EDMUND A. SARGUS, JR., District Judge.
This matter is presently before the Court on Defendants' Motion to Dismiss the Amended Class Action Complaint with Prejudice (Doc. 36). For the reasons stated herein, the motion is
Plaintiff
The claims brought by Plaintiff primarily relate to Victoria's Secret Direct ("VSD"), the internet and catalog sales arm of Victoria's Secret. According to Plaintiff, between August 22, 2007 and February 28, 2008 ("class period"), Defendants made a series of false or misleading statements concerning two separate, but related initiatives at VSD. The first of these initiatives was the development of a new "front-end" software system that would, inter alia, "enable VSD to interact with customers in real-time through online merchandising displays and email promotions." (Am. Compl. ¶ 40.) This system was intended to replace VSD's older system, which had become obsolete as VSD's business had increased. (Am. Compl. ¶ 40.) Instead of developing the system internally, Limited partnered with General Catalyst, a private equity firm, to launch a joint venture dubbed "n2N" to develop the software system for VSD, with the goal of marketing similar systems to
The second initiative was the opening of a new distribution center for VSD in August 2007. (See Am. Compl. ¶ 45.) According to Plaintiff, in the months before its opening, Defendants had touted the new distribution center (along with n2N) as a key strategic initiative that would help to drive down costs and increase profit margins. However, upon opening, the distribution center was beset with operational problems. Plaintiff alleges that throughout the class period, Defendants failed to disclose the true extent of these problems in an attempt to keep Limited's stock price at an artificially high level.
Plaintiff's allegations are supported by the statements of six confidential witnesses integrated into the amended complaint. Confidential Witness 1 ("CW1") is described as a former "Associate Merchandise Planner at VSD from May 2007 to February 2008." (Am. Compl. ¶ 31.) According to Plaintiff, in November 2007, CW1 was assigned to a special team tasked with fixing the problems at the new distribution center. (Am. Compl. ¶ 31.) CW2 is described as a "Business Relation Executive (an IT position) in the Victoria's Secret Stores Retail Division from October 2005 to March 2009." (Am. Compl. ¶ 32.) According to Plaintiff, pursuant to his or her job responsibilities, CW2 had direct contact with persons working on information technology issues at the new distribution center. (Am. Comp. ¶ 32.)
CW3 "was a Director of Technology at VSD from 2000 to May 2009. In this position, CW3 was responsible for the integration of the n2N system with Limited Brands and for building, installing and implementing the interface and processing large volumes of data interchanged between Limited Brands and n2N." (Am. Compl. ¶ 33.) CW4 "held various high-level IT jobs at Limited" including Director of Technology Delivery at VSD during the class period. (Am. Compl. ¶ 34.) According to Plaintiff, CW4 headed a team "that worked on upgrading the VSD website as part of the new n2N platform." (Am. Compl. ¶ 34.) CW4 reported to Donna Ruch ("Ruch"), Senior Vice President of Victoria's Secret information technology, who herself reported directly to Redgrave and Turney. (Am. Compl. ¶ 34.)
CW5 was "an Internet Manager at VSD from November 2006 to August 2007." (Am. Compl. ¶ 36.) In this position, CW5 worked on "business processes for the n2N platform and attended daily n2N meetings." (Am. Compl. ¶ 36.) Finally, CW6 is alleged to have held various high-level information technology jobs with Limited, including Financial Systems Manager at VSD during the class period. (Am. Compl. ¶ 38.) In this position, CW6 also worked on the n2N project and had direct communications with high-level technical managers at n2N. (Am. Compl. 138.)
Plaintiff brings claims pursuant to §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, codified as amended at 15 U.S.C. §§ 78j(b) & 78t(a), and Securities and Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5. Section 10(b) makes it unlawful:
15 U.S.C. § 78j(b). Section 20(a) establishes instances in which individuals controlling others who have violated the Securities Exchange Act can be deemed personally liable. See id. § 78t(a). Rule 10b-5, issued by the SEC pursuant to § 10(b), provides that:
17 C.F.R. § 240.10b-5. To establish a cause of action under Rule 10b-5, a Plaintiff must plead the following six elements: "(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008).
Defendants move to dismiss the amended class action complaint for failing to state a claim pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6), and the Private Securities Litigation Reform Act ("PSLRA").
