Shаh RAHMAN, Individually and On Behalf of All Others Similarly Situated, Appellant v. KID BRANDS, INC.; Bruce G. Crain; Guy A. Paglinco; Raphael Benaroya.
No. 12-4257
United States Court of Appeals, Third Circuit.
Filed: Nov. 15, 2013.
Submitted under Third Circuit LAR 34.1(a) Oct. 8, 2013.
We agree with Hernandez that the agency‘s finding is not supported by substantial evidence. In order to be eligible for cancellation of removal, Hernandez had to show (amоng other things) that he had been physically present for a continuous period of ten years preceding his April 2007 Notice to Appear. Thus, one key fact that Hernandez had to establish was his continuous presence in the United States starting in April 1997.
As the government concedes, the IJ made no adverse credibility determination in this case. Without such a finding, this Court assumes that Hernandez‘s testimony is credible. See
Hernandez also introduced the birth certificate of his oldest child, on which Hernandez is listed as the father. The child was born in New York on March 16, 1998 to an American citizen. In combination with Hernandez‘s own testimony that he entered in July of 1996, the birth certificate constitutes strong circumstantial evidence that Hernandez was present in this country about nine months prior to March of 1998, i.e., in June of 1997. Hernandez also offered proof of his address in Connecticut from 2001 to 2006 and other evidence of his presence in the United States in the 2000s.
Taking these pieces of evidence together, and in the absence of any evidence from the government tending to disprove Hernandez‘s presence, we find that the record permits only one reasonable conclusion: that Hernandez was continuously present in the United States from July of 1996 onward. We will therefore remand the case to the agency, where Hernandez will be able to present the new evidence of hardship in an attempt to reopen his case.
CONCLUSION
Because we may not review the agency‘s exercise of discretion, we DISMISS No. 10-4100. For the reasons discussed above, we REMAND No. 11-1833 for further proceedings consistent with this opinion.
Robert J. Del Tufo, Skadden, Arps, Slate, Meagher & Flom, Newark, NJ, Jay B. Kasner, Christopher R. Gette, Rachel J. Barnett, Matthew S. Barkan, Andrew Muscato, Skadden, Arps, Slater, Meagher & Flom, New York, NY, for Appellees Kid Brands, Inc. and Raphael Benaroya.
Eric B. Fisher, Dickstein Shapiro, New York, NY, Jeffrey Rhodes, Dickstein Shapiro, Washington, DC, Stefano V. Calogero, Wildels, Marx, Lane & Mittendorf, Madison, NJ, for Appellee, Bruce G. Crain.
Rebecca Brazzano, C. Dennis Southard, IV, David A. Wilson, Thompson Hine, Washington, DC, for Appellee, Guy A. Paglinco.
BEFORE: FUENTES, GREENBERG, and BARRY, Circuit Judges.
OPINION OF THE COURT
GREENBERG, Circuit Judge.
I. INTRODUCTION
Shah Rahman, now the appellant, brought this federal securities class action on March 22, 2011, against defendant Kid Brands, Inc., a New Jersey corporation, and against the individual defendants, Bruce G. Crain, Guy A. Paglinco, and Raphael Benaroya, officers of Kid Brands (collectively with Kid Brands “appellees“). Kid Brands is in the business of importing inexpensive infant furniture and products for the purpose of ultimate resale to consumers. The complaint alleged that defendants, now appellees, violated (1) Section 10(b) of the Securities Exchange Act (the “Exchange Act“) and SEC Rule 10b-5 and (2) and Sеction 20(a) of the Exchange Act. In particular, the complaint alleged that defendants misled investors by artificially inflating Kid Brands stock price by issuing deceptive public financial reports and press releases dealing with Kid Brands’ compliance with customs laws and overall financial performance. The putative class included Rahman and all others similarly situated who purchased or obtained Kid Brands common stock between March 26, 2010, and August 16, 2011, inclusive (the “class period“).
Subsequently, Rahman filed a first amended complaint (“FAC“) which the District Court dismissed without prejudice on defendants’ motion, on March 8, 2012,
Kid Brands operates through four wholly owned subsidiaries: Kids Line, LLC, Sassy, Inc., LaJobi, Inc., and CoCaLo, Inc.1 Kid Brands primarily imports the inexpensive furniture in which it deals from China for ultimate resale to the public. Kid Brands is a substantial business as its net sales in 2010 were $276,000,000. Under “anti-dumping” laws, Kid Brands is subject to duties that the United States imposes beyond those ordinarily assessed to discourage the importation of some products at very low cost. During the
class period, Crain was the president and chief executive officer of Kid Brands and served on its board of directors, and Paglinco was its vice president and chief financial officer. Paglinco retained both positions after the close of the class period. In September 2011, after the close of the class period, Benaroya, previously an outside director, was appointed interim chief executive officer.
