By John Filar Atwood
A district court granted in part and denied in part a motion to dismiss which was based on claims of extraterritoriality, forum non conveniens, and material misstatements and/or omissions under 1934 Act Rule 10b-5. The case involves a Canadian cannabis company that operated facilities in the U.S. and whose shares were traded over-the-counter in the U.S. through an alternative trading system. The court, which granted a prior motion to dismiss because the 1934 Act does not apply extraterritorially, concluded that plaintiffs alleged sufficiently that certain stock purchases and the purchase of a debenture from the defendant were domestic under U.S. v. Morrison. The court also found that dismissal is not warranted under forum non conveniens, and that some 10b-5 claims can stand while others are dismissed (In re iAnthus Capital Holdings, Inc. Securities Litigation, September 29, 2022, Kaplan, L.).
The ruling applies to second amended complaints filed against iAnthus Capital Holdings, Inc., one by an individual (Silva) representing a class of iAnthus shareholders, and another by Hi-Med LLC, iAnthus’s largest shareholder. iAnthus is a Canadian company that operates cannabis facilities in the U.S. Its shares are listed on the Canadian Stock Exchange and also trade over-the-counter in the U.S.
In April 2020, iAnthus announced that it had defaulted on a debt due to its senior secured lender, but this was followed by iAnthus's CEO accepting a loan from the lender's managing member. In October 2020, a transaction to restructure iAnthus was approved.
Extraterritoriality. In the first round of complaints the court granted defendants motions to dismiss, concluding that no plaintiff had pled facts sufficient to show a domestic purchase of iAnthus securities. The court determined, therefore, that the claims were improper because the 1934 Act does not apply extraterritorially. The court granted leave for the plaintiffs to replead their claims.
In the second amended complaint, Silva provided additional information about how TD Ameritrade processed his purchases of iAnthus shares. In particular, he paid for the trades with funds in his TD Ameritrade account which were held in the U.S. He noted that some of the trades were routed through E*TRADE and that it was when the trades were fulfilled that they became final and could not be revoked. The court found that the facts pleaded are sufficient to show a domestic purchase under Morrison because the trades allegedly became binding when E*TRADE fulfilled the orders, which it did domestically.
With regard to Hi-Med’s purchase of an iAnthus debenture, the court noted that the debenture-related allegations in the second amended complaint were largely duplicative of those the court already found wanting, including claims that iAnthus promised to repay the debenture to Hi-Med at its Florida address and that iAnthus was located in New York and Hi-Med was located in Florida and New Jersey at the time the agreement was made.
Hi-Med’s new allegations included that iAnthus and Hi-Med negotiated and executed the debenture from office locations in the U.S., that Hi-Med purchased it with funds from a Florida bank account, and that Hi-Med had a right to compel iAnthus to issue the title to iAnthus shares by delivering a conversion to its New York offices. The defendant argued that the Second Circuit’s decision in Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings SE compels dismissal notwithstanding the plaintiffs’ domestic purchases of iAnthus securities.
The court was not persuaded, finding that Silva’s stock purchases and Hi-Med’s purchase of a debenture from iAnthus were domestic under Morrison. However, it also found that Hi-Med’s acquisition of shares through the purchase by iAnthus of MPX Bioceutical Corp. in October 2018 was not a domestic purchase.
Proper forum. On the claim of forum non conveniens, the court applied the three-factor test of: 1) deference to the plaintiff’s choice of forum, 2) whether the proposed alternative forum is adequate, and 3) the balance of the public interest and the private interests of the parties. The court determined that the plaintiffs’ forum choices were entitled to deference, that a Canadian court would be an adequate alternative forum to try the actions, and that the interest of the U.S. in adjudicating federal law claims is string and no private interests of the parties should preclude litigating the matter in court. The court concluded, therefore, that that dismissal for forum non conveniens is not warranted.
On the Rule 10b-5 allegations, the court examined several categories of alleged material misstatements and omissions: 1) defendants’ conflicts of interest; 2) descriptions of iAnthus’s debt; 3) statements concerning the availability of financing, and 4) statements as to escrow obligations. The defendants argued that the statements and omissions were not actionable because they were not pled with particularity, constitute mere puffery, fall under judicial or statutory safe harbor provisions, and/or were not false or misleading when they were made.
Regarding conflicts of interest, the court stated that plaintiffs failed to allege that defendants made any misstatements or omissions based on their purported conflicts of interest. However, concerning the company’s debt descriptions, the court agreed with plaintiffs that a reasonable investor would view the right of Gotham Green Partners (GGP), iAnthus’s largest lender, to receive an exit fee as creating a “significant alteration of the total mix of information made available.” The court determined that in this instance the defendants’ omissions are actionable.
With respect to statements regarding availability of financing, the court mostly sided with the defendants by finding that only the few statements in which the defendants relied on GGP’s first financing as support for a claim or claims about availability of capital but omitted to mention the exit fee are actionable. On the issue of escrow obligations, the court acknowledged that the defendants may be able to produce evidence at a later stage of the litigation supporting their position, but concluded that given the facts presented in the operative pleadings plaintiffs have pleaded adequately the alleged materially false or misleading statements.
Scienter. Finally, the court noted that claims under Section 10(b) must give rise to a strong inference of scienter. The court found that the complaints pled strong circumstantial evidence that defendants intended to deceive or defraud plaintiffs or acted recklessly. In reaching this conclusion, the court noted that following the release of a special committee’s report on the matter, at least two members of the iAnthus board resigned. Resignations are not sufficient in and of themselves to establish scienter, the court said, but may add to the overall pleading of circumstantial evidence of fraud.
The case is No. 1:20-cv-03135-LAK.