The opinion of the court was delivered by: Honorable Joseph E. Irenas
As amended January 29, 2002
Plaintiff Walter Wilson filed the instant lawsuit as a putative class action, seeking damages for alleged violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), Rule 10b-5, and Section 20(a) of the Exchange Act ("control person liability"). Plaintiffs are representatives of a class consisting of all persons who purchased the common stock of Vlasic Foods International, Inc. ("Vlasic"), on the open market from February 24, 1999 through February 10, 2000, inclusive ("class period").
Plaintiffs' original complaint named as defendants Vlasic and two individual defendants, Robert F. Bernstock, Vlasic's former President and Chief Executive Officer, and Mitchell P. Goldstein, former Vice President and Chief Financial Officer of Vlasic. Vlasic filed a petition for bankruptcy on January 29, 2001, and, on February 14, 2001, the Court administratively terminated this action as to Vlasic, but permitted the litigation to proceed as to the two individual corporate defendants.
Plaintiffs subsequently filed an Amended Class Action Complaint ("Amended Complaint") incorporating additional facts and statements obtained during the investigation by its counsel. Presently before the Court is Defendants' motion to dismiss Plaintiffs' Amended Complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b), and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. §78u-4(b) ("PSLRA" or "Reform Act"). For the reasons set forth below, the Court concludes that Plaintiffs' Amended Complaint fails to meet the heightened pleading requirements of the PSLRA and therefore will be dismissed.
Federal Rule of Civil Procedure 12(b)(6) provides that a court may dismiss a complaint "for failure to state a claim upon which relief can be granted." In considering a Rule 12(b)(6) motion, the court will accept as true all of the factual allegations contained in the complaint and any reasonable inferences that can be drawn therefrom. Nami v. Fauver, 82 F.3d 63, 65 (3d Cir. 1996). Dismissal of claims under 12(b)(6) should be granted only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). Although the court must assume as true all facts alleged, "[i]t is not . . . proper to assume that the [plaintiff] can prove any facts that is has not alleged." Associated General Contractors of Calif., Inc. v. California State Council of Carpenters, 459 U.S. 519, 526 (1983). Finally, when "confronted with a [12(b)(6)] motion, the court must review the allegations of fact contained in the complaint; for this purpose the court does not consider conclusory recitations of law." Commonwealth of Pennsylvania v. PepsiCo., Inc., 836 F.2d 173, 179 (3d Cir. 1988) (emphasis added).
Generally, in reviewing the legal sufficiency of a complaint, a court may not consider material beyond the pleadings without converting the motion to dismiss into a motion for summary judgment. See In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997). The Third Circuit, however, has recognized certain exceptions to this general rule relevant to this Court's resolution of Defendants' motion to dismiss. For instance, a "`document integral to or explicitly relied upon in the complaint' may be considered `without converting the motion to dismiss into one for summary judgment.'" Id. at 1410 (quoting Shaw v. Digital Equipment Corp., 82 F.3d 1194, 1220 (1st Cir. 1996)); see also, Pension Benefits Guar. Corp. v. White Consol. Indus., Inc. 998 F.2d 1192, 1196-1197 (3d Cir. 1993) ("When a complaint relies on a document . . . the plaintiff obviously is on notice of the contents of the document, and the need for a chance to refute the evidence is greatly diminished."); In re NAHC, Inc. Securities Litigation, 2001 WL 1241007 at * 5 (E.D.Pa. Oct. 17, 2001). Accordingly, when an Amended Complaint contains excerpts from certain press releases, public announcements, or publicly filed disclosure documents, a court may properly refer to the full text of those public statements. See In re Rockefeller Ctr. Props. Sec. Litig., 184 F.3d 280, 292 (3d Cir. 1999) (Nygaard, Circuit J., concurring and dissenting) (citing Burlington Coat, 114 F.3d at 1426 and In re Westinghouse Sec. Litig., 90 F.3d 696, 707 (3d Cir. 1996)). Additionally, in ruling on a motion to dismiss, the court also may consider certain matters of public record. See id. (citing Pension Benefit Guar. Corp. v. White Consol. Indus., Inc. 998 F.2d 1192, 1196 (3d Cir. 1993). For instance, Courts of Appeals for the Second and Fifth Circuits permit a district court to take judicial notice of all public disclosure documents which are either required to be filed with the SEC or are actually filed with the SEC. See Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d Cir. 1991); Lovelace v. Software Spectrum Inc., 78 F.3d 1015, 1018 (5th Cir. 1996). Decisions of the Third Circuit also support taking judicial notice of such mandated and/or duly filed SEC forms or notices. See Oran v. Stafford, 226 F.3d 275, 289 (3d Cir. 2000) (taking judicial notice of information contained in Forms 4 and 5 and Form 14A Proxy statements filed with the SEC); In re Advanta Corp. Sec. Litig., 180 F.3d 525, 540 (3d Cir. 1999) (citing information contained in Form 4 annexed to motion to dismiss).