"A claim survives [a Rule 12(b)(6) motion] where its `[f]actual allegations [are] enough to raise a right to relief above the speculative level on the assumption that all of the complaint's allegations are true.'" Zaluski v. United Am. Healthcare Corp., 527 F.3d 564, 570 (6th Cir.2008) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 545, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). "[W]hen a complaint adequately states a claim, it may not be dismissed based on a district court's assessment that the plaintiff will fail to find evidentiary support for his allegations or prove his claim to the satisfaction of the factfinder." Twombly, 550 U.S. at 563 n. 8, 127 S.Ct. 1955. The court must also "construe the complaint in the light most favorable to the plaintiff." Inge v. Rock Fin. Corp., 281 F.3d 613, 619 (6th Cir.2002). Furthermore, "[a]lthough for purposes of a motion to dismiss [a court] must take all the factual allegations in the complaint as true, [it][is] not bound to accept as true a legal conclusion couched as a factual allegation." Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949-50, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955) (internal quotations omitted).
Id. § 78u-4(b)(2)(A). Accordingly, as to the scienter element of Plaintiff's Rule 10b-5 claim, the amended complaint must state facts that give rise to a strong inference of a fraudulent intent on the part of Defendants.
The Court will now discuss in detail the series of statements that Plaintiff alleges were false or misleading, and the facts that Plaintiff contends support these allegations. These statements were made by Defendants on fourteen different occasions throughout the class period. The occasions include, in chronological order: a press release discussing Limited's second quarter financial results issued by the company on August 22, 2007; an August 23, 2007 conference call with analysts to discuss the second quarter results; a presentation at a global retailing conference on September 5, 2007; a recorded message reporting Limited's August 2007 sales released on September 6, 2007; a press release issued by n2N on September 17, 2007; an interview given by Turney that appeared in a magazine sometime in October 2007; the recording summarizing September 2007 sales released on October 11, 2007; a presentation to analysts by Wexner on October 16, 2007; a presentation at the "3rd Annual Consumer Focus Forum" on October 25, 2007; the October 2007 sales results recording that was released on November 8, 2007; a November 20, 2007 conference call with analysts to discuss third quarter earnings; the November 2007 sales results recording that was released on December 6, 2007; the December 2007 sales results recording that was released on January 10, 2008; and the January 2008 sales results recording that was released on February 7, 2008.
Turning first to the August 22, 2007 press release, Plaintiff alleges that the following statement was false or misleading:
(Doc. 36, Ex. C at 2.)
During the August 23, 2007 earnings conference call, Plaintiff alleges that several false or misleading statements were made by Burgdoerfer, Redgrave and Turney. During his portion of the presentation, Burgdoerfer reiterated that
(Doc. 36, Ex. D at 6.) At the start of the conference call. Tom Katzenmeyer ("Katzenmeyer"), a Limited Sensor Vice President, stated that, "As always, a reminder, any forward-looking statements we may make today are subject to the Safe Harbor statement found in our SEC filings." (Doc. 36, Ex. D at 1.) According to Plaintiff,
Plaintiff alleges that the statements in the press release and earnings call of the following day were false and misleading because Defendants knew by August 22nd that the distribution center was experiencing significant operational and software problems that were causing errors in shipments. (Am. Compl. ¶ 58.) According to CW6, Limited had failed to properly test the distribution center before opening it. (Am. Compl. ¶ 58.) CW4 stated that the problems were so substantial, in the months following the startup, the output of the new distribution center was less than that of the old distribution center. (Am. Compl. ¶ 58.) A special team had to be established to focus on the problems at the center. (Am. Compl. ¶ 58.) Finally, Plaintiff alleges that, as of the time the above statements were made, the n2N project was experiencing significant problems, and it was clear by August 2007, at least to CW4, that the software was not going to work. (Am. Compl. ¶ 59.) According to Plaintiff, as a result of these problems, the estimates made by Defendants of $.04 earnings per share in the third quarter and $1.18 earnings per share in the fourth quarter "lacked reasonable basis." (Am. Compl. ¶ 60.)
On September 5, 2007, Plaintiff alleges that Katzenmeyer gave the following allegedly false or misleading statements at the 14th Annual Global Retailing Conference:
(Am. Compl. ¶ 61.)
