We’ve blogged about the new wave of class action litigation. Among the emerging trends has been a burgeoning class of cannabis securities investors who brought actions against companies selling cannabis products. The claims primarily center on how these companies misled investors on product quality, leading to substantial investment losses. The first results are in, and they highlight the challenges plaintiffs face in prosecuting these claims.

As reported in the New York Law Journal, in a class action captioned In re Sundial Growers Securities Litigation, #655178/2019, Dkt. No. 39 (Sup. Ct. N.Y. County), Justice Barry Ostrager granted the defendant’s motion to dismiss a proposed securities action against Sundial Growers, a Canadian cannabis producer. The plaintiffs’ action lodged claims under sections 11, 12 (a) (2) and 16 of the Securities Act of 1933, alleging misleading statements and errors and omissions within the registration statement or public offering. 

The plaintiffs asserted that defendant Sundial misrepresented its cannabis products as “high quality” and “premium” when in fact, the goods were “adulterated, and of low quality, with significant batches that were not fit for human consumption.” The complaint further asserted that the offering materials failed to disclose a vital Sundial customer who rejected 554 kilograms as “materially deficient.”

Defendants moved to dismiss, claiming plaintiffs failed to “allege a materially false or misleading statement or omission” that could “serve as the basis for a Securities Act claim,” and which was not otherwise “offset by robust warnings and risk disclosures.” In support of their motion, the defendants submitted the full registration statement and prospectus according to the offering, including risk disclosures concerning the quality of Sundial’s crop.

Judge Ostrager agreed with the defendant and dismissed the complaint. The court held that the offering materials presented by the defendant specifically discussed quality issues and concerns. The court further held “… that Sundial’s use of the terms’ high quality’ and ‘premium’ are merely examples of ‘puffery’ which, at most, are non-actionable statements of opinion.”

Although private securities actions are typically filed in federal court, state court has concurrent jurisdiction resulting in cases being filed there, with the apparent hope that a lower pleading standard applies. Not so in this case: the court applied a higher pleading standard for claims based on fraud or misrepresentation under CPLR section 3016 (a), given the plaintiffs were asserting fraud.

These actions are at an early stage, as the dismissal was based on inadequate pleadings. The lessons learned in Sundial, nevertheless, can serve as a roadmap for similar future claims.

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