On March 12, 2020, Judge Naomi Reice Buchwald of the United States District Court for the Southern District of New York dismissed a putative class action asserting claims under Section 10(b) of the Securities Exchange Act of 1934 against a shoe manufacturer and certain of its executives. In re Skechers USA, Inc. Sec. Lit., No. 18-CV-8039 (NRB) (S.D.N.Y. Mar. 12, 2020). Plaintiffs alleged that the company made misstatements and omissions in earnings calls and SEC filings regarding the growth rate of expenses in comparison to the growth rate of sales. The Court held that plaintiffs failed to adequately allege either an actionable misrepresentation or scienter, and denied leave to amend.
As an initial matter, the Court held that the alleged misstatements did not fall under the protection of the PSLRA's safe harbor provision, which renders inactionable forward-looking statements that are accompanied by meaningful risk disclosures. The Court determined that the company's risk disclosures did not satisfy the safe harbor because they were insufficiently specific as compared to the specific risk complained of by plaintiffs; whereas the disclosures noted that sales could fluctuate and that the relationship between sales and expenses could fluctuate, the alleged misstatements complained of by plaintiffs concerned how the company's operational structure in China, specifically, affected expenses. Id. at 19-20.
However, the Court held that statements made by a company executive on earnings calls were not misleading because they were either mere puffery or were predictions without any guarantee. Id. at 21-25. The Court emphasized that statements must be read in context, so that even when the executive stated that expense growth rates would "certainly continue" to slow in the first quarter, an investor could not reasonably have interpreted that statement as a guarantee in the context of other statements on the call that made clear that the executive was merely providing an opinion of future performance. Id. at 23.
Moreover, the Court rejected plaintiffs' argument that an executive's statement on an earnings call that spending in excess of projections was due to a "later event" was misleading based on the company's forecasts and the fact that the company had claimed to be able to carefully monitor and forecast inventory needs. The Court held that whether this statement was misleading depended on whether the additional expenses were actually the result of a "later event"—which plaintiffs' allegations did not address—not on whether they could have been anticipated in advance. Id. at 24-25.
Similarly, the Court held that the alleged misstatements in SEC filings amounted to non-actionable puffery. The Court emphasized that these statements, such as that company management "intend[s] to focus on . . . continuing to manage . . . expenses to be in line with expected sales levels" did not indicate that management had set a specific target ratio of expenses to sales. Id. at 25-26. Moreover, the Court concluded that because the complaint contained no allegations regarding the growth in sales, it could not establish that the company made misrepresentations relating to the ratio of growth in expenses to growth in sales. Id. at 30‑31.
The Court also rejected plaintiffs' attempts to support their falsity claims by pointing to analyst reports that, according to plaintiffs, revealed that securities analysts were misled by the company's statements. The Court noted that no context was provided for how representative the analyst reports were, and in any event the analysts' reactions were irrelevant when the statements were clear on their face. Id. at 33-34. The Court further emphasized that falsity and reasonable reliance were elements that needed to be proven separately, and plaintiffs could not use evidence relating to reliance "to reverse-engineer a non-actionable statement into an actionable misstatement." Id. at 35.
In addition, plaintiffs argued that the company's statements were misleading because they omitted additional information about future expenses. The Court disagreed, however, emphasizing that plaintiffs failed to allege what specific information was known to the company and its executives that "would have provided a meaningfully different understanding to a reasonable investor." Id. at 36. Moreover, the Court rejected the argument that the company had a duty to disclose an upward trend in expenses based on Item 303 of Regulation S-K, noting that there was no factual allegation that the company actually knew of such a trend. Id. at 37-38.
The Court also determined that plaintiffs failed to adequately plead scienter. Plaintiffs argued that scienter should be inferred based on executives' sale of stock, their incentive-based compensation structure, and their access to and knowledge of information contradicting the alleged misstatements. Id. at 39. Regarding stock sales, the Court concluded that the sales were not unusual or suspicious. For several, the Court determined that allegations based on the size and timing of the sales were not sufficient, given that plaintiffs failed to allege the profit earned and because the sales represented only approximately five percent of each executive's holdings. Id. at 41-42. While one sale, amounting to 65 percent of an executive's holdings, was "sufficiently large to merit close scrutiny," the Court held that plaintiffs' allegations were insufficient because (i) plaintiffs failed to allege the profits obtained from the sale, (ii) the executive had engaged in similar sales previously, and (iii) this sale came five months before the first alleged corrective disclosure, which the Court determined "attenuate[d]" any inference of scienter. Id. at 43-44.
With respect to plaintiffs' allegations regarding the incentive-based compensation system, the Court observed that such compensation systems were generally insufficient to support a finding of scienter and further concluded that plaintiffs failed to allege how compensation based on sales created a motive to mislead with respect to the statements at issue. Id. at 46. The Court similarly rejected plaintiffs' allegations under a recklessness theory that the company's executives should have known of the alleged misrepresentations given their high-level positions, which the Court observed was insufficient to support scienter. Id. at 50. Moreover, the Court rejected plaintiffs' attempt to invoke the "core operations" doctrine—under which some courts have inferred scienter where statements concerned core operations of the company—noting that even if the doctrine is viable, the "majority rule" is to consider such allegations as supplementary, not independent, means to establish scienter. Id. at 51. The Court also concluded that the complaint lacked factual allegations that would support an inference of corporate scienter, and in particular plaintiffs failed to allege non-conclusory facts that anyone in the company had knowledge of the alleged misrepresentations at any specific point in time. Id. at 53-54.
Finally, the Court denied what it described as plaintiffs' "perfunctory" request for leave to amend. The request was contained in a footnote without any suggestion regarding how a further complaint would cure the many deficiencies identified by the Court. The Court explained that the currently operative complaint was a consolidated amended complaint, and its decision followed a pre-motion letter exchange, full briefing on the motion to dismiss, and oral argument. Yet, plaintiffs at no time proffered the content of any proposed amendment or an explanation as to how the complaint's defects could be cured. Id. at 55 n.19.
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