RICHARD J. HOLWELL, District Judge:
Lead Plaintiff James S. Metz brings this putative class action against defendants Liz Claiborne, Inc. ("LIZ"), Trudy F. Sullivan, and William L. McComb, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), Exchange Act Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and Exchange Act Section 20(a), 15 U.S.C. § 78t(a). Plaintiff alleges that between January 16, 2007, and April 30, 2007 (the "Class Period"), defendants fraudulently misrepresented facts relating to LIZ's relationship with Macy's, Inc. ("Macy's") and to LIZ's design of a new line of clothing for J.C. Penney Company, Inc. ("JC Penney"). Defendants now move to dismiss. For the reasons set forth below, and specifically because plaintiff fails to adequately plead scienter, defendants' motion is GRANTED in its entirety; and this action is dismissed with prejudice.
For the purposes of the present motion, the following facts—drawn from the complaint, documents incorporated by reference therein, Securities Exchange Commission ("SEC") public disclosure documents, and documents known to the plaintiffs and upon which they relied in bringing this action
Plaintiff seeks to represent the class of persons who purchased LIZ's common stock during the Class Period, January 16, 2007, through April 30, 2007. (Second Amended Compl. ("SAC") ¶¶ 1, 18.) LIZ, a Delaware corporation with its principal place of business in New York, designs and sells clothing and other apparel, both wholesale and retail. (Id. ¶ 19.) LIZ's
In 2005, two of the most powerful department store chains, Federated Department Stores, Inc. ("Federated"), and May Department Stores Company ("May") merged. (Id. ¶ 24.) Federated operated the department store Macy's. (Id.) After the merger, Macy's become one of the United States' largest department stores. (Id. ¶¶ 24, 26, 29.) With its new power, Macy's demanded merchandise and fashion lines that were exclusive to Macy's; it desired to sell items not available at other stores. (Id. ¶¶ 26, 28, 31.) Fashion items designed by LIZ were sold wholesale to, and sold retail by, Macy's under the brand "Liz Claiborne." (See id. ¶¶ 9, 13, 36.)
Macy's was LIZ's largest customer by volume, accounting for eighteen percent of LIZ's total sales in 2005 and sixteen percent in 2006. (Id. ¶ 25.) However, sales of the Liz Claiborne brand at Macy's had been "slumping for some time," (id. ¶ 36); and therefore the relationship between LIZ and Macy's "was already precarious" (id.), at the time of the events described herein. According to CW1
The Federated-May merger rocketing Macy's into the department store stratosphere apparently caused "turmoil" and "confusion" in "the department store landscape." (Id. ¶ 33.) Taking advantage of the situation, JC Penney undertook a new business strategy of closing down stores located in shopping malls and opening several stand-alone, more traditional department stores. (Id.) To establish its presence as a "real department store," (id.), and to bring in customers, JC Penney needed brand-name merchandise. It obtained that merchandise by entering into a deal with LIZ under which LIZ would design two new fashion lines branded as "Liz & Co." and "CONCEPTS by Claiborne." (Id. ¶ 35.) JC Penney would sell those lines exclusively at JC Penney stores. (Id.) The deal was announced on October 5, 2006. (Id.) McComb, who prior to becoming CEO of LIZ was Company Group Chairman at Johnson & Johnson, became CEO of LIZ on November 6, 2006. (Id. ¶ 42.) Between October 2006 and April 2007, LIZ did not repurchase any of its own stock from the market. (Id. ¶¶ 11, 72, 93a, d.) Allegedly, prior to the fourth quarter of 2006, LIZ had repurchased some of its stock in each quarter for over a year. (Id. ¶ 72.)
Some LIZ employees and some in LIZ management found the new JC Penney
Apparently, Lundgren, Macy's CEO, made his displeasure with the LIZ-JC Penney deal known to McComb in November 2006. According to an article published in Fortune on December 4, 2008, on November 22, 2006, McComb had a meeting with Lundgren in which "Lundgren was furious at [LIZ] for creating a less expensive line for [JC Penney] that competed directly with products sold in Macy's stores." (Id. ¶ 54.) In addition, according to a New York Times article from July 31, 2007, Lundgren apparently "told executives at [LIZ]," that "`You have lost your most-favored-nation status.'" (Id. ¶ 55.)
