N.Y. Judge Dismisses Warner Bros. Discovery Securities Fraud Case

U.S. District Judge Valerie Caproni for Southern New York in Manhattan granted Warner Bros. Discovery's motion to dismiss a class action brought by two WBD shareholders alleging that false and misleading statements were in the offering materials that preceded the transaction from which WBD emerged (see 2302160002), said her signed opinion and order Monday (docket 1:22-cv-08171). She dismissed the case with prejudice.

The WBD lead plaintiff shareholders -- the Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio -- haven’t “adequately alleged any actionable statements or omissions” under Sections 11 or 12(a)(2) of the Securities Act, said Caproni’s opinion and order. The merger offering documents “accurately explained the methodology WarnerMedia and Discovery used for calculating the number of subscribers to their streaming platforms,” it said.

The judge also found that WBD wasn’t required to disclose that WarnerMedia had allegedly changed its business strategy “with respect to third-party licensing deals” because it didn’t “hype a contrary strategy,” said the opinion and order. Caproni also found that the plaintiffs didn’t adequately allege that WarnerMedia “failed to analyze whether its investment in content likely would be profitable,” it said.

The plaintiffs also didn’t adequately allege that WarnerMedia had shifted away from licensing feature films for theatrical distribution in favor of a direct-to-streaming model, said the opinion and order. The defendants weren’t “obligated to disclose” information about the impending demise of CNN+, post WBD, merely because the offering documents “discussed the broader content strategies of the parties,” it said. The defendants also weren’t obligated to “disclose limitations” to the deal's due diligence process because the offering documents didn’t represent that Discovery “was given comprehensive access to WarnerMedia’s non-public information,” it said.

Two types of omissions can give rise to liability under the Securities Act, said the opinion and order. A defendant can be found liable for omitting information that’s required to be disclosed under the securities laws, it said. As the plaintiffs “primarily argue” in this case, a defendant can be found liable “for failing to disclose information that is necessary to keep the representations that it does make from being misleading,” it said.

A plaintiff may not plead a Securities Act claim with the benefit of 20/20 hindsight or base the claim on a backward-looking assessment of the statement, said the opinion and order. For example, the plaintiffs’ amended complaint attempts to “engineer” Securities Act claims based on WBD’s downward adjustment of its projected EBITDA following the merger. But this type of hindsight pleading “falls short,” it said.

To state a claim under Section 15 of the Securities Act, a plaintiff must allege a primary violation by a controlled person, and control by the defendant of the primary violator, said the opinion and order. Because the plaintiffs here failed adequately to allege any primary violation under Sections 11 and 12(a)(2) of the Securities Act, their claims under Section 15 “fail as well,” it said.