IN RE APHRIA, INC. SECURITIES LITIGATION

Background

Lead Plaintiffs Shawn Cunix and Elizabeth Alexander brought a proposed class action against Aphria Inc., Victor Neufeld, Carl Merton, Cole Cacciavillani, John Cervini, Andrew DeFrancesco, and SOL Global Investments Corp., formerly known as Scythian Biosciences Corp. They asserted claims under Section 10(b) of the Securities Exchange Act, Securities and Exchange Commission Rule 10b-5(b), and Section 20(a), which concerns control-person liability.

The complaint concerned Aphria’s acquisition of Latin American assets from Scythian. The plaintiffs alleged that Aphria made misleading statements about the assets’ operational condition, value, licenses, and business prospects. They also alleged that Aphria, Neufeld, and Merton knew or should have known that the assets were underdeveloped or largely inoperable because of due diligence, site visits, financial information, and other available data. The allegations included statements describing the assets as “world class,” “established and successful,” and “fully operational.”

The defendants Neufeld, Merton, and Aphria moved to dismiss under Rules 9(b) and 12(b)(6) and the Private Securities Litigation Reform Act. Cacciavillani and Cervini moved to dismiss for lack of personal jurisdiction under Rule 12(b)(2). DeFrancesco moved to dismiss under Rules 9(b) and 12(b)(6) and the Act. The plaintiffs separately moved to strike portions of the Aphria Defendants’ motions or convert those motions into motions for summary judgment.

Plaintiffs’ Motion to Strike or Convert

The court denied the plaintiffs’ motion to strike or convert. It stated that the rules cited by the plaintiffs did not authorize a party to strike portions of an opposing motion to dismiss. The court also explained that, when deciding a motion to dismiss, it could consider materials attached to or incorporated into the complaint, legally required public filings with the Securities and Exchange Commission, and documents in the plaintiffs’ possession or known to them and relied on in bringing the action. The court stated that it did not consider material beyond those categories. It did not address Elizabeth Alexander’s standing at this stage.

Cacciavillani and Cervini: Personal Jurisdiction

The court granted Cacciavillani and Cervini’s motion to dismiss for lack of personal jurisdiction. The plaintiffs argued that jurisdiction existed because the two defendants signed Canadian financial statements that Aphria later attached to filings with the Securities and Exchange Commission. The court found that the plaintiffs had not alleged facts supporting general jurisdiction or showing that the defendants purposefully conducted activities in the United States.

In particular, the court found that the plaintiffs had not alleged that Cacciavillani and Cervini knew, anticipated, or intended that the Canadian financial statements they signed would be attached to Aphria’s United States filings. The court also noted that the defendants were not alleged to have certified those United States filings. It concluded that the complaint should be dismissed as to them for lack of personal jurisdiction.

Aphria, Neufeld, and Merton: Securities-Fraud Claims

The court denied the motion to dismiss by Aphria, Neufeld, and Merton. It held that the plaintiffs adequately alleged actionable misrepresentations concerning the operational status and condition of the Latin American assets. Although statements such as “world class” and “established and successful” can sometimes be nonactionable corporate optimism, the court concluded that a reasonable investor could understand those statements, in context, to mean that the assets were at least operational. The court also found that the alleged facts could affect an investor’s assessment of the assets, Aphria’s valuations, and whether to buy or sell Aphria securities.

The court further held that the plaintiffs adequately alleged a strong inference of scienter, meaning an intent to deceive or reckless disregard for the truth. The complaint alleged that Neufeld and Merton conducted site visits, met with local representatives, and had access to due-diligence materials, including financial statements and forecasts. The court concluded that, if the assets were actually valueless or sham assets that were not operational, the alleged access to information could support an inference that Neufeld and Merton knew the true condition of the assets. The court also held that their intent could be attributed to Aphria because of their senior positions.

DeFrancesco: Securities-Fraud and Control-Person Claims

The court granted DeFrancesco’s motion to dismiss. It found that the plaintiffs did not attribute any material misstatement or omission to him, making it difficult to identify a statement by him on which Aphria investors could reasonably rely. The court therefore dismissed the Section 10(b) and Rule 10b-5(b) claim against DeFrancesco.

The court also held that the complaint did not adequately allege that DeFrancesco controlled Aphria. The allegations that he owned 5.6 percent of Aphria’s shares and was a co-founder were insufficient, and the court stated that his stockholding undermined the claim that he controlled Aphria. To the extent the plaintiffs attempted in briefing to assert a Section 20(a) claim based on Scythian, the court found that the amended complaint did not plead that claim and did not adequately allege a primary securities-law violation by Scythian.

Disposition

Judge George B. Daniels denied the plaintiffs’ motion to strike and/or convert. He denied Aphria, Neufeld, and Merton’s motion to dismiss. He granted Cacciavillani and Cervini’s motion to dismiss for lack of personal jurisdiction, and granted DeFrancesco’s motion to dismiss under Rules 9(b) and 12(b)(6) and the Private Securities Litigation Reform Act.