United States District Court, E.D. Kentucky, Central Division
NORFOLK COUNTY RETIREMENT SYSTEM, Individually and On Behalf of All Others Similarly Situated, Plaintiffs,
TEMPUR-PEDIC INTERNATIONAL, INC., MARK A SARVARY, and DALE E. WILLIAMS, Defendants
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
For Norfolk County Retirement System, Individually and On Behalf of All Others Similarly Situated, Plaintiff: Christine S. Azar, LEAD ATTORNEY, Labaton Sucharow LLP - DE, Wilmington, DE; Christopher J. Keller, Cynthia A. Hanawalt, Eric J. Belfi, Javier Bleichmar, Jonathan Gardner, Jonathan M. Plasse, Michael W. Stocker, Rachel A. Avan, LEAD ATTORNEYS, PRO HAC VICE, Matthew C. Moehlman, LEAD ATTORNEY, Labaton Sucharow LLP, New York, NY; John C. Roach, S. Chad Meredith, W. Keith Ransdell, LEAD ATTORNEYS, Ransdell & Roach, PLLC, Lexington, KY.
For Police and Fire Retirement System of the City of Detroit, Designated Lead Plaintiff on 12/3/2012 per DE 66, Plaintiff: Amanda F. Lawrence, LEAD ATTORNEY, PRO HAC VICE, Scott & Scott, LLP - CT, Colchester, CT; Beth A. Kaswan, Donald A. Broggi, Joseph D. Cohen, LEAD ATTORNEYS, PRO HAC VICE, Joseph P. Guglielmo, LEAD ATTORNEY, Scott & Scott LLP - NY, New York, NY; John C. Roach, LEAD ATTORNEY, Ransdell & Roach, PLLC, Lexington, KY; Doris A. Kim, Mark K. Gray, Gray & White, Louisville, KY.
For Arthur Benning, Jr., Plaintiff: Randall S. Strause, LEAD ATTORNEY, Strause Law Group, PLLC, Louisville, KY.
For Tempur-Pedic International, Inc., Mark A. Sarvary, Dale E. Williams, Defendants: Jason Trent Ams, LEAD ATTORNEY, David Andrew Owen, Bingham Greenebaum Doll LLP - Lexington, Lexington, KY; Jason D. Frank, Jordan D. Hershman, William R. Harb, LEAD ATTORNEYS, PRO HAC VICE, Bingham McCuthen, LLP - Boston MA, Boston, MA.
For Robert Leibrandt, Movant: J. Gregory Joyner, Naber, Joyner & Jaffe, Louisville, KY.
For Philip C and Carol A Scardina Revocable Inter Vivos Trust, Movant: Charles W. Miller, Miller & Falkner, Louisville, KY.
For Jim Channell, Movant: John G. Irvin, Jr., Kinkead & Stilz, PLLC, Lexington, KY.
Karen K. Caldwell, United States District Judge.
In an Order issued March 31, 2014 (DE 115) this Court granted Defendants' motion to dismiss (DE 91), denied as moot Defendants' motion for a hearing (DE 92), and denied as futile Plaintiff's motion to file an amended complaint (DE 97). This memorandum opinion will explain that Order.
Plaintiff Norfolk County Retirement System represents a class of investors (the " class" ) who acquired publicly-traded common stock of Tempur-Pedic (" TPX" ) between January 25, 2012 and June 5, 2012. (DE 87, p. 1). TPX manufactures and distributes premium mattresses, pillows, and related viscoelastic products and maintains a market in North America and internationally. (DE 87, p. 13). Defendant Mark Sarvary is the Chief Executive Officer of TPX and a member of TPX's board of directors. (DE 87, p.3). Defendant Dale E. Williams is the Executive Vice President and Chief Financial Officer of TPX. (DE 87, p. 10). The Court will refer to Sarvary and Williams together as the " individual defendants."
During 2011, TPX experienced record sales, (DE 96, p. 1) and entering 2011, TPX " was the unquestioned market leader in specialty premium" mattresses. (DE 96, p. 5). In April 2011, Serta, one of TPX's competitors, launched its line of iComfort mattresses, which like TPX products, were non-spring, viscoelastic mattresses. (DE 87, p. 16). According to a confidential witness referred to in the complaint, in August of 2011, Sarvary, Williams, and other TPX executives attended a tradeshow, where Sarvary and other executives attended a meeting and
learned that four of TPX's top ten retailers would begin carrying the iComfort beginning in January of 2012. (DE 87, p. 18). The confidential witness also stated that TPX executives directed territorial sales managers to compile their sales data into an excel spreadsheet comparing sales figures prior to the introduction of the iComfort and TPX sales after the release of the iComfort. (DE 87, p.18). This information was compiled into a PowerPoint presentation entitled " iComfort Risk Analysis for Mark [Sarvary] Meeting Sept 11." (DE 87, p. 18-19). The report indicated that sales of TPX in retailers that were also carrying iComfort grew only 3% on average; whereas at retailers not carrying iComfort, TPX sales increased by an average of 33%. (DE 87, p. 19). The complaint states, " by September 2011, Sarvary . . . and other Tempur-Pedic executives would have known [about] . . . the 'TPX 2011 iComfort Risk Analysis' [Report], [and] that iComfort was materially impacting the Company's sales growth by an implied 30% at retailers who had begun selling the iComfort." (DE 87, p. 19).
