In re Lions Gate Entertainment Corp. Securities Litigation
165 F. Supp. 3d 1
S.D.N.Y.
2016

Background

  • Plaintiffs (KBC Asset Management and others) brought a consolidated securities class action under §10(b)/Rule 10b-5 and §20(a) against Lions Gate and four senior executives, alleging failure to disclose an SEC investigation and possible settlement arising from 2010 transactions designed to thwart Carl Icahn’s takeover.
  • The challenged transactions occurred in July 2010: exchange of KCM notes, sale to director Mark Rachesky, and conversion to stock that increased Rachesky’s stake and diluted Icahn; Lions Gate filed related disclosures in 2010 and later faced NYSE inquiries and an SEC investigation starting 2010–2011.
  • SEC issued subpoenas in 2011 and Wells Notices in July 2012; settlement negotiations culminated in Lions Gate’s signing an offer on February 14, 2014 and a public administrative order on March 13, 2014, with Lions Gate paying a $7.5 million civil penalty and admitting certain omissions about the 2010 transactions.
  • Plaintiffs’ Class Period ran from Feb. 11, 2013 to Mar. 13, 2014; they allege Lions Gate’s Forms 10-Q/10-K during that period were misleading for failing to disclose the SEC investigation/Wells Notices and for stating pending claims were not expected to have a material adverse effect.
  • Defendants moved to dismiss under Rule 12(b)(6), arguing no duty to disclose the investigation/Wells Notices, no materially misleading statements during the Class Period, and insufficient scienter; the court granted the motion and dismissed all claims.

Issues

Issue Plaintiff's Argument Defendant's Argument Held
Whether omission of SEC investigation/Wells Notices during Class Period was a material omission under §10(b)/Rule 10b-5 Failure to disclose the SEC staff investigation and Wells Notices was material and rendered 2013–2014 filings misleading No duty to disclose preliminary investigation or Wells Notices; investigation alone is not a pending proceeding and not necessarily material Dismissed — no duty to disclose and plaintiffs failed to plead materiality under Basic
Whether specific 2013–2014 Form 10-K/10-Q statements were rendered false or misleading by omission Lions Gate’s standard disclosures about pending claims were deceptive because they omitted the SEC Enforcement Division’s investigation and Wells Notices The filings accurately stated the company’s belief that pending claims would not have a material adverse effect; plaintiffs failed to allege falsity or that opinion lacked factual basis Dismissed — statements not plausibly false or misleading; plaintiffs didn’t plead omitted facts undermined the opinions
Whether Regulation S-K (Items 103, 303, 503) or ASC 450 imposed a disclosure/accrual duty to reveal the investigation earlier Item 103/303/503 and GAAP (ASC 450) required disclosure/accrual because the SEC inquiry was a known uncertainty/loss contingency Investigation was not a pending legal proceeding; Wells Notices are not litigation; settlement amount immaterial relative to assets; accrual/disclosure not required until settlement imminent Dismissed — plaintiffs failed to show those provisions created an affirmative duty or materiality under Basic
Whether plaintiffs pleaded a strong inference of scienter for §10(b) and to support control-person liability under §20(a) Defendants had motive (retain control after Icahn struggle) and recklessly withheld material facts; corporate self-protection was a concrete benefit Motive alleged (keep control) is unrelated in time to Class Period filings; no facts show defendants knew statements were false or acted recklessly; opposing inference (no duty to disclose) is stronger Dismissed — plaintiffs failed to plead scienter for any defendant; §20(a) claim fails because no primary §10(b) violation

Key Cases Cited

  • McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184 (2d Cir.) (standard for accepting allegations on a motion to dismiss)
  • Goldman v. Belden, 754 F.2d 1059 (2d Cir.) (role of court on Rule 12(b)(6) motion)
  • Bell Atl. Corp. v. Twombly, 550 U.S. 544 (Sup. Ct.) (plausibility standard)
  • Ashcroft v. Iqbal, 556 U.S. 662 (Sup. Ct.) (legal conclusions not entitled to pleading-stage credit)
  • ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir.) (Rule 9(b) and particularity for securities fraud)
  • Basic, Inc. v. Levinson, 485 U.S. 224 (Sup. Ct.) (materiality / ‘total mix’ standard)
  • Stratte-McClure v. Morgan Stanley, 776 F.3d 94 (2d Cir.) (limits on duty to disclose government investigations; duties arise only in specific circumstances)
  • Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 135 S. Ct. 1318 (Sup. Ct.) (opinion-statement pleading standards)
  • ECA, Local 134 IBEW Joint Pension Tr. of Chicago v. JP Morgan Chase Co., 553 F.3d 187 (2d Cir.) (quantitative materiality guidance)
  • Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147 (2d Cir.) (duty to correct pre-Class Period statements)
  • Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (Sup. Ct.) (how to evaluate competing scienter inferences)
  • Kalnit v. Eichler, 264 F.3d 131 (2d Cir.) (recklessness standard for scienter)
  • Novak v. Kasaks, 216 F.3d 300 (2d Cir.) (motive/opportunity and access-to-information pleading for scienter)
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