Just about everyone who has been active in the D&O insurance arena for a while knows that every now and then one industrial segment or another will suddenly find itself in the midst of a securities litigation blitz. Years ago after the Internet bubble burst, it was the dot com companies. Further back than that, as at least some of us can remember, there were all of the failed banks in the S&L Crisis (and, again, in the wake of the global financial crisis). More recently, companies in the opioid pharmaceuticals space have drawn the unwanted attention of the plaintiffs’ securities lawyers. Often these kinds of securities suits and other D&O claims follow after some industry-wide event or sector slide.
Now, it appears, another sector is drawing heat. The e-cigarette business has found itself in the headlines recently as health-related issues have been raised about the product. These health questions have been followed, almost inevitably as things go in this country, by lawsuits. As discussed below, these lawsuits now include, in at least some instances, securities class action lawsuits.
The first of these securities suits involving e-cigarette industry companies was filed against Greenlane Holdings, Inc., a company that distributes e-cigarettes, vaporizers and accessories through its subsidiaries. The company also distributes products containing hemp-derived cannabidiol (CBD). The company completed its IPO in April 2019. According to the company’s registration statement filed in connection with the offering, the company is “one of the largest distributors of products made by JUUL Labs,” an e-cigarette manufacturer. Among other things, the registration statement emphasized that “a significant percentage of our revenue is dependent on sales of products … that we purchase from a number of our key suppliers, including PAX Labs and JUUL Labs.”
The securities class action complaint that was later filed against Greenlane alleges that on June 18, 2019, the San Francisco Board of Supervisors unanimously approved a ban on the sale and distribution of e-cigarette products within the city. It also endorsed a ban on the manufacturing of e-cigarette products on city property. According to the complaint, on this news, Greenlane’s share price declined 17%, and in subsequent trading days, declined another 15%, falling a total of nearly 68% by the time the complaint was filed.
The securities complaint against Greenlane was filed in the Southern District of Florida on September 11, 2019, just five months after the company’s IPO. A copy of the complaint can be found here. The complaint names as defendants the company itself; certain of its directors and officers; and the offering underwriters. The complaint alleges that the offering documents prepared in connection with the company’s IPO contain material misrepresentations and omissions. The complaint purports to be filed on behalf of investors who purchased the company’s securities pursuant to or traceable to the company’s offering, and seeks to recover on behalf of the class damages under the liability provisions of the Securities Act of 1933.
According to the Complaint, the company’s offering documents were false and misleading because the defendants failed to disclose to investors “(1) that the City of San Francisco had introduced a major initiative to ban the sale of e-cigarette product across three major cities and prohibit the manufacture of products at the headquarters of Greenlane’s key partner, JUUL Labs; (2) that, if approved, the initiative would materially and adversely impact the Company’s financial results and prospects; and (3) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis.”
On October 16, 2019, a second lawsuit was filed in the Southern District of Florida against Greenlane in connection with the company’s IPO. The complaint in the second lawsuit does not name the offering underwriters as defendants and updates the stock price information, but otherwise is substantially identical to the initial complaint. A copy of the second complaint can be found here.
Altria Group, Inc.
The second company to be caught up in this e-cigarette industry-related litigation is the major tobacco-product manufacturer and distributor, Altria Group, Inc. In December 2018, Altria announced that it had agreed to invest $12.8 billion in JUUL Labs, the top U.S. maker of e-vapor products, including e-cigarettes. As announced Altria Labs investment of JUUL represented a 35% economic interest in JUUL.
According to the securities class action lawsuit complaint that was subsequently filed against Altria, after Altria invested in JUUL, there were a series of media articles and other reports that the Food and Drug Administration (FDA) was, among other things, investigating e-cigarette companies sales practices, including the companies’ sales practices in connection with sales to minors, as well as other media articles that the FDA was investigating reports of respiratory health issues purportedly associated with e-cigarettes and other e-vapor products. Altria’s share price declines on these news reports. Finally, in September 2019, Altria announced that Phillip Morris was calling off discussions of a possible $200 billion merger with Altria due to concerns about the scrutiny of the vaping industry and with the Company’s 35% stake in JUUL.
On October 2, 2019, an Altria shareholder filed a securities class action lawsuit against the company in the Eastern District of New York. A copy of the complaint can be found here. The complaint names as defendants the company itself and two of its executives. The complaint purports to be filed on behalf of a class of persons who purchase Altria securities between December 20, 2018 and September 24, 2019. The complaint seeks to recover damages on behalf of the class based on alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
The complaint alleges that the defendants made false or misleading statements or failed to disclose that “(i) Altria had conducted insufficient due diligence into JUUL prior to the Company’s $12.8 billion investment, or 35% stake, in JUUL; (ii) Altria consequently failed to inform investors, or account for, material risks associated with JUUL’s products and marketing practices and the true value of JUUL, and its products; (iii) all of the foregoing, as well as mounting public scrutiny, negative publicity, and governmental pressure on e-vapor products and JUUL made it reasonably likely that Altria’s investment in JUUL would have a material negative impact on the Company’s reputation and operations; and (iv) as a result, the Company’s public statements were materially false and misleading at all relevant times.”
These complaints have only just been filed and it remains to be seen whether and to what extent that will be successful. The complaints have not yet been tested by motions to dismiss. In that regard, it is worth noting that the scienter allegations in the Altria complaint, which purports to state ’34 Act claims, are, shall we say scarce. The Greenlane Holdings complaint not only tries to boostrap regulatory developments into a ’33 Act claim, but it tries to do so based actions that clearly took place well after the offering. In connection with both sets of cases, the complaints purport to allege that, because of developments after significant corporate transactions, the disclosures made in connection with the prior transactions were misleading.
In connection with the claims against both of the companies, the plaintiffs are trying to convert the cascade of negative regulatory developments and adverse press reports involving e-cigarettes and other vaping products into violations of the federal securities laws. In that respect both of sets of litigation represent examples of what I have described as event-driven securities litigation, in which plaintiffs allege supposed securities law violations based not on accounting or financial misrepresentations but rather based on adverse developments in the company’s business operations that result in a share price decline.
Both sets of litigation also represent examples of how an industry sector can suddenly find itself thrust into the securities litigation maelstrom. The advent of sector-targeting does not necessarily mean any of the companies in fact committed securities fraud; rather, it means that the sector has managed to move its way to the center of the target in the plaintiffs’ lawyers’ shooting gallery. Given the amount of difficult press and adverse publicity that has developed about the industry and its products, it is hardly surprising that the industry has drawn the attention of the plaintiff securities lawyers.
It is worth noting that many of the companies in the industry are privately-held. These companies are not going to draw securities class action lawsuits and are less likely (arguably much less likely) to attract D&O litigation. That is not to say that, given the current tone of publicity surrounding the industry, that this could be a very long slog for many of the companies in the industry. And given the tone of much of the recent press, this could go on for a while.
Again, just because lawsuits may be filed does not mean the lawsuits are meritorious. Plaintiffs’ lawyers may be rushing into this space, attracted by the adverse media reports. But that does not necessarily mean these lawsuits will be successful from the plaintiffs’ perspective.