412 F.Supp.3d 206
E.D.N.Y2019Background
- Lead plaintiff (New England Carpenters Guaranteed Annuity and Pension Funds) brought a putative securities class action against Foot Locker, CEO Richard A. Johnson, and CFO Lauren B. Peters for alleged misstatements from Aug 19, 2016 to Aug 17, 2017.
- Plaintiffs allege defendants misled investors about Foot Locker’s competitive position and "strong" vendor relationships while vendors (e.g., Nike, Adidas) were selling directly online and limiting premium allocations.
- Fraud theory largely relies on statements from eight confidential witnesses (former Foot Locker employees) describing allocation rules (e.g., a purported "70/30" rule), restrictive return policies, and increased vendor direct-to-consumer sales.
- Plaintiffs point to a May 19, 2017 partial disclosure (weak 1Q results) and an Aug 18, 2017 disclosure (worse-than-expected 2Q results) that corresponded with sharp stock drops.
- Defendants moved to dismiss for failure to plead actionable misstatements/omissions, scienter, and loss causation. Court granted dismissal without prejudice and gave leave to amend.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Material misstatements/omissions about Foot Locker's market position and customer/ vendor relationships | Plaintiff: defendants portrayed Foot Locker as "strong" and insulated from vendor DTC trends, concealing adverse market shifts | Defendants: statements were vague puffery/opinions, and plaintiffs failed to plead specific falsity or a duty to disclose | Held: Statements were non-actionable puffery and plaintiffs failed to plead particularized falsity or an omission that made disclosures misleading |
| Failure to disclose under Items 303 & 503 (MD&A, risk factors) | Plaintiff: Forms 10-Q/10-K omitted material trends (vendor disintermediation, inability to obtain premium product, excess undesirable inventory) | Defendants: no specific trend alleged showing an actual material adverse effect; disclosure obligations not triggered | Held: Allegations insufficient to show a material trend harming results; statutory-item claims fail |
| Scienter — motive via insider stock sales | Plaintiff: insider sales during the period (192,162 shares) indicate motive to keep price inflated | Defendants: many sales were small percentages or pursuant to pre-existing Rule 10b5-1 plans; sales not unusual | Held: Sales do not support a strong inference of scienter (plans, timing, and percentages undercut inference) |
| Scienter — recklessness/core operations and access to data | Plaintiff: defendants had access to daily sell-through data, regular meetings, and therefore must have known of vendor competition | Defendants: allegations are conclusory; no particularized facts that defendants knew contradictory information | Held: Plaintiffs failed to plead conscious recklessness with the required particularity; core-operations doctrine insufficient alone |
| Section 20(a) control-person liability | Plaintiff: Johnson and Peters are alleged controlling persons of Foot Locker | Defendants: primary Section 10(b) claim fails | Held: Section 20(a) claim fails as dependent on a viable Section 10(b) claim |
Key Cases Cited
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility standard for Fed. R. Civ. P. 8)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standards and plausibility applied to factual allegations)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (standard for evaluating whether scienter inference is "strong")
- Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011) (duty to disclose to avoid misleading statements when speaking on an issue)
- Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005) (loss causation and damages principles)
- Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004) (Rule 9(b) particularity for securities fraud)
- Stratte-McClure v. Morgan Stanley, 776 F.3d 94 (2d Cir. 2015) (documents courts may consider on motion to dismiss in securities cases)
- ATSI Communications v. Shaar Fund, 493 F.3d 87 (2d Cir. 2007) (PSLRA and Rule 9(b) pleading requirements)
- Vivendi v. [In re Vivendi], 838 F.3d 223 (2d Cir. 2016) (when partial disclosures create duty to disclose additional facts)
- Kleinman v. Elan Corp., 706 F.3d 145 (2d Cir. 2013) (pleading standards and reliance)
- Kalnit v. Eichler, 264 F.3d 131 (2d Cir. 2001) (motive and opportunity; stock-sale analysis)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) (requirements for pleading scienter with particularity)