Case 1:19-cv-04486-BMC Document 46 Filed 06/04/20 Page 1 of 33 PageID #: 1328
`
`UNITED STATES DISTRICT COURT
`EASTERN DISTRICT OF NEW YORK
`
`
`
`
`
`
`IN RE CURALEAF HOLDINGS, INC.
`SECURITIES LITIGATION
`
`Case No. 1:19-cv-04486-BMC
`
`
`
`
`
`MEMORANDUM OF LAW IN OPPOSITION TO
`DEFENDANTS’ MOTION TO DISMISS PLAINTIFFS’
`AMENDED CLASS ACTION COMPLAINT
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`WOLF HALDENSTEIN ADLER
` FREEMAN & HERZ LLP
`Matthew M. Guiney, Esq.
`Kevin G. Cooper, Esq.
`270 Madison Avenue
`New York, NY 10016
`Tel: (212) 545-4600
`guiney@whafh.com
`kcooper@whafh.com
`
`Lead Counsel for Plaintiffs and the Class
`
`

`

`Case 1:19-cv-04486-BMC Document 46 Filed 06/04/20 Page 2 of 33 PageID #: 1329
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`TABLE OF CONTENTS
`
`Page(s)
`
`III.
`
`TABLE OF AUTHORITIES .......................................................................................................... ii
`INTRODUCTION .............................................................................................................. 1
`I.
`II.
`STATEMENT OF FACTS ................................................................................................. 2
`A.
`CBD History and Regulation .................................................................................. 3
`B.
`Curaleaf’s History and Relevant Class Period Statements ..................................... 4
`C.
`The Truth is Revealed ............................................................................................. 7
`ARGUMENT ...................................................................................................................... 8
`A.
`Defendants’ Jurisdictional Arguments are Without Merit ...................................... 9
`B.
`The Amended Complaint Adequately Alleges False and Misleading
`Statements or Omissions of Material Fact ............................................................ 11
`1.
`Defendants’ False And Misleading Statements and Omissions ............... 11
`2.
`Defendants’ Statements and Omissions Concerning The Health
`Benefits of its Products were False and Misleading ................................. 14
`Defendants’ “Truth-On-The-Market” Defense Is Inapposite ................... 17
`3.
`THE AMENDED COMPLAINT ADEQUATELY ALLEGES SCIENTER .................. 20
`THE AMENDED COMPLAINT ADEQUATELY ALLEGES CONTROL
`PERSON LIABILITY UNDER SECTION 20(a) ............................................................ 24
`LEAVE TO AMEND SHOULD BE FREELY GRANTED ............................................ 25
`VI.
`VII. CONCLUSION ................................................................................................................. 25
`
`
`IV.
`V.
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`
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`i
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`