The Class Period begins on January 16, 2007, and ends on April 30, 2007. (Id. ¶ 1.) Plaintiff alleges that McComb and Sullivan made fraudulently misleading statements during that period that fall generally into three categories. The first category consists of statements allegedly indicating that the LIZ-Macy's relationship was strong. The second is made up of statements to the effect that the LIZ-JC Penney deal would not affect sales to Macy's generally. The third category is of statements allegedly representing that Macy's understood that the "Liz Claiborne" and "Liz & Co." lines were differentiated and appealed to different consumers, and that therefore Macy's was on board with the LIZ-JC Penney deal.
On January 16, 2007—the first day of the Class Period—the trade journal Women's Wear Daily published a profile of McComb. (Id. ¶ 57.) The article suggested that Macy's was "miffed" at LIZ for selling the "Liz & Co." brand to JC Penney, and quoted "[s]ources" as saying that Macy's was "looking to cut back space for the Claiborne brand as [Macy's] focuses more on exclusive collections ... or it could drop Claiborne's licensed products." (Id.) When McComb was asked whether Macy's was going to drop LIZ, he responded, "You would have to ask [Macy's], but I would be surprised if that was the case because it is a long-standing and important relationship for both of us." (Id.) In the same article, a Macy's spokesman stated, "Liz Claiborne will continue to be an ongoing brand at [Macy's]." (Id.) Plaintiff alleges that McComb's statements were false and misleading when made because (1) LIZ's relationship with Macy's
Sullivan addressed the differentiation between the "Liz Claiborne" and the "Liz & Co." lines in her opening remarks on a February 28, 2007 conference call announcing LIZ's financial results for fiscal year 2006 and the fourth quarter of that year. (Id. ¶¶ 63-64; see also Stern Decl. Ex. A at 7-8.) She stated, in summarizing the quarterly updates relating to the Liz Claiborne brand:
(SAC ¶ 64; Stern Decl. Ex. A. at 8.) Plaintiff alleges that Sullivan's statements were false and misleading when made because (1) Lundgren had been "furious" with LIZ in November; (2) Macy's had cut its fall season orders earlier in February
Later on the same conference call, McComb responded to the question of what his "takeaway[s]" were from meeting with his "larger customers." (Id. ¶ 66.) McComb's lengthy answer included that LIZ's
(Id.) Plaintiff alleges that this statement was false and misleading when made, with respect to Macy's, because in fact Macy's relationship with LIZ had deteriorated and its CEO, Lundgren, was "furious" with LIZ. (Id. ¶ 67.)
Following McComb's statement above, Sullivan was asked about how the "Liz Claiborne" brand was selling at Macy's. (Id. ¶ 68.) Sullivan responded, "[W]e're pleased with the business we see in the department stores." (Id.) Plaintiff alleges that this statement was false and misleading when made because Macy's had cut around thirty percent of its fall season orders earlier that February. (Id.)
The last allegedly false and misleading comments on the February 28, 2007 conference call were made by both Sullivan and McComb in response to a question about "concerns over the Liz & Co. launch in Penney's among other department store executives." (Id. ¶ 69.) Sullivan responded that "[LIZ's] commitment to [the department stores] is that we will have very separate and distinct and elevated lines in department stores......" (Id.) Later, McComb, responding to the same question, stated that "the Liz Claiborne apparel lines in the traditional department stores have a distinctive and elevated product presentation versus what we're doing with the diffused line." (Id.) Plaintiff alleges that these statements were false and misleading when made for all the reasons heretofore mentioned, including specifically (1) that at some undetermined time before July 31, 2007, Lundgren told "executives" at LIZ that LIZ had "lost [its] most-favored-nation status" at Macy's; and (2) that McComb stated, after the Class Period, that business for the "Liz & Co." brand was bolstered by the Liz Claiborne "brand halo." (Id. ¶¶ 70.a-b.)
The final allegedly false and misleading statements made in the Class Period were made by Sullivan and McComb during a question-and-answer session at a March 21, 2007 Merrill Lynch Retailing Leaders Conference. (Id. ¶ 76.)
