On November 21, 2019, when a plaintiff shareholder filed a securities class action lawsuit against Aurora Cannabis, Inc. and certain of its directors and officers, the company became the latest U.S.-listed Canadian cannabis company to be hit with a U.S. securities class action lawsuit. The lawsuit against Aurora came just one day after a different claimant launched a separate U.S. securities lawsuit against another Canadian-based and U.S.-listed cannabis company, Canopy Growth. These two companies join a growing list of cannabis-related firms that have been hit with securities suits this year. As discussed below, these cannabis-related company lawsuits are one of several factors contributed to the continued elevated level of securities class action lawsuit filings in the U.S.
As I noted in an earlier post about cannabis company-related securities litigation, one of the things that happened both in the lead up to and in the wake of the October 2018 legalization of cannabis-based products in Canada is that a number of Canada-based cannabis companies listed their shares on U.S. securities exchanges. As these companies have tried to ride the wave of investor enthusiasm for these kinds of companies, when the companies have disappointed investors, the companies’ share prices have plummeted – and in many instances the share price decline has been followed by a U.S. securities class action lawsuit.
The Aurora Cannabis Lawsuit
The latest example of these phenomena is the lawsuit that was filed on November 21, 2019 in the District of New Jersey against Aurora Cannabis and certain of its directors and officers. The lawsuit purports to be filed on behalf of a class of investors who purchased Aurora shares between September 11, 2019 and November 14, 2019. Aurora is an Alberta, Canada-based company whose shares are listed on the NYSE and that is in the business of production and distribution of cannabis products. A copy of the plaintiff’s complaint can be found here.
The lawsuit follows in the wake of the company’s November 14, 2019 press release (copy here), in which the company reported an unexpected revenue decline, missing analysts’ revenue estimates. The complaint alleges that the revenue disappointment, and the company’s stated reasons for the revenue decline, were contrary to prior statements the company had made earlier in the class period. The plaintiffs also allege that the earlier statements omitted reference to the various operating conditions the company later said contributed to the revenue decline. The complaint also alleges that the company’s earlier statements had omitted to mention the termination of capital expenditures on the company’s two facilities with the largest capacity for production.
The complaint alleges that the company’s share price declined on the news. The complaint alleges that the companies’ prior misrepresentations or omissions violated Sections 10(b) and 20 of the Securities Exchange Act of 1934. The complaint seeks to recover damages on behalf of the putative class.
The Canopy Growth Lawsuit
The Aurora Cannabis lawsuit was filed just one day after a plaintiff shareholder filed a separate securities class action lawsuit against Canopy Growth, an Ontario, Canada-based NYSE-listed company, and certain of its directors and officers. The Canopy Growth lawsuit, like the Aurora lawsuit, was filed in the District of New Jersey. The Canopy Growth lawsuit was filed by the same plaintiffs’ law firm as the one that filed the Aurora lawsuit. A copy of the Canopy Growth complaint can be found here.
The Canopy Growth lawsuit purports to be filed on behalf of a class of investors who purchased Canopy Growth securities between June 21, 2019 and November 13, 2019. Canopy Growth engages in the production, distribution, and sales of cannabis products in Canada. The lawsuit refers extensively to the company’s November 14, 2019 press release (copy here), in which the company said that it was modifying its “pricing architecture” and taking a C$32.7million restructuring charge for returns, return provisions, and pricing allowances.
The complaint alleges that in prior statements during the class period, the company had omitted to disclose that it was experiencing weak demand for its softgel and oil products, and that as a result the company would be forced to take a restructuring charge due to poor sales, excess returns, and excess inventory.
The complaint alleges that the company’s prior misstatements and omissions violated Sections 10(b) and 20 of the Securities Exchange Act of 1934. The complaint alleges further that the company’s share price declined following the November 14, 2019 disclosure. The complaint seeks to recover alleged damages on behalf of the putative class.
Earlier 2019 Cannabis-Related Securities Lawsuits
These two recently-filed lawsuits are merely the latest in a series of cannabis-related securities class action lawsuits filed in 2019. Thus, for example, as discussed here, on January 7, 2019, a plaintiff shareholder filed a securities class action lawsuit against Liberty Health Sciences, Inc., a Canadian-based cannabis company. Similarly, as discussed here, on January 21, 2019, a plaintiff shareholder filed a securities class action lawsuit against the cannabis company 22nd Century Group, a U.S.-based cannabis company that is alleged to have engaged in stock manipulation.
In addition, as I discussed in an earlier post (here), on July 10, 2019, a plaintiff shareholder filed a securities class action lawsuit against the Canada-based cannabis company, CannTrust Holdings and certain of its directors and officers. Notably, CannTrust has also been hit with a securities lawsuit in Ontario (about which refer here) and a separate state court lawsuit in Santa Clara County, California.
In addition to these lawsuits, there have also been two other cannabis-related securities class action lawsuits filed in 2019. On August 6, 2019, as discussed here, a plaintiff shareholder filed a securities class action lawsuit against Canada-based cannabis company Curaleaf Holdings. And, as discussed here, on September 25, 2019, a plaintiff shareholder filed a securities suit against Canada-based cannabis company Sundial Growers.