Section 10(b) and Rule 10b-5 address "false or misleading statements or omissions of material fact that affect trading on the secondary market." In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1417 (3d Cir. 1997). Section 10(b) prohibits the "use or employ[ment], 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 Commission may prescribe . . . ." 15 U.S.C. § 78j(b). Rule 10b-5, in turn, makes it illegal "[t]o 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 light of the circumstances under which they were made, not misleading . . . in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5(b).
In order to state a claim under Section 10(b) and Rule 10b-5, a plaintiff must plead that: (1) the defendant made a materially false or misleading statement or omitted to state a material fact necessary to make a statement not misleading *fn1 ; (2) with scienter *fn2 ; (3) in connection with the purchase or sale of securities; (4) upon which the plaintiff relied; and (5) the plaintiff's reliance was the proximate cause of its injury. See EP MedSystems, Inc. v. EchoCath, Inc., 235 F.3d 865, 871 (3d Cir. 2000) (citing Weiner v. Quaker Oats Co., 129 F.3d 310, 315 (3d Cir. 1997); In re Advanta Corp. Sec. Litig., 180 F.3d 525, 537 (3d Cir. 1999) (citing In re Westinghouse Sec. Litig., 90 F.3d 696, 710 (3d Cir. 1996).
Because claims brought under Section 10(b) and Rule 10b-5 are "fraud" claims, a plaintiff alleging such "false or misleading statements or omissions of material fact" must satisfy the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure. Rule 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting the fraud or mistake shall be stated with particularity." The purpose of this heightened pleading standard for allegations of fraud is to give "defendants notice of the claims against them, [provide] an increased measure of protection for their reputations, and reduce the number of frivolous lawsuit brought solely to extract settlements." Burlington Coat, 114 F.3d at 1418.
Allegations of securities fraud also must satisfy the specific pleading requirements of the PSLRA, 15 U.S.C. § 78u-4 et seq. The PSLRA both supplements and supersedes Rule 9(b) by imposing additional, heightened pleading requirements on claims alleging securities fraud. See Advanta, 180 F.3d at 530. By establishing a "uniform and stringent pleading" standard, Congress intended this reform legislation to resolve inconsistencies among the circuits as to the appropriate pleading standard and to provide added protection against what was perceived as a growing number of frivolous "strike suits" aimed at achieving quick settlements. See S. Rep. No. 104-98, at 15 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 694; Advanta, 180 F.3d at 531; see also, In re CDNOW, Inc. Securities Litig., 138 F.Supp.2d 624, 639 ("While the PSLRA does not resolve the tension between deterring securities fraud and stymieing meritless suits, it was designed to favor the second consideration."). *fn3 Under the PSLRA, a complaint alleging violations of Section 10(b) and Rule 10b-5 must: (1) specify each statement alleged to have been misleading; (2) the reason or reasons why the statement is misleading and, (3) if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which the belief is formed." Klein v. Gen. Nutrition Cos., 186 F.2d 338, 344 (3d Cir. 1999) (citing 15 U.S.C. § 78u-4(b)(1)).
