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On April 4, 2024, the State of New York, Appellate Division,
First Judicial Department (the “First Department”)
affirmed dismissal of a securities class action against a mass
media and entertainment company (the “Company”) and two
of its executives (the “Individual Defendants”), and
affirmed-in-part and reversed-in-part the denial of the motions to
dismiss filed by the underwriters of the offerings at issue (the
“Underwriters”). Camelot Event Driven Fund, et al. v.
Morgan Stanley & Co. LLC, et al., No. 2023-00983 (1st
Dep’t Apr. 4, 2024). Plaintiffs alleged defendants violated
Sections 11, 12 and 15 of the Securities Act of 1933 (the
“Securities Act”) by concealing certain information from
the offering materials issued in connection with the Company’s
March 2021 secondary and initial offerings (the
“Offerings”).
Plaintiffs alleged that defendants improperly concealed from the
Company’s offering materials that a now-defunct asset
management company (the “Asset Management Company”) had,
through investments known as “total return swaps,”
concentrated its assets in the Company that were ultimately
liquidated due to the Asset Management Company’s financial
distress—which allegedly reduced the value of the stock that
plaintiffs purchased in Offerings. The Company argued that it was
not aware of the Asset Management Company’s position and
therefore could not have disclosed what it did not know. The
Supreme Court of New York agreed and dismissed the claims as
against the Company and Individual Defendants, but denied the
motions to dismiss filed by the Underwriters.
On appeal, the First Department affirmed the dismissal decision
as it related to the dismissal of claims against the Company and
Individual Defendants. In so affirming, the First Department cited
NIO Inc. Sec. Litig., 211 AD.3d 464, 466 (1st Dept 2022),
which held that a company was not liable under the Securities Act
for failing to disclose an alleged issue where plaintiffs had not
alleged that the company was even aware of the issue at the time of
the offering and, as such, the Company “could not have
disclosed what it did not know.” In so holding, the First
Department clarified that NIO was not limited to claims
brought under Item 303 of Regulation S-K, as plaintiffs contended
on appeal.
The Court separately reversed-in-part and affirmed-in-part the
part of the Supreme Court of New York’s decision that denied
the motions to dismiss filed by other defendants in the action.
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