Brown Vs Cerberus Capital Case Study

In Brown v. Cerberus Capital Mgmt., L.P., No. 17-63, Doc. 49-1 (2d Cir. N.Y. July 11, 2017), the United States Court of Appeals for the Second Circuit (the “Court of Appeals”) affirmed the District Court’s holding, which dismissed under Rule 12(b)(6) the former employees (“Plaintiffs”) of Covis Pharmaceuticals Inc. (“Defendants”) federal securities fraud claims.

According to the factual allegations, Plaintiffs’ grievances arose out of a 2013 reorganization of the “Covis enterprise”. Plaintiffs argue that, before the reorganization, they held valuable profits interests in Covis Holdings LP (“CLP”). But, as part of the reorganization hey exchanged those interests for less valuable profits interests in Covis US Holdings, LLC (“C-US”), in reliance on Defendants’ actions.

In District Court, Plaintiffs alleged securities fraud by claiming that Defendants violated Rule 10b-5 by making material misstatements about the value of the C-US profits interests and a tax “gross up” to induce Plaintiffs’ continued employment at Covis Pharmaceuticals, Am. Compl. ¶ 23. By the failure to pursue it in their opening brief, the plaintiffs abandoned the theory of securities fraud. Regardless, under the Private Securities Litigation Reform Act
The complaint alleged that the business plan of Covis enterprise was that it would try to sell itself or its assets soon after developing a market in the pharmaceuticals that it acquired. Based on that description, merger discussions and negotiations were to be expected by Plaintiffs. Therefore, the pendency of merger negotiations thus signaled no more than the Covis enterprise’s continued adherence to its announced corporate