Hrsa Ila Funds V Adidas Ag

Key Facts

Issues

• The court affirmed the district court's dismissal of HRSA-ILA's section 20(a) claims, which provide joint and several liability for controlling persons. The court noted that section 20(a) requires a plaintiff to prove both a primary violation of federal securities law and that the defendant exercised actual power or control over the primary violator. Since HRSA-ILA failed to plead an actionable section 10(b) claim, the section 20(a) claim also failed.
• The court analyzed whether HRSA-ILA adequately alleged an actionable securities fraud claim under section 10(b) for Adidas's statements claiming compliance with the EU's Non-Financial Reporting Directive and Global Reporting Initiative disclosure standards. The court determined that Adidas's statement about fulfilling GRI Standards was not capable of objective verification because no enforcement body exists to settle the meaning of GRI's broad discretionary provisions, thus HRSA-ILA failed to plead a material misrepresentation.
• The court examined whether HRSA-ILA adequately alleged an actionable securities fraud claim under section 10(b) of the Securities Exchange Act of 1934 for Adidas's Business Partners Risk disclosures, which warned of potential negative effects from unethical business practices or improper behavior by partners and influencers. The court concluded that the disclosure presented hypothetical risks rather than improper behavior itself, and that a reasonable investor would not be misled by these disclosures.
• The court determined whether HRSA-ILA sufficiently pleaded scienter, even assuming a material misrepresentation existed. The court concluded that HRSA-ILA failed to plead scienter because the complaint did not state with particularity facts giving rise to a strong inference that Adidas acted with deliberate recklessness. As a corporation, Adidas can only act through its employees and agents, and HRSA-ILA failed to show that any agent of Adidas acted with deliberate recklessness.

Holdings

• The Ninth Circuit affirmed the district court's dismissal of HRSA-ILA's securities fraud claims under section 10(b) and section 20(a) of the Securities Exchange Act. The court held that Adidas's compliance statements with the EU's Non-Financial Reporting Directive (NFRD) and Global Reporting Initiative (GRI) standards were not material misrepresentations because they were not capable of objective verification. The court also affirmed dismissal of claims regarding Adidas's Business Partners Risk disclosures, finding they adequately warned of hypothetical risks from celebrity partners' improper behavior. Additionally, the court found HRSA-ILA failed to plead scienter as required for section 10(b) claims.
• The court affirmed the district court's conclusion that HRSA-ILA fails to plead an actionable securities fraud claim for Adidas's Business Partners Risk disclosures. The disclosure presented hypothetical risk of improper behavior as a negative effect, not the improper behavior itself, and a reasonable investor would know partnership risks with celebrity partners. The court also affirmed dismissal of section 20(a) claims because the primary section 10(b) claim failed.
• The court affirmed dismissal of HRSA-ILA's section 20(a) claims against Adidas and Harm Ohlmeyer. Section 20(a) requires proof of a primary violation of federal securities law and that the defendant exercised actual power or control over the primary violator. Because HRSA-ILA failed to plead an actionable section 10(b) claim, the section 20(a) claim also fails.

Remedies

Legal Principles

• Scienter in securities fraud cases requires showing deliberate recklessness, defined as an extreme departure from the standards of ordinary care. A corporation can only act through its employees and agents and can likewise only have scienter through them.
• Section 20(a) provides joint and several liability for controlling persons and requires a plaintiff to prove (1) a primary violation of federal securities law and (2) that the defendant exercised actual power or control over the primary violator. If a plaintiff fails to plead a primary violation of section 10(b), his section 20(a) claim fails.
• Section 10(b) claims require pleading loss causation as an element. A plaintiff must adequately allege: (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.
• Federal Rule of Civil Procedure 9(b) requires parties alleging fraud to state with particularity the circumstances constituting fraud. The Private Securities Litigation Reform Act of 1995 requires complaints to specify each statement alleged to have been misleading and the reason or reasons why the statement is misleading.

Precedent Name

• In re ChinaCast Educ. Corp. Sec. Litig.
• In re Alphabet, Inc. Sec. Litig.
• Retail Wholesale & Dep't Store Union Loc. 338 Ret. Fund v. Hewlett-Packard Co.
• In re Facebook, Inc. Sec. Litig.
• Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am.
• Glazer Cap. Mgmt., L.P. v. Forescout Techs., Inc.
• Howard v. Everex Sys., Inc.
• No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am. W. Holding Corp.
• Weston Family Partnership LLLP v. Twitter, Inc.
• Matrixx Initiatives, Inc. v. Siracusano
• Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc.
• Zucco Partners, LLC v. Digimarc Corp.

Cited Statute

• Securities Exchange Act of 1934
• 28 U.S.C. § 1291
• Federal Rule of Civil Procedure 9(b)
• Private Securities Litigation Reform Act of 1995

Judge Name

• Bumatay
• Murugia
• Owens

Passage Text

• 4. We affirm the district court's dismissal of HRSA-ILA's section 20(a) claims. Section 20(a) provides joint and several liability for controlling persons and requires a plaintiff to prove '(1) a primary violation of federal securities law and (2) that the defendant exercised actual power or control over the primary violator.' If a plaintiff fails to plead a primary violation of section 10(b), his section 20(a) claim fails. Thus, because we determine that HRSA-ILA fails to plead an actionable section 10(b) claim, we also conclude that HRSA-ILA fails to plead a section 20(a) claim. AFFIRMED.
• 1. We affirm the district court's conclusion that Plaintiff fails to plead an actionable securities fraud claim for Adidas's Business Partners Risk disclosures. To plead a successful section 10(b) claim, a plaintiff must adequately allege: '(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.' The district court determined that HRSA-ILA failed to allege an actionable material misrepresentation or omission.
• We affirm the district court's conclusion that HRSA-ILA fails to plead an actionable securities fraud claim for Adidas's compliance with the EU's NFRD and GRI disclosure standards. The NFRD requires Adidas to disclose certain non-financial information about its business, risks, and social issues, and Adidas complies by following the GRI. However, allegedly misleading statements must be 'capable of objective verification.' HRSA-ILA conceded it was unsure if any enforcement body for the GRI exists that could definitively settle the meaning of the GRI's broad, discretionary provisions. As Adidas's statement is not capable of objective verification, HRSA-ILA fails to plead a material misrepresentation.