EDNY Dismisses Claims That Online Retail Company Violated Securities Laws in Connection With IPO

Skadden, Arps, Slate, Meagher & Flom LLP

Saleh Altayyar, et al. v. Etsy Inc., et al., No. 15-cv-2785-AMD (E.D.N.Y. Mar. 16, 2017)

Judge Ann M. Donnelly dismissed with prejudice claims that an online peer-to-peer commerce company violated Section 10(b) of the Securities Exchange Act by making material misstatements and omissions in connection with the company’s April 16, 2015, initial public offering (IPO). The company’s share price allegedly dropped after the company’s quarterly earnings disclosures and an analyst report suggesting that the company’s growth was harmed by counterfeit goods being sold through the company’s online platform as well as by increased competition. The plaintiffs alleged that, although the company’s registration statement and previous periodic filings emphasized the company’s commitment to providing a platform for artisans and small-batch manufacturers and preventing counterfeit manufacturers, certain confidential witnesses purportedly stated that the company failed to implement adequate controls for preventing mass-produced and counterfeit goods.

The defendants argued that the plaintiffs had failed to sufficiently plead fraud and scienter under the applicable heightened standards. The court agreed, finding that although the “allegations might show that [the company’s] compliance practices were imperfect ... and that its managers knew of ongoing infringement problems,” the plaintiffs failed to “establish that the challenged values statements were objectively false or disbelieved when [the company] made them.” Further, the court found that the company’s statements about its values and counter-infringement policies were aspirational and accompanied by sufficient cautionary language about the limits of preventing infiltration by purveyors of counterfeit goods.

This summary can be found in the June 2017 issue of Inside the Courts.