Second Circuit Upholds Dismissal of AstraZeneca Investor Suit; Southern District of New York Dismisses Stockholder Suit Against Array Technologies; Eastern District of New York Tosses Stockholder Class Action Based on Ericsson Bribery Investigation

Second Circuit Upholds Dismissal of AstraZeneca Investor Suit

On May 16, 2023, the US Court of Appeals for the Second Circuit affirmed the Southern District of New York’s order dismissing an action brought by investors of AstraZeneca PLC (AstraZeneca) attempting to hold the company liable for alleged misstatements regarding enrollment in its clinical trials for a COVID-19 vaccine candidate. The group of investors brought claims against AstraZeneca under Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act).

On appeal, the investors argued that the company failed to disclose that an insufficient number of patients older than 55 were enrolled in the studies, rendering the studies unable to determine whether the vaccine was effective in this age group. The investors claimed the omission of this information rendered statements regarding the progress of the studies and interim results false and misleading because they created the “impression that their trials were proceeding as expected, [and] producing positive results, . . . with no significant setbacks or unusual issues.” AstraZeneca’s stock price dropped in late 2020 and early 2021 after these and other issues were disclosed to the market.

The Second Circuit ruled that, even if true, the supposed omission of details regarding the enrollment of older patients did not render the challenged statements regarding the progress of the studies false or misleading because those statements did not address the topic of the age of enrolled patients. The court also rejected the investors’ argument that the defendants were motivated to fraudulently conceal patient ages to inflate AstraZeneca’s stock price to fund its December 2020 acquisition of Alexion Pharmaceuticals, finding that the investors failed to draw a sufficient link between the challenged statements and this acquisition. The court further found that AstraZeneca’s voluntary disclosure of other issues regarding the studies to regulators well before the public disclosure of negative information regarding the studies undermined any inference of fraudulent intent.

This case demonstrates that courts may be skeptical of Section 10(b) claims based on the alleged omission of specific negative information from more generalized public statements, at least where the allegedly omitted information does not directly contradict the public statements.

Southern District of New York Dismisses Stockholder Suit Against Array Technologies

On May 19, 2023, US District Judge Victor Marrero of the Southern District of New York dismissed a putative class action against solar panel infrastructure company Array Technologies, Inc. (Array), finding that investors failed to allege any actionable misstatements in Array’s disclosures about how rising steel prices during the COVID-19 pandemic would impact its business. The investors alleged that Array misled investors in prospectus documents and earnings calls in violation of Section 10(b) of the Exchange Act, and Sections 11 and 12(a)(2) of the Securities Act of 1933 (the Securities Act).

According to the complaint, Array — whose principal product is an integrated system of steel supports and electric motors that move solar panels throughout the day to maintain an optimal orientation to the sun and enhance energy production — knowingly used outdated steel and logistics costs in its financial models, painting a false picture of Array’s margins and business prospects. The complaint alleges that, ultimately, when Array disclosed that increases in steel prices and logistics costs were having and would continue to have a material impact on its margins for the foreseeable future, this caused Array to miss profit expectations and withdraw its full-year outlook, resulting in a 46% drop in its stock price.

In dismissing these claims, the court found that Array’s optimism about its past ability to reduce costs and leverage its supply chain was inactionable puffery, given that Array was “not required to take a gloomy, fearful or defeatist view of the future.” To the extent that ultimately Array was not able to meet its projections given the unprecedented rise in commodities prices during the COVID-19 pandemic, “such circumstances constitute classic fraud by hindsight and not actionable.” As the court held, “[t]he securities laws do not require any issuer, including Array, to have such prescience for divining market volatility with the precision that the investors seek, especially not in the context of all the financial market challenges, uncertainties, and volatility engendered by the COVID-19 pandemic.”

Eastern District of New York Tosses Stockholder Class Action Based on Ericsson Bribery Investigation

On May 24, 2023, US District Judge William Kuntz of the Eastern District of New York dismissed with prejudice a putative class action against Telefonaktiebolaget LM Ericsson (Ericsson), finding that investors failed to allege any actionable misstatements in Ericsson’s disclosures about its growth in the Middle East. The investors alleged that Ericsson misled investors with various public statements in violation of Section 10(b) of the Exchange Act.

The complaint alleges that Ericsson, which constructs and manages telecommunications infrastructure, misled investors by failing to disclose its “rampant” corrupt practices in Iraq (which were the subject of two highly publicized Department of Justice and Securities and Exchange Commission investigations) in statements concerning its burgeoning growth in the Middle East. Specifically, the investors claim that Ericsson should have disclosed that its success was due in large part to illegal bribes paid to secure contracts in Iraq, and illicit payments made to terrorists to ensure safe passage across transportation routes necessary to access markets in Jordan, Syria, and Turkey. According to the complaint, the “truth” of the overseas illegality was concealed for more than a decade, until Ericsson disclosed that an internal investigation found, among other things, “serious breaches of compliance rules” and “evidence of corruption-related misconduct.”

In dismissing these claims, the court ruled that truthful statements regarding Middle East sales growth did not trigger an additional duty to disclose the contribution of alleged corruption to the company’s financial performance. According to the court, the company’s statements were “too general” and thus did not “put the source of Ericsson’s growth in Iraq in particular at issue.” The court found that Ericsson’s statements touting its commitment to regulatory compliance were similarly too general to be actionable and were “far from the detailed ‘assurances of actual compliance’ required to trigger further disclosure” and that Ericsson “never promised perfect compliance.” To the contrary, the court held that the highly publicized nature of the internal investigations made investors “even less likely to rely on generic compliance-related statements in making investment decisions.” In sum, the challenged statements were simply “too general to require further disclosure” under Section 10(b).