Netshoes Sec. Litig. v. XXX

• Citation: 64 Misc.3d 926,105 N.Y.S.3d 846
• Decision Date: 16 July 2019
• Docket Number: 157435/2018
• Parties: Matter of NETSHOES SECURITIES LITIGATION, Plaintiff, v. XXX, Defendant.
• Court: United States State Supreme Court (New York)

64 Misc.3d 926

105 N.Y.S.3d 846

Matter of NETSHOES SECURITIES LITIGATION, Plaintiff,

v.XXX, Defendant.

157435/2018

Supreme Court, New York County, New York.

Decided on July 16, 2019

Skadden, Arps, Slate, Meagher & Flom LLP, New York City, for Netshoes (Cayman) Limited and others, defendants.

Sullivan & Cromwell, New York City, for Goldman Sachs & Co., LLC and others, defendants.

Scott & Scott LLC, New York City, for plaintiffs.

Andrew Borrok, J.

This is an action brought in the Commercial Division of New York County following the United States Supreme Court decision in Cyan, Inc. v. Beaver County. Emps. Retirement Fund, ––– U.S. ––––, 138 S.Ct. 1061, 200 L.Ed.2d 332 [2018]. Inasmuch as securities litigation brought in New York, generally, was discussed at oral argument, a brief summary of the framework in which the instant action is brought is provided for clarity.

As the Cyan Court chronicled, following the stock market crash in 1929, and to promote honest business practices in the securities markets, Congress enacted the Securities and Exchange Act of 1933 (the 1933 Act ) and the Securities and Exchange Act of 1934 (the 1934 Act ). The 1933 Act created private rights of action in connection with the initial public offering of securities and the 1934 Act regulates subsequent trading activity. Under the 1933 Act, although concurrent state and federal court jurisdiction is authorized, removal is prohibited. Under the 1934 Act, federal courts have exclusive jurisdiction. In 1995, to address perceived abuses in class action lawsuits, Congress passed the Private Securities Litigation Reform Act (the Reform Act ) which both substantively and procedurally amended the 1933 Act and the 1934 Act ( Cyan , 138 S.Ct. at 1066, citing Merrill Lynch, Pierce, Fenner & Smith v. Dabit, 547 U.S. 71, 81, 126 S.Ct. 1503, 164 L.Ed.2d 179 [2006] ). For example, among other substantive amendments, the Reform Act created a "safe harbor" for "forward looking statements" made by company officials ( 15 USC § 77z-2 [1933 Act] and § 78u-5 [1934 Act] ). Among other procedural amendments, the Reform Act requires the lead plaintiff to execute a sworn certification that the purchase of the relevant securities was not at the direction of plaintiff's counsel (§ 77z-1[a][2][A][ii] [1933 Act]; § 78u-4[a][2][ii] [1934 Act] ). Although the Reform Act's substantive amendments affected both the state and federal courts, the Reform Act's procedural amendments affected only the federal courts. Accordingly, plaintiffs could avoid the procedural reforms of the Reform Act by bringing their complaints of securities misconduct under state law. To address this unintended "loophole," Congress passed the Securities Litigation Uniform Standards Act of 1988 (SLUSA ) which barred state-law based securities class actions (and authorized their removal to ensure their dismissal) and guaranteed that the Reform Act's heightened substantive standards would govern all future securities class action litigation.

Following its adoption, there was some apparent confusion as to the breadth and scope of SLUSA as it related to two questions: (i) whether state courts had been stripped of jurisdiction to adjudicate class actions brought under the 1933 Act, and (ii) whether such class actions could be removed to federal court. For example, the court in Schwartz v. Concordia Intl. Corp. , held that following Congressional enactment of SLUSA, class actions that solely assert claims under the 1933 Act "must be removable [to federal court] because SLUSA vested federal courts with exclusive jurisdiction over" such claims ( 255 F.Supp.3d 380, 383 [E.D.N.Y. 2017] ; see also Knox v. Agria Corp., 613 F.Supp.2d 419, 423 [S.D.N.Y. 2009] ; Brody v. Homestore, Inc. , 240 F. Supp. 2d 1122, 1123-24 [C.D. Cal. 2003] ). Other courts, however, looking to the plain language of the 1933 Act, held that SLUSA did not strip state courts of their jurisdiction to adjudicate class actions alleging only 1933 Act violations as it did not expressly authorize removal of such actions from state to federal court (e.g. , Fortunato v. Akebia Therapeutics, Inc., 183 F. Supp. 3d 326, 331 [D. Mass. 2016] ; Christians v. KemPharm, Inc., 265 F.Supp.3d 971, 983 [S.D. Iowa 2017] ). In Cyan , the United States Supreme Court unanimously resolved these two questions in the negative. Now, as prior to SLUSA, 1933 Act claims can be brought in either state or federal court, but once filed in state court, removal is not permitted.