In addition, under the Reform Act, the complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with" scienter. See 15 U.S.C. § 78u-4(b)(2) (emphasis added). As the Third Circuit has noted, in Rule 10b-5 actions, this requirement supersedes the provisions of Rule 9(b) to the extent that rule would otherwise permit state of mind to averred generally. Advanta, 180 F.3d at 531 n. 5. *fn4 If a complaint fails to comply with the specific pleading requirements of the PSLRA, dismissal of the complaint is statutorily mandated. 15 U.S.C. § 78u-4(b)(3)(A).
For purposes of this Motion to Dismiss pursuant to Fed.R.Civ.P. 12(b)(6), the Court must accept as true the facts as alleged in Plaintiffs' Amended Class Action Complaint and any reasonable inferences which can be drawn therefrom. See Nami, 82 F.3d 63, 65 (3d Cir. 1996). The following recitation of the facts therefore draws from Plaintiffs' complaint and does not represent findings of fact by the Court.
In a September 9, 1997 press release, Campbell Soup Company announced its plans to initiate a management-led spin-off of an array of Campbell's non-core business units, including Vlasic brand pickles and condiments and Swanson brand frozen foods. (Amend. Compl. at ¶ 36) The company subsequently announced in a February 26, 1998 press release that its Board of Directors had formally approved the spin-off of what would become Vlasic Foods International, Inc. (Id. at ¶ 38). Vlasic filed its Form 10-12B with the Securities Exchange Commission ("SEC") on March 5, 1998, registering its securities pursuant to Section 12(b) of the Securities Act of 1933. According to the Form 10-12B, the Campbell Board of Directors had decided to approve the spin-off "to enable the management of each of Campbell and Vlasic to focus on the operational strategies appropriate for its businesses so that each can accelerate growth, decrease overall costs and maximize wealth for its shareholders." (Id. at ¶ 40). Defendant Robert Bernstock, a long-time, high-level business executive at Campbell who was slated to become the Chief Executive Officer of the new spin-off, touted Vlasic's prospects for future growth:
Vlasic Foods International starts public life with an incredibly strong portfolio of businesses, having icon brand names such as Swanson, Vlasic, Freshbake and Swift. Moreover, nearly three quarters of our sales come from businesses in which we occupy the number one market share position, representing a wonderful and continuing consumer vote of confidence. Our brand and market positions are a superb foundation for building a lean, growth-oriented company, committed to delivering superior earnings performance and to seeking superior shareholder returns. (Id. at ¶ 45).
Vlasic was poised to become an independent manufacturer and marketer of "high quality, branded convenience food products," showing pro forma revenues of $1.5 billion for fiscal 1997 and $732 million for the first six months of fiscal 1998. Pro forma earnings for those periods were $50.6 and $21.2 million respectively. (Id. at ¶ 40).
When Vlasic's spin-off from Campbell became effective on March 30, 1998, Defendant Bernstock became the newly formed company's President and Chief Executive Officer, a position which he retained throughout the relevant class period. (Id. at ¶ 21) *fn5 Following the spin-off, Defendant Mitchell Goldstein joined Vlasic as the company's Vice President of Strategic Planning and Corporate Development and was eventually promoted to Vice President and CFO, a position left vacant by the resignation of William R. Lewis in the autumn of 1998. (Id. at ¶ 69). *fn6
Despite the strength of its portfolio, the fledgling company faced several challenges in making the transition from a disparate band of subsidiaries into a unified, independent company. On February 20, 1998, just prior to announcing that its Board of Directors had formally approved the spin-off, Campbell entered into an agreement with various creditors which ultimately burdened Vlasic with a significant amount of debt. Campbell, Vlasic, and various banks, including Chase Manhattan Bank and Morgan Guaranty Trust Co. of New York, entered into a five-year revolving credit facility in the amount of $750 million. (Id. at ¶ 39). Under the terms of the Credit Facility, Campbell was entitled to borrow up to $500 million from this line of credit for its own uses. (Id.) *fn7 Upon Vlasic's separation from Campbell, Vlasic assumed all of Campbell's obligations to repay these borrowed funds, releasing Campbell from any further obligation. (Id.) As with any lending agreement, the Credit Facility contained various debt covenants requiring, among other things, that Vlasic meet certain financial ratios and provide accurate and reliable financial reports to the lenders on a timely basis. (Id. at ¶ 50) *fn8
In addition to assuming a heavy debt load, Vlasic began its operations with no independent administrative facilities - buildings, electricity, telephones, computers, record-keeping programs and software, etc. - and essentially had to build all the necessary infrastructure from scratch. In order to assist the newly formed company in building this infrastructure, Campbell and Vlasic entered into a Transition Services Agreement ("TSA") pursuant to which Campbell agreed to provide transitional administrative and support services to Vlasic. (Id. at ¶ 43). By its terms, this contractual arrangement was scheduled to expire on March 29, 1999, providing Vlasic with twelve months within which to purchase and develop its own independent administrative facilities and computer systems. (Id.).
