On April 4, 2024, the State of New York, Appellate Division, First Judicial Department (the “First Department”) affirmed dismissal of a securities class action against a mass media and entertainment company (the “Company”) and two of its executives (the “Individual Defendants”), and affirmed-in-part and reversed-in-part the denial of the motions to dismiss filed by the underwriters of the offerings at issue (the “Underwriters”). Camelot Event Driven Fund, et al. v. Morgan Stanley & Co. LLC, et al., No. 2023-00983 (1st Dep’t Apr. 4, 2024). Plaintiffs alleged defendants violated Sections 11, 12 and 15 of the Securities Act of 1933 (the “Securities Act”) by concealing certain information from the offering materials issued in connection with the Company’s March 2021 secondary and initial offerings (the “Offerings”).

Plaintiffs alleged that defendants improperly concealed from the Company’s offering materials that a now-defunct asset management company (the “Asset Management Company”) had, through investments known as “total return swaps,” concentrated its assets in the Company that were ultimately liquidated due to the Asset Management Company’s financial distress—which allegedly reduced the value of the stock that plaintiffs purchased in Offerings. The Company argued that it was not aware of the Asset Management Company’s position and therefore could not have disclosed what it did not know. The Supreme Court of New York agreed and dismissed the claims as against the Company and Individual Defendants, but denied the motions to dismiss filed by the Underwriters.

On appeal, the First Department affirmed the dismissal decision as it related to the dismissal of claims against the Company and Individual Defendants. In so affirming, the First Department cited NIO Inc. Sec. Litig., 211 AD.3d 464, 466 (1st Dept 2022), which held that a company was not liable under the Securities Act for failing to disclose an alleged issue where plaintiffs had not alleged that the company was even aware of the issue at the time of the offering and, as such, the Company “could not have disclosed what it did not know.” In so holding, the First Department clarified that NIO was not limited to claims brought under Item 303 of Regulation S-K, as plaintiffs contended on appeal.

The Court separately reversed-in-part and affirmed-in-part the part of the Supreme Court of New York’s decision that denied the motions to dismiss filed by other defendants in the action.

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Camelot Event Driven Fund, et al. v. Morgan Stanley & Co. LLC, et al.

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