Case 1:20-cv-03459-PAC Document 109 Filed 09/28/22 Page 1 of 24
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`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
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`GANESH KASILINGAM,Individually and
`on Behalf of All Others Similarly Situated,
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`Plaintiffs,
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`~against-
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`TILRAY, INC., BRENDAN KENNEDY,
`and MARK CASTANEDA,
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`20-cv-03459 (PAC)
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`OPINION & ORDER
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`:
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`:
`:
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`:
`Defendants.
`peteeeeeene neeens geceeeeeeeeeeee nen enenenecesx
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`Following the dismissal of Plaintiffs’ First Amended Complaint (“FAC”) without
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`prejudice, Defendants Tilray, Inc. and Brendan Kennedy now moveto dismiss Plaintiffs’ Second
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`Amended Complaint (“SAC”). The SAC asserts securities fraud claims against both Defendants
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`under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, as weil as
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`control personliability against Kennedy under Section 20(a) of the Exchange Act.' The motionis
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`GRANTED in part and DENIED in part.
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`BACKGROUND
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`The Court articulated the backdrop of this case in its previous Opinion, and now reiterates
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`key facts and summarizes newly pleaded allegations. See Kasilingam v. Tilray, Inc., No. 20-cv-
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`03459, 2021 WL 4429788 (S.D.N.Y. Sep. 27, 2021).
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`All allegations are drawn from the SAC and documents incorporated therein. However,as
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`they did in their first motion to dismiss, Defendants ask the Court to conducta full context review
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`and take judicial notice of certain documents. Req. Full Context Rev., ECF No. 101. Defendants
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`specifically asks the Court to review documents as “integral” to Plaintiff's complaint; SEC filings
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`"15 U.S.C. §§ 78], 78t(a); 17 CF.R. § 240.10b-5.
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`Case 1:20-cv-03459-PAC Document 109 Filed 09/28/22 Page 2 of 24
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`as a matter of public record; and newsarticles discussing Tilray and the cannabis industry.
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`Id.
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`The Court disagrees with Defendantsthatit is required to do a “full context review” on a motion
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`to dismiss in a securities fraud action.
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`Id. at 1-2: see Gray v. Wesco Aircraft Holdings, Inc., 454
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`F. Supp. 3d 366, 382 (S.D.N.Y. 2020) (noting that
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`the rules surrounding securities fraud
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`complaints “permit” courts to consider documents incorporated into the complaint and matters of
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`judicial notice), aff'd, 847 F. App’x 35 (2d Cir. 2021). Further, to the extent the Court does
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`consider Defendants’ extensive record, it may only do so to “determine what the documents
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`stated,” not for the truth of the matter asserted. Roth v. Jennings, 489 F.3d 499, 509 (2d Cir, 2007)
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`(quoting Kramer v. Time Warner Inc., 937 F.2d 767, 774 (2d Cir. 1991)).
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`Defendants rely on these documents to contradict the allegations in the complaint. See,
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`é.g., Def’s MOLat 10 n.13, ECF No. 100. It is improper for this Court to supplant the allegations
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`of the Plaintiff at the pleadings stage, so it declines to take judicial notice of Defendants’ news
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`articles.
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`see Akerman v. Arotech Corp., 608 F. Supp. 2d 372, 380-81 (E.D.N.Y. 2009) (“Despite
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`the several ‘heightened’ pleading requirements imposed on securities fraud plaintiffs,
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`their
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`allegations are still accepted as true at the 12(b)(6) stage.” (citations omitted)); Gagnon v.
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`Alkermes PLC, 368 F. Supp. 3d 750, 763 (S.D.N.Y. 2019) (“{Cjourts may take judicial notice not
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`of the truth in newsarticles, but that their contents are publicly available.”), Defendants further
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`produce several SEC published documents. While many of these documents are referenced in the
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`SACand appropriate to consider on a motion to dismiss,” several are undated and/or unsigned, and
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`therefore unverifiable? See In re Take-TwoInteractive Sec. Litig., 551 F. Supp. 2d 247, 262 n.4
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`2 See Greene Decl., Exs. 2, ,4 ,5, 8, 9, 10.
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`3 See Greene Decl., Exs. 11, 12.
