United States District Court, N.D. Texas, Dallas Division
Town of Davie Police Pension Plan, individually and on behalf of all others similarly situated, Plaintiff
Pier 1 Imports, Inc., Alexander W. Smith, and Charles H. Turner, Defendants
MEMORANDUM OPINION AND ORDER
GREN SCHOLER, UNITED STATES DISTRICT JUDGE
Order addresses Defendants Pier 1 Imports, Inc. ("Pier
1" or the "Company"), Alexander W. Smith
("Smith"), and Charles H. Turner's
("Turner") Motion to Dismiss Plaintiff Municipal
Employees' Retirement System of Michigan's
("MERS") Amended Class Action Complaint
("Amended Complaint") [ECF No. 93], For the reasons
stated below, the Court grants the motion.
Background of the Case
case is a putative class action alleging claims for
securities fraud, in violation of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 ("Exchange
Act"), and Securities Exchange Commission
("SEC") Rule 10b-5 promulgated thereunder. Per
Special Order 3-318, this case was transferred from the
docket of Judge Sidney A. Fitzwater to the docket of this
Court on March 8, 2018.
original complaint was filed on October 21, 2015. The Court
held a motion hearing on March 11, 2016, to determine the
lead plaintiff and to select lead counsel. Following
proceedings required by the Private Securities Litigation
Reform Act ("PSLRA"), the Court appointed MERS as
lead plaintiff on April 25, 2016.
filed a Consolidated Class Action Complaint (the
"Previous Complaint") on August 8, 2016. Defendants
filed their first motion to dismiss on October 21, 2016. The
Court requested oral argument from the parties, and the
parties attended a motion hearing on April 28, 2017. The
Court issued a lengthy memorandum opinion and order granting
Defendants' first motion to dismiss on August 10, 2017,
but allowing MERS the opportunity to replead (the
"Fitzwater Order"). MERS filed the Amended
Complaint on September 25, 2017. Defendants subsequently
filed a second motion to dismiss on November 22, 2017.
parties attended a status conference hearing ordered by this
Court on March 22, 2018, and requested an oral argument on
the pending motion. The Court granted the request, and the
parties attended a motion hearing on April 19, 2018.
Origins of the Claim
facts set out here are taken primarily from the Amended
Complaint. MERS brings this putative class action against
Defendants Pier 1, Pier 1 's former Chief Executive
Officer, Smith, and Pier 1 's former Chief Financial
Officer, Turner, on behalf of itself and all other persons or
entities who purchased or otherwise acquired the
publicly-traded stock of Pier 1 during the period from April
10, 2014, through December 17, 2015 (the "Class
Period"). MERS alleges that Defendants committed
securities fraud "when, after excess inventory
accumulated at Pier 1, after excess inventory imposed
significant costs on the Company, and after this resulted in
significant markdown risk, Defendants, with severe
recklessness, falsely and misleadingly misrepresented to
investors the true state of affairs at Pier 1." Am.
Compl. ¶ 1.
is a specialty retailer that sells decorative home
furnishings at more than 1, 000 stores in the United States
and Canada, as well as through its website, Pier1.com,
Id. ¶ 2, Smith became Pier 1 's CEO in
February 2007, following seven consecutive quarterly losses
at the Company. Id. ¶ 31. According to the
Amended Complaint, Pier 1 embarked on a series of expansion
campaigns in the early 2000s, after its sales reached $1
billion. Id. ¶ 30. However, by 2007, sales
plummeted, and the Company reported a $227 million loss for
that fiscal year. Id. After Smith was named CEO, he
adopted a cost-cutting strategy centered on aggressive
inventory management. Id. ¶ 31. Smith announced
on a conference call with analysts and investors that Pier 1
would "tighten up our supply chain," in order to
"drive down costs, reduce lead times, and increase
inventory turn." Id. ¶ 36. Turner was
chosen to lead this effort and was tasked with taking over
Pier l's entire supply chain distribution system.
Id. By 2009, Pier l's financial condition had
improved, but a shift in the industry toward online retail
put new pressure on Pier 1 to enter the online market.
