ERIE COUNTY EMPLOYEES RETIREMENT SYSTEM v. NN INC LLC LLC CJS LLC (2021)

The following e-filed documents, listed by NYSCEF document number (Motion 001) 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 34, 35, 36, 38, 39, 40 were read on this motion to/for DISMISS.

The defendants' motion to dismiss pursuant to CPLR §§ 3211(a)(1) and (a)(7) must be denied. The well plead amended complaint alleges that the offering documents issued in connection with the secondary public offering (SPO) of the securities of NN, Inc. (NN) was materially misleading because (i) it materially inaccurately described the business of NN as having changed from a “ball and roller operation” to a “global diversified company” when, in fact, it had not, and (ii) because it failed to disclose that certain identified risks were not mere potential business risks but events that had already materialized that materially atrophied NN's business and value. Thus, the plaintiffs' have stated a claim under the 1933 Act (hereinafter defined).

The Relevant Facts and Circumstances

The instant action asserts strict-liability and negligence claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the 1933 Act) against: (i) NN, a “global industry company that designs and manufactures a range of products from high-precision metals to plastic components and assemblies for multiple end markets,” (ii) certain of NN's senior executives and directors who signed the Registration Statement in connection with its SPO, and (iii) each of the investment banks that acted as underwriters for the SPO (NYSCEF Doc. No. 18)

The gravamen of the amended complaint (NYSCEF Doc. No. 18) is that the SPO documents presented a materially false and misleading picture of NN's business by characterizing NN as a “global diversified company” operating in three business segments focused on discreet end markets: (i) mobile solutions (general industrial and automotive), (ii) life sciences (medical), and (iii) power solutions (electrical, aerospace and defense), and did not adequately disclose certain known risks that had already materialized and negatively affected the company's project stability and revenue.

To wit, NN characterized its operations in these three business segments as focused on discreet end markets that gave it a “[l]ong-term blue-chip customer base” of predominantly non-retail customers with limited volatility and significant growth potential (id., ¶¶ 59-61; Prospectus at S-3-S-4 [NYSCEF Doc. No. 27]). In fact, however, the amended complaint alleges that all the while NN hid the fact that at the time of the SPO, the mobile solutions business segment, which accounted for 40% of the company's business, was experiencing an undisclosed slow-down in its operations in China due to increased regulation of the peer-to-peer (P2P) lending that had fueled the significant growth in auto sales in that country. In addition, revenue growth in NN's power solutions business segment, which accounted for 20% of NN's revenues, had purportedly stalled prior to the SPO due to the loss of two large customers. These events were allegedly all adversely impacting NN's revenues, margins, earning, and free cash flow (FCF), which all hindered NN's efforts to reduce its large debt. Plaintiffs claim that the failure to disclose the foregoing, and the risks and uncertainties arising therefrom, rendered the SPO documents materially misleading and incomplete. When these issues were disclosed just two months after the SPO, NN's stock price fell by nearly 50% below the SPO price and never recovered (NYSCEF Doc. No. 18, ¶¶ 9, 73-74).

Discussion

It is well established that on a motion to dismiss pursuant to CPLR 3211, the complaint must be liberally construed. Under CPLR § 3211(a)(1), dismissal is only warranted if the documentary evidence submitted conclusively establishes a defense to the asserted claims as a matter of law (Leon v Martinez, 84 NY2d 83, 88 [1994]). Under CPLR § 3211(a)(7), the court must “accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory” (id. at 87-88).