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`Case 1:20-cv-03459-PAC Document 109 Filed 09/28/22 Page 3 of 24
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`(S.D.N.Y. 2008). Therefore, though the Court reviews all documents incorporated into the SAC,’
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`it declines to review the unincorporated SEC documents. Gray, 454 F. Supp. 3d at 383 (declining
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`to review SEC documentsthat are not incorporated into the complaint). The Court reserves further
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`review of the documents for summary judgment. See In re Top Tankers, Inc. Sec. Litig., 528 F.
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`Supp. 2d 408, 418 (S.D.N.Y. 2007).
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`I.
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`The Parties and Class Period
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`Defendant Tilray, Inc. (“Tilray”) is a publicly traded company that produces and sells
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`marijuana, hemp, and related products globally. SAC 4] 24-25, ECF No. 95. Defendant Kennedy
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`has been Tilray’s President and Chief Executive Officer since January 2018. Id. 926.
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`In 2011,
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`Kennedy and other non-party individuals (the “Kennedy Group”) created Privateer Holdings
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`Incorporated (“Privateer”) to invest in the nascent cannabis industry.
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`Jd. { 30.
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`In 2014, the
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`Kennedy Group formed Tilray’s predecessor as a Privateer subsidiary. Id. Over time, the Kennedy
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`Group privately sold economic interest
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`in Privateer but retained voting control
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`through
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`“supervoting” shares. Id. $31. In July 2018, when Tilray held its initial public offering, Privateer
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`purchased the majority of the shares. Id. J 3.
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`Plaintiffs are purchasers of Tilray common stock during the purported Class Period—from
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`January 16, 2019, through March 2, 2020.
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`Id. J 1. They bring this action on behalf of a putative
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`class of those who purchased Tilray stock during said Class Period, which spans from the day after
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`Tilray entered a high-profile co-marketing deal with Authentic Brands Group (the “ABG
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`Agreement”) until the day Tilray announcedit had impairedits valuation of the ABG Agreement
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`* This includes Kennedy’s Forms3 and 4s from the relevant time period, which may be considered
`for the truth of the matter asserted. In re Bear Stearns Companies, Inc. Sec., Derivative, & ERISA
`Litig., 763 F. Supp. 2d 423, 582 (S.D.N.Y. 2011).
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`> Mark Castaneda is no longer named as a defendant in the SAC.
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`Case 1:20-cv-03459-PAC Document 109 Filed 09/28/22 Page 4 of 24
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`by $102.6 million and also written down the value of its inventory by $68.2 million.
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`Id. Jf 81,
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`138-45. Before it was impaired, under the ABG Agreement, Tilray would have paid ABG $100
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`million, and an additional $150 million in future consideration.
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`Id. { 71(a).
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`In exchange, Tilray
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`would expand globally as ABG’s preferred cannabis supplier, receiving up to 49%of net revenue
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`from ABG-branded cannabis and a guaranteed $10 million payment annually.
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`fd. {{[ 70-71. The
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`Agreement was later renegotiated to relieve Tilray of its obligation to pay future consideration.
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`Id. ¥ 136. In exchange, ABG wasrelievedofits obligation to pay Tilray $10 million annually. Jd.
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`According to Plaintiffs, Defendants made materially false and misleading statements throughout
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`the Class Period to inflate Tilray’s stock price. Tilray, 2021 WL 4429788,at *2.
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`Hi.
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`The Share Exchange and the Aphria Merger
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`Just before the Class Period began, Privateer sent a letter of intent stating its desire to
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`execute a downstream merger with Tilray (the “Share Exchange”).
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`Id. ff] 160, 168. The Share
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`Exchange was completed on December 12, 2019.
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`/d. Plaintiffs allege the Share Exchange had
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`three goals: “(a) eliminate Privateer’s corporate sales tax, (b) contro! the flow of Privateer
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`investors’ Tilray shares into the market, and (c) secure personal control over Tilray ....” Id. ¥ 159.
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`Aspartof the Share Exchange, investors agreed to a two-year lockup (the “Lockup Agreement”)
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`during which time they could notsell their shares. Id. { 160(d).
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`Meanwhile,
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`in Fall 2019, Tilray entered merger negotiations with a large Canadian
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`company, Aphria Incorporated (“Aphria”).
