GORDON GAMM, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, DON PRITCHARD, Plaintiffs – Appellants, v. SANDERSON FARMS, INC., JOE F. SANDERSON, JR., MICHAEL D. COCKRELL, LAMPKIN BUTTS, Defendants – Appellees.
Docket No. 18-0284-cv
United States Court of Appeals for the Second Circuit
December 10, 2019
August Term, 2018 (Argued: August 31, 2018)
WINTER, WALKER, AND DRONEY, Circuit Judges.
18-0284-cv
Gordon Gamm, et al. v. Sanderson Farms, Inc., et al.
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
Appeal from a judgment of the United States District Court for the Southern District of New York (Richard M. Berman, Judge), granting appellees’ motion to dismiss appellants’ complaint for failure to plead, with the requisite particularity, securities fraud under
TAMAR A. WEINREB (Marc I. Gross, Jeremy A. Lieberman, Pomerantz LLP, New York, NY, on the brief) for Plaintiffs-Appellants.
JOSHUA Z. RABINOVITZ (Robert J. Kopecky, Nathaniel J. Kritzer, Stacy Pepper, Kirkland & Ellis LLP, Chicago, IL and New York, NY, on the brief) for Defendants-Appellees.
Gordon Gamm and Don Pritchard (“appellants“) appeal from the district court‘s dismissal of their complaint under
BACKGROUND
In assessing a motion to dismiss, a court must view the evidence – and interpret any allegations – in the light most favorable to the plaintiffs, and it must draw reasonable inferences in plaintiffs’ favor. See Eastman Kodak Co. v. Henry Bath LLC, 936 F.3d 86 (2d Cir. 2019).
Appellants Gordon Gamm and Don Pritchard acquired shares of Sanderson Farms, Inc. (“Sanderson Farms“) between December 17, 2013 and November 17, 2016, the “Class Period” alleged in the relevant complaint.
Appellee Sanderson Farms is a fully integrated poultry processing company engaged in the production, processing, marketing, and distribution of fresh and frozen chicken and other prepared food items. Appellees Joe F. Sanderson Jr., Michael Cockrell, and Lampkin Butts serve as the company‘s Chief Executive Officer, Chief Financial Officer, and Chief Operations Officer, respectively.
The chicken2 industry is vertically integrated in that a relevant company tends to own or control every aspect of the breeding, hatching, feeding, basic processing, and selling of chicken. There are high barriers to market entry: A new entrant faces significant start-up costs and lengthy periods of regulatory approval.
In addition, the market for chicken is inelastic. When chicken prices go up, consumers’ buying habits remain about the same. When prices go down, consumers’ buying habits also do not change. Therefore, industry-wide profits are driven by the price of chicken, rather than by increased or decreased market demand.
Because of the inelastic market, the chicken industry has historically been marked by “boom and bust cycles” in which producers increase chicken production in response to rising prices, causing an oversupply in the market. The oversupply of chicken, along with stable demand, then forces down the market price. Chicken becomes less profitable and producers must cut supply until the price eventually rises again.
Appellants explain that this cyclical market pattern changed, beginning in 2008, when Sanderson Farms and several other large chicken producers began colluding in an anticompetitive conspiracy to inflate the price of chicken by coordinating supply reductions and manipulating a chicken price index.
Sanderson Farms accomplished its supply reductions by destroying breeder hens and eggs, exporting eggs from the U.S. starting in 2013, and “dumping” excess chicken inventories in foreign markets where they sold for a fraction of the U.S. price.
Furthermore, Sanderson Farms and its competitors were able to monitor one another‘s reductions, and ensure that all producers maintained low supply through the use of Agri Stats, Inc., a private company that generates chicken industry data reports. Producers provide Agri Stats with detailed data about their operations through actual sales invoices. Agri Stats then generates detailed reports, including in them data on weighted average price, top third average, and bottom third average; on volume traded on a daily, weekly, and monthly basis; on supply and sales volume by detailed product type and form; and on pricing information for whole and cut-up chickens. Although Agri Stats purports to maintain the confidentiality and anonymity of individual companies in their reports, the reports are detailed enough that a reasonably informed producer could discern the identity of competitors.
