Case 1:21-cv-03070-ARR-TAM Document 58 Filed 11/07/22 Page 1 of 55 PageID #: 1552
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`21-CV-03070-ARR-TAM
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`OPINION & ORDER
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`UNITED STATES DISTRICT COURT
`EASTERN DISTRICT OF NEW YORK
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`MARK KUSNIER and ROBERT SCHEELE, Individually
`and On Behalf of All Others Similarly Situated,
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`Plaintiff,
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`-against-
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`VIRGIN GALACTIC HOLDINGS, INC., MICHAEL A.
`COLGLAZIER, GEORGE WHITESIDES, MICHAEL
`MOSES, RICHARD BRANSON, and CHAMATH
`PALIHAPITIYA,
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`Defendants.
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`---------------------------------------------------------------------
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`Plaintiffs Mark Kusnier, Robert Scheele, Xinqiang Cui, Justin Carough, Jennifer Ortiz, and
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`Richard O’Keefe-Jones bring this putative securities class action against defendants Virgin
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`Galactic Holdings, Inc. (“Virgin Galactic”), Richard Branson, Chamath Palihapitiya, George
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`Whitesides, Michael Moses, and Michael Colgazier1 alleging violations of Sections 10(b), 20(a),
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`and 20A of the Securities Exchange Act of 1934 (“Exchange Act”). Defendants have moved to
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`dismiss the Corrected Amended Complaint in its entirety. For the reasons set forth below, I grant
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`this motion in part and grant plaintiffs leave to amend pursuant to Rule 15 of the Federal Rules of
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`Civil Procedure.
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`1 The case caption also identifies Doug Ahrens and Jon Campagna as defendants, but plaintiffs
`make no allegations regarding these individuals. The Clerk of Court is instructed to adjust the case
`caption to the above.
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`Case 1:21-cv-03070-ARR-TAM Document 58 Filed 11/07/22 Page 2 of 55 PageID #: 1553
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`BACKGROUND
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`The Parties
`Plaintiffs Kusnier and Scheele purchased Virgin Galactic securities during the Class Period,2
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`and plaintiffs Cui, Carlough, Ortiz, and O’Keefe-Jones purchased common stock in Virgin
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`Galactic during the Class Period. Corrected Amended Compl. ¶¶ 28–29, ECF No. 36 (“Compl.”).
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`Defendant Virgin Galactic was founded in 2004 and is in the business of taking customers to
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`space. Id. ¶ 30. Virgin Galactic trades on the New York Stock Exchange under the ticker SPCE.
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`Id. Defendant Branson is the founder of Virgin Galactic and was its controlling shareholder during
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`the Class Period. Id. ¶ 31. Defendant Palihapitiya was Chairman of the Board of Social Capital
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`Hedosophia Holdings Corp. (“Social Capital”), a special purpose acquisition company (“SPAC”)
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`that merged with Virgin Galactic in October 2019. Id. ¶¶ 32, 67. Following the October 2019
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`transaction, Palihapitiya was Chairman of the Board of Virgin Galactic. Id. ¶ 32.
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`Defendant Whitesides was Virgin Galactic’s CEO from May 2010 through July 2020; he was
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`replaced by Defendant Colgazier. Id. ¶¶ 33, 35. Defendant Moses is Virgin Galactic’s President
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`for Missions and Safety, a position he has held since June 2016; he was previously Virgin
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`Galactic’s Vice President of Operations. Id. ¶ 34.
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`Virgin Galactic’s Spacecraft and Safety History
`The spacecraft utilized by Virgin Galactic during the Class Period, Unity and Eve, are a two-
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`part system consisting of a carrier aircraft and a space shuttle. The carrier, Eve, takes the space
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`shuttle to 45,000 feet, then releases the shuttle, Unity, which activates its own engine and flies to
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`approximately 275,000 feet, the definition of “space” under U.S. law. Id. ¶¶ 4, 5, 82. The shuttle
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`then glides down to Earth from space using a process known as “feathering,” through which Unity
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`2 Defined as July 10, 2019 through October 14, 2021, inclusive. Corrected Amended Compl. ¶ 1,
`ECF No. 36.