Id. ¶¶ 38, 53. In response, Smith and
Turner developed an "omni-channel" initiative to
integrate online and in-store sales. Id. ¶ 53.
Referred to as "1 Pier 1," the initiative allowed
customers to shop online and have their purchases shipped to
their homes, or to pick them up at Pier 1 's U.S. stores
without incurring shipping charges. Id. 1 Pier 1
launched in August 2012. Id.
development of the 1 Pier 1 initiative required substantial
investments in Pier 1 's inventory management and
distribution network. Id. ¶ 54. During a May
2013 conference call with analysts and investors, Pier
l's Executive Vice President of Planning and Allocations,
Michael Benkel ("Benkel"), stated that Pier 1 had
upgraded its planning and allocation systems to accurately
monitor and maintain inventory in line with sales.
Id. According to Benkel, the new systems
"resulted in more accurate projection, improved
assortment planning and optimal [Distribution Center]
inventories to drive sales." Id. During the
Class Period, Defendants represented to investors on various
occasions that Pier 1 was operating with a
"clean" inventory, that Pier 1 had the resources
and infrastructure in place to scale the business, and that
Pier 1 's increasing inventory did not present
"immediate," "significant," or
"substantial markdown risk." Id. ¶ 3.
alleges that, despite the reassurances and optimistic
forecasts from Pier 1 and its top executives, Pier 1 was
carrying abnormally high amounts of slow-moving inventory
that represented significant markdown risk. Id.
¶ 6. According to MERS, Pier l's distribution
centers and logistics network "were flooded with excess
merchandise." Id. ¶ 13, MERS claims that
Pier 1 had to resort to employing outside labor and third
parties to manage the inventory, and non-discretionary
expenditures related to capital improvements were
approximately six to seven times higher than average.
Id. ¶ 13.
alleges that Smith and Turner knew of-or were severely
reckless in disregarding- Pier 1 's excessive inventory
and markdown risk. MERS alleges, "There were numerous
red flags of excess inventory, significant markdown risk, and
undisclosed costs at Pier 1." Id. ¶ 9. For
example, during a March 2014 internal Pier 1 town hall
meeting, Smith admitted that he was responsible for pushing
overly high sales goals on Pier 1 employees and for
underestimating what it would take to achieve them.
Id. ¶ 10, in October 2014, Smith personally
inquired of a former employee how he planned to deal with an
almost 1, 000-container backlog at the Baltimore distribution
center. Id. ¶ 12.
to the Amended Complaint, Pier 1 did not disclose to its
investors the existence and magnitude of its excess inventory
and markdown risk until it made a series of "partial
corrective disclosures" in 2015. Id. ¶ 16.
On February 10, 2015, Pier 1 announced that it had higher
costs resulting from "unplanned supply chain
expenses" and announced the departure of Turner as CFO.
Id. In response to these revelations, the price of
Pier l's stock fell 25 percent- from $16.97 per share on
February 10, 2015, to $12.84 per share on February 11, 2015.
alleges that, during the months that followed, Pier 1 made a
series of misrepresentations and omissions, including that
Pier l's inventory complexion was "healthy" and
did "not pose a significant immediate markdown
risk," Id. ¶ 17. On September 24, 2015,
however, Pier 1 announced that its inventory had caused
"issues" within its supply chain, that there were
"inventory related inefficiencies within the
Company's distribution center network," and that it
needed to resort to increased clearance activity to sell off
the excess. Id. ¶ 18. MERS alleges that, in
response to these announcements, Pier l's stock price
fell by more than 12 percent-from $8.67 per share on
September 24, 2015, to $7.61 per share on September 25, 2015,
Id. ¶ 19.
December 16, 2015, MERS alleges that Pier 1 confirmed for the
first time that it would take at least 18 months before
inventory levels would be in line with actual demand.
Id. ¶ 20. Pier l's interim CFO, Laura
Coffey ("Coffey"), also disclosed that only four of
the Company's six distribution centers were operating
with "acceptable levels of efficiencies."
