MARGARET M. MORROW, District Judge.
This is a consolidated putative securities class action against defendants American Apparel, Inc., Dov Charney, Adrian Kowalewski, and Lion Capital, Inc. Plaintiffs' primary allegation is that during the class period, defendants misled the public about its hiring of workers employed in American Apparel's Los Angeles factory. Plaintiffs allege that defendants hired numerous undocumented workers in violation of the Immigration and Nationality Act ("INA"); that they failed to comply with the INA's reporting requirements; and that they tried to conceal from investors the results of ongoing federal investigations regarding American Apparel's hiring practices. Plaintiffs assert that when American Apparel's misconduct came to light, it was forced to terminate a substantial number of factory workers and that it subsequently misled the public about the effect the staffing reduction would have on the company's bottom line.
Plaintiffs contend that defendants' misrepresentations and omissions violated sections 10(b) of the Securities Exchange Act of 1934 (the "1934 Act") and Securities and Exchange Commission ("SEC") Rule 10b-5 during a class period extending from November 28, 2007 to August 17, 2010. They also contend that defendants Charney, Kowalewski, and Lion Capital violated § 20(a) of the 1934 Act because they were controlling persons of American Apparel.
Defendants ask that, in evaluating their motions to dismiss, the court take judicial notice of numerous SEC filings, American Apparel press releases, news articles, analyst reports and other documents. Plaintiffs oppose a number of these requests.
In deciding a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil
American Apparel is a Delaware corporation with its principal place of business in Los Angeles, California.
Dov Charney is American Apparel's founder; during the class period, he was the company's President, CEO, and Chairman of the Board.
Adrian Kowalewski was American Apparel's Executive Vice President and Chief Financial Officer ("CFO") during the relevant time period. He also served as a director of the company.
Lion Capital is a limited liability partnership with a registered office in London, England.
Plaintiffs' allegations regarding defendants' false statements and scienter concern three primary issues. First, plaintiffs allege that although American Apparel touted its progressive labor policies and represented that the company was in full compliance with U.S. immigration laws, a substantial portion of the company's manufacturing employees were not authorized to work in the United States. Plaintiffs assert that Charney and other defendants knew this fact during the class period, and materially misrepresented American Apparel's compliance with the immigration laws. Ultimately, U.S. Immigration and Customs Enforcement ("ICE") commenced an investigation regarding the company's hiring and retention practices. The investigation eventually resulted in the termination of 1,800 individuals, or more than one-third of the company's Los Angeles-based manufacturing workforce.
Second, plaintiffs allege that during the class period, defendants misrepresented the seriousness of the workforce reduction's effect. Plaintiffs allege that because of the company's structure and the individual defendants' personal and intimate knowledge of its operations, defendants knew that terminating so many employees would have a significant adverse impact on American Apparel's ability to maintain its inventory levels, which in turn would affect its profitability. They assert that defendants nonetheless minimized the effect of the work force reduction, claiming that excess inventory and a backlog of employment applications would blunt the impact of the terminations.
Third, plaintiffs allege that American Apparel and the individual defendants repeatedly misrepresented the company's financial health not only to investors via conference calls, press releases, and SEC filings, but also to the company's independent auditors. Plaintiffs assert that defendants,
The complaint alleges that the class period began on November 28, 2007, the date American Apparel filed a Proxy Statement with the Securities and Exchange Commission ("SEC") in preparation for an initial public offering.
Approximately one month later, on December 21, 2007, the company went public.
In January 2008, American Apparel received notice that ICE was conducing an audit of its records to ensure compliance with the immigration laws.
The company's representatives took a hard public stance against the federal_government's enforcement actions. Specifically, on April 30, 2008, American Apparel's attorney Peter Schey stated that the company would "come down like a ton of bricks" on ICE if the agency and other law enforcement officials raided the company's facilities.
Although the company allegedly had some hope that the Obama administration would secure passage of an immigration reform bill that included a path to legalization for at least some undocumented immigrants, by April 2009 it had become clear that reform would not occur in the immediate future.
On June 30, 2009, American Apparel filed a Form 8-K without an accompanying press release.
The June 2009 Form 8-K stated that it was American Apparel's policy "at all times, to fully comply with its obligations to establish the employment eligibility of prospective employers under immigration laws."
On August 13, 2009, American Apparel had an earnings call with analysts and investors.
On September 3, 2009, the Los Angeles Times quoted Schey as saying that "[w]e do not anticipate [the immigration violations] will have a significant impact on American Apparel's productivity because of the confluence of several factors including the slow economy and high preexisting inventory levels."
In October 2009, American Apparel admitted that it had dismissed approximately 1,500 employees due to discrepancies in their immigration documentation.
On November 10, 2009, the company held another earnings conference call. Kowalewski said that "the efficiency [of the workforce was] probably pretty comparable" to what it had been prior to the terminations. Charney noted that the transition to new workers had been "virtually seamless."
On May 19, 2010, the company issued a preliminary report on its first quarter 2010 earnings in a press release. The release stated that there had been a "significant drop in [the company's] gross margin due, in part to `reduced labor efficiency.'"
The day the press release issued and the conference call occurred, American Apparel's stock price plunged 40.51 percent on "unusually heavy" trading volume.
Plaintiffs allege that during most, if not all, of the class period, American Apparel knew that many of its employees were not authorized to work in the United States.
The complaint also alleges a specific instance reported by a former American Apparel customer service representative, who worked at the downtown Los Angeles factory from late 2004 to May 2010.
Plaintiffs assert that American Apparel knowingly deceived the public about the effect the workforce reduction would have on its operations and profitability. They cite the Proxy Statement filed in November 2007, which acknowledged that shifts in immigration or labor laws could affect the ability of American Apparel workers to "remain or legally work in the United States," and that "[a]ny changes in U.S. laws having such an [e]ffect could make it harder for American Apparel to maintain and expand its work force, which would be adverse to American Apparel's manufacturing capabilities and harm [its] operations and financial results."
Plaintiffs allege that later, defendants admitted the full extent of the workforce reduction's impact on American Apparel's bottom line. On March 25, 2010, defendants acknowledged that the terminations had had a "substantial" impact, and that the "extended disruption o[f] [American Apparel's] operations ha[d] been unprecedented."