During the September 6, 2007 recorded report of August 2007 sales, Amie Preston ("Preston"), Vice President of Investor Relations, made the following allegedly false and misleading statements:
(Am. Compl. ¶ 62.) The September 6th recording was prefaced by the following qualifier: "As a matter of formality I need to remind you that any forward-looking
According to Plaintiff, the statements in the September 6th call were misleading because the operational problems at the distribution center were much more severe than Defendants disclosed. Accordingly, Plaintiff alleges that Defendants knew that ship times would not be normal by the end of September. (Am. Compl. ¶ 63.)
On September 17, 2007, n2N issued a press release stating that
Turney gave an interview in the October 2007 edition of Apparel Magazine in which she allegedly made several false and misleading statements regarding n2N. First, she stated that n2N software would allow Limited to
(Am. Compl. ¶ 65.) According to Plaintiff, the statements in the n2N press release and Turney's interview were false and misleading because the many problems allegedly being encountered at that time with the development of the n2N system meant that Defendants could not reasonably have believed that the software would be operational prior to 2008. (See Am. Compl. ¶ 66.)
In the October 11, 2007 recorded report of September sales, Plaintiff alleges that Preston made the following false or misleading statements:
(Doc. 36, Ex. G at 1-2.) This sales recording was also prefaced by the qualifier regarding forward-looking statements. (See
On October 16, 2007, Wexner delivered a presentation to analysts in which he made the following allegedly false and misleading statements:
(Am. Compl. ¶ 70.) Additionally, Wexner described Limited's planning as
In a presentation to the 3rd Annual Consumer Focus Forum on October 25, 2007, Katzenmeyer and Preston stated that
In the November 8, 2007 recorded report on October 2007 sales, Preston made the following allegedly false and misleading statements:
(Doc. 36, Ex. I at 2.) This recording also included the same prefatory language regarding forward-looking statements as the previous sales report recordings. (See Doc. 36, Ex. I at 1.)
According to Plaintiff, following the release of this sales results recording, Limited stock fell over 13% during the next two trading days. (Am. Compl. ¶ 74.)
On November 20, 2007, Limited issued a press release regarding its third quarter sales results. This press release contained the following statement:
(Doc. 36, Ex. J. at 1.) The press release also included similar warning language concerning forward-looking statements as the August 22, 2007 press release, with the addition of specific language concerning the distribution center: "risks associated with the Company's reliance on information technology, including risks related to the implementation of new information technology and distribution systems, including risks associated with our new Victoria's Secret Direct distribution center." (Doc. 36, Ex. J. at 2.)
On November 20, 2007, Defendants also conducted a conference call with analysts to discuss third quarter results. During that call, several allegedly false and misleading statements were made by Turney and Redgrave. Redgrave stated the following:
(Doc. 36, Ex. B at 2-3.) Later, Turney stated the following:
(Doc. 36, Ex. B at 5.)
The following exchange concerning the distribution center occurred during the question and answer portion of the conference call:
(Doc. 36, Ex. B at 6-7.)
Later, the following exchange concerning issues associated with limiting VSD demand during the holiday season occurred:
(Doc. 36, Ex. B at 9.)
As with the August 23rd call, Katzenmeyer began the November 20th earnings call with a disclaimer concerning forward-looking statements. (See Doc. 36, Ex. B at 1.) According to Plaintiff, following the "positive reassurances" given by Defendants during the November 20th call, Limited's stock price increased 7% over the next two days. (Am. Compl. ¶ 83.)
During the December 6, 2007 recorded message reporting November 2007 sales, Preston made the following allegedly false and misleading statements:
(Doc. 36, Ex. L at 2.) As with the other recorded messages reporting monthly sales, this recording also contained a cautionary statement on forward-looking statements. (See Doc. 36, Ex. L at 1.) According to Plaintiff, the highlighted statements, along with the statements
In early January 2008, a technology website posted an article indicating that VSD had decided to drop n2N as the developer of its new front-end software system. (Am. Compl. ¶ 86.) Similar articles appeared in other media outlets. According to Plaintiff, these disclosures caused Limited's stock price to plummet over 18% over a six day period. (Am. Compl. ¶ 87.)
