District of New Jersey Dismisses Putative Class Action Lawsuit Against Women’s Clothing Retailer for Failure to Allege Material Inaccuracies and Scienter | Shearman & Sterling LLP
On June 28, 2022, Judge Kevin McNulty of the United States District Court for the District of New Jersey granted a motion to dismiss a putative class action lawsuit against a retail clothing brand (the “Company”) and two of its officers (“Individual Defendants”) alleging violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. In re Ascena Retail Grp., Inc. Sec. Litigation, no. CV1913529KMJBC, 2022 WL 2314890 (DNJ 28 June 2022). The plaintiffs alleged that the company knowingly or recklessly overstated the value and business prospects of the company and its subsidiaries in public statements and filings with the SEC. The Court dismissed the plaintiffs’ claim for failure to plead an actionable misrepresentation or allegations sufficient to support a strong inference of scienter.
According to the plaintiffs, the company, a publicly traded apparel and apparel retailer, engaged in an “expansion-driven strategy” of acquiring other women’s clothing companies during the December period. 2015 to May 2017. The company indicated in SEC filings that the value of the Company’s goodwill and trade names were generally stable and that the value of its goodwill ranged from 1.268 billion to $1.29 billion, while the value of its other intangible assets, such as trade names, ranged from $1.263 billion to $1.283 billion. The plaintiffs alleged that, during the same period, “key metrics underlying the value of [the Company’s] goodwill and other intangible assets” eroded due to factors such as declining sales and store traffic, a change in consumer spending, a significantly changed competitive environment and a steady decline in share price and market capitalization of the Company. The company reportedly recognized the impact of these key metrics on the value of the company’s goodwill and trade names in June 2017 when the company reported an impairment charge of more than $1.3 billion. Plaintiffs, however, alleged that the company was aware that these actions demonstrated the need for an impairment analysis and concomitant impairment charge much earlier under generally accepted accounting principles (“GAAP”).
The Court first considered whether the alleged misrepresentations were actionable, noting that the disputed statements regarding the value of the company’s goodwill and trade names were statements of opinion that were properly analyzed in under the Supreme Court’s decision in Omnicare, Inc. c. Workers’ District Council Construction Industry Pension Fund, 575 US 175 (2015). According to the Court, although the company’s statements regarding goodwill and trade names “rely on accounting procedures described by GAAP to measure and test these assets”, they “require[s] exercise of subjective judgement. To apply Omnicare, the Court found that the impugned statements regarding the Company’s valuation were not false or misleading because, although the Company was allegedly aware of its difficult business environment (and had said so publicly), GAAP leaves the Company to decide when to reassess the value of its intangible assets. And while the magnitude of the impairment when taken “suggests that the defendants’ valuations were overly optimistic and that the impairment could or even should have been recorded sooner”, the impairment charge appears better explained due to the errors. defendants, bad luck, or poor performance, not a long-standing effort by defendants to dupe investors. Accordingly, plaintiffs have failed to demonstrate that defendants “did not believe their own statements; transmitted false statements of fact; or omitted material facts forming the basis of their opinions.
The Court also held that the plaintiffs had not pleaded sufficient allegations to support a strong inference of scienter. The Court rejected plaintiffs’ argument that statements by individual defendants “in press releases and investor conference calls. . . show [the Company’s] goodwill and trade names [were] overvalued and demonstrated the need for an impairment analysis. Instead, the Court ruled that plaintiffs’ “allegations more plausibly support the conclusion than defendants’ assessments.” [the Company’s] goodwill and trade names were calls for judgment – reasonable at the time they were made, even if they ultimately proved overly optimistic. According to the Court, although the company’s “positive reviews” “may be indicative of errors in [the Company’s] management . . . they or they . . . do not constitute culpable conduct demonstrating the science necessary for securities fraud. »
Finally, the Court granted the plaintiffs’ application for leave to amend their complaint to incorporate new allegations from confidential witnesses that the plaintiffs had recently identified.
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In re Ascena Retail Grp., Inc. Sec. Litigation