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`Id. { 182.
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`In 2020, Aphria would “repeatedly place
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`the transaction on holdin light of other concerns,” including the COVID-19 pandemic. Id. { 196.
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`Eventually, on December 15, 2020, the companies merged (the “Aphria Merger”). fd. The Class
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`Period ended on March 2, 2020, when the allegedly false statements were disclosed in Tilray’s
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`quarterly earnings call and year-end filings for 2019. Id. ff] 138-45.
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`Case 1:20-cv-03459-PAC Document 109 Filed 09/28/22 Page 5 of 24
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`IIL Misleading Statements
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`The SAC reiterates prior allegations concerning Defendants’ alleged exaggeration of
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`Tilray’s gross margins and the value of the ABG Agreement. See Tilray, 2021 WL 4429788,at
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`#36. The alleged false statements fall into three categories: (1) the value of Tilray’s inventory
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`and its gross margins; (2) the misclassification of labor as an input; and (3) the value of the ABG
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`Agreement.
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`A,
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`Inventory
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`Plaintiffs allege Defendants overstated inventory to exaggerate Tilray’s gross margins, a
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`“critical metric” which made the company appear more profitable than it was. SAC {ff 40, 63.
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`During the Class Period, when asked about the market for CBD in the United States, Kennedy
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`said, “we’re modeling pretty conservatively for 2020 for US CBD. Until we have that regulatory
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`change, we are not going to adjust our numbers up.” Jd. § 128. Kennedy also claimed that Tilray
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`was “building inventory.” Id. § 110. Despite Kennedy’s assurances of the company’s
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`“conservative” modeling, Tilray’s SEC filings indicated significant growth in its inventory.°
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`According to Plaintiffs, this growth was a farce. They allege Tilray overvalued “worthless”
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`trim—aterials left over after harvesting the buds and flowers of the cannabis plant—and other
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`unsellable formulated oils. SAC J 55, 63, 99, 111. They cite one former employee’s recollection
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`of “bags and bags, and boxes and boxesof end-of-run materials,” materials which were not given
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`a defined internal value but ascribed a value onfinancial statements of over $40 million. Id. {J 61—
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`63 (internal quotation marks omitted). Plaintiffs allege there was “no wayto sell” these materials
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`6 Tilray’s reported inventory grew from $16.2 million at the end of 2018, to $48.7 million after the
`first quarter of 2019, to $75.3 million halfway through 2019, and ultimately $111.5 million at the
`end of the third quarter of 2019. Id. J] 90, 98, 114, 134.
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`and “Tilray should haveclassified them as waste.” Id. [62. Similarly, according to another former
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`employee, Tilray valued worthless, non-reusable oils between $750,000 and $7,500,000. Id. $55.
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`All told, Tilray allegedly inflated its stock by over $68 million throughout the Class Period,
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`until March 2, 2020, when the company accurately wrote downits inventory. Tilray’s public
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`filings state that, “[n]et realizable value is defined as the estimated selling price in the ordinary
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`course of business, less reasonably predictable costs of completion, disposal and transportation.”
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`Id. JF 89, 96, 97, 113, 133. In reality, by ascribing value to trim unrelated to “the ordinary course
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`ofbusiness,” Defendants allegedly violated Generally Accepted Accounting Principles (“GAAP”).
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`Id. 19 61, 91, 99. Similarly, the unsellable oils were allegedly given a false value, in violation of
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`GAAP,andtheir true value was only reflected once inventory was written downat the end of the
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`Class Period. Id.
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`Plaintiffs allege that on May 11, 2020, after the close of the Class Period, Kennedy said
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`that the inventory was written down “[s]o everything that wesell will have all the cost structure
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`associated with it so that we don’t have any write-offs at the end of the year.” Jd. J 148. This
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`statement, according to Plaintiffs, constitutes Kennedy’s admission that Defendants violated
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`GAAP because the inventory should have always had the correct cost structure. Id. | 149.
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`B.
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`Labor
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`Plaintiffs next allege that Defendants understated the costof labor in the Bills of Materials,
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`which carries over into the financial statements.
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`Specifically, Plaintiffs take issue with
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`Defendants’ calculation of the labor required to produce certain products, including marijuana pre-
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`rolls.