The SAC alleges that Kid Brands obscured the origin of its Chinese-manufactured products to reduce import duties and increase profits, and then made misleading statements regarding its financial health. Rahman supported the SAC with statements from six confidential witnesses who had been employees of Kid Brands or its subsidiaries.2 Rahman believes that the statements support his contention that defendants engaged in repeated violations of customs laws. He described the witnesses in the SAC as follows:
- CW1: A former LaJobi employee who worked in the outbound shiрping department from March 2010-March 2012 and dealt with the products entering and exiting the distribution center.
- CW2: A former LaJobi employee who worked in the recovering and shipping department from June 2011-January 2012 and dealt with inbound and outbound shipments of products.
- CW3: A former LaJobi distribution manager who worked for the company from May 2000-November 2010. CW3 oversaw safety and security at a Cranbury, New Jersey, warehouse and dealt with the packing slips.
CW4: A former Kid Brands employee who worked in the internal auditing department as a Sarbanes Oxley consultant from March 2004-August 2009 and reviewed the internal financial informatiоn for Kid Brands and its subsidiaries. - CW5: A former LaJobi sales and forecast demand manager who worked at the company from March 2010-April 2011. CW5 had personal knowledge and familiarity with the subsidiary‘s operations, database and inventory tools.
- CW6: A former Kids Line employee who worked in packaging design from June 2011-March 2012 and whose statements relate to his discharge from that employment.
The immediate event that led to this litigation occurred in December 2010, when U.S. Customs and Border Protection informed Kid Brands that it was conducting a “Focused Assessment” of its import practices and procedures. Following this notification, Kid Brands’ board of directors initiated an investigation of Kid Brands’ practices and, for that purpose, hired the outside law firm of Skadden, Arps, Slate, Meagher & Flom. Kid Brands, however, did not publicly disclose that it was subject to the Focused Assessment or that it had hired the law firm until after it received a report from the firm. Eventually on March 15, 2011, Kid Brands revealed that LaJobi had violated United States law by misidentifying the manufacturer and shipper of certain products, that it had discharged two LaJobi employees, and that it anticipated needing to pay $7 million in fines and charges to resolve issues largely arising from the Focused Assessment. As might be expected, this information had a negative impact on Kid Brands’ stock price. Thus, at the end of the day on March 15, 2011, Kid Brands’ stock closed at $6.91 a share, a large drop from its prior day closing price of $9.24. Five months later, on August 15, 2011, Kid Brands filed a federal Form 10-Q for the quarter ending June 30, 2011, in which it indicated that CoCaLo and Kids Line also had evaded custom duties. The next day, August 16, 2011, Kid Brands issued a Form 8-K that estimated its total liabilities to be in excess of $10 million for wrongful practices extending over a period of nearly five years. Kid Brands’ stock closed at $4.49 per share оn August 15, 2011, at $3.65 the following day, and at $2.97 on August 22, 2011.