EDITOR’S NOTE: A loyal reader pointed out to me that I may want to add to the list of 2019 cannabis-related securities class action lawsuits the securities suit filed in September 2019 against Greenlane Holdings, Inc. As I discussed in an earlier post about the Greenlane Holdings lawsuit, Greenlane is an e-cigarette company; however, the company also distributes hemp-derived CBD. Reasonable minds may disagree about whether or not the Greenlane lawsuit belongs on this list; at the time the lawsuit was filed, I wrote about it as a suit against an e-cigarette company rather than a suit against a cannabis-related company.
ADDITIONAL EDITOR’s NOTE: On November 26, 2019, a plaintiff shareholder filed yet another cannabis-related securities class action lawsuit against a Canadian-based, U.S.-listed company. The lawsuit, filed in the Southern District of New York, names as defendants HEXO Corp. and certain of its directors and officers. A copy of the complaint can be found here.
The Role of the “Emerging Law Firms”
Interestingly, the 22nd Century Group, Curaleaf Holdings, and Sundial Growers lawsuits were all filed by the same law firm as filed the Aurora Cannabis and Canopy Growth lawsuits. These lawsuits and the other 2019 lawsuits were all filed by plaintiffs’ law firms who have been euphemistically referred to as the “emerging growth law firms” that are responsible for so much of the growth in securities class action litigation in recent years. (For a discussion of the “emerging law firms” and their role in the growth of securities class action litigation, refer here.)
Prior Cannabis-Related Securities Litigation
The 2019 wave of cannabis-related securities litigation was not unprecedented. There were in fact a number of cannabis-related securities suits filed in 2018.
For example, as I discussed in a prior post (here), in September 2018, Canadian cannabis producer and distributor Cronos Group was hit was a securities class action lawsuit in the Southern District of New York. In addition, as discussed here, in October 2018, shareholders filed securities class action lawsuits in the Central District of California and in the Southern District of New York against Canadian-based Cannabis e-commerce company Namaste Technologies, Inc. and certain of its directors and officers. And, as discussed here, on November 2, 2018, cannabinoid-based therapy company India Globalization Capital, Inc. was hit with a securities class action lawsuit in the District of Maryland.
The latest lawsuits have only just been filed and it remains to be seen how they will fare. Along those lines, it seems important to note that, as I read the complaints, the respective courts processing these cases will, upon consideration of the defendants’ motions to dismiss, find it challenging to identify allegations in the complaints sufficient to satisfy the requirement that the plaintiffs’ plead with specificity allegations sufficient to support an inference that the defendants acted with scienter.
But whatever the merits of these suits, it is clear that the plaintiffs’ bar, or at least a portion of the plaintiffs’ bar, has targeted companies in the cannabis sector, including but not limited to Canadian U.S.-listed cannabis companies.
By my count, there have been at least seven federal court cannabis-related securities class action lawsuits filed in the U.S. in 2019, including the two filed just in the last week. These seven join the several additional lawsuits that were filed against cannabis companies in 2018.
At this point in the calendar year, it is clear that 2019 will be another year of elevated federal court securities class action lawsuit filings, following on the heightened pace of securities litigation filings in 2017 and 2018. By my unaudited count, as of Friday November 22, 2019, there have been 374 federal court securities class action lawsuits filed this year. The current filing pace projects to a year-end total of about 418 federal court securities class action lawsuit filings, which were it to happen would eclipse 2017’s near record annual total of 412 (exceeded only by the IPO laddering lawsuit-inflated total of 498 in 2001).
Of the securities suits filed this year, many are merger objection lawsuits. Setting the merger objection suits to the side, there have been a total of approximately 233 “traditional” securities class action lawsuits YTD. The seven cannabis-related lawsuits are not a huge part of this total, but they are one of many factors that are swelling the totals and contributing to the elevated securities class action lawsuit filing levels this year.
Another thing that has driven the securities class action lawsuit filings this year has been the high number of securities lawsuits filed in 2019 against non-U.S. companies. By my count, of the approximately 374 total securities lawsuits filed YTD, 54 involve non-U.S. companies. Eight of the 54 involve Canadian companies, include six Canadian cannabis companies. So the cannabis-related securities litigation is also a significant factor contributing to the wave of litigation against non-U.S. companies.
It is interesting to note that while there has been an outbreak of cannabis-related securities litigation this year, these lawsuits are not being filed by the top plaintiffs law firms. Rather, as noted above, all of the 2019 cannabis-related lawsuits have been filed by the small group of plaintiffs’ firms euphemistically referred to as the “emerging law firms” that have been such a significant factor contributing to the elevated levels of securities litigation.
Readers interested in these cannabis-related issues may wish to refer to an earlier guest post on this site which examined the challenge and opportunity that the growth of cannabis-related businesses present for insurers, here.
Upcoming Global D&O Event: On Tuesday December 3, 2019, I will be participating as a panelist in a Chubb Agency Education event entitled “Impact of Global Litigation Trends on Multinational D&O Insurance.” I will be joined on the panel by my good friends Perry Granof, of Granof International LLC, and David Williams, of Chubb. Among other things, the webinar will address the global rise of collective investor actions; the rise of cross-border regulatory collaboration; and the significance of third-party litigation funding. The hour-long session will begin at 2:00 pm EST and is free and open to readers of The D&O Diary. For more information and to register, please refer here.