Opinion
Case No: 8:03-cv-1958-T-23TGW.
April 4, 2005
ORDER
On behalf of purchasers of stock offered pursuant to a June, 2002, secondary public offering ("SPO") and purchasers of common stock from June 27, 2001, to January 14, 2004 (the "class period"), the lead plaintiffs assert claims against Tropical Sportswear International ("TSI"), Michael Compton, Christopher Munday, N. Larry McPherson, and Michael Kagan (the "individual defendants") under sections 11 and 15 of the Securities Act of 1933 (the "Securities Act"), sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), Securities and Exchange ("SEC") Rule 10b-5, and section 304 of the Sarbanes-Oxley Act. The individual defendants each move to dismiss the complaint. The individual defendants argue that the complaint fails to meet the pleading requirements of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act ("PSLRA").
The complaint asserts claims against TSI, officers and directors of TSI, and the underwriters of TSI's second public offering. Initially, all defendants moved to dismiss (Docs. 32, 34, 35, 37 39). TSI submitted a notice of filing of bankruptcy, and the action was stayed with regard to TSI. The plaintiffs dismissed the director defendants and the underwriter defendants with prejudice (Doc. 50) and dismissed Robin Cohan without prejudice (Doc. 60). Accordingly, this order resolves the individual defendants' motions to dismiss (Docs. 32, 34 39). The Clerk is directed to TERMINATE TSI's motion to dismiss (Doc. 37). Upon resolution of the bankruptcy action and dissolution of the stay, TSI may move to dismiss consistent with this order.
In evaluating the sufficiency of a complaint, a court "must accept the well-pleaded facts as true and resolve them in the light most favorable to the plaintiff." Beck v. Deloitte Touche 144 F.3d 732 (11th Cir. 1998) (citing St. Joseph Hospital Inc. v. Hospital Corp. of America, 795 F.2d 948 (11th Cir. 1986)). Mere conclusory allegations provide no support for the sufficiency of a complaint. South Fla. Water Mgmt. Dist. v. Montavalo, 84 F.3d 402, 409 n. 10 (11th Cir. 1996). Pursuant to Rule 9(b), Federal Rules of Civil Procedure, a complaint must plead fraud with particularity.
The complaint alleges that TSI, a publicly-traded company, produces and markets brand name apparel, primarily for men. The complaint directs particular attention to statements, SEC filings, and financial reports issued about "Project Synergy" and three brand names marketed by TSI, "Duck Head," "Savane," and "Victorinox" (the "brand names"). TSI identifies Project Synergy as the plan to move TSI's "cutting" facility from El Paso, Texas, to Tampa, Florida.
The complaint asserts that the individual defendants held controlling positions at TSI during the class period and that each signed the prospectus issued with the SPO. Compton served as TSI's chairman of the board and chief executive officer ("CEO") during the class period and until his resignation in November, 2002. Munday served as TSI's president during the class period and became CEO in November, 2002. Kagan served as TSI's executive vice-president, chief financial officer ("CFO"), and vicechairman of the board during the class period. Kagan stepped down as CFO in May, 2002. McPherson served as TSI's executive vice-president and treasurer during the class period and became CFO in May, 2002. Both McPherson and Munday were terminated in August, 2003.
The complaint alleges that the individual defendants artificially inflated the value of TSI's stock by portraying both the brand names and Project Synergy as attractive and profitable assets, notwithstanding the individual defendants' knowledge that the brand names and Project Synergy were poorly managed and unprofitable. Further, the complaint alleges that during the class period TSI implemented the SPO and issued a prospectus that contained material misstatements and omissions.
The complaint asserts that the individual defendants were motivated to inflate the price of the stock to ensure the success of the SPO, to maintain beneficial lending terms for TSI, and to garner personal and corporate gain. The complaint also describes two "corporate shake-ups" during the class period.
