In re: Omega Healthcare Investors, Inc. Securities Litigation
This is the third opinion assessing the sufficiency of lead plaintiffs’ putative class action claims for securities fraud in violation of
The Court assumes familiarity with the facts of the case and the legal standards governing motions to dismiss a complaint for securities fraud, as set forth in its prior opinion, In re Omega Healthcare Invs., Inc. Sec. Litig., 375 F. Supp. 3d 496 (S.D.N.Y. 2019) (“Omega I“), and the Second Circuit‘s subsequent opinion, Setzer v. Omega Healthcare Invs., Inc., 968 F.3d 204 (2d Cir. 2020) (“Omega II“).1 It is, however, helpful to summarize the procedural history of this action.
In Omega II, the Second Circuit agreed with our finding that defendants’ failure to disclose the Loan in the context of discussing Orianna‘s financial performance and rent payments “rendered statements about Orianna‘s performance actionably misleading.” 968 F.3d at 213-14.3 As explained by the Second Circuit, defendants’ omission of the Loan “gave a false impression of the financial health of one of Omega‘s largest assets” and “concealed the extent of Orianna‘s solvency problems,” as “Orianna could not pay rent without borrowing from its landlord.” Id. at 214.
However, the Second Circuit reversed our decision on scienter, finding that plaintiffs had adequately alleged that defendants’ decision not to disclose the Loan in the context of statements about Orianna‘s performance and rent payments was “a sufficiently extreme departure from the standards of ordinary care” to plead a strong inference of scienter under a “conscious recklessness” theory. Id. at 214-16.4
Two key factors informed the panel‘s conclusion. First, given the importance of Orianna to Omega‘s overall portfolio, the Second Circuit reasoned that “Omega had to know that revealing the full extent of Orianna‘s performance problems would have been troubling news to its investors.” Id. at 215. Second, because Omega knew that the Loan proceeds were used to pay Orianna‘s rent and would be going directly back to Omega‘s funds from operations and adjusted funds from operations, the panel concluded that defendants created the illusion that Orianna was “on the road to recovery” despite “ma[king] a conscious
Notably, in reaching its conclusion on scienter, the Second Circuit disagreed with our view on the nature of Omega‘s interim disclosures throughout the class period on Orianna‘s financial difficulties. While we originally determined that these disclosures were adequate warnings to investors about Orianna‘s financial predicament, see Omega I, 375 F. Supp. 3d at 511, the Second Circuit found that these disclosures about Orianna‘s “partial rent payments” “strongly suggest” that defendants intended to “express optimism” about Orianna‘s financial prospects and ability to pay rent while “underrepresent[ing] the extent of those very problems,” Omega II, 968 F.3d at 216. In other words, according to the Circuit, these disclosures further concealed the issues affecting Orianna that defendants had failed to disclose.
Following remand, the parties entered into a stipulation permitting plaintiffs to file the operative second amended complaint (“Complaint” or “SAC” (ECF No. 80)), which seeks to move the start of the proposed class back from May 2017 to February 2017 by asserting claims for alleged material misstatements in February 2017.5
Defendants now move to dismiss the Complaint under
DISCUSSION
I. Loss Causation
We begin by addressing defendants’ argument that the Complaint fails to allege that plaintiffs’ losses—the diminution in Omega‘s stock price—were caused by the market learning of the truth underlying defendants’ alleged misrepresentations about the full extent of Orianna‘s financial distress, including its inability to pay rent, and its ramifications.
A. Pleading Loss Causation
Loss causation is the proximate “causal connection between the material misrepresentation and the loss” allegedly suffered by plaintiffs. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 342 (2005) (citing
Plaintiffs may plead loss causation either by alleging “(a) the existence of cause-in-fact on the ground that the market reacted negatively to a corrective disclosure of the fraud; or (b) that that the loss was foreseeable and caused by the materialization of the risk concealed by the fraudulent statement.” Carpenters Pension Tr. Fund of St. Louis v. Barclays PLC, 750 F.3d 227, 232-33 (2d Cir. 2014) (noting that pleading loss causation under either theory is sufficient) (citations and internal quotation marks omitted).