Id. MERS alleges that, in response to these
disclosures, Pier l's shares again plummeted by 20
percent in one day- from $5.95 per share on December 16,
2015, to $4.75 on December 17, 2015. Id. In all,
Pier l's stock dropped from a Class Period high of $18.67
on April 28, 2014, to $4.75 on December 17, 2015, a reduction
of more than 65 percent. Id. ¶ 21, Smith
ultimately departed as CEO at the end of 2016. Id.
asserts two claims in the Amended Complaint. Count I alleges
that Defendants violated Section 10(b) of the Exchange Act
and Rule 10b-5, Count II alleges that Smith and Turner are
liable as control persons under Section 20(a) of the Exchange
The Rule 12(b)(6) Standard
defeat a motion to dismiss filed pursuant to Federal Rule of
Civil Procedure 12(b)(6), a plaintiff must plead "enough
facts to state a claim to relief that is plausible on its
face." Bell All. Corp. v. Twombly, 550 U.S.
544, 570 (2007); Reliable Consultants, Inc. v.
Earle, 517 F.3d 738, 742 (5th Cir. 2008). To meet this
"facial plausibility" standard, a plaintiff must
"plead factual content that allows the court to draw
the reasonable inference that the defendant is liable for the
misconduct alleged." Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009). Plausibility does not require
probability, but a plaintiff must establish "more than a
sheer possibility that a defendant has acted
unlawfully." Id. The Court must accept
well-pleaded facts as true and view them in the light most
favorable to the plaintiff. Sonnier v. State Farm Mutual
Auto. Ins. Co., 509 F.3d 673, 675 (5th Cir, 2007).
However, the Court does not accept as true "conclusory
allegations, unwarranted factual inferences, or legal
conclusions." Ferrer v. Chevron Corp., 484 F.3d
776, 780 (5th Cir. 2007). A plaintiff must provide "more
than labels and conclusions, and a formulaic recitation of
the elements of a cause of action will not do."
Twombly, 550 U.S. at 555 (internal citations
omitted). "Factual allegations must be enough to raise a
right to relief above the speculative level ... on the
assumption that all the allegations in the complaint are true
(even if doubtful in fact)." Id. (internal
ruling on a Rule 12(b)(6) motion, the Court limits its review
to the face of the pleadings. See Spivey v.
Robertson, 197 F.3d 772, 774 (5th Cir. 1999). The
pleadings include the complaint and any documents attached to
it. Collins v. Morgan Stanley Dean Witter, 224 F.3d
496, 498 (5th Cir. 2000). However, the Court may also
consider documents outside of the pleadings if they fall
within certain limited categories. First, a "court is
permitted... to rely on 'documents incorporated into the
complaint by reference, and matters of which a court may take
judicial notice."' Dorsey v. Portfolio Equities,
Inc., 540 F.3d 333, 338 (5th Cir. 2008) (quoting
Tellabs, Inc. v. Makor Issues & Rights, Ltd, 551
U.S. 308, 322 (2007)). Second, a "court may consider
documents attached to a motion to dismiss that 'are
referred to in the plaintiffs complaint and are central to
the plaintiffs claim.'" Sullivan v. Leor Energy,
LLC, 600 F.3d 542, 546 (5th Cir. 2010) (quoting
Scanlan v. Tex. A & M Univ., 343 F.3d 533, 536
(5th Cir. 2003)). Third, "[i]n deciding a 12(b)(6)
motion to dismiss, a court may permissibly refer to matters
of public record." Cinel v. Connick, 15 F.3d
1338, 1343 n.6 (5th Cir. 1994) (internal citations omitted);
see also, e.g., Funk v. Stryker Corp., 631 F, 3d
777, 783 (5th Cir. 2011) (stating, in upholding district
court's dismissal pursuant to Rule 12(b)(6), that
"the district court took appropriate judicial notice of
publicly-available documents and transcripts produced by the
[Food and Drug Administration], which were matters of public
record directly relevant to the issue at hand."