I. The Heightened Pleading Standard Does Not Apply

As this court has previously explained in Matter of Uxin Ltd. Sec. Litig. v XXX, a heightened pleading standard does not apply to the plaintiffs' claims under the 1933 Act because the claims are based on an alleged breach of duty imposed by the 1933 Act. At bottom, these are negligence-based claims (66 Misc 3d 1232 [A] [Sup Ct NY Cnty Mar 9, 2020]). Thus, a heightened pleading standard need not be satisfied because the defendants' state of mind is not relevant. Scienter is not an element under Sections 11 and 12(a)(2) of the 1933 Act (i.e., as opposed to a claim based on fraud or otherwise under the Securities and Exchange Act of 1934) (id.; In the Matter of Netshoes Sec. Litig., 64 Misc 3d 926 [Sup Ct NY Cnty July 16, 2019]). In any event, for the reasons discussed below, even if the heightened pleading standard applicable to claims of fraud and misrepresentation were to apply, it would be satisfied under the circumstances of this case.

II. The Amended Complaint Adequately Alleges Violations under Sections 11 of the 1933 Act

Section 11 of the 1933 Act provides:

In case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the facts stated therein not misleading, any person acquiring such security ․ [may] sue

(15 USC § 77k[a] [emphasis added]).

“Section 11 [ ] creates two ways to hold issuers liable for the contents of a registration statement—one focusing on what the statement says and the other on what it leaves out” (Omnicare, 135 S Ct. at 1323). In either case, Section 11 imposes strict liability on issuers and signatories and negligence liability on underwriters (NECA-IBEW Health & Welfare Fund, 693 F3d at 156).

In addition, Item 303 (Item 303) of SEC Regulation S-K (17 CFR § 229.303) requires the disclosure of “trends or uncertainties ․ that the registrant reasonably expects will have a material ․ unfavorable impact on ․ revenues or income from continuing operations’ ” (Litwin v Blackstone Group, L.P., 634 F3d 706, 716 [2d Cir 2011]).

There is no question that defendants had a duty to disclose that (i) NN's mobile solutions business segment was experiencing a sharp decline in its business in China and (ii) that NN's power solutions business segment had lost two large customers. The defendants' argument that the SPO documents warned investors of the risks that plaintiffs claim materialized fails.

To serve as a shield, “a cautionary statement must discredit the alleged misrepresentations to such an extent that the risk of real deception drops to nil” (In re Facebook, Inc., IPO Secs. & Derivative Litig., 986 F Supp 2d 487 [SD NY 2013]). The risk warnings cited by the defendants were generic in nature and could have applied to any company. Nor can it be said that the alleged misstatements in the SPO were mere puffery, forward-looking or otherwise non-actionable because the amended complaint alleges that defendants were aware at the time of the SPO of present facts that made the statements in the SPO misleading and “whose accuracy could be determined at the time the statements were made” (In re Vivendi Universal, S.A. Secs. Litig., 765 F Supp 2d 512, 569 [SD NY 2011]). In other words, the argument that the statements in the SPO were forward-looking protected statements fails because the allegations are that they were false at the time they were made. The fact that the SPO documents contained generic, boilerplate risk warnings about the risks of investment does not absolve the defendants of liability (In re Bioscrip, Inc. Secs. Litig., N2015 WL 3540736, at *6 [SD NY June 5, 2015)].

Each of these issues adversely impacted NN's ability to drive the growth in revenue, operating margins, and FCF necessary to address the Company's enormous debt load. NN could not speak a “half-truth” See Meyer v JinkoSolar Holdings Co., 761 F3d 245, 250 [2d Cir 2014]). By promoting NN's “significant exposure to emerging markets in Asia,” which the SPO documents described as “provid[ing] resistance to localized market and geographic fluctuations and help[ing] [to] stabilize[ ] overall product demand,” and the “significant growth potential” of NN's facilities in this region, the defendants put NN's operations and prospects in China “in play” and triggered a duty to disclose “the whole truth” concerning these issues (id.; In re Mylan N.V. Secs. Litig., 2018 WL 1595985, at *6 (SD NY Mar. 28, 2018). Similarly, the SPO documents' discussion of NN's diverse and “[l]ong-term blue-chip customer base,” which purportedly “limit[ed] volatility” and “provide[d] enhanced sales visibility,” obligated NN to disclose that its power solutions business segment had lost two of its larger customers. Put another way, under either a quantative or a qualitative analysis, the disclosure of the omitted information in the SPO was required (see Litwin, 634 F3d at 717) and the plaintiffs have stated a claim with sufficient particularity to satisfy CPLR § 3016 (b) even if it applied, which it does not.