Plaintiff alleges that during the class period, McComb and Sullivan knew or should have known that the statements detailed above were false or misleading for several reasons. First, plaintiff relies heavily on the December 8, 2008 Fortune article which recounted that, at a November 22, 2006 meeting between Lundgren and McComb, Lundgren was furious at LIZ for dealing with JC Penney. (See, e.g., id. ¶¶ 59.a, 67.) Plaintiff also points out that Lundgren had made very well-known Macy's desire to partner only with designers and wholesalers who would supply Macy's with exclusive and unique products. (Id. ¶ 59.b.) Relatedly, Macy's was LIZ's biggest customer, accounting for around sixteen percent of LIZ's sales during the period in question. (Id. ¶¶ 25, 65.b; see also Pl.'s Opp'n at 14-15.) And at least one article from January 2007 noted that the "Liz & Co." brand sold to JC Penney could have a detrimental effect on the "Liz Claiborne" core brands sold at Macy's. (SAC ¶¶ 57, 65.d.) In addition, JC Penney had made known its desire to compete more directly as and against more traditional department stores such as Macy's. (Id. ¶¶ 33, 65.c.)
Plaintiff also points to Macy's spring and fall 2007 season order cuts. Following standard fashion industry practice, Macy's had placed large bulk orders for LIZ's spring 2007 line in September 2006, and placed orders for LIZ's fall 2007 line in February 2007. (Id. ¶ 40.) These orders would eventually be scaled back shortly before being filled, also a standard practice in the industry. (Id.) CW1, however, recalls that there were "big cuts" in Macy's' February 2007 orders for that fall from prior years—approximately thirty percent. (Id.) CW1 believed the reduction to be a retaliatory response by Macy's due to the LIZ-JC Penney deal. (Id.) In addition, the December 4, 2008 Fortune article asserted that a "few months" after the McComb-Lundgren November 2006 meeting, Macy's greatly scaled back its spring 2007 orders, originally placed the previous September. Quoted in the article on that issue, McComb said that "`Terry [Lundgren] wanted to teach us a lesson.'" (Id. ¶ 54). Plaintiff alleges that defendants' statements to the effect that the LIZ-Macy's relationship was strong and that Macy's understood that the "Liz Claiborne" and "Liz & Co." line were differentiated, were made with scienter because Macy's had scaled back its spring and fall 2007 orders before many of those statements were made. (See, e.g., id. ¶¶ 65.a, 68, 71.) Prior to the Fortune article's publication, however, Lundgren had been quoted in the New York Times article of July 31, 2007, flatly denying that any retaliatory motive underlay the order cuts:
Michael Barbaro, At Liz Claiborne, a Bold Fashion Statement, N.Y. Times, July 31, 2007; (see also SAC ¶ 55.)
Plaintiff additionally relies on the fact that defendants added a risk factor relating to the LIZ-JC Penney deal in LIZ's
Finally, plaintiff asserts that LIZ's failure to repurchase its own stock from the market during the class period, when it had repurchased stock for several months prior to the class period, supports scienter because it suggests that LIZ knew its stock price would plummet during the class period. (Pl.'s Opp'n at 13-14.)
The Class Period ends on April 30, 2007. On May 1, 2007, LIZ released its first-quarter 2007 financials which indicated that first-quarter earnings had dropped sixty-five percent. (SAC ¶ 79.) Clothing sales "to chains such as [Macy's] declined 7.4%...." (Id.) Profits-per-share were also significantly lower than analysts had anticipated. (Id.)
On a conference call to discuss these results, McComb explicitly recognized "ever-growing demands for increased margin [sic] ... [and a]n increasing demand by retailers for exclusively branded labels for their floors." (Id. ¶ 80.) McComb also noted that
(Id.) On the same call, Sullivan stated that LIZ "remain[ed] committed to maintaining a clear distinction between the [`Liz Claiborne' line and the `Liz & Co.' line]." (Id.)
Later on the call, McComb responded to an analyst's question regarding whether
On May 1, after LIZ had released its first-quarter financials and held the above-detailed conference call, LIZ's share price dropped $7.72 per share, or 17.26%, to close at $37.00 per share. (Id. ¶ 90.)
On May 16, 2007, a spokesperson for Macy's denied that Macy's had recently required higher margins than had been historically required for products sold at its stores across the board, but instead had been requiring higher margins "than what [LIZ products] have been producing." (Id. ¶ 92.d.) Later, in the July 31, 2007, New York Times article, McComb was quoted as saying that LIZ was "shocked" by the magnitude of Macy's scaling back of its spring 2007 orders and reductions in its fall 2007 orders. (Id. ¶ 98.) McComb also was quoted in the article to say that "the use of that precious capital `L' [in `Liz & Co.'] made [Macy's] crazy." (Id.) But the article went on to state that
(Id.)