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`2
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`deploys wings (the “feather”) in the higher, thinner part of the atmosphere to slow and stabilize
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`the shuttle on reentry. Id. ¶¶ 84–85. Lower to the Earth’s surface, where the atmosphere is thicker,
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`the pilot retracts the feather and glides the shuttle to a landing strip. Id. ¶ 86.
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`Working with aircraft prototype maker Scaled Composites, Virgin Galactic developed a
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`shuttle, Enterprise, and began operations and safety testing. Id. ¶ 87. Scaled Composites and Virgin
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`Galactic conducted three types of flight tests (in addition to ground testing). Id. ¶¶ 97–99. The
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`“least risky” type of test flight is a “captive carry flight,” during which the carrier takes the shuttle
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`to 45,000 feet but does not release it. Id. ¶ 97. Next, in a “glide test,” the carrier releases the shuttle,
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`but the shuttle does not engage its own engine and instead glides to a landing strip. Id. ¶ 98. Finally,
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`in a “powered test,” the carrier releases the shuttle, which engages its engine and proceeds to space
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`before gliding back to the landing strip. Id. ¶ 99. During Enterprise’s development, Virgin Galactic
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`conducted thirty glide tests and three “limited powered tests” during which the pilot engaged the
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`rocket motor for less time than needed to reach space (approximately 60 seconds). Id. ¶ 100.
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`During its first full powered test in October 2014, Enterprise disintegrated mid-flight as a result
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`of the premature deployment of the feather, killing the co-pilot and severely injuring the pilot.
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`Plaintiffs contend the accident was a result of Virgin Galactic’s design flaws and failure to properly
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`train pilots not to engage the feather prematurely. See id. ¶¶ 101–11.
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`As a result of the Enterprise accident, Virgin Galactic (1) implemented an overhauled testing
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`program, (2) severed its relationship with Scaled Composites and determined to build craft only
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`through The Spaceship Company, Virgin Galactic’s sister company, and (3) took over from Scaled
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`Composites the construction of Unity. Id. ¶¶ 121–23.
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`Unsuccessful Powered Tests
`Virgin Galactic’s safety testing of Unity revealed significant problems with its safety both
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`before and during the Class Period. After several successful glide flights, Virgin Galactic
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`conducted a final glide flight on January 11, 2018, during which Unity’s left horizontal stabilizer
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`became stuck, a potentially disastrous problem. Id. ¶ 133. Virgin Galactic described this flight as
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`“successfully completed” and “well-executed” in a post-flight press release and did not describe
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`the issue with the horizontal stabilizer. Id. ¶ 134.
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`Virgin Galactic proceeded to conduct test powered flights with Unity, including:
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`• An April 5, 2018 flight during which the pilot aborted Unity’s ascent because his
`instruments were “messed up” and “nearly took Unity off course.” Id. ¶ 135. Virgin
`Galactic’s post-test press release did not mention the failure of its instruments or the fact
`that the flight nearly flew off course. Id. ¶ 136.
`• A July 26, 2018 powered flight during which the pilot inadvertently activated Unity’s
`Reaction Control System, a series of pressurized nozzles used to control Unity’s movement
`in space and thin atmospheres, which caused Unity to roll “at a rate 10 times higher than
`its recommended maximum.” Id. ¶ 139. Virgin Galactic was aware of the potential for this
`problem to arise before the test flight but did not fix the issue ahead of time. Id. ¶ 138.
`Virgin Galactic characterized the flight as “another significant step towards commercial
`service” and did not mention the issue with the Reaction Control System. Id. ¶ 140.
`• A December 2018 flight during which Unity “began veering off course” 30 seconds into
`its 60-second flight path. Id. ¶ 297. Veering off course is dangerous because Unity glides
`to a landing and does not have the ability to reach a landing strip using its own engine. Id.