Sanderson Farms allegedly planned the antitrust conspiracy with its competitors during industry meetings and conferences, including those of the National Chicken Council, of which appellees and its co-conspirators were members. The conspiracy was also facilitated at investor conferences organized by Wall Street analysts and attended by Sanderson Farms and its competitors and through competitor plant tours.
Relatedly, Sanderson Farms and its competitors allegedly manipulated poultry prices by colluding to inflate the price of chicken reflected in an index referred to as the Georgia Dock. Chicken prices are reported by three entities: Urner Barry, the United States Department of Agriculture (“USDA“), and the Georgia Department of Agriculture‘s (“GDA“) Georgia Dock. The USDA and Urner Barry‘s indices are based upon a system of double verification, which includes telephonic and written surveys of chicken producers as well as verification of prices reported to chicken purchasers such as brokers and customers. However, no such verification process existed for the Georgia Dock. This, appellants argue, rendered the Georgia Dock susceptible to manipulation.
Additionally, in order to manipulate the Georgia Dock, appellees would have had to work in coordination with their competitors. This is so because the Georgia Dock has a rule whereby a preliminary dock price calculation is made based on the single price quotation from each company. Then, any company whose quote is more than one cent above or below the initial dock price calculation will not be included in the dock price for that week. Its quote is taken out and the dock price is recalculated without it. The purpose of this rule is to prevent one company from having the ability to greatly influence the price.
Beginning in January 2015, the Georgia Dock price began to depart significantly from the pricing reflected by the other indices, which appellants attribute to Sanderson Farms and its competitors collectively submitting similar, artificially high prices to the Georgia Dock. In August 2016, the USDA stopped using the Georgia Dock index, and the GDA suspended the index permanently in December 2016.
Specifically, in its Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC“) on December 17, 2013, Sanderson Farms stated “The Registrant [Sanderson Farms] is subject to significant competition from regional and national firms in all markets in which it competes.” SAC ¶ 82. “The increase in cash flows from operating activities of $47.0 million resulted primarily from improved market prices for poultry products during fiscal 2013 as compared to fiscal 2012, and a $27.2 million decrease in live chicken, feed, and egg inventories attributable to the declining costs of feed grains experienced as we moved through the fourth quarter of fiscal 2013.” SAC ¶ 84.
In its Quarterly Report on Form 10-Q filed with the SEC on February 25, 2014, Sanderson Farms represented that “The Company competes with regional and national firms, some of which have greater financial and marketing resources than the Company.” SAC ¶ 87. In an accompanying press release, appellees stated that Sanderson Farms “competes with regional and national firms.” SAC ¶ 88.
Sanderson Farms made similar disclosures on May 29, 2014, and every subsequent quarterly disclosure through August 25, 2016. These statements were materially false and misleading, according to appellants, because “Sanderson Farms did not compete with its industry peers but instead engaged in collusive conduct, facilitated by their extensive information sharing via Agri Stats, to prop up broiler prices through systemic reductions of the broiler supply, destruction of eggs, and manipulation of poultry prices reflected on the Georgia Dock index.” SAC ¶ 138. Appellants further claimed that the undisclosed anticompetitive conduct “rendered Sanderson Farms vulnerable to litigation and regulatory scrutiny for potential violations of the federal antitrust laws as well as reputational damage.” Id.
In the fall of 2016, several antitrust complaints were filed against U.S. chicken producers, including the following: On September 2, 2016, Maplevale Farms, Inc. filed its antitrust class action complaint (the “Maplevale Complaint“) in the Northern District of Illinois against Sanderson Farms and several other poultry producers, alleging that they had conspired since 2008 to manipulate the prices of chicken in violation of the Sherman Antitrust Act,
On October 7, 2016, Pivotal Research downgraded Tyson from “Hold” to “Sell” citing the “powerfully convincing” allegations of price manipulation by the defendants in the Maplevale Complaint. Soon after, Sanderson Farms’ share price fell $4.03 or 4.32%, to close at $89.15 on October 7, 2016.