Plaintiffs’ burden in pleading loss causation is “not a heavy one,” and they need only “give [d]efendants ‘some indication’ of the actual loss suffered and of a plausible causal link between that loss and the alleged misrepresentations.” Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d 160, 187 (2d Cir. 2015) (quoting Dura Pharm., 544 U.S. at 347); accord Charles Schwab Corp. v. Bank of Am. Corp., 883 F.3d 68, 93 (2d Cir. 2018).7
Indeed, at the pleading stage, plaintiffs need not establish that the disclosure of the truth underlying the alleged fraud was the sole cause of their losses nor must they conclusively rule out the role of potentially intervening events in the causal chain, as those are issues of proof reserved for the merits stage of the case. See Loreley, 797 F.3d at 187, 189 (citing Lentell v. Merrill Lynch & Co., 396 F.3d 161, 174 (2d Cir. 2005) and Fin. Guar. Ins. Co. v. Putnam Advisory Co., LLC, 783 F.3d 395, 404 (2d Cir. 2015)).
B. Application to Plaintiffs’ Allegations
Plaintiffs argue that they adequately allege loss causation through both corrective disclosures and the materialization of a concealed risk. In arguing that plaintiffs fail to plead loss causation under either approach, defendants first submit that plaintiffs do not point to a corrective disclosure that revealed the falsity of a prior alleged misrepresentation. Defendants
1. Corrective Disclosure
We start with plaintiffs’ theory that their losses were caused by defendants issuing corrective disclosures that revealed that prior representations had been false.
To plead loss causation through a corrective disclosure, plaintiffs must establish that the latter disclosure “reveal[ed] to the market the falsity” of the prior disclosure and that the market reacted negatively to the revelation that that prior disclosure had been false. Lentell, 396 F.3d at 175 & n.4.
Here, plaintiffs argue that defendants consistently understated the extent of Orianna‘s rent delinquency by several weeks in their quarterly disclosures and related earnings calls and then corrected that information in the disclosures from the following quarter. Thus, for example, plaintiffs allege that defendants represented in May 2017 that in Orianna was only 45 days past due on its rent as of the end of the first fiscal quarter when, in fact, Orianna was 90 days delinquent at that time but for the undisclosed Loan. (SAC ¶¶ 120-21.) Likewise, plaintiffs allege that, in July 2017, defendants stated that Orianna was only 90 days delinquent at the end of the second quarter when it was really 180 days delinquent at that point but for the undisclosed Loan. (Id. ¶¶ 139-40.) According to plaintiffs, the July disclosures “corrected” the May disclosures because they accurately described the circumstances of Orianna‘s rent delinquency as they existed at the end of the prior quarter.
While there is no requirement that the corrective disclosure be a “mirror image” of the prior misstatement, Freudenberg v. E*Trade Fin. Corp., 712 F. Supp. 2d 171, 202 (S.D.N.Y. 2010) (citation omitted), the supposedly “corrective” statements identified by plaintiffs did not reveal to the market or otherwise establish that the prior representations had been false. Thus, while the latter disclosures may have accurately stated the extent of Orianna‘s delinquency as it existed at the time of the prior disclosures, there is nothing in these disclosures that suggested to the market that Omega had been untruthful in making its prior statements by understating the extent of Orianna‘s rent delinquency but for the Loan or that Orianna had been unable to pay rent using money from its own operations in 2017. Thus, plaintiffs’ corrective disclosure theory of loss causation fails.
2. Materialization of a Concealed Risk
We now turn to plaintiffs’ allegations that their losses were caused by the materialization of a risk concealed by defendants’ alleged misrepresentations.
To plead loss causation through the materialization of a concealed risk, plaintiffs must show their losses were: (1) foreseeable, that is, the “materialized risk that caused the loss was within the zone of risk concealed by the misrepresentations and omissions alleged by the disappointed investor“; and (2) caused by the materialization of the concealed risk concealed by the fraud, i.e., “that the misstatement or omission concealed something from the market that, when disclosed, negatively affected the value of the security.” Lentell, 396 F.3d at 173 (citations omitted) (emphasis in original); see In re Lehman Bros. Sec. & ERISA Litig., 799 F. Supp. 2d 258, 304-05 (S.D.N.Y. 2011) (listing cases and summarizing standard).
