By Victoria Dishner
Introduction
The novel coronavirus has been wreaking havoc upon individuals, businesses, markets, and entire nations in the past weeks and months. It appears the pandemic is continuing its reign of terror as shareholder plaintiffs have officially filed the first securities class action lawsuit––perhaps, of many––alleging that a company has not been honest in its representations about COVID-19’s effects on its operations.[1] On March 12, 2020, Plaintiff Eric Douglas filed this securities class action lawsuit in the Southern District of Florida against Norwegian Cruise Lines, Ltd. (“Norwegian”).[2]
The complaint alleges that Norwegian published materially false or misleading statements in SEC filings.[3] Additionally, Norwegian allegedly engaged in a scheme to defraud customers through deceptive marketing, which spread falsehoods regarding the severity of the coronavirus in an effort to induce cruise vacation purchases.[4] This action falls under the Securities Exchange Act of 1934. Section §10(b) of this Act is a “catchall” antifraud provision, prohibiting manipulative or deceptive schemes and devices in connection with the sale of securities.[5] The statute is implemented by SEC Rule 10b–5, which proscribes the making of untrue statements of material fact as well as material omissions.[6] A plaintiff must carry a heavy burden in establishing the elements of a Rule 10b-5 securities claim: a material misrepresentation or omission, connection of the fraud to a sale of a security, scienter, reliance, and loss causation.[7]
Though Norwegian has not filed an answer to the complaint yet, one might anticipate that Norwegian could attempt to defend two of Norwegian’s allegedly actionable statements––namely, its “confiden[t]” projections in the press release described below, and its claims in the 2019 10–K Form of focusing on health and safety, surrounded by cautionary language warning of viral outbreaks––by attacking the statements’ materiality through characterizing them as opinions, taking shelter under the Private Securities Litigation Reform Act (PSLRA) statutory safe harbor for forward-looking statements, and invoking the bespeaks caution doctrine.
Materiality and Statements of Opinion
A statement or omission is material if it is substantially likely that a reasonable investor would find the disclosure of the information important in her decision to buy or sell the security, or if the disclosure would significantly alter the total mix of information.[8] In assessing materiality, it is important to distinguish between hard and soft information. Hard information is rooted in historical or objective fact, while soft information has a subjective or futuristic aspect.[9] Statements expressing opinion or explaining what a company believes about its future are examples of soft information.[10]
In Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund,[11] the Supreme Court clarified that in a Securities Act §11 claim, an opinion will not form the basis for liability except for in two circumstances. The first is when the speaker did not genuinely believe his statement of opinion.[12] The second instance is when the plaintiff pinpoints material facts which should naturally underlie the stated opinion, whose omission “makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.”[13] Courts have been willing to extend Omnicare’s holding to cover Rule 10b–5 claims as well.[14]
Norwegian May Argue “Confidence” Amounts to Immaterial Opinion
The complaint against Norwegian points to a press release accompanying the company’s Form 8–K, filed with the SEC on February 20, 2020, as containing material misrepresentations.[15] The press release discussed optimistic projections for the cruise line notwithstanding the recent outbreak of COVID-19.[16] In pertinent part, the press release stated that “[d]espite the current known impact from the COVID-19 coronavirus outbreak, as of the week ending February 14, 2020, the Company’s booked position remained ahead of prior year and at higher prices on a comparable basis.”[17] The press release continued, “our Company has an exemplary track record of demonstrating its resilience in challenging environments and we remain confident in our ability to deliver strong financial performance over the long-term.”[18]
Norwegian’s first statement concerning the company’s booked position seems like a factual assertion; whether or not Norwegian’s booked position surpassed that of the previous year can be proven objectively by comparing data from the two years. Here, because it is not difficult to discern whether Norwegian lied, assuming that statement is false, a court may be quick to infer materiality. However, if that statement is true, plaintiffs’ claim hinges on Norwegian’s successive “softer” statements.
Norwegian’s second statement asserts confidence in its ability to overcome challenges and turn a profit in the future due to its “exemplary track record.”[19] This seems like an unactionable opinion, because proving the falsity of Norwegian’s belief in its rosy future is an altogether more subjective inquiry than proving the falsity of Norwegian’s rosy future itself. Plaintiffs in this suit claim that this press release is actionable because it omitted facts which would have shown that Norwegian’s “confidence” was unfounded. Still, in Omnicare, the Supreme Court emphasized that establishing liability based on omissions underlying a stated opinion would be quite the hurdle for plaintiffs.[20] Because establishing that an opinion does not have a reasonable basis is challenging, choosing to defend these statements as opinion may be Norwegian’s best strategy to defeat materiality as to these statements in the press release.
