In Re Crocs, Inc. Securities Litigation
2011 U.S. Dist. LEXIS 19212
D. Colo.2011Background
- Crocs, Inc. and related defendants faced a consolidated securities class action under the Securities Exchange Act arising from Crocs’ 2006–2008 inventory and data-management problems allegedly concealed from investors.
- Plaintiffs allege senior Crocs executives, the auditor Deloitte & Touche, and Crocs’ board/insiders violated Sections 10(b) and 20(a) and that Deloitte violated Section 10(b).
- The class period spans April 2, 2007 to April 14, 2008, encompassing numerous filings (10-Ks and 10-Qs) and related press releases describing Crocs’ growth and inventory strategies.
- Crocs’ growth allegedly relied on outdated inventory/tracking systems (Excel-based), problematic Rotterdam European distribution, and counterfeiting concerns, leading to large, unsellable inventories and later write-downs.
- The court granted motions to dismiss, finding no viable Section 10(b) claims or scienter against the named Crocs defendants, and dismissed Section 20(a) and 20A claims as to various defendants; the case and related motions were all resolved in Crocs’ favor.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the PSLRA pleading standards were met for the 10(b) claims. | Adams factors show strong inference of fraud. | Pleading insufficient; misstatements/omissions lack strong scienter. | Claims not sufficiently pled; dismissed. |
| Whether plaintiffs sufficiently pleaded scienter under Tellabs/Adams. | Comprehensive facts show knowledge of inventory problems. | Management missteps; no cogent inference of knowing fraud. | No strong inference of scienter; dismissal affirmed. |
| Whether the Affiliated Ute reliance presumption applies. | Omissions predominate; reliance presumed. | Misrepresentations central; reliance not automatically presumed. | Affiliated Ute presumption applies; but claims still fail on merits. |
| Whether Section 20A insider-trading claims survive against Crocs and insiders. | Internal insider trading connected to misstatements. | No predicate Section 10(b) violation; no external tipping; no 20A claim. | No Section 20A claims against insiders or controlling persons. |
| Whether Deloitte is liable as auditor under PSLRA pleading requirements. | Red flags and access to confidential information show scienter. | Negligence insufficient; no specific knowledge of fraud by Deloitte. | No scienter shown; Deloitte’s motion to dismiss granted. |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (established plausibility standard for pleading a claim)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (requires a holistic evaluation of scienter; strong inference must be cogent)
- Adams v. Kinder-Morgan, Inc., 340 F.3d 1083 (10th Cir. 2003) (adopts Adams factors for evaluating scienter and pleadings under PSLRA)
- In re City of Philadelphia v. Fleming Companies, Inc., 264 F.3d 1245 (10th Cir. 2001) (materiality and context-based evaluation of statements)
- Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (U.S. 1972) (presumption of reliance in omissions cases; affects 10(b) claims)
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (U.S. 1976) (establishes scienter as knowledge or extreme recklessness)
- Dronsejko v. Thornton, 632 F.3d 658 (10th Cir. 2011) (limits scienter to knowledge or recklessness; GAAP violations alone insufficient)
- Zucco Partners v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009) (cautions on relying solely on certifications for scienter)