Pomerantz Defeats Motion to Dismiss in In re Bed Bath and Beyond Sec. Litig.

POMERANTZ MONITOR | SEPTEMBER OCTOBER 2023

By Omar Jafri

In a significant victory for investors, Pomerantz defeated an attempt to dismiss a securities fraud complaint against Ryan Cohen (“Cohen”) and his investment entity, RC Ventures LLC, in connection with a scheme to pump and dump the securities of Bed Bath and Beyond, Inc. (“BBBY”). While the Firm often prevails at the pleading stage of securities fraud actions, this case is unique because we convinced a federal court that misleading emoji can be actionable misrepresentations under the federal securities laws. We also showed that claims for scheme liability are viable even if there is significant overlap between a defendant’s statements and his overt acts, and that liability for market manipulation under Section 9 of the Securities Exchange Act of 1934 can extend to professional traders.

Cohen, a billionaire investor, took control of GameStop Corp. (“GameStop”) in 2021 at or around the time that an online community of retail investors used their collective power to drive up GameStop’s stock price and squeeze short sellers. This cemented Cohen’s role as one of the principal leaders of the meme stock movement. An army of retail investors began to follow his every move, purchasing shares of companies that Cohen invested in or otherwise endorsed. In 2022, Cohen followed the GameStop blueprint to purchase a large stake in BBBY. Retail investors immediately reacted with enthusiasm, causing BBBY’s stock price to experience the largest intraday percentage increase since the company went public in June 1992.

When Cohen bought nearly 10% of BBBY’s stock in March 2022, he claimed that he alone could turn the company around and save it from a downward spiral of sky-high debt and lethal liquidity concerns. Cohen believed that a sale or spin-off of BBBY’s crown jewel asset, buybuy BABY, would reverse a decade-long decline in profitability. Pursuant to a cooperation agreement with BBBY, three of Cohen’s handpicked Directors were placed on the Board, including two chosen to serve on a newly formed Strategy Committee specifically charged with exploring Cohen’s turnaround strategy of selling or spinning off buybuy BABY.

We alleged a strong basis to infer that Cohen knew, no later than the summer of 2022, that a sale or spin-off of buybuy BABY was impossible. In particular, the company entered into a new loan agreement in August 2022 in which it specifically pledged buybuy BABY as collateral to secure loans. Because of the time required to negotiate the complex loan agreement, the number of parties involved in the negotiations, and the company’s admission that it had been working on the expanded loan package for weeks before it was finalized at the end of August 2022, it is inconceivable that Cohen was not informed by BBBY’s management that his turnaround strategy was doomed before he dumped his holdings in August 2022. The district court accepted these logical inferences as compelling to deny Cohen’s motion to dismiss.

Knowing that his turnaround strategy for BBBY was impossible to implement, Cohen searched for a way to end his investment in the company without suffering a significant loss. We allege that Cohen leveraged his leadership position in the meme stock movement to encourage investors to buy BBBY securities while he secretly planned to sell his own shares. On August 12, 2022, Cohen sent a misleading tweet with a moon emoji, which is a rallying cry in the meme stock subculture to take the stock price “to the moon.” A few days later, Cohen filed a Schedule 13D disclosing that he had amassed over 10% of the company’s shares, a fact that he knowingly or recklessly failed to disclose months earlier as required by SEC rules. Consistent with Cohen’s past experiences, BBBY’s stock price exponentially rose again in response, as investors were led to believe that Cohen not only held but increased his holdings in BBBY. On the same day, Cohen also filed a Form 144, which misleadingly described any future transactions in BBBY securities as “potential” even though Cohen had used material, nonpublic information to sell millions of shares hours before filing the form. On August 18, 2022, the market learned that Cohen had sold all his BBBY shares and options on the previous day, converting a loss of over $80 million into a profit of over $68 million. As a result, the company’s stock price collapsed over the next three trading days.

Rejecting Cohen’s argument that the tweet was mere puffery, the district court became the second federal court in the country to conclude that emoji can be actionable misrepresentations. The court reasoned that emoji are symbols that can be used to effectively communicate powerful ideas. Here, the moon emoji symbolized Cohen’s confidence in BBBY and acted as a catalyst to drive up the stock price and trading volume in BBBY securities. Given Cohen’s leadership role in the meme stock movement, his access to inside information at BBBY, and his influence on BBBY’s management, the court found that retail investors took Cohen’s message as an “expert insider’s direction to buy or hold” BBBY’s securities, and that Cohen’s subsequent SEC filings were misleading because he failed to disclose a predetermined plan to sell all his shares.

Scheme liability, a notoriously difficult claim to plead, was also sustained. The scheme liability provisions under SEC Rule 10b-5(a) and (c) broadly prohibit “any device, scheme, or artifice to defraud” and any “act, practice, or course of business” that operates as a fraud on the market. Although scheme liability can extend to overt acts that are separable from a defendant’s statements, it is unclear which acts can qualify to assert a claim. A further complication is that many courts refuse to allow a scheme liability claim to proceed if a complaint primarily alleges a collection of misstatements and omissions. Here, the court correctly recognized that Cohen’s conduct went beyond making misrepresentations. Cohen not only made false statements, but also strategically delayed filing a form documenting that his total interest in BBBY exceeded 10% to stimulate demand and drive up the company’s stock price. Further, Cohen slow walked filing a form showing that he sold all his BBBY securities in order to keep the company’s stock price elevated while he secretly exited his position. The court ruled that we properly pled a claim for scheme liability because Cohen’s actions constituted a premeditated course of conduct that included more than just misrepresentations or omissions.

Finally, Pomerantz broke new ground in convincing the court that market manipulation claims under Section 9 of the Exchange Act are not confined to brokers and dealers, but also extend to professional traders such as Cohen. Case law on Section 9 is sparse and claims brought under this provision rarely succeed. There is no case law interpreting Section 9(a)(3). Cohen argued that Section 9(a)(3) should be limited to brokers and dealers since they are identified in the statute as individuals to whom liability may attach. We argued that Cohen ignored other provisions of Section 9(a)(3) that applied to him. In particular, the statute imposes liability for market manipulation claims on “any person” who disseminates information “in the ordinary course of business.” The court concluded that this catchall provision of Section 9(a)(3) applied to professional traders like Cohen, agreeing that we had the better reading of the law.

The case is now in discovery. Plaintiff and the purported Class expect to develop substantial evidentiary support for their allegations.