Curaleaf got some good news in mid-February when a federal court dismissed a class action lawsuit alleging it violated federal securities law. We wrote about this lawsuit when it was first filed in August 2019 and tracked various issues with Curaleaf in other posts (see links below). Judge Cogan’s decision of New York’s Eastern District reflects the importance of providing meaningful, appropriate, and timely information in their securities filings for companies selling CBD products.
A motion tests the adequacy of a complaint, as my colleague Jihee Ahn recently stated. This means that a complaint must contain sufficient facts which, if applicable, contain an allegation that would enable a court to reasonably infer the liability of the defendant. A motion to dismiss a complaint then essentially argues to the court that even if the facts alleged in the complaint are correct, the plaintiff has not created a legal ground for liability and therefore the complaint should be dismissed.
With that in mind, let’s review some key facts. Curaleaf was founded in 2018 through a reverse acquisition between a Canadian company and a Delaware company and is listed on the Canadian Stock Exchange. On October 26, 2018, Curaleaf announced the completion of the business combination and filed a “Listing Statement” with the Electronic Document Analysis and Access System (“SEDAR”). SEDAR is the Canadian equivalent of the US Electronic Data Collection, Analysis, and Retrieval System (“EDGAR”) and is used to enable electronic filing of securities information and enabling information dissemination.
The listing declaration submitted to SEDAR had a significant impact on the application for dismissal. The listing declaration states in part:
- The company would generate a significant portion of the revenue from cannabis in the United States, the industry of which is illegal under federal law.
- Cannabis is classified as a List I drug, which under federal law means that it is a substance with high potential for abuse that is not approved for medical purposes.
- that the FDA has not approved marijuana as a safe and effective drug for any indication, and
- The company’s products are not FDA approved.
The listing statement explained the legal risks of participating in the cannabis industry and the potentially “material adverse effects” of that risk on the company and its share price.
Shortly after filing the listing statement, Curaleaf began trading on the Canadian Stock Exchange. On November 21, 2018, Cureleaf published a press release describing its “Premium Hemp-Based CBD Products”. The press release advertised the products for the treatment of a wide variety of diseases (chronic pain, depression, PTSD, Parkinson’s disease, Alzheimer’s disease) but did not discuss FDA approval. The press releases published on November 26th and 28th and on December 4th, 5th and 14th also did not contain any information on the approval by the FDA.
To provide a ground for a federal securities fraud lawsuit, a plaintiff must assert facts that the defendant made a false statement to a scientist or omitted a material fact (i.e., a culpable state of mind) and that the plaintiff’s confidence in the lawsuit The defendant caused the plaintiff’s injury. According to federal law, any allegedly misleading statement and the reasons for misleading the statement must be stated in the complaint. This is not an easy task.
Here, plaintiffs alleged that the company’s public statements were false and misleading because defendants failed to fully disclose the illegality of the sale of CBD products under federal law due to a lack of FDA approval.
The problem for the plaintiffs, the court said, is that the listing statement “publicly and repeatedly recognized precisely the information that the plaintiffs believe was hidden: the cannabis-based products are not FDA approved, and therefore the As a result, the court ruled that an essential fact relating to the alleged infringement was not omitted. Plaintiffs argued that Curaleaf’s press releases “should” have established that the company’s products were illegal, but citing long-standing precedent, the Court ruled that not every public statement made by Curaleaf need contain the full list of information contained in its securities filings.
The ruling contains several other “ins and outs” related to pleadings and securities lawsuits. For the present purposes, however, the judgment shows the importance of providing timely and accurate information about securities. That essentially won the day for Curaleaf here.
For more information on Curaleaf and cannabis securities, please visit:
Full Disclosure: My colleague Vince Sliwoski signed a $ 5 million mezzanine loan for a Curaleaf acquisition some time ago on behalf of a third party.