On November 3, 2016, the New York Times published an article entitled “You Might be Paying Too Much for Your Chicken,” which revealed that the United States Department of Agriculture had started an inquiry into the Georgia Dock index. The article pointed out that the Georgia Dock price for chicken differed significantly from the prices provided in
On November 17, 2016, the Washington Post published an article entitled, “If you thought you were paying fair prices for chicken at the supermarket, think again.” The article revealed new information, provided by Arty G. Schronce of the GDA, suggesting issues with the credibility of the Georgia Dock index. The price of Sanderson Farms shares continued to fall for the next three consecutive trading days, closing on November 21, 2016 at $78.98, or a three-day loss of almost 8%.
a) Procedural History
This case is one of several shareholder suits brought against chicken producers following the wave of antitrust suits and accompanying stock price drops.3
On October 28, 2016, appellants filed a putative class action in the Southern District of New York on behalf of all persons who purchased Sanderson Farms shares between December 17, 2013 and November 17, 2016. On February 13, 2017, appellants Gordon Gamm and Don Pritchard were appointed lead plaintiffs, and Pomerantz LLP was appointed lead counsel. Gamm et al., v. Sanderson Farms, Inc., et al., 16-8420, Dkt. No. 23 (Feb. 13, 2017). On March 30, 2017, appellants filed an amended complaint.
On May 18, 2017, at a conference before Judge Berman, counsel for the parties set a briefing schedule for a motion to dismiss and response. Judge Berman, pursuant to his individual practices, requested that the parties submit pre-motion letters. The court explained to appellants that, through the pre-motion letters, appellants would be able to determine appellees’ “bases” for dismissal, and amend their complaint a second time, accordingly. However, the court cautioned that any second amended complaint “would be the last amendment,” stating, that “if [appellants] were to lose the motion [to dismiss]” the court would not provide further leave to amend.
Pre-motion letters were submitted on May 25 and June 1, 2017. On June 15, 2017, appellants filed a second amended complaint, alleging that appellee Sanderson and its Chief Executive Officer Joe F. Sanderson, Jr., Chief Financial Officer Michael D. Cockrell, and Chief Operations Officer Lampkin Butts violated
Appellees moved to dismiss for failure to adequately plead the elements of securities fraud on June 29, 2017. On January 19, 2018, the district court granted appellees’ motion to dismiss with prejudice. Decision and Order, Gamm et al., v. Sanderson Farms, Inc., et al., 16-8420, Dkt. No. 55 (S.D.N.Y. Jan. 19, 2018). Observing that the case was “strikingly similar” to the suit against Tyson Foods, Inc., the district court concluded that because “[p]laintiffs fail to support their allegation of a chicken supply reduction conspiracy with particularized facts,” they had not properly alleged a
DISCUSSION
We review de novo a district court‘s dismissal pursuant to
The pleadings are typically subject to
This appeal involves a different pleading standard. Claims of fraud must be “state[d] with particularity” under
[i]n any private action arising under this chapter in which the plaintiff alleges that the defendant— (A) made an untrue statement of a material fact; or (B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading; the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.
We have held that Rule 9(b) and the PSLRA require a securities fraud complaint to “(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.” Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993). This rule “serves to provide a defendant with fair notice of a plaintiff‘s claim, safeguard his reputation from improvident charges of wrongdoing, and protect him against strike suits.” ATSI Commc‘ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007).
To state a claim for securities fraud under
Appellants acknowledge that their allegations of misstatements and omissions - also known as the “falsity” prong of a 10(b) action – must be pleaded with particularity. However, they disagree as to whether facts of the underlying antitrust conspiracy must similarly be pleaded with particularity or must merely meet the Rule 8 plausibility standard. Appellants argue that “there is no public policy reason” supporting the use of a heightened pleading standard for allegations of anticompetitive conduct “simply because they underpin a securities fraud class action.” They argue that their complaint was “replete with factual allegations” providing sufficient notice to appellees. Appellees respond that the district court was correct to require that allegations of antitrust conspiracy be pleaded with particularity.
