CEOs tend to be optimistic by nature, but if they're too upbeat about what lies ahead, they're likely to stir up the always-lurking plaintiff's bar, which seizes on unfulfilled business plans as evidence that the company failed to disclose material business risks.

Among the latest companies tripped up by a failure-to-disclose suit is Portland, Oregon–based NuScale Power, the first firm in the United States to receive federal certification for a small-scale modular nuclear reactor design.

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Scott Sigman, a shareholder who bought just $200 of the company's shares, sued NuScale in U.S. District Court in Oregon last month, alleging that company executives didn't fully disclose risks and misled investors regarding the viability of its proposed nuclear project in Idaho—shelved last month after utilities balked at rising costs.

Securities attorneys say companies are especially vulnerable to such claims at the moment, as high interest rates ratchet up businesses' borrowing costs and economists forecast a slowing global economy.

Plaintiff's attorneys typically find fodder for their suits by perusing the transcripts of quarterly earnings calls—where executives field questions from analysts, forcing them at times to go off script. The risks may be even greater for companies led by hard-core entrepreneurs, "who just have a natural inclination to be rosily optimistic about what a business can do," said Mark Maddox, a securities attorney at Maddox Hargett & Caruso in Fishers, Indiana.

"There is sort of a battle that always goes on between the [management] of a company—especially one led by an entrepreneurial CEO—and their lawyer … who is usually trying to rein them in," he said. "It's a struggle. The vast majority of the time, the lawyers win out, but not always," added Maddox, a former Indiana securities commissioner.

"What I would emphasize is having good internal control procedures that are followed, including effective use of a disclosure committee that involves inside and outside disclosure counsel," said Stanley Keller, a corporate and securities lawyer and a senior partner at Locke Lord in Boston.

Keller also underscored the importance of "a good governance structure that surfaces relevant risks and disclosure issues."

The likelihood of S&P 500 companies being hit with a federal securities class-action suit has increased for the first time since 2018 and now stands at 3.8 percent, according to Cornerstone Research. That's the equivalent of 1 in 28 companies.

There's no shortage of plaintiff lawyers looking for anything that could be construed as a false or incomplete statement concerning the prospects of a product, project, or deal.

Sigman's case against NuScale was filed by the prolific, Boston-based securities litigation firm Block & Leviton. The firm also brought cases this year against FMC Corp., NextEra Energy, and Spirit AeroSystems.

Block & Leviton's complaint against NuScale quotes from Securities and Exchange Commission (SEC) filings and transcripts of analyst calls in which executives provided details on how many utilities had, to that point, subscribed to buying power from the proposed project in Idaho.

The company clearly stated that the deal would be in jeopardy if it did not reach a commitment level from utilities to buy at least 370 megawatts of power by the end of 2023. In a filing in February, the company reported commitments for just 120 megawatts.

However, the lawsuit says that NuScale executives, when asked about their confidence that the project would be completed, responded with such remarks as "we believe the funding will come through," though they prefaced that with "as it stands right now—and things could change."

In fact, the project was not even close to viable, according to an October 2023 report from Iceberg Research, which is cited heavily in the 24-page lawsuit. Iceberg specializes in identifying companies it believes are headed for a fall and profiting from their declines through short-selling.

The suit alleges that the NuScale project was done in by inflationary pressures on the cost of construction and power—obstacles it said the company failed to fully disclose.

Block & Leviton isn't alone in pursuing a case against NuScale. For example, New York–based Levi & Korsinsky has issued a press release saying it is seeking NuScale investors to participate in a suit against the company.

NuScale hasn't filed a response to the Block & Leviton suit, but a spokesperson took issue with any case reliant on the Iceberg report. "We are aware that certain serial litigants have announced their intention to file lawsuits based on a false and misleading short-seller report," Diane Hughes, vice president of marketing and communications, said in a statement. "Repeating false and misleading claims does not make them true. The company will vigorously defend itself in the proper forum."

Plaintiffs will have to prove material misrepresentations or material omissions to advance the case. "These cases are not easy. There's never a guarantee that these class-action suits are going to be successful," Maddox said.

Indeed, in March, in a separate lawsuit, Judge William Young of the District of Massachusetts rebuked Block & Leviton and dismissed its case against Biogen alleging executives misled investors about prospects for the company's new Alzheimer's drug, which underperformed. Young said Block & Leviton's complaint, filed on behalf of the Oklahoma Firefighters Pension and Retirement System, was full of "constant misrepresentations of what the defendants said."



From: Corporate Counsel

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