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In re Campbell Soup Co. Securities Litigation

June 19, 2001


The opinion of the court was delivered by: Irenas, District Judge


Presently before the Court is Defendants' Campbell Soup Company, Dale F. Morrison, and Basil L. Anderson's Motion to Dismiss Plaintiffs' Consolidated Amended Class Action Complaint alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1331 and 1337. For the reasons set forth below, Defendants' motion to dismiss is denied.


In considering this Motion to Dismiss pursuant to Fed. R. Civ. P. 12(b)(6), the Court must accept as true the facts as alleged in the Amended Complaint and any reasonable inferences that can be drawn therefrom. See Nami v. Fauver, 82 F.3d 63, 65 (3d Cir. 1996). Accordingly, the following recitation does not represent findings of fact by the Court.

Plaintiffs brought this putative class action on behalf of all persons who purchased the common stock of Campbell Soup Company ("Campbell" or "the Company") between September 8, 1997, and January 8, 1999, with the exception of defendants, the Company's officers and directors, their families, and any controlled entities.

Defendant Campbell, which is headquartered in Camden, New Jersey, is the world's largest manufacturer and marketer of soup products, with reported fiscal year 1998 sales of approximately $6.7 billion. (Am. Compl. at ¶ 18). The Company's primary customers are wholesalers and grocery store chains. (Id. at ¶ 40). Campbell's stock trades on the New York Stock Exchange. (Id. at ¶ 18). At all times relevant to the Amended Complaint, Defendant Dale F. Morrison ("Morrison") was President and Chief Executive Officer of Campbell and a member of its Board of Directors. (Id. at ¶ 19). Defendant Basil L. Anderson ("Anderson") was, at all relevant times, Executive Vice President and Chief Financial Officer of the Company. (Id. at ¶ 20).

In the years leading up to 1997, when Morrison was appointed President and CEO, Campbell experienced great success, with increasing sales, gross margins, and profits, and a consequent increase in its stock price. (Id. at ¶ 32-33). In its 1997 Annual Report, the Company disclosed that the increases in 1997 and 1996 "were due principally to continued productivity gains in manufacturing and higher selling prices." (Id. at ¶ 33). Analysts noted that, because the retail price of Campbell's soup was approaching $1.00 per can, which was viewed as a break point for retail consumers, further growth would need to come primarily from increased sales volume. (Id.) Thus, Plaintiffs allege, when Morrison took over the Company in June 1997, he faced the substantial challenge of maintaining Campbell's impressive growth while finding new avenues for that growth. (Id.)

Plaintiffs claim that, while the Company looked for new opportunities for growth in foreign markets, Defendants pursued a plan to dramatically increase the volume of domestic soup sales. However, in early 1997, Campbell's customers, in anticipation of an imminent price increase, had bought large quantities of soup to take advantage of the then-current price. (Id. at ¶ 36). Plaintiffs allege that this bulge in purchases reduced subsequent demand and that, faced with this reduced demand, Defendants sought to spur purchases by offering significant quarter-end discounts. (Id. at ¶ 37).

This sales effort was directed by William Toler ("Toler"), the head of marketing, and Ron Gable ("Gable"), Vice President of Supply Chain. Toler reported to Mark Leckie ("Leckie"), President of the U.S. Grocery Division, who reported to Morrison. Gable reported directly to Morrison. (Id. at ¶ 38). Plaintiffs allege that Morrison and William O'Shea, who served under Anderson as Comptroller, would give Toler revenue targets that the Company needed to report in order to meet analyst estimates. (Id. at ¶ 39). Toler, through frequent and sometimes daily conference calls, would discuss these targets with his marketing team and would authorize ever larger "discounts" necessary to induce customers to take product which the Company would then "load" onto trucks by the end of each fiscal quarter. (Id. at ¶ 40).

This "loading," as the practice was called, included discounts of up to fifteen to twenty percent. (Id. at ¶ 41). Plaintiffs contrast these large discounts with the modest two to three percent discounts that Campbell traditionally offered its customers in exchange for in-store advertising and promotions of Campbell's products. (Id.). Although the "loading" discounts were significantly larger than the traditional discounts and were not offered in exchange for marketing concessions, Plaintiffs allege that Defendants nevertheless reported these discounts as "sales, general and administrative expenses" ("SG&A") -- in other words, marketing expenses -- rather than as deductions from gross revenue, as, Plaintiffs claim, is required under generally accepted accounting principles ("GAAP"). (Id. at ¶ 86(h)).

