Investors suing GreenSky, Inc. and its underwriters for failing to disclose important changes to the company’s business in documents accompanying its 2018 initial public offering (“IPO”) cleared an important procedural hurdle recently when a federal judge denied defendants’ motion to dismiss the case.
Judge Alvin K. Hellerstein of the U.S. District Court for the Southern District of New York announced his ruling from the bench November 25, 2019 after presiding over a spirited oral argument, handled largely on the plaintiffs’ side by Cohen Milstein Managing Partner Steven J. Toll with participation by Partner S. Douglas Bunch. Judge Hellerstein issued his order denying the motion to dismiss the next day.
Cohen Milstein is co-lead counsel in the case, representing co-lead plaintiffs Northeast Carpenters Annuity Fund and El Paso Firemen & Policemen’s Pension Fund. Judge Hellerstein upheld all claims alleged by those two funds, dismissing only one overlapping claim brought by a third co-lead plaintiff, the Employees’ Retirement System of the City of Baton Rouge and Parish of East Baton Rouge.
GreenSky is a technology company that operates an online platform that allows creditors to process loan applications at the point of sale. More than 10,000 businesses use GreenSky’s platform.
Plaintiffs argued that GreenSky was required under the Securities Act of 1933 to tell IPO investors about its decision to sharply reduce business from solar energy merchants who earned the company high transaction fees in favor of other less-profitable merchants.
In 2016, two years before its IPO, GreenSky had derived approximately 20 percent of its transaction-fee revenues from solar panel merchants; that share had dropped to 12 percent by 2017 and to 8 percent in the first quarter of 2018, just before the IPO. By the second quarter of 2018, it had fallen to 5 percent. While it was aggressively reducing its presence in the solar panel business, where the average transaction fee was 14 percent, the company was increasing its involvement in the elective healthcare industry, where the average transaction fee was 6.5 percent. When the truth about GreenSky’s reduced transaction fees and consequential impact on transaction fee revenue emerged, the company’s stock price fell, damaging investors.
At issue was whether, taken at face value, plaintiffs’ allegations appeared plausible and were pleaded with enough particularity and detail.
At the November hearing, defense counsel argued that the company was not required to disclose the shift in merchant mix in its offering documents and that some of the decline in business from solar panel merchants was unexpected. Defense counsel also contended that the risk disclosures contained in the prospectus for the IPO constituted sufficient disclosure.
Judge Hellerstein, however, noted that the shift from the higher-profit solar panel sector to lower-profit elective healthcare merchants seemed “counterintuitive” and was never explained in the prospectus. “There’s something missing here. It doesn’t make sense,” he said. Toll argued that the prospectus and other offering documents made virtually no mention of the solar panel merchants, let alone their importance to the company’s bottom line. Despite all the pages in the prospectus devoted to risk disclosures, “you do not find the words ‘solar panel merchant’ in any risk factor in the entire prospectus,” he said.
In addition, Toll said, investors couldn’t know how a shift to healthcare would hurt the company without knowing more about its reliance on solar panel merchants. “This was their most profitable business,” he said. “It’s not like it’s 1 percent. It’s 20 percent in ’16. The investors aren’t told that. They don’t have a clue. So when [GreenSky] make[s] this disclosure they are going to actively reduce transaction volume with solar merchants, no investor knows what that means.”
The judge agreed. “The prospectus cries out for an explanation,” he said. “It doesn’t make sense without more of an explanation. At this point, I have too many questions to grant the motion [to dismiss] in this aspect.”
The case, In re GreenSky Securities Litigation, No. 18 Civ. 11071 (S.D.N.Y.), is proceeding to discovery.