Our analysis begins by defining what defendants allegedly concealed, as described in Omega II. As the Circuit recognized, plaintiffs have alleged that Orianna was unable to pay rent from its operations throughout 2017 and that the only rent that Omega collected from Orianna was paid out of the proceeds of Omega‘s $15 million Loan to Orianna. Thus, according to Omega II, defendants’ omission of the Loan in the context of the interim performance reports and earning calls “gave a false impression of the financial health of one of Omega‘s largest assets,” and concealed both “the extent of Orianna‘s solvency problems” and the fact that “Orianna could not pay rent without borrowing from its landlord” throughout 2017. Omega II, 968 F.3d at 214-16. Thus, Omega II reasoned that defendants had a duty to disclose that Omega‘s Loan “was the source of Orianna‘s rent payments.” Id.
Among the risks concealed by not disclosing the Loan or the true nature of Orianna‘s financial straits was that Omega‘s second-largest tenant would continue to not be able to generate enough revenue from its own operations to fulfill its obligations to Omega after five months of not being able to pay rent. This, in turn, concealed the likelihood that defendants would have to recognize significant losses related to Orianna, place Orianna on cash-basis accounting and correspondingly downgrade its financial guidance to reflect the gap in revenue it had expected to receive from its second-largest asset. Given the nature of these concealed risks, defendants reasonably could have foreseen that their materialization would cause Omega‘s stock price to drop.
This is the scenario pled by plaintiffs. As set forth in the Complaint, Omega acknowledged for the first time in July that Orianna‘s operations were impaired to the point that Omega might have to transition to a cash-basis accounting with respect to Orianna. While the extent of Orianna‘s issues and the likelihood of its insolvency were not fully disclosed at that time, Omega‘s stock price fell by 4% immediately following the announcement. The concealed risks further materialized in October, when Omega announced that Orianna‘s liquidity crisis had caused Omega to place Orianna on cash-basis accounting, to transition assets from Orianna to other operators, to revise its financial guidance to reflect no revenue from Orianna at all for the rest of the year, and to recognize a $9.5 million provision for losses associated with Orianna. This, too, was followed by an immediate 6.8% drop in Omega‘s stock price. Of course, absent the concealment of the Loan, Orianna‘s inability to pay rent from its own operations would have been known to investors since May and presumably would have been reflected in Omega‘s stock price.
As the Complaint plausibly pleads that the extent of Orianna‘s financial issues and
Defendants resist the conclusion that plaintiffs have alleged loss causation primarily by asserting two arguments, which, in our view, fail to fully internalize the Second Circuit‘s approach to this case.
First, defendants argue that Omega‘s disclosures throughout the class period sufficiently alerted the market to Orianna‘s struggles and thus investors would not have viewed the risk of Orianna‘s failure to pay rent and its potential ramifications as “remote or highly unlikely.” (Defs.’ Mot. (ECF No. 89) at 10 (quoting Lentell, 396 F.3d at 173).)8 However, as noted above, the Second Circuit found that Omega‘s interim disclosures did not sufficiently reveal the extent of Orianna‘s financial problems but rather “strongly suggest[ed]” that defendants “underrepresent[ed] the extent” of Orianna‘s financial problems and, in some instances, used references to Orianna‘s “partial rent payments” throughout the class period to “express optimism” about Orianna‘s prospects, which supported the finding that defendants acted recklessly. Omega II, 968 F.3d at 216.
Given that the Second Circuit has characterized these disclosures as furthering the fraud as opposed to revealing it, we likewise find that these disclosures did not sufficiently warn investors about the full extent of Orianna‘s performance issues and the likelihood that the related consequences would materialize to rebut plaintiffs’ theory of loss causation, even if Omega‘s interim disclosures did reference Orianna‘s rent delinquency and possible accounting ramifications. Indeed, the allegations of sharp drops in Omega‘s share price in reaction to Omega‘s announcements about Orianna in July and October 2017 suggest that the market had not fully internalized the extent of the risks related to Orianna‘s financial impairment that defendants claim to have warned of in the interim disclosures, at least for purposes of pleading loss causation at the motion to dismiss stage.
Defendants’ second argument similarly rests on the notion that they had adequately disclosed Orianna‘s financial issues during the class period and is premised on the following passage from Lentell:
[W]here . . . substantial indicia of the risk that materialized are unambiguously apparent on the face of the disclosures alleged to conceal the very same risk, a plaintiff must allege (i) facts sufficient to support an inference that it was defendant‘s fraud—rather than other salient factors—that proximately caused plaintiff‘s loss; or (ii) facts sufficient to apportion the losses between the disclosed and concealed portions of the risk that ultimately destroyed an investment.
