On February 16, 2021, Judge Brian M. Cogan of the United States
District Court for the Eastern District of New York dismissed a
putative securities class action against a medical and wellness
cannabis operator and certain of its officers alleging violations
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5. In re Curaleaf Holdings Inc.
Securities Litigation, No. 19-cv-04486 (E.D.N.Y. 2021).
Plaintiffs alleged the Company made false and misleading statements
regarding the benefits and legality of its cannabinol
("CBD") products. The Court dismissed the
complaint, holding that the Company disclosed what plaintiffs
claimed was not disclosed and that plaintiffs thus failed to plead
falsity or, with respect to certain alleged misstatements, loss
causation.
The Company is a U.S. cannabis operator listed on the Canadian
Stock Exchange. In November 2018, the Company announced the
launch of "a line of premium hemp-based CBD products" to
support "overall wellness." It marketed the
products as treatments for a variety of health and medical
conditions. In the initial announcement, as well as
subsequent press releases, the Company stated that its products
were of "highest standard for safety [and]
effectiveness." On July 22, 2019, the Food and Drug
Administration ("FDA") issued a letter warning the
Company that several of its CBD products were unapproved and/or
misbranded drugs sold in violation of federal law. Plaintiffs
claimed the Company failed to warn investors of the lack of FDA
approval and that potential regulatory issues would stymie Company
sales. Plaintiffs also claimed the Company misleadingly
touted the health benefits of its CBD products.
Several claims were dismissed for failure to plead falsity based on
disclosures and warnings contained in a listing statement that the
Company filed with the Canadian securities regulatory authorities
in October 2018. For example, the Court dismissed
plaintiffs' claims that the Company failed to fully disclose
the illegality of the sale of CBD products under federal law due to
lack of FDA approval. Agreeing with defendants, the Court
held that "the Company publicly and repeatedly acknowledged
the very information that plaintiffs contend it
concealed"—namely, that its CBD products were not
approved by the FDA and that marketing them as having health
benefits may violate federal law. The Court rejected
plaintiffs' argument that the Company did not disclose that the
products were "illegal" but instead only disclosed that
the products could be "in violation" of federal law,
holding that there is "no requirement that a Company disclose
its risk in any magic words preferred by plaintiffs."
The Court also rejected plaintiffs' claim that the warnings
were misleading because they only disclosed the
"potential[]" for regulatory action" when such
action was, according to plaintiffs, a certainty, concluding that
"[d]escribing this risk in terms of potentiality rather than
certainty – when certainty of enforcement could not be known
anyway – does not violate securities
law."
The Court also dismissed plaintiffs' claim that the Company
mispresented its CBD products as being "safe" and
"effective" for failure to allege loss causation.
Plaintiffs claimed that the FDA letter "revealed" the
"truth" that the Company's products did not have the
touted health benefits. However, the Court held that the FDA
letter offered no opinion regarding the truth or falsity of the
Company's statements, but instead admonished the Company for
making such statements without FDA approval. As such, the
letter was simply a materialization of disclosed risks with respect
to FDA approval and not a corrective disclosure as to the
Company's prior statements.
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