Plaintiffs allege that during the relevant period, and contrary to Charney's and Kowalewski's representations, American Apparel's finances and internal controls were in utter disarray. As noted, American Apparel went public by merging with a public company; as a result, it had to comply immediately with SEC regulations and standards.
On March 17, 2008, a few months after American Apparel went public, Kowalewski assured investors that "[a] big focus for us in 2008 as a public company is going to be remediating these material weaknesses [in accounting procedures] so we can get into compliance with Sarbanes-Oxley."
Less than two months later, on January 7, 2009, CBS reported that on December 24, 2008, Kowalewski had sent a series of emails to American Apparel's head of public relations.
On March 17, 2009, as these news reports were emerging, the company held another investor call during which Charney stated that the company "fe[lt] [its] brand and the market segment [it] serve[d] [would] allow [it] to weather the economic storm well."
Analysts reacted positively to Charney's statements, noting American Apparel's performance in an economic downturn. A KeyBanc Capital Markets report dated April 22, 2009 highlighted the fact that the firm was "[c]ommitted to best practices," and reported that Charney had emphasized its commitment to conservatism.
This time period also marked the beginning of American Apparel's relationship with Lion Capital. In a news release on March 13, 2009,
During a May 18, 2009 analyst call, "[t]he Company ... announced [the] April [2009] ... appointment of a new independent auditor [Deloitte], and [the fact that it had] completed a full quality of earnings review with Lion Capital's accountants at KPMG."
During its review, Deloitte learned that on March 16, 2009 (the same day American Apparel filed its 2008 Annual Report), it notified investors in a separate filing that on March 13, 2009, it had refinanced its "long-term" debt by obtaining an $80 million credit facility from Lion Capital.
On May 19, 2010, the Company issued an earnings press release, which stated it was likely to be in default on June 30, 2010, and that this "would have a material adverse impact on the Company's operations which would result in the need for the Company to modify its current business plan and/or curtail its operations and [which] could affect the Company's ability to continue operations as a going concern."
Despite this fact, Deloitte signed an audit opinion on March 31, 2010, less than two months earlier, that failed to include any "going concern" language.
On July 22, 2010, Deloitte resigned as American Apparel's auditor; the company announced the resignation publicly on July 28, 2010 in a Form 8-K filing.
Deloitte resigned because, in its words, it was "no longer willing to rely on management's representations [given its] belief that management [had] withheld from [it] the February 2010 monthly financial statements until after the filing of the 2009 Annual Report and [had] made related misrepresentations."
On August 17, 2010, the last day of the class period, American Apparel made a number of additional disclosures. First, it announced a preliminary report on its second quarter 2010 financial results, which stated:
American Apparel also reported that the United States Attorney's Office for the Southern District of New York had issued a grand jury subpoena to the company on July 30, 2010, requiring the production of documents related to the circumstances surrounding Deloitte's resignation and a related SEC inquiry.
During the two days following these disclosures, American Apparel's stock price fell approximately 46 percent on heavy trading, from $1.39 per share to just over $0.75 per share.
On August 18, 2010, WWD reported, following an interview with Charney, that
On February 7, 2011, American Apparel filed what plaintiffs denominate "an unusual amendment" to its 2009 Annual Report. It was the company's fourth amendment of the 2009 Annual Report. Plaintiffs allege that the amended 2009 Annual Report was filed to provide investors with "unaudited" financial statements for the year ended December 31, 2009 that had previously been filed as "audited." It included an "Explanatory Note" denying that the amendment was an admission of any mistakes or untrue statements in prior filings.
On March 31, 2011, American Apparel filed its 2010 Annual Report. It stated that Deloitte had alleged misrepresentations by management
On April 1, 2011, the two Lion Capital members sat on American Apparel's board resigned from their positions, citing "conflicts of interest."
Multiple shareholders initiated lawsuits against American Apparel. On December 3, 2010, the court ordered consolidation of the cases.
On April 29, 2011, Rendelman filed a consolidated class action complaint.
A Rule 12(b)(6) motion tests the legal sufficiency of the claims asserted in the complaint. A Rule 12(b)(6) dismissal is proper only where there is either a "lack of a cognizable legal theory" or "the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir.1988). In deciding a Rule 12(b)(6) motion, the court generally looks only to the face of the complaint and documents attached thereto. Van Buskirk v. Cable News Network, Inc., 284 F.3d 977, 980 (9th Cir.2002); Hal Roach Studios, Inc. v. Richard Feiner & Co., Inc., 896 F.2d 1542, 1555 n. 19 (9th Cir.1990).
The court must accept all factual allegations pleaded in the complaint as true, and construe them and draw all reasonable inferences from them in favor of the nonmoving party. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007) ("[F]aced with a Rule 12(b)(6) motion to dismiss a § 10(b) action, courts must, as with any motion to dismiss for failure to plead a claim on which relief can be granted, accept all factual allegations in the complaint as true"); see also Cahill v. Liberty Mutual Ins. Co., 80 F.3d 336, 337-38 (9th Cir.1996); Mier v. Owens, 57 F.3d 747, 750 (9th Cir.1995). The court need not, however, accept as true unreasonable inferences or conclusory legal allegations cast in the form of factual allegations. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 545, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ("While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the `grounds' of his `entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of
Both plaintiffs and defendants have asked that the court take judicial notice of various documents. Because Rule 12(b)(6) review is confined to the complaint, the court typically does not consider material outside the pleading (e.g., facts presented in briefs, affidavits, or discovery materials). In re American Continental Corp./Lincoln Sav. & Loan Securities Litig., 102 F.3d 1524, 1537 (9th Cir. 1996). It may, however, properly consider exhibits attached to the complaint and documents whose contents are alleged in the complaint but attached, if their authenticity is not questioned. Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir.2001). In addition, the court can consider matters that are proper subjects of judicial notice under Rule 201 of the Federal Rules of Evidence. Id. at 688-89; Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir.1994), overruled on other grounds by Galbraith v. County of Santa Clara, 307 F.3d 1119 (9th Cir.2002); Hal Roach Studios, Inc., 896 F.2d at 1555 n. 19; see also Tellabs, 551 U.S. at 322, 127 S.Ct. 2499 ("[C]ourts must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice").