(internal citations omitted)).
ultimate question is whether the complaint states a valid
claim when viewed in the light most favorable to the
plaintiff. Great Plains Tr. Co. v. Morgan Stanley Dean
Witter, 313 F.3d 305, 312 (5th Cir. 2012). At the motion
to dismiss stage, the Court does not evaluate the plaintiffs
likelihood of success. It only determines whether the
plaintiff has stated a claim upon which relief can be
granted. See Mann v. Adams Realty Co., 556 F.2d 288,
293 (5th Cir. 1977).
The Rule 9(b) Standard
the Amended Complaint alleges fraud, MERS must plead the
elements of its claims with the heightened particularity
required by Rule 9(b). See, e.g., Coates v.
Heartland Wireless Commc'ns, Inc., 26
F.Supp.2d 910, 914 (N.D. Tex. 1998). Rule 9(b) requires that
"[i]n alleging fraud or mistake, a party must state with
particularity the circumstances constituting fraud or
mistake." Fed.R.Civ.P. 9(b). "At a minimum. Rule
9(b) requires allegations of the particulars of time, place,
and contents of the false representations, as well as the
identity of the person making the misrepresentation and what
he obtained thereby." Benchmark Elecs,, Inc. v. J.M.
Huber Corp., 343 F.3d 719, 724 (5th Cir. 2003) (quoting
Tel-Phonic Servs., Inc. v. TBS Ml, Inc., 975 F.2d
1134, 1139 (5th Cir. 1992). Put simply, 9(b) requires the
"who, what, when, where, and how" of the fraud.
United States ex rel. Williams v. Bell Helicopter Textron
Inc., 417 F.3d 450, 453 (5th Cir. 2005) (quoting
United States ex rel. Thompson v. Columbia/HCA Healthcare
Corp., 125 F.3d 899, 903 (5th Cir. 1997)).
The Pleading Standard under the PSLRA
in federal securities fraud actions must also comply with the
strictures imposed by the PSLRA. See 15 U.S.C.
§ 78u-4(b). "The PSLRA has raised the pleading bar
even higher and enhances Rule 9(b)'s particularity
requirement for pleading fraud in two ways." Neiman
v. Bulmahn, 854 F.3d 741, 746 (5th Cir. 2017) (quoting
Local 731 I.B. of T. Excavators & Pavers Pension Tr.
Fund v. Diodes, Inc., 810 F.3d 951, 956 (5th Cir.
2016)). "First the plaintiff must specify each statement
alleged to have been misleading." Id. (internal
quotation marks and citation omitted); see also 15
U.S.C. § 78u-4(b)(1). "Second, for each act or
omission alleged to be false or misleading, plaintiffs must
state with particularity facts giving rise to a strong
inference that the defendant acted with the requisite state
of mind." Neiman, 854 F.3d at 746 (internal
quotation marks and citation omitted); see also 15
U.S.C. § 78u-4(b)(2)(A).
Violations of the Exchange Act
alleges that Pier 1 and its two most senior former
executives, Smith and Turner, committed securities fraud in
violation of Section 10(b) of the Exchange Act and Rule 10b-5
by knowingly or recklessly making material misstatements or
omissions regarding Pier l's financial metrics;
distribution network, inventory levels, and markdown risk;
internal controls; and increasing costs tied to excess
inventory. To state a claim under Section 10(b) and Rule
10b-5, "a plaintiff must allege, in connection with the
purchase or sale of securities, (1) a misstatement or an
omission (2) of material fact (3) made with scienter (4). on
which the plaintiff relied (5) that proximately caused [the
plaintiffs] injury.'" Nathenson v. Zonagen
Inc., 267 F.3d 400, 406-07 (5th Cir. 2001) (quoting
Tuchman v. DSC Commc'ns Corp., 14 F.3d 1061,
1067 (5th Cir. 1994)); see also Neiman, 854 F.3d at
avoid dismissal when pleading a false or misleading statement
or omission as the basis for a Section 10(b) and Rule 10b-5
claim, a plaintiff must:
(1) specify . . . each statement alleged to have been
misleading, i.e., contended to be fraudulent; (2) identify
the speaker; (3) state when and where the statement was made;
(4) plead with particularity the contents of the false
representations; (5) plead with particularity what the person
making the misrepresentation obtained thereby; and (6)
explain the ...