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Aguilar v. Vitamin Shoppe, Inc.

United States District Court, D. New Jersey

April 25, 2018

IVAN I. AGUILAR, individually and on behalf of all others similarly situated, Plaintiff,


          KEVIN MCNULTY United States District Judge

         Before the court in this putative federal securities class action are the competing motions of:

(1) a group of individual plaintiffs consisting of Richard Schubert, Daniel E. Onishuk, Jr., and Mohammed Kayyal (collectively, the "SOK plaintiffs") (ECF No. 4); and
(2) plaintiff Corpus Christi Firefighters' Retirement System ("CCFRS") (ECF No. 5).

         Each seeks appointment as lead plaintiff and appointment of its counsel as lead counsel.


         The underlying federal securities class action is brought on behalf of purchasers of Vitamin Shoppe, Inc. ("Vitamin Shoppe") common stock between March 1, 2017 and August 8, 2017, inclusive (the "Class Period"). The plaintiffs allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), as amended by the Private Securities Litigation Reform Act of 1995 (the "PSLRA"), 15 U.S.C. § 78u-4, et seq., and of the Securities and Exchange Commission (the "SEC") Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5.

         Defendant Vitamin Shoppe is a specialty retailer and direct marketer of nutritional products. (CC ¶¶ 2, 22). Its common stock was taken public in an initial public offering ("IPO") in 2009. (CC ¶ 2). Defendant Richard L. Markee ("Markee") served as a Director of Vitamin Shoppe from the start of the Class Period until June 7, 2017. (CC ¶ 13). He previously served as the CEO and Chairman of the Board. (CC ¶ 13). Defendant Colin F. Watts ("Watts") served as the CEO and a Director of Vitamin Shoppe throughout the class period. (CC ¶ 14). Defendant Brenda M. Galgano ("Galgano") served as Executive Vice President and the Chief Financial Officer ("CFO") of Vitamin Shoppe during the Class Period. (CC ¶ 15).

         Named plaintiff Ivan I. Aguilar, on behalf of the putative class, alleges that from March 1, 2017 to August 8, 2017 Vitamin Shoppe issued materially false statements and failed to disclose adverse facts known about Vitamin Shoppe. (CC ¶¶ 1, 11-17). More specifically, plaintiffs allege that defendants represented that Vitamin Shoppe's financial statements were prepared in conformity with Generally Accepted Accounting Principles ("GAAP"). (CC ¶¶ 23-25). Plaintiff alleges that these representations were materially false because, in violation of GAAP, defendants allegedly delayed the recognition of a goodwill impairment charge of more than $168 million for Vitamin Shoppe's retail segment, thereby inflating the company's income and assets during the class period. (CC ¶¶ 23-28).

         A. March 1, 2017 Press Release

         The Class Period starts on March 1, 2017. (CC ¶¶ 29). On that date, before the opening of trading, Vitamin Shoppe issued a press release announcing its Financial results for the fourth quarter of 2016, the period that ended December 31, 2016. (CC ¶ 29). The press release reported $304.9 million total net sales, up 3.9% from the same period of the prior year, and a "fully diluted loss per share [of] $0.49, compared to fully diluted earnings per share of $0.22 in fourth quarter 2015." (CC ¶ 29). The release stated that the company had more than $210.6 million in goodwill. (CC ¶ 29). It also provided a fiscal year 2017 guidance of "[t]otal comparable sales growth of flat to low single digit negative, " with "[f]ully diluted earnings per share in the range of $1.95-2.20." (CC ¶ 29). The release quoted defendant Watts, who stated that Vitamin Shoppe's "reinvention strategy, " "growth initiatives, " "accelerated progress in our cost reduction and margin enhancement initiatives, " and "long-term prospects for sustainable, profitable growth" supported this guidance. (CC ¶ 29).