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`Id. §{ 51-53. One former employee was “certain that Tilray artificially lowered the pre-
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`roll’s cost of sales” after seeing that labor costs were “were substantially lower than those [the
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`Case 1:20-cv-03459-PAC Document 109 Filed 09/28/22 Page 7 of 24
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`employee] had established.” Id. § 51. According to the SAC,this labor cost was incorrectly
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`recorded as indirect overhead to mislead investors. Id. ¥ 53.
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`Cc,
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`ABG Agreement
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`Finally, Plaintiffs allege that Defendants made multiple misleading statements regarding |
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`the ABG Agreement. As previously mentioned, the Agreementessentially specified that Tilray
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`would pay ABG $100 million and $150 million in future consideration in exchange for ABG’s
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`services globalizing the Tilray brand. SAC 470.
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`Kennedy made several statements trumpeting the value of the ABG Agreement. He was
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`quoted in a news article commenting that the ABG Agreement arose because “[ABG] liked
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`[Tilray’s] focus on research and science, and when the U.S. Farm Bill passed [on December 20,
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`2018], things started coming together.” Id. | 84.’ He also highlighted the “vetting process” the
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`companies underwent and the Agreement’s “first of its kind”nature.
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`fd. fj 93, 108.
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`Tilray’s quarterly filings and earningscalls also reflected high hopes for the Agreement.
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`See Id, Tf 116, 120, 123, 130. Tilray’s first financial statement after the ABG Agreement recorded
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`that the Agreement was worth over $151 million.
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`Id. § 101. He explained that “this agreement
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`leverages our complementary strengths and will be accretive to our shareholders” and that the
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`“revenue sharing” component would be “a long-term partnership designed to leverage ABG’s
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`portfolio ....” Id. [ff 82, 86.
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`Plaintiffs claim these statements were demonstrably false. To start, they allege the
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`Agreement was negotiated and executed within “literally a matter of days,” a rush job inconsistent
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`with Kennedy’s remarks on the Agreement. SAC { 73.
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`It further alleges that Tilray overvalued
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`7 The U.S. Farm Bill passed on December 20, 2018, where Congress removed hempfrom thelist
`of controlled substances under federal law. SAC 33. While the Bill only legalized hemp,it was
`the first time cannabis was made federally legal in the United States.
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`Case 1:20-cv-03459-PAC Document 109 Filed 09/28/22 Page 8 of 24
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`the Agreement at $100 million to arrest the fail in Tilray’s stock price that had begun on January
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`15, 2019.8 Jd. According to the SAC, the Agreement was created and overvalued in this matter
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`partially to stop a fall in Tilray’s stock price that had begun on January 15, 2019.
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`Id. J 75. The
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`alleged true value of the Agreement cameto light on January 30, 2020—when Tilray renegotiated
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`the Agreementto relieve both parties of their obligatory payments. On March 2, 2020, Tilray
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`confirmed the extent of the devaluation by disclosing on its Q4 2019 Statements that it impaired
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`the ABG Agreement by $102.6 million. fd. ff] 136-39.
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`IV.
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`Sale of Securities
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`On January 24, 2019, Kennedy sold over $11 million worth of his individual stock. SAC
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`q] 220-22; Greene Decl., Ex 10, ECF No, 102-10. This sale occurred less than two weeks after
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`Kennedy promised not to sell any of his Tilray shares. Id. {]224—25. All told, Kennedy sold over
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`$28 million worth of his stock during the Class Period, at a high profit margin——his original
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`“purchase price for the shares he sold was a small number of pennies per share.” Jd. [J 220-21.?
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`V.
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`Smith & Sinclair Acquisition
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`In July 2019, “Kennedy caused Tilray to purchase Smith & Sinclair,” a company that was
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`30% owned by Privateer. SAC | 229. Kennedy received all $2.4 million of the Privateer-related
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`proceeds from the sale. Id, 230. For the other 70% not owned by Privateer, Tilray paid 79,289
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`shares and a contingent consideration of approximately $2 million.
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`Jd. at 230. Subsequent
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`financial statements revalued that consideration from $2 million to $420. Id. ¥ 231.
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`8 Tilray’s stock price fell approximately 17% on volume “three times higher than the previous
`day[].” fd. | 75.
