Business Litigation Practice Group
December 20, 2016
Eleventh Circuit Confirms that Issuers are not Required to
Disclose Retention of Outside Promotional Firms
On December 15, 2016, the United States Court of Appeals for the
Eleventh Circuit affirmed the dismissal of a securities class action against
Galectin Therapeutics Inc., a Georgia-based biotechnology company.1 The
suit alleged that Galectin violated the federal securities laws by failing to
disclose that it had retained third-party firms to publish promotional articles
about the Company. Although a number of district courts have opined on
whether an issuer must disclose the hiring of such outside promotional
firms,2 the Eleventh Circuit is the first appellate court to publish an opinion
on the question. The Galectin decision confirms that the duty to disclose
payments to outside firms who publish promotional material regarding a
company and its stock rests with the third-party firms, not the issuer.
Background
In May 2015, lead plaintiff Glynn Hotz filed suit on behalf of a putative
class of Galectin shareholders alleging violations of Section 10(b) of the
Exchange Act and Rule 10b-5(b) promulgated thereunder, as well as
Section 20(a). The complaint alleged that Galectin and certain of its
current and former officers and directors defrauded the Company’s
investors by secretly hiring third-party firms to publish positive articles
about the Company and to “tout” its stock. The complaint did not allege
that any of the third-party articles were actually false or misleading under
the federal securities laws, but rather were “exceedingly boastful.” The
complaint did allege, however, that it was false for Galectin to state—in
two private contracts between Galectin and its sales agent for two “at-the-
market” offerings—that Galectin had not “directly or indirectly” taken any
actions that caused or resulted in the “manipulation” of its stock price.3
According to Plaintiff, hiring third-party firms to promote the Company
was “manipulating” its stock price. Therefore, because the Company had
stated that it had not engaged in any such “manipulation,” its statements to
that effect from the two “at-the-market” offering sales agent agreements
were allegedly false.
The United States District Court for the Northern District of Georgia
granted Defendants’ motion to dismiss the complaint for failure to state a
claim.4 The district court concluded that Defendants did not impermissibly
“manipulate” the price of Galectin’s stock because paying outside
promotional firms to publish admittedly truthful information does not
For more information, contact:
Michael R. Smith
+1 404 572 4824
mrsmith@kslaw.com
B. Warren Pope
+1 404 572 4897
wpope@kslaw.com
Alexandra S. Peurach
+1 404 572 3574
apeurach@kslaw.com
King & Spalding
Atlanta
1180 Peachtree Street, NE
Atlanta, Georgia 30309-3521
Tel: +1 404 572 4600
Fax: +1 404 572 5100
www.kslaw.com