Plaintiffs and defendants first ask that the court take judicial notice of several of American Apparel's SEC filings and of an SEC Investor Bulletin.
Courts can consider securities offerings and corporate disclosure documents that are publicly available. See Metzler Inv. GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1064 n. 7 (9th Cir.2008) ("Defendants sought judicial notice for Corinthian's reported stock price history and other publicly available financial
Finally, the SEC Investor Bulletin is a proper subject of judicial notice, as it is a government publication and matter of public record. See Lee, 250 F.3d at 688; Branch, 14 F.3d at 454; see also In re Seracare Life Sciences, Inc., No. 05-CV-2335-H (CAB), 2007 WL 935583, *4 (S.D.Cal.2007) (taking notice of an Accounting Research Bulletin, as it "is not subject to reasonable dispute in that it is capable of accurate and ready determination by reference to sources whose accuracy cannot be reasonably questioned").
Plaintiffs and defendants next request that the court take judicial notice of multiple news reports and press releases describing American Apparel's business before and during the class period, as well as purported statements by representatives of the company.
Although the parties dispute the purpose for which some of these documents should be considered, the requests for judicial notice of the existence and contents of the reports are largely unopposed. Taking judicial notice of news reports and press releases is appropriate for show "that the market was aware of the information contained in news articles...." Heliotrope Gen., Inc. v. Ford Motor Co., 189 F.3d 971, 981 n. 18 (9th Cir.1999); see also In re White Electronic Designs Corp. Sec. Litig., 416 F.Supp.2d 754, 760 (D.Ariz.2006) ("[J]udicial notice is appropriate for SEC filings, press releases, and accounting rules as they are capable of accurate and ready determination by resort to sources whose accuracy cannot be reasonably questioned" (internal quotations and citations omitted)).
Courts in the Ninth Circuit routinely take judicial notice of press releases. See, e.g., In re Netflix, Inc. Securities Litig., Nos. C 04-2978 WHA, C 04-3021, C 04-3204, C04-3233, C 04-3329, C 04-3770, C 04-3801, 2005 WL 3096209, *1 (N.D.Cal. Nov. 18, 2005); In re Ligand Pharmaceuticals, Inc. Securities Litig., CV 04-1620 DMS LSP, 2005 WL 2461151, *2 n. 1 (S.D.Cal. Sept. 27, 2005); In re Home-store.com. Inc. Sec. Litig., 347 F.Supp.2d 814, 816-17 (C.D.Cal.2004) (stating that the court can take judicial notice of press releases).
In addition, some of the documents in question, such as the Los Angeles Times article titled "Employer is for Open U.S. Door" and The New York Times article titled "Politics Wrapped in a Clothing Ad," are explicitly referenced in the complaint, making consideration of them proper under the incorporation by reference rule.
The court, therefore, declines to take judicial notice of Exhibit 2 to the Abadou Declaration, as it does not explicitly reference any of the defendants, is not discussed in the complaint, and does not relate to American Apparel's business or financial condition during the relevant period. Additionally, as defendants note, "[a]lthough a court may take judicial notice of a newspaper article, petitioner must meet the burden of demonstrating that the facts of the article are either `(1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned' as required under Rule 201(b) of the Federal Rules of Evidence." See Hardison v. Newland, No. C984517CRB(PR), 2003 WL 23025432, *5 (N.D.Cal. Dec. 17, 2003); see also Castaneda v. Saxon Mortg. Servs. Inc., 687 F.Supp.2d 1191, 1196 (E.D.Cal.2009) (denying a request for judicial notice of an unpublished article "which expresse[d] opinions of the author that may reasonably be questioned"); Ekdahl v. Ayers, No. C 07-3642 SBA (PR), 2008 WL 4344314, *3
Shortly before the hearing, plaintiffs filed a request for judicial notice of two documents they had obtained by submitting a FOIA request to DHS.
Plaintiffs assert that the court should judicially notice these documents because they show that ICE made certain "findings" regarding American Apparel's hiring of unauthorized workers. Defendants oppose the request to the extent plaintiffs rely on the documents for the truth of the assertions they contain.
Rule 9(b) of the Federal Rules of Civil Procedure provides that the "circumstances constituting fraud or mistake shall be stated with particularity." FED.R.CIV. PROC. 9(b). A securities fraud claim cannot survive a motion to dismiss under this rule merely by alleging that certain statements were false. Metzler, 540 F.3d at 1070 ("A litany of alleged false statements, unaccompanied by the pleading of specific facts indicating why those statements were false, does not meet this standard"); see also In re Oracle Corp. Sec. Litig., 627 F.3d 376, 390 (9th Cir.2010) ("Plaintiffs must "demonstrate that a particular statement, when read in light of all the information then available to the market, or a failure to disclose particular information, conveyed a false or misleading impression," quoting In re Convergent Technologies Sec. Litig., 948 F.2d 507, 512 (9th Cir.1991)). Rather, the complaint must allege "why the disputed statement was untrue or misleading when made." In re GlenFed, Inc. Securities Litigation, 42 F.3d 1541, 1549 (9th Cir.1994) (en banc) (emphasis added).
In 1995, Congress passed the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4, which amended the Securities Exchange Act of 1934. The PSLRA modified Rule 9(b)'s particularity requirement, "providing that a securities fraud complaint [must] identify: (1) each statement alleged to have been misleading; (2) the reason or reasons why the statement is misleading; and (3) all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1); see Silicon Graphics, 183 F.3d at 996. The statute requires, with respect to pleading that each allegedly misleading statement or omission was made with scienter, that plaintiff "state with particularity... facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). If the complaint does not contain such allegations, it must be dismissed. 15 U.S.C. § 78u-4(b)(3)(A).
In enacting the PSLRA, "Congress `impose[d] heightened pleading requirements in actions brought pursuant to § 10(b) and Rule 10b-5.'" Tellabs, 551 U.S. at 320, 127 S.Ct. 2499 (citing Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 81, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006)). The PSLRA's heightened particularity requirement "prevents a plaintiff from skirting dismissal by filing a complaint laden with vague allegations of deception unaccompanied by a particularized explanation stating why the defendant's alleged statements or omissions are deceitful." Metzler, 540 F.3d at 1061 (citing Falkowski v. Imation Corp., 309 F.3d 1123, 1133 (9th Cir.2002)).
