487 F.Supp.3d 111
E.D.N.Y.
2020
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Background

  • Revlon implemented a company-wide SAP ERP system beginning in 2014, culminating in a go-live at its Oxford, NC manufacturing facility on February 1, 2018.
  • The SAP roll-out caused integration and training failures that produced production delays, a two-month backlog at Oxford, lost sales (disclosed later as ~$64 million) and incremental remediation charges (~$53.6 million).
  • Revlon made pre-launch risk disclosures (2016 10-K and other filings) and repeatedly discussed ongoing disruptions and remediation efforts in its 2017 10-K, quarterly 10-Qs and earnings calls; it later disclosed a material weakness in internal control over financial reporting (ICFR) in March 2019.
  • Plaintiff Lachman filed a putative securities-fraud class action (Mar. 3, 2017–Mar. 28, 2019) alleging that Revlon and certain current/former officers made materially false or misleading statements and omissions about the ERP rollout and ICFR, violating §10(b)/Rule 10b-5 and asserting §20(a) control-person claims.
  • Defendants moved to dismiss under Rules 9(b) and 12(b)(6). The district court found plaintiffs failed to plead actionable misstatements/omissions or a strong inference of scienter under the PSLRA and dismissed the complaint without prejudice, allowing limited opportunity to move for leave to amend.

Issues

Issue Plaintiff's Argument Defendant's Argument Held
Were defendants’ pre-launch statements about SAP materially false or misleading? Revlon downplayed known risks and failed to disclose measures/known problems. 10-K and proxy warned of ERP risks; statements were general risk disclosures, opinion, or puffery. Not actionable — plaintiffs did not plead specific omitted facts or that defendants knew additional material risks when speaking.
Were post-launch statements (10-Ks, 10-Qs, earnings calls) materially false/misleading about remediation and impact? Defendants minimized severity/progress and misrepresented remediation success. Company disclosed disruptions, losses and ongoing remediation; statements were accurate, qualified, or nonactionable optimism. Not actionable — disclosures and surrounding context undercut any claim the statements were false; one isolated statement lacked materiality.
Were SOX certifications and ICFR statements false? Certifications and statements that ERP would not materially affect ICFR were untrue. Certifications were statements of opinion/knowledge; no facts alleged showing defendants knew of a material weakness when certifying. Not actionable — plaintiffs failed to allege defendants did not genuinely believe the certifications or had actual knowledge of a material weakness.
Did plaintiffs adequately plead scienter and control-person liability? Recklessness or intent inferred from implementation failures, meetings, and officers’ roles; control-person claims follow. No motive or concrete personal benefit alleged; no specific access-to-contradictory-information pleaded; §20(a) depends on a primary violation. Not pleaded — scienter inference not cogent as required by Tellabs; §20(a) dismissed because primary claims fail.

Key Cases Cited

  • Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (standards for pleading scienter: inference must be cogent and at least as compelling as nonfraudulent inference)
  • Setzer v. Omega Healthcare Inv’rs, Inc., 968 F.3d 204 (2d Cir. 2020) (elements of a §10(b) claim)
  • ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (pleading fraud with particularity under Rule 9(b) and PSLRA)
  • Dura Pharms., Inc. v. Broudo, 544 U.S. 336 (2005) (PSLRA and loss-causation principles referenced in securities pleading contexts)
  • Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility standard for Rule 12(b)(6))
  • Ashcroft v. Iqbal, 556 U.S. 662 (2009) (application of Twombly plausibility standard)
  • ECA, Local 134 IBEW Joint Pension Tr. of Chicago v. JPMorgan Chase Co., 553 F.3d 187 (2d Cir. 2009) (heightened pleading in securities cases)
  • Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004) (particularity requirements for misstatement allegations)
  • Basic Inc. v. Levinson, 485 U.S. 224 (1988) (materiality standard in securities law)
  • Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011) (limits on affirmative duty to disclose; omissions actionable when duty exists)
  • Levitt v. J.P. Morgan Securities, Inc., 710 F.3d 454 (2d Cir. 2013) (duty to disclose when choosing to speak on a topic)
  • Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 575 U.S. 175 (2015) (when statements of opinion are actionable)
  • Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) (motive and access-to-information pleading standards)
  • Ganino v. Citizens Utilities Co., 228 F.3d 154 (2d Cir. 2000) (scienter requirement: intent to deceive, manipulate, or defraud)
  • Dynex Capital Inc. v. (lead case), 531 F.3d 190 (2d Cir. 2008) (corporate scienter and imputation to corporation)
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