Kusnier v. Virgin Galactic Holdings, Inc.

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MARK KUSNIER and ROBERT SCHEELE, Individually and On Behalf of All Others Similarly Situated, Plaintiffs, v. VIRGIN GALACTIC HOLDINGS, INC., MICHAEL A. COLGLAZIER, GEORGE WHITESIDES, MICHAEL MOSES, RICHARD BRANSON, and CHAMATH PALIHAPITIYA, Defendants.

No. 21-CV-3070 (ARR) (TAM)

United States District Court, E.D. New York

July 2, 2024

NOT FOR ELECTRONIC OR PRINT PUBLICATION

OPINION & ORDER

Allyne R. Ross United States District Judge

This is a putative class action against Virgin Galactic Holdings Inc. (“Virgin Galactic”) and individual defendants alleging violations of Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934 (“Exchange Act”). I have previously ruled on two motions to dismiss the action, both times granting defendants' motion in part and denying it in part. See Kusnier v Virgin Galactic Holdings, Inc., 639 F.Supp.3d 350 360-67 (E.D.N.Y. 2022); Op. & Order 1-8, ECF No. 90 (“2023 Op.”). Plaintiffs, individuals who purchased Virgin Galactic securities during the class period move to amend their complaint for the third time to add Montgomery Brantley as a named plaintiff in the action. For the reasons below, plaintiffs' motion is granted.

BACKGROUND

I assume familiarity with the facts underlying this case as detailed in my previous opinions and include here only the factual allegations and procedural background necessary to understand this opinion.

Defendant Virgin Galactic is a commercial space company founded in 2004 by defendant Richard Branson. Second Amended Compl. ¶ 27, 28 (“SAC”), ECF No. 69.^[1] The SAC details numerous mishaps in the development of Virgin Galactic's commercial space program. Of particular relevance here, during a test flight in February 2019, Virgin Galactic's spaceship suffered “critical damage” that was “so significant” that Virgin Galactic's head of safety remarked, “I don't know how we didn't lose the vehicle and kill three people.” Id. ¶ 78. The damage was so extensive that the spaceship was immediately grounded. Id. ¶¶ 82, 84. The near disaster of this test flight eventually became public through a Washington Post article published on February 1, 2021. Id. ¶ 15. Prior to that revelation, however, Mr. Branson sold approximately $123 million in Virgin Galactic shares on October 25, 2019.^[2] Id. ¶ 322-30.

On May 28, 2021, Plaintiff Shane Lavin initiated this action against Virgin Galactic and individual defendants, alleging various forms of securities fraud. Compl., ECF No. 1. Following appointment of lead plaintiffs and counsel, see Order, ECF No. 22, plaintiffs filed an amended complaint in December 2021, see First Amended Compl. (“FAC”), ECF No. 36. The FAC alleged, among other things, that Mr. Branson violated the Exchange Act when he traded Virgin Galactic shares while in possession of material, non-public information. See id. ¶¶ 595-610. I dismissed the FAC in part and granted plaintiffs leave to amend. Kusnier, 639 F.Supp.3d at 390-91. Plaintiffs then filed a Second Amended Complaint, which included separate counts for insider trading against Mr. Branson under § 20A and § 10(b) of the Exchange Act. See SAC ¶¶ 387-92, 398-406. I sustained plaintiffs' § 10(b) insider trading claim against Mr. Branson as to the October 2019 sales; however, I dismissed plaintiffs' corresponding § 20A claim because plaintiffs did not allege that they had traded Virgin Galactic shares contemporaneously with Mr. Branson's October 2019 sales, as required under the statute. See 2023 Op. 53, 61-62.

In February, defendants submitted a letter requesting a pre-motion conference regarding an anticipated motion for judgment on the pleadings. Defs.' Letter, ECF No. 108. Defendants argued that plaintiffs' § 10(b) insider trading claim against Mr. Branson should be dismissed as to the October 2019 sales because, as with the corresponding § 20A claim, plaintiffs did not allege purchases contemporaneous with those sales. Id. at 2 (“[A]n insider's ‘duty of disclosure is owed only to those investors trading contemporaneously with the insider.'” (quoting Wilson v. Comtech Telecomms. Corp., 648 F.2d 88, 94-95 (2d Cir. 1981))). In their initial response to defendants' letter, plaintiffs indicated that “[w]hile the currently named [p]laintiffs lack standing to pursue the SAC's insider trading claim against Branson as to Branson's October 25, 2019 sale, [p]laintiffs are searching for an investor with standing to pursue this claim to add as a plaintiff to the case.” Pls.' Letter 1, ECF No. 111. Roughly one month later, plaintiffs requested a pre-motion conference regarding an anticipated motion to add Mr. Brantley as a named plaintiff. Pls.' Letter, ECF No. 113. As indicated in plaintiffs' letter and accompanying documentation, Mr. Brantley purchased Virgin Galactic securities on October 25, 2019, contemporaneously with Mr. Branson's sales. See id. at 1; id., Ex. A at 3 (“Certification”), ECF No. 113-1. Because Mr. Brantley's addition as a plaintiff would likely moot defendants' motion, I stayed briefing on that motion and directed the parties to brief plaintiffs' motion to amend, now before me. See Docket Order dated April 2, 2024; Docket Order dated April 11, 2024.