`Following the powered flight testing, Virgin Galactic believed it was ready send its first non-
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`pilot “astronaut” to space. Id. ¶ 298. On February 22, 2019, Eve and Unity took Beth Moses, Virgin
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`Galactic’s chief customer trainer (and wife of defendant Moses), to space. Id. ¶¶ 117, 299. During
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`this flight, Unity “suffered critical damage[] to its horizontal stabilizers” which was so extensive
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`that one employee told a journalist “I don’t know how we didn’t lose the vehicle and kill three
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`people.” Id. ¶ 300. Virgin Galactic employees, including defendant Moses, “immediately noticed
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`a large gash running along the trailing edge of the right horizontal stabilizer,” which was “way too
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`damaged to fly again.” Id. ¶¶ 302, 304. The only reason the flight did not end in disaster was that
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`the horizontal stabilizer was damaged in the exact right spot to avoid destruction. Id. ¶ 305. Virgin
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`Galactic did not mention this incident in its post-flight press release. Id. ¶¶ 318–20.
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`Engineering and Inspection Flaws
`Plaintiffs allege that Virgin Galactic’s vehicles suffered from a series of design, engineering,
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`and inspection flaws. Scaled Composites built Eve and had partially completed construction of
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`Unity when it was turned over to Virgin Galactic, and Unity was completed based on Scaled
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`Composites’ designs. Id. ¶ 142. Scaled Composites never “produce[d] detailed designs and
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`engineering drawings” to Virgin Galactic, such that “Virgin Galactic was continuously discovering
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`that parts were included in Unity and Eve’s technical drawings that did not exist,” making it
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`impossible to model how the crafts would behave under certain conditions. Id. ¶¶ 145, 147. A
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`confidential witness described Virgin Galactic as putting “blind faith” in the engineering drawings
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`they had received from Scaled Composites. Id. ¶ 173. Another stated that the drawings they had
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`received “did not have enough detail for Virgin Galactic to understand [components’] dimensions
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`or specifications,” nor could Virgin Galactic “know why a change was made” to a given part’s
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`specifications. Id. ¶¶ 175–76. The result was time-wasting attempts to “reverse engineer” the
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`vehicles’ construction. Id. ¶ 178.
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`Virgin Galactic then “compounded the problems by failing to consistently keep track of the
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`modifications it was making,” or by failing to “keep track of the parts it used to make repairs.” Id.
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`¶ 148. Confidential witnesses describe that Virgin Galactic’s system for tracking modifications to
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`Unity and Eve as “a chaotic mess” that was not capable of tracking further changes to engineering
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`orders after they were “published” to technicians. Id. ¶¶ 198–99. The system also erased
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`technicians’ notes of the name, lot number, serial number, and expiration date of parts that they
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`had replaced. Id. ¶ 204. As a result, “engineers frequently did not know how old Unity’s
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`components were,” meaning that “Virgin Galactic would not know if a part has endured too much
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`wear and tear and should either be replaced or taken in for some maintenance.” Id. ¶ 209. In sum,
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`a confidential witness describes Virgin Galactic’s documentation of maintenance as “loosey-
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`goosey.” Id. ¶ 216. Concerns about Virgin Galactic’s ability to make repairs were amplified by a
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`practice of “deliberately concealing problems” in order to maintain flight schedules. Id. ¶ 233. In
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`one instance, a confidential witness stated that he heard a Vice President direct a colleague not to
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`present slides about deferring maintenance to preserve flight schedules. Id. Another confidential
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`witness stated that safety engineers “told management” that ignorance of the configuration of Unity
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`was dangerous. Id. ¶ 235. Four confidential witnesses stated that they felt management set
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`“unrealistic deadlines.” Id. ¶ 246.
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`Further, “Virgin Galactic’s inspections and processes could not reliably detect problems” and
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`were “largely pro forma.” Id. ¶ 151. Confidential witnesses described the inspections process as
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`“pencil-whipping,” i.e., signing off on inspections that were not conducted or were conducted
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`improperly. Id. ¶ 272. A confidential witness described inspectors as relying upon technicians who
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`worked for the production department, a conflict of interest because that department had a vested
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`interest in adhering to flight schedules. Id. ¶ 273. Further, technicians at Virgin Galactic “were not
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`certified” under either Federal Aviation Administration (“FAA”)3 or industry guidelines. Id.