II. JURISDICTION AND STANDARD OF REVIEW
The District Court had jurisdiction pursuant to
III. DISCUSSION
The PSLRA established heightened pleading requirements for a plaintiff to meet in order to plead a cause of action successfully in class actions alleging securities fraud. Thus, it requires that a comрlaint ““state with particularity both the facts constituting the alleged violation, and the facts evidencing scienter, i.e., the defendant‘s intention ‘to deceive, manipulate,
Pursuant to its authority under Section 10(b) of the Exchange Act, the SEC issued Rule 10b-5, which renders it unlawful for any person:
- To employ any device, scheme, or artifice to defraud,
- To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made ... not misleading, or
- To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
The Supreme Court long has construed the rule to provide a basis for individuals to bring private securities fraud actions on behalf of putative classes. Tellabs, 551 U.S. at 318, 127 S.Ct. at 2507. To state a Rule 10(b) claim, plaintiffs “must ‘allege defendants made a misstatement or an omission of material fact with scienter in connection with the purchase or the sale of a security upon which plaintiffs reasonably relied and plaintiff[s‘] reliance was the proximate cause of their injury.‘” Avaya, 564 F.3d at 251 (quoting Winer Family Trust v. Queen, 503 F.3d 319, 326 (3d Cir.2007)). Under the PSLRA‘s heightened pleading standard, a private securities complaint involving an allegedly “false or misleading statement must: (1) ‘specify each statеment alleged to have been misleading [and] the reason or reasons why the statement is misleading,’
The District Court found that some, but not all, of defendants’ statements satisfied the first, i.e., materiality prong of the PSLRA‘s heightened pleading requirements. An allegation of materiality is crucial because “[t]he first requirement under the PSLRA obliges a plaintiff to specify each allegedly misleading statement, the reason or reasons why the statement is misleading, and, if an allegation is made on information and belief, all facts supporting that belief with particularity.” Avaya, 564 F.3d at 259 (citations omitted).5 An allegation that a defendant uttered an immaterial statement will not satisfy the requirement that the complaint include a “false or misleading statement.” 6
In considering the SAC, the District Court indicated that it did not believe that a jury could find fault with Kid Brands’ delay in the disclosure of the information regarding LaJobi‘s misidentification of the manufacturer and shipper of its products until March 15, 2011. The Court reached this conclusion taking into account “[d]efendants’ efforts to investigate the matter through an independent law firm and the practical considerations regarding the timing of the disclosures.” J.A. at 9. On the other hand, the Court held that the delayed August 2011 disclosure regarding the other subsidiaries’ violations “was sufficiently misleading and [as] such could be found material by a jury.” Id.
Though we are inclined to agree with the District Court‘s latter but not former conclusion, we do not make a definitive holding on the point as we have no need to do so. We think that Rahman makes a strong argument when he contends that a jury reasonably could have found fault under Rule 10b-5 with Kid Brands’ failure to disclose the Focused Assessment and the resultant internal investigation prior to March 15, 2011, inasmuch as this information was available to Kid Brands before that date and surely was negative. Of course, we recognize that in explaining its conclusion the District Court referenced Kid Brands’ “practical considerations” for delaying the announcement. Yet the Court did not detail these considerations beyond indicating the need for Kid Brands to investigate the matter to give out accurate information. Id. Arguably Kid Brands should have released information with respeсt to the Focused Assessment and internal investigation on a tentative basis before March 15, 2011.
But our possible partial disagreement with the District Court ultimately does not matter because we agree with it that Rahman failed to plead scienter with sufficient particularity. We explained in Avaya that “under the PSLRA‘s ‘[e]xacting’ pleading standard for scienter, ‘any
[W]here plaintiffs rely on confidential personal sources but also on other facts, they need not name their sources as long as the latter facts provide an adequate basis for believing that the defendants’ statements were false. Moreover, even if personal sources must be identified, there is no requirement that they be named, prоvided they are described in the complaint with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged.
We have continued to apply this standard even after the Supreme Court‘s decision in Tellabs. In Avaya, we explained that when dealing with confidential witnesses, courts should assess the “detail provided by the confidential sources, the sources’ basis of knowledge, the reliability of the sources, the corroborative nature of other facts alleged, including from other sources, the coherеnce and plausibility of the allegations, and similar indicia.” 9 Avaya, 564 F.3d at 261 (quoting Chubb, 394 F.3d at 147). If, after that assessment, “anonymous source allegations are found wanting with respect to these criteria ... [courts] must discount them steeply.” Id. at 263. We explained in Avaya that such a discount “is consistent with Tellabs‘s teaching that omissions and ambiguities count against inferring scienter under the PSLRA‘s particularity requirements,” but if “a complaint‘s confidential witness allegations are adequately particularized, we will not dismiss them simply on account of their anonymity.” Id. (footnote omitted) (internal quotation marks omitted). We concur with the District Court‘s conclusion that such discounting is necessary in this case.
Regarding the customs duty violations, CW1 stated that he was in charge of relabeling furniture from China with stickers containing a different country of origin, and CW2 confirmed his account. According to both witnesses, director of operations Myles McGrath demonstrated how to apply the new labels, and another manager (referred to only as “Brenda“) provided the labels.10 According to CW2, this prac-
CW5 offers general information regarding meetings between the Kid Brands and LaJobi leadership including the Kid Brands CEO. Yet the fact that a CEO visited a subsidiary‘s premises to meet with its president will not establish that the CEO had knowledge of illegal activities at the subsidiary. After all, it would be expected that the CEO would visit his company‘s subsidiaries in the course of conducting legitimate business. CW3 provides even more abstract commentary, suggesting that he and his coworkers in the LaJobi distribution center “hа[d] a feeling something suspicious was going on.” 12 J.A. at 208 (SAC ¶ 142). CW6, the only confidential witness from Kids Line, was enmeshed in an employment dispute that had no bearing on the customs violations in question. Of all the confidential witnesses, the statements of CW4 were the most plausible and he was in a position to have what was potentially the most damaging information. Yet even CW4, who allegedly spent more than five years reviewing Kid Brands’ internal financial information, offers little more than generalized allegations with few specifics and even less concrete support.