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`? Privateer also allegedly authorized suspicious sales after the Privateer Share Exchange that
`exceeded the total allowable amount of permitted sales pursuant to the Lockup Agreement.
`Id. F¥ 241-46.
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`VI.
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`Kennedy’s Aspirations
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`The SAC alleges Kennedy madethese false statements to overvalue Tilray and accomplish
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`a series of corporate goals, including to help him avoid a sizeable tax bill and secure personal
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`control over the world’s largest cannabis company. SAC 4151. The Kennedy Group had indirect
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`control of Tilray through its majority voting shares in Privateer, which owned 90% of Tilray’s
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`voting power.
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`Id. 1155. However, this indirect ownership cameat disadvantage: the power of
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`the Kennedy Group’s supervoting power only applied to certain kinds of decisions; any sale of
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`Privateer stocks was to be distributed evenly amongst shareholders; any sale of Privateer stock
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`would drive down Tilray’s price because Tilray was controlled by Privateer; and any sales of
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`Privateer’s Tilray stock would be subject to double taxation.
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`Jd. J] 156-57.
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`If anyone in the
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`Kennedy Group sought to monetize their interest in the companies, they “would face a tax bill of
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`more than 40% of the proceeds.” Id. { 158. Plaintiffs allege that Kennedy made the false
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`statements at issue to make it “seem that it would be relatively simple for Tilray to become
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`profitable” and to “convince Privateer investors that Tilray was succeeding at the very strategy
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`[Kennedy] had publicly touted: developing branded products.”
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`fd. { 167.
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`Essentially,
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`‘Defendants’ false statements helped convince Privateer investors to vote their shares in favor of
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`the Share Exchange.” Id.
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`Plaintiffs further allege that Kennedy’s desires are reflected in various statements he made
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`about the cannabis industry andhisintent to beat its helm.
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`/d. { 192. Kennedy explained that he
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`believed only three or four companies would dominate the potentially $200 billion industry and
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`he expected to be leading one ofthose. Id. JJ 175-80. Plaintiffs claim that Kennedy pursued the
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`Aphria Mergervigorously, because “by ensuring a quick approval, Kennedy made the combination
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`more attractive to Aphria, a carrot he could use to make himself CEO.” Id. J 191. However,
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`“Kennedy’s term sheet was not favorable to Tilray investors.” Jd. { 188. The Aphria Merger was
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`delayed due to Covid-19, and eventually concluded on December 15, 2020. Jd. { 196. The two
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`companies’ value had changed over the pandemic and Aphria was now worth more than two-thirds
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`of the combined company, so Aphria’s CEO became the combined company’s CEO while
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`Kennedy becamea Director.
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`id.
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`197.
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`Plaintiffs allege the timing of Kennedy’s actions is also important because, were “Tilray to
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`merge with Aphria before the Share Exchange, the Controlling Shareholders could not secure
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`terms as beneficial” under the deal because they would lose their control. [d. J 217 (emphasis in
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`original). Furthermore, Defendants had to make the “corrective disclosures” before the Aphria
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`Merger because “Aphria would naturally request, and expect, copious due diligence .. .
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`Defendants could not hope to hide from Aphria the ‘bags and bags, boxes and boxes’ oftrim that
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`made up 44% of Tilray’s inventory. Nor could they hide that the ABG Agreementwasillusory.”
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`Id. § 218.
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`VII. Damage to Investors
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`Plaintiffs allege that Defendants’ misstatements caused immediate falls in stock prices.
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`SAC 9 137-44. First, the renegotiation relieved ABG of its obligatory annual $10 million
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`payment, and in exchange Tilray would not pay the $83.3 million in cash or stock. /d. { 136. “The
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`news surprised the markets because Tilray had boasted that the guaranteed annual payments were
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`a key provision that aligned ABG’s incentives with Tilray’s and suggested difficulties with the
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`ABG Agreement.” Id. On January 30, 2020, the same day that the renegotiation was announced,
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`Tilray’s stock dropped nearly 8.8%.
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`Jd. J 137. Subsequently on March 2, 2020, the ABG
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`Agreement was impaired by over 80%ofits value, which was announcedthe samedayin Tilray’s
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`year-end filings and on a quarterly earnings call.