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`¶¶ 275–78. One confidential witness was hired to improve Virgin Galactic’s inspection practices
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`and found that inspectors were not adequately trained to, e.g., inspect internal cracks using a
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`borescope and determine how large they were. Id. ¶ 283. Finally, “Virgin Galactic ignored its own
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`inspections.” Id. ¶ 293.
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`As a result of these deficiencies, confidential witnesses described that Eve and Unity
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`“constantly developed cracks,” in particular in parts of the wings where components were bonded
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`3 The Complaint acknowledges that FAA standards do not apply to Virgin Galactic. See, e.g., id.
`¶ 279.
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`with resin. Id. ¶¶ 254, 256. Prior to eventually hiring two individuals to investigate, Virgin Galactic
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`“never attempted to determine why cracks formed on Eve’s wings.” Id. ¶ 261.
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`Plaintiffs allege the near-disastrous February 2019 flight resulted from these operational flaws
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`within Virgin Galactic. Sometime before the flight, Virgin Galactic removed a layer of thermal
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`protection from Unity’s horizontal stabilizers. Id. ¶ 306. To replace the layers, employees re-
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`covered the surface with Kapton sheets, a film that provides thermal protection. Id. However, the
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`technicians’ application of Kapton covered holes in the horizontal stabilizers designed to vent air
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`when moving to thinner atmospheres. Id. With nowhere to go during the February 2019 flight, the
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`resulting air pressure cracked the horizontal stabilizers. Id. Following this incident, Moses was
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`told that the Director of Maintenance should be fired, but Moses refused to do so. Id. ¶ 314. Moses
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`later told the Washington Post that after the flight “the company immediately notified board
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`members and shareholders as well as the FAA and kept them apprised regularly of what we were
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`finding, as well as the corrective actions.” Id. ¶ 327.
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`Following the February 2019 flight, Vice President of Safety Todd Ericson raised maintenance
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`issues with Virgin Galactic’s Board of Directors, telling the Board’s safety committee that
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`“failures in the maintenance organization were making the program unsafe and that if something
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`didn’t change someone was going to get killed.” Id. ¶ 322. In response, the Board commissioned
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`a report from a former Boeing executive, who interviewed those responsible for Virgin Galactic’s
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`safety. Id. ¶ 323. Based on this report, Virgin Galactic concluded that Unity was safe to fly. Id.
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`¶ 324. Believing his concerns were not taken seriously, Ericson resigned. Id. ¶ 326.
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`Virgin Galactic did not disclose the damage to Unity caused by the February 2019 flight in its
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`SEC filings or otherwise; instead the Washington Post broke the news in a February 1, 2021 article.
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`Id. ¶ 365.
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`Delayed Attempts to Launch Branson into Space
`Virgin Galactic’s “top priority” for 2020 was flying defendant Branson into space. Id. ¶ 330.
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`On August 3, 2020, Virgin Galactic published a press release stating that Branson’s flight would
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`be delayed to 2021. Id. ¶ 331. Plaintiffs argue that this delay “was a materialization of the risk
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`concealed by Defendants’ fraud.” Id. ¶ 333. All told, Unity did not fly for 14 months after the
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`February 2019 flight, id. ¶ 334, because Virgin Galactic was (1) building replacement horizontal
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`stabilizers, which ultimately weighed more than planned and required further modifications, and
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`(2) Virgin Galactic “spent time addressing hazards it had known about for years,” in particular
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`Unity’s tendency to shake at certain speeds, by installing a digital stabilizer control system. Id.
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`¶¶ 336–48.
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`Virgin Galactic scheduled a powered flight for December 12, 2020, the first time since
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`modifying Unity. Id. ¶ 356. After reaching 45,000 feet, Unity failed to start its rocket and the flight
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`automatically aborted, due to electromatic interference between the digital stabilizer control
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`system and the rocket motor controller. Id. ¶¶ 358–59. On December 14, 2020, Virgin Galactic
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`published a press release stating that the cause of Unity’s failure to launch was the triggering of
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`the failsafe system that halted ignition of the rocket motor. Id. ¶ 362.