LEGAL STANDARD

At this stage of the litigation “a party may amend its pleading only with the opposing party's written consent or the court's leave.” Fed.R.Civ.P. 15(a)(2). Courts “should freely give leave [to amend] when justice so requires.” Id. However, “[a] district court has discretion to deny leave for good reason, including futility, bad faith, undue delay, or undue prejudice to the opposing party.” McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 200 (2d Cir. 2007). The party opposing a motion to amend bears the burden of establishing that such a reason exists. Contrera v. Langer, 314 F.Supp.3d 562, 567 (S.D.N.Y. 2018).

DISCUSSION

Defendants object to Mr. Brantley's addition as a plaintiff on the grounds that (a) his § 10(b) and § 20A claims are futile, and (b) the amendment would unfairly prejudice defendants. See Defs.' Mem. of Law in Opp'n 6-10, 14 (“Opp'n”), ECF No. 118-2. As explained below, neither argument is convincing.^[3]

I. Futility

Section 10(b) Claim-Defendants principally argue that plaintiffs' proposed amendment should be denied as futile because Mr. Brantley's § 10(b) claim is time barred under the two-year statute of limitations for § 10(b) claims. Opp'n 6-10. Defendants argue that the statute of limitations on Mr. Brantley's claim ran as of October 25 2021, two years from the date of the alleged insider trading; or, at the latest, as of February 1, 2023, two years from the publication of the Washington Post article, when the “material nonpublic information in Branson's possession was publicly disclosed.” Opp'n 6 (quotation omitted). Plaintiffs counter that Mr. Brantley's claim is not time barred because, under American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), “commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class.” Id. at 554; Pls.' Mot. to Amend 8-10 (“Mot.”), ECF No. 118-1. According to plaintiffs, the earliest the statute of limitations on Mr. Brantley's claim could have begun was February 1, 2021, and the statute of limitations was tolled as of December 7, 2021, when plaintiffs first pleaded insider trading in the FAC. See Mot. 8. Defendants respond that American Pipe tolling does not apply “where, as here, the original named plaintiffs lacked standing to pursue the relevant claim.” Opp'n 7.

First, I agree with plaintiffs that the earliest the statute of limitations could have begun was February 1, 2021. The statute of limitations for § 10(b) claims is two years from the date on which a “reasonably diligent plaintiff” would be able to plead “facts constituting a securities fraud violation . . . with sufficient detail and particularity to survive a 12(b)(6) motion to dismiss.” City of Pontiac Gen. Employees' Ret. Sys. v. MBIA, Inc., 637 F.3d 169, 175 (2d Cir. 2011); Arco Cap. Corps. Ltd. v. Deutsche Bank AG, 949 F.Supp.2d 532, 545 (S.D.N.Y. 2013). Mr. Brantley could not have known that Mr. Branson was in possession of non-public information when he made the October 2019 trades until February 1, 2021, when the Washington Post article revealed the near disaster of the February 2019 test flight. See SAC ¶ 15. I likewise agree with plaintiffs that if American Pipe tolling applies, Mr. Brantley's § 10(b) claim was tolled as of December 7, 2021, when plaintiffs filed the FAC pleading insider trading against Mr. Branson.

The central question is therefore whether American Pipe tolling applies to Mr. Brantley's § 10(b) claim here, where both parties agree that the existing plaintiffs cannot maintain a § 10(b) claim because they did not trade contemporaneously with Mr. Branson's October 2019 sales. District courts in the Second Circuit are divided on the general question of whether American Pipe tolling applies where the original plaintiff in a class action lacks standing. Compare, e.g., Pac. Life Ins. Co. v. U.S. Bank Nat'l Ass'n, 636 F.Supp.3d 366, 404 (S.D.N.Y. 2022) (concluding that American Pipe tolling applies); In re Wachovia Equity Sec. Litig., 753 F.Supp.2d 326, 372 (S.D.N.Y. 2011) (same); Monroe Cnty. Employees' Ret. Sys. v. YPF Sociedad Anonima, 980 F.Supp.2d 487, 489 (S.D.N.Y. 2013) (same), with, e.g., Sonterra Cap. Master Fund Ltd. v. Credit Suisse Grp. AG, 409 F.Supp.3d 261, 271-72 (S.D.N.Y. 2019), abrogated on other grounds, 2021 WL 4997939 (2d Cir. Sept. 21, 2021) (concluding that American Pipe tolling does not apply); In re Direxion Shares ETF Tr., 279 F.R.D. 221, 237 (S.D.N.Y. 2012) (same).

Those courts that have declined to apply American Pipe tolling have reasoned that where the original plaintiff...