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Garden City Employees' Retirement System, and v. Anixter International

March 29, 2012


The opinion of the court was delivered by: Judge Robert M. Dow, Jr.


Before the Court is Defendants' motion to dismiss [73] Plaintiff's Second Amended Complaint ("SAC"). Plaintiffs filed their SAC [65] after the Court granted Defendants' motion to dismiss the First Amended Complaint ("FAC") in its March 31, 2011 Order [63]. Defendants now argue that Plaintiffs SAC again fails to state a claim on which relief can be granted. For the reasons below, the Court grants Defendants' motion [73].

I. Background

Garden City Employees' Retirement System and Indiana Laborers Pension Fund ("Plaintiffs") bring this putative class action under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a), on behalf of themselves and all persons other than Defendants who purchased or otherwise acquired the common stock of Anixter International Inc. ("Anixter" or the "Company") between January 29, 2008 and October 20, 2008, inclusive.

On March 31, 2011, the Court granted Defendants motion to dismiss Plaintiffs' FAC without prejudice. The Court's March 31, 2011 Opinion held that Plaintiff failed to plead facts sufficient to suggest that: (1) any of the statements made by Defendants were false or misleading when they were made ([63 at 38]); (2) Defendants were promising 8%-12% organic growth for the entire company for 2008 (Id. at 41); and (3) Defendants claimed Anixter was not being affected of the global economic slowdown (Id. at 42). In other words, Plaintiffs failed to point to any specific statements that were untrue or misleading or identified information known to Defendants at that time that was of such a negative nature as to preclude Anixter from saying nearly anything positive. Id. at 50. Moreover, Plaintiffs failed to plead a "strong" or "cogent" inference of scienter. Id. at 53. Plaintiffs filed a SAC on April 28, 2011 [65]. On May 26, 2011, Defendants filed a motion to dismiss the SAC [73].

Because the Court provided detailed background in its March 31, 2011 Order ("March 31 Order"), it will not do so again. In their motion to dismiss, Defendants argue that Plaintiffs SAC suffers from the same failures that resulted in the dismissal of the FAC. The Court agrees.

II. Legal Standard

The complaint alleges two causes of action against Defendants. Count I of the complaint asserts violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and the SEC's Rule 10(b)(5), 17 C.F.R. 240.10b-5. "Section 10(b) * * * forbids the 'use or employ, in connection with the purchase or sale of any security * * * [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors.'" Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 318 (2007) (quoting 15 U.S.C. § 78j(b)). Rule 10b-5 also forbids a company or an individual "to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5(b). "In a typical § 10(b) private action, a plaintiff must prove (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Pugh v. Tribune Co., 521 F.3d 686, 693 (7th Cir. 2008) (citing Stoneridge Inc. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008)).

Count II of the complaint is directed against the Individual Defendants only and alleges violations of Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a). That provision provides that "[e]very person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person." "Thus, to state a claim under § 20(a), a plaintiff must first adequately plead a primary violation of securities laws-here, a violation of § 10(b) and Rule 10b-5." Pugh, 521 F.3d at 693.

Defendants move to dismiss the amended complaint for failure to state a claim under Fed. R. Civ. P. 12(b)(6). A motion to dismiss tests the sufficiency of the complaint, not its merits. See, e.g., Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir.1990). In considering a Rule 12(b)(6) motion in securities fraud actions, courts must, "as with any motion to dismiss for failure to plead a claim on which relief can be granted, accept all factual allegations in the complaint as true." Tellabs, 551 U.S. at 322. To survive a Rule 12(b)(6) motion to dismiss, the complaint first must comply with Rule 8(a) by providing "a short and plain statement of the claim showing that the pleader is entitled to relief," Fed. R. Civ. P. 8(a)(2), such that the defendant is given "fair notice of what the * * * claim is and the grounds upon which it rests." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). Second, the factual allegations in the complaint must be sufficient to raise the possibility of relief above the "speculative level," assuming that all of the allegations in the complaint are true. E.E.O.C. v. Concentra Health Servs., Inc., 496 F.3d 773, 776 (7th Cir. 2007) (quoting Bell Atlantic, 550 U.S. at 569 n.14). "[O]nce a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint." Bell Atlantic, 550 U.S. at 563.

Allegations of fraud, such as the allegations made in support of Plaintiffs' securities fraud claim, are subject to the heightened pleading standard set forth in Federal Rule of Civil Procedure 9(b). In re Healthcare Compare Corp. Sec. Litig., 75 F.3d 276, 280-81 (7th Cir. 1996). Plaintiffs must plead the circumstances constituting fraud with particularity. Fed. R. Civ. P. 9(b). They must identify the person who made the misrepresentation; the time, place, and content of the misrepresentation; and the method by which the misrepresentation was communicated. Vicom, Inc. v. Harbridge Merchant Servs., Inc., 20 F.3d 771, 777 (7th Cir. 1994); see also Borsellino v. Goldman Sachs Group, Inc., 477 F.3d 502, 507 (7th Cir. 2007) (fraud must be pled with particularity by providing the who, what, when, where, and how).

The Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(b), further raises the pleading standard for securities fraud claims. See Teamsters Affiliates Pension Plan v. Walgreen Co., 2010 WL 3894149, at *2 (N.D. Ill. Sept. 29, 2010) (quoting Makor Issues & Rights, Ltd. v. Tellabs, Inc. (Tellabs I), 437 F.3d 588, 596 (7th Cir. 2006) ("[T]he PSLRA essentially returns the class of cases it covers to a very specific version of fact pleading-one that exceeds even the particularity requirement of Federal Rule of Civil Procedure 9(b).")).

