IN RE iANTHUS CAPITAL HOLDINGS, INC. SECURITIES LITIGATION

Background

These consolidated class actions and an individual action arose from iAnthus Capital Holdings, Inc.’s announcement that it had defaulted on debt and from a later restructuring agreement with Gotham Green Partners. The plaintiffs alleged that iAnthus, Gotham Green Partners, and executives at both companies violated Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 by failing to disclose information about their relationship and financing arrangements.

Jose Antonio Silva alleged that he purchased iAnthus common stock. Hi-Med LLC alleged that it received iAnthus shares through iAnthus’s acquisition of MPX Bioceutical Corporation and separately purchased $5 million in unsecured convertible debentures from iAnthus. Hi-Med also asserted common-law claims based on the same conduct. Defendants moved to dismiss all claims.

Exchange Act Claims

The court applied the Supreme Court’s rule that Section 10(b) does not apply outside the United States. Under that rule, the statute covers transactions in securities listed on domestic exchanges and domestic transactions in other securities.

The court concluded that iAnthus’s shares were listed on the Canadian Stock Exchange, which the plaintiffs did not claim was domestic. The shares also traded over the counter in the United States on the OTCQX. The court held that the OTCQX and OTC Link were not exchanges under the Exchange Act. Therefore, the plaintiffs could not rely on the rule covering securities listed on domestic exchanges.

The court then examined whether the transactions were domestic. A transaction is domestic when the parties incur irrevocable liability in the United States or when title passes in the United States. The court explained that a plaintiff must allege specific facts about matters such as contract formation, purchase orders, passage of title, or exchange of money. The location or residence of a buyer, seller, or broker alone is not enough.

For Silva’s stock purchases, the complaint identified transactions under the ticker symbol for iAnthus’s over-the-counter stock but did not state where or how the purchases occurred. A declaration submitted later stated that Silva purchased the stock through an online account while in Louisiana, but those facts were not alleged in the complaint and did not establish where liability became irrevocable or where title passed. The court therefore dismissed Silva’s Section 10(b) and Rule 10b-5 claims.

For Hi-Med’s acquisition of iAnthus shares, the court found that the transaction resulted from a merger between Canadian companies governed by Canadian law. The delivery of documents to Hi-Med in the United States did not show that the transaction itself or the passage of title occurred in the United States. Hi-Med’s conversion notice also did not establish a domestic transaction because the relevant transaction was between iAnthus and MPX, not between iAnthus and Hi-Med. The court dismissed these claims as well.

For Hi-Med’s convertible debenture, the complaint did not allege where the purchase occurred. The debenture’s reference to repayment at a United States address and its requirement that notices be sent to an iAnthus office in the United States did not show where title passed or where the purchase took place. The court dismissed Hi-Med’s Section 10(b) and Rule 10b-5 claims.

Common-Law Claims and Disposition

The court had supplemental jurisdiction—authority to hear related state-law claims—over Hi-Med’s common-law claims. After dismissing all of Hi-Med’s federal claims, however, the court declined to exercise that authority. It cited the connection to Canadian law, related litigation in Canadian courts, efficiency concerns, and the risk of conflicting proceedings. The court stated that dismissal of the common-law claims was without prejudice to Hi-Med’s ability to allege a viable federal claim.

Judge Lewis A. Kaplan granted defendants’ motions to dismiss. The court permitted plaintiffs to move for leave to file proposed second amended complaints, which had to be attached to any such motion, by September 30, 2021.