639 F.Supp.3d 350
E.D.N.Y2022Background
- Plaintiffs filed a putative securities class action against Virgin Galactic and individual executives (including Richard Branson and former CEOs) alleging false/misleading statements and omissions about the safety and readiness of Virgin Galactic’s SpaceShipTwo program (Unity/Eve) during July 10, 2019–Oct. 14, 2021.
- Key factual allegations: repeated test-flight problems (instrument failures, control issues), recurring structural cracks, and a February 2019 powered flight that critically damaged Unity’s horizontal stabilizers (a near-disaster the complaint alleges was not disclosed contemporaneously).
- Plaintiffs allege defendants misrepresented test progress and safety, and concealed defects while insiders (notably Branson and Palihapitiya) sold large blocks of stock following the de‑SPAC and thereafter.
- Defendants moved to dismiss under Rule 12(b)(6) and the PSLRA; the court applied fraud pleading standards (Rule 9(b), PSLRA, Tellabs scienter analysis, Omnicare opinion standard, Basic materiality test).
- The court granted the motion in part: it dismissed many of the 35 challenged statements, allowed some misstatement claims to survive, dismissed claims against all individual defendants except Branson for lack of scienter, dismissed several claims for failure to plead loss causation, dismissed control/Section 20A claims in part, and granted plaintiffs leave to amend.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Materiality of alleged misstatements about test progress/safety | Statements (e.g., that testing demonstrated repeatability or cleared milestones) omitted critical facts (February 2019 damage, recurring cracks, poor documentation/inspections) and thus were misleading | Many statements were forward‑looking, generic optimism or puffery; where forward‑looking they were protected by the PSLRA safe harbor and risk‑disclosures | Certain statements were materially misleading in context (court identified a limited set of actionable statements), but many challenged statements were dismissed as puffery or adequately warned by risk disclosures |
| Forward‑looking statements / PSLRA safe harbor | Statements presented as ‘‘we are on track’’ were actually concealing known grounding/repairs and so not protected | Statements were forward‑looking with meaningful cautionary language in SEC filings and plaintiffs fail to plead defendants had actual knowledge they were false | Court treated several “on track” statements as forward‑looking and within the safe harbor; plaintiffs failed to plead actual knowledge sufficient to negate safe harbor |
| Loss causation (connection between misstatements and stock drops) | Stock declines after August 4, 2020; Dec. 14, 2020; Feb. 1, 2021; Oct. 15, 2021 reflect corrective disclosures or materialization of concealed risks | Market already knew of general risks (delays, testing issues); plaintiffs must show the concealed facts, not disclosed risks, caused the loss | Court found loss causation adequately pleaded for some disclosures (e.g., FAA grounding after July 2021 Branson flight) but rejected causation for other price drops tied to disclosed risks; several misstatements dismissed for lack of loss causation |
| Scienter / insider trading / control liability | Branson had motive/opportunity (large proceeds from de‑SPAC and later sales); sales timing and volume support inference of intent; control liability over corporation | Sales timing and market context undercut inference (some sales occurred before price declines or during low prices); corporate optimism provides innocent explanation | Court found scienter adequately pleaded for Branson as to certain statements/trades (e.g., de‑SPAC letter sale and August 2021 sales tied to July flight), dismissed scienter allegations against other individual defendants; control person and §20A claims were narrowed or dismissed in part |
Key Cases Cited
- Basic Inc. v. Levinson, 485 U.S. 224 (1988) (materiality of omitted facts judged by whether disclosure would have altered the total mix of information available to reasonable investor)
- TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976) (materiality standard for securities disclosures)
- Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 575 U.S. 175 (2015) (opinion‑statement liability: plaintiff must identify omitted facts about basis for opinion that render it misleading)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (pleading scienter requires that alleged facts, taken collectively, give rise to a strong inference of fraudulent intent; courts must consider plausible opposing inferences)
- Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011) (elements of a §10(b) claim and materiality analysis)
- Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005) (transaction causation is distinct from loss causation; plaintiffs must plead a causal link between misrepresentation and economic loss)
- Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005) (loss causation requires that the misstatement concealed the reason for the loss; market must learn the concealed truth)
- ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (fraud pleading: plaintiffs must plead motive/opportunity or strong circumstantial evidence of recklessness; separate allegations against each defendant)
- Kalnit v. Eichler, 264 F.3d 131 (2d Cir. 2001) (circumstantial evidence of recklessness standard and when motive is not alleged, stronger circumstantial proof is required)
- In re Omnicom Grp., Inc. Sec. Litig., 541 F. Supp. 2d 546 (S.D.N.Y. 2008) (corrective disclosure must reveal some aspect of the alleged fraud and be new to the market)