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`After initially stating that the problem was solved and that Virgin Galactic intended to conduct
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`another powered flight in mid-February, id. ¶ 363, the powered flight was further delayed because
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`Virgin Galactic had not fully fixed the electromagnetic interference issue. Id. ¶¶ 376–78. Plaintiffs
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`allege that “Unity could not have flown in February even if Virgin Galactic had fully addressed
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`the electromagnetic interference problem,” based on an anonymous source who told the
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`Washington Post that “Unity had ‘serious structure problems now appearing, including composite
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`structure coming apart’” and a confidential witness who stated the February 2021 flight was
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`delayed “because an inspection found serious problems that required repairs and modifications.”
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`Id. ¶ 380. Virgin Galactic then conducted a powered flight on May 22, 2021, without issue. Id.
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`¶ 384.
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`Alleged Misrepresentations About Branson’s Spaceflight
`On June 6, 2021, Virgin Galactic competitor Blue Origin announced that it would take its
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`founder, Jeff Bezos, to space on July 20, 2021. Id. ¶ 385. In response, Virgin Galactic announced
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`that it would take Branson to space on July 11, 2021. Id. ¶ 386. After Branson’s flight, defendants
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`declared the flight a “complete success.” Id. ¶ 387. However, this was not the case—Branson’s
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`flight “dangerously strayed from its landing cone, thus imperiling the lives of its passengers.” Id.
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`¶ 391. Because Unity glides to Earth rather than using fuel to land, pilots must ensure that the ship
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`maintains position within a “landing cone” during the trip. Id. ¶ 393. If the ship leaves the cone,
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`Unity may not be able to return to the landing strip and would need to crash land. Id. ¶ 394. In
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`Unity, a yellow cockpit warning light indicates to pilots that Unity is about to leave the cone; a red
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`light means that it has left the cone. Id. On September 1, 2021, the New Yorker reported that during
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`Branson’s flight, the red light flashed, meaning that Unity had strayed from the landing cone. Id.
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`¶ 397. Unity ultimately stayed outside of the cone for 1 minute and 41 seconds, approximately
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`10% of the flight. Id. ¶ 399.
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`This deviation attracted the attention of the FAA, which investigated the flight for straying
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`from its assigned airspace. Id. ¶ 398. The plaintiffs note that “per FAA regulations, [the departure]
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`is considered a mishap,” a term of art describing “a serious incident that did not result in an
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`accident.” Id. ¶ 402 & n.16. ON September 2, 2021, the FAA announced it was grounding Unity.
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`Id. ¶ 408. On September 16, 2021, Virgin Galactic announced that it had resolved the FAA’s
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`concerns. Id. ¶ 405.
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`Virgin Galactic Becomes a Public Company Through a De-SPAC Transaction
`The purpose of a SPAC such as Social Capital is to acquire another company via reverse
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`merger. Id. ¶¶ 51, 53. The SPAC first goes public through a traditional initial public offering, after
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`which the cash raised via the SPAC’s IPO is maintained in a trust account. Id. ¶ 52. When a private
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`company wishes to go public via a SPAC transaction, the SPAC formally acquires the private
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`company, but issues SPAC shares to the private company’s shareholders, “such that they hold the
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`majority, and usually the substantial majority, of the SPAC’s shares.” Id. ¶ 53. Following the
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`SPAC’s acquisition of the private company, the SPAC assumes the private company’s name and
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`operations, SPAC shares are mostly held by the shareholders in the original private company, and
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`the private company receives the cash that was held in the SPAC’s trust account. Id. ¶ 54. Together,
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`this series of transactions is known as a “de-SPAC” transaction. Id.