As this passage establishes, the threshold condition for this test to apply is that there were “substantial indicia” of the risks concealed by the alleged fraud that were “unambiguously apparent” on the face of the challenged disclosures. For substantially the same reasons discussed above, we find that defendants’ disclosures between May and October 2017 did not “unambiguously” provide “substantial indicia” of Orianna‘s inability to pay rent in 2017 without the benefit of the Loan or the full extent and likelihood of the related consequences. Indeed, our conclusion is well illustrated by distinguishing the two cases upon which defendants rely in presenting this argument.
The first is Alpha Capital Anstalt v. Schwell Wimpfheimer & Assocs. LLP, No. 17 Civ. 1235 (GHW), 2018 WL 1627266 (S.D.N.Y. Mar. 30, 2018), in which defendants allegedly made misrepresentations about a startup company‘s operations, ability to secure financing, and managerial integrity, which concealed the company‘s risk of bankruptcy. Id. at *17. The defendants in Alpha Capital, however, explicitly warned investors that there were substantial doubts about the company‘s ability to continue as a going concern and that the company faced the risk of bankruptcy if it could not raise additional funds on acceptable terms because it was experiencing recurring losses from operations, was having difficulty raising finances, and might not be able to pay its debts based on current cash flows. Id. In light of these warnings, Judge Woods determined that the challenged “filings facially contained substantial indicia of the Company‘s risk of insolvency” and thus plaintiffs failed to allege facts “sufficient to support an inference that those Defendants’ purported fraud, and not other factors,” proximately caused the losses when the company went into bankruptcy. Id.
The warnings at issue in defendants’ second case, In re The Warnaco Group, Inc. Securities Litigation (II), 388 F. Supp. 2d 307 (S.D.N.Y. 2005), aff‘d sub nom. Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147 (2d Cir. 2007), were likewise explicit and unambiguous. 388 F. Supp. 2d 307. Warnaco concerned alleged misstatements made by Deloitte, Warnaco‘s outside accountant, regarding Warnaco‘s financial condition that, according to plaintiffs, concealed the risk of Warnaco‘s bankruptcy and its related ability to obtain waivers from its creditors. Deloitte, however, noted in its audit letter that Warnaco “was not in compliance with certain covenants” and “has a working capital deficiency,” which Deloitte warned “raise[s] substantial doubt about [Warnaco‘s] ability to continue as a going concern,” a risk that was ultimately “dependent on the outcome of negotiations [with Warnaco‘s creditors] or upon its ability to refinance its debt.” Id. at 311. As reasoned by the Second Circuit, the “going concern” warning and related disclosures about Warnaco‘s falling value made it “unambiguously apparent that Warnaco was in need of desperate measures and faced a risk of bankruptcy,” and thus satisfied the threshold condition for the Lentell test to apply. Lattanzio, 476 F.3d at 158 (citation and internal quotation marks omitted).
Accordingly, we hold that plaintiffs have adequately pled loss causation as to the omission of the Loan.
II. New Allegations of Misrepresentations in February 2017
We now turn to plaintiffs’ attempt to move the start of the proposed class period back to February 2017, several months before the Loan was issued. In the new allegations set forth in the SAC, plaintiffs seek to expand their case beyond the alleged nondisclosure of the Loan and claim that defendants misleadingly omitted information about Orianna‘s financial condition in the context of three disclosures from February 2017: (1) a press release about Omega‘s 2016 fourth quarter financial results; (2) an earnings call about Omega‘s 2016 fourth quarter results; and (3) Omega‘s Form 10-K annual report for 2016. (SAC ¶¶ 99-115.)
Specifically, plaintiffs allege that it was misleading for defendants to not disclose in February 2017 that Orianna suffered from operations difficulties, that “Orianna had informed Defendants directly—including Defendant Pickett—that it would be unable to pay rent for the foreseeable future,” and that Orianna had failed to pay rent in January or February 2017. (Id. ¶¶ 100, 102, 104, 106, 111, 113, 114.) However, plaintiffs have since conceded that it was inaccurate to allege that Orianna had “directly informed” Omega by January 2017 that it could not pay rent for the “foreseeable future,” and instead urge us to construe these allegations “to mean that Defendants knew both from facts Orianna provided and had not provided that Orianna would be unable to pay rent for the foreseeable future.” (Pls.’ Opp. Br. (ECF No. 21) at 21 n. 30.)