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`Case 1:19-cv-04486-BMC Document 46 Filed 06/04/20 Page 3 of 33 PageID #: 1330
`
`TABLE OF AUTHORITIES
`
`
`CASES Page(s)
`
`380544 Can., Inc. v. Aspen Tech., Inc.,
` 544 F. Supp. 2d 199 (S.D.N.Y. 2008).........................................................................................25
`
`Absolute Activist Master Fund LLC v. Ficeto,
` 677 F.3d 60 (2d Cir. 2012)............................................................................................................9
`
`Alpha Capital Anstalt v. New Generation Biofuels, Inc.,
` No. 13-CV-5586 (VEC), 2014 U.S. Dist. LEXIS 161472 (S.D.N.Y. Nov. 18, 2014) ...............10
`
`In re Andrx Corp.,
` 296 F. Supp. 2d 1356 (S.D. Fla. 2003) .......................................................................................20
`
`Ashcroft v. Iqbal,
` 556 U.S. 662 (2009) ......................................................................................................................8
`
`Asher v. Baxter Int'l Inc.,
` 377 F.3d 727 (7th Cir. 2004) ......................................................................................................13
`
`In re Atlas Air Worldwide Holdings, Inc. Sec. Litig.,
` 324 F. Supp. 2d 474 (S.D.N.Y. 2004).........................................................................................22
`
`ATSI Commc’ns, Inc. v. Shaar Fund, Ltd.,
` 493 F.3d 87 (2d Cir. 2007)..........................................................................................................25
`
`In re Avon Sec. Litig.,
` No. 19 Civ. 01420 (CM), 2019 WL 6115349 (S.D.N.Y. Nov. 18, 2019) ..................................24
`
`In re Bank of Am. AIG Disclosure Sec. Litig.,
` 980 F. Supp. 564 (S.D.N.Y. 2013) ........................................................................................18, 19
`
`In re Bank of Am. Corp. Sec., Deriv. & ERISA Litig.,
` No. 09 MD 02058, 2011 WL 3211472 (S.D.N.Y. July 29, 2011) ..............................................21
`
`Barilli v. Sky Solar Holdings, Ltd.,
` 389 F. Supp. 3d 232 (S.D.N.Y. 2019).........................................................................................19
`
`In re Barrick Gold Sec. Litig.,
` No. 13 CIV. 3851 SAS, 2015 WL 1514597 (S.D.N.Y. Apr. 1, 2015) .......................................23
`
`Beleson v. Schwartz,
` 419 Fed. App’x 38 (2d Cir. 2011)...............................................................................................20
`
`
`
`
`ii
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`

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`Case 1:19-cv-04486-BMC Document 46 Filed 06/04/20 Page 4 of 33 PageID #: 1331
`
`City of Providence v. Aeropostale, Inc.,
` No. 11 Civ. 7132 (CM)(THK),
` 2013 U.S. Dist. LEXIS 44948 (S.D.N.Y. Mar. 25, 2013) ............................................................8
`
`CompuDyne v. Shane,
` 453 F. Supp. 2d 807 (S.D.N.Y. 2006).........................................................................................24
`
`Cortina v. Anavex Life Sciences Corp.,
` No. 15-cv-10162 (JMF), 2016 WL 7480415 (S.D.N.Y. Dec. 29, 2016) ....................................22
`
`In re Delcath Sys. Sec. Litig.,
` 36 F. Supp. 3d 320 (S.D.N.Y. 2014)...........................................................................................13
`
`DiStefano v. Carozzi N. Am., Inc.,
` 286 F.3d 81 (2d Cir. 2001)..........................................................................................................10
`
`In re Egalet Corp. Sec. Litig.,
` 340 F. Supp. 3d 479 (E.D. Pa. 2018) ..........................................................................................24
`
`In re Eletrobras Sec. Litig.,
` 245 F. Supp. 3d 450 (S.D.N.Y. 2017).........................................................................................23
`
`Emerson v. Mut. Fund Series Tr.,
` 393 F. Supp. 3d 220 (E.D.N.Y. 2019) ........................................................................................12
`
`Freudenberg v. E*Trade Fin. Corp.,
` 712 F. Supp. 2d 171 (S.D.N.Y. 2010).........................................................................................12
`
`Galestan v. OneMain Holdings, Inc.,
` 348 F. Supp. 3d 282 (S.D.N.Y. 2018).........................................................................................23
`
`Ganino v. Citizens Utils. Co.,
` 228 F.3d 154 (2d Cir. 2000)........................................................................................................18
`
`Giunta v. Dingman,
` 893 F.3d 73 (2d Cir. 2018)............................................................................................................9
`
`Gregory v. ProNAi Therapeutics, Inc.,
` 297 F. Supp. 3d 372 (S.D.N.Y. 2018).........................................................................................16
`
`In re Guidant Corp. Sec. Litig.,
` No. 1:03-CV-0892-SEB-WTL,
` 2004 U.S. Dist. LEXIS 22809 (S.D. Ind. Nov. 8, 2004) ............................................................16
`
`In re Harman Int’l Indus., Inc. Sec. Litig.,
` 791 F.3d 90 (D.C. Cir. 2015) ......................................................................................................14
`
`
`
`iii
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`