Under Rule 9(b) and the PSLRA, the circumstances of a fraud include “the basis” for that contention. First, in this matter, the alleged fraud and the facts of the alleged anticompetitive conspiracy are inseparable and the clear language of the statute requires that underlying facts be pleaded with particularity. As discussed above,
District courts within this circuit have correctly taken the view that when the nondisclosure of an illegal act is the basis of a 10(b) complaint, the illegal act must be alleged with particularity. See, e.g., In re Axis Capital Holdings Ltd. Sec. Litig., 456 F. Supp. 2d 576, 585 (S.D.N.Y. 2006) (“If the complaint fails to allege facts which would establish such an illegal scheme, then the securities law claims premised on the nondisclosure of the alleged scheme are fatally flawed.“); In re Banco Bradesco S.A. Sec. Litig., 277 F. Supp. 3d 600, 631 (S.D.N.Y. 2017) (“As part of the ‘circumstances constituting fraud,‘” an alleged bribery scheme, nondisclosure of which formed the basis of the securities suit, “must be pleaded with particularity.“) (quoting
District courts in other circuits that have considered follow-on securities class actions arising out of allegations of antitrust conspiracy have all concluded that antitrust schemes must be pleaded with particularity.4
Applying that standard here, appellants were required to plead with particularity sufficient facts to support their contention that Sanderson Farms’ financial disclosures were misleading. This necessarily requires that facts of the underlying anticompetitive conduct be pleaded with particularity. Otherwise, the complaint provides no basis as to what rendered Sanderson‘s statements false or misleading. Because Sanderson Farms’ statements were materially false or misleading only to the extent that anticompetitive conduct actually occurred, appellants must plead sufficient - though not exhaustive - facts describing the essential elements of that underlying conduct.
Requiring that illegal acts underpinning a securities fraud suit be pleaded with particularity also comports with the stated intent and public policy rationale of the PSLRA. The requirements of Rule 9(b) and the PSLRA operate “to deter strike suits wherein opportunistic private plaintiffs file securities fraud claims of dubious merit in order to exact large settlement recoveries.” Novak, 216 F.3d at 306. See also
A stock-issuing company like Sanderson cannot be required, whenever accused of illegal activity, to simultaneously defend itself in an accompanying securities fraud
The clear language of the statute, the existing case-law, and the stated intent of the securities laws all lead us to recognize that, when a complaint claims that statements were rendered false or misleading through the non-disclosure of illegal activity, the facts of the underlying illegal acts must also be pleaded with particularity, in accordance with the heightened pleading requirement of Rule 9(b) and the PSLRA.
In practical terms, the pleading standard required appellants to have alleged the basic elements of an underlying antitrust conspiracy, which are: “(1) a contract, combination, or conspiracy; (2) in restraint of trade; (3) affecting interstate commerce.” Maric v. St. Agnes Hosp. Corp., 65 F.3d 310, 313 (2d Cir. 1995). The first element, and the “crucial question” in any antitrust claim, has to do with “whether the challenged anticompetitive conduct stems from independent decision[s] or from an agreement, tacit or express.” Twombly, 550 U.S. at 553. An agreement can be alleged through direct evidence; however, in most antitrust cases “this type of ‘smoking gun’ can be hard to come by, especially at the pleading stage.” Mayor and City Council of Baltimore, Md. v. Citigroup, Inc., 709 F.3d 129, 136 (2d Cir. 2013). As an alternative, a complaint may “present circumstantial facts supporting the inference that a conspiracy existed.” Id. This inference may arise through the alleging of “conscious parallelism, when such interdependent conduct is accompanied by circumstantial evidence and plus factors.” Todd v. Exxon Corp., 275 F.3d 191, 198 (2d Cir. 2001). Such “plus factors” may include: “a common motive to conspire, evidence that shows that the parallel acts were against the apparent individual economic self-interest of the alleged conspirators, and evidence of a high level of interfirm communications.” Twombly v. Bell Atlantic Corp., 425 F.3d 99, 114 (2d Cir. 2005). In sum, an agreement may be alleged through conscious parallelism together with plus factors, but “alleging parallel conduct alone is insufficient, even at the pleading stage.” Citigroup, 709 F.3d at 136.