Plaintiff filed his initial complaint on April 28, 2009. Plaintiff filed his first amended complaint on April 19, 2010, and filed this second amended complaint on August 23, 2010. Defendants have since moved to dismiss.
To survive a Rule 12(b)(6) motion to dismiss, a complaint must allege "`enough facts to state a claim to relief that is plausible on its face.'" Starr v. Sony BMG Music Entm't, 592 F.3d 314, 321 (2d Cir.2010) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009). If the factual averments permit no reasonable inference stronger than the "`mere possibility of misconduct,'" the complaint should be dismissed. Starr, 592 F.3d at 321 (quoting Iqbal, 129 S.Ct. at 1950). Thus, "[w]here a complaint pleads facts that are `merely consistent with' a defendant's liability, it `stops short of the line between possibility and plausibility of `entitlement to relief.''" Iqbal, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 557, 127 S.Ct. 1955). In applying this standard of facial plausibility, the Court accepts all factual allegations as true, but it does not
"To state a claim under § 10(b) and Rule 10b-5, `a plaintiff must allege that the defendant (1) made misstatements or omissions of material fact, (2) with scienter, (3) in connection with the purchase or sale of securities, (4) upon which the plaintiff relied, and (5) that the plaintiff's reliance was the proximate cause of its injury.'" Local No. 38 Int'l Bhd. of Elec. Workers Pension Fund v. American Express Co., 724 F.Supp.2d 447, 458 (S.D.N.Y.2010) (quoting ATSI Commc'ns Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 105 (2d Cir.2007)). Plaintiffs must also "satisfy the heightened pleading standard of Fed.R.Civ.P. 9(b), which requires that `the circumstances constituting fraud ... be stated with particularity.'" Id. (quoting Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir.2000)). "Thus `[a] plaintiff cannot base securities fraud claims on speculation and conclusory allegations.'" Plumbers & Steamfitters Local 773 Pension Fund v. Canadian Imperial Bank of Commerce, 694 F.Supp.2d 287, 297 (S.D.N.Y.2010) (quoting Kalnit v. Eichler, 264 F.3d 131, 142 (2d Cir.2001)).
In addition to Rule 9(b), plaintiffs must also satisfy the pleading requirements of the Private Securities Litigation Reform Act ("PSLRA"). ECA and Local 134 IBEW Joint Pension Trust of Chi. v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir.2009). "In order to plead scienter adequately under the PSLRA, a plaintiff must plead `with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.'" Id. at 198 (quoting 15 U.S.C. § 78u-4(b)(2)) (emphasis in original). For Section 10(b) and Rule 10b-5 claims, "the required state of mind is `a mental state embracing intent to deceive, manipulate, or defraud.'" Fort Worth Employers' Retirement Fund v. Biovail Corp., 615 F.Supp.2d 218, 225 (S.D.N.Y.2009) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007)). "[T]o qualify as a `strong inference,' the 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.'" ECA, 553 F.3d at 198 (quoting Tellabs, 551 U.S. at 314, 127 S.Ct. 2499). "In determining whether this inference can be reasonably drawn, courts must consider both the inferences urged by the plaintiff and any competing inferences rationally drawn from all the facts alleged." Id. Thus, the court "must assess `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.'" Local No. 38, 724 F.Supp.2d at 458 (quoting Tellabs, 551 U.S. at 323, 127 S.Ct. 2499). "Moreover, the facts alleged must support an inference of an intent to defraud the plaintiffs rather than some other group." ECA, 553 F.3d at 198 (citing Kalnit, 264 F.3d at 140-41). In the Second Circuit, "[t]he requisite scienter can be established by alleging facts to show either (1) that defendants had the motive and opportunity to commit fraud, or (2) strong circumstantial evidence of conscious misbehavior or recklessness." Id.; In re MRU Holdings Sec. Litig., 769 F.Supp.2d 500, 515 (S.D.N.Y.2011).