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`Jd. JJ 138-39. At the same time, Tilray
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`10
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`announced a writing downofits inventory by $68.6 million, over 40%ofits total value. Id. {[ 142.
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`These announcements caused Tilray’s stock price to fall about 18% over the next two days.
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`Id. ¥{ 143-44. From their all-time high during the Class Period to “the close of the Class Period,
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`Tilray’s shares traded for about $5 — down more than 95% from their Class Period highs.” Id. $18.
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`L
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`Applicable Law
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`DISCUSSION
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`“To survive a motion to dismiss, a complaint must contain sufficient factual matter,
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`accepted astrue, fo ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556
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`U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). When ruling
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`on a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6),
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`a court accepts as true all the allegations in the complaint and draws every inference in favor of
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`the plaintiff. Twombly, 550 U.S. at 555.
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`Securities fraud claims must meet the heightened pleading standard of Rule 9(b) of the
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`Federal Rules of Civil Procedure, which requires the plaintiff to state with “particularity the
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`circumstances constituting fraud.” ECA & Local 134 IBEW Joint Pension Tr. ofChi. v. JP Morgan
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`Chase Co., 553 F.3d 187, 196 (2d Cir. 2009) (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
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`551 U.S. 308, 320 (2007)). Additionally, claims brought pursuant to Rule 10b-5 must also meet
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`the requirements of the Private Securities Litigation Reform Act (“PSLRA”). See 15 U.S.C.
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`§ 78u-4(b). The plaintiff must: “(1) specify the statements that the plaintiff contends were
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`fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and
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`(4) explain why the statements were fraudulent.” Anschutz Corp. v. Merrill Lynch & Co., 690 F.3d
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`98, 108 (2d Cir. 2012) (internal quotation marks omitted). The plaintiff must also “state with
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`Case 1:20-cv-03459-PAC Document 109 Filed 09/28/22 Page 12 of 24
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`particularity facts giving rise to a strong inference of scienter.” In re Sketchers USA, Inc. Sec.
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`Litig., 444 P. Supp. 3d 498, 511 (S.D.N.Y. 2020)(citing Anschutz Corp., 690 F.3d at 108).
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`Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder make
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`it “unlawful .
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`.
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`. [t]o make any untrue statement of a material fact or to omit to state a material fact
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`necessary in order to make the statements made, in light of the circumstances under which they
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`were made, not misleading.” 17 C.F.R. § 240.10b—5(b). To state a claim under Section 10(b) of
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`the Exchange Act and Rule 10b-5, a plaintiff must allege that
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`the defendant: “(1) made
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`misstatements or omissions of material fact; (2) with scienter; (3) in connection with the purchase
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`or sale of securities; (4) upon whichplaintiffs relied;'° and (5) that plaintiffs’ reliance was the
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`proximatecauseoftheir injury.” Sketchers, 444 F. Supp. 3d at 511-12 (citing Gamm v. Sanderson
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`Farms, Inc., 944 F.3d 455, 463 (2d Cir. 2019)).
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`iH.
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`Misstatements and Omissions of Material Fact
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`Plaintiffs must first allege that Defendants made misstatements or omissions of material
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`fact. A statement or omission is actionable under Section 10(b) of the Exchange Act and Rule
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`10(b)-5 if it is both false and material. Sketchers, 444 F. Supp. 3d at 512. Falsity must existat the
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`time the statement was made,
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`Jd, The test for materiality is an objective one, evaluating each
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`statement from the perspective of the “ordinary investor.” Rosi v. Aclaris Therapeutics, Inc., No.
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`19-cy-7118, 2021 WL 1177505, at *9 (S.D.N.Y. Mar. 29, 2021) (quoting Ommicare, Inc. v.
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`Laborers Dist. Council Const. Indus. Pension Fund, 575 U.S. 175, 187 (2015)). As to omissions,
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`“once a company speaks on an issue or topic, there is a duty to tell the whole truth.” Meyer v.
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`JinkoSolar Holdings Co., 761 F.3d 245, 250 (2d Cir. 2014). Plaintiffs’ allegations of false
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`'© Defendants do not contest the third or fourth elements, and the Court finds that they are
`adequately pled; therefore, those elements are not discussed.