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`A SPAC’s structure is designed to encourage its sponsors, here Palihapitiya, to conduct a de-
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`SPAC transaction and take a private company public. Id. ¶ 55. Ordinarily if a transaction is
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`consummated, the SPAC’s sponsor is entitled to new shares in the SPAC, usually equivalent to
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`25% of the SPAC’s pre-merger shares. Id. If a de-SPAC transaction is not completed within two
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`years, the sponsor does not receive the additional shares, the SPAC’s trust is liquidated, and the
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`proceeds are returned to investors on a pro rata basis. Id. ¶ 56. Therefore, a SPAC sponsor earns
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`considerably more if it completes a de-SPAC transaction by the assigned transaction date. Social
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`Capital’s transaction date was September 18, 2019. Id. ¶¶ 63–64.
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`Defendants’ Rationale for Taking Virgin Galactic Public
`Plaintiffs allege that Branson’s decision to take Virgin Galactic public was driven by his need
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`for cash and desire to avoid losing control of Virgin Atlantic, an airline company Branson founded.
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`Id. ¶¶ 424–26. Branson considered Virgin Atlantic the “crown jewel of his empire” and like “one
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`of his children.” Id. ¶ 423. In May 2017, Branson held 51% of Virgin Atlantic’s shares, but
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`“reluctantly” agreed to sell a 31% stake to Air France-KLM, meaning that he would lose control.
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`Id. ¶ 425. Plaintiffs attribute Branson’s decision to sell this stake in Virgin Atlantic to the fact that
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`he was “cash poor” and “most of [his] companies were private, meaning that he could not easily
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`sell their shares to meet his pressing needs for cash.” Id. ¶¶ 426–27.
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`In October 2018, sixteen months after Branson agreed to sell his stake in Virgin Atlantic,
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`Virgin Galactic began exploring a merger with Social Capital. Id. ¶ 430. Merger discussions began
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`in January 2019, and in February 2019, the parties negotiated an additional transaction through
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`which Virgin Galactic would purchase up to $100 million in shares from Viceo 10 Ltd., a company
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`80.7% owned by Branson. Id. ¶¶ 430–31. During the parties’ negotiations, this amount increased
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`to $200 million, id. ¶ 432, subject to a requirement that Virgin Galactic have $500 million in cash
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`on hand after the SPAC transaction was completed (i.e., Virgin Galactic’s ability to purchase
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`shares from Viceo 10 Ltd. was limited by its post-transaction cash balance), id. ¶ 435. Branson
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`and Palihapitiya also negotiated for Palihapitiya to purchase an additional $100 million in shares
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`from Viceo 10 Ltd. Id. ¶ 433. When the de-SPAC transaction closed, Virgin Galactic ultimately
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`purchased only $52.1 million in Viceo 10 Ltd. shares. Id. ¶ 436.
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`Plaintiffs allege that Palihapitiya’s involvement in SPACs arose from the failure of his venture
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`capital fund, id. ¶¶ 447–53, and that Palihapitiya saw SPACs as a means of resurrecting his career.
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`Id. ¶ 456.
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`The Virgin Galactic de-SPAC transaction closed on October 25, 2019. Id. ¶ 67. As a result of
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`the transaction, Virgin Galactic’s shareholders were issued 130 million shares at $10 each; Social
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`Capital’s existing shareholders held about 65 million shares; Social Capital’s sponsors, including
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`Palihapitiya, were issued 15.75 million new shares for free; Palihapitiya bought 10 million shares
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`for $100 million from Viceo 10 Ltd.; and Virgin Galactic repurchased about 5.2 million shares
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`from Viceo 10 Ltd. Id. ¶¶ 66–67. As a result of these transactions, Branson received approximately
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`$152.1 million from the de-SPAC transaction.4 Id. ¶ 436.
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`The proceeds from the de-SPAC transaction allowed Branson “to keep his controlling interest
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`in Virgin Atlantic, particularly as Branson could now sell Virgin Galactic stock on the open market
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`when he needed more cash.” Id. ¶ 437. Plaintiffs suggest that the sale of 31% of Virgin Atlantic to
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`Air France-KLM was cancelled because Branson now had cash from Virgin Galactic. See id.