Here, though, the factual record incorporated by reference in the Complaint establishes only that Orianna had informed Omega at the beginning of 2017 that it would have difficult making January‘s rent10 and that, by the time of the February
Given that Orianna did not inform Omega that it would be unable to pay rent for the foreseeable future, that Orianna had for the first time missed a rent payment just weeks before the challenged disclosures were issued, and that Omega and Orianna were in the process of evaluating strategies to improve Orianna‘s financial condition, we reject the premise that defendants were obligated to disclose in February 2017 that Orianna would not be able to pay rent for the foreseeable future. Rather, the appropriate question is whether plaintiffs have adequately alleged that defendants had a duty to disclose that Orianna‘s financial issues had caused it to miss two rent payments in the context of the February 2017 disclosures. We hold that they have not.
A. The February 8, 2017 Press Release
We begin with Omega‘s February 8, 2017 press release about its 2016 fourth quarter earnings. Specifically, plaintiffs allege that defendants’ duty to disclose Orianna‘s deteriorated financial condition and missed rent payments arose from Omega‘s statements that:
(1) Omega had increased its dividend by $0.01;
(2) Omega‘s quarterly adjusted funds from operations “is a strong testament to the strength of our operating model against the backdrop of an increasingly difficult operating environment“;
(3) Omega shared industry and investor “concerns that increasing labor and liability costs and evolving reimbursement models may put near term financial strain on many operators within our industry“; and
(4) Omega is “pleased to have built a conservative balance sheet allowing us to manage through this uncertainty while delivering superior earnings and reliable dividends.”
(SAC ¶¶ 99-100.)
While the Complaint concedes that these statements about Omega‘s fourth quarter results are “technically true” (id. ¶ 100), plaintiffs nevertheless insist that defendants had a duty to disclose information about Orianna‘s financial condition and missed rent in order to render the statements not materially misleading. However, to prevail on such a theory, plaintiffs must establish a sufficiently close nexus between the affirmative statement and the alleged omission to demonstrate that defendants specifically put Orianna‘s financial condition and missed rent payments “in play” and thus had a duty to disclose the omitted information about Orianna in order to prevent
Here, in the absence of any factual attack on the accuracy of the statements about Omega‘s quarterly financial performance and given the broad and generic descriptions of both industry trends and Omega‘s overall balance sheet, plaintiffs cannot show anything but a tenuous connection between the affirmative statement and the specific information about Orianna that plaintiffs claim should have been disclosed. In other words, these broad statements did not put Orianna‘s specific issues “in play.” Accordingly, we find that plaintiffs have not established a materially misleading omission arising from these statements.
B. The February 9 Earnings Call
The next set of statements challenged by plaintiffs arises from the February 9, 2017 earnings call regarding Omega‘s 2016 fourth quarter performance. (Id. ¶¶ 101-08.)
The first two statements were responses by defendant Stephenson, Omega‘s CFO, to analysts’ questions about: (1) whether Omega was having conversations about rent relief or rent cuts with Omega‘s tenant Signature; and (2) whether Omega was having conversations about rent relief or lower rent escalators with underperforming tenants. (Id. ¶¶ 101-02, 107-08.) In both instances, Stephenson responded that Omega was not having those specific discussions but broadly added that Omega was exploring the possibility of repositioning, selling, releasing, or closing facilities with several operators, which would
in effect ha[ve] the effect of reducing rent to some degree . . . to the extent that you sell off one of their buildings and you provide [the operator] with a rent cut that‘s equal to the amount of the sales proceeds times some cap rate . . . they would get a rent haircut and it does ultimately benefit them. And it takes away some of their time that they‘re focused on facilities that might otherwise be taking up an undue amount of their time. So, we are having those conversations.
(Id. ¶¶ 101, 107.)
Plaintiffs maintain that it was materially misleading for Stephenson to make these statements and not specifically mention Orianna‘s financial issues and missed rent. (Id. ¶¶ 102, 108.) We reject this argument. To start, these statements accurately conveyed the nature of the conversations that Omega was having with distressed operators, including Orianna, at the time.11 Otherwise, the statements are either directed towards other operators besides Orianna or too broad in their focus to require that defendants specifically reveal that Orianna‘s financial issues had caused it to miss January‘s and February‘s rent in order to prevent the statement from being misleading.
