Central District of California Rejects Alleged Injury Class Action Against Canadian Cannabis Manufacturer | Shearman & Sterling LLP

On December 8, 2021, Judge Philip S. Gutierrez of the United States District Court for the Central District of California, with prejudice, dismissed a lawsuit against a Canadian cannabis manufacturer (the “Company”), alleging that the Company had failed to disclosed important information. on its facilities in Colombia and its transactions with other companies in violation of Sections 10 (b) and 20 (a) of the Securities Exchange Act of 1934. In re Pharmacielo Ltd. Dry. Litigation., n ° 20-2182-PSG (CD Cal. 8 December 2021). The complainants, whose complaint has already been dismissed, amended their complaint to strengthen their allegations based on an assortment of statements from the company regarding its facilities and expansion plans which the complainants say were designed to inflate artificially the price of the shares of the company. The Court dismissed the amended complaint for failure to invoke falsity or materiality and did so with prejudice as any amendment would be futile due to their “unsuccessful attempt to remedy” the shortcomings of the previous complaint.

The complainants’ allegations were based on several statements by the Company between June 2019 and March 2020 regarding: (i) the soil quality of the Company’s property in Colombia (the “Property”) which housed a cannabis cultivation facility, and the characterization of this facility by the company and the plans of the facility; (ii) transactions with third parties which ultimately did not materialize in the manner in which the Company had announced them; and (iii) the Company’s unsuccessful attempt to enter the cannabis market in Peru.

The Court dismissed the allegations for want of allegations of materiality or falsity, and further noted that the complainants had not alleged any new facts in the amended complaint and instead added largely irrelevant facts, relied on on vague references and repeated arguments that the Court had already rejected when rejecting the preliminary complaint.

Alleged inaccuracies and omissions regarding ownership: The Court dismissed the claims based on the Company’s statements regarding the Property. First of all, the plaintiffs claimed that the company’s announcement that the property “produced[ed] some of the purest cannabis in the world ”,“[w]with fertile soil, perfect equatorial sunshine and cutting edge science and technology ”was wrong because the property was“ far from perfect ”, partially located on a floodplain and contaminated with mold. But, according to the court, the plaintiffs did not allege how these issues impacted the Company’s business in any way, in particular because the Company only manufactured extract oil. of cannabis, not raw cannabis crops (which could potentially be affected by the floodplain and contaminant issues), and the complainants made no claims suggesting that the issues with the ownership had an impact on the product. final of the company. Second, the plaintiffs alleged that the company’s statement that it was “successfully developing its operations in Colombia and expanding its capacity”, based in part on the construction of a new research, technology and processing center on the property of ‘by the end of 2019 was wrong as construction faced significant delays. The court ruled that the statements about planned construction dates were not actionable because they were forward-looking statements of corporate optimism. Third, the plaintiffs asserted that the Company’s statement that the facility on the property was its “primary” facility was substantially misleading because that facility was in fact the “only” facility in use. The Court disagreed, finding that the plaintiffs had not alleged that the distinction between “principal” and “only” was important and that it would have changed the opinion of a reasonable investor on the value of the society.

Alleged inaccuracies and omissions regarding third party transactions: The Court also dismissed the claims based on the Company’s statements relating to two agreements with third parties. First of all, the complainants alleged that the company’s failure to disclose that an agreement with a third-party multi-state distributor was a related party transaction was in itself a material omission. The Court rejected the argument because the plaintiffs did not cite the authority that the non-disclosure of a related party transaction was in itself liable to action and also noted that the plaintiffs did not allege that the transaction was a related party transaction under Canadian law which governed the company’s disclosure obligations. Second, the plaintiffs alleged that the company had misled investors into believing that an agreement with a third-party distributor was a “significant opportunity” to enter the German market when that third party was “almost insolvent and led by a CEO with a track record of running businesses in the field ”, and the deal ultimately did not result in the benefits the company announced of bringing the company’s products to Germany. In dismissing the claims based on the two third party agreements at issue, the Court found that the allegations that an agreement did not go as planned were insufficient to demonstrate a material inaccuracy or omission.

Alleged omissions regarding entry into the Peruvian market: Finally, the complainants alleged that the company’s statement that it had “laid the groundwork” and “looked forward to expanding its presence throughout Latin America” ​​was false because the company had failed to meet the bidding process to supply medical cannabis to Peru and knew he would lose his bid. The Court rejected this argument because the plaintiffs did not allege how “the loss of an offer in Peru made it deceptive [the Company’s] optimistic statements about current or future expansion in Latin America.

Because the Court found that any modification would be futile based on the substance and nature of the plaintiffs’ amended claims, the Court dismissed the action with prejudice.

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In re Pharmacielo Ltd. Dry. Litigation.

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