To satisfy "motive and opportunity," plaintiffs must allege that defendants "benefitted in some concrete and personal way from the purported fraud." ECA, 553 F.3d at 198. Motives "common to most corporate officers, such as the desire for the corporation to appear profitable and the desire to keep stock prices high to increase officer compensation, do not constitute `motive' for the purposes of this inquiry." Id. Instead, "[s]ufficient motive allegations must entail concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged." In re SLM Corp. Sec. Litig., 740 F.Supp.2d 542, 557 (S.D.N.Y.2010). Plaintiffs must allege a "unique connection between the fraud and the [benefit]." ECA, 553 F.3d at 201 n. 6. In other words, the particular fraud alleged must specifically enable the schemes or business plans plaintiffs contend conferred concrete and personal benefits on the defendants. Compare ECA, 553 F.3d at 201 (finding no motive when, inter alia, alleged misstatements, which plaintiffs contended were meant to inflate stock price to make eventual acquisition of a target company easier, occurred several years prior to the acquisition and therefore could not reasonably be said to contribute to the ease of that acquisition), with In re SLM, 740 F.Supp.2d at 557-58 (finding motive when imminent merger would have been "torpedoed," costing company $2 billion and individual defendant $225 million, if stock price were to drop below a certain level, and when fraud allegedly kept stock price above that particular level). In addition, as with the other scienter pleading requirements, "mere conclusory allegations" connecting fraud to benefits for purposes of motive are insufficient. Biovail Corp., 615 F.Supp.2d at 225.
"[M]otive can be shown, however, `when corporate insiders allegedly make a misrepresentation in order to sell their own shares at a profit.'" In re Citigroup Inc. Sec. Litig., 753 F.Supp.2d 206, 233 (S.D.N.Y.2010) (quoting ECA, 553 F.3d at 198). "However, the mere fact that insider stock sales occurred does not suffice..., [instead] [p]laintiffs must establish that the sales were `unusual' or `suspicious.'" In re Gildan Activewear, Inc. Sec. Litig., 636 F.Supp.2d 261, 270 (S.D.N.Y.2009) (internal quotation marks and citation omitted).
"Where motive is not apparent, it is still possible to plead scienter by identifying circumstances indicating conscious behavior by the defendant, though the strength of the circumstantial allegations must be correspondingly greater." In re Citigroup, 753 F.Supp.2d at 233. Under this theory, a "plaintiff must show that the defendant's conduct is at the least[ ] conduct which is highly unreasonable and which represents an extreme departure from the standards of ordinary care to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it." Gissin v. Endres, 739 F.Supp.2d 488, 503 (S.D.N.Y.2010) (internal quotation marks omitted).
For purposes of this action plaintiffs must "specifically allege defendants' knowledge of facts or access to information contradicting defendants' public statements." Id.
On the other hand, specific identification of reports or other documents indicating defendants' recklessness as to their public statements' truth or falsity suggests
Finally, the law is clear that whichever path plaintiffs pursue to plead scienter, plaintiffs must plead an inference of scienter that is at least as strong and compelling as "any competing inferences rationally drawn from all the facts alleged, taken collectively." ECA, 553 F.3d at 198. In other words, the pleadings must satisfy both (1) either the "motive and opportunity" or the "strong circumstantial evidence" requirement; and (2) Tellabs' requirement that the inference drawn from the facts is at least as compelling as any other rational inference. Biovail Corp., 615 F.Supp.2d at 225 ("Regardless of the manner in which a plaintiff attempts to plead scienter, at the end of its evaluation, this Court must be convinced that the inference of scienter is at least as compelling as any competing inferences." (internal quotation marks omitted)); In re PXRE, 600 F.Supp.2d at 528.
Plaintiff's only allegation going to motive and opportunity is that LIZ did not purchase its own stock in the market during the Class Period after doing so for several quarters prior. (See Pl.'s Opp'n at 13.) While true that unusual insider sales during the Class Period can establish motive, see Gildan Activewear, 636 F.Supp.2d at 270, the converse does not appear to be true. First, the argument plaintiff makes, that the corporation's failure to purchase stock establishes scienter, hardly follows from the rule that insider sales can, if unusual, establish scienter. The same logical failure exists in plaintiff's argument that a corporation's failure to repurchase stock can establish motive because "[c]ourts have repeatedly held that substantial
In his brief, plaintiff supports his argument for scienter based on strong circumstantial evidence on three grounds.
