Noto v. 22nd Century Grp.

650 F.Supp.3d 33

Joseph NOTO, Garden State Tire Corp., and Stephens Johnson,Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. 22ND CENTURY GROUP, INC., Henry Sicignano, III,and John T. Brodfuehrer, Defendants

19-CV-1285 (JLS)

United States District Court, W.D. New York

Signed January 6, 2023

Brian Calandra, Jeremy A. Lieberman, Joseph Alexander Hood, II, Pomerantz LLP, New York, NY, Garth Avery Spencer, Glancy Prongay & Murray LLP, Los Angeles, CA, for Plaintiff.

Charles C. Ritter, Jr., Duke, Holzman, Photiadis & Gresens, LLP, Buffalo, NY, John A. Tucker, Pro Hac Vice, Foley & Lardner LLP, Jacksonville, FL, Jonathan Hale Friedman, Foley & Lardner, New York, NY, for Defendants.

DECISION AND ORDER

JOHN L. SINATRA, JR., UNITED STATES DISTRICT JUDGE

Defendant 22nd Century Group, Inc. is a publicly traded company that engineers tobacco and cannabis plants to adjust nicotine and cannabinoid levels. Defendants Henry Sicignano, III and John T. Brodfuehrer were 22nd Century's CEO and CFO, respectively, during the relevant time period. Plaintiffs Joseph Noto, Garden State Tire Corp., and Stephens Johnson, individually and on behalf of all others similarly situated, were investors in 22nd Century.

Defendants moved to dismiss Plaintiffs' amended complaint.¹ For the reasons below, the Court denies the remaining portion of Defendants' motion.

BACKGROUND

I. Factual Background

The Court takes the following facts from Plaintiffs' amended complaint.² Dkt. 31. As it must, the Court treats Plaintiffs' well-pleaded factual allegations as true and draws all reasonable inferences in Plaintiffs' favor.

22nd Century is a Buffalo-based biotechnology company that claims to have the ability to breed tobacco and cannabis plants with specific levels of nicotine and THC. Dkt. 31 ¶ 2. Sicignano served as 22nd Century's CEO from March 2015 to July 2019. Id. ¶ 35. Brodfuehrer served as 22nd Century's CFO and Treasurer from April 2013 to December 2019. Id. ¶ 36. In 2013, around when Sicignano took over as CEO, 22nd Century struggled to maintain sufficient cash reserves to continue operating. Id. ¶ 56.

Some time before 2016, the SEC began an investigation into purported material weaknesses in 22nd Century's internal accounting practices (the "SEC Investigation"). Id. ¶ 48. According to a confidential witness hired to address 22nd Century's accounting weaknesses, as of February 2019, no notice was ever received indicating the SEC Investigation had concluded. Id. ¶¶ 45, 47, 48. 22nd Century retained counsel to deal with the investigation, and Brodfuehrer traveled to Washington, D.C. to meet with the SEC. Id. ¶ 49. Brodfuehrer told a confidential witness he was worried the investigation may cost him his CPA license or result in his imprisonment. Id. He also told this confidential witness, on multiple occasions in 2017, that he was not comfortable signing 22nd Century's SEC filings because of Sicignano's improper conduct as CEO, stating that "people need to save Henry [Sicignano] from himself." Id. ¶ 208.

Between February 18, 2016, and July 31, 2019 (the "Class Period"), Defendants issued numerous public statements about the status of 22nd Century to influence public opinion about the company. Id. ¶ 1. On February 18, 2016, 22nd Century filed its 2015 10-K with the SEC ("2015 10-K"). Id. ¶ 193. The 2015 10-K stated that:

[O]ur management concluded that as of December 31, 2015, that our internal controls over financial reporting were not effective and that material weaknesses exist in our internal control over financial reporting. The material weakness consists of controls associated with segregation of duties whereby individuals have incompatable duties within the financial reporting area. To address the material weakness we performed additional analyses and other post-closing procedures to ensure that our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).