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`Defendants’ Stock Sales During the Class Period
`Branson “sold every Virgin Galactic share he was allowed to sell during the Class Period,” for
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`total proceeds of approximately $891.7 million. Id. ¶¶ 440–43. During the Class Period, Virgin
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`Galactic sold shares for total proceeds of approximately $960.2 million. Id. ¶ 445. Palihapitiya
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`also sold all the stock he was able to sell for total proceeds of approximately $310.6 million. Id.
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`¶ 462. A timeline of defendants’ stock sales is set forth below:
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`• On May 14-22, 2020, Branson, through Viceo 10, sold 23.7 million shares for $358.8
`million, id. ¶ 440(a);
`• On June 2, 2020, Branson, through Viceo 10, sold 12.5 million shares for $188.3 million,
`id. ¶ 440(b);
`• On August 5, 2020, Virgin Galactic sold 23.6 million shares of stock for $460.2 million,
`id. ¶ 445(a);
`• On December 14 and 15, 2020, Palihapitiya sold 3.8 million shares for $97.8 million, id.
`¶ 462(c);
`• On March 2 and 3, 2021, Palihapitiya sold 6.2 million shares for $212.8 million, id.
`¶ 462(d);
`• Between April 12 and April 14, 2021, Branson sold approximately 5.6 million shares for
`$150.3 million, id. ¶ 440(d);
`• Between July 12 and July 16, 2021, Virgin Galactic sold approximately 13.7 million shares
`for $500 million, id. ¶ 445(b); and
`• Between August 10 and August 12, 2021, Branson sold 10.4 million shares for $299.9
`million, id. ¶ 440(e).
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`4 Plaintiffs assume that the full proceeds of the two transactions with Viceo 10 Ltd. went to
`Branson, although Branson held 80.7 percent of Viceo 10 Ltd. See id. ¶ 436 (stating full proceeds
`of $152.1 million went to Branson).
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`Procedural History
`Plaintiff Lavin filed his initial Complaint on May 28, 2021. ECF No. 1. Following motion
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`practice concerning appointment of the lead plaintiff in this putative securities class action, the
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`court appointed Robert Scheele and Mark Kusnier lead plaintiffs and appointed co-class counsel.
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`ECF No. 22. Plaintiffs then filed their Corrected Amended Complaint on December 7, 2021. ECF
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`No. 36.
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`Defendants filed a motion to dismiss on April 4, 2022. See ECF No. 51; Defs.’ Mem. in Supp.
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`Mot. Dismiss, ECF No. 53 (“Mem.”). Plaintiffs filed their opposition on May 4, 2022. Pls.’ Mem.
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`in Opp’n Mot. Dismiss, ECF No. 56 (“Opp’n”). Defendants filed a reply on May 18, 2022. Defs.’
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`Reply in Supp. Mot. Dismiss, ECF No. 57 (“Reply”).
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`LEGAL STANDARD
`On a motion to dismiss under Rule 12(b)(6), I accept all factual allegations in the Complaint
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`as true and draw all reasonable inferences in favor of the non-moving party. Press v. Chem. Inv.
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`Servs. Corp., 166 F.3d 529, 534 (2d Cir. 1999). Dismissal is proper “only if it is clear that no relief
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`could be granted under any set of facts that could be proved consistent with the allegations.” In re
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`Scholastic Corp. Sec. Litig., 252 F.3d 63, 69 (2d Cir. 2001) (quoting Hishon v. King & Spalding,
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`467 U.S. 69, 73 (1984)). The Complaint’s allegations “must be enough to raise a right to relief
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`above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). Accordingly,
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`only “a plausible claim for relief survives a motion to dismiss.” LaFaro v. N.Y. Cardiothoracic
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`Grp., PLLC, 570 F.3d 471, 476 (2d Cir. 2009). I am “not bound to accept as true a legal conclusion
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`couched as a factual allegation.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly,
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`550 U.S. at 555). “Threadbare recitals of the elements of a cause of action, supported by mere
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`conclusory statements, do not suffice.” Id.