The 1933 Act "protects investors by ensuring that companies issuing securities make a full and fair disclosure of information relevant to a public offering" ( Omnicare, Inc. v. Laborers Dist. Council Const. Indus., ––– U.S. ––––, 135 S.Ct. 1318, 1323, 191 L.Ed.2d 253 [2015] [internal quotation and citation omitted] ). As further discussed below, sections 11, 12, and 15 of the 1933 Act impose "strict liability for material misstatements contained in registered securities offerings" ( NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co. , 693 F.3d 145, 148 [2d Cir. 2012] ).

In their Amended Complaint (the Complaint ), the plaintiffs allege strict liability and negligence claims under sections 11, 12(a)(2), and 15 of the 1933 Act against Netshoes (Cayman) Limited (Netshoes ), a Brazilian based online retailer, certain of its senior executives and directors, and the investment banks that acted as its underwriters in connection with its April 12, 2017 initial public offering (IPO ).

To wit, the Complaint alleges that Netshoes' Registration Statement and Prospectus (collectively, the Offering Documents ), issued in connection with its IPO, painted a materially false and misleading picture of Netshoes' business, and, thus, inappropriately and unlawfully lifted the IPO offering price. The gravamen of the allegations are that although the Offering Documents touted Netshoes' competitive position, "high margin" business strategy, and the new business-to-business (B2B ) supplements and vitamins distribution business (the B2B Business ), in fact, Netshoes' core sports and lifestyle eCommerce business was under intense pressure to significantly increase its marketing and to provide further and deeper discounts to customers so as to preserve its market share at the expense of its supposedly "high margin" business model. More specifically, the plaintiffs allege that Netshoes knew or should have known at the time of the IPO that the income set forth in its financial statements for the year ended December 2016 (the 2016 Financial Statements ) was overstated because certain substantial write-downs taken subsequently for its accounts receivable meant that there must have been a return policy which was not disclosed to investors, and, accordingly, the financial statements were not prepared in accordance with International Financial Reporting Standards (IFRS ),¹ contrary to the representations contained in the Offering Documents. The Complaint alleges that as a result of the foregoing, Netshoes' stock collapsed from its $18 per share IPO price on April 12, 2017 to $2.87 per share on May 15, 2018 and has not materially recovered.

The defendants have moved to dismiss the action with prejudice (mtn. seq. no. 002), pursuant to CPLR 3211(a)(1), (a)(5), and (a)(7) — i.e. , based on documentary evidence, statute of limitations, and failure to state a claim. The plaintiffs have moved for alternative service as it relates to certain unserved defendants (mtn. seq. no. 003).

Under CPLR 3211(a)(1), a dismissal is warranted only if the documentary evidence submitted conclusively establishes a defense to the claims asserted as a matter of law ( Leon v. Martinez , 84 N.Y.2d 83, 87, 614 N.Y.S.2d 972, 638 N.E.2d 511 [1994] ). To be entitled to dismissal of the action as untimely under CPLR 3211(a)(5), a defendant must establish, prima facie , that the time in which to commence the action has expired. The burden then shifts to the plaintiff to raise an issue of fact as to whether the statute of limitation is tolled or otherwise inapplicable. Finally, when considering a motion to dismiss for failure to state a claim under CPLR 3211(a)(7), the court, accepting all facts alleged as true and according the plaintiff the benefit of every favorable inference, must determine if the allegations fit within any cognizable legal theory ( id., 84 N.Y.2d at 87-88, 614 N.Y.S.2d 972, 638 N.E.2d 511 ; EBC I, Inc. v. Goldman, Sachs, & Co. , 5 N.Y.3d 11, 799 N.Y.S.2d 170, 832 N.E.2d 26 [2005] ). When documentary evidence is submitted on a motion to dismiss for failure to state a claim, the court must consider not just whether the plaintiff has stated a cause of action, but also whether it has one ( Basis Yield Alpha Fund (Master) v. Goldman Sachs Group, Inc. , 115 A.D.3d 128, 135, 980 N.Y.S.2d 21 [1st Dept. 2014] [citation omitted] ). Dismissal is appropriate if a well-pleaded cognizable claim is "flatly rejected by the documentary evidence" ( id. ).

To the extent that the claims alleged in the Complaint contain allegations of fraud or misrepresentation, the defendants urge the court to apply the heightened pleading standard of CPLR 3016(b) to the plaintiffs' claims, i.e.,

Where a cause of action or defense is based upon misrepresentations, fraud, mistake, willful default, breach of trust or undue influence, the circumstances constituting the wrong shall be stated in detail.

The federal analog to CPLR 3016(b) is contained in Rule 9(b) of the Federal Rules of Civil Procedure and states:

Fraud or Mistake, Conditions of the Mind . In alleging fraud or mistake a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.

However, as federal courts have held, a claim brought pursuant to sections 11 and 12(a)(2) of the 1933 Act which does not explicitly allege fraud (i.e., it only alleges negligence) in the preparation of the registration statement and...