Fosbre v. Las Vegas Sands Corp.: United States District Court Denies Liability Under PSLRA “Safe Harbor”

In Fosbre v. Las Vegas Sands Corp., No. 2:10-CV-00765-KJD-GWF (D. Nev. Aug. 24, 2011), the court denied in part and granted in part the defendant’s motion to dismiss the plaintiffs’ class action lawsuit alleging that the defendant misrepresented or omitted key information about development plans and financing issues. 

Las Vegas Sands Corporation (“LVS”) operates resorts and gaming properties in Las Vegas, Macao, and Singapore, and was raising equity by issuing common stock between August 2, 2007 and November 6, 2008 to develop additional properties.  The plaintiffs alleged that LVS violated §10(b) and §20(a) of the Securities and Exchange Act of 1934 when LVS “knowingly or recklessly made misrepresentations and omissions about LVS, its development and its financial condition” while raising equity. 

Under §10(b) of the Securities Exchange Act of 1934 it is unlawful “‘to use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe.’”  To allege security fraud in accordance with the Private Securities Litigation Reform Act (“PSLRA”), the plaintiffs’ complaint must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.”   When pleading §10(b) actions, a plaintiff must show that the defendant acted knowingly or recklessly.  To avoid dismissal of a §10(b) claim, the plaintiff “must allege (1) a material misrepresentation or omission, (2) scienter or intent to defraud, (3) in connection with the purchase or sale of a security, (4) reliance, (5) economic loss, and (6) loss causation.” 

A plaintiff’s allegations must be supported by facts that show either a false statement of material fact or “an omission of material fact that renders other statements misleading.”  The plaintiffs alleged three different areas where the defendants made material misrepresentations or omissions.  The first area dealt with the cost for LVS’s planned development in Macao.  The plaintiffs alleged that LVS stated that the project would cost $12 billion, despite internal company documents showing projected costs of $16 billion. 

The plaintiffs also alleged that LVS made false representations about their cash flow and need for equity to complete the development in Macao. LVS asserted it had the financial flexibility to fund the development despite internal documents indicating the LVS could not complete the development without additional equity.

The final area of misrepresentations and omissions involved the operating conditions in Macao.  The plaintiffs alleged that LVS stated the company was experiencing high returns and strong visitation.  These statements were, according to plaintiffs, inconsistent with the company’s internal reports.  The internal reports noted poor performance and declining visitation. The court found that the plaintiffs adequately pled facts to show that the LVS’s statements were both misleading and material. 

The court held that the facts alleged in the plaintiffs’ complaint, if assumed true, “present a sufficiently cogent and compelling inference that Defendant’s recklessly or fraudulently made misstatements or omissions in violation of §10(b) . . . [were] sufficient to create a strong inference of scienter.”  

LVS argued the plaintiffs’ complaint should be dismissed because the contested statements were forward-looking.  The “safe harbor” protects from liability forward-looking statements “‘accompanied by meaningful cautionary statements.’”    The plaintiffs argued that the statements were not supplemented by cautionary language. 

The court held that LVS had provided cautionary statements that adequately described potential misfortunes that it might encounter.  As a result, the forward looking statements were protected by the safe harbor.  The court, therefore, granted the defendant’s motion to dismiss with respect to the statements about time and cost of the projects, availability of future funding, the sale of condominiums, and the company’s hopes for performance in Macao.  The court did not dismiss other allegations not considered forward-looking.    

The primary materials for this case may be found at the DU Corporate Governance website.