PSLRA and Bespeaks Caution Doctrine
The PSLRA, enacted in 1995, added a statutory safe harbor for forward-looking statements.[21] The safe harbor protects defendants from liability when the alleged statement is forward-looking, and the speaker does not make the statement with actual knowledge that it is false.[22] The bespeaks caution doctrine, which existed as a judicial creation prior to the PSLRA, provides that forward-looking statements are not actionable when accompanied by meaningful cautionary language.[23] Generic disclaimers are not sufficient to provide meaningful cautionary language; instead, the warnings must precisely address each part of the forward-looking statement for which the speaker is hoping to avoid liability.[24]
Norwegian May Argue Cautionary Language Rebuts Materiality
Plaintiffs assert that Norwegian’s Form 10–K, filed with the SEC in 2019, contains material omissions pertaining to the business’s operations and prospects.[25] Specifically, the complaint alleges that “the Company was employing sales tactics of providing customers with unproven and/or blatantly false statements about COVID-19 to entice customers to purchase cruises.”[26] Therefore, the complaint alleges, Norwegian’s reaffirmation of “plac[ing] the utmost importance on the safety of [its] guests and crew” materially omits its contrary practices.[27]
Further along in the 10–K, Norwegian touts a cautionary paragraph with the heading, “Epidemics and viral outbreaks could have an adverse effect on our business, financial condition and results of operations.”[28] The paragraph continues by specifically naming COVID-19 as a threat to its business, financial condition, and general operations.[29] Norwegian may argue that this paragraph provides meaningful cautionary language as to the danger of COVID-19, making its omission of its marketing practices immaterial. This paragraph likely sends red flags to investors regarding the potential financial hazards COVID-19 might impose on Norwegian’s business; even still, the language does not caution customers that Norwegian may be employing deceptive marketing practices to induce their purchase of cruise vacations. Because cautionary language must be precise in its substance, the bespeaks caution doctrine likely is a weak argument for Norwegian as to this particular statement.
Conclusion
As Norwegian attempts to recover from the tremendous
financial loss imposed by the COVID-19 pandemic, the cruise line may also find
itself scrambling for creative defenses against securities class action
lawsuits. While it is still too early in
litigation to accurately assess the strength of the claim, the cruise ship
company may at least be able to raise several defenses centering around
immateriality of the misrepresentations or omissions in order to keep from
getting sunk by a securities class action suit.
[1] Kevin LaCroix, Cruise Line Shareholder Files First Coronavirus-Related Securities Suit, The D&O Diary (Mar. 13, 2020), https://www.dandodiary.com/2020/03/articles/securities-litigation/cruise-line-shareholder-files-first-coronavirus-related-securities-suit/.
[2] Id.
[3] Complaint at 5, Douglas v. Norwegian Cruise Lines, Ltd., No. 1:20cv21107 (S.D. Fla. Mar. 12, 2020).
[4] Id. at 7.
[5] 15 U.S.C. §§ 78j(b) (2020).
[6] 17 C.F.R. § 240.10b-5 (2020).
[7] Id.
[8] Basic Inc. v. Levinson, 485 U.S. 224, 232 (1988).
[9] Marc I. Steinberg, Understanding Securities Law 153 (2009).
[10] Id.
[11] 575 U.S. 175 (2015).
[12] See id. at 184.
[13] Id. at 194.
[14] See In re Lehman Bros. Sec. & ERISA Litig., 131 F. Supp. 3d 241 (S.D.N.Y. 2015) (extending the principles established by Omnicare to a Rule 10b-5 claim).
[15] Complaint at 5, Douglas v. Norwegian Cruise Lines, Ltd., No. 1:20cv21107 (S.D. Fla. Mar. 12, 2020).
[16] Id.
[17] Id.
[18] Id.
[19] Id.
[20] Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 575 U.S. 175, 194 (2015).
[21] 15 U.S.C. §78u-5 (2020).
[22] Id.
[23] In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357, 371 (3d Cir. 1993).
[24] Id.
[25] Complaint at 7, Douglas v. Norwegian Cruise Lines, Ltd., No. 1:20cv21107 (S.D. Fla. Mar. 12, 2020).
[26] Id.
[27] Id. at 6.
[28] Id.
[29] Id.