Plaintiffs next challenge Stephenson‘s comment that Omega had not made
Plaintiffs’ final attempt to claim that defendants made a materially misleading omission about Orianna on the February 9 earnings call concerns yet another question and answer that was focused on overall trends at Omega with no specific reference to Orianna. The statement at issue arises from following question posed by an analyst that was directed at Pickett, Omega‘s CEO:
[I]t seems like you‘re suggesting that maybe [Omega] will get down to the high 1.2 range [for its coverage ratio] but maybe not much lower than that. . . . [I‘m h]oping you can help me understand how it might not be worse than that just based on the roughly 10 bps of decline we‘ve seen in the last several quarters.
(SAC ¶ 105.) In response, Pickett stated:
I think part of it is that the decline hasn‘t been at the revenue line. Our operators have managed to maintain relatively flat census. So that‘s an important component. And then you look at the expense side of the equation and it‘s tough to predict labor but there‘s nobody in our group of operators saying labor is going to be a 5% component of the increase. But it‘s continued to put pressure on us. So as long as census continues to hold up, and we think it should, then it‘s really managing the expense side of the equation. And these guys are pretty effective at it but that‘s not to say that labor is not going to pressure them throughout the year.
(Id.) Plaintiffs once again allege that this statement was materially misleading because Omega concealed that Orianna‘s performance, census, and revenue was down, that Orianna was suffering operational problems dissimilar from other operators, and that Orianna had missed January‘s and February‘s rent. (Id. ¶ 106.) We, again, disagree. The nature of the question concerned Omega‘s portfolio overall and was not directed at any particular operator. The substance of Pickett‘s response was, accordingly, generalized and focused on across-the-board trends. Given the breadth of the question, we find that Pickett‘s equally broad answer was not rendered materially misleading by not discussing issues specifically related to Orianna, especially in the absence of any allegation that Orianna‘s issues as of February 2017 posed a realistic threat at dropping Omega‘s overall coverage ration below 1.2.
C. The February 24 Form 10-K 2016 Annual Report
We finally turn to the challenged statements in Omega‘s Form 10-K 2016 annual report. (Id. ¶¶ 109-15.)
1. Risk Disclosures and Statements Regarding Historical Transactions
Plaintiffs first challenge Omega‘s failure to disclose the materialization of the risk of operator bankruptcy and insolvency in its risk disclosure statements. (Id. ¶¶ 109-11.) In Omega I we rejected the
We next consider the statement from Omega‘s February 10-K describing the details of its 2013 acquisition of Orianna‘s predecessor, including the number of facilities acquired and the related the 50-year leases whose terms dictated a 10.6% per annum yield on lease payments. (SAC ¶¶ 112-13.) Plaintiffs allege that it was materially misleading to discuss the details of the 2013 transaction, including the number of facilities acquired and the structure of the leases, when, in February 2017, Orianna was distressed, was attempting to sell off facilities, and had missed rent payments in January and February. (Id. ¶ 113.) The challenged statement, however, was describing the terms of a historical acquisition that was completed in 2013 and does not purport to have anything to do with Orianna‘s current condition. Accordingly, we reject the premise that defendants had a duty to disclose information about Orianna‘s current financial status in the context of this retrospective statement.
2. Management Discussion and Analysis
Turning to the management discussion and analysis section of the February 24 10-K, plaintiffs allege that defendants omitted discussion of Orianna‘s financial issues from 2016 through present and that Orianna had missed two months’ rent in violation of Item 303.13 (Id. ¶ 114.)
In Omega I, we rejected plaintiffs’ assertion that
Specifically, we find that plaintiffs have not adequately pleaded a trend or uncertainty that triggered any duty of disclosure pursuant to
In an effort to avoid application of this principle, plaintiffs attempt to construct a supposed “trend” of Orianna‘s financial troubles that started with its leveraged buyout in 2013 or its falling coverage ratios in 2016. (Pls.’ Opp. Br. at 13-14.) However, this definition of the allegedly disclosable “trend” advanced by plaintiffs is simply not credible because, as plaintiffs acknowledge, it was not until January 2017 that Orianna‘s operational issues had reached the point where they caused Orianna to miss its rent obligations to Omega, which, again, we find to be the only relevant disclosable pattern that posed a potential threat to Omega‘s revenue and income from continuing operations.