It also is significant that Rahman did not demonstrate thаt the individual defendants had a motive for their wrongful conduct. Though it is not necessary to plead motive to establish that a defendant acted with scienter, its presence can be persuasive when conducting a holistic review of the evidence. See Tellabs, 551 U.S. at 325-26, 127 S.Ct. at 2511. Of course, “[m]otives that are generally possessed by most corporate directors and officers do not suffice; instead, plaintiffs must assert a concrete and personal bene-
In considering the adequacy of the SAC under the PSLRA, we must address the doctrine of “corporate scienter,” alternatively referred to as “collective scienter.” A plaintiff can use corporate or collective scienter to plead an inference of scienter against a corporate defendant without raising the same inferences required to attribute scienter to an individual defendant. See Glazer Capital Mgmt., LP v. Magistri, 549 F.3d 736, 743 (9th Cir.2008).14 We, however, neither have accepted nor rejected the doctrine of corporate scienter in securities fraud actions, and we do not do so now because the allegations in the SAC cannot support the existence of corporate or collective scienter. For comparison, we refer to City of Monroe Employees Retirement System v. Bridgestone Corp., 399 F.3d 651 (6th Cir.2005), a case that does recognize the adequacy of a claim of corporate scienter. In Bridgestone, the plaintiff alleged that a corporate subsidiary of the defendant engaged in a massive cover-up to hide the fact thаt tires it manufactured were rupturing and causing a high number of accidents. Id. at 656-59. But in this case, there is no credible evidence to suggest that Kid Brands covered up the customs violations at its subsidiaries. Quite to the contrary, when U.S. Customs notified Kid Brands of the Focused Assessment, Kid Brands hired an outside law firm to conduct an internal investigation and, when it received a report from the firm, it publicly disclosed both the existence of the Focused Assessment and the remedial steps it had taken. Thus, even if we recognize the doctrine of corporate scienter, this case would not come within the doctrine and the SAC wоuld not survive the motion to dismiss.
Rahman also relies on Avaya, in which we recognized a core operations doctrine in a case in which the CEO and CFO of a communications company affirmatively denied the existence of intense price competition at a time when the company actively was granting steep price discounts. We acknowledged the shareholders’ contention “that since competition, pricing policies, and pricing concessions [were] ‘core matters’ of central importance to Avaya and its principal executives, a ‘core operations inference’ supports scienter.” Avaya, 564 F.3d at 268 (emphasis added). But reliance on Avaya is unavailing in this case because in Avaya the individuals who denied that there was intense competition were responding to pointed inquiries from analysts during multiple conference calls that addressed pricing problems. No such circumstances are present here.
Moreover, even aside from its factual differences, Avaya has limited precedential value in this case because in Avaya we cited approvingly to an opinion of the Court of Appeals for the Ninth Circuit in Metzler Investment GMBH v. Corinthian
In reaching our result we recognize that in Tellabs the Supreme Court described a scienter inquiry as addressing the question of “whether all of the facts alleged, taken cоllectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard.” Tellabs, 551 U.S. at 323, 127 S.Ct. at 2509 (emphasis in original). In conducting this inquiry, a court must weigh “plausible opposing inferences” by comparing competing conclusions that can be drawn from the facts.15 Id. at 323, 127 S.Ct. at 2509. Yet the Supreme Court warned that “[t]he inference that the defendant acted with scienter need not be irrefutable, i.e., of the ‘smoking-gun’ genre, or even the ‘most plausible of competing inferences.‘” Id. at 324, 127 S.Ct. at 2510 (citation omitted). Nonetheless, we find that the District Court properly reviewed the comрlaint in its entirety and rightfully found that the SAC failed to meet the heightened pleading requirements of the PSLRA.
Finally, Rahman asserts a claim for controlling person liability against the individual defendants under 20(a) of the Exchange Act,
IV. CONCLUSION
For the reasons set forth above, we will affirm the District Court‘s order of October 17, 2012, dismissing Rahman‘s second amended complaint with prejudice.