The complaint alleges that each individual defendant knew or was severely reckless in not knowing of the falsity of statements in press releases and financial statements. The complaint includes exactly the allegedly false and misleading statements featured in the prospectus and issued during the class period. The complaint alleges that TSI issued a prospectus signed by the individual defendants and containing "untrue statements and material omissions." The complaint alleges that the prospectus falsely portrays the success of the integration of the brand names and the success and cost of Project Synergy. Further, the complaint alleges that the financial statements issued with the prospectus fail to disclose a significant decrease in the market value of the Savane brand and fail to comply with Generally Accepted Accounting Principles ("GAAP"), which failures result in a significant overstatement of income in financial statements.
The complaint asserts that during the class period TSI issued press releases and financial reports containing false and misleading statements and identifies both the allegedly false statements and the reasons the statements are false. Further, the complaint asserts that with knowledge and reckless disregard for the truth Compton, Kagan, and Munday issued false and misleading statements to the press and during conference calls.
The complaint also alleges specific violations of GAAP. The complaint asserts that TSI failed to timely "write-down" a substantial loss in the "goodwill" associated with the Savane product line and failed to properly account loss reserves. The complaint asserts that the failure to properly account the loss of goodwill in the Savane brand and to establish and account adequate loss reserves violated GAAP and resulted in false and misleading financial statements. More pointedly, the complaint alleges that, in a January, 2004, SEC filing issued at the close of the class period, TSI announced a $130 million loss for fiscal year 2003 that included a $34.2 million loss in the Savane brand goodwill. The complaint alleges that the losses associated with the Savane brand goodwill should have been disclosed in early 2000.
The individual defendants argue that the complaint fails to plead the Securities Act claims with the requisite particularity required by the Federal Rules of Civil Procedure. The individual defendants argue also that the Securities Act claims are barred by the one-year statute of limitations. The individual defendants argue that the complaint fails to state a claim for a violation of the Exchange Act because the complaint fails to specify with particularity each alleged misrepresentation and to allege facts creating a strong inference of scienter as to each instance of fraud and as to each defendant. Further, the individual defendants argue that, even if pled with sufficient particularity, both the Exchange Act claims and the Securities Act claims fail because each relies on either immaterial statements or statements protected by the safe harbor provision of the PSLRA.
Securities Act Claims
The complaint asserts that during June, 2002, TSI implemented the SPO and issued a prospectus signed by each of the individual defendants. The complaint asserts that the prospectus contains material misstatements and omissions and identifies the specific, allegedly false and misleading statements. The complaint further asserts that financial statements issued with the prospectus contain false and misleading information and were created in violation of GAAP. To assert a violation of section 11 of the Securities Act, a plaintiff must demonstrate "(1) that the registration statement contained an omission or misrepresentation, and (2) that the omission or misrepresentation was material, that is, it would have mislead a reasonable investor about the nature of his or her investment." Kaplan v. Rose, 49 F.3d 1363, 1371 (9th Cir. 1994), cert. denied, 516 U.S. 810 (1995). The individual defendants argue (1) that because the Securities Act claim "sounds in fraud" the complaint must satisfy the particularity requirement of Rule 9(b), Federal Rules of Civil Procedure, and (2) that the Securities Act allegations fail to satisfy the Rule 9(b) requirement. The plaintiffs submit that Rule 9(b) does not apply to Securities Act claims, that the Securities Act Claim does not "sound in fraud," and that the Securities Act allegations meet the particularity requirement of Rule 9(b).
The complaint alleges that the defendants employed a "fraudulent scheme" to inflate TSI stock for the purpose of the SPO. The Securities Act claim relies on allegations of fraud rather than mere oversight, mistake, or negligence. In re Healthsouth Corporation Securities Litigation, CV-98-J-2634-S, 2000 WL 34211319 (N.D. Ala. Dec. 13, 2000). Specifically, the complaint alleges misstatements and omissions in TSI's prospectus and accompanying financial statements, provides the exact statements alleged to be false, and offers the reasons the statements would mislead the plaintiffs. A complaint satisfies the particularity requirement of Rule 9(b) for a federal securities claim "if the complaint sets forth what statements or omissions were made in what documents or oral representations; the time and place of the statements or omissions; who made the statements; the content of the statement and the manner in which they misled the plaintiffs; and what the defendant `obtained as a consequence of the fraud.'" Druskin v. Answerthink, Inc., 299 F. Supp. 2d 1307, 1321 (S.D. Fla. 2004) (citing Brooks v. Blue Cross and Blue Shield of Florida, Inc., 116 F.3d 1364, 1369 (11th Cir. 1997)). Accordingly, the complaint pleads a violation of the Securities Act with the particularity prescribed in Rule 9(b), Federal Rules of Civil Procedure.
