On February 7, 2020, Judge Richard G. Andrews of the United States District Court for the District of Delaware granted in part and denied in part motions to dismiss a putative securities class action against an automotive aftermarket parts provider (the "Company"), certain members of its management (the "Company Individual Defendants"), a hedge fund that owned approximately four percent of the Company's shares, and the fund's Chief Executive Officer who was a member of the Company's board of directors.  In re Advance Auto Parts, Inc., Sec. Litig., No. CV-18-212-RGA (D. Del. Feb. 7, 2020).  Plaintiffs alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making misleading misstatements and omissions about the Company's projected growth and financial condition.  The Court dismissed the claims to the extent it found them to be puffery or lacking sufficient allegations of falsity, but denied the motion with respect to claims based on statements related to projections and opinions regarding the Company's financial outlook. 

Plaintiffs alleged that defendants made false and misleading statements and omissions regarding the Company's increased sales and operating margins in 2016 and 2017.  Specifically, plaintiffs alleged that defendants knew that the Company's internal forecasts predicted negative growth when it had stated publicly that it projected growth in sales.  The complaint identified 16 false or misleading public statements made in the Company's quarterly investor earnings calls and press releases.  After categorizing each of the statements as (i) projection; (ii) opinion; (iii) puffery; or (iv) lacking in falsity, the Court allowed the claims based on projections and opinions to proceed, but dismissed claims based on puffery and statements lacking in sufficient allegations of falsity. 

Projections:  The Court first addressed statements constituting projections for the 2017 fiscal year, including, among others, statements that the Company will "deliver positive sales comp growth and a modest increase in operating margin"; that "comparable store sales will grow between 0% to 2%"; and that the "adjusted operating margin [will] increase between 15 basis points to 35 basis points for the year."  Relying on information allegedly obtained from a confidential informant, plaintiffs alleged that the Company's internal projections for that period forecasted "growth of negative 3%."  Although defendants argued that the internal forecast related to "gross sales" and not "comparable sales" referenced in the statements at issue, the Court rejected that argument because defendants' own filings expressly stated that the two were linked by explaining that a decline in total gross sales was related to comparable store sales.  The Court also rejected defendants' argument that information from the confidential informant must be discounted because the informant was a low-level employee, stating that a plaintiff is required only to show that the confidential witness has personal knowledge of the information and was employed in a position in which he or she would have reason to know such information.  Noting that projections may be actionable false statements if they either (1) are made with "inadequate consideration of the available data" or (2) use "unsound forecasting methodology,"  In re Burlington Coat Factory Sec. Litig., 114 F.3d 1140, 1429 (3d Cir. 1997), the Court held that plaintiffs adequately pled both grounds. 

Opinions:  The Court found that plaintiffs adequately pled falsity and materiality with respect to opinion statements, including that the Company "plan[s] to accelerate sales growth to industry average [and] . . . close the margin gap versus [its] competition" and that a "soft patch" in sales compared to previous quarters was "a blip, not a trend."  Plaintiffs claimed that defendants omitted material information relating to these statements, including that the Company had fallen short of its operating margin target by the largest percentage in its history, that sales during this period were trending down, and that the Company disregarded negative internal forecasts in favor of numbers based on an unsound methodology.  The Court held that these statements were actionable and that a defendant's honest belief of a statement's veracity is irrelevant where a plaintiff alleges that "the speaker omitted known material facts that 'conflict with what a reasonable investor would take from the statement itself.'"
With respect to the projections and opinions, the Court also found that plaintiffs sufficiently alleged facts from which scienter could be inferred, including that defendants received the negative internal forecasts and reports of the Company's declining sales.  The Court also rejected defendants' argument that the Company Individual Defendants' acquisition of the Company's stock negated an inference of scienter because the individual defendants had received most of the stock as part of their executive compensation package.

Puffery:  The Court dismissed plaintiffs' claims based on statements that the Company was "excited" and "pleased" with its performance as inactionable puffery, or statements that were "so vague and such obvious hyperbole that no reasonable investor would rely upon them." 

Falsity:  The Court also held that plaintiffs had not adequately pled falsity with respect to statements that described the Company's "positive sequential performance," "dramatic improvement," or "improved trends."  The Court emphasized that falsity is a context-specific inquiry and that these statements were accurate when read in context.   

Finally, the Court denied the Company Individual Defendants' motion to dismiss the Section 20(a) claims because plaintiffs adequately pled the predicate Section 10(b) violations and the Company Individual Defendants made some of the actionable statements at issue.  However, the Court granted the motion with respect to the hedge fund and its CEO, finding that plaintiffs had not adequately alleged control or culpable conduct.  More specifically, the Court found that a minority stock interest and the power to select a minority number of directors were insufficient to show control, and that the hedge fund's alleged role in the ouster of the former CEO and the Company's adoption of certain cost-cutting strategies failed to show "culpable participation" with respect to the Section 10(b) violations.  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.