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`13
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`Case 1:21-cv-03070-ARR-TAM Document 58 Filed 11/07/22 Page 14 of 55 PageID #: 1565
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`In securities fraud cases such as this one, the Private Securities Litigation Reform Act
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`(“PSLRA”) requires that the complaint “specify each statement [or omission] alleged to have been
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`misleading, the reason or reasons why the statement [or omission] is misleading, and, if an
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`allegation regarding the statement or omission is made on information and belief, . . . state with
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`particularity all facts on which that belief is formed.” 15 U.S.C. § 78u–4(b)(1). Rule 9(b) of the
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`Federal Rules of Civil Procedure imposes a comparable requirement on allegations of fraud. See
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`Fed. R. Civ. P. 9(b) (“In alleging fraud or mistake, a party must state with particularity the
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`circumstances constituting fraud or mistake.”).
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`Exchange Act Section 10(b)
`Plaintiffs allege that the defendants violated Section 10(b) of the Exchange Act and Rule 10b-
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`5 thereunder, 17 C.F.R. § 240.10b-5, by “disseminat[ing] or approv[ing]” a number of “materially
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`false and misleading statements . . . which they knew, or were deliberately reckless in not knowing,
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`were misleading.” Compl. ¶ 596.
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`Section 10(b) makes it unlawful “[t]o use or employ, in connection with the purchase or sale
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`of any security . . . any manipulative or deceptive device or contrivance in contravention of” the
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`SEC’s rules and regulations. 15 U.S.C. § 78j(b). Rule 10b-5 in turn prohibits “mak[ing] any untrue
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`statement of a material fact or [] omit[ting] to state a material fact necessary in order to make the
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`statements made, in light of the circumstances under which they were made, not misleading.” 17
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`C.F.R. § 240.10b-5. Because Section 10(b) claims sound in fraud, plaintiffs’ allegations must meet
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`the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure and of
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`the PSLRA. Fresno Cnty. Emps.’ Ret. Ass’n v. comScore, Inc., 268 F. Supp. 3d 526, 535 (S.D.N.Y.
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`2017). Plaintiffs must plead six elements: “(1) a material misrepresentation or omission by the
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`defendant[s]; (2) scienter; (3) a connection between the misrepresentation or omission and the
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`purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic
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`14
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`Case 1:21-cv-03070-ARR-TAM Document 58 Filed 11/07/22 Page 15 of 55 PageID #: 1566
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`loss; and (6) loss causation.” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 37–38 (2011)
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`(internal quotation and citation omitted). Defendants challenge only the elements requiring a
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`materially misleading statement or omission, loss causation, and scienter. See generally Mem.
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`Accordingly, I address only these elements.
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`DISCUSSION
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`Material Misrepresentations
`Under Rule 10b-5, an omission is “material” where there is “a substantial likelihood that the
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`disclosure of the omitted fact would have been viewed by the reasonable investor as having
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`significantly altered the ‘total mix’ of information made available.” Basic Inc. v. Levinson, 485
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`U.S. 224, 231–32 (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). The
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`challenged statement must be both material and misleading; “[i]t is not enough that a statement is
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`false or incomplete, if the misrepresented fact is otherwise insignificant.” Id. at 238. “[T]he
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`materiality of an omission [or false statement] is a mixed question of law and fact,” and I must
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`“analyze the allegedly fraudulent materials in their entirety to determine whether a reasonable
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`investor would have been misled.” Halperin v. eBanker USA.com, Inc., 295 F.3d 352, 357 (2d Cir.
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`2002).
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`Plaintiffs have alleged that 35 statements made by defendants over the course of the Class
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`Period were materially misleading. See Compl. ¶¶ 497–571; see also Mem. App. A, ECF No. 53-
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`1 (defendants’ chart summarizing challenged statements).
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`1. Defendants’ “Puzzle Pleading” and Waiver Arguments
`Defendants contend that plaintiffs’ Complaint should be dismissed because it constitutes
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`improper “puzzle pleading,” that is, it “places the burden on courts and defendants to ‘determine
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`on [their] own initiative how and why . . . statements were false.’” Mem. 12 (quoting Boca Raton
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`Firefighters & Police Pension Fund v. Bahash, 506 F. App’