Plaintiffs further allege that, after Campbell's customers indicated that they did not have enough space to store the product that Campbell was pushing them to buy, Defendants implemented a plan to ship and warehouse product for its customers. (Id. at ¶ 42). As Plaintiffs claim, Defendants used forty to fifty warehouses, owned or leased by Campbell, to store the product. (Id.). Defendants also arranged for trucks to pick up the product, drive to other areas of the lots at Campbell facilities, and wait there until the product was to be delivered to the customers. (Id.). Up to one hundred trucks may have been involved in this process. (Id.). Plaintiffs allege that, because Campbell did not have enough trucks to handle the large amount of product "loaded" at the end of each quarter, the Company, specifically Gable, arranged for third party shipping companies to provide assistance. (Id. at ¶ 43).

Plaintiffs allege that Campbell realized the revenue from this product during the quarter in which it was "loaded," even though: (i) the product was not delivered until after the quarter ended; (ii) Campbell paid for the additional shipping, storage, and handling of the product; (iii) there was no transfer of risk of loss; and (iv) there was no legitimate business reason for the customers to purchase products under those conditions. (Id. at ¶ 85(c)). As a result, Plaintiffs contend, Defendants improperly reported the "sales" as legitimate revenue earlier than they should have. (Id. at ¶ 44).

Plaintiffs claim that Defendants further induced Campbell's customers to take additional product by offering a "guaranteed sales" policy, whereby customers could return unsold product within a reasonable period of time. (Id. at ¶ 46). Although Defendants allegedly believed that the customers would not return product because of its long shelf life, Plaintiffs contend that the returns ended up being quite significant. (Id.). Plaintiffs indicate that return levels were so high that Toler sent out a memorandum stating that his approval was required before any further "guaranteed sales" were made. (Id.). Plaintiffs claim that Campbell's "guaranteed sales" policy violated GAAP because Defendants recognized these sales as revenue even though future returns could not be reasonably estimated and Defendants did not provide a reserve for returns in their financial statements. (Id. at ¶ 85(d)).

As a result of these sales practices, Plaintiffs allege, several of Campbell's major customers had almost a year or more of advance inventory of Campbell's soup products. (Id. at ¶ 47).

Plaintiffs allege that these practices, and concerns about their propriety, were discussed among senior management, including Morrison and Anderson, and that Morrison received memoranda reviewing the practices. Plaintiffs also claim that Morrison rejected recommendations that the Company stop such improper practices. (Id. at ¶ 45).

Throughout this period, the Company reported impressive, often record, growth. (Id. at ¶¶ 49-75). As Defendants disclosed in quarter-end press releases, SEC filings, and annual reports, reported sales and earnings steadily increased, due to, Defendants claimed, "volume-driven growth" and increased advertising and marketing, among other factors. (Id.). Defendants also represented in their filings that "shipments are made promptly by the company after receipt and acceptance of orders." (Id. at ¶¶ 52, 71). As the Company consistently met analysts' expectations, the stock price rose accordingly. (Id. at ¶¶ 49-75). However, Plaintiffs allege, Defendants never disclosed in its public releases or SEC filings its engagement in, nor the extent of, its allegedly improper sales and accounting practices.

On January 11, 1999, Defendants announced that fiscal year earnings would fall short of analysts' estimates due to "unusually warm weather" and "major inefficiencies throughout the supply chain, including procurement, manufacturing, shipping and storage of products." (Id. at ¶¶ 76, 78). As a result of the announcement, Campbell's stock price dropped almost sixteen percent from the previous close, from a high of $53.9375 per share on January 8, 1999 to a closing price of $45.375 per share on January 11, 1999. (Id. at ¶ 80).

As reported on January 12, 1999, Morrison told Wall Street analysts that "Campbell planned to end its long-time practice of offering retailers rebates and steep discounts at quarters end as a way to entice stores to stock up on soup so Campbell can meet its sales target." (Id. at ¶ 87). However, Plaintiffs allege, Defendants still did not disclose the true extent of the improper "loading" and "shipping" practices nor the improper accounting practices. (Id.). As Campbell's sales and earnings suffered during the remainder of fiscal year 1999 and the beginning of fiscal year 2000 due, in large part, to Defendants' decision to cease its allegedly improper sales practices, Campbell's stock price correspondingly declined, to $40.68 per share on February 16, 1999, and, after a slight rebound, to a 1999 low of $37.44 per share on December 21, 1999. (Id. at ¶ 88).

In January 2000, ten identical class action complaints were filed against Defendants, and were later consolidated into a single action. On July 27, 2000, Plaintiffs filed a consolidated amended class action complaint ("Amended Complaint"). The Amended Complaint alleges that: (1) Defendants, by not revealing their allegedly improper sales and accounting practices, violated Section 10(b) by disseminating false and misleading statements and failing to disclose material facts necessary to make those statements not misleading; and (2) the individual defendants -- Defendants Morrison and Anderson -- were controlling persons of the Company, and, as such, caused the Company to engage in its allegedly wrongful conduct, in violation of Section 20(a).

