On April 10, 2020, the United States Court of Appeals for the Eighth Circuit affirmed the dismissal of a putative class action against a large American retailer (the "Company") and certain of its current and former executives for violations of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 (the "Exchange Act") and SEC Rule 10b-5. In re Target Corp. Sec. Litig., 2020 WL 1814268 (8th Cir. 2020). Plaintiffs alleged that defendants made materially misleading statements about problems facing the Company's Canadian subsidiary ("Canadian Subsidiary"), which filed for bankruptcy less than two years after opening in the Canadian market. The district court dismissed the action, holding that plaintiffs failed to meet the pleading standards of the Private Securities Litigation Reform Act ("PSLRA"), and denied reconsideration and leave to amend. The Eighth Circuit affirmed, holding that plaintiffs failed to plead scienter adequately for any of the alleged misleading statements and falsity for some of the alleged misstatements
The Company is one of the largest retailers in the United States. In 2013, it opened 124 Canadian stores and developed new supply chain and information technology infrastructure to support them, which immediately encountered significant problems. In 2015, the Canadian Subsidiary filed for bankruptcy and closed its stores. Plaintiffs alleged that defendants understated the Canadian Subsidiary's problems, overstated the Company's ability to resolve them, and issued overly optimistic projections about its profitability. The Court reviewed the district court's decision de novo and examined the alleged misstatements, applying the PSLRA's heightened pleading standards.
The Eighth Circuit affirmed the district court's dismissal of the action, concluding that none of the allegations supported an inference of fraudulent intent and certain allegations did not show falsity. On appeal, plaintiffs argued that the Company's statements at a retail conference about its supply chain demonstrated scienter because the Company failed to disclose systemic problems known to defendants or recklessly disregarded by them. The Court rejected this argument and ruled that plaintiffs failed to offer a particularized explanation of how or when the Company's executives learned that the statement was false, and noted that "blanket" or "catch-all" assertions of intent are to be disregarded. Plaintiffs also argued that defendants' statements that they could fix the problems with "tuning" were intentionally false and misleading, but the Court rejected this argument too, stating that while the Company's claims of "tuning" were inaccurate in hindsight, the PSLRA does not allow pleading fraud by hindsight.
Plaintiffs also argued that they pleaded the required mental state by showing that the Company's executives were motivated to inflate the Company's stock price because they sold large amounts of stock during the class period. The Court disagreed, stating that insider stock sales are not inherently suspicious, and further noted that plaintiffs alleged that defendants only sold 10% to 20% of their shares, most of which occurred at the beginning of the class period.
The Court also rejected plaintiffs' argument that it was materially misleading to express optimism about the performance at certain stores, which conflicted with statements made three months later, when the Company revealed that sales at those stores had fallen over 11% the previous year. The Court explained that financial deterioration alone is insufficient to show fraud, and no factual allegations suggested that fraud accounted for the difference or otherwise indicated that the earlier statement was false when made.
Finally, the Court affirmed the district court's denial of plaintiffs' request for leave to file an amended complaint. It found the proposed amended complaint would have been futile because it merely added allegations that were conclusory and consistent with non-fraudulent explanation for the alleged statements to investors, namely that the Company had serious problems that none of its executives fully understood.
Originally published 21 April, 2020
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