The individual defendants also argue that the one-year statute of limitation bars the Securities Act claim. A Securities Act claim must commence within a year of the "discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of due diligence." 15 U.S.C. § 77m. The individual defendants submit that the cautionary language in the prospectus conveyed "inquiry notice" to the plaintiffs. Grippo v. Perazzo, T.S.C, 357 F.3d 1218, 1224 (11th Cir. 2004) ("inquiry notice" is "knowledge of facts that would lead a reasonable person to begin investigating the possibility that his legal rights had been infringed." [citation omitted]). Accordingly, the individual defendants argue that the limitation period expired a year after the prospectus issued. The cautionary language provided in the prospectus warns about the possible risk of investment but fails to notify the plaintiffs of the possibility that the individual defendants were perpetrating a fraud. In re Sterling Foster CO., Inc., Securities Litigation, 222 F. Supp. 2d 216, 249 (E.D. NY. 2002) (cautionary language in a prospectus warns a reasonable investor of the risk associated with investment not of the possibility of fraud); In re Colonial Limited Partnership Litigation, 854 F. Supp. 64, 84 (D. Conn. 1994) ("While the cautionary language contained in the [private placement memoranda] may have suggested that the investment was risky, it did not warn the plaintiffs of the possibility that the whole scheme was fraudulent."). Accordingly, the prospectus failed to sufficiently notify the plaintiffs of the fraud alleged in the complaint.
The defendants assert also that the plaintiffs received inquiry notice in November, 2002, when Compton resigned and analysts downgraded TSI stock. By merely alleging that the plaintiffs knew that Compton resigned and analysts downgraded TSI stock, the defendants fail to establish that the plaintiffs received inquiry notice of their Securities Act claims in November, 2002. Great Rivers Coop. v. Farmland Industries, Inc., 120 F.3d 893, 896 (8th Cir. 1997) (inquiry notice requires consideration of "(1) the facts of which the victim was aware; (2) whether a reasonable person with knowledge of those facts would have investigated the situation further; and (3) upon investigation, whether a reasonable person would have acquired actual notice of the defendant's misrepresentations.").
Exchange Act Claims
The complaint asserts that during the class period and while controlled by the individual defendants, TSI issued false and misleading statements in press releases and annual and quarterly reports. The complaint identifies with specificity the allegedly false and misleading statements issued by TSI during the class period. The complaint further alleges that during the class period Compton, Kagan, and Munday issued false and misleading statements. The complaint asserts that during the class period McPherson and Munday served as TSI's CFOs and prepared false and misleading financial statements and SEC filings in violation of GAAP. To assert a violation of section 10(b) of the Exchange Act and Rule 10b-5, the plaintiff must show that the defendant with scienter misstated or omitted a material fact and that the plaintiff relied on the misstatement or omission to the plaintiff's detriment. Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1281 (11th Cir. 1999). Further, the PSLRA requires that a complaint (1) state with particularity facts (2) giving rise to a strong inference (3) that each separate defendant acted with scienter (4) with respect to each act or omission alleged." 15 U.S.C. § 78u 4(b)(2); see also Druskin v. Answerthink, Inc., 299 F. Supp. 2d 1307, 1322 (S.D. Fla. 2004).
