Law360 (October 30, 2020, 9:56 PM EDT) -- Investors told a Florida federal judge Thursday Norwegian Cruise Line blatantly downplayed the COVID-19 pandemic to prospective customers in order to stave off revenue losses, leaving investors holding the bag when the deceptive sales campaign made headlines in March and triggered multiple government investigations.
Lead plaintiff Employer-Teamsters Local 175 & 505 Pension Trust Fund fired back at Norwegian Cruise Line's bid to escape a consolidated securities fraud class action from investors seeking damages for the more than 50% hit the company's stock took when a Miami newspaper reported on leaked internal memos instructing Norwegian sales staff to lie to prospective customers about the impact of the novel coronavirus outbreak.
Norwegian isn't protected from liability under the Private Securities Litigation Reform Act's safe harbor, and Norwegian's argument that it sufficiently warned investors about the business risks associated with COVID-19 don't hold up, the pension fund said in its opposition brief. Norwegian's blatant disinformation campaign wasn't just the company painting a rosy picture of the state of business that would amount to puffery or corporate optimism, the pension fund added.
"The market's reaction to the revelation of Norwegian's deceptive sales campaign evidences these warnings did not adequately inform investors of these risks," the pension fund said, urging the court to reject dismissal arguments from the cruise line, Norwegian President and CEO Frank Del Rio, and Executive Vice President and Chief Financial Officer Mark A. Kempa.
The pension fund said Thursday it clearly alleged the cruise line's top executive ranks directed the "dangerously false" sales campaign, which was revealed by an "explosive" March 11 Miami New Times article detailing a whistleblower's account and leaked internal emails appearing to show a senior sales manager giving scripted responses to sales agents to discourage concerned customers from canceling their cruise bookings.
Those scripts included false and unproven statements, the pension fund alleged. For example, Norwegian sales staff would say, "the coronavirus can only survive in cold temperatures" and "scientists and medical professionals have confirmed the warm weather of the spring will be the end of the coronavirus," among other things. The pension fund also alleged Norwegian sales managers told their staff to "be aggressive" and "hook in customers" by creating a false sense of increased demand for Norwegian's cruises.
The next day, two additional articles published by the Washington Post and the Miami Herald revealed further details about Norwegian's misinformation campaign, quoting additional internal company emails that called the coronavirus "overhyped," the pension fund alleged.
The market reaction was "swift and severe," the pension fund said, as Norwegian's stock fell nearly 27% to close at $15.03 per share on March 11, the day the Miami New Times article was published. Then on March 12, Norwegian stock dropped an additional 36% to close at $9.65 per share. That same day, Democratic U.S. Sens. Richard Blumenthal of Connecticut and Edward Markey of Massachusetts publicly condemned Norwegian in a letter to Del Rio demanding that Norwegian stop spreading false information and "suspend all operations until sufficient measures are in place to protect the health and safety of passengers and crew members."
Norwegian on March 13 suspended its cruises after the Cruise Lines International Association announced a voluntary suspension of all U.S. cruise ship operations. Those suspensions have been extended several times since.
But Norwegian's troubles continued as Florida Attorney General Ashley Moody on March 23 launched an investigation into allegations of Norwegian's misleading sales pitches downplaying the severity and highly contagious nature of the novel coronavirus.
By May 15, Norwegian disclosed in a U.S. Securities and Exchange Commission filing that it had "received notifications from other attorneys general and governmental agencies that they are conducting similar investigations" into the company's deceptive sales practices.
The Employer-Teamsters Local 175 & 505 Pension Trust Fund on Thursday slammed the Norwegian defendants' argument that they had no duty to disclose the deceptive sales campaign, which they put in play knowing full well how damaging it would be to investors.
It's a material omission, the pension fund argued, because in the face of one of the greatest crises to hit the cruise industry, Norwegian kept saying that it was "working tirelessly to do what is right" for its shareholders, would not respond to the coronavirus in ways that would hurt the company's brand equity, and bragged about the company's marketing prowess.
"Defendants, therefore, had a duty to disclose that the company instructed its sales force to engage in a dangerously false sales campaign that prioritized profits over passengers and risked destroying Norwegian's brand equity and reputation — at a time when investors were already 'absolutely panicked' about COVID-19 and how Norwegian would respond to it," the pension fund said in Thursday's brief.
The pension fund said Norwegian actively created the misleading impression that it was being "transparent" about its handling of the coronavirus, experiencing an improvement in bookings and a moderation of cancellations, and adhering to the company's code of conduct.
"Defendants, therefore, had a duty to 'neutralize' the 'natural and normal implication' of their statements by disclosing the deceptive sales campaign," the pension fund said.
Norwegian, Del Rio and Kempa moved to dismiss the consolidated class action in September. They argued the case is based entirely on the whistleblower's statements that were reported in various news articles, which are hardly enough to prove any securities fraud. According to Norwegian, the anonymous employee admitted that the series of talking points that were given to sales staff, or so-called "one-liners," were not part of a mandatory sales script, and had zero evidence indicating that they were actually used on calls with customers.
"In fact, neither the articles nor the [complaint] cites to a single guest who claimed to have heard any of the one-liners and who decided to either book a cruise or forego cancellation as a result of them," Norwegian argued. "While the factual underpinnings for the [complaint] are thin, the issue in this case is not whether the one-liners were poorly conceived or deceived any customers. Rather, the issue is whether Norwegian's CEO and CFO misled its stockholders in connection with the one-liners." And in that regard, Norwegian said, the case completely falls apart for failure to state a claim for securities fraud.
The consolidated class action is the combination of an initial suit filed on March 12 by investor Eric Douglas with a second suit filed by Abraham Atachbarian on March 31 and subsequent suits from other investors, resulting in at least nine law firms vying for lead counsel status. U.S. District Judge Robert N. Scola appointed the Teamsters fund as lead plaintiff and Robbins Geller Rudman & Dowd LLP as lead class counsel in June.
Counsel or representatives for the parties could not be immediately reached for comment Friday.
The lead plaintiff is represented by Robert J. Robbins, Elizabeth A. Shonson, Maureen E. Mueller, Sabrina E. Tirabassi and Christian G. Montelione of Robbins Geller Rudman & Dowd LLP and Michael J. Del Giudice of Ciccarello Del Giudice & LaFon.
Norwegian is represented by Tracy A. Nichols, Alex M. Gonzalez, Louise McAlpin, Allison Kernisky and Michael W. Glenn of Holland & Knight LLP.
The case is Douglas et al. v. Norwegian Cruise Lines et al., case number 1:20-cv-21107, in the U.S. District Court for the Southern District of Florida.
--Additional reporting by Carolina Bolado and Rachel O'Brien. Editing by Janice Carter Brown.
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