Last week, the Second Circuit affirmed the dismissal of a putative securities fraud class action brought by investors in International Flavors & Fragrances Inc. (IFF) under Section 10 of the Securities Exchange Act of 1934 and Rule 10b-5. (Menora Mivtachim Ins. Ltd., et. al. v. Frutarom Indus. Ltd., et. al.)
IFF, a “U.S. based seller of flavoring and fragrance products, acquired Frutarom Industries Ltd. (Frutarom), an Israeli firm in the same industry.” Putative class plaintiffs alleged securities fraud in connection with the merger, particularly “material misstatements regarding its [Frutarom’s] compliance with anti-bribery laws and source of its business growth.”
The Second Circuit held that the putative class of investors in IFF lacked standing: “Plaintiffs here lack standing to sue based on alleged misrepresentations that Frutarom made about itself because they never bought or sold shares of Frutarom.”
The Second Circuit opinion provides factual background as alleged in an Amended Complaint, noting that at the motion to dismiss stage, the Court “accept[s] these facts as true and draw[s] all reasonable inferences in Plaintiffs’ favor.”
Frutarom executives allegedly engaged in scheme from 2002 to 2018 to bribe “key employees of important clients in order to maintain and increase business.” Frutarom executives also allegedly bribed customs officials in Russia and China to facilitate exports. “Frutarom made materially misleading statements about its compliance with anti-bribery laws and the sources of its business growth, most of which were incorporated into IFF’s Form S-4 Registration Statement.”
The merger closed in October 2018, and Frutarom became a wholly-owned IFF subsidiary. “On August 5, 2019, IFF acknowledged that Frutarom had ‘made improper payments to representatives to a number of customers’ in Russia and Ukraine’ [internal quotation from the Amended Complaint]. The following day, IFF’s share price dropped nearly 16%.”
The named plaintiffs purport to represent a “class of investors who acquired IFF securities between May 7, 2018 [the day of the announcement of the anticipated merger] and August 19, 2019 [shortly after the August 5th disclosure].” Plaintiffs originally named IFF and two IFF officers as well as Frutarom and five of its officers. On appeal, it appears that only Frutarom and four Frutarom-related individuals remained defendants in the case.
Relying on the seminal 1975 Supreme Court opinion of Blue Chip Stamps v. Manor Drug Stores as well as Second Circuit precedent, the Court held that the “Puchaser-Seller Rule” governed. Such precedents “limited the class of plaintiffs who could sue under Rule 10b-5 to those who purchased or sold the securities of an issuer about which a material misstatement was made.” The Second Circuit rejected plaintiffs’ arguments “meritless” arguments that IFF shareholders could have such standing. One of the three judges on the panel filed a concurring opinion based on a different reading of relevant precedent.