IN RE iANTHUS CAPITAL HOLDINGS, INC. SECURITIES LITIGATION

Background

These related cases concern claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The consolidated class action is led by Jose Antonio Silva, and Hi-Med LLC brought an individual action. The defendants include iAnthus Capital Holdings, Inc.; several iAnthus executives and directors; Gotham Green Partners LLC; and Jason Adler.

Plaintiffs alleged that defendants failed to disclose information about iAnthus’s financing arrangements and its relationship with Gotham Green Partners. The allegations included an undisclosed exit fee connected to Gotham Green’s first financing, undisclosed loans to former iAnthus chief executive officer Hadley C. Ford, the release or unavailability of escrow funds, statements about iAnthus’s access to financing, and other alleged self-dealing. Plaintiffs claimed that these matters contributed to iAnthus’s default and restructuring, which substantially reduced or eliminated existing shareholders’ interests.

The court had dismissed the first amended complaints in an August 30, 2021 opinion because plaintiffs had not adequately alleged that they bought iAnthus securities in domestic transactions. Plaintiffs filed second amended complaints, and defendants again moved to dismiss under Rules 9(b), 12(b)(6), and the Private Securities Litigation Reform Act. The court considered the pleaded facts as true for purposes of the motions.

Domestic Transactions and Foreign-Location Arguments

Under Morrison v. National Australia Bank Ltd., Section 10(b) applies to securities listed on domestic exchanges and to domestic transactions in other securities. The iAnthus shares were listed on the Canadian Securities Exchange and traded over the counter in the United States. The court had previously determined that the Canadian exchange was not domestic and that the over-the-counter market was not a national exchange, so the relevant question was whether the purchases were domestic transactions.

The court held that Silva adequately pleaded domestic purchases. He alleged that TD Ameritrade processed his purchases through Susquehanna International Group, which sought matching brokers, and that ETRADE fulfilled at least two orders. The court concluded that the transactions allegedly became binding when ETRADE fulfilled the orders domestically. The court found these allegations sufficient at the pleading stage.

The court reached different conclusions about Hi-Med’s two alleged acquisitions. Hi-Med did not adequately allege that its acquisition of iAnthus stock through iAnthus’s acquisition of MPX was domestic. The relevant transaction was the arrangement between iAnthus and MPX, and Hi-Med was not a party to that transaction. The delivery of registration certificates and Hi-Med’s execution and delivery of a conversion notice in the United States did not establish that the underlying transaction or transfer of title was domestic.

Hi-Med did adequately allege that its purchase of $5 million in unsecured convertible debentures from iAnthus was domestic. Although using a domestic bank account and receiving a right to request later delivery of stock were not enough by themselves, the allegations that the parties negotiated and executed the debenture agreements from their respective United States offices supported a plausible inference that the parties incurred contractual obligations domestically.

The court also rejected defendants’ argument that the claims were impermissibly foreign because iAnthus was Canadian, its shares were listed on a Canadian exchange, and related litigation and restructuring proceedings were occurring in Canada. The court distinguished the Second Circuit’s decision in Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings SE and concluded that the domestic trading of iAnthus securities and the alleged domestic conduct supported applying Section 10(b).

Forum Non Conveniens

Defendants argued that the cases should be dismissed because Canada would be a more suitable forum. The court concluded that Canada was an adequate alternative forum, but it nevertheless declined to dismiss the cases. Silva and Hi-Med had bona fide connections to the United States, relevant defendants and evidence were accessible in the United States, and the United States had a strong interest in adjudicating federal securities-law claims. The court also concluded that possible inconsistencies with Canadian proceedings could be addressed through issue preclusion and respect for foreign judgments. Dismissal on this ground was therefore not warranted.

Securities-Fraud Allegations

A Section 10(b) and Rule 10b-5 claim requires a material misstatement or omission, an intent to deceive or reckless conduct, a connection to the purchase or sale of a security, reliance, economic loss, and loss causation. The court also applied heightened pleading requirements requiring plaintiffs to identify the allegedly false statements or omissions, their speakers, when and where they were made, and why they were misleading.

The court rejected plaintiffs’ conflict-of-interest allegations as a sufficient basis for liability. The complaints did not adequately establish when the alleged $60,000 loan from David Rozinov occurred, and allegations based on the Stockhouse Report about other loans were too vague. The court also held that statements made before December 21, 2019 could not be misleading because of the $100,000 loan from Adler to Ford, which allegedly occurred on that date. The court concluded that the challenged post-loan disclosures also were not adequately shown to be false or misleading based on the facts alleged.

The court did, however, find certain allegations concerning the undisclosed exit fee sufficient. The fee was $10 million plus interest, represented a substantial part of the financing, and allegedly altered the nature of what defendants repeatedly described as a $50 million investment including a $10 million equity investment. The court held that the alleged omission could have materially changed the information available to reasonable investors and was actionable at the pleading stage.

The court also allowed some claims concerning iAnthus’s escrow obligations to proceed. Plaintiffs adequately alleged that iAnthus made materially misleading statements about escrowed funds that were supposed to protect against a default. By contrast, many statements about iAnthus’s access to future financing were not actionable because plaintiffs did not adequately allege that defendants knew those statements were false when made. Some statements were also considered nonactionable general praise or protected forward-looking statements. Only a limited number of financing-related statements based on the undisclosed exit fee were actionable.

The court found that the complaints adequately alleged scienter, meaning an intent to deceive or reckless disregard for the truth, for the surviving allegations. The alleged facts supported a strong inference that Ford, Adler, and Julius John Kalcevich knew about or had access to information concerning the exit fee.

The court also held that Gotham Green’s and Adler’s statements could satisfy the requirement that the alleged fraud be connected to the purchase or sale of securities. Silva adequately alleged reliance under the fraud-on-the-market theory, which can presume reliance when public statements materially affect an efficiently traded market. The court further concluded that Silva adequately alleged economic loss and loss causation.

Other Claims and Dispositions

Hi-Med’s scheme-liability claim under Rule 10b-5 was dismissed because the complaint did not identify deceptive acts separate from the alleged misstatements and omissions or describe the alleged scheme with sufficient precision.

The court allowed control-person claims against Ford, Kalcevich, and Adler to proceed to the extent the complaints adequately alleged primary violations by iAnthus or Gotham Green and alleged the defendants’ control and culpable participation. The court dismissed Hi-Med’s control-person claims against Elizabeth Stavola, Robert Galvin, and Randy Maslow because Hi-Med did not allege facts showing their culpable participation in the primary violations.

Hi-Med’s common-law fraud claim could proceed as to the alleged misstatements and omissions that were adequately pleaded under Section 10(b). Hi-Med’s breach-of-contract claims against iAnthus could also proceed because the court considered iAnthus’s argument that the restructuring would make those claims moot premature while the restructuring remained under review in Canada. Hi-Med’s tortious-interference claims against Gotham Green and Adler were dismissed because the complaint did not adequately allege how they induced the alleged interference or provide facts supporting the required elements.

Disposition

The court ordered that the motions to dismiss were granted in part and denied in part. The opinion did not assign a separate outcome to each individual motion beyond that overall disposition, but it identified the claims that could proceed and those that were dismissed as described above.