Allegations in Securities Fraud Class Action Failed to Meet Heightened Pleading Requirements under Private Securities Litigation Reform Act (PSLRA) Warranting Dismissal with Prejudice of Class Action Complaint Washington Federal Court Holds
Plaintiffs filed a class action against Zumiez and three individual defendants alleging violations of federal securities laws; the class action complaint asserted that defendants “engaged in a scheme to defraud shareholders by making materially false and misleading statements by making false and misleading statements and engaging in insider trading.” In re Zumiez Inc. Sec. Litig., ___ F.Supp.2d ___ (W.D. Wash. March 30, 2009) [Slip Opn., at 7]. According to the allegations underlying the class action, defendants made six different statements that were false or misleading, each of which concerned guidance given to investors and expectations for earnings growth. _Id._, at 7-8. Defense attorneys moved to dismiss the class action on the grounds that it failed to satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA). _Id._, at 9. The district court granted defendants’ motion.
The federal court began by noting that “One obvious difficulty with Plaintiffs’ theory is that, from arch until mid-October, Zumiez not only met, but significantly exceeded, its prediction of ‘mid-single digit’ comparable-store sales growth.” In re Zumiez, at 12. The district court explained at page 12, “Therefore, to raise a credible inference that the Company’s predictions during this time period were false or misleading, Plaintiffs must allege facts to suggest not only that Defendants knew of undisclosed problems within the company, but that these known problems (1) would somehow not manifest a negative effect on earnings until the later quarters, and (2) were not taken into account when calculating the Company’s projected earnings. Plaintiffs allege hardly any such facts, much less facts sufficient to raise a strong inference of wrongdoing.” The court considered plaintiffs’ claim that five of Zumiez’s 2007 earnings projections were false or misleading, see id., at 12-20, but ultimately found that the class action complaint “completely failed to raise a ‘strong inference’ that Defendants knowingly made false or misleading earnings projections,” id., at 20. The district court also considered plaintiffs’ challenges to “two statements that could arguably be viewed as assertions regarding current business performance, rather than forward-looking statements”; specifically, an October 18, 2007, statement that “the Company was ‘on track’ to grow earnings by at least 30%,” and a November 29, 2007, statement that “the Company’s month-to-date comparable-store sales growth were in line with its fourth quarter projections.” Id., at 20. To be actionable, these statements required allegations in the class action complaint of “specific facts sufficient to raise a strong inference that Brooks made the statements with deliberate recklessness to investors,” id., at 20-21 (citation omitted), but the court found no evidence to support such an inference, see id., at 21-23. Accordingly, the district court dismissed the class action complaint with prejudice.
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