Rule 10b-5, promulgated by the Securities and Exchange Commission pursuant to section 10(b) of the 1934 Act, makes it
The elements of a section 10(b) or Rule 10b-5 violation are (1) the misrepresentation or omission of a material fact, (2) scienter, (3) reliance (4) in connection with the purchase or sale of a security, (5) economic loss and damages, and (6) loss causation. Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 341, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005); see also Paracor Finance, Inc. v. General Electric Capital Corp., 96 F.3d 1151, 1157 (9th Cir.1996) (en banc); McCormick v. Fund American Companies, Inc., 26 F.3d 869, 875 (9th Cir.1994). "Scienter" refers to "a mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). While recklessness can constitute scienter, see Nelson v. Serwold, 576 F.2d 1332, 1337 (9th Cir.1978), the Ninth Circuit in Silicon Graphics clarified that recklessness "satisfies scienter under § 10(b)" only to the extent that it "reflects some degree of intentional or conscious misconduct." Silicon Graphics, 183 F.3d at 977; see also Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 991 (9th Cir.2009) (reiterating the standard for scienter articulated in Silicon Graphics following Tellabs); Metzler, 540 F.3d at 1066 (same).
To state a claim for securities fraud, the complaint must specify "each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading." 15 U.S.C. § 78u-4(b)(1).
Plaintiffs allege that defendants made three types of false statements. First, they assert defendants falsely claimed that all their employees were authorized to work in the United States, when in fact large numbers of employees had to be terminated after ICE could not verify their eligibility to work in this country. Second, after the results of the ICE investigation were disclosed and the company laid off a significant number of employees at its Los Angeles manufacturing plant, defendants purportedly misrepresented the extent to which those layoffs would affect the company's profitability. Finally, plaintiffs allege that defendants repeatedly assured the public that American Apparel's accounting practices were conservative and careful, when in fact the company's financial statements contained material misrepresentations and omissions, and it failed to disclose material information to its auditors.
Defendants contend that plaintiffs have failed to plead falsity with the requisite particularity. The court addresses defendants' arguments below in the context of the three categories of misstatement identified in the complaint.
Plaintiffs assert that during the class period, American Apparel claimed it was in compliance with the immigration laws when in reality it had employed hundreds of undocumented workers and workers who had not submitted adequate documentation of their eligibility for employment. To support this allegation, plaintiffs focus primarily on three statements made during the class period — American Apparel's November 2007 Proxy Statement, which asserted that its "workers are documented immigrants, authorized to work in the United States";
Plaintiffs' allegation concerning the November 2007 Proxy Statement quotes the document selectively. The Proxy Statement, which was attached to American Apparel's request for judicial notice, states: "Many of American Apparel's workers are
The other statements plaintiffs plead successfully allege falsity, however. The March 17, 2008 Form 10-K reported that American Apparel "makes diligent efforts to comply with all employment and labor regulations, including immigration laws."
Given the number of employees that had subsequently to be terminated, it is hard to credit defendants' assertion that plaintiffs' allegations concerning these statements merely plead "fraud by hindsight."
For these reasons, the court concludes that plaintiffs have sufficiently pled the falsity of defendants' representations regarding their diligent efforts to comply with the immigration laws and their policy of full compliance with those laws.
Plaintiffs also allege that defendants misrepresented the effect the termination of the employees would have on its operations and profitability. Beginning with its June 30, 2009 Form 8-K, American Apparel acknowledged that the ICE investigation would likely result in the termination of a substantial number of employees. Initially, company representatives stated that despite the large staffing reduction, "the Company [did] not presently believe that the loss of employees would have a materially adverse impact on its financial results."
As defendants correctly observe, alleging that certain predictions proved incorrect is not the same as "alleg[ing] with particularity facts that show the initial prediction was a falsehood." Alaska Elec. Pension Fund v. Adecco S.A., 434 F.Supp.2d 815, 823 (S.D.Cal.2006). The complaint does not allege facts showing that, at the time the statements were made, American Apparel was already experiencing significant difficulties producing and shipping product. Compare Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 985-87 (9th Cir.2008) ("The passage, moreover, speaks entirely of as-yet-unrealized risks and contingencies. Nothing alerts the reader that some of these risks may already have come to fruition, and that what the company refers to as backlog includes work that is substantially delayed and at serious risk of being cancelled altogether"); Siracusano v. Matrixx Initiatives, Inc., 585 F.3d 1167, 1181 (9th Cir.2009) ("Similar to Berson, the passage in the Form 10-Q speaks about the risks of product liability claims in the abstract, with no indication that the risk `may already have come to fruition'"), aff'd, Matrixx Initiatives, Inc. v. Siracusano, ___ U.S. ___, 131 S.Ct. 1309, 179 L.Ed.2d 398 (2011).
The parties' central dispute concerning falsity appears to concern whether defendants' admittedly optimistic statements about the impact of the work force reduction contained sufficient caveats that they did not constitute misrepresentations. While defendants' statements were certainly optimistic, not enough facts are pled to show that they were also false. For example, the company's June 30, 2009 Form 8-K, filed shortly after the ICE investigation began, stated that unless work authorization issues could be resolved, the "employees [would] not be able to continue their employment at the Company."
Plaintiffs observe that as the class period progressed, defendants' characterization of events became markedly less optimistic. They note that on March 25, 2010, the company issued a press release and conducted a conference call acknowledging that the company's "biggest problem ha[d] been employee productivity."
Plaintiffs allege finally that defendants made numerous false statements regarding their accounting practices and internal controls. They assert that defendants falsely stated that American Apparel was "taking th[e] issue [of financial compliance and internal controls] very seriously";
The allegedly false statements are couched in aspirational terms. The repeated use of words like "pursuing," "looking to build," "going to be" and "committed to" indicates that the company was articulating goals it was trying to meet, not making factual statements about the current status of its financial compliance and accounting records.