As further proof that TPX executives had knowledge of the new Serta competition, the class refers to " Top 30 reports," which, according to the complaint, were compilations of the sales results in TPX's top thirty retail accounts. (DE 87, p. 19-20). The class alleges that these reports were sent by email to defendant Sarvary. (DE 87, p. 19-20). However, it is unclear how these weekly reports would reveal anything about the iComfort or its impact on sales. The class also offers a number of statements from three other confidential witnesses, ranging from reports of declining sales in territories where iComfort had been introduced to reports of TPX warehouse meetings where TPX employees or executives indicated that the excess inventory at the warehouse was due to the competition. (DE 87, p. 21-24). The complaint also alleges that seven weeks in advance of the first " corrective disclosure," " Defendants Sarvary and Williams exercised a total of 85,000 stock options and sold those shares at a higher price for . . . [a] gain . . . of over $5.7 million." (De 87, p 25).
The complaint then asserts that Sarvary and Williams made a series of " false and misleading statements." (DE 87, p. 25). The statements were made during the following events: a January 24, 2012 press release, a January 24, 2012 conference call, a January 30, 2012 fiscal year 2011 form 10-K, a February 22, 2012 webcast, a March 5, 2012 conference, an April 19, 2012 conference call, and a 1Q 2012 Form 10-Q. (DE 87, p. 25-49). In a series of press releases beginning on April 19th and continuing to June 6, 2012, TPX began lowering the company's expectations and projections for the year due to increased North American competition. (DE 87, p. 48-49). As a result, TPX's share price dropped dramatically. (DE 87, p. 49).
In Counts 1 and 2 of the complaint, the class asserts violations of Section 10(b) of the Securities Exchange Act of 1934 (" Securities Act" ) and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission (" SEC" ) against TPX and against the individual defendants. (DE 87, p. 69-73). In Count 3, the class also asserts a cause of action for violation of Section 20(a) of the Securities Act against the individual defendants. (DE 87, P. 73). At the root of the complaint, the class asserts that TPX and the individual defendants violated Section 10(b) of the Securities Act when they made certain statements and positive growth projections, while knowing or being reckless in not knowing that the introduction and expansion
of the iComfort was and would continue to encroach on TPX's market share.
II. STANDARD OF REVIEW
When considering a Fed.R.Civ.P. 12(b)(6) motion to dismiss, the Court must regard the " factual allegations in the complaint . . . as true." Scheid v. Fanny Farms Candy Shops, Inc., 859 F.2d 434, 436 (6th Cir. 1988) (quoting Windsor v. The Tennessean, 719 F.2d 155, 158 (6th Cir. 1983)). " 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 action will not do." Bell A. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). To survive a motion to dismiss, a plaintiff's factual allegations in the complaint " must be enough to raise a right to relief above the speculative level." Id. The plaintiff must plead " enough facts to state a claim to relief that is plausible on its face" and to nudge his claim " across the line from conceivable to plausible." Id. at 570. " [A] complaint must contain either direct or inferential allegations respecting all the material elements to sustain recovery under some viable legal theory." League of United Latin Am. Citizens v. Bredesen, 500 F.3d 523, 527 (6th Cir. 2007) (citing Twombly, 550 U.S. at 562).
The Private Securities litigation Reform Act of 1995 (" PSLRA" ) creates pleading requirements in securities fraud cases that are more rigorous than general pleading standards. Campbell v. Lexmark Intern. Inc., 234 F.Supp.2d 680, 682 (E.D. Ky. 2002). The purpose of the PSLRA's heightened requirements is to protect companies from frivolous securities lawsuits. See id. Further, unlike in a general case on a motion to dismiss, " a court can consider the full texts of SEC filings, prospectuses, analysts' reports and other documents referenced in the complaint, regardless of whether they are attached in part or whole." Albert Fadem Trust v. Am. Elec. Power Co., Inc., 334 F.Supp.2d 985, 995 (S.D. Ohio 2004).
Finally, in relation to scienter, the PLSRA's heightened pleading standard is as follows:
[i]n any private action arising under this chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, 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). This standard does not alter the level of scienter (i.e. knowledge or recklessness) that a plaintiff must ultimately prove to prevail in a securities fraud case, but does change the pleading standard he must meet to survive a motion to dismiss. In re Humana, Inc. Sec. Litig., No. 3:08CV-00162-JHM, 2009 WL 1767193 at *7 (W.D. Ky. June 23, 2009) (citing PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 682, 91 F.App'x 418 (6th Cir. 2004)). " Therefore, if a plaintiff does not plead with particularity facts giving rise to a strong inference of scienter, i.e. knowledge or recklessness, a court may, on any defendant's motion, dismiss the complaint." Id. (emphasis added) (internal citations omitted).
