IFF and Frutarom Secure Dismissal of Securities Fraud Class Action
March 30, 2021
Cleary Gottlieb represented International Flavors & Fragrances Inc. (IFF), certain of its officers, and its subsidiary Frutarom Industries Ltd. (Frutarom) in successfully obtaining the complete dismissal of a putative securities class action in the U.S. District Court for the Southern District of New York.
Plaintiffs brought claims against IFF, Frutarom, and other defendants under the Securities Exchange Act of 1934 and the Israeli Securities Law of 1968, alleging that the defendants made materially misleading statements and/or omitted material information concerning IFF’s acquisition of Frutarom, the integration of the two companies, and the companies’ financial reporting and results. The lawsuit was filed after IFF disclosed that preliminary results of investigations indicated that Frutarom businesses operating principally in Russia and Ukraine had made improper payments to representatives of customers.
On March 30, 2021, Judge Naomi Reice Buchwald issued an 89-page opinion dismissing the complaint in its entirety. At the outset, the court concluded that plaintiffs had failed to adequately plead that the alleged scheme of improper payments operated during the class period. The court also concluded that plaintiffs had failed to plead any actionable misrepresentation or omission, rejecting plaintiffs’ “attempt to tie Frutarom’s alleged payments to a representation made in each challenged statement and then claim that the representation is misleading because defendants omitted mention of the payments or their impact.” Among other things, the court found that statements containing accurate historical financial data were not actionable and that statements concerning the effectiveness of controls over financial reporting were not actionable because plaintiffs did not allege that the defendants failed to implement those controls or that any such controls were ineffective. The court also found that the alleged misstatements and omissions, even if they had been pleaded with particularity, were neither quantitatively nor qualitatively material.
The court also held that plaintiffs had failed to plead a strong inference of scienter as to IFF and its officers. In doing so, the court rejected plaintiffs’ allegations that IFF knew or should have known about the alleged improper payments before the acquisition, which were based principally on a triple hearsay statement from a confidential witness and allegations about IFF’s due diligence process in the acquisition. The court stated that plaintiffs’ theory of scienter was “incredible in every sense of the word,” and “stitched together by tissue paper-thin factual allegations and conjecture.”
The court also held that plaintiffs, whose claims were based on their purchase of IFF shares, lacked standing to bring claims against Frutarom for statements made about Frutarom.
Finally, having dismissed the claims under Section 10(b) and Rule 10b-5, the court declined to exercise supplemental jurisdiction over plaintiffs’ Israeli securities law claims.