The individual defendants argue that the complaint fails to describe with particularity any misstatement or omission attributable to the individual defendants. Rule 9(b), Federal Rules of Civil Procedure, requires a plaintiff to attribute fraudulent acts or statements to a particular defendant. A securities fraud plaintiff may employ "group pleading" to impute "false and misleading statements appearing in annual reports, quarterly and yearly financial statements, press releases, or other `group published' information to all inside corporate officers and directors, who are presumed to have knowledge of and involvement in the day to day affairs of the company." In re Sensormatic Electronics Corp. Securities Litigation, No. 018346CIVHURLEY, 2002 WL 1352427 at *4 (S.D. Fla. June 10, 2002);see also In re Sunbeam Securities Litigation, 89 F. Supp. 2d 1326, 1340 (S.D. Fla. 1999); In re AFC Enterprises, Inc., Securities Litigation, 348 F. Supp. 2d 1363, 1371 (N.D. Ga. 2004).
The complaint asserts that the individual defendants controlled TSI during the class period. The complaint further describes the exact allegedly false and misleading statements contained in group published documents, including press releases and annual and quarterly reports. In re Sensormatic Electronics Corp. Securities Litigation, No. 018346CIVHURLEY, 2002 WL 1352427 at *4 (S.D. Fla. June 10, 2002). Employing group pleading, the complaint satisfies the particularity requirement of pleading an Exchange Act claim.
The individual defendants correctly assert that a false or misleading statement in a group published document imputes only to an individual in control at the drafting or issuance of the statement. Brown v. Enstar, 84 F.3d 393, 396 (11th Cir. 1996) (a "controlling person" wields "the power to control the general affairs of the entity primarily liable at the time the entity violated the securities laws" [emphasis supplied]). Accordingly, no individual defendant incurs liability for a false or misleading statement by TSI after the individual defendant's retirement or termination.
The individual defendants next argue that the complaint fails to show scienter with respect to each defendant and each allegation. Phillips v. Scientific-Atlanta, Inc., 374 F.3d 1015, 1017-1018 (11th Cir. 2004) (scienter necessary "with respect to each defendant and with respect to each alleged violation of the statute"). A plaintiff meets the pleading requirements for scienter by showing "severe recklessness."Druskin v. Answerthink, Inc., 299 F. Supp. 2d 1307, 1323 (S.D. Fla. 2004). The Eleventh Circuit describes severe recklessness as "limited to those highly unreasonable omissions or misrepresentations," known to the defendant or so obvious that the defendant must have been aware, "that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers. . . ." McDonald v. Alan Bush Brokerage Co., 863 F.2d 809, 814 (11th Cir. 1989). The plaintiffs may aggregate facts to imply scienter as to each defendant but may not rely on group pleading. Phillips v. Scientific-Atlanta, Inc., 374 F.3d 1015, 1017 (11th Cir. 2004).Druskin v. Answerthink, Inc., 299 F. Supp. 2d 1307, 1322 (S.D. Fla. 2004) ("While the group pleading doctrine may assist Plaintiffs in satisfying the Reform Act's and Rule 9(b)'s particularity requirements, it does not apply to the Reform Act's scienter requirement" [citing Sunbeam Sec. Lithog., 89 F. Supp. 2d 1326, 1341 (S.D. Fla. 1999)]).
The complaint provides allegations sufficient to strongly imply that each of the defendants acted with severe recklessness. Each of the individual defendants held a controlling position during the class period. Compton and Munday served as CFOs during the class period and McPherson and Kagan served as CFOs during the class period. The complaint asserts facts to support the allegation that each possessed actual knowledge of the falsity of statements issued by TSI in press releases and financial statements.
The complaint alleges violations of GAAP in financial reports controlled by CFOs McPherson and Kagan. The complaint also asserts that in 2004, at the close of the class period, TSI issued a series of press releases and financial statements that belatedly account loss reserves and the loss of goodwill associated with the Savane brand. In January, 2004, TSI announced a $130 million loss, due in part to the inclusion of loss reserves and the loss of goodwill. Although GAAP violations alone insufficiently support an inference of scienter, violations of GAAP plus other averments of fraud, including a profound financial overstatement, create a strong inference of scienter.In re AFC Enterprises, Inc., Securities Litigation, 348 F. Supp. 2d 1363, 1371 (N.D. Ga. 2004). Further, the allegations of false and misleading financial reporting and GAAP violations sufficiently allege scienter as to the CFOs. In re Sunbeam Securities Litigation, 89 F. Supp. 2d 1326, 1340 (S.D. Fla. 1999); Danis v. USN Communications, Inc., 73 F. Supp. 2d 923 (N.D. Ill. 1999). The allegations create a sufficiently strong inference that the failure to account loss reserves and the loss of goodwill was an extreme departure from the standards of ordinary care known to the defendant or so obvious that the defendant must have been aware of it. Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1281 (11th Cir. 1999); McDonald v. Alan Bush Brokerage Co., 863 F.2d 809, 814 (11th Cir. 1989). The complaint describes violations of GAAP and asserts a profound financial impact as a result of the GAAP violations.