During the January 10, 2008 recorded message announcing December 2007 sales, Preston made the following allegedly false statements:
(Am. Compl. ¶ 88.) Plaintiff alleges that as a result of these statements, Limited's stock price rose 2%. (Am. Compl. ¶ 89.)
Finally, in the February 7, 2008 recording announcing January 2008 sales results, Preston made the following allegedly false and misleading statement:
According to Plaintiff, the true impact of the problems with the distribution center was not announced by Limited until it reported its fourth quarter 2007 and full-year results near the end of February 2008. In a press release issued on February 27th, Limited stated the following regarding the outlook for 2008:
(Doc. 36, Ex. M at 2.)
The next day, Limited held a conference call with analysts to discuss the earnings results. During this call, Redgrave made the following statements concerning the distribution center and n2N:
(Doc. 36, Ex, N. at 2.) As a result of these disclosures, Plaintiff alleges that Limited's stock price fell 15%. (Am. Compl. ¶ 96.)
Generally, Plaintiff alleges that all of the statements highlighted above concerning the new distribution center and n2N were false and misleading because Defendants failed to disclose the true extent of the problems plaguing both initiatives. According to Plaintiff, despite Turney's August 2007 claim that the distribution center was experiencing normal implementation issues, the problems were so substantial that a special team had to be put in place to deal with them. (See Am. Compl. ¶ 98.) CW2 and CW6 reported that staff at the distribution center were not adequately trained in using the new systems employed at the center, which were much more complicated that those employed at the old center. (See Am. Compl. ¶¶ 99-100.) The lack of training, coupled with the complexity of the new system, led to frequent human error in the location and shipment of merchandise ordered by customers. As a result, "customers often received the wrong products, the wrong quantities, or no items at all." (Am. Compl. ¶ 101.) Thus, according to Plaintiff, the center was not operating under normal ship times at the times represented by Defendants.
CW4 and CW6 represented that the distribution center was experiencing software glitches throughout the class period, and that these problems were reported to Defendants.
With regard to n2N, Plaintiff essentially alleges that Defendants knew that the software project was destined to fail from the start and yet continued to make laudatory statements about the project during the class period. For instance, Plaintiff alleges that the problems at n2N were largely the result of VSD's failure to provide design specifications to n2N in a timely manner, and the fact that VSD was continually changing the scope of the project. Defendants also allegedly knew that the software was experiencing many problems. According to CW4, by August 2007, it was clear that the system was not going to work. (See Am. Compl. ¶ 110.) According to CW6, n2N could not have been operational prior to the end of 2008. (See Am. Compl. ¶ 110.) Finally, Plaintiff alleges that by the start of the class period, Defendants had already decided to end the n2N project. In August 2007, a Limited employee is alleged to have told an n2N employee that high-level executives at Limited wanted to "shut down" n2N. (Am. Compl., ¶ 116.) According to CW5, Limited's applications manager and senior database administrator had both expressed doubts about the system as early as December 2006. (Am. Compl. ¶ 116.) Additionally, a draft internal memorandum from September 2007 stated that "[t]he current working relationship between Limited Brands and n2N [was] not efficient or effective for delivering a solution that [could] be implemented in Limited Brands within an acceptable time frame and budget." (Am. Compl. ¶ 116.)
The amended complaint also has specific allegations concerning Defendants' scienter. First, Plaintiff contends that Defendants knew of the true extent of the problems with n2N and the distribution center through the receipt of various internal reports and through attendance at status meetings. Second, Plaintiff contends that Defendants' motive in orchestrating the scheme to artificially inflate Limited's stock price is evidenced by Limited's April 16, 2007 proxy statement, which indicates that the individual Defendants' incentive compensation was tied to the company's stock price. (Am. Compl. ¶ 129.) Third, according to Plaintiff, the timing of the problems with n2N and the new distribution center, which occurred during the fourth quarter, supports an inference of scienter. In this regard, the fourth quarter is the most important quarter for Limited. Thus, in Plaintiff's view, Defendants had an incentive to conceal problems with n2N and the distribution center so that fourth quarter results would not be affected. (See Am. Compl. ¶ 132.)