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`Case 1:20-cv-03459-PAC Document 109 Filed 09/28/22 Page 13 of 24
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`statements fall into three general categories: (1) the value of Tilray’s inventory and its gross
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`margins; (2) the misclassification of labor as an input; and (3) the value of the ABG Agreement.
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`A.
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`Falsity"!
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`1.
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`Inventory
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`Plaintiffs have plausibly alleged that Defendants made false statements overvaluing
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`materials that had negligible value. The former employee’s allegations aboutessentially worthless
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`oils that were valued between $750,000 and $7,500,000, coupled with the subsequent documenting
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`of Tilray’s inventory, demonstrate both how and whythe statements were misleading. At the time
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`the companyascribed value to the oils—each time Tilray made quarterly statements, and Kennedy
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`approved them-~-those oils allegedly bad negligible financial value. See Novak v. Kasaks, 216
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`F.3d 300, 304 (2d Cir. 2000)(finding falsity where defendants were “accounting for inventory that
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`they knew to be obsolete and nearly worthless at inflated values”). Those statements were
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`therefore plausibly alleged to be “false.”
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`Similarly, Kennedy’s claim that Tilray was “building” inventory was false because the trim
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`hadlittle to no value at the time it was being accumulated. Defendants claimed—intheir 2018 10-
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`K, Q1 2019-10Q, Q2 2019-10Q, and Q3 2019-10Q—that inventory was growing significantly:
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`from $16.2 million to $110.5 million. But when Tilray wrote downits inventory just months later
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`in March 2020, $68.6 million of that inventory growth was revealed to have been a mirage.
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`Furthermore, the false statements in the quarterly filings violated GAAP, which further
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`bolsters the claim that Defendants misled investors. In re Citigroup Bond Litig., 723 F. Supp. 2d
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`568, 594 (S.D.N.Y. 2010) (denying a motion to dismiss where plaintiff alleged GAAPviolations).
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`'l Because the Court, for reasons explained infra, finds that the loss causation is not met with
`respect to the labor statements, it does not discuss the labor statements’ alleged falsity.
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`Case 1:20-cv-03459-PAC Document 109 Filed 09/28/22 Page 14 of 24
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`Plaintiffs allege Defendants’ statementin the filings that value was “the estimated selling price in
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`the ordinary course of business” would have been false because various items that had been
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`accounted for had noselling price in the ordinary course of business. In re CannaVest Corp. Sec.
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`Litig., 307 F. Supp. 3d 222, 239 (S.D.N.Y. 2018) (holding revenue statementslater corrected to be
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`valued at 15% less than the original valuation to be false). These allegations of GAAP violations
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`are sufficient at the pleadings stage, despite Defendants’ argumentsto the contrary and references
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`to outside accounting experts. See Citigroup, 723 F. Supp. 2d at 594 (reserving a determination
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`on GAAPviolations for a later point in the litigation).
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`Finally, Kennedy made statements related to the false inventory claims that were
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`misleading. For example, the claim “we are not going to adjust our number up” misled investors
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`to believe that Tilray was accurately and conservatively reporting its inventory, when really the
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`numbers were already inflated. See Iwa Forest Indus. Pension Plan vy, Textron Inc., 14 F.4th 141,
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`14546 (2d Cir. 2021) (statements about the status of the company’s inventory were misleading
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`because those statements would lead a reasonable investor to believe otherwise).
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`2.
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`The ABG Agreement
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`Likewise, Plaintiffs have plausibly alleged that Defendants made false statements touting
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`the value of the ABG Agreement. The SAC alleges that Defendants lied about the value of the
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`ABG Agreement from the momentof its inception. Defendants contend that the statements,
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`including Tilray’s accounting and related SEC filings, are too subjective to be actionable. Defs.’
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`MOL at 14-15. However, taking Plaintiffs’ allegations as true, Defendants reported in their
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`financial disclosures that the ABG Agreement was worth $102.6 million more than it was actually
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`worth—an objective figure.