Moreover, while our holding that plaintiffs have not identified a sufficiently lengthy trend is dispositive, plaintiffs’ concession in their opposition briefing that “the two rent payments were not yet quantitatively material” (Pls.’ Opp. Br. at 15
3. Financial Statements
Last, we consider plaintiffs’ allegation that pursuant to GAAP, as codified in the Financial Accounting Standards Board‘s Accounting Standards Codification (“ASC“), defendants were required to disclose a reference to Orianna‘s “financial, operational, and liquidity problems and its early 2017 rent delinquency” in the notes to the 2016 financial statements contained in Omega‘s February 2017 10-K. (SAC ¶ 115.) Specifically, plaintiffs claim that Orianna‘s issues constitute “nonrecognized subsequent events” that must be reported pursuant to ASC Section 855.
In relevant part, ASC Section 855 defines a nonrecognized subsequent event as an event that “provide[s] evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet but before financial statements are issued or are available to be issued.” ASC § 855-10-25-3 (as contained in Rieder Decl. Ex. 18). GAAP does not require nonrecognized subsequent events to be reported unless they are “of such a nature that they must be disclosed to keep the financial statements from being misleading.” ASC § 855-10-50-2 (as contained in Rieder Decl. Ex. 19).
Neither party cites any case law that interprets these provisions in ASC 855 or otherwise addresses when a nonrecognized subsequent event must be disclosed to prevent a financial statement from being misleading.16 However, our evaluation of this claim is guided by some familiar principles.
First, it is black letter law in this Circuit that “[t]he disclosure of accurate historical data does not become misleading even if less favorable results might be predictable by the company in the future.” In re Initial Pub. Offering Sec. Litig., 358 F. Supp. 2d 189, 210 (S.D.N.Y. 2004) (citation omitted); see Pollio v. MF Global, Ltd., 608 F. Supp. 2d 564, 571 (S.D.N.Y. 2009) (“It is well-established that defendants may not be held liable under the securities laws for accurate reports of past successes, even if present circumstances are less rosy.“) (internal quotation marks and brackets omitted). Indeed, the Second Circuit previously “easily rejected” the argument that a company‘s “statements about its earnings were actionable, even though literally true, because they did not acknowledge the long-term unsustainability of its business model,” noting that “[i]t is clear that a violation of federal securities law cannot be premised upon a company‘s disclosure of accurate historical data.” Boca Raton Firefighters & Police Pension Fund v. Bahash, 506 F. App‘x 32, 38-39 (2d Cir. 2012) (summary order) (citation omitted). As plaintiffs do not allege that Omega‘s 2016 financial statements inaccurately reported historical financial data, their theory of liability, which is premised on those financial statements being misleading in light of an alleged omission, is directly at odds with the principle that accurate historical financial statements
Second, even assuming arguendo that ASC 855 mandates some extra disclosure beyond Section 10(b) and Rule 10b-5‘s prohibition of misleading omissions discussed above (which we strongly doubt), we find that the financial statements in the February 10-K were not materially misleading because of the absence of a corresponding note concerning the “subsequent event” of Orianna failing to pay rent in January and February. As Omega‘s fiscal year follows the calendar year, the missed rent payments from Orianna in January and February 2017 would have no impact whatsoever on Orianna‘s 2016 financial statements. Moreover, as noted above, plaintiffs have acknowledged that “the two rent payments were not yet quantitatively material” (Pls.’ Opp. Br. at 15 n. 22), and Omega at the time was in the midst of exploring measures to help alleviate Orianna‘s financial issues and allow it to resume paying rent.17
Accordingly, we find that defendants did not have a duty under ASC 855 to disclose Orianna‘s missed rent from January and February 2017 as nonrecognized subsequent events in the notes to the 2016 financial statement.
CONCLUSION
For the reasons above, defendants’ motion to dismiss is denied as it relates to the sufficiency of the pleading of loss causation for the omissions that we found material in Omega I. However, the motion to dismiss is granted as to plaintiffs’ allegations of violations of Section 10(b), Rule 10b-5, and Section 20(a) for the challenged statements from February 2017. The claims arising from those statements are dismissed with prejudice. Accordingly, the putative class period begins on May 3, 2017, as alleged in the first amended complaint.
The Clerk of Court is respectfully directed to terminate the motion pending at ECF No. 88.
SO ORDERED.
Dated: New York, New York
September 28, 2021
NAOMI REICE BUCHWALD
UNITED STATES DISTRICT JUDGE