A ruling from the 11th Circuit Court of Appeals has clarified which legal responsibilities an issuer of stock has when it hires outside analysts to write glowing reviews of its stock. The federal appeals court in Atlanta upheld a lower court ruling in favor of the company and against a class of shareholders, stating that the company did not have an obligation to shareholders or potential shareholders to disclose its business relationship with the analysts. Since the company’s nondisclosure wasn’t improper, and its plan of hiring analysts to tout its stock wasn’t an illegal price manipulation scheme, that meant the shareholders had no basis for their lawsuit. Whether your shareholder dispute involves a well-established legal claim or an issue of law that is unsettled (as this one was), it pays to have experienced Georgia business attorneys representing you in your case.
The lawsuit was a class action launched by shareholders of a small pharmaceutical firm based in Norcross. The company made several stock offerings in 2013 and 2014. During that same time, the company retained multiple outside entities to promote or tout the value of the company’s stock as a good buy. The promoters published articles with headlines that urged “Investors Should Consider” the company’s stock (as a purchase). Several of the articles did not indicate anywhere within them that they were authored by companies hired by the pharmaceutical company itself. The goal was to pump up the company’s stock prices, but the stockholders in the lawsuit did not allege that the firm engaged in a “pump-and-dump” scheme.
After the firm’s stock promotion scheme was exposed by other analysts, however, its stock prices collapsed from almost $16 a share to just over $7 per share. The shareholders sued.
The District Court dismissed the case. That court ruled in favor of the company because, it concluded, the scheme that it undertook was merely a promotional plan instead of an illegal price manipulation scheme. The court also stated that the firm was not under any legal obligation to disclose the fact that it had retained outside entities to promote its stock. Since it did not engage in illegal price manipulation and did not fail to disclose anything that it had a duty to disclose, the shareholders had no case, according to the court’s ruling.
The shareholders appealed but again were not successful. The appeals court pointed out that there is nothing in the federal securities laws that bars a company “from hiring analysts to promote [the company], circulating positive articles about its drug development, or recommending the purchase of” its stock. While possibly counterintuitive to some, the federal securities laws do not prohibit an issuer of stock “from paying an analyst for a stock recommendation.”
The appeals court also stated that the obligation to disclose any promotional payments lies with the company that receives the money, rather than the one paying for the promotion. Additionally, since the pharmaceutical company did not actually make the statements contained in the articles, it could not possibly be liable for anything that was in, or omitted from, those pieces. In other words, out of any potential wrongdoing and possible liability arising from it, none of it belonged to the pharmaceutical company itself.
If you find yourself embroiled in a shareholder dispute, it pays to have counsel who keenly knows how to handle such matters. The experienced Atlanta business litigation attorneys at Poole Huffman, LLC have been working for many years to help their clients in these types of actions, among many other varieties of business disputes. Contact our attorneys online or by calling (404) 373-4008 to schedule your confidential consultation.
More blog posts:
Confirmation Letters – Avoiding Potential Conflict Regarding Agreement Terms, Atlanta Business Litigation Attorneys Blog, April 5, 2016
New Garnishment Ruling: What You Should Know, Atlanta Business Litigation Attorneys Blog, Sept. 29, 2015