Despite optimistic forecasts and the ambitious goals of the company's senior executives, the performance and growth of the company failed to live up to the expectations of investors and the company's executives. On May 21, 1998, Vlasic issued a press release announcing that its earnings for the third and fourth quarters of fiscal 1998, ending May 3 and August 2, 1999 respectively, would fall short of analysts' expectations. (Id. at ¶ 52). *fn9 Vlasic's disappointing performance was attributed, in part, to the company's efforts to "align shipments with consumption" in order to more accurately reflect the actual sales of its products, even though it meant sacrificing short-term gains in earnings. (Id. at ¶ 52). According to Plaintiffs' Amended Complaint, these corrective measures were necessary in order to eliminate the lingering effects of Campbell's aggressive pre-spin-off discounting and sales practices. (Id. at ¶ 58). These alleged sales practices, referred to as "trade loading," involved offering unusually large discounts to Campbell's customers in exchange for advance purchases of Campbell's products in order to artificially boost reported quarterly sales and earnings. (Id. at ¶ 59). These practices, which are the subject of private securities fraud litigation currently pending before this court, caused excess inventory of Vlasic products to exist throughout Vlasic's network of customers. (Id. at ¶ 58). *fn10 While inflating Campbell's reported pre-spin-off sales and earnings, these "trade loading" practices had an adverse affect on Vlasic's sales in the second half of fiscal 1998. (Id. at ¶ 58). *fn11 According to Plaintiffs, Campbell's sales practices also resulted in the accumulation of a large balance of unresolved trade expenses and customer deductions which Campbell had promised to Vlasic customers in exchange for purchasing Vlasic products those customers did not need. (Id. at ¶¶ 60-62).
Vlasic also experienced difficulty complying with the debt covenants contained in the $750 million Credit Facility. In its Quarterly Report on Form 10-Q for the period ended May 3, 1998, Vlasic informed investors that, "as a result of accelerated and higher than anticipated transition charges and lower than anticipated earnings," it did not expect to be in compliance with financial ratio requirements of its lending agreements as of the fiscal year ending August 2, 1998. (Id. at ¶ 66). *fn12 Following negotiations with its creditors, Vlasic was able to avoid default by entering into an Amended and Restated Credit Agreement which eased the financial ratio requirements, but increased the interest rate and fees.(Id. at ¶ 67). *fn13
Defendants sought to reassure investors and its shareholders that they remained confident about Vlasic's growth potential despite the company's disappointing performance during the transition period, expressing their continued optimism in the May 27, 1998 press release:
Fiscal 1998 is a transition year on our road to becoming a truly great food company. We are now even more confident of delivering our fiscal 1999 financial goals which have never changed. We have made conscious decisions to do the right things in the short-term, such as investing in brand building and aligning shipments with consumption, because they are necessary for the long-term health and growth of the business. (Id. at ¶ 56).
In the same press release, Vlasic also informed investors that it was "ahead of schedule in the development of its independent infrastructure, including the implementation of a state-of-the-art MIS [Management Information System] system." (Id. at ¶ 55).
Vlasic, however, continued to report declining sales and disappointing earnings. On November 30, 1998, the company issued a press release announcing sales of $327 million for the first quarter of fiscal 1999 (ended November 1, 1998), down from $348 million in the same quarter of fiscal 1998. Earnings per share were $0.10. (Id. at ¶ 70). Commenting on these results, Defendant Bernstock continued to reassure investors about the Company's potential for growth, focusing in part on ...