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)
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
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
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
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
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
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
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
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 ¶¶
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
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
the benefits which the company's investment in its new infrastructure
expected to yield following the transition period:
Our capabilities across our entire infrastructure,
including information technology, sales, and research
and development, should be as good as, if not better
than those of the large-cap food companies. We will
use these capabilities for competitive advantage. Our
investments in these areas — as well as in our
brands are beginning to pay-off now and are expected
to continue even more so in the future.
(Id. at ¶ 70). It was, thus, expected that, following the one-year
transition period, Vlasic's newly purchased MIS systems would contribute
to the company's future growth potential.
As part of its plan for achieving full independence from Campbell prior
to the expiration of the TSA on March 29, 1999, Vlasic purchased and
proceeded to implement a new MIS systems designed, in part, to perform
various financial reporting functions previously provided by Campbell's
information systems. Vlasic purchased and proceeded to implement a
state-of-the-art computer network, Business Process Control System
("BPCS"), for use in its financial reporting functions. For use in the
processing, tracking, and analyzing trade deductions, Vlasic selected
Gelco Trade Management Solution ("Gelco TMS"), a web-based system
offering funds and deduction management and spending analysis. (Id. at
¶¶ 75-76). In theory, this system was designed to provide a single
integrated system for accurately identifying, managing, and resolving
customer deductions that worked across Vlasic's entire business and was
compatible with Vlasic's existing internal systems. (Id. at ¶¶
While it is unclear from the Amended Complaint precisely when
implementation of these systems began, in Vlasic's Form 10-Q (for the
period ending November 1, 1998), filed with the SEC on December 15, 1998,
the company reported that "implementation of newly purchased systems is
targeted for completion from April 2, 1999 and is approximately 70%
complete. (Id. at ¶ 72). Vlasic subsequently made the following
announcement in a press release issued on Feb. 24, 1999:
It has been only 10 months since we became a
separate, independent company and in that short amount
of time we've completed building our infrastructure
for the future growth of the Company. . . . "As of
February 1, 1999 we're operating with our new
state-of-the-art IT system which includes our own
Customer Services and Business Service Centers.
(Id. at ¶ 82). In its next Form 10-Q, for the Third Quarter,
ending on May 2, 1999, Vlasic provided the following update: