Employees' Retirement System v. Blanford
2015 U.S. App. LEXIS 12901
2d Cir.2015Background
- Plaintiffs are five employee retirement systems bringing a putative securities class action against Green Mountain and certain executives.
- Plaintiffs allege misrepresentations about Green Mountain’s inventory, production, and growth prospects to inflate stock price during Feb–Nov 2011.
- Class Period investors heard assurances that Green Mountain was meeting demand and maintaining appropriate inventories.
- During the Class Period Green Mountain allegedly accumulated overstock, expiring inventory, and engaged in phantom shipments to auditors and audits of inventories.
- Executives made substantial personal stock sales totaling over $49 million at or near peak prices, after various positive disclosures.
- The district court dismissed the Complaint for failure to plead a false statement and pleaded scienter; the court denied relief. The Second Circuit vacated and remanded for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Did the complaint plead a misleading statement or omission of material fact? | Plaintiffs argue statements about inventory were false/omitted. | Defendants contend statements were not misleading given context and gaps. | Yes; sufficient specificity and timing present. |
| Did the complaint plead a strong inference of scienter? | Plaintiffs claim motive/opportunity and conscious recklessness supported by stock sales and concealment. | Defendants argue trading plans and ordinary business risks negate scienter. | Yes; strong inference of scienter supported by motive, opportunity, and concealment. |
| Is the pleadings standard under PSLRA properly satisfied at motion to dismiss? | Plaintiffs contend the complaint meets Rule 9(b) and PSLRA pleading requirements with particularity and collective inference. | Defendants contend the complaint fails to state with particularity and to show scienter. | Yes; both Rule 9(b)/PSLRA requirements satisfied at this stage. |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (strong inference standard; consider opposing inferences)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (pleading plausibility standard)
- ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (heightened pleading standard for securities fraud)
- Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004) (pleading requirements for misstatement/omission)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) (confidential witnesses can support allegations with sufficient particularity)
- Iowa Pub. Emps.’ Ret. Sys. v. MF Global, Ltd., 620 F.3d 137 (2d Cir. 2010) (activity in one period can support inferences about similar conduct in another)
- In re Scholastic Corp. Sec. Litig., 252 F.3d 63 (2d Cir. 2001) (application of scienter and falsity standards across periods)
- ECA & Local 134 IBEW Joint Pension Trust v. JP Morgan Chase Co., 553 F.3d 187 (2d Cir. 2009) (motive, opportunity, and recklessness as scienter indicators)
- George v. China Auto. Sys., Inc., 2012 WL 3205062 (S.D.N.Y. 2012) (pre-class-period trading plans and scienter considerations)