The one allegation that suggests some of these statements may have been false when made concerns the company's relationship with Deloitte. The complaint alleges that American Apparel announced the fact that it had hired Deloitte as part of its ongoing effort to institute stronger financial controls during a May 18, 2009 analyst call.
While an analyst report acknowledged that the resignation "did not necessarily imply any degree of misstatement,"
Plaintiff's citation of such cases as In re New Century, 588 F.Supp.2d 1206 (C.D.Cal.2008), and Atlas v. Accredited Home Lenders Holding Co., 556 F.Supp.2d 1142 (S.D.Cal.2008) actually undercuts their argument by demonstrating the type of facts regarding internal controls and financial conservatism that should be alleged to survive a motion dismiss. In New Century, the court stated that plaintiffs' pleading "adequately support[ed]" a finding that statements regarding the defendant's loan quality and underwriting "were false and misleading when made" because it cited "an array of confidential witness statements that attest[ed] to [defendant's] progressively riskier loan origination practices leading up to and throughout the Class Period; analyze[d] data indicating rising defaults and delinquent loans; and set[] forth data, that corroborate[d] the witnesses, showing a proliferation of high-risk loans such as adjustable-rate mortgages provided to less-qualified borrowers." 588 F.Supp.2d at 1225 (internal citations omitted); see also id. at 1226 ("The Complaint details declining loan performance, an increase in defaults, and a concomitant rise in repurchase claims, that were baldly disregarded in setting the reserve and valuing residual interests"). In Atlas, the court addressed allegations that the defendant had actually loosened its own underwriting standards in order to increase dramatically the volume of loans it could make. 556 F.Supp.2d at 1149, 1152 ("The Complaint alleges that Defendants caused Accredited to maintain an inadequate reserve for repurchase losses. Because Accredited allegedly deviated from its own underwriting guidelines, during the class period the company allegedly originated loans to an increasing number of borrowers that could be expected to default and by 2006 the company in fact was beginning to be forced to repurchase a growing number of loans"). Here, the complaint is lacking such detail.
For the reasons stated, the court concludes that plaintiffs have successfully alleged
As noted, "'[t]he PSLRA significantly altered pleading requirements in private securities fraud litigation by requiring that a complaint plead with particularity both falsity and scienter.'" Middlesex Retirement System v. Quest Software Inc., 527 F.Supp.2d 1164, 1178-79 (C.D.Cal.2007) (quoting Vantive, 283 F.3d at 1084). In addition to pleading falsity adequately, a complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. §§ 78u-4(b)(2). "To qualify as `strong' within the intendment of § 21D(b)(2) ... an inference of scienter must be more than merely plausible or reasonable-it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent." Tellabs, 551 U.S. at 314, 127 S.Ct. 2499 (2007) (emphasis added). "[C]ourts must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss.... The inquiry ... is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard." Id. at 322-23, 127 S.Ct. 2499 (emphasis original).
The Ninth Circuit has articulated a "two-part inquiry for scienter: first, [the court must] determine whether any of the allegations, standing alone, are sufficient to create a strong inference of scienter; second, if no individual allegation is sufficient, ... the court [must] conduct a 'holistic' review of the same allegations to determine whether the insufficient allegations combine to create a strong inference of intentional conduct or deliberate recklessness." New Mexico State Investment Council v. Ernst & Young, 641 F.3d 1089, 1095 (9th Cir.2011) (citing Zucco, 552 F.3d at 991-92).
When determining whether plaintiffs have alleged facts showing a strong inference of scienter, the court must draw all reasonable inferences from the allegations presented, including inferences unfavorable to plaintiffs. Gompper, 298 F.3d at 897. "However, the `inference that the defendant acted with scienter need not be irrefutable, i.e., of the "smoking-gun" genre, or even the "most plausible of competing inferences."... [T]he inference of scienter must be more than merely "reasonable" or "permissible[,]" [however] — it must be cogent and compelling ... in light of other explanations.'" Middlesex Retirement System, 527 F.Supp.2d at 1179 (quoting Tellabs, 551 U.S. at 314, 127 S.Ct. 2499).
Defendants contend that plaintiffs have not pled scienter with the degree of particularity required by the PSLRA.
As noted, plaintiffs have successfully alleged that American Apparel and the individual defendants made false and misleading statements regarding the company's efforts to comply with immigration laws. Those statements proved to be dramatically incorrect once the ICE investigation concluded, and the company discharged approximately 1,500 workers. Demonstrating that defendants made the statements intentionally or were deliberately reckless in making them is another. The key to pleading intentional or reckless conduct is pleading facts that show that when defendants made the allegedly false statements, they knew they were false, or knew facts "so obvious that they must have been aware" that they were misleading the public. Zucco, 552 F.3d at 991.
Plaintiffs attempt to satisfy this standard in various ways. They cite Charney's general statements regarding the need for immigration reform and amnesty for undocumented immigrants before and during the class period.
Plaintiffs also assert that Charney's repeated statements regarding the level of his involvement in the company and its manufacturing operations gives rise to an inference that he possessed actual knowledge
The facts pled do give rise to an inference that American Apparel was lax and deficient in its immigration compliance, and perhaps even negligent in making statements about its diligent compliance with immigration regulations that later proved to be demonstrably and substantially false. Even assuming its conduct was negligent, however, a higher level of intent is necessary to plead scienter under the PSLRA. Therefore, plaintiffs' scienter allegations regarding American Apparel's hiring of undocumented workers are inadequate.