As stated supra, Plaintiff brings claims pursuant to Rule 10b-5 and § 20(a) of the Securities Exchange Act of 1934. Defendants move to dismiss the Rule 10b-5 claim on various grounds, including that the allegedly false and misleading statements were not false or material and that Plaintiff has failed to allege facts giving rise to a strong inference of scienter. Defendants move to dismiss the § 20(a) claim on the ground that it is dependent on the
In the Sixth Circuit, a plaintiff may satisfy the scienter requirement of a Rule 10b-5 action by alleging reckless behavior. See La. Sch. Emps.' Ret. Sys. v. Ernst & Young, LLP, 622 F.3d 471, 478 (6th Cir.2010) ("We have held that, following passage of the PSLRA, a plaintiff may plead scienter in a securities fraud complaint by alleging facts that give rise to a strong inference of recklessness."). "Recklessness sufficient to satisfy 10b-5 is `a mental state apart from negligence and akin to conscious disregard.'" Id. (quoting In re Comshare Inc. Sec. Litig., 183 F.3d 542, 550 (6th Cir.1999)). It is "highly unreasonable conduct which is an extreme departure from the standards of ordinary care." Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017, 1025 (6th Cir.1979).
The PSLRA requires that a plaintiff bringing a claim for securities fraud "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)(A). The Supreme Court has interpreted this provision to require dismissal of a complaint unless "a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). In making this determination, a court must collectively examine all of the facts alleged. Id. at 323, 127 S.Ct. 2499. In so doing, this Court concludes that the inference of scienter that Plaintiff asks the Court to make is neither cogent, nor as compelling as the competing inferences. Accordingly, Plaintiff's amended complaint must be dismissed.
In Helwig v. Vencor, Inc., 251 F.3d 540 § 6th Cir.2001 (partially abrogated by Tellabs), the Sixth Circuit articulated the following non-exhaustive list of factors relevant to the issue of scienter:
Id. at 552. Here, Plaintiff alleges a nefarious scheme during the class period by
While the amended complaint may suggest that some of the Helwig factors are present in this case, a review of the totality of the facts and circumstances leads the Court to conclude that any inference of scienter is simply not plausible, let alone as compelling as the more benign inferences that are readily drawn. As per the second and sixth factors, the amended complaint contains allegations that Defendants did not disclose all of the information they had regarding the exact details of the problems with the distribution center. However, any inference of fraud that can be drawn from these allegations is essentially negated by the fact that, from almost the very beginning of the class period, Defendants provided information to their investors concerning the problems at the distribution center. During the August 23, 2007 earnings call, Turney stated that the center was experiencing normal implementation issues, but also emphasized that, at that time, the center was in the midst of a controlled start. During the September 6, 2007 sales call, less than three weeks into the class period, Preston stated that it was taking longer than anticipated to get the center up to full capacity, resulting in shipment delays. Preston also reported that, because of the problems, sales at VSD for August 2007 were down a full 64% from August 2006. Additionally, Preston stated that gross margins were down as a result of added costs caused by problems at the center.
During the November 8, 2007 recorded sales call, Preston made the significant announcement that, because progress in ramping up the distribution center had been slower than expected, the company would be taking action to reduce demand at VSD during the fourth quarter. The November 20th press release concerning third quarter earnings readjusted the projected fourth quarter earnings per share because of the problems at the distribution center. Further, during the conference call discussing the earnings results, Redgrave gave a lengthy statement regarding these problems and the impact they were having on the company, and restated the company's plan to restrict demand at VSD during the fourth quarter. During the call, Turney also discussed how problems at the distribution center had impacted VSD's sales during the third quarter. Finally, in Limited's third quarter form 10-Q, risks associated with the distribution center were listed as having a potential impact on the company's results. (See Doc. 36, Ex. A at 39.)
If, as Plaintiff alleges, Defendants were purposefully concealing the true extent of the problems with the distribution center in order to artificially inflate the stock price, why would they have revealed any of the problems at the distribution center at all? Instead, however, they not only revealed the existence of the problems, but also announced to investors the seemingly drastic plan of reducing demand, and thus sales at VSD, in order to protect customer satisfaction. All of the negative statements concerning the distribution center would have been taken as strong warning
Next, the amended complaint alleges that
(Am. Compl. ¶ 129.) However, even if this allegation is true, courts have rejected the assertion that an inference of fraudulent intent can be drawn from the mere fact that an executive is given an incentive to ensure that his or her corporation succeeds. See, e.g., PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 690 (6th Cir.2004) ("All corporate managers share a desire for their companies to appear successful. That desire does not comprise a motive for fraud.... Neither does an executive's desire to protect his position within a company or increase his compensation.'" (citations omitted)). Further, any inference of fraud that could be drawn based on the motive of Defendants to keep the stock price high, and thus increase their own compensation, is effectively negated by the fact that, as explained above, they were releasing negative information about the distribution center throughout the class period that possibly resulted in substantial declines in Limited's stock price.
