Bass, Berry & Sims attorney Chris Lazarini analyzed a case in which a group of shareholders claimed misleading statements in a press release caused them to sell stock early and lose money in a subsequent bidding war. The court examined four elements of the plaintiffs’ Section 10(b) claim – falsity, scienter, reliance and causation – and granted summary judgment to defendants because plaintiffs could not establish scienter and causation. 

Chris provided the analysis for Securities Online Litigation Alert (SOLA). 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 SOLA, please visit the SOLA website to sign up for the newsletter.

Gross vs. GFI Group, Inc., No. 14-cv-9438 (S.D. N.Y., 4/20/18) 

*Whether a statement would give an investor a false impression is generally a question reserved for the fact-finder. 

**A duty to speak arises when necessary to make existing statements not materially misleading. 

***To prove a causal link between an alleged fraud and economic harm suffered, a plaintiff must distinguish the alleged fraud from the tangle of information affecting a stock’s price. 

This putative Section 10(b) class action was filed after GFI, an inter-dealer broker (“IDB”), issued a press release (the “Release”) announcing a proposed merger with CME that would pay GFI shareholders a slight premium over the current market value. The Release disclosed that following the merger, a private consortium led by GFI’s Executive Chairman and largest shareholder (Gooch) and Chief Executive Officer (Heffron) – also Defendants – would purchase back the IDB business at a substantial discount. Plaintiff’s fraud allegations focused on Gooch’s statements in the Release that management was focused on “optimizing GFI’s value” and the transaction presented a “singular and unique opportunity to return value.” The Release said nothing about another IDB’s (“BCG”) prior interest in purchasing GFI at a higher price, or that Gooch opposed any transaction other than the CME merger. In the six weeks following the Release, BCG triggered a bidding war, during which GFI released a Proxy Statement disclosing all events leading to the proposed CME merger. Subsequently, GFI shareholders rejected the CME merger and BCG completed its tender offer. The putative class consists of shareholders who sold their stock after the Release and before BCG announced its tender offer.

In considering Defendants’ Rule 12(b)(6) motion to dismiss, the Court analyzes four elements of Plaintiff’s 10(b) claim: falsity, scienter, reliance and causation. It favors Plaintiffs on the falsity and reliance elements. Here, a jury might conclude that Gooch’s statements in the Release were material misstatements because a reasonable person might interpret them as saying that the proposed CME merger provided the “best” possible share price and “best” opportunity to maximize GFI’s value, facts which Gooch knew to be false. Similarly, a jury might conclude that Gooch’s silence about BCG’s interest in GFI was a material omission because the words “singular” and “unique” might reasonably be construed as being incomplete and inaccurate and because, having spoken on the subject, GFI had a duty not to make its statements materially misleading. The Court rejects Defendants’ argument that Gooch’s statements were forward-looking, entitled to protection under the PSLRA’s safe harbor provision. Rather, the statements are comments on the merits of the proposed merger as known at the time, not a forecast of future events. There is also enough evidence of materiality in Gooch’s statements to withstand summary judgment on the reliance element.

However, the Court grants summary judgment as to scienter and causation. Although Gooch’s and Heffron’s potential gains from buying back GFI’s IDB unit after the merger at a substantial discount might satisfy the motive requirement, any fraudulent scheme (if one existed) was doomed to fail because the detailed Proxy Statement provided shareholders with all information needed to assess the proposed merger before voting on it. Causation also fails because Plaintiffs cannot disentangle the news that BCG intended to make a tender offer (the corrective information) from other firm-specific facts simultaneously coming to light (including that BCG acquired a significant stake in GFI and a bidding war might ensue), of which GFI was ignorant at the time of the Press Release. In view of this mix of corrective and new information, the Court concludes, there was no way a jury could determine whether the alleged fraud “caused” Plaintiffs’ losses. 

Having determined Plaintiffs failed to establish the alleged primary violation of the securities laws, the Court also grants summary judgment on Plaintiffs’ Section 20(a) control person liability claims.