Securities Regulation Daily Norwegian Cruise Lines sends COVID-19 disclosure suit to the bottom
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Tuesday, April 13, 2021

Norwegian Cruise Lines sends COVID-19 disclosure suit to the bottom

By John M. Jascob, J.D., LL.M.

A failure to plead the materiality of statements concerning the company’s sales practices at the beginning of the pandemic sinks the plaintiff’s securities fraud claims.

The federal district court in Miami has dismissed a federal securities fraud complaint alleging that Norwegian Cruise Lines and two senior executives made material misrepresentations and omissions regarding the impact of COVID-19 on the company. Although the plaintiff alleged that the defendants used a deceptive marketing scheme to increase bookings despite the growing health concerns related to the pandemic, the court found the alleged misstatements to be so vague and broad that no reasonable investor would have relied on them. And even if the alleged misstatements or omissions concerning the company’s sales practices were actionable, the allegations were insufficient to show that the defendants had the requisite intent to defraud (Douglas v. Norwegian Cruise Lines, April 13, 2021, Scola, R.).

In a complaint filed on March 12, 2020, the plaintiff cited Norwegian Cruise Lines’ 8-K filing with the SEC on February 20, in which the firm stated that despite the then-known impact from the COVID-19 outbreak, the company’s booked position remained ahead of the prior year. The company also touted the procedures it had in place to protect its guests and crew, claiming it had implemented several preventative measures to reduce potential exposure and transmission of COVID-19. In its 10-K filing on February 27, 2020, signed by CEO Frank Del Rio and CFO Mark Kempa, Norwegian Cruise Lines again discussed its focus on health and safety and its compliance with cruise industry standards.

These statements were materially false or misleading, according to the complaint, because at the time they were made, Norwegian Cruise Lines was allegedly endangering the lives of both their customers and crew members by employing sales tactics that provided customers with unproven or blatantly false statements about coronavirus to boost cruise sales. Among other things, the complaint cited a March 11, 2020, article from the Miami New Times that reported statements from leaked employee emails showing that the company directed its sales staff to lie to customers and ease consumer concerns by using scripted one-line statements regarding the dangers and impact of the virus. One line from a marketing script allegedly sought to reassure customers by saying, "The only thing you need to worry about for your cruise is do you have enough sunscreen?"

Corporate puffery. The court ruled, however, that all of the challenged statements constituted mere corporate puffery because they were so vague and so broad that no reasonable investor would have relied on them in making an investment decision. For example, the plaintiff claimed that because the defendants generally referred to their marketing strategy on conference calls and in SEC filings, the defendants had a duty to disclose the specifics of the deceptive marketing scheme, i.e. the one-line statements. Although the marketing strategies were arguably important to the success of Norwegian Cruise Lines’ business, the challenged statements did not assert specific, verifiable facts that reasonable investors would rely on in deciding whether to buy or sell the company’s stock, the court reasoned.

The court also rejected claims that statements made by CEO Del Rio on a conference call on February 20, 2020, regarding improvement in Norwegian Cruise Lines’ bookings were misleading or false. At best, the challenged statements constituted a general report of the bookings from the prior week. "Considering the defendants’ undisputed acknowledgement of the pandemic’s impact on bookings during the conference call, press release, and Form 10-K, no reasonable investor would believe that a statement regarding a brief window of improvement in bookings during a global pandemic implied that all was well within the company and that its marketing strategies were not accounting for customer concerns regarding Covid-19," the court stated.

No scienter. Turning to the issue of scienter for the sake of completion, the court stated that the allegations were also insufficient to show that the defendants had the requisite intent to deceive or defraud. For example, contrary to the plaintiff’s argument, knowledge of the allegedly deceptive marketing scheme could not be inferred solely because of Del Rio's and Kempa’s positions in the company. And while the plaintiff argued that internal emails, meetings, and whistleblower accounts made it clear that the marketing scheme was implemented from the "top down," the were no claimed emails or communications from any of the individual defendants expressly ordering sales employees to use the one-line statements.

The complaint also failed to create a strong inference of scienter through circumstantial evidence. For example, the complaint did not cite the actual communication directing sales employees to use the scripted statements, but instead relied on the reports of three different publications—none of which identify who created the one-line statements, who required their use, or which of the defendants knew of their existence and use. Accordingly, the complaint did not allege sufficient facts to impute knowledge on the part of the defendants under the circumstances.

The case is No. 20-21107.

Attorneys: Laurence Matthew Rosen (The Rosen Law Firm, P.A.) for Eric Douglas. Alex M. Gonzalez (Holland & Knight LLP) for Norwegian Cruise Lines and Frank J. Del Rio.

Companies: Norwegian Cruise Lines

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