35 F.4th 95
2d Cir.2022Background
- 22nd Century Group (publicly traded) and its CEO (Henry Sicignano) and CFO (John Brodfuehrer) are accused of (a) paying third‑party writers to publish positive articles about the company without disclosing payment and (b) failing to disclose an SEC investigation into material weaknesses in the company’s internal financial controls.
- Confidential witnesses alleged Sicignano reviewed press releases, knew the company paid writers (directly or via IRTH Communications), and pressured to prop up the stock; the stock rose during the period of published articles and the company raised $50.7M in October 2017.
- The company repeatedly disclosed material weaknesses in internal controls in SEC filings (2015–2018); a FOIA denial by the SEC indicated an ongoing law‑enforcement investigation into the company (2016–2018), and company executives met with the SEC.
- An online commentator (“Fuzzy Panda”) published articles in 2018–2019 alleging the paid promotion scheme and the SEC investigation; the stock fell after those publications and the company issued public denials of any enforcement proceedings.
- Plaintiffs sued as a class (securities acquired Feb. 18, 2016–July 31, 2019). The district court dismissed the amended complaint with prejudice for failure to state a claim; on appeal the Second Circuit affirmed in part, vacated in part, and remanded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Duty to disclose paid promotional articles (Rule 10b‑5(b)) | Noto: defendants paid writers and furnished/reviewed content, so omission of payment was a material omission | Defs: they were not the "makers" of the articles and had no duty to disclose payments | Court: Allegations do not plausibly show defendants had "ultimate authority" over article content; no duty to disclose payments — claim dismissed |
| Duty to disclose SEC investigation (Rule 10b‑5(b)) | Noto: omission of an SEC investigation into accounting controls rendered the company’s statements about remediation misleading | Defs: no independent duty to disclose an investigation | Court: Company’s repeated statements about control weaknesses and remediation created a duty to speak fully; nondisclosure (and later denials) plausibly alleged a material misrepresentation — remanded for further proceedings |
| Market manipulation (Rules 10b‑5(a) & (c)) | Noto: paying undisclosed promoters and publishing articles manipulated market price | Defs: articles repeated public information; payments/non‑disclosure did not inject false information into the market | Court: Plaintiffs failed to allege defendants injected inaccurate information or controlled the articles; manipulation claim dismissed |
| §20(a) control‑person liability | Noto: Sicignano and Brodfuehrer controlled 22nd Century and are liable for primary violations | Defs: no primary securities law violation alleged | Court: Because the SEC‑investigation nondisclosure claim survives, the §20(a) dismissal is vacated only as to that predicate violation; otherwise §20(a) claims tied to dismissed §10(b) theories fail |
Key Cases Cited
- Janus Capital Grp. v. First Derivative Traders, 564 U.S. 135 (2011) (maker of a statement is the person with ultimate authority over content and communication)
- Basic Inc. v. Levinson, 485 U.S. 224 (1988) (an omission is actionable only when there is a duty to disclose; duty may arise when a corporation speaks)
- Meyer v. JinkoSolar Holdings Co., 761 F.3d 245 (2d Cir. 2014) (once a company speaks on an issue it must be accurate and complete)
- ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (elements of market‑manipulation claim under §10(b) and Rules 10b‑5(a),(c))
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) (scienter requirement for §10(b) claims)
- Ganino v. Citizens Utils. Co., 228 F.3d 154 (2d Cir. 2000) (standard for material misrepresentation and loss causation pleading)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standard: courts may disregard conclusory allegations)
- Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004) (Rule 9(b) pleading requirements in securities fraud cases)
- Caiola v. Citibank, N.A., 295 F.3d 312 (2d Cir. 2002) (corporation that chooses to speak must speak truthfully about material issues)