Although appellants do allege that Sanderson engaged in “anticompetitive” conduct, there is virtually no explanation as to how that collusive conduct occurred, and whether and how it affected trade.
On the first element – tacit agreement – appellants allege mere parallel conduct, and lack indicia of mutuality or otherwise interdependent action. Specifically, appellants allege that Sanderson Farms and its industry peers engaged in supply reductions through a variety of means, including destroying broiler breeder hens, Compl. ¶ 38; destroying eggs, Compl. ¶¶ 38, 41; exporting excess eggs and flocks, Compl. ¶¶ 38, 39; and dumping excess inventory in foreign markets, Compl. ¶ 40. But appellants provide no facts alleging that Sanderson or its peers actually reduced supply, and that these reductions were the result of an agreement, or were even interrelated. Appellants instead merely use stock phrases such as “worked in concert” and “coordinated.” Appellants could have alleged when Sanderson Farms decided on its course of supply reduction, which industry peers were a part of that decision, how specific supply reductions were performed by each of the different poultry producers, what information Sanderson Farms knew about its peers’ supply reductions, if any, and — perhaps most basic of all — whether Sanderson Farms
Appellants’ “plus factors” fail to remedy the deficient pleadings. Although appellants allege that, through Agri Stats, Sanderson Farms and its industry peers were able to “facilitate” the supply reductions, they do not allege when and how Sanderson Farms used Agri Stats to know of their peers’ supply reductions. Rather, appellants merely allege that by reverse-engineering the Agri Stats data, Sanderson Farms “could” determine whether or not its peers were reducing supply. Compl. ¶ 49. Similarly, they allege that Sanderson Farms had “numerous opportunities to conspire” through its participation in trade associations and plant tours, and that the general structure of the poultry market made it “susceptible to price-fixing.” Compl. ¶¶ 69 and 74. But the law is clear that “[t]he mere opportunity to conspire does not by itself support the inference that such an illegal combination actually occurred.” Capital Imaging Associates, P.C. v. Mohawk Valley Medical Associates, Inc., 996 F.2d 537, 545 (2d Cir. 1993). See also AD/SAT, Div. of Skylight, Inc. v. Associated Press, 181 F.3d 216, 234 (2d Cir. 1999) (“[A]lthough the nature of trade associations is such that they are frequently the object of antitrust scrutiny, every action by a trade association is not concerted action by the association‘s members.“) (internal citation omitted).
Separately, appellants allege that Sanderson Farms and its peers manipulated the pricing reported to the Georgia Dock, and that this manipulation would necessarily require coordination because “[a]s a producer, your high price quote doesn‘t work unless others go along because it will be an outlier that gets thrown out per the GDA‘s methodology.” Compl. ¶ 62. The detail of this allegation exceeds that of the allegations of supply reductions because here appellants have provided a theory for why price reporting would have had to be coordinated. However, the allegation regarding the Georgia Dock is still insufficient. Appellants have pleaded no facts regarding Sanderson Farms’ communications with the Georgia Dock such as what information Sanderson Farms provided to the Georgia Dock, on what occasions, and whether it was false.
For these reasons, appellants have failed to plead the first element of antitrust conspiracy agreement at even a basic level, much less with particularity. Furthermore, on the second and third elements of an antitrust conspiracy, appellants have provided no allegations. The complaint is entirely silent as to whether the supply reductions or the Georgia Dock manipulations unreasonably restrained trade, and whether that restraint affected interstate commerce. This complaint merely attempts to “establish fraud by innuendo,” and accordingly, its pleadings are insufficient. Chicago Title & Trust Co. v. Fox Theatres Corp., 182 F. Supp. 18, 33 (S.D.N.Y. 1960).
In view of our disposition of this matter, we need not reach the issues of scienter, reliance, or control person liability under
CONCLUSION
For the foregoing reasons, we hold that when a securities fraud complaint claims that statements were rendered false or misleading through the nondisclosure of illegal activity, the facts of the underlying illegal acts must be pleaded with particularity
WINTER, WALKER, AND DRONEY
Circuit Judges