On January 12, 2001, Defendants filed the instant motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6). Defendants contend that: (1) Defendants did not have a duty of disclosure; (2) Plaintiffs failed to sufficiently plead that Defendants acted with scienter as required under the Private Securities Litigation Reform Act ("PSLRA") and Rule 9(b); (3) Plaintiffs failed to identify the nature and extent of counsel's investigation; (4) Plaintiffs failed to state a claim under Section 20(a); and (5) Plaintiffs' new claims in the Amended Complaint are barred by the statute of limitations.


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 Rule 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 (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 it has not alleged." Associated General Contractors of Calif., Inc., v. California State Council of Carpenters, 459 U.S. 519, 526 (1983). Finally, when "[c]onfronted 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).



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. § 78(j(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 the 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).

To establish a claim under Section 10(b) and Rule 10b-5, a plaintiff must plead that: (1) the defendant made a representation or omission of material fact; (2) with scienter; (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. 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 Sec. Litig., 180 F.3d 525, 537 (3d Cir. 1999) (citing In re Westinghouse Sec. Litig., 90 F.3d 696, 710 (3d Cir. 1996)). The instant Motion focuses on the first and second prongs.

For a defendant to be found liable for non-disclosure, a plaintiff must first establish that the defendant had an affirmative duty to disclose. See Basic, Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988) ("Silence, absent a duty to disclose, is not misleading under Rule 10b-5.") However, once a disclosure is made, the disclosing party has an obligation to ensure that the representations are accurate. Cf. Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1098 n.7 (1991) (citing Berg v. First American Bankshares, Inc., 796 F.2d 489, 496 (D.C. Cir. 1986)). In the context of Section 10(b) and Rule 10b-5 actions, "[a] statement is false or misleading if it is factually inaccurate, or additional information is required to clarify it." In re Nice Sys., Ltd. Sec. Litig., 135 F. Supp.2d 551, 573 (D.N.J. 2001) (Lechner, J.) (citations and internal quotations omitted).

To be actionable, a representation or omission must also be material. Basic, 485 U.S. at 238. Material information is defined as "information that would be important to a reasonable investor in making his or her investment decisions." Burlington, 114 F.3d at 1425. "Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available." TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); see also Oran v. Stafford, 226 F.3d 275, 282 (3d Cir. 2000). "Material representations must be contrasted with statements of subjective analysis or extrapolations, such as opinions, motives and intentions, or general statements of optimism, `which constitute no more than `puffery' and are understood by reasonable investors as such.'" EP MedSystems, 235 F.3d at 872 (quoting Advanta, 180 F.3d at 538) (internal quotations omitted).

In Burlington, the Third Circuit announced an alternative standard for determining materiality in the context of an "efficient" market. Burlington, 114 F.3d. at 1425; see also Oran, 226 F.3d at 282. Recognizing that "efficient markets are those in which information important to reasonable investors," the Burlington court concluded that "the concept of materiality translates into information that alters the price of the firm's stock." Burlington, 114 F.3d at 1425. "As a result, when a stock is traded in an efficient market, the materiality of disclosed information may be measured post hoc by looking to the movement, in the period immediately following the disclosure, of the price of the firm's stock." Oran, 226 F.3d at 282.


1. Rule 9(b)

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 comply with the heightened pleading requirements of both Rule 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 ("PSLRA"). 15 U.S.C. § 78u-4 et seq.; Oran, 226 F.3d at 288; Advanta, 180 F.3d at 530.

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." Fed. R. Civ. P. 9(b). This heightened standard gives "defendants notice of the claims against them, provides an increased measure of protection for their reputations, and reduces the number of frivolous suits brought solely to extract settlements." Burlington, 114 F.3d at 1418.

However, because "application of the Rule prior to discovery `may permit sophisticated defrauders to successfully conceal the details of their fraud[,]... the normally rigorous particularity rule has been relaxed somewhat where the factual information is peculiarly within the defendant's knowledge or control." Id. (quoting Shapiro v. UJB Fin. Corp., 964 F.2d 272, 284-85 (3d Cir. 1992)) (internal citations omitted).

That said, even under a relaxed standard, "boilerplate and conclusory allegations will not suffice. Plaintiffs must accompany their legal theory with factual allegations that make their theoretically viable claim plausible." Burlington, 114 F.3d at 1418 (citing Shapiro, 964 F.2d at 285) (italics omitted).

2. Private Securities Litigation Reform Act

In response to inconsistency among the circuits as to the appropriate pleading standard and to an increasing number of frivolous "strike suits" aimed at achieving quick settlements, Congress passed the PSLRA in 1995 to supplement the Rule 9(b) standard with a "uniform and stringent pleading requirement." S. Rep. No. 104-98, at 15 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 694. The PSLRA requires that, in 10(b) and Rule 10b-5 actions, 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). As a result, the Court must scrutinize intensively the allegations of fraud in the complaint and consider each allegation separately. Westinghouse, 90 F.3d at 712.


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