On January 26, 2021, the United States Court of Appeals for the Ninth Circuit affirmed the dismissal of a putative securities class action against an electric car manufacturer (the “Company”) and certain of its officers for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. Wochos v. Tesla, Inc., No. 3:17-cv-05828 (9th Cir. Jan. 26, 2021). Plaintiffs alleged that the Company made false and misleading statements and omissions about its progress in building production capacity for the Company's first mass market electric vehicle. The Court affirmed the dismissal of these claims because certain of the alleged misstatements were forward-looking and protected by the Private Securities Litigation Reform Act's (“PSLRA”) and because plaintiffs had failed to adequately plead falsity as to the remaining alleged misstatements. Our prior analysis of the district court's dismissal of a previous complaint can be found here.
In 2016, the Company, a “niche” carmaker at the time producing 76,000 luxury electric vehicles a year, announced plans to sell its first mass market electric vehicle. In May 2017, the Company announced that it would produce 5,000 of the new cars a week by the end of 2017. It did so even though two employees responsible for overseeing production allegedly warned the Company's CEO that the target could not be met. In subsequent securities filings and on earnings calls through August 2017, the Company said the new car was “easy to make,” that there were “no issues” that “would prevent” the Company from meeting the target, and that it was “on track” to meet the target. The Company made these statements despite allegedly facing significant challenges in automating its production lines. In November 2017, the Company disclosed that it would not be able to meet the target. Plaintiffs alleged that the Company's announced 5,000 car target and its repeated affirmations that it was on track were misleading because of the employee warnings and the challenges and delays it faced in automating its production facilities.
The Court first considered whether certain alleged misstatements were forward-looking, holding that the announced target was “unquestionably a ‘forward-looking statement' because it is a ‘plan' or ‘objective of management for future operations,' and this plan or objective ‘relate[es] to [the Company's] products.” In reaching this conclusion, the Court rejected arguments that the statements contained embedded statements about the current production status. According to the Court, the statements simply articulated goals and did not include any information about the assumptions underlying those goals.
The alleged forward-looking misstatements also were accompanied
by cautionary language that was “detailed and
specific,” which was not challenged. Instead,
plaintiffs argued that the warnings were insufficient because the
Company allegedly “knew that ‘it was
impossible' to meet the . . . forward-looking
projections, and ‘not merely highly
unlikely.'” In considering this issue, the Court
noted that plaintiffs' allegation—that two employees
warned the CEO that producing 5,000 cars a week was
impossible—fell short because it did not show the CEO ever
accepted those views or that the Company adopted the two
employees' conservative outlook.
The Court next held that plaintiffs failed to plead falsity with respect to the Company's statements that it had “started the installation of Model 3 manufacturing equipment” and built 50 “production cars.” Plaintiffs argued these statements implied that “automatic” manufacturing equipment had already been installed and that cars were being produced using that equipment. The Court rejected these arguments, holding that plaintiffs were not claiming that these things had not happened and that plaintiffs otherwise failed to plead that the actual words used had “some special or nuanced meaning that differ[ed] from what the literal words suggest,” e.g., that the manufacturing equipment necessarily was “automatic.”
Finally, the Court affirmed the district court's denial of leave to amend. Plaintiffs argued that amendment was not futile because they could plead an additional alleged misstatement that had not been raised in the operative complaint. The Court rejected this argument, finding that plaintiffs could not adequately plead loss causation with respect to this alleged misstatement because the Company's stock price quickly recovered after the alleged misrepresentation became public. Specifically, the Court held that a “quick and sustained price recovery after the modest . . . drop refutes the inference that the alleged concealment of this particular fact caused any material drop in the stock price.”
Originally Published by Shearman & Sterling, February 2021
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