III. The Amended Complaint Adequately Alleges Violations under Sections 12 of the 1933 Act

Section 12(a)(2) of the 1933 Act imposes liability under similar circumstances to that of Section 11 against certain “statutory sellers” for misstatements or omissions in a prospectus (15 USC § 77l [a][2]). The defendants argue that amended complaint insufficiently alleges that they were “statutory sellers” under Section 12. The definition of a “statutory seller” is not limited to the person who directly passes title to the securities but also includes persons who solicited the purchase of securities to serve its own or the securities' owner's interests (Perry v Duoyuan Printing, Inc., 2013 WL 4505199, at *10 [SD NY Aug. 22, 2013]). Whether the defendants may qualify as “statutory sellers” is generally a question of fact that cannot be properly decided on the pleadings (see Degulis v LXR Biotechnology, Inc., 1997 WL 20832, at *6 [SD NY Jan. 21, 1997] [“whether a defendant is a ‘seller' under Section 12(2) is a question of fact”]; In re Scottish Re Grp. Secs. Litig., 524 F. Supp. 2d 370, 400 [same]).

The amended complaint alleges that the defendants: (i) participated in the promotion and sale of NN common stock to investors at various events; (ii) did so to promote their own financial interests and those of the company; (iii) drafted and disseminated the SPO documents; and (iv) signed the Registration Statement (NYSCEF Doc. No. 18, ¶¶2, 15-32, 91-94). This is sufficient to ground liability under Section 12 (Briarwood Invs. Inc. v Care Inv. Trust Inc., 2009 WL 536517, at *4 [SD NY Mar. 4, 2009]).

For the avoidance of doubt, Labourers' Pension Fund of Central & Eastern Canada v CVS Health Corp. does not compel a different result. In Labourers' Pension Fund, the Appellate Division held that individual defendants cannot be deemed statutory sellers “merely because they reviewed, approved, and signed the registration statement” (192 AD3d 424 [1st Dept 2021]). The allegations set forth in the amended complaint, however, are not so limited. In the amended complaint, the plaintiffs allege that the individual defendants solicited the investing public to purchase NN securities pursuant to the SPO by attending road shows and other events to meet with investors and promote NN stock (NYSCEF Doc. No. 18, ¶ 22). Thus, the individual defendants may qualify as “statutory sellers” because they successfully solicited the purchase of the securities at issue here (In re iDreamSky Tech. Ltd. Secs. Litig., 236 FSupp3d 824, 831-32 [SD NY 2017]). If the allegations in the amended complaint are proven to be true, the individual defendants did more than just sign the requisite paperwork (cf. Labourers' Pension Fund, supra). Therefore, the motion must be denied at this stage of the pleadings.

IV. The Amended Complaint Adequately Alleges Violations under Sections 15 of the 1933 Act

To state a claim under Section 15 of the 1933 Act, a plaintiff must allege (i) a primary violation by a controlled person and (ii) control by the defendant of the primary violator (In re Refco, 503 F Supp 2d 611, 637 [SD NY 2007]). Here, the plaintiffs have adequately stated Section 15 claims against the individual defendants by having properly pleaded a “primary violation” by NN, and that the individual defendants were controlling persons within the meaning of Section 15 with control over NN (Federal Hous. Fin. Agency for FNMA v Nomura Holding Am., Inc., 873 F3d 85, 99 (2d Cir 2017). This is sufficient at this stage of the pleadings.

Accordingly, it is

ORDERED that the motion to dismiss is denied, and it is further

ORDERED that the defendants are directed to file an answer within 20 days of this decision and order; and it is further

ORDERED that the parties are directed to appear for a remote preliminary conference on June 21, 2021 at 11 A.M.

Andrew Borrok, J.