Pearlstein v. Blackberry Limited: Second Consolidated Amended Complaint Alleged Sufficient Facts to Infer Securities Fraud
In Pearlstein v. Blackberry Ltd, 13-CV-7060 (TPG), 2017 BL 321990 (S.D.N.Y. Sept. 13, 2017), the United States District Court for the Southern District of New York granted in part and denied in part Marvin Pearlstein’s (“Plaintiff”) motion to amend his complaint against Blackberry Limited (“Defendant”). The court found Plaintiff’s amended complaint alleged sufficient facts to show violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 violations but did not establish Defendant violated SEC Item 303 of Regulation S-K of the Securities Act of 1933.
On June 2, 2014, Plaintiff filed a class action complaint alleging Defendant made false statements regarding the sales and returns of the Blackberry Z10 smartphone (“Z10”). The court granted Defendant’s motion to dismiss based on lack of sufficient claims of material misrepresentation and scienter. The Second Circuit affirmed but remanded the case for the court to reconsider Plaintiff’s motion to amend in light of new evidence and the Supreme Court’s decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015).
In his original complaint, Plaintiff alleged Defendant made false statements in two press releases and in its 2013 and 2014 financial reports. One of the press releases challenged a report released by Detwiler Fenton (“Fenton”) regarding Z10 return rates. After the original complaint was filed, on June 4, 2015, James Dunham (“Dunham”), the COO of one of Defendant’s franchisors, stated in a criminal plea hearing that he sold confidential Z10 sales and return information to Fenton. Subsequently, Plaintiff filed a motion to amend, alleging Dunham’s statements supported Section 10(b) and Rule10b-5 violations.
Section 10(b) and Rule 10b-5 prohibit manipulative or deceptive securities sales practices. A plaintiff must allege facts that show a material misrepresentation; scienter; a connection between the misrepresentation and the purchase or sale of a security; reliance upon the misrepresentation; economic loss; and causation. Misrepresentation requires asking what a reasonable investor would find important in making an investment decision. Under Omnicare, a misrepresentation includes statements of opinion that omit conflicting facts a reasonable investor would find material. Scienter can be inferred from recklessness, which requires alleging a defendant knew or had access to facts contradicting his public statements. Causation requires showing the withheld information, upon disclosure, lowered the security’s value. SEC Item 303 of Regulation S-K requires a company to disclose any known trends that may have an unfavorable impact on its net sales or revenues.
The court found Dunham’s disclosed sales data made plausible the claims that Defendant had knowledge of facts contradictory to the press releases and financial reports, and overstated sales and return numbers. The court held that since non-disclosure of such information would likely mislead a reasonable investor, Plaintiff alleged sufficient facts to show material misrepresentation, scienter, and loss and causation. Finally, the court found Plaintiff did not establish a plausible claim for violations of SEC Item 303 because Defendant is a Canadian entity to which the rule is not applicable.
For the reasons above, the court granted Plaintiff’s motion to amend the Section 10(b) claims and denied the motion to amend the Item 303 claim.
The primary materials for this case may be found on the DU Corporate Governance website.