On February 26, 2025, Circuit Judge Stephanos Bibas, sitting by designation in the District Court for the District of Delaware, granted a motion for summary judgment in a securities action brought by an investment firm against a racing game developer (the “Company”) and several of its officers after the firm sold shares in one of its portfolio companies to the Company. Plaintiff alleged that the sale occurred at a lower price because of misstatements and omissions made by defendants regarding the profitability of the portfolio company in violation of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). The Court granted summary judgment for defendants, stating that “not every poor investment decision is due to securities fraud” and holding that plaintiff failed to establish any actionable misstatements or omissions.
Plaintiff is a publicly traded investment company.Among its investment portfolio companies was a video game publisher (the “Publisher”), a non-public corporation that held the exclusive license for video game development and publishing in connection with the NASCAR® racing franchise. Plaintiff owned a majority of the Publisher’s shares from 2014 through 2018. During that period, the Publisher operated at a loss and was in constant need of cash, and plaintiff decided that it did not wish to invest any more money into it. The Publisher sought out other investors, and, in 2018, the Company purchased a majority stake in the Publisher, significantly reducing plaintiff’s ownership and giving the Company control of the Publisher. The Publisher’s financial performance did not improve.Plaintiff began exploring a sale of its remaining shares, which ultimately were sold to the Company in August 2020. The Company went public in January 2021, and plaintiff subsequently filed suit alleging that defendants painted a misleadingly gloomy picture about the Publisher’s new game, which launched in July 2020, “as part of a scheme to buy out [plaintiff] at a bargain price before the Company went public” and that defendants withheld the true nature of the new game’s sales and the value of the Publisher. Plaintiff asserted claims for securities fraud, breach of contract, and common law fraud.
At summary judgment, the Court held that plaintiff failed to prove the first element of its securities fraud claim—a false or misleading representation or omission of a material fact—and that all other claims, which revolved around the same alleged fraud, also failed. First, the Court held that there was no false or misleading representation or omission. Plaintiff’s primary claim centered around statements at a June 2020 board meeting (the “June 2020 Board Meeting”) in which the Company represented that the Publisher’s newest game was projected to do poorly and that the Publisher was in financial trouble. Although plaintiff claimed that defendants knowingly misrepresented the projections for the new game, evidence showed that the Company believed that the financial projections made in June 2020 were accurate. Additionally, the information on which plaintiff relied to claim that the statements in the June 2020 Board Meeting were false were all based on sales data and occurrences in July and August of 2020, which could not support a claim for a misstatement or omission in June 2020.
Second, the Court rejected plaintiff’s claim that defendants omitted to disclose the Publisher’s more positive outlook post-June 2020 because defendants had no duty to disclose that information. The Court acknowledged that there is a duty to correct a statement a company believes is true that turns out to have been false. Defendants did not violate this duty, however, because the statements in the June 2020 Board Meeting were not false at the time they were made. The Court also acknowledged that there can be a duty to update if statements have a reasonable basis when made but then become misleading when viewed in the context of subsequent events. The Court held, however, that a duty to update “does not extend to a single, ordinary earnings forecast” like those given in the June 2020 Board Meeting “as a matter of law” because “accurate projections do not contain ‘an implicit representation that the trend is going to continue.’ ”Plaintiff argued that an exception to this rule applied because the Publisher’s outlook was “a fundamental change in the course the company is likely to take.”The Court noted, however, that this “narrow” exception applies only when there are “extreme changes in the company’s originally expressed expectation of an event such as a takeover, merger, or liquidation.”Although the new game was part of a series that accounted for 99% of the Publisher’s sales, the projections were made in the ordinary course, and the changed outlook on the game’s sales was not a “fundamental change transforming the company” such as a takeover, a merger, or liquidation.
The Court found plaintiff’s other claims to be equally without merit, including claims that the Company omitted other information about the licensing of other games and about its proposed IPO, because the evidence demonstrated that such information was disclosed to the Company.
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