As noted by Defendants, conspicuously absent from this case are any allegations of insider stock sell-offs, ancillary lawsuits, or investigations. See id. at 691 (while not dispositive, "the absence of inside sales dulls allegations of fraudulent motive"). Rather, public filings submitted by Defendant indicate that during the class period, all of the Defendants, including Limited itself, purchased shares of Limited Stock. (See Doc. 36, Exs. J, Q, R, S, T.) These purchases undermine any inference of scienter. Also absent from the amended complaint are any allegations that, after the allegedly fraudulent scheme was consummated, Limited later restated or amended its financial statements concerning the period in question. This begs the question: if Defendants' goal was to artificially inflate Limited's stock price, what would be the point of concealing the problems at the distribution center and with the n2N project, but then still accurately reporting sales and financial results — results that were clearly being impacted by the problems with the initiatives?
With regard to the n2N project, Plaintiff alleges that fraud was committed because Defendants knew that the software system was doomed to failure from the very beginning and then misled investors
The Court further holds that a sizable portion of the allegedly false or misleading statements identified by Plaintiff are not actionable as Plaintiff has failed to adduce facts demonstrating their falsity. Additionally, many of the other statements are best characterized as corporate "puffery" or are otherwise protected by the PSLRA's safe harbor for forward-looking statements.
"To state a claim under § 10(b) or Rule 10b-5, Plaintiffs must allege that Defendants made a misrepresentation or omission of material fact that Defendant had a duty to disclose." Ley v. Visteon Corp., 543 F.3d 801, 807 (6th Cir.2008). An omission of fact is material if there is a "`substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available.'" Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976)). "When a company chooses to speak, it must `provide complete and non-misleading information.'" Ind. State Dist. Council of Laborers and Hod Carriers Pension and Welfare Fund v. Omnicare, Inc., 583 F.3d 935, 943 (6th Cir.2009) (quoting Rubin v. Schottenstein, Zox, and Dunn, 143 F.3d 263, 268 (6th Cir.1998)).
Statements that constitute mere corporate puffery are not considered to be material. In this regard, "[c]ourts have consistently found immaterial a certain kind of rosy affirmation commonly heard from corporate managers and numbingly familiar to the marketplace — loosely optimistic statements that are so vague, so lacking in specificity, or so clearly constituting the opinions of the speaker, that no reasonable investor could find them important." Id. at 944 (internal quotation omitted).
Additionally, the PSLRA established a safe harbor for forward-looking statements in certain instances. See 15 U.S.C. § 78u-5. The PSLRA defines "forward-looking statement" to include:
Id. § 78u-5(i)(1). The Sixth Circuit has held that a plaintiff may overcome the
A review of the amended complaint and the documents of which the Court may take judicial notice, reveals that many of the statements alleged by Plaintiff to be false or misleading are either immaterial puffery, not accompanied by additional facts indicating why the statements were false, or protected by the safe harbor for forwarding-looking statements.
Turning first to the August 22, 2007 press release, the allegedly false statements therein are clearly forward-looking and accompanied by meaningful cautionary statements. The statements in question assert Limited's comfort with the then-current estimates of its earnings per share in the third and fourth quarters. These statements are forward-looking in that they contain "a projection of ... earnings (including earnings loss) per share." Id. § 78u-5(i)(1)(A). Additionally, as quoted in Part III supra, the press release contains an extremely detailed statement of the risks that might impact any earnings projections. The Court disagrees with Plaintiff's assertion that the cautionary language found in the press release was mere boilerplate. Rather, a review of this language reveals that it identifies rather specific risks associated with the retail and fashion industries. As Defendants have pointed out, they were "not required to detail every facet or extent of [the] risk[s] to have adequately disclosed the nature of the risk[s]." Miller, 346 F.3d at 678.