The court next examines plaintiffs' scienter allegations as they concern defendants' statements regarding the effect of the terminates on its operations and profitability. As noted, plaintiffs have failed to allege sufficient facts to show that the statements are actionable or that they were false. Their allegations of scienter fail for similar reasons. To show that forward-looking statements were false, "plaintiffs must prove that [they] were made with `actual knowledge' that they were false or misleading." Silicon Graphics, 183 F.3d at 993 (Browning, J., concurring in part and dissenting in part) (quoting 15 U.S.C. §§ 78u-5(c)(1)(B), 77z-2(c)(1)(B)); Alaska Elec. Pension Fund v. Adecco S.A., 434 F.Supp.2d 815, 823 (S.D.Cal.2006) ("[A] bare allegation that bad debt reserves were inadequate is insufficient `because even reasonable predictions turn out to be wrong. Instead, plaintiffs must allege with particularity facts that show the initial prediction was `a falsehood.''" Kane v. Madge Networks N.V., CV No. 96-20652(RMW), 2000 WL 33208116, *6 (N.D.Cal. May 26, 2000) (in turn quoting In re GlenFed, Inc. Sec. Litig., 42 F.3d at 1549)). Plaintiff's allegations that defendants knew the statements were false rely on (1) statements before and during the early part of the class period indicating that Charney knew the importance of the work force to the company's operations; and (2) statements near the end of and after the class period acknowledging that the company was in dire straits because of its significantly reduced staff and inventory.
Plaintiffs' allegations regarding the first group of statements appear to be based on a "core operations" argument.
While these arguments have some persuasive force, defendants' statements are either too vague to be actionable or too attenuated in a temporal sense to support the inference plaintiffs seek to have drawn. As defendants note, the earlier 2008 statements regarding the challenges inherent in training new employees do not necessarily contradict the post-ICE investigation statements about the ability to compensate for staffing reductions with surplus inventory.
Plaintiffs do not rely solely on past statements to show that statements regarding the impact of the work force reduction were made with scienter, however; they also cite statements made near the
A later statement may suggest that a defendant had contemporaneous knowledge of the falsity of his statement, if the later statement directly contradicts or is inconsistent with the earlier statement. Yourish v. Cal. Amplifier, 191 F.3d 983, 996-97 (9th Cir.1999). However, "`[i]t is clearly insufficient for plaintiffs to say that a later, sobering revelation makes an earlier, cheerier statement a falsehood.'" Id. at 997 (alterations omitted). Here, the complaint is devoid of any factual allegations suggesting that when Charney, Kowalewski, and American Apparel predicted that the work force reduction would not impact the business, they knew or deliberately and recklessly disregarded the fact that the statements were false. See Metzler, 540 F.3d at 1066 ("To meet [the scienter] pleading requirement, the complaint must contain allegations of specific contemporaneous statements or conditions that demonstrate the intentional or the deliberately reckless false or misleading nature of the statements when made").
The third group of purported misrepresentations concern the fact that American Apparel took seriously the matter of financial compliance and internal controls, that it was pursuing "a strict corporate orthodoxy as far as financial accounting issues," and that it was "commit[ted] to conservatism and maintaining best [financial] practices." As noted, plaintiffs have failed adequately to plead the falsity of these statements. The court similarly concludes they have failed to adequately to plead scienter.
The complaint alleges that American Apparel's "material weaknesses in internal controls" caused it to violate various provisions of the 1934 Act, as well as generally accepted accounting principles ("GAAP").
The most damning allegations, of course, are those regarding Deloitte's resignation as the company's independent auditor, and the company's admission that information had surfaced that might "materially impact the reliability of either its previously issued audit report or the underlying consolidated financial statements" for fiscal year 2009.
For all of these reasons, the court finds plaintiffs' allegations of scienter regarding statements concerning the company's financial compliance and internal controls inadequate.
As noted, even if individual allegations of scienter are not sufficient to give rise to a "strong inference" of knowledge or recklessness, the court must "conduct a `holistic' review of the same allegations to determine whether the insufficient allegations combine to create a strong inference of intentional conduct or deliberate recklessness." New Mexico State Investment Council, 641 F.3d at 1095; Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 1234 (9th Cir.2004) ("We find that the totality of the allegations does create a strong inference that Oracle acted with scienter, and we reverse the District Court"). Under this standard, "[v]ague or ambiguous allegations are ... considered as a part of [the] holistic review ... [because] the federal courts ... need not close their eyes to circumstances that are probative of scienter viewed with a practical and common-sense perspective." South Ferry, 542 F.3d at 784. In conducting a holistic review, however, "[e]ven if a set of allegations may create an inference of scienter greater than the sum of its parts, it must still be at least as compelling as an alternative innocent explanation." Zucco, 552 F.3d at 1006. As the Supreme Court has instructed, the analysis is a comparative one. Tellabs, 551 U.S. at 310, 127 S.Ct. 2499 ("The inquiry is inherently comparative: How likely is it that one conclusion, as compared to others, follows from the underlying facts? To determine whether the plaintiff has alleged facts that give rise to the requisite `strong inference' of scienter, a court must consider plausible nonculpable explanations for the defendant's conduct, as well as inferences favoring the plaintiff').
Although in this case the whole is indeed greater than the sum of its parts, the facts pled do not give rise to a "strong inference" of scienter that is as compelling as plausible innocent explanations. Plaintiffs paint the picture of a company that was heavily dependent on a work force that management had reason to believe was drawn heavily from Los Angeles's large undocumented population. The company was led by Charney, a charismatic and sometimes mercurial figure who took strong stances on immigration reform and seemed well aware that many companies in the garment industry employed ineligible workers. Charney
Were plaintiffs' view of what occurred supported by sufficient facts, the court would find it as compelling as any innocent explanation of events, and deny defendants' motions to dismiss. Plaintiffs allege no facts indicating that defendants had contemporaneous knowledge their statements were false. Their repeated pleading of vague and forward-looking statements and their comparison of those statements with what eventually occurred does not suffice to plead scienter. Plaintiffs' allegations ask the court to assume that defendants "must have known" given what ultimately transpired. Plaintiffs omit key words from documents or statements they quote, and take other statements out of context to suggest that defendants were making false representations. While the allegations would most likely support a finding of negligence, this is not the equivalent of scienter.
Taken as a whole, therefore, the court finds that plaintiffs' allegations do not give rise to a "strong inference" that, at the time the allegedly false statements were made, defendants knew they were false, or deliberately and recklessly disregarded the likelihood that they were false. South Ferry LP # 2 v. Killinger, 687 F.Supp.2d 1248, 1254 (W.D.Wash.2009) ("[T]he PSLRA demands `particular allegations which strongly imply Defendants' contemporaneous knowledge that the statement was false when made,'" quoting Berson, 527 F.3d at 989 (emphasis in original)).
