U.S. Court of Appeals for the Second Circuit.
U.S. Court of Appeals for the Second Circuit (Credit: ALM)

Shifting fraud theories helped sink an attempted securities class action appeal by former employees of the pharmaceutical company Covis.

The U.S. Court of Appeals for the Second Circuit ruled in Brown v. Cerberus Capital Management, 17-63, that the defendants had “abandoned the theory of securities fraud that they pressed before the district court,” in favor of an insider trading charge “for the first time.”

The employees had sued over the restructuring of a major investor, private equity firm Cerberus Capital Management.

The panel said the plaintiffs initially presented a theory that the restructuring resulted in misstatements about the value and tax reasoning for the new U.S.-based spin-off.

On appeal, however, the plaintiffs argued that the defendants induced them, through material misrepresentations and omissions, to swap their more profitable holdings in the original holding Covis company into a subsidiary during a reorganization, the panel said.

The original amended complaint did not meet a “heightened” scienter pleading standard, and the panel declined to evaluate the new theory presented on appeal.

Appellants “enjoyed a full opportunity to amend … and have continued only to shift theories of recovery, as reflected in their briefs, without identifying any way in which a further amendment of its factual allegations would cure the amended complaint’s shortcomings,” the panel said.

The decision by Judges Robert Sack, Susan Carney and Christopher Droney upheld Southern District Judge George Daniels’ dismissal of the case.

The defendant-appellees were represented by Lowenstein Sandler partners Sheila Sadighi and Gavin Rooney. In a statement, counsel said they were pleased with the panel’s “prompt affirmation of the … thoughtful dismissal with prejudice of this meritless action.”

Private attorney Joshua Seifert represented the appellants. He could not be reached for comment.