Similarly, most of the identified statements made during the August 23rd earnings conference call are either unaccompanied by sufficient allegations of their falsity, or are forward-looking. During this call, Redgrave and Turney both described the opening of the new, 1-million-square-foot distribution center that was intended to support the growth of VSD, and which had a capacity over 40% greater than the old distribution center. Plaintiff does not allege that the new center never opened or did not actually exist, or anything to indicate that the intended capacity was not 40% greater than the old distribution center. Other statements, such as Burgdoerfer's repeat of the press release's indication that they were comfortable with the predicted earnings per share for the third and fourth quarters, and Turney's statement that the investments undertaken by the company would support future growth of VSD are forward-looking, or, in the case of the statement about future growth, puffery. At the start of the call, Katzenmeyer reminded listeners that forward-looking statements made during the call were subject to the risks identified in Limited's SEC filings. A review of these filings reveals ample and sufficient cautionary language. For example, a review of pages four through eight of Limited's 2006 annual report,
Additionally, all the statements allegedly made in the September 5, 2007 presentation are either unsupported by allegations of their falsity or are mere puffery. These statements include that the n2N and distribution center projects would provide "significant growth opportunities," that a new distribution center had just opened, and that major technology initiatives were underway. The statement regarding growth is clearly of the type of subjective, optimistic fluff deemed to be immaterial puffery. As to the other two statements, as stated above, Plaintiff has not alleged that the distribution center never opened or never existed, nor did Plaintiff provide any allegations to indicate that the statement concerning major technology initiatives was not true.
The statement made in the September 6th sales results recording that the company anticipated that normal ship times would be in place at the distribution center by the end of September and predicting an increase in September sales is also forward-looking. This statement contains a prediction of future financial performance, and components of the statement underlie the assumptions on which the prediction is based. As with the August 23rd call, the substantial cautionary language included in Limited's SEC filings was incorporated into the call by Preston.
Turning to n2N's September 17th press release, which stated that VSD's substantial business would within a few months be operating on n2N's software platform, Plaintiff has failed to allege how the statement by a separate corporate entity should be attributed to Defendants. Despite allegations that Redgrave and Turney were on n2N's board of directors, and that Limited had a controlling interest in n2N, Plaintiff has not specifically alleged that Defendants themselves ordered or in any way were involved with the issuance of the September 17th press release. Accordingly, the statement contained therein cannot be attributed to Defendants.
Turney's statement in the October issue of Apparel Magazine that "[o]verall, we're very excited about the implementation [of n2N]. It's going to add a lot of value to our business. We're very dedicated to it. We've got a lot of people focused on it, and I think it is going to set us up for growth for the future" is puffery, as it presents subjective, vague, and optimistic prospects for the future. The Court also notes that Turney's alleged statement during this interview that n2N would allow VSD to double its sales in five years is forward-looking, but unprotected by cautionary language.
As with similar statements identified above, Preston's statement in the October 11th sales results recording that VSD transitioned to a new distribution center in August is not false, despite the fact that Plaintiff has identified it as false or misleading. As for Wexner's presentation on October 16th, his statements about the company being drastically better planned for the holiday than in previous years and being better disciplined, along with his statement about conservative planning and his confidence and ease going into the holiday season represent his subjective, rosy opinion about the company's future prospects and are thus puffery.
In several paragraphs of the amended complaint, Plaintiff alleges that, in November 2007, Defendants made statements that demand for Victoria's Secret direct products remained strong. Similar statements were made by Preston during the November 8, 2007 sales results recording, and by Turney and Redgrave during the November 20th earnings call. However, despite the fact that Plaintiff alleges that these statements were false and misleading, no specific allegations support this contention. Moreover, it is unclear how issues related to demand for VSD's products is relevant to Defendants' purported scheme to conceal problems on the distribution side of their VSD business.
Furthermore, the falsity of several other statements made during the November 20th call is not supported by sufficient allegations in the amended complaint. During the call, Turney and Redgrave both stated that solving the problems at the distribution center was the company's "most significant operational priority." However, no allegations in the amended complaint specifically suggest that this was not the case. During the call, Redgrave also stated that they were reevaluating the approach and timing of the front-end technology systems at VSD and also made a statement about the importance of distinguishing between the separate VSD and Victoria's Secret stores lines of business. As with many of the other "false" statements identified in the amended complaint, the fraudulent nature of these statements is not specifically explained by other allegations, nor readily apparent.