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`Case 1:19-cv-04486-BMC Document 46 Filed 06/04/20 Page 5 of 33 PageID #: 1332
`
`
`In re Henry Schein Secs. Litig.,
` 18-cv-01428, 2019 U.S. Dist. LEXIS 230571 (E.D.N.Y Sept. 27, 2019) ....................................8
`
`In re Iso Ray Sec. Litig.,
` 189 F. Supp. 3d 1057 (E.D. Wash. 2016) ...................................................................................12
`
`In re KeySpan Corp. Sec. Litig.,
` 383 F. Supp. 2d 358 (E.D.N.Y. 2003) ..................................................................................11, 19
`
`Matrixx Initiatives, Inc. v. Siracusano,
` 563 U.S. 27 (2011) ..................................................................................................................8, 11
`
`Meyer v. Jinkosolar Holdings Co.,
` 761 F.3d 245 (2d Cir. 2014)........................................................................................................14
`
`Morrison v. National Australia Bank Ltd,
` 561 U.S. 247 (2010) ................................................................................................................9, 10
`
`Myun-Uk-Choi v. Tower Research Capital LLC,
` 890 F.3d 60 (2d Cir. 2018)............................................................................................................9
`
`N.J. Carpenters Health Fund v. Royal Bank of Scot. Gp., PLC,
` 709 F.3d 109 (2d Cir. 2013)..................................................................................................19, 20
`
`Novak v. Kasaks,
` 216 F.3d 300 (2d Cir. 2000)........................................................................................................21
`
`In re Pall Corp.,
` No. 07-CV-3359 (JS)(ARL), 2009 WL 3111777 (E.D.N.Y. Sept. 21, 2009) ............................21
`
`In re Refco, Inc. Sec. Litig.,
` 503 F. Supp. 2d 611 (S.D.N.Y. 2007).........................................................................................23
`
`In re Rhodia S.A. Sec. Litig.,
` 531 F. Supp. 2d 527 (S.D.N.Y. 2007).........................................................................................24
`
`Robb v. FitBit,
` 216 F. Supp. 3d 1017 (N.D. Cal. 2016) ......................................................................................17
`
`In re Rockwell Med., Inc. Sec. Litig.,
` No. 16 Civ 1691 (RJS), 2018 WL 1725553 (S.D.N.Y. Mar. 30, 2018) .....................................22
`
`In re Sanofi-Aventis Sec. Litig.,
` 774 F. Supp. 2d 549 (S.D.N.Y. 2011)...................................................................................12, 17
`
`
`
`
`iv
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`

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`Case 1:19-cv-04486-BMC Document 46 Filed 06/04/20 Page 6 of 33 PageID #: 1333
`
`S.E.C. v. Gabelli,
` 653 F.3d 49 (2d Cir. 2011), rev’d on other grounds,
` Gabelli v. S.E.C., 568 U.S. 442 (2013) .......................................................................................11
`
`S.E.C. v. StratoComm Corp.,
` 652 Fed. App’x 35 (2d Cir. 2016)...............................................................................................11
`
`Shemian v. Research In Motion Ltd.,
` No. 11 Civ. 4068, 2013 WL 1285779 (S.D.N.Y. Mar. 29, 2013) ..............................................22
`
`Starr ex rel. Estate of Sampson v. Georgeson S’holder, Inc.,
` 412 F.3d 103 (2d Cir. 2005)........................................................................................................19
`
`Steamfitters’ Indus. Pension Fund v. Endo Int’l PLC,
` 771 Fed. App’x 494 (2d Cir. 2019) ............................................................................................16
`
`Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc.,
` 531 F.3d 190 (2d Cir. 2008)..................................................................................................21, 23
`
`Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
` 551 U.S. 308 (2007) ................................................................................................................9, 21
`
`Tongue v. Sanofi,
` 816 F.3d 199 (2d Cir. 2016)........................................................................................................16
`
`United States v. Georgiou,
` 777 F.3d 125 (3d Cir. 2015)........................................................................................................10
`
`In re Vale S.A. Sec. Litig.,
` No. 19 CV 526 (RJD) (SJB), 2020 U.S. Dist. LEXIS 91150 (E.D.N.Y. May 20, 2020) ...........23
`
`
`STATUTES AND RULES
`
`Securities Exchange Act of 1934, 15 U.S.C. § 78(a), et seq.
` § 78j(b) (“Section 10(b)”) .......................................................................................................9, 24
` § 78t(a) (“Section 20(a)”) ...........................................................................................................24
`
`SEC Rule 10b-5 (17 C.F.R. § 240.10b-5) ..................................................................................8, 11
`
`Federal Food, Drug and Cosmetic Act, 21 U.S.C. § 301, et seq. ..............................................7, 15
`
`
`
`
`
`
`v
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`

