followed a lock-up period during which those defendants were prohibited from trading.  Id.

    With respect to allegations concerning executive departures, the Court held that plaintiffs failed to allege facts indicating that these departures were under suspicious circumstances.  Id. at *12–13.  Moreover, while plaintiffs also pointed to third-party websites with anonymous posts suggesting high employee turnover at the company, the Court treated these as “tantamount to confidential witness statements,” emphasizing that plaintiffs failed to allege any facts supporting that these sources were reliable and possessed knowledge of the company’s alleged fraudulent conduct.  Id. at *13.

    Turning to plaintiffs’ Securities Act claims, the Court first held that, for Securities Act defendants against whom plaintiffs had also asserted Exchange Act claims, those claims sounded in fraud because they were based on the same underlying facts and course of conduct alleged in the Exchange Act claims.  Id. at *15.  Applying the heightened pleading standard for allegations of fraud, the Court explained that plaintiffs “fall short in their explanation on ‘why’ a particular statement is false or misleading under Rule 9(b).”  Id. at *15–16.  As for claims against the remaining Securities Act defendants, the Court held plaintiffs failed to explain the involvement of two defendants in the company’s offerings and failed to identify any statements the underwriters provided in the company’s offering materials that were false and misleading.  Id. at *16.  The Court also rejected claims based on alleged violations of Items 105 and 303 of Regulation S-K, holding that plaintiffs failed to provide any factual allegations suggesting that adverse undisclosed facts were known to management.  Id. at *16–18.

Links & Downloads