Noto v. 22nd Century Grp., No. 21-0347 (2d Cir. 2022)Annotate this Case
Plaintiffs, investors in 22nd Century Group, alleged on behalf of an investor class that (1) Defendants engaged in an illegal stock promotion scheme in which they paid authors to write promotional articles about the company while concealing the fact that they paid the authors for the articles; and (2) Defendants failed to disclose an investigation by the Securities and Exchange Commission (“SEC”) into the company’s financial control weaknesses. Plaintiffs alleged they were harmed after public articles revealed the promotion scheme and stock prices fell. The district court dismissed the complaint for failing to state a claim.
On appeal, Plaintiffs argued (1) they adequately alleged material misrepresentations sufficient to sustain claims under SEC Rule 10b-5; (2) their claim under Section 20(a) of the Securities Exchange Act was premised on a valid predicate violation of Section 10(b); and (3) the district court erred in dismissing the complaint with prejudice.
The Second Circuit affirmed in part and vacated in part. On the first and second points, the court agreed that the allegation that Defendants failed to disclose the SEC investigation states a material misrepresentation and could also support Section 20(a) liability. However, the court found no merit in the remaining challenges. The court reasoned that because the complaint does not adequately allege that Defendants had a duty to disclose that they paid for the articles’ publication, Plaintiffs fail to state a claim that the existence of the stock promotion scheme constituted a materially misleading omission.