Recent tumultuous markets seem to have brought with them a continued flurry of stock drop cases, including five that were filed last week alone in New York, New Jersey, and California. The putative class actions, which seek hundreds of millions of dollars in claimed losses in the form of share price declines, involve two cannabis companies, two pharmaceutical companies, and – last but not least – WWE, or World Wrestling Entertainment Inc.
The targeting of NASDAQ-traded Canadian cannabis company Tilray Inc. is a continuation of an increasing trend of investors asserting securities fraud claims against such companies following Canada’s legalization of cannabis-related products in 2018. Another continuing trend reflected in the recent filings – in particular, the action filed against PharmaCielo – is the proliferation of short seller campaigns that lead to Rule 10b-5 claims. PharmaCielo cultivates, processes, produces, and supplies medicinal-grade cannabis oil extracts and related products in Colombia and internationally. The suit against it followed on the heels of a report released by Hindenburg Research – an investor with a short position on the company – that made allegations of self-dealing, sham transactions, and serious problems with PharmaCielo’s fields in Colombia.
Perhaps the most colorful set of facts are those alleged in the WWE action. The Plaintiff there charges the wrestling association with publicly offering an overly rosy portrayal of the potential for a renewed deal for television distribution rights and live wrestling events in Saudi Arabia prior to the deal being officially called off early last month due to rising tensions between the company and the embattled Middle Eastern nation. In fact, the Plaintiff alleges, tensions between WWE and the Saudis continued to escalate since late 2018, culminating in the Saudi government temporarily refusing to allow several WWE wrestlers to leave the country in what was later described as akin to a “hostage situation’ under the pretense of mechanical airplane issues. Plaintiff contends that, prior to the first corrective disclosure in April 2019, the company’s CEO sold 3.2 million shares of stock for over $260 million, purportedly indicating his knowledge that the truth would cause the stock to plummet. In fact, according to the complaint, the stock dropped from more than $100 per share this time last year to $40 per share following the definitive announcement that the Saudi Arabia deal had died on February 5.
Publicly traded companies should brace for more of these actions as the markets continue to indicate a move towards possible recession. Additionally, to the extent they do not already have them in place, directors and officers of such companies should give serious consideration to the implementation of Rule 10b5-1 plans. Such plans can, among other things, trigger the automatic sale of shares upon drops in stock price to predetermined levels and provide an affirmative defense to allegations of scienter or insider trading in a later securities fraud action. Importantly, such plans may only be adopted at a time when the officer or director is not in possession of any material non-public information about the company.