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`Case 1:19-cv-04486-BMC Document 46 Filed 06/04/20 Page 7 of 33 PageID #: 1334
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`Lead Plaintiff Warren Basch and additional party plaintiffs W. Frank Klun and Laura
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`Klun (collectively, the “Plaintiffs”) respectfully submit this memorandum of law in opposition to
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`Defendants’ Motion to Dismiss Plaintiffs’ Amended Class Action Complaint. ECF No. 42.1
`
`I.
`
`INTRODUCTION
`
`Defendants have knowingly and recklessly misled investors by touting the quality,
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`effectiveness, safety, health and medical benefits of Curaleaf’s CBD-based products in press
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`releases, while omitting the fact that these products were not approved by the FDA and were,
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`consequently, illegal to sell under federal law. Defendants also knowingly and recklessly
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`misled investors by representing that Curaleaf’s CBD-based products were beneficial for human
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`and animal health, and could treat medical conditions, when the FDA had never deemed the
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`products safe or effective.
`
`The Defendants argue that this is a “particularly weak securities fraud case” because
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`Curaleaf purportedly disclosed the “precise risk it is accused of omitting” – namely the “risk that
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`[Curaleaf] would be subject to FDA enforcement.” Def. Mem. at 1. Indeed, the Defendants
`
`argue that “the only information the Amended Complaint suggests it should have disclosed [is]
`
`that the [Food and Drug Administration (“FDA”)] had not approved the Company’s products and
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`the Company was therefore at risk of FDA regulation.” Def. Mem. at 15 (emphasis added).2
`
`
`1 Defendants are Curaleaf Holdings, the parent company of Curaleaf, Inc. (collectively,
`“Curaleaf” or the “Company”), Joseph Lusardi (the Company’s CEO), Neil Davidson (the
`Company’s CFO), and Jonathan Faucher (the Company’s CFO from January 2017 through
`February 2019.
`2 Defendants repeat this characterization, in slightly differing form, throughout the brief. See
`Def. Mem. at 2, 10 (“risk of FDA enforcement”); at 2 (FDA “potential regulation”); at 3, 11
`(“risk of federal regulation”); at 3, 8, 9, 13, 15, 16, 17, 19 (“risk of FDA Regulation”); at 4
`(“potential for FDA regulation”); at 7 (“risk of potential FDA regulation”); at 16 (“risk of
`regulating CBD products”).
`
`
`
`1
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`

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`Case 1:19-cv-04486-BMC Document 46 Filed 06/04/20 Page 8 of 33 PageID #: 1335
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`Defendants’ argument misconstrues the severity of their omissions. Defendants did not
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`simply omit that Curaleaf was subject to potential regulation at some indefinite and speculative
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`point in the future. Defendants omitted that the Company’s products had not received
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`regulatory approval, and their sale was therefore illegal. Indeed, the Defendants concede that
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`they made no mention of the FDA or FDA approval (or lack thereof), and consequent illegality
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`of their product’s sale, in either of the most critical press releases at issue in this case: Curaleaf’s
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`November 21, 2018 press release announcing its new “Curaleaf Hemp” line of CBD products or
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`the May 10, 2019 press release announcing the new Bido line of CBD products for pets. Def.
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`Mem. at 9-10.
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`When the FDA ultimately took action to halt the illegal sale of Curaleaf’s CBD-based
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`products, the truth was revealed and Curaleaf investors were harmed. As set forth below, the
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`Amended Complaint adequately alleges that the Defendants made material misrepresentations
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`and omissions, and did so with scienter. As a consequence, Defendants’ motion to dismiss
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`should be denied.
`
`II.
`
`STATEMENT OF FACTS
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`This is a federal securities class action on behalf of all Curaleaf securities purchasers on
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`the OTCQX between November 21, 2018 and July 22, 2019 (the “Class Period”).3 Plaintiffs
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`seek to recover damages caused by Defendants’ violations of the federal securities laws and to
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`pursue remedies under the Exchange Act of 1934.
`
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`3 The OTCQX is a U.S. market for companies already listed on a qualified international stock
`exchange.
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`
`
`2
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`

