On August 10, 2017, Judge Sidney A. Fitzwater of the United States District Court for the Northern District of Texas dismissed a putative securities class action brought against Pier 1 Imports, Inc. (“Pier 1”) and its former CEO and CFO that alleged the defendants had misrepresented the company’s excess inventory and potential price markdown risk in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder. Town of Davie Police Pension Plan v. Pier 1 Imports, Inc. et al., No. 3:15-cv-3415-D, 2017 WL 3437215 (N.D. Tex. Aug. 10, 2017). The Court held that the plaintiffs had failed to plead that defendants had either misrepresented Pier 1 inventory or intended to do so.
Pier 1 is a specialty retailer that sells home decorative furnishings at stores nationwide. Plaintiffs alleged that during the period from December 19, 2013 to December 17, 2015, company executives stated that the company was operating with strong internal controls and “clean” and “well-controlled” inventory that lacked material markdown risk even while its stores were “busting at the seams with merchandise.” The alleged build-up of inventory was revealed in a series of partial corrective disclosures that plaintiffs alleged led to a drop in the price of Pier 1 shares from $16.97 per share in February 2015 to $4.75 per share in December 2015.
The Court first held that, contrary to plaintiffs’ allegations, the company’s statements regarding “clean” inventory did not hold special meaning that raised such claims to the level of a representation of a “concrete, verifiable and objective fact” the investors would reasonably rely on in making an investment decision. The Court further held that neither the company’s representations of “clean inventory,” nor its statements that the Pier 1 did not face “substantial mark-down risk,” were actionable misstatements because plaintiffs had not adequately pled intent, or scienter. Among other things, the Court found that the following facts undercut a strong inference of scienter: (1) plaintiffs’ allegations that performance awards had incentivized the officer defendants to inflate the company’s stock price were insufficient to establish an actionable motive, (2) during the class period the company had publicly disclosed the buildup of inventory, decreasing sales, and the risk of markdowns, (3) throughout the class period the company had continued purchasing inventory, which was inconsistent with the allegation that it knew it had too much inventory, and (4) the resignations of two executives were insufficient to establish scienter, and in fact could reflect that the company had lost faith in its senior executives.
The Court also held that plaintiffs had not adequately alleged that defendants recklessly disregarded a known substantial markdown risk. Specifically, the Court, finding that plaintiffs’ allegations essentially amounted to claims that inventory was important to Pier 1 and that its executives could not help but know of the growing inventory levels and risk of markdowns, held that such allegations were insufficient. Plaintiffs had not alleged that the officer defendants were aware of reports showing excessive inventory, and plaintiffs could not rely simply on the officers’ positions in the company and their access to company data to establish knowledge.
Further, the Court held that even if the company did have a duty to disclose growing inventories under Item 303 of Regulation S-K—a ruling the Court declined to make—the Company had made all necessary disclosures. As a result, the Court dismissed plaintiffs’ claims in their entirety, with leave to replead consistent with the Court’s approach in cases decided under the Private Securities Litigation Reform Act.
This case serves as a reminder that a precipitous decline in stock price will not alone suffice to state a securities fraud claim. Plaintiffs must still demonstrate actionable material misstatements and well-pled allegations of scienter beyond performance motivations held by many company officers or their presumed knowledge.
