Bass, Berry & Sims attorney Chris Lazarini discussed the class action suit brought against Party City alleging the company failed to disclose material facts in SEC documents when it did not discuss the impact the decline in sales of merchandise related to the Disney movie, Frozen had on its overall performance. Plaintiffs sought relief under Sections 11, 12(a)(2), and 15 of the Securities Act. The court disagreed, ruling that the omission would not have misled reasonable investors.
Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.
Jones vs. Party City Holdco, Inc., No. 15-cv-9080 (S.D. N.Y., 2/1/17)
To state a claim under Section 11 or 12(a)(2) of the Securities Act of 1933, plaintiffs must allege that the registration statement or prospectus contained an untrue statement of material fact.
This putative stock drop class action against Party City, two beneficial owners of its stock and four securities underwriters, was brought on behalf of all persons who purchased shares in or traceable to Party City's April 2015 initial public offering. Plaintiffs alleged violations of Sections 11, 12(a)(2), and 15 of the Securities Act, focusing on the Company's statement that "none" of its third-party intellectual property licenses were "individually material to our aggregate business." Plaintiffs argued that the company's Registration Statement and Prospectus failed to disclose that the company's 2014 sales were driven in large part by sales of Disney's Frozen merchandise, sales that cooled in 2015. The omission was material, Plaintiffs argued, because the Company later disclosed that sales of its other licensed products could not offset the Frozen "phenomenon." Defendants moved to dismiss, arguing that the statement related to possible risks if the Company lost one of its product licenses and said nothing about future demand or sales.
Both the Section 11 and Section 12 claims require a showing of materiality. Even drawing all reasonable inferences in Plaintiffs' favor, the Court finds that they have not adequately alleged that the alleged misstatement was false or material. Just because the Company later described Frozen's performance as "phenomenal" and "extraordinary," the Court concludes, does not mean that it had a material impact on the Company's aggregate business. When the Registration Statement and Prospectus are viewed as a whole, the Court finds, no reasonable investor could have been misled by the challenged statement, as Plaintiffs alleged no connection between the statement and the Company's business as a whole. Having dismissed the claims related to the primary allegations, the Court also dismisses the Section 15 claims.
Perhaps the Duke of Weselton was wrong when he said, "I knew there was something dubious going on here."