Id. On May 10, 2016, it filed its 2016 10-Q for the first quarter of 2016 ("Q1 2016 10-Q"). Id. ¶ 194. The Q1 2016 10-Q stated that:

[O]ur chief executive officer and chief financial officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Exchange Act Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures were not effective and that material weaknesses described in our Form 10-K for the year ended December 31, 2015 exist in our internal control over financial reporting based on their evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

Id. On August 9, 2016, it filed its 2016 10-Q for the second quarter of 2016 ("Q2 2016 10-Q"). Id. ¶ 195. The Q2 2016 10-Q stated that:

During the second quarter of 2016, we hired an additional accounting employee to assist with remediating our material weakness associated with a lack of segregation of duties. In addition, subsequent to the end of the second quarter of 2016, we engaged a third-party consultant to assist with material weakness remediation and to assist with our controls and procedures over our financial reporting. Except as set forth herein, there were no changes in the Company's internal control over financial reporting during the second quarter of 2016 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Id. On November 8, 2016, it filed its 2016 10-Q for the third quarter of 2016 ("Q3 2016 10-Q"). Id. ¶ 196. The Q3 2016 10-Q stated that:

During the third quarter of 2016, an additional accounting employee hired during the second quarter of 2016 was fully deployed and with the assistance of a third-party consultant, we developed and commenced the implementation of a remediation plan targeted at eliminating our previously reported material weakness in our internal controls over financial reporting primarily resulting from a lack of segregation of duties. Except as set forth herein, there were no changes in the Company's internal controls over financial reporting during the third quarter of 2016 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Id. And finally, on March 8, 2017, it filed its 2016 10-K ("2016 10-K"). Id. ¶ 197. The 2016 10-K stated that:

During the fourth quarter of 2016, we completed the implementation and testing of a remediation plan that was targeted at eliminating our previously reported material weakness in our internal controls over financial reporting primarily resulting from a lack of segregation of duties. Except as set forth herein, there were no changes in the Company's internal controls over financial reporting during the fourth quarter of 2016 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Id. In each filing (collectively, the "SEC Filings"), Defendants disclosed that issues existed with 22nd Century's accounting practices, but did not mention the SEC Investigation. Id. ¶¶ 193-97. Plaintiffs argue that, because information regarding the SEC Investigation was omitted from these statements, the SEC Filings are each materially false or misleading. Id. ¶ 192.

Also during this time, 22nd Century executed multiple stock offerings to raise cash for the company at the cost of diluting the interests of existing shareholders. Id. ¶ 57. On February 5, 2016, 22nd Century closed a registered direct offering of common stock and warrants—consisting of 5,000,000 shares of common stock and warrants—to purchase 2,500,000 shares. Id. On July 27, 2016, 22nd Century closed another registered direct offering of common stock and warrants—consisting of 6,172,840 shares of common stock and warrants—to purchase 7,043,211 shares. Id. Finally, on October 19, 2016, 22nd Century sold 8,500,000 shares of common stock and warrants to purchase 4,250,000 shares. Id. On December 30, 2016, 22nd Century filed a Form S-3 with the SEC that was declared effective on January 17, 2017, allowing it to raise up to $100 million of capital over a three-year period ending on January 17, 2020. Id.

Later, on October 25, 2018, an author by the username "Fuzzy Panda" published a short seller report on financial news and analysis website, "Seeking Alpha." Id. ¶ 12 n.2. The author claimed that the SEC denied his FOIA request for documents relating to 22nd Century because the request would "reasonably be expected to interfere with on-going enforcement proceedings." Id. ¶ 17. As a result, he accused 22nd Century of being under SEC investigation and failing to inform its shareholders. Id. After Fuzzy Panda posted this article, 22nd Century shares fell $0.11 per share, or 4.3%, to close at $2.45 per share on October 25, 2018. Id. ¶¶ 17, 139, 221. Fuzzy Panda previously raised questions regarding 22nd Century's technology claims on Seeking Alpha and, based on the shared username with a known account on another website, Defendants believed Fuzzy Panda was former 22nd Century CEO Joseph Pandolfino. Id. ¶ 12.

In response to the article, 22nd Century issued a press release on October 26, 2018 (the "2018 Press Release") that discredited Fuzzy Panda—without mentioning his suspected identity—and denied knowledge of any SEC enforcement proceedings, stating that "22nd Century has not received any notice of, and the Company has no knowledge of, any enforcement proceeding against 22nd Century by the SEC or any other regulator." Id. ¶ 19. The 2018 Press Release characterized the October 25 article as a "highly deceptive article published . . . by a self-professed short seller of the Company's stock who launched his smear campaign in an effort to dupe shareholders into selling their shares of 22nd Century...