         B. March 1, 2017 Conference Call

         Vitamin Shoppe held a conference call for analysts and investors on the same day as the March 1, 2017 press release. (CC ¶ 30). Defendants spoke positively about the ongoing "reinvention strategy" and the company's businesses and prospects. (CC ¶ 30). Defendant Watts promised a "more in-depth update on the progress we made on our company reinvention strategy, giving some early indications of what we expect to see on key initiatives for 2017." (CC ¶ 30). He also stated that cost savings and improved margin opportunities "will begin to be reflected in our profit performance later in 2017" and that, because of the reinvention strategy, "our company is well positioned to grow profitably and to increase shareholder value by the back-half of 2017." (CC ¶ 30). Defendant Galgano stated, in pertinent part, that Vitamin Shoppe expected an approximately $17 million year-over-year increase in cost reduction, longer-term growth opportunities, and continued progress on company initiatives. (CC ¶ 31).

         C. March 1, 2017 Form 10-K

         On March 1, 2017, Vitamin Shoppe filed its Form 10-K with the SEC, which was signed by Markee, Watts, and Galgano, and certified pursuant to the Sarbanes Oxley Act of 2002 by Watts and Galgano. (CC ¶ 32). The 2016 10-K stated that the company's audited financial statements had been prepared in accordance with GAAP and that the company possessed more than $210.6 million in goodwill. (CC ¶ 32). The form stated that Vitamin Shoppe operated three business segments (i.e., retail, direct, and manufacturing) and that the company had allocated $165.3 million and $45.3 million of its recorded goodwill to the retail and direct segments, respectively. (CC ¶ 32). The form recorded its process for evaluating goodwill. (CC ¶ 32).

         Plaintiff alleges that the actions of March 1, 2017 caused Vitamin Shoppe's stock to rise more than 8% from its close of $21.30 on February 28, 2017 in intraday trading, reaching a Class Period high of $23.25 per share on March 1, 2017. (CC ¶ 33). Several Vitamin Shoppe senior executives and directors sold approximately $2.4 million of their personally held stock at this peak time. (CC ¶ 34). Defendant Markee sold 100, 000 shares on March 3, 2017 alone, for $2, 224, 000 in gross proceeds. (CC ¶ 34).

         D. May 10, 2017 Press Release

         On May 10, 2017, Vitamin Shoppe announced its first quarter financial results for 2017. (CC ¶ 35). Vitamin Shoppe reported "GAAP fully diluted earnings per share of $0.35" for the first quarter. (CC ¶ 35). The company also reduced its fiscal year 2017 guidance by more than 45% to "GAAP fully diluted earnings per share in the range of $1.03-$1.28." (CC ¶ 35). The release stated that the company had more than $210.6 million in goodwill as of April 2017. (CC ¶ 35). Defendant Watts was quoted in the release, stating that "[w]hile the start of the year ha[d] been challenging, I am encouraged by the progress we have made on our major reinvention and cost reduction initiatives that we began developing and piloting over the last several months, " and that "[c]ustomer response to our pilots has given us confidence that these new initiatives should have a positive impact on our business trends starting in the back half of this year." (CC ¶ 35).

         E. May 10, 2017 Conference Call

         Vitamin Shoppe held a conference call on May 10, 2017. (CC ¶ 36). Defendant Watts acknowledged that Vitamin Shoppe was "disappointed" by its first quarter results and that the second quarter was "shaping up to be another difficult quarter." (CC ¶ 36). Nonetheless, he reassured investors that the company had fully "adjusted [its] guidance to reflect this." (CC ¶ 36). Defendant Galgano also assured investors that Vitamin Shoppe was returning to profitability. (CC ¶ 36). She also provided specific second quarter 2017 guidance, stating in pertinent part, "We currently estimate that the second quarter GAAP EPS will be in the range of a loss of $0.07 to earnings of $0.03 a share." (CC ¶ 37).

         The price of Vitamin Shoppe shares declined by about one-third on May 10, 2017. (CC ¶ 38). The share price decreased by more than $6 to close at $12.70 per share. (CC ¶ 38), Plaintiffs allege that this reduction occurred in response to the unexpected 45% reduction in fiscal year 2017 earnings guidance. (CC ¶ 38).

