“Fraud by hindsight,” or contrasting a defendant’s past optimism with less favorable actual results, does not satisfy the pleading requirements in securities fraud case.
The Pension Trust vs. J. Jill, Inc., No. 1:17-cv-11980 (D. Mass., 12/20/18).
J. Jill went public in March 2017. During the following months, the company reported on decelerating sales, competitive pressures, declining margins, and increased store closures, all of which led to “surprisingly conservative guidance” and a drop in the stock’s price. Plaintiffs alleged J. Jill, the company’s IPO underwriters, and others violated Sections 11 and 12(a)(2) of the Securities Act of 1933 by issuing a Registration Statement and Prospectus containing untrue statements of material fact and omitting material information required to be disclosed. The crux of the complaint was that the company’s post-IPO statements supported the inference that the adverse circumstances being discussed existed at the IPO and were omitted from or not properly addressed in the Registration Statement and Prospectus.
The Court grants Defendants’ motions to dismiss. First, the Court rejects Plaintiffs’ argument that statements made by J. Jill’s executive officers during a second quarter conference call were an admission that problems existed at the IPO. Putting the entire conference call in context, the Court explains, shows that the officers were commenting on the then-current adverse general economic conditions and providing cautious guidance for the remainder of the year. The only inference to be drawn from the call, the Court finds, is that the problems being discussed arose in the second quarter and were not known at the IPO.
Second, the Court rejects Plaintiffs’ argument that the company had created the false impression at the IPO that its unique business strategy insulated it from adverse industry trends. The statements highlighted in the complaint, particularly those prefaced with “we believe,” were statements of opinion, not fact. In addition, the Court describes Plaintiffs’ efforts to contrast the company’s past optimism against less favorable actual results as an unsupportable claim of “fraud by hindsight.” Nothing in the complaint supports the conclusion that Defendants knew of facts when they predicted sales and market share growth that would have made those predictions unreasonable.
Finally, the Court rejects Plaintiffs’ allegations of material omissions. The Court highlights the Risk Factors section of the Registration Statement which addressed matters such as the cyclical nature of the industry, competitive pressures, the company’s ability to respond to changing customer preferences, required promotional efforts to reduce excess inventory, anticipated annual closures of underperforming stores, and the impact of adverse economic conditions and other factors on the company’s business.
(SOLA Ref. No. 2019-04-03)
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