“It’s enough to make you lose your faith in capitalism—like, you could say anything.”
This statement, from Kendall Roy, reads like a thesis statement for the back half of this last season of Succession. In episode six, “Living +” Kendall makes grand promises about technology that have never been vetted (sound familiar?), juicing the financial projections of his new product, and editing his dead father’s own recording to make predictions on new, supposedly life-expanding, technology.
At the end of it all, his company’s stock price jumps.
And then in the following episode, “Tailgate Party” we learn that Kendall’s foil, Lucas Mattson, is also juicing his own numbers. Mattson sheepishly admits to Shiv Roy that GoJo’s subscriber in India has been vastly overstated, to the extent that the numbers would require “two Indias” to make sense.
Of course, you cannot, in fact, “say anything” and both Roy and Mattson are keyed into the fact that the other’s misrepresentations are their weakness. In fact, each character may have potentially committed significant acts of securities fraud.
What is securities fraud?
Demonstrating securities fraud can be complex, but the concept behind it isn’t: securities fraud involves the misrepresentation or omission of information in an attempt to deceive investors and manipulate the financial markets.
Securities fraud can involve a wide range of activities, but generally speaking, it’s composed of six basic elements:
- Material misrepresentation or omission by the defendant
- Connection between the misrepresentation or omission and the purchase or sale of a security
- Reliance upon the misrepresentation or omission
- Economic loss
- Loss causation
Breaking down securities fraud on Succession
How would a potential case of securities fraud against both Kendall Roy and Lukas Mattson play out in court? Let’s look at the different factors and how each character’s actions stack up.
Creating material misrepresentation
Both Roy and Mattson have ticked the box for the first requirement of securities fraud: each has made a material misrepresentation.
Mattson’s is clearer, as he knowingly misrepresenting the number of subscribers to his company’s product. Kendall’s is a little murkier, as he intentionally fogs things up, posing the potential health benefits as hypotheticals. His aggressive financial projections are positioned as just that—projections.
However, Kendall omits the real questions behind these forecasts and projections. He also alters his father’s video to make a claim his father, the influential former CEO, never made, a clear misrepresentation (although again the alteration is to a forecast, not a statement of fact; Kendall is careful to create some plausible deniability).
Scienter and false statements
Scienter speaks to the state of mind of the issuer of the false statement: did they know it was untrue?
In Succession, both characters here are clearly in the know: Mattson is fully aware that his numbers are nonsense, and so does Kendall.
In short: if a factfinder at trial had access to the same evidence the audience does, this element is clearly satisfied.
Sales, reliance, economic loss, and loss causation
Assuming people are making stock purchase decisions based upon these statements, the rest of the criteria for securities fraud could be quickly met. A critical factor, of course, is the movement of the financial markets. Assuming stock prices drop once the truth is revealed, economic loss and loss causation potentially follow.
Loss causation requires a showing that of either:
- A corrective disclosure revealing the fraud to the public followed by a significant decline in stock price, or
- That the events causing the investor losses were a foreseeable consequence of the fraud and within the zone of risk the securities law were designed to prevent.
While this can sometimes be a high bar to clear, in these cases, especially Mattson’s, the bar is well-cleared.
How common is securities fraud?
While this all makes for good television, how often does something like this happen in reality?
We know Waystar Royco is a massive publicly-traded company. Assuming the same is true for GoJo, the answer is not very often at all.
Publicly-traded companies are required to make quarterly disclosures, which are audited. Moreover, companies aren’t just under the watchful eye of the auditors. They’re also under the watchful eye of professional short sellers like Citron Research, whose mission is to cast a skeptical eye on statements and projections of publicly-traded companies.
This means that if GoJo was overstating its India subscriber numbers by a factor of two, this information would quickly come to light. Mattson even hints at this in the most recent episode, complaining, “I don’t want some forum monkeys just shorting me.”
Indeed, it’s hard to recall a large publicly-traded company engaged in this level of fraud since the days of Enron, Worldcom, and Tyco.
Navigating securities fraud matters? We can help.
In the world of non-publicly traded companies fraud is—while not commonplace by any means—more common. And when securities fraud is in question, the stakes can be extremely high.
Dressel/Malikschmitt LLP is a commercial litigation boutique that aids in both the prosecution and defense of claims of fraud, including securities fraud. If you have been accused of fraud, or believe you have been the victim of a fraud, please contact us online or give us a call at 848.202.9323.
The content in this article is for general informational purposes only. It should not be construed as legal advice or a substitute for legal advice. The information above does not create an attorney-client relationship. Any reliance you place on such information is therefore strictly at your own risk.