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Town of Davie Police Pension Plan v. Pier 1 Imports, Inc.

United States District Court, N.D. Texas, Dallas Division

June 25, 2018

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



         This 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.

         I. Background of the Case

         A. Procedural History

         This 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.

         The 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.

         MERS 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.

         The 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.

         B. Origins of the Claim

         The 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.

         Pier 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,, 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.

         The 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"[1] 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.

         MERS 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.

         MERS 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.

         According 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. Id.

         MERS 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.

         On 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. ¶ 27.

         MERS 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 Act.

         II. Legal Standard

         A. The Rule 12(b)(6) Standard

         To 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 citations omitted).

         In 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)).

         The 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).

         B. The Rule 9(b) Standard

         Because 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)).

         C. The Pleading Standard under the PSLRA

         Pleadings 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).

         III. Analysis

         A. Violations of the Exchange Act

         MERS 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 746.

         To 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 ...

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