Judge Kaplan recently reminded the Plaintiffs’ bar that there’s room for a company to be publicly optimistic about its prospects without violating the securities laws, even when it turns out that its optimism is misplaced. As Judge Kaplan shows, rosy expectations are quite different from fraud.
In Prime Mover Capital Partners v. Elixir Gaming, Judge Kaplan dismissed all but two state law claims,kicking out all federal causes of action and forcing the lead Plaintiff, Prime Mover, out of the litigation altogether. The opinion has a nice review of the critical “safe harbor” provision for forward looking statements. Specifically, Elixir Gaming Technologies (“EGT”) represented that it was about deploy over 3,000 gaming machines to casinos with an average win rate of $125 U.S. per day, of which EGT would get a 20% cut. When it was revealed that the $125 per day rate would not be achieved at launch, but only after 12 months of operation, EGT’s stock price fell dramatically.
The plaintiffs, hedge fund investors, alleged that EGT’s misrepresentations artificially inflated the stock price, and damaging plaintiffs when the truth was ultimately revealed. On that basis, they brought almost a dozen securities fraud, state statutory, common-law, and other claims.
Judge Kaplan was unconvinced. Only one of several alleged misrepresentations – the $125 per day win rate – adequately demonstrated both transaction causation and loss causation (i.e., that the Plaintiff purchased the securities because of the false information, and that the price drop occurred once the truth about the false information became public). However, even this claim could not overcome the substantial hurdle posed by the “safe harbor” provision of the Private Securities Litigation and Reform Act (“PSLRA”).
As Judge Kaplan pointed out, “[u]nder the PSLRA, ‘a defendant is not liable if the forward-looking statement is identified and accompanied by meaningful cautionary language or is immaterial or the plaintiff fails to prove that it was made with actual knowledge that it was false or misleading.’” Moreover, the PSLRA incorporates a heightened pleading standard for this last element, scienter. A plaintiff looking to jump this hurdle must allege facts sufficient to support “a strong inference of scienter;” the inference “must be more than merely plausible or reasonable,” and rise to a level that is “cogent and at least as compelling as any opposing inference of nonfraudulent intent.”
Here, Plaintiffs completely failed to demonstrate fraudulent intent on the part of EGT. Their allegations “consist primarily of bald assertions that the defendants knew, or should have known, that they had no basis for asserting the expected $125 average net win figure and that they lied in order to inflate EGT’s stock price.” The $125 per day win rate fell within the class of forward-looking statements entitled to safe harbor, and the Plaintiffs did nothing to overcome this presumptive protection.
In the Southern District, securities fraud plaintiffs may occassionally hit the jackpot, but it is very clear that the PSLRA gets the house’s odds.
(This post was drafted with the able help of my colleague, Mike McMahan)