Class Action Alleging Securities Violations Failed to Plead “Strong Inference of Scienter” as Required by the Private Securities Litigation Reform Act (PSLRA) Warranting Dismissal of Class Action With Prejudice Kentucky Federal Court Holds
Plaintiffs filed a class action lawsuit against Tempur-Pedic and others alleging securities laws violations arising out of allegedly false and misleading statements regarding the company’s financial situation as part of a scheme to drive up the stock price thereby allowing insiders “to sell more than $246 million worth of stock at an inflated price.” Grillo v. Tempur-Pedic Int’l, Inc., ___ F.Supp.2d ___ (E.D. Ky. March 28, 2008) [Slip Opn, at 1-2]. In essence, the class action alleged that after Tempur-Pedic announced a 6% price increase in its mattress lines in January 2005, it “caused a frenzy of retailers to stock up on their inventory needs before the price increase occurred.” Id., at 5. According to plaintiffs, this caused a “huge amount” of the company’s revenue to be “pulled forward,” but Tempur-Pedic denied this when asked by Goldman Sachs, id. The company reported record earnings and represented to the public that its growth could be “sustained,” when (according to the class action allegations) the company’s retail sales actually were “volatile and irregular.” Id., at 5-6. Plaintiffs’ class action complaint followed a September 19, 2005 press release that lowered guidance for the year, causing the stock to plummet 28% in a single day. Id., at 9. The complaint also detailed allegedly improper insider trading, see id., at 10-11. The class action alleged violations of Sections 10(b), 20(a) and 20A of the Securities and Exchange Act of 1934, and Rule 10b-5, id., at 2. Defense attorneys moved to dismiss the class action on the grounds that it failed to plead the specificity required under the Private Securities Litigation Reform Act (PSLRA). Id., at 2-3. The district court granted the defense motion and dismissed the class action complaint.
The federal court began with the now well known Supreme Court holding that, under the PSLRA, “‘a complaint will survive…only if 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.’” Grillo, at 17 (citation omitted). Plaintiffs’ mere allegation that defendants had access to internal financial reports and that those reports demonstrate the inaccuracy of the company’s financial representations was held to be inadequate, as they failed to provide any of those reports to the court or to “cite any of their specific details.” Id., at 18-19. Under the district court’s analysis, the allegations underlying the class action failed to meet the requisite level of scienter. For example, the mere fact that certain defendants held high positions within the company, or that they sold stock, were insufficient, as “[holding] high positions in the Company…is not enough to establish scienter,” id., at 19-20, and plaintiffs failed to demonstrate that the stock trades were “unusual or suspicious,” id., at 23-24. (The district court provided a detailed discussion of the stock trade issue. See id., at 24-27.) At bottom, the court concluded that the “strong inference” of scienter had not been shown.
Finally, we note that the district court denied plaintiffs’ request for leave to amend. See Grillo, at 32-33. This request was denied for two reasons. First, the federal court noted that the request was flawed procedurally, as plaintiffs failed to file a formal motion seeking leave to amend, id. Second, under Sixth Circuit authority, the PSLRA “‘restrict[s] the ability of plaintiffs to amend their complaint, thus as limiting the scope of Rule 15(a) of the Federal Rules of Civil Procedure.’” Id., at 33 (citation omitted). Plaintiffs “have had a number of chances to amend their pleadings,” and failed to demonstrate good cause for receiving yet another opportunity to do so, id. Accordingly, the district court dismissed the class action complaint with prejudice, id., at 33-34.