Plaintiff argues that "McComb's face-to-face confrontation with Lundgren [on November 22, 2006] and, later, Macy's February [2007] order cutbacks (for both spring and fall seasons), are directly at odds with Defendants' public statements portraying LIZ as continuing to have a strong relationship with Macy's despite the
"`Where plaintiffs contend defendants had access to contrary facts, they must specifically identify the reports or statements containing this information.'" Brecher v. Citigroup Inc., 797 F.Supp.2d 354, 369, 2011 WL 2209145, at *11 (S.D.N.Y. June 7, 2011) (quoting Novak, 216 F.3d at 309); see also In re Wachovia Equity Sec. Litig., 753 F.Supp.2d 326, 359 (S.D.N.Y.2011) ("[A] finding of reckless disregard based on access to contrary facts must specifically identify the contradictory
Nor does Lundgren's November 22, 2006 meeting with McComb give rise to such an inference. First of all, the SAC does not even plead what was said at that meeting, and neither does the Fortune article from which the SAC takes the allegation. (See SAC ¶ 54 ("... Lundgren was furious at the apparel maker....").) It is hard to say that plaintiff has plead a contrary statement with particularity when plaintiff has not plead any specific statement
Second, assuming arguendo that Lundgren actually told McComb he was furious about the LIZ-JC Penney deal, it is not clear how Lundgren's displeasure over a certain deal McComb's predecessor had made with JC Penney provided McComb or Sullivan with the information that their public statements were inaccurate. Those statements included (1) that Macy's and LIZ had a longstanding and important relationship; (2) that LIZ's "larger customers" were eager to do business with LIZ "in spite of any specific tensions that might exist on a given brand or on a given issue"; and (3) that the department stores had a good relationship with LIZ. (See SAC ¶¶ 57, 66, 76.) That Lundgren was "furious" about the LIZ-JC Penney deal does not appear to contradict or undermine any of those statements. This is especially so considering that in the winter of 2007 LIZ hired fashion icon Isaac Mizrahi to design a new Liz Claiborne line exclusively by Macy's; i.e., Macy's clearly was still eager to do business with LIZ. (Id. ¶ 54); see also Suzanne Kapner, Liz Claiborne's extreme makeover, Fortune (Dec. 4, 2008) (available at http://money.cnn.com/ magazines/fortune/fortune_archive/2008/12/ 08/105757740/index.htm).
Finally, even if (1) Lundgren actually told McComb he was furious about the LIZ-JC Penney deal; and (2) that statement of displeasure contradicted public statements about the longstandingness of the Macy's-LIZ relationship or the eagerness of department stores to buy from LIZ at the time of the Lundgren-McComb meeting, plaintiff still would have failed to establish a strong inference of scienter based on that meeting. Close to two months passed between the meeting and McComb's first allegedly misleading statement, and close to four months passed between the meeting and the final misleading statements. That Lundgren was upset in November does not mean that the Macy's-LIZ relationship was rocky the following February. Cf. In re PXRE, 600 F.Supp.2d at 536 (plaintiff must allege "(1) specific contradictory information [that] was available to the defendants (2) at the same time they made their misleading statements" (emphasis in original)). Especially without any report or specific
LIZ's 2006 10-K contained as a risk factor: "Risks associated with selling out Liz & Co. and Concepts by Claiborne brands outside of better department stores." Liz Claiborne, Inc. Annual Report for the Fiscal Year Ending Dec. 31, 2006 (Form 10-K), at 16 (Feb. 28, 2007). Plaintiff argues that because the 2006 10-K contained that risk factor yet no prior financial statement did so, the defendants must have known that their statements "about the segmented Liz Claiborne/Liz & Co. sales plan ... going well" were false when made. (Pl.'s Opp'n at 14.) Plaintiff's brief does not identify the specific statements from the SAC, but the statements apparently include (1) Sullivan's February 28, 2007 conference call statement that "[o]ur department store partners realize these new launches are geared toward a distinct and separate consumer.... They acknowledge our intent to preserve the marked differences in the product offering...." (SAC ¶ 64); (2) Sullivan's later statement on the same call that "[LIZ's] commitment to [the department stores] is that we will have very separate and distinct and elevated lines in department stores...." (id. ¶ 69); (3) McComb's statement on that call that "the Liz Claiborne apparel lines in the traditional department stores have a distinctive and elevated product presentation versus what we're doing with the diffused line." (id.); and (4) Sullivan's assertion in late March that "[the department stores] are fully engaged in ... discussions [about LIZ's business strategy]." (id. ¶ 76.) None of these statements are rendered false by the contemporaneous addition of a warning factor related to a risk broadly discussed in the press and by management. And whether the warning was adequate, as plaintiff now argues (Pl.'s Opp'n at 14), adds nothing to the issue of whether defendants statements were either false or made with scienter.