Congress enacted the PSLRA "[a]s a check against abusive litigation by private parties," Tellabs, 551 313-it was intended "to screen out frivolous suits, while allowing meritorious actions to move forward." Id. at 324. "Exacting pleading requirements are among the control measures Congress included in the PSLRA." Id. at 313. In charging misrepresentations or omissions of material fact, the PSLRA requires that the complaint "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1).

Further, in claiming scienter under the PSLRA, the "complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). The required scienter is an intent to deceive, demonstrated by knowledge of the statement's falsity or reckless disregard of a substantial risk that the statement is false. Higginbotham v. Baxter Int'l Inc., 495 F.3d 753, 756 (7th Cir.2007). A complaint will survive a motion to dismiss only if a reasonable person would deem the inference of scienter cogent and at least as compelling as an opposing inference that could be drawn from the facts alleged. Tellabs, 551 U.S. at 324. The Supreme Court has emphasized that "[t]he inquiry * * * is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard." Id. at 322-23 (original emphasis). As the Court explained, "[t]he strength of an inference cannot be decided in a vacuum. The inquiry is inherently comparative: How likely is it that one conclusion, as compared to others, follows from the underlying facts?" Id. at 323. Although the inference of scienter must be more than merely "reasonable," it need not be irrefutable, or even the "most plausible of competing inferences." Id. at 324. It must, however, be "cogent and compelling." Id. The Seventh Circuit has rejected the "'group pleading doctrine,' a judicial presumption that statements in group-published documents are attributable to officers who have daily involvement in company operations; thus, the plaintiffs must create a strong inference of scienter with respect to each individual defendant." Pugh, 521 F.3d at 693.

As is common with similar securities actions, some of Plaintiffs' contentions are made on information obtained from confidential sources. "While the PSLRA does not require [plaintiffs] to name their confidential source, they must nevertheless describe the source 'with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged.'" Selbst v. McDonald's Corp., 432 F. Supp. 2d 777, 782-83 (N.D. Ill. 2006) (quoting Tellabs I, 437 F.3d at 596); see also Makor Issues & Rights, Ltd v. Tellabs Inc. ("Tellabs III"), 513 F.3d 702, 712 (7th Cir. 2008) (permitting reliance on the assertions of unnamed confidential sources who were "numerous and consist of persons who from the description of their jobs were in a position to know at first hand the facts to which they are prepared to testify"). While the Seventh Circuit does allow information from confidential witnesses to help generate a strong inference of scienter, see Silverman v. Motorola, Inc., 2008 WL 4360648, at *14 (N.D. Ill. Sept. 23, 2008) (citing Tellabs III, 513 F.3d at 712), it has expressed a healthy skepticism regarding information obtained from confidential sources. See Higginbotham v. Baxter Int'l, Inc., 495 F.3d 753, 756-57 (7th Cir. 2007) (discounting allegations from confidential sources as unreliable and of limited value in establishing scienter, adding that "[i]t is hard to see how information from anonymous sources could be deemed 'compelling' or how we could take account of plausible opposing inferences. Perhaps these confidential sources have axes to grind. Perhaps they are lying. Perhaps they don't even exist.").

III. Analysis of Motion to Dismiss

In the SAC, Plaintiffs argue that Defendants engaged in a scheme to deceive and defraud investors of the true value of Anixter's stock in violation of federal securities law. To prove their claim, Plaintiffs' sixty-three page complaint focuses on Defendants' January, April, and July 2008 statements (including press releases and earnings conference calls), the statements of analysts in January, April, July and September 2008, and the testimony of confidential witnesses.

Defendants argue that the SAC fails because: (1) Plaintiffs have again failed to plead that Defendants made any false or materially misleading statements; (2) Plaintiffs fail to adequately plead scienter; (3) Defendants' forward-looking statements are protected by the PSLRA's safe harbor; (4) several challenged statements were immaterial puffer; and (5) Plaintiffs have failed to plead loss causation.

A. Count I

1. Failure to Adequately Plead Falsity or Materially Misleading

The first argument that Defendants direct at the complaint is that Plaintiffs have again failed to specify each statement alleged to have been false or misleading and the reasons why the statement is false or misleading, as required by the PSLRA. § 78u-4(b)(1)(B). As stated above, the PSLRA's heightened pleading instructions require Plaintiffs to "specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading."

15 U.S.C. ยง 78u-4(b)(1). Claiming that a particular statement was untrue is not enough- Plaintiffs must explain, with particularity, the factual basis for their assertion that the statement was untrue. See Premier Capital Management, L.L.C. v. Cohen, 2003 WL 21960357, at *2 (N.D. Ill. Aug. 15, 2003) (citing Clark v. TRO Learning, Inc., 1998 WL 292382, at *4 (N.D. Ill. May 20, 1998)); see also In re Harley-Davidson, Inc. Sec. Litig., 660 F. Supp. 2d 969, 1000 (E.D. Wis. 2009) (complaint deficient because it lacked "fact-based connections between a speaker, a statement, and specific, contradictory information presumably known to that speaker at the time the statement was made"). The relevant question is "whether the facts alleged are ...

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