In further support of scienter, the complaint describes two corporate "shake-ups" and the individual defendants' motive and opportunity to inflate the price of TSI's stock, including performance based bonuses, an interest in the success of the SPO, and a desire to avoid TSI's default on loan covenants. See e.g., Druskin v. Answerthink, Inc., 299 F. Supp. 2d 1307, 1321 (S.D. Fla. 2004) (finding scienter not sufficiently plead because "red flags" such as a management shake-up not alleged); In re AFC Enterprises, Inc., Securities Litigation, 348 F. Supp. 2d 1363, 1373 (N.D. Ga. 2004) (evidence of motive and opportunity may contribute to an implication of intent to defraud). The allegations of scienter support a strong inference that each of the individual defendants acted with severe recklessness. Safe Harbor and Materiality
The complaint asserts that Compton's and Kagan's sales of stock support scienter. Compton and Kagan sold only a small percentage of stock within one month of the SPO and Kagan sold his stock only after he resigned as CFO and just before retiring from the company. Compton's and Kagan's mere sale of stock during the SPO fails to support an inference of scienter. In re AFC Enterprises, Inc., Securities Litigation, 348 F. Supp. 2d 1363, 1373 (N.D. Ga. 2004).
The individual defendants argue further that, even if pled in compliance with the Federal Rules of Civil Procedure and the PSLRA, the complaint should be dismissed because both the Securities Act and the Exchange Act claims rely on immaterial statements and statements protected by the safe harbor provision of the PSLRA.
A statement or omission qualifies as material if the disclosure of the facts would have been "viewed by the reasonable investor as having significantly altered the `total mix' of information made available." Oxford Asset Management, Ltd. v. Jaharis, 297 F.3d 1182 (11th Cir. 2002) (citing Basic Incorporated v. Levinson, 485 U.S. 224 (1988)) (internal quotes omitted). A statement is immaterial only if reasonable minds cannot differ in finding that the statement lacks importance. Oxford Asset Management, Ltd. v. Jaharis, 297 F.3d 1182 (11th Cir. 2002). The complaint sufficiently alleges material misstatements.
The PSLRA protects a defendant from liability for a statement if accompanying language identifies the statement as `forward-looking' and includes meaningful cautionary statements "identifying important factors that could cause actual results to differ materially from those in the `forward-looking' statement.'" 15 U.S.C. § 77z-2(c)(1)(A)(I) 78u-5(c)(1)(A)(I). A defendant remains liable, even for a forward-looking statement, if the plaintiff shows that the defendant "knew at the time of the statement of false and misleading content and thus lacked a reasonable basis for making the statement." In re Enron, 235 F. Supp. 2d 549, 576 (S.D. Tex. 2002) (citing Shaw v. Digital Equipment Corp., 82 F.3d 1194, 1213 (1st Cir. 1996); see also Harris v. Ivax Co, 182 F.3d 799, 803 (11th Cir. 1999). Although the complaint contains allegations based on "forward-looking" statements, including projections of revenue, plans and objectives, and future economic performance, the complaint sufficiently alleges that no reasonable basis existed for the forward-looking statements contained in the prospectus and issued during the class period. Further, the complaint alleges actual knowledge of the falsity of the statements. Accordingly, the complaint satisfactorily pleads facts to counter the presumption that forward-looking statements are not actionable.
Accordingly, the complaint sufficiently pleads violations of the Securities Act and the Exchange Act against each of the individual defendants The individual defendants' motions to dismiss (Docs. 32, 34, and 39) are DENIED.
ORDERED.