In pleading scienter, "[t]he requisite recklessness must be an `extreme departure from the standards of ordinary care, and ... present[ ] a danger of misleading buyers that is either known to the defendant or so obvious that the actor must have been aware of it.'" Middlesex Retirement System, 527 F.Supp.2d at 1179 (quoting Silicon Graphics, 183 F.3d at 984). Plaintiffs have failed to satisfy this stringent pleading standard, and defendants' motion to dismiss must be granted on this basis as well. The court grants plaintiffs leave to amend.
Section 20(a) imposes joint and several liability on persons who directly or indirectly control a violator of the securities laws. The section provides:
A prima facie case of control person liability requires evidence (1) that a primary violation of the securities laws occurred and (2) that defendant directly or indirectly controlled the person or entity committing the primary violation. See, e.g., Howard v. Everex Systems, Inc., 228 F.3d 1057, 1065 (9th Cir.2000); Paracor Finance, 96 F.3d at 1161. Plaintiffs need not prove the individual defendant's scienter or "culpable participation" in the alleged wrongdoing. Id. (quoting Arthur Children's Trust v. Keim, 994 F.2d 1390, 1396 (9th Cir.1993)). "Section 20(a) claims may be dismissed summarily ... [however,] if a plaintiff fails to adequately plead a primary violation of section 10(b)." Zucco, 552 F.3d at 990. Because the court has dismissed plaintiffs' section 10(b) and Rule 10b-5 claims, there is no primary violation on which to predicate section 20(a) liability. Consequently, the court dismisses plaintiffs' Section 20(a) claim.
For the foregoing reasons, defendants' motion to dismiss is granted. Plaintiffs may file an amended complaint within forty-five (45) days of the date of this order.
In Matrixx, the Supreme Court affirmed a Ninth Circuit decision that explicitly used the two-step approach in deciding that plaintiffs had successfully pled scienter. Siracusano v. Matrixx Initiatives, Inc., 585 F.3d 1167, 1180 (9th Cir.2009) ("We must first `determine whether any of the plaintiff's allegations, standing alone, are sufficient to create a strong inference of scienter.' If not, we are to `conduct a "holistic" review of the same allegations to determine whether the insufficient allegations combine to create a strong inference of intentional conduct or deliberate recklessness,'" citing Zucco, 552 F.3d at 992). The Supreme Court did not disapprove or even mention the circuit court's test. It simply "conclude[d], in agreement with the Court of Appeals, that respondents ha[d] adequately pleaded scienter." Matrixx, 131 S.Ct. at 1324. Given that Matrixx relied on Tellabs, and given that the Ninth Circuit in Zucco adhered to the two-step analysis while acknowledging the Tellabs holding, the court concludes that it continues to adhere to its earlier methodology.
The court agrees that the viability of group pleading under the PSLRA is questionable. Here, as in Nextcard, however, "[t]he Court's conclusion makes little difference ..., because Plaintiffs do not rely solely on the group published pleading doctrine, but also allege explicitly that [the individual defendants] participated in the preparation of the company's press releases and SEC filings. Section 10(b) liability extends to those who substantially contribute to the drafting of the allegedly misleading statements.... Thus, the false and misleading statements included in press releases and SEC filings were made by and are attributable to all of the defendants because the press releases and SEC filings were the collective actions of these defendants." (See Complaint, ¶ 50 ("The Individual Defendants substantially participated in the issuance and/or review of the false and/or misleading statements alleged herein, including the false SEC filings and reports issued to American Apparel shareholders").)
To dismiss a statement under these provisions, however, requires "a stringent showing: There must be sufficient `cautionary language or risk disclosure [such] that reasonable minds could not disagree that the challenged statements were not misleading.'" Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 947 (9th Cir. 2005) (quoting In re Stac Elecs. Securities Litigation, 89 F.3d 1399, 1408 (9th Cir. 1996)). The safe harbor provision also requires that the forward-looking statement be identified as such, and be accompanied by statements "identifying important factors that could cause actual results to differ materially from those in the forward-looking statement." 15 U.S.C. § 77z-2(c)(1)(A)(i); see also Employers Teamsters Local Nos. 175 and 505 Pension Trust Fund v. Clorox, Co., 353 F.3d 1125, 1133 (9th Cir.2004) ("The safe harbor requires that the cautionary language mention `important factors that could cause actual results to differ materially from those in the forward-looking statement'"). General, nonspecific cautionary statements are insufficient. See In re Clorox Co. Securities Litigation, 238 F.Supp.2d 1139, 1142 (N.D.Cal.2002) ("The cautionary statements must, within context, be meaningful; boilerplate, generalized warnings do not suffice to balance specific predictions"); In re Amylin Pharm., Inc., Securities Litigation, No. 01CV1455 BTM (NLS), 2003 WL 21500525, *2 (S.D.Cal. May 1, 2003) ("Vague or boilerplate disclaimers are insufficient to invoke safe harbor protection").
The Ninth Circuit's directives in Zucco and New Mexico State Investment Council bind the court. Given that the two step analysis dictated by the Ninth Circuit explicitly incorporates a holistic review of the facts, plaintiffs will not be prejudiced by the court's examination of individual allegations. In fact, the two-step analysis is designed to guard against the very thing plaintiffs fear, which is that a court will examine each allegation in isolation without considering them in totality. Zucco, a post-Tellabs, case specifically noted the Supreme Court's instruction that courts view plaintiffs' allegations of scienter holistically, but stated that consideration of individual allegations of scienter was still pertinent when comparing whether the inference of knowledge or recklessness plaintiffs seek to draw is at least as compelling as the competing inference. See Zucco, 552 F.3d at 991-92 (9th Cir.2009) ("[W]e recognize that Tellabs calls into question a methodology that relies exclusively on a segmented analysis of scienter. We read Tellabs to mean that our prior, segmented approach is not sufficient to dismiss an allegation of scienter. Although we have continued to employ the old standards in determining whether a plaintiff's allegations of scienter are as cogent or as compelling as an opposing innocent inference, we must also view the allegations as a whole").
