Within the last two years, private litigants have initiated more than a dozen "stock drop" suits against publicly traded companies in the cannabis industry under U.S. securities law. The types of claims are not new: Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, prohibit companies or their officers from making false or misleading statements or omissions in connection with the sale of securities. Sections 11 and 12 of the Securities Act of 1933 generally impose similar requirements with respect to securities offerings. Stock drop actions are those actions that follow from a decline in the price of a security. A shareholder will assert that new information provided by the defendant company or a third-party contradicts prior company statements or reveals they were incomplete. Shareholders further assert that this new information caused a decline in the value of a security, and damage to the shareholder. These litigants will bring suit not only on behalf of themselves, but on behalf of a class of all similarly situated shareholders. Litigants will typically not only bring suit against the company but certain high-ranking corporate representatives as well. There is nothing new about "stock drop" suits; they represented 214 of the 441 securities class actions filed in 2018 in federal court. However, the uptick in recent years of cannabis companies as defendants in such litigation is new. To provide a better sense of the significance of these kinds of lawsuits, this alert: (1) gathers data on the value, duration, and dispositions of this type of securities case; and (2) surveys "stock drop" cases filed recently against actors in the cannabis industry.
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