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`Case 1:19-cv-04486-BMC Document 46 Filed 06/04/20 Page 9 of 33 PageID #: 1336
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`A.
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`CBD History and Regulation
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`CBD – shorthand for cannabidiol – is a chemical compound found in plants in the
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`cannabscae family. CBD can be extracted from hemp or from marijuana.4 CBD-based products
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`have grown significantly in popularity in recent years, with companies selling topical creams and
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`lotions, beverages, dietary supplements and tinctures, vape pens, bath bombs, pet treats and
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`cosmetics with various levels of CBD. Although retailers like Curaleaf routinely extoll CBD’s
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`purported health benefits and treatment capabilities concerning a range of health issues, the FDA
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`has raised significant red flags about the safety of CBD: “we have seen only limited data about
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`CBD’s safety and these data point to real risks that need to be considered.” In fact, the FDA had
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`approved only one drug product containing CBD and has raised significant concerns about
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`safety. July 22, 2019 FDA Letter at 8.
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`
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`On December 20, 2018, the FDA detailed its ongoing regulation of CBD products, and its
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`intention to take enforcement action in relation to the illegal sale of CBD products. The FDA
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`explicitly stated that selling unapproved products with unsubstantiated therapeutic claims is not
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`only “a violation of the law” and “illegal” but also put “patients at risk, as these products have
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`not been proven to be safe or effective.” Amended Complaint at ¶ 39. The FDA’s website was
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`as clear:
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` “Can THC or CBD products be sold as dietary supplements? No.”
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` “Is it legal, in interstate commerce, to sell a food (including any animal food or
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`feed) to which THC or CBD has been added? No.”
`
`4 Hemp plants are cannabis plants that contain less than 0.3 percent tetrahydrocannabinol
`(“THC”), while marijuana plants are cannabis plants that contain higher concentrations of THC.
`THC is the main psychoactive compound in marijuana that gives the “high” sensation. It can be
`consumed by smoking marijuana. In contrast, CBD is a non-psychoactive compound and,
`consequently, it does not produce the “high” associated with THC.
`
`
`
`3
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`

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`Case 1:19-cv-04486-BMC Document 46 Filed 06/04/20 Page 10 of 33 PageID #: 1337
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`Id. at ¶¶ 42-43. The FDA also explicitly warned that it had not approved any CBD products for
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`pets and animals. Id. at ¶ 42. These warnings continued through 2019. For example, in April
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`2019, the FDA explained as follows: “Selling unapproved products with unsubstantiated
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`therapeutic claims can put patients and consumers at risk. These products have not been shown
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`to be safe or effective, and deceptive marketing of unproven treatments may keep some patients
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`from accessing appropriate, recognized therapies to treat serious and even fatal diseases.”5 In
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`short, by December 2018, if not earlier, the FDA had made it explicitly clear that marketing
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`CBD products advertised to have health benefits, without FDA approval, was illegal and that the
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`FDA would take enforcement action against retailers doing so.
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`B.
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`Curaleaf’s History and Relevant Class Period Statements
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`Curaleaf describes itself as “the leading vertically integrated multi-state cannabis operator
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`in the United States” and held itself out as a fast-growing, successful company selling a cutting-
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`edge product with significant health benefits during the class period. In particular, on November
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`21, 2018, Curaleaf announced “a line of premium hemp-based CBD products” including oil
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`droplets, soft gel capsules and vape pens. The products were described as “premium,” meeting
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`“the strictest quality standards” and “supporting overall wellness.” Amended Complaint at
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`Exhibit B. During a conference call concerning the products’ launch, Defendant Lusardi drew a
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`distinction between the new CBD-based products and other marijuana-based products:
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`The interstate regulations for CBD are vastly different than that of
`our THC products, which will give us the opportunity to offer
`these products through e-commerce, major third party retailers,
`
`5 “Statement from FDA Commissioner Scott Gottlieb, M.D., On New Steps To Advance
`Agency’s Continued Evaluation of Potential Regulatory Pathways for Cannabis-Containing and
`Cannabis-Derived Products” (Apr. 2, 2019), available at https://www.fda.gov/news-events/press-
`announcements/statement-fda-commissioner-scott-gottlieb-md-new-steps-advance-agencys-
`continued-evaluation.
`
`
`
`4
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`

