Judge Engelmayer Dismisses Putative Securities Class Action Because Allegations Were Based On Unconfirmed Allegations In Short Seller's Report

• Jurisdiction: United States,Federal
• Law Firm: Steptoe & Johnson
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Class Actions, Securities
• Author: Meghan Newcomer
• Published date: 13 January 2023

Today, Judge Engelmayer dismissed with prejudice a putative securities class action filed against DraftKings, Inc., and denied Plaintiffs' leave to replead. Plaintiffs' Second Amended Complaint alleged that a company that DraftKings had acquired in the course of going public, SBTech (Global) Limited ("SBTech"), had secretly operated in "black-market" jurisdictions, thereby exposing DraftKings to regulatory and criminal risks. It further alleged that DraftKings made materially false and misleading statements about, and failed to disclose, SBTech's violations of foreign law and their potential consequences.

Plaintiffs argued that DraftKings's shares traded at artificially inflated prices until June 15, 2021, when a short seller, Hindenburg Research published a report that revealed SBTech's ostensible operations in black market jurisdictions and the risks to which the merger with SBTech allegedly exposed DraftKings. That day, DraftKings's shares fell 4.17%.

In dismissing the Second Amended Complaint, the Court focused on Plaintiffs' reliance on the Hindenburg report without having verified the information contained in the report:

The SAC's claims as to SBTech's business practices are virtually entirely based on the Hindenburg Report, which in turn was largely based on unsourced or anonymously sourced allegations. The SAC's threadbare sourcing and the conclusory quality of these factual allegations and attributions are ultimately fatal to all of its ' 10(b) or ' 20(a) claims, whether based on DraftKings's statements about its compliance with law or its failure to disclose SBTech's ostensible black-market activity and revenues.

Judge Engelmayer found that the Hindenberg report had "two features that are problematic in compounding ways." First, the report was authored by a short seller who had an economic interest in driving down the stock's price. Judge Engelmayer...