Plaintiffs suggest that the Ninth Circuit's decision in South Ferry LP No. 2 v. Killinger, 542 F.3d 776 (9th Cir.2008), also casts doubt on the two step analysis used in Silicon Graphics, Vantive, and Read-Rite. South Ferry's discussion of pleading scienter focused on the inference to be drawn from the fact that allegedly false statements concern a company's "core operations." In holding that such an allegation should be evaluated in conjunction with other allegations of scienter, even if vague or ambiguous, to discern whether the whole of the allegations is greater than its parts, the South Ferry court acknowledged that "Tellabs suggests that ... a court should look to the complaint as a whole, not to each individual scienter allegation as Silicon Graphics suggests." Id. at 784. Id. at 784 ("Tellabs suggests that while a high level of detail is required under the PSLRA, a court should look to the complaint as a whole, not to each individual scienter allegation as Silicon Graphics suggests"). It concluded that in the case before it-which concerned how much reliance plaintiffs could place on the "core operations" inference that following Tellabs, the court should "consider the totality of circumstances, rather than ... develop separately rules of thumb for each type of scienter allegation." Id. It did not comment specifically on the two-step analysis used in earlier cases. Moreover, both Zucco and New Mexico State Investment Council were decided after South Ferry. Each employed the two-step analysis and Zucco, as noted, continued to endorse as a means of comparing the competing inferences that can generally be drawn from plaintiffs' allegations in a securities fraud case. See New Mexico State Investment Council, 641 F.3d at 1095 ("Under Tellabs and Ninth Circuit law, we conduct a two-part inquiry for scienter: first, we determine whether any of the allegations, standing alone, are sufficient to create a strong inference of scienter; second, if no individual allegation is sufficient, we conduct a `holistic' review of the same allegations to determine whether the insufficient allegations combine to create a strong inference of intentional conduct or deliberate recklessness"); Zucco, 552 F.3d at 991-92.
The second is where allegations concerning core operations are accompanied by "detailed and specific allegations about management's exposure to factual information within the company." South Ferry, 542 F.3d at 785; see also Zucco, 552 F.3d at 1000 ("To satisfy this standard, plaintiffs might include in their complaint "`specific admissions from top executives that they are involved in every detail of the company and that they monitored portions of the company's database,'" a specific admission by a top executive that "`[w]e know exactly how much we have sold in the last hour around the world,'" or other particular "details about the defendants' access to information within the company" " (internal citations omitted)).
Plaintiffs no doubt knew that these allegations would be insufficient to support an allegation of scienter, viewed independently, as the first two "indicia" do not allege that Charney behaved deceptively in any way, and the last relies completely on the complaint's central allegations of falsity, which the court has found to be inadequately pled. Furthermore, signing Sarbanes-Oxley certifications on SEC forms, without more, has been held to be insufficient to plead scienter. Zucco, 552 F.3d at 1003-04 ("Boilerplate language in a corporation's 10-K form, or required certifications under Sarbanes-Oxley section 302(a), however, add nothing substantial to the scienter calculus"). Nor does "the mere publication of inaccurate accounting figures, or a failure to follow GAAP, without more, ... establish scienter." DSAM Global Value Fund v. Altris Software, Inc., 288 F.3d 385, 390 (9th Cir.2002). The court therefore declines to conduct an individualized analysis of the "additional indicia" of scienter. It does, however, consider them in assessing plaintiff's allegations holistically.
Lion Capital asserts that to allege the "control" element, plaintiffs "must plead ... that defendants exercised `a significant degree of day-to-day operational control, amounting to the power to dictate another party's conduct or operations.'" In re McKesson HBOC Secs. Litig., 126 F.Supp.2d 1248, 1277 (N.D.Cal. 2000); see also Lilley v. Charren, 936 F.Supp. 708, 716 (N.D.Cal. 1996) ("[P]laintiffs must allege facts showing that each defendant possessed the actual power to control the person primarily liable"). Lion Capital notes that lenders are generally not treated as "control persons" under the securities laws. See Paracor Finance, 96 F.3d at 1162 (courts "have been very reluctant to treat lenders as controlling persons of their borrowers"). It also asserts that having representatives on a company's board and holding a minority stock interest are insufficient to establish control person liability. See In re Gupta Corp. Securities Litigation, 900 F.Supp. 1217, 1243 (N.D.Cal.1994) (defendant's "position as a minority shareholder ... with an agent on the board does not establish control person liability"); O'Sullivan v. Trident Microsystems, No. C 93-20621 RMW (EAI), 1994 WL 124453, *18 (N.D.Cal. Jan. 31, 1994) (owning 9.5% of a defendant's stock and having a representative on the board were insufficient to state a claim for control person liability).
Control person liability, however, is "an intensely factual question." Howard v. Everex Systems, Inc., 228 F.3d 1057, 1065 (9th Cir.2000). Plaintiffs' allegations may not plead liability taken individually, but they may amount to control person liability in the aggregate. See Batwin v. Occam Networks, Inc., No. CV 07-2750 CAS (SHx), 2008 WL 2676364, *25 (C.D.Cal. Jul. 1, 2008) ("`The traditional indicia of control are: having a prior lending relationship, owning stock in the target company, or having a seat on the board,'" quoting In re Surebeam Corp. Securities Litigation, No. 03 CV 1721JM(POR), 2005 WL 5036360, *25 (S.D.Cal. Jan. 3, 2005)). Given its dismissal of the primary violation claims, the court need not assess the adequacy of plaintiffs' allegations against Lion Capital at this time. None of Lion Capital's arguments convince the court that it should dismiss the control person claim against it without leave to amend, and the court presumes that plaintiffs will consider those arguments, and the case law cited, in pleading the claim in any amended complaint.
One of Lion Capital's arguments has particular merit, however. Since Lion Capital's alleged control of American Apparel began in March 2009-in the middle of the class period it can be held liable only for misrepresentations and omissions made after that time. See Teamsters Local 617 Pension and Welfare Funds v. Apollo Group, Inc., 690 F.Supp.2d 959, 979 (D.Ariz.2010) ("First, the court agrees with [defendant's] assertion that `officers and directors' cannot be found `liable as control persons under Section 20(a) for alleged violations that took place before they assumed their positions'"). The court directs plaintiffs to amend this aspect of their claim against Lion Capital in any amended complaint.