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`14
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`Case 1:20-cv-03459-PAC Document 109 Filed 09/28/22 Page 15 of 24
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`Likewise, Defendants’ statements bolstering the Agreement are plausibly false because
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`they implied untrue facts. See Villella v. Chem. & Mining Co. of Chile Inc., No. 15 CIV. 2106,
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`2017 WL 1169629, at *10 (S.D.N.Y. Mar. 28, 2017). Kennedy’s statement that “[ABG] liked our
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`focus... and when the .., Farm Bill passed.. . things started coming together,” could imply that
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`Tilray commenced discussions with ABG at least prior to December 20, 2018—when the Farm
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`Bill passed. Plaintiffs allege that in reality, there were only a few days of negotiationstotal that
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`did not commenceuntil nearly a month later. Abramson, 965 F.3d at 174 (opinions are misleading
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`when they imply contrary facts), The later impairment of the Agreementfurther indicates the
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`plausible falsity of the claims. CannaVest, 307 F. Supp. 3d at 238.
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`The parties dispute the extent to which the Agreement was indeed carefully planned and
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`negotiated. Defendants argue that “[t]he ABG Agreement was carefully negotiated and vetted
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`with assistance from outside experts.” Defs.” MOL at 5. Conversely, Plaintiffs allege that it is
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`partly the lack of careful negotiation and vetting that makes the announcement of the ABG
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`agreement, the related statements by Kennedy, and the subsequentvaluation, misleading. Because
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`the Court is ruling on a motion to dismiss, it does not need to decide which of these accounts is
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`correct. Tellabs, Inc., 551 U.S. at 322. Rather, the Court asks if the alleged statements were
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`plausibly false at the time they were made. Sketchers, 444 F. Supp. 3d at 512.
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`Plaintiffs plead suchfalsity. For one, the SAC sufficiently alleges that the ABG Agreement
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`was hastily put together to arrest a falling stock price and the statements describing its potential
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`value were false. SAC { 73. Further, just as the misstatements regarding inventory werefalse,
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`statements related to the ABG Agreement and the company’s subsequentfailure to abide by GAAP
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`render Kennedy’s statements and Tilray’s related filings false. In re Citigroup BondLitig., 723 F.
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`Supp. 2d at 594. Nor were these statements accompanied by sufficient cautionary language, or
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`Case 1:20-cv-03459-PAC Document 109 Filed 09/28/22 Page 16 of 24
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`plausibly believed by Kennedy,at the time they were made. Villella, 2017 WL 1169629, at *10
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`(holding that opinion statements were actionable because Defendant knew or should have known
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`that they were false when made).
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`B.
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`Materiality
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`“A statement is materially misleading when the defendants’ representations, taken together
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`and in context, would have misled a reasonable investor.” Altimeo Asset Mgmt., 19 F.4th at 151
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`(internal quotations omitted). The question is whetherthe falsity would have significantly altered
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`the total mix of available information. Basic Inc. v. Levinson, 485 U.S. 224, 231 (1988).
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`Generally, “a complaint may not properly be dismissed on the ground that
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`the alleged
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`misstatements or omissions are not material unless they are so obviously unimportant to a
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`reasonable investor that reasonable minds could not differ on the question of their importance.”
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`Gray v. Alpha & Omega Semiconductor, Ltd., No. 20-CV-2414, 2021 WL 4429499, at *7
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`(S.D.N.Y. Sep. 27, 2021) (cleaned up).
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`Defendants do not challenge the materiality of the inventory statements or the report on the
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`valuation ABG Agreement’s valuation, and rightly so. A reasonable investor could find the
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`absence oftens of millions of dollars of inventory, or the overvaluation of an Agreement by $100
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`million, to be material. In re Veeco Instruments, Inc., Sec. Litig., 235 F.R.D. 220, 234 (S.D.NLY.
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`2006) (finding fraudulent staternent causing artificially inflated prices to be material).
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`The only statements Defendants do contest as to materiality are the positive statements
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`about the ABG Agreement. Defs.” MOL at 14 n.18. However, the Court cannot concludeat this
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`preliminary stage that these statements about the “long-term relationship” of the Agreement—one
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`designed to “leverage ABG’s portfolio” and be “accretive to shareholders”—did not alter the mix
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`of available information upon which an investor would rely as a matter of law. Altimeo Asset
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`Case 1:20-cv-03459-PAC Document 109 Filed 09/28/22 Page 17 of 24
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`Memt., 19 F.4th at 151 (finding statements regarding potential negotiations to be material and
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`holding that materiality should rarely be decided on a motion to dismiss); see also United