(Article from Securities Law Alert, February 2021)
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On February 4, 2021, the Southern District of New York dismissed with prejudice a securities fraud class action against an international package delivery company and certain of its officers and directors alleging that the company misrepresented the status of its recovery from a significant cyberattack. In re FedEx Sec. Litig., 2021 WL 396423 (S.D.N.Y. 2021) (Abrams, J.). The court held that “plaintiff fail[ed] to adequately plead the falsity of [the company’s] statements about its recovery from [the cyberattack] because those same statements were accompanied by numerous disclosures about the difficulties faced and expenses incurred by [the company] in that process.”
Background
In 2016, the company acquired a subsidiary to expand its presence in Europe. In 2017, the company announced that this subsidiary had been impacted by a cyberattack that took the form of a computer virus. Plaintiff pension fund alleged that the company misrepresented the status of its recovery from the cyberattack. Plaintiff claimed the company’s statements concerning its recovery “were materially misleading because they failed to disclose 1) that [the subsidiary’s] international service was largely disabled for six months due to the virus; 2) that [the subsidiary] was losing a significant proportion of its high-margin customers due to its failure to operate internationally; and 3) that [the cyberattack] had substantially delayed, rather than accelerated, the integration of [the subsidiary] into [the company].” Plaintiff claimed these facts demonstrated that “[d]efendants lacked a reasonable basis for their positive statements about the [c]ompany and its prospects, including its ability to meet the [subsidiary’s] [i]ncome [i]mprovement [t]arget.”
Numerous Disclosures Belied Claim That Cyberattack Damage Was Belatedly Disclosed
The court stated that “[e]ven accepting [p]laintiff’s allegations as true, [it] conclude[d] that the challenged statements, when considered in their full context, would not mislead a reasonable investor as to [the cyberattack’s] effect on the [c]ompany or as to the status of [its subsidiary’s] integration.” The court stated that “[the company’s] numerous disclosures during the [c]lass [p]eriod belie [p]laintiff’s contention that [it] belatedly disclosed to the market the damage [the cyberattack] had caused to the [c]ompany and . . . [its subsidiary] in December 2018.” The court continued that “[u]nder those circumstances, [d]efendants’ professed optimism about [the subsidiary] in the wake of the [] attack is an insufficient basis for securities fraud, even though hindsight suggests that such optimism may have been misguided.”
Cautionary Statements, Often Bolded and Italicized, Warned Investors
The court explained that “an examination of [the company’s] statements in their full context illustrates the inadequacy of [p]laintiff’s fraud allegations.” The court noted that “[e]ach of the quarterly reports[,] from which [p]laintiff has selected allegedly misleading statements[,] contained language, often bolded and italicized for emphasis, that warned investors about the potentially lingering effects of the June 2017 cyberattack.” For example, the court pointed to the company’s December 2017 10-Q report that was filed six months after the attack, which stated that the cyberattack’s “ongoing impact could negatively affect our results of operations and financial condition in the future, particularly if our continuing recovery efforts do not proceed as expected.” The court stated that “[t]hese cautionary statements exemplify [d]efendants’ repeated disclosure of the [c]ompany’s difficulties in recovering from [the cyberattack].” In light of these disclosures, the court “conclude[d] that [p]laintiffs have failed to allege sufficient facts to establish that [the company’s] more optimistic statements misled the investing public.” The court further stated that “[e]ven accepting the allegedly omitted facts as true, none of the categories of statements challenged by [p]laintiff was actionably false or misleading under the securities laws.”