Eleventh Circuit Confirms that Issuers are not Required to Disclose Retention of Outside Promotional Firms

King & Spalding

On December 15, 2016, the United States Court of Appeals for the Eleventh Circuit affirmed the dismissal of a securities class action against Galectin Therapeutics Inc., a Georgia-based biotechnology company. The suit alleged that Galectin violated the federal securities laws by failing to disclose that it had retained third-party firms to publish promotional articles about the Company. Although a number of district courts have opined on whether an issuer must disclose the hiring of such outside promotional firms, the Eleventh Circuit is the first appellate court to publish an opinion on the question. The Galectin decision confirms that the duty to disclose payments to outside firms who publish promotional material regarding a company and its stock rests with the third-party firms, not the issuer.

Background -

In May 2015, lead plaintiff Glynn Hotz filed suit on behalf of a putative class of Galectin shareholders alleging violations of Section 10(b) of the Exchange Act and Rule 10b-5(b) promulgated thereunder, as well as Section 20(a). The complaint alleged that Galectin and certain of its current and former officers and directors defrauded the Company’s investors by secretly hiring third-party firms to publish positive articles about the Company and to “tout” its stock. The complaint did not allege that any of the third-party articles were actually false or misleading under the federal securities laws, but rather were “exceedingly boastful.” The complaint did allege, however, that it was false for Galectin to state—in two private contracts between Galectin and its sales agent for two “at-themarket” offerings—that Galectin had not “directly or indirectly” taken any actions that caused or resulted in the “manipulation” of its stock price. According to Plaintiff, hiring third-party firms to promote the Company was “manipulating” its stock price. Therefore, because the Company had stated that it had not engaged in any such “manipulation,” its statements to that effect from the two “at-the-market” offering sales agent agreements were allegedly false.

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