855 F. Supp. 2d 1043
C.D. Cal.2012Background
- Consolidated securities class action against American Apparel, Charney, Kowalewski, Lion Capital (defendants).
- Plaintiffs allege undocumented workers were hired at LA factory; ICE investigation followed with large terminations.
- Alleged misrepresentations/Omissions targeted 10(b) and 10b-5; PSLRA scienter standards applied.
- Defendants moved to dismiss, seeking judicial notice of various SEC filings and press materials.
- Court conducts Rule 12(b)(6) review, applying incorporation by reference and judicial notice rules.
- Court’s decision: grant motions to dismiss, with leave to amend.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Falsity of immigration-compliance statements | Plaintiffs assert statements falsely claimed compliance. | Defendants argue statements were not false when made. | Falsity adequately pled for diligence/compliance statements. |
| Impact of workforce reduction on operations/profitability | Terminations would have material adverse effects. | Predictions about impact were forward-looking and not clearly false. | Not adequately pled as false when made; dismissed on scienter grounds. |
| Accounting practices and internal controls representations | Statements about SOX, controls, and conservatism were false. | Allegations lack specificity and falsity details. | No adequate PSC/ scienter pleaded; dismissed. |
| Scienter standard and sufficiency of pleadings | Holistic view shows strong inference of intent/recklessness. | Allegations too speculative; insufficient for strong inference. | Holistic scienter not established; dismissal upheld. |
| Section 20(a) control-person liability against Lion Capital | Lion Capital controlled the company and caused/connected to violations. | Control allegations insufficient to show post-2009 liability. | Dismissed for lack of primary violation; Lion Capital leave to amend. |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (two-step scienter analysis; strong inference standard)
- Silicon Graphics, Inc. v. Atl. Computer Sys., Inc., 183 F.3d 970 (9th Cir. 1999) (recklessness must reflect conscious misconduct to satisfy scienter)
- New Mexico State Investment Council v. Ernst & Young, 641 F.3d 1089 (9th Cir. 2011) (holistic scienter review; two-step framework)
- In re Northpoint Communications Group, Inc. Securities Litigation, 184 F. Supp. 2d 991 (N.D. Cal. 2001) (contemporaneous information; Rule 9(b) specificity guidance)
- Berson v. Applied Signal Tech., Inc., 527 F.3d 982 (9th Cir. 2008) (core operations & detailed management exposure; scienter standards)