New York Cannabis Co. Investor Suit Survives Motion To Dismiss

The District Court for the Western District of New York denied a motion on January 6, 2023, to dismiss claims alleging that a publicly traded company misled investors regarding an investigation by the U.S. Securities and Exchange Commission (SEC). The company, 22nd Century, engineers cannabis plants to regulate their levels of cannabinoids. The court’s denial of the motion to dismiss is an important reminder to companies, especially those in the cannabis space, about the importance of compliance and disclosure.

Noto v. 22nd Century Grp., Inc. is a class action alleging that the company and two former officers misled investors. Plaintiffs claim that the company issued a 10-K filing in 2016 noting that its internal controls regarding financial reporting had not been effective due to “material weaknesses” and, in later filings, that it was undertaking remediation efforts. According to a confidential witness cited in the complaint, the company had been cooperating with an SEC investigation since 2016, which was not terminated until at least 2019. In 2018, an online commentator allegedly posted a series of articles about this scheme, prompting the company’s share price to fall. In response, plaintiffs claim that the company issued statements saying it had no knowledge of any SEC enforcement proceedings and the commentator’s statements were untrue.

The court initially dismissed the claims of the putative class, reasoning that 22nd Century had no duty to disclose the SEC investigation and its officers could not, therefore, be held personally liable for its failure to disclose. But the United States Court of Appeals for the Second Circuit vacated and remanded, holding that 22nd Century’s alleged statements in SEC filings describing “material weaknesses” in its financial reporting created “a duty to tell the whole truth” and “defendants’ false public denial . . . amount[ed] to an admission of the materiality of its nondisclosure.” Noto et al. v. 22nd Century Grp., Inc. et al., 35 F.4th 95, 105-06 (2d Cir. 2022). On remand, the District Court allowed claims that the company had made material misrepresentations to survive, reasoning that the company’s alleged public statements satisfied the standard set by the Court of Appeals. See Noto et al., v. 22nd Century Grp., Inc. et al., 2023 WL 122305, at *5 (W.D.N.Y. Jan. 6, 2023).

Companies in highly regulated industries such as cannabis face complex regulatory landscapes, which can create challenges in compliance. Here, a federal court allowed claims of material misrepresentations to survive based on a company’s alleged repeated false public denials, highlighting the importance of timely and accurate disclosures.

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