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`pharmacy chains and grocery stores, in addition to vape shops and
`dispensaries. We are very enthusiastic about this opportunity and
`hope to announce a number of significant third-party distribution
`agreements in 2019.
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`Amended Complaint at ¶ 70. (Emphasis added). But as the Defendants concede, the
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`announcement made “no mention to the FDA” or FDA regulation whatsoever. Def. Mem. at 9-
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`10.
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`On May 10, 2019, Curaleaf announced a new CBD-based line of products for pets, in the
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`forms of “pet drops” and “soft-baked bites.” The product line – called Bido – was purportedly
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`designed to “support a pet's overall wellness including the potential to help manage pain and
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`anxiety.” Amended Complaint at ¶ 88. Again, the Defendants concede that the announcement
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`“made no reference to the FDA” whatsoever. Def. Mem. at 10.
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`In short, the Defendants made statements as to the quality, effectiveness, safety, health
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`and medical benefits of Curaleaf’s CBD-based products when announcing its new products to
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`great fanfare, but failed to disclose that those products were not approved by the FDA and were,
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`consequently, illegal under federal law when making the public announcements in November
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`2018 and May 2019. Indeed, the Defendants conceded that no such disclosures were made at
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`those times. In this way, both press releases gave investors the misleading belief that the
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`products were both legal and provided the touted health benefits.
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`Nevertheless, Defendants argue that the “risks of FDA regulation” were disclosed
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`because other regulatory documents filed in Canada purportedly made the risks clear. In so
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`doing, Defendants rely on boilerplate disclosure documents which simply provided vague,
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`circumscribed or irrelevant warnings as follows:
`
` October 2018 Listing Statement: the document merely discloses that cannabis is
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`illegal under federal law. See Amended Complaint at ¶ 58. This document
`
`
`
`5
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`

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`Case 1:19-cv-04486-BMC Document 46 Filed 06/04/20 Page 12 of 33 PageID #: 1339
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`predates Curaleaf’s CBD-based product announcements as well, and does not
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`disclose that selling CBD-based products (as opposed to cannabis itself) is illegal
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`under federal law. Indeed, the Listing Statement drew a clear distinction between
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`cannabis itself and “isolated cannabinoids (such as cannabidiol (“CBD”) and
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`THC).” Listing Statement at 90. Furthermore, Defendant Lusardi highlighted the
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`very same distinction when announcing Curaleaf’s CBD-based product line,
`
`observing that “[t]he interstate regulations for CBD are vastly different than that
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`of” Curaleaf’s other product lines. Amended Complaint at ¶ 70.
`
` November 2018 disclosures: this document merely referred back to the October
`
`2018 Listing Statement.
`
` January 2019 disclosures: this document merely referred back to the October
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`2018 Listing Statement.
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` April 2019 disclosures: “the FDA may regard any promotion of the cannabis-
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`based products as the promotion of an unapproved drug.” (Emphasis added). In
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`addition to the circumscribed warning, the document was not filed with the
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`OTCQX until well after Curaleaf announced either its human or pet-based CBD
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`products. Furthermore, these disclosures are not referenced, at all, in either of the
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`most critical press releases at issue in this action. Finally, the document failed to
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`explicitly state that Curaleaf’s CBD-based products were illegal because the FDA
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`had not approved them nor was in the process of doing so.
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` May 2019 disclosures: this document merely referred back to the April 2019
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`disclosure document.
`
`
`
`6
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`