A. SECTION 10(b) OF THE SECURITIES EXCHANGE ACT
The class asserts a claim against TPX and the individual defendants under the
" anti-fraud provision, § 10(b), of the Securities Act, 15 U.S.C. § 78j(b). In relevant part, it provides:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange . . . [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
15 U.S.C. § 78j(b).
The SEC regulation promulgated under § 10(b) provides:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5. " The basic elements of a cause of action under the anti-fraud provision are " (1) a material misrepresentation or omission; (2) scienter ; (3) a connection with the purchase or sale of a security; (4) reliance (or transaction causation); (5) economic loss; and (6) loss causation," Humana, No. 3:08CV-00162-JMH, 2009 WL 1767193 at *7 (emphasis added) (citing Brown v. Earthboard Sports USA, Inc., 481 F.3d 901, 917 (6th Cir. 2007)). The only issue in the present motion is whether the class has adequately pleaded (1) a material misrepresentation or omission and (2) scienter.
i. Material Misrepresentation
There are two components in the first element of an actionable claim under Section 10(b)/Rule 10b-5. A statement must be (1) material and (2) a misrepresentation or omission. TPX and the individual defendants insist that the majority of the statements at issue fail as they are either not material or not misrepresentations. The Court agrees.
As the Court of Appeals has explained regarding materiality,
[a] misrepresentation or an omission is material only if there is a substantial likelihood that a reasonable investor would have viewed the misrepresentation or omission as having significantly altered the total mix of information made available. . . . . We may properly dismiss a complaint on the ground that the alleged misrepresentations or omissions are immaterial only if they are so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their unimportance. Immaterial statements include vague, soft, puffing statements or obvious hyperbole upon which a reasonable investor would not rely. Statements that are " mere puffing" or " corporate optimism" may be forward-looking or " generalized statements of optimism that are not capable of objective verification."
In re Ford Motor Co. Sec. Litigation, Class Action, 381 F.3d 563, 570 (6th Cir. 2004) (emphasis added) (internal citations omitted). " Courts everywhere have demonstrated a willingness to find immaterial as a matter of law 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 constitute the opinions of the speaker, that no reasonable investor could find them important to the total mix of information available." Id. at 570-71; City of Monroe Emp. Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 669 (6th Cir. 2005). In short, dismissal is appropriate when the allegedly misleading statements are general or vague or are opinions made by the corporation and its executives while wearing rose-colored glasses. Put another way, statements that are so general and void of any substantive content and that fail to communicate anything that would alter the total mix of information are not material; " empty statements [are] immaterial as a matter of law." Plumbers and Pipefitters Local Union No. 630 Pension Annuity Trust Fund v. Allscripts-Misys Healthcare Solutions, Inc., 778 F.Supp.2d 858, 872 (N.D.Ill. 2011).
In this case, many of the statements referenced in the class's complaint are not material as a matter of law. The statements are either so vague as not to alter the total mix of information or so generally optimistic that they lack substantive content and do not communicate much at all. For example, on March 5, 2012 at a Raymond James International Institutional Investors Conference, Defendant Williams said, " Just a phenomenal year for the Company, very pleased with the kind of performance and we look for that kind of growth opportunity to continue into the long-term future." (DE 91-7, p.3). What constitutes a " phenomenal year" ? How can an investor objectively verify whether the company is looking for " growth opportunity" in the future? A reasonable investor simply would not find such statements " important to the total mix of information available." Ford, 381 F.3d at 570-71. The class also argues that the statement " We continue to see good -- a long runway of opportunity continuing to improve gross margins in the business" is misleading. (DE 87, p. 35). Yet, it is so vaguely optimistic it almost says nothing at all. Taking many of the statements in question in context, it is clear that they are " too squishy, too untethered to anything measurable, to communicate anything that a reasonable person would deem important to a securities investment decision." Monroe, 399 F.3d at 671. The list in Part III. B of this opinion provides a full account of all of the statements at issue in this matter; many of the statements in whole or in part are clearly immaterial as a matter of law, as " no reasonable investor could find them important to the total mix of information available." Ford, 381 F.3d at 571.
Even if a statement is a material, a plaintiff must plead facts that demonstrate that the material statement is misleading in order for it to be considered a misrepresentation. The PSLRA provides heightened pleading requirements in certain securities cases to help prevent " strike suits" that are filed simply because a company's stock price drop. See Miller v. Champion Enters., Inc., 346 F.3d 660, 690 (6th Cir. 2003). " Adding to the Federal Rules of Civil Procedure 9(b) requirement that fraud must be stated with particularity, the PSLRA mandates that" when a plaintiff alleges that there is an untrue or misleading statement, the plaintiff must " specify each ...