Other statements made by Turney and Redgrave during the November 20th call also can best be considered either puffery or to fall within the safe-harbor provision for forward-looking statements. Redgrave's statement that the company was "very strong and that we are very well positioned" is clearly puffery. Turney's statements about ramping up the distribution center for spring and Redgrave's statement about being able to handle spring volume are both forward-looking as they deal with predictions concerning future business operations. These statements were prefaced by the adequate cautionary language found in Limited's SEC filings, which were referred to by Katzenmeyer at the start of the call Furthermore, risk associated with VSD's new distribution center was specifically mentioned in Limited's third quarter form 10-Q. (See Doc. 36, Ex. A at 39.)
Finally, as to the allegedly false statements in the December 6, 2007 sales results recording, the amended complaint does not provide sufficient supporting allegations concerning the falsity of the statements. The statements include that there had not been any significant changes in the status of the distribution center and that the company was focused on maximizing the throughput of the distribution center. The amended complaint does not allege that the company was not focusing on maximizing throughput or that some significant setback specifically occurred between the November 20th call and the December 6th recording.
The Court also holds that Plaintiff has failed to sufficiently plead that any of the statements not specifically disregarded in Part IV.B. 1 supra, concerning n2N were material. The only remaining "actionable" statements specifically concerning the n2N project were those made by Turney in the published magazine interview in October 2007. These include her statement that she hoped n2N's software would held double VSD's sales within five years, and that the software only had "normal glitches" but nothing major. However, despite identifying these forward-looking and optimistic statements concerning Turney's hopes with regard to the new, front-end software system, and despite Plaintiffs own vague allegations that n2N's prospects were contributing to Limited's forecasts of future earnings per share, Plaintiff has failed to allege that the failure of the n2N project had any impact whatsoever on the sales or profits of Limited. Despite Plaintiff's contention that Limited stock's 18% decline over a six day period in early January 2008 was caused by the announcement that n2N was being closed, Defendants have demonstrated that several of Limited's competitors in the retail segment also suffered sharp declines in their stock prices during that same short period. (See Doc. 36, Ex. X.) See also Beaver Cnty. Ret. Bd. v. LCA-Vision Inc., No. 1:07-CV-750, 2009 WL 806714, at *5 (S.D.Ohio Mar. 25, 2009) (a court may take judicial notice of well-publicized stock prices without converting a motion to dismiss into one for summary judgment). The Court also notes that Limited's income statement issued in the February 27, 2008 press release indicates that in 2007, the company's sales totaled over $10 billion dollars, with profits exceeding $700 million (Doc. 36, Ex. M at 6). The Plaintiff has not plausibly pleaded a scenario in which a failed $18 million investment in a software system was material to the economic condition of a company the size of Limited.
Count 2 of the amended complaint alleges that the individual Defendants should be liable as controlling persons pursuant to § 20(a) of the Securities Exchange Act. However, as this count is contingent on the success of Count 1, it must also be dismissed for failing to state a claim.
In conclusion, the most plausible inference to be derived from the totality of the facts in this case is as follows: during the class period, two initiatives, the n2N project and the opening of the new distribution center, were underway at VSD. Defendants were optimistic that the n2N project would help to enhance sales on the "front-end" of VSD's business model and were equally optimistic that the new distribution center would reduce costs at the back-end. Despite this optimism, the initiatives encountered difficulties. The distribution center was plagued by problems in accurately processing orders, resulting in lost sales and profits. Similarly, the n2N venture was unable to successfully develop and deliver the new front-end software system, and Defendants decided to end the project. As to the problems with the distribution center, Defendants provided adequate information to their investors, and even publically announced a plan to reduce sales during the fourth quarter so as to protect customer satisfaction. As to the n2N project, there was no evidence that its failure had any impact on Limited's financial results.
No inference of fraudulent or reckless intent can be drawn from the facts that is nearly as compelling as the above. In this
For the foregoing reasons, Defendants' Motion to Dismiss the Amended Class Action Complaint with Prejudice (Doc. 36) is