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`Case 1:19-cv-04486-BMC Document 46 Filed 06/04/20 Page 13 of 33 PageID #: 1340
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`In short, none of these disclosures indicate that Curaleaf’s CBD-based products touted in
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`November 2018 and May 2019 were illegal under U.S. federal law and none of these disclosures
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`were included in those press releases in any event.
`
`C.
`
`The Truth is Revealed
`
`On July 22, 2019, the FDA issued a warning letter to Curaleaf addressing the improper
`
`and illegal marketing and selling of CBD-based products as dietary supplements, and selling
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`unapproved new animal drugs in violation of the Federal Food, Drug and Cosmetic Act. The
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`FDA letter exposed two facts that had previously been misstated and omitted by Curaleaf. First,
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`the letter explicitly detailed the fact that Curaleaf’s products were illegal under federal law, e.g.,
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`that a number of Curaleaf’s CBD products were “unapproved new drugs,” “misbranded drugs,”
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`and “unapproved new animal drugs that are unsafe . . . and adulterated” in violation of the
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`Federal Food, Drug and Cosmetic Act. July 22, 2019 FDA Letter at 3. Second, the letter
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`explained that Curaleaf’s repeated statements about the health benefits associated with its
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`products were without any basis whatsoever: “these products are not approved [. . .] and
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`therefore these products are considered unsafe.” Id. at 8.
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`The FDA letter garnered significant attention in the media. CNN reported that Curaleaf
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`had made “unsubstantiated health claims” and observed that the “biggest enemy isn’t the FDA
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`or the DEA, but CBD companies making false claims.” Amended Complaint at ¶ 98. (Emphasis
`
`added). The Boston Globe highlighted Curaleaf’s unsubstantiated claims that CBD could treat
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`illnesses like cancer and the FDA’s concerns of harm to patients from CBD products marketed in
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`this way, reporting that the “FDA blasted Curaleaf’s claims that its CBD products can treat
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`chronic pain, eating disorders, anxiety, attention deficit hyperactivity disorder, Alzheimer’s
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`disease, Parkinson’s disease, depression, post-traumatic stress disorder, schizophrenia, and
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`addiction.” Id. at ¶ 99. The article quoted David Gortler, a former FDA official and
`7
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`
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`

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`Case 1:19-cv-04486-BMC Document 46 Filed 06/04/20 Page 14 of 33 PageID #: 1341
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`pharmacologist, who stated “[t]he jury is still out on this drug” and that the FDA protected
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`people from “snake oil salesmen.” Id. Andrew Kessner, analyst at William O’Neil & Co., said
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`that it was not surprising that the first major action was against Curaleaf because it had “made
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`the largest push into CBD.” Id. at ¶ 100.
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`As a result of the FDA Letter, Curaleaf shares fell $0.58 per share, or 7.27% to close at
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`$7.40 per share on July 23, 2019, damaging investors. Curaleaf was forced to remove the
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`statements highlighted in the FDA Letter and to discontinue the sale of many of the products
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`referred to in the FDA letter as a consequence.
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`III. ARGUMENT
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`A claim for a primary violation of Section 10(b) of the Exchange Act and SEC Rule 10b-
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`5 must allege: “(1) a material misrepresentation or omission … [falsity]; (2) scienter; (3) a
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`connection between the misrepresentation or omission and the purchase or sale of a security; (4)
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`reliance …; (5) economic loss; and (6) loss causation. Matrixx Initiatives, Inc. v. Siracusano,
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`563 U.S. 27, 37-38 (2011) (internal quotations omitted). To survive a motion to dismiss “a
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`complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is
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`plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation and internal
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`quotations omitted). “A claim is plausible ‘when the plaintiff pleads factual content that allows
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`the court to draw the reasonable inference that the defendant is liable for the misconduct
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`alleged.’” In re Henry Schein Secs. Litig., 18-cv-01428, 2019 U.S. Dist. LEXIS 230571, at **21-
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`22 (E.D.N.Y Sept. 27, 2019) (quoting Maston v. Bd. of Educ., 631, F.3d 57 (63 (2d Cir. 2011));
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`cf. City of Providence v. Aeropostale, Inc., 2013 U.S. Dist. LEXIS 44948, *42 (S.D.N.Y. Mar.
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`25, 2013) (“The inference need not, however, be ‘irrefutable, i.e., of the ‘smoking-gun’ genre, or
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`
`
`8
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`