Plaintiff argues that because sales to Macy's constituted eighteen-percent of LIZ's business in 2005 and sixteen-percent of LIZ's business in 2006, "it is thus reasonable to infer that defendants ... were aware that the Liz & Co. deal would have serious repercussions with Macy's...." (Pl.'s Opp'n at 15.)
Recently this Court dealt with a similar "core operations doctrine" argument in Glaser v. The9, Ltd., 772 F.Supp.2d 573 (S.D.N.Y.2011). There the Court noted:
The9, 772 F.Supp.2d at 596 n. 17. And since the Court's decision in The9, the thrust of the case law indicates continued movement away from the doctrine. See, e.g., In re Wachovia,
In any event, that an allegedly fraudulent statement concerned "core operations," standing alone, is insufficient to support strong circumstantial evidence of scienter. Rather, the "core operations doctrine" bolsters the strength of the inference of scienter when plaintiff has already adequately alleged facts indicating that defendants might have known their statements were false. See In re Reserve Fund Sec. and Derivative Litig., 732 F.Supp.2d 310, 323 (S.D.N.Y.2010) (in discussing "core operations" argument, noting requirement that "accurate information... that contradicts or undermines Defendant's assurances as outlined in the Complaint" be "apparent" to the individual defendants "at the time the alleged false statements and omissions took place."); In re eSpeed, 457 F.Supp.2d at 294 ("even if [the product in question] was sufficiently significant that knowledge of its true prospects can be imputed to the individual defendants, plaintiffs must still adequately allege that defendants lacked a reasonable basis for their optimism about [it].") Here none of plaintiff's other allegations support an inference of scienter, and thus the "core operations doctrine" cannot bolster it.
Finally, even if the "core operations" doctrine could apply, it appears that Macy's business was not sufficiently "core" to LIZ so that that doctrine would apply. Sales to Macy's represented sixteen percent of LIZ's business in 2006. But courts have required that the operation in question constitute nearly all of a company's business before finding scienter based on the "core operations doctrine." Compare In re Atlas Air Worldwide Holdings, Inc. Sec. Litig., 324 F.Supp.2d 474, 496 (S.D.N.Y.2004) (concealment sufficient for "core operations doctrine" because revelation caused company to declare bankruptcy), and In re Cell Pathways Sec. Litig., No. 99-725, 2000 WL 805221, at *1, *7
Plaintiff also brings claims against the Individual Defendants pursuant to the Exchange Act Section 20(a). Such claims require "(a) a primary violation by a controlled person, (b) actual control by the defendant, and (c) the controlling person's culpable participation in the primary violation." In re Security Capital Assurance, 729 F.Supp.2d at 602. Because plaintiff here has failed to allege a primary violation, these claims are also dismissed.
"[I]t is the usual practice upon granting a motion to dismiss to allow leave to replead." In re eSpeed, 457 F.Supp.2d at 298. However, as plaintiff has already amended his complaint twice, dismissal with prejudice is appropriate at this stage in the litigation. See Biovail, 615 F.Supp.2d at 233 ("Because plaintiff has already amended its complaint once ... dismissal is with prejudice."); In re PXRE, 600 F.Supp.2d at 548 ("In light of the fact that the PSAC constitutes Plaintiff's fourth attempt at pleading this matter, the dismissal is with prejudice."); Treppel v. Biovail Corp., No. 03 Civ. 3002, 2005 WL 2086339, at *12 (S.D.N.Y. Aug. 30, 2005) ("[T]he Court finds that leave to amend would be futile because plaintiff has already had two bites at the apple and they have proven fruitless."); see also Harris v. Westchester Cnty. Med. Ctr., No. 08 Civ. 1128, 2011 WL 2637429, at *4 (S.D.N.Y. July 6, 2011) (dismissing third amended complaint with prejudice on defendant's first motion to dismiss).
For the reasons stated above, defendants' motion to dismiss is GRANTED in its entirety, and this action is dismissed with prejudice. The Clerk of the Court is directed to close this motion
SO ORDERED.
