Alleged violation of Exchange Act § 10(b) (15 USC § 78t(a)) & Rule 10b-5 (17 CFR § 240.10b–5); Private Securities Litigation Reform Act (PSLRA); § 78u-4(b)(1); FedRCivP 9(b); Material misrepresentation element; Scienter element; Scheme liability under Rule 10b–5(a) & (c); “Control person” theory

In this class action, the court affirmed the district court’s dismissal of plaintiff-Newtyn’s complaint for failing to allege any viable allegations of misrepresentation and scienter, necessary elements of a securities fraud claim. Defendant-Alliance Data Systems (ADS) spun off part of its business as a stand-alone-company, Loyalty Ventures (Loyalty), which in turn contained two segments, one of which was AIR MILES, a Canadian-based customer rewards program. ADS executives pitched Loyalty as a good investment. When Loyalty went bankrupt about a year and a half after the spinoff, those who had invested in it, including Newtyn, sued for securities fraud based on alleged misrepresentations regarding AIR MILES. Considering the material misrepresentation element, the court held that the challenged statements regarding the withdrawal of a prominent sponsor of AIR MILES and that the client base was “stable” constituted “little more than the type of puffery that is ubiquitous in the corporate world.” It found that there were “[m]ultiple cautionary warnings in the registration statement” that the program could encounter “sudden sponsor troubles.” The court concluded that “Newtyn failed to allege a single materially false statement or omission.” It also held that Newtyn failed on the scienter element. It was required to plausibly allege either “knowing and deliberate intent” or “recklessness.” It appeared the purported facts supporting Newtyn’s complaint went “beyond Newtyn’s direct personal knowledge, and Newtyn has not otherwise claimed to have verified those assertions.” Such allegations, treated “as in the nature of ‘information and belief[,]’” cannot support a strong inference of scienter under the PSLRA. Further, it was not established that the sponsor’s withdrawal of participation in AIR MILES on which the investors allegedly relied was a “done deal” when defendants were promoting the investment. The court also rejected the contention that they “had motive and opportunity to defraud investors” where this assertion was not supported by defendants’ stock holdings. Newtyn’s claims based on scheme liability and “control person” theory also failed.