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`Case 1:19-cv-04486-BMC Document 46 Filed 06/04/20 Page 15 of 33 PageID #: 1342
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`even the most plausible of competing inferences.’”) (quoting Tellabs Inc. v. Makor Issues &
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`Rights, Ltd., 551 U.S. 308, 324 (2007)).
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`Defendants argue that the Amended Complaint fails to adequately allege falsity and
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`scienter and also fails to adequately allege domestic transactions. As set forth below, those
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`arguments are without merit.6
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`A.
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`Defendants’ Jurisdictional Arguments are Without Merit
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`Defendants argue that the Amended Complaint does not adequately allege a domestic
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`transaction under Morrison v. Nat’l Australia Bank Ltd, 561 U.S. 247, 267 (2010). Def. Mem. at
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`23-24. While Plaintiffs concur that the OTCQX does not constitute a domestic exchange,
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`Plaintiffs can satisfy the second prong of Morrison given that Lead Plaintiff’s purchases of
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`Curaleaf securities were domestic transactions.
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`Section 10(b) applies to both transactions in securities listed on domestic exchanges, and
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`domestic transactions in other securities. Id. The Second Circuit has held that “a securities
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`transaction is domestic when the parties incur irrevocable liability to carry out the transaction
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`within the United States or when title is passed within the United States.” Absolute Activist
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`Master Fund LLC v. Ficeto, 677 F.3d 60, 69 (2d Cir. 2012); see also Giunta v. Dingman, 893
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`F.3d 73, 79-80 (2d Cir. 2018) (stating the a “domestic transaction” means the purchaser
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`“incurred irrevocable liability within the United States to take and pay for a security” or the
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`seller “incurred irrevocable liability within the United States to deliver a security.”). In other
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`words, when a security is not listed on a domestic exchange, “[i]t is the ‘location of the
`
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`6 Defendants do not argue that the Amended Complaint fails to adequately allege a connection
`between the misrepresentation or omission and the purchase or sale of a security, reliance,
`economic loss or loss causation. Those arguments are, consequently, waived. See Myun-Uk-
`Choi v. Tower Research Capital LLC, 890 F.3d 60, 69 n. 5 (2d Cir. 2018).
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`
`
`9
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`Case 1:19-cv-04486-BMC Document 46 Filed 06/04/20 Page 16 of 33 PageID #: 1343
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`transaction that establishes (or reflects the presumption of) the [Securities Exchange] Act’s
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`inapplicability.” United States v. Georgiou, 777 F.3d 125, 135 (3d Cir. 2015) (alternation in
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`original (quoting Morrison, 561 U.S. at 268)).
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`Defendants argue that the Amended Complaint offers no way to conclude that the
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`underlying transactions were “domestic transactions” under the operative definition. Def. Mem.
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`at 24. Lead Plaintiff Basch’s declaration, filed herewith, establishes that he did, in fact, purchase
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`his shares of Curaleaf from a U.S.-based market maker. See Declaration of Warren Basch at 1.7
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`Specifically, on May 3, 2019 and May 14, 2019, Basch purchased Curaleaf stock from G1X (G1
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`Execution Services, LLC), loc