         F. May 10, 2017 Form 10-Q

         On May 10, 2017, Vitamin Shoppe filed with the SEC its Form 10-Q, which was signed and certified pursuant to the Sarbanes Oxley Act of 2002 by defendants Watts and Galgano. This form stated that the company still had more than $210.6 million in goodwill on the books as of April 1, 2017, but now stated that all "210.6 million of its recorded goodwill" was being "allocated" to the retail segment. (CC ¶ 39). This added more than $45 million in goodwill to the retail segment. (CC ¶ 39). The Form 10-Q stated that the "interim financial statements reflect all adjustments, which [were], in the opinion of management, necessary for a fair presentation in conformity with GAAP" and that they "should be read in conjunction with the audited financial statements and notes thereto included in the Form 10-K for the fiscal year ended December 31, 2016, as filed with the Securities and Exchange Commission on March 1, 2017." (CC ¶39).

         G. August 9, 2017 Announcement

         On August 9, 2017, Vitamin Shoppe announced that it was taking a $168.1 million impairment charge on the goodwill associated with its retail segment. (CC ¶ 41). Vitamin Shoppe would thus report a "GAAP loss per share of $6.73" in the second quarter of 2017. (CC ¶ 41). Vitamin Shoppe also dropped its fiscal year 2017 guidance altogether, citing "the potential increase in variability of the Company's results due to the number of initiatives being launched in the back half of the year." (CC ¶ 41).

         Vitamin Shoppe's common stock price again decreased. (CC ¶ 42). It fell $3.50 per share to close at $6.10 per share. (CC ¶ 42). Plaintiffs claim that Vitamin Shoppe's common stock was traded on an open, well-developed, and efficient market at all times during the Class Period. (CC ¶ 42).

         H. Causes of Action

         Plaintiffs allege that defendants made several materially false and misleading statements during the Class Period. (CC ¶ 40). Specifically, plaintiffs allege that the company's retail segment was continuing to dramatically decline and the "reinvention strategy" was not successful; the ongoing changes from the "reinvention strategy" had significantly impaired the more than $168 million in goodwill being carried on Vitamin Shoppe's retail segment; Vitamin Shoppe improperly delayed in recognizing the impairment to the retail segment's goodwill; Vitamin Shoppe's financial statements were not prepared in conformity with GAAP; the value of the retail segment's goodwill did not increase by more than $45 million during the first quarter of 2017; and that defendants thus lacked a reasonable basis for their positive statements about the success of Vitamin Shoppe's reinvention plan and financial prospects. (CC ¶ 40). Defendants also allegedly did not have a reasonable basis to claim that Vitamin Shoppe would return to profitability during fiscal year 2017. (CC¶4O).

         Plaintiffs allege that defendants acted with scienter. (CC ¶ 47). Furthermore, plaintiffs claim that defendants are not entitled to the protection of the statutory safe harbor for "forward-looking statements." (CC ¶ 50). They claim that defendants' actions perpetrated a fraud on the market and that the plaintiffs should be joined in a class. (CC ¶¶ 48, 51-56).

         Count I alleges violation of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. (CC ¶¶ 57-61). Count II alleges violation of Section 20(a) of the Exchange Act. (CC ¶¶ 62-63). Plaintiffs seek compensatory damages, including interest; reasonable costs and expenses incurred in the action, including counsel fees and expert fees; and any other appropriate relief.

         Now before the court are the competing motions of the SOK plaintiffs and CCFRS. (ECF Nos. 4, 5). Each seeks appointment as lead plaintiff and approval of its selection of counsel as lead counsel. (ECF Nos. 4, 5).


         The PSLRA governs the appointment of the lead plaintiff in "each private action arising under the [Exchange Act] that is brought as a plaintiff class action pursuant to the Federal Rules of Civil Procedure." 15 U.S.C. § 78u-4(a)(1). The PSLRA directs courts to adopt a rebuttable presumption that "the most adequate plaintiff is the person or group of persons that has (1) either filed the complaint or made a motion in response to the notice to the class; (2) has the largest financial interest in the relief sought by the class; and (3) otherwise satisfies the requirements of Federal Rule of Civil Procedure 23." Lewis v. Lipocine Inc., No. 16-cv-4009-BRM-LHG, 2016 WL 7042075, at *4 (D.N.J. Dec. 2, 2016) (citing Fields v. Biomatrix, Inc., 198 F.R.D. 451, 456 (D.N.J. 2000) and 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I)).

         At this stage, in the context of the PSLRA, Rule 23 requires that the party or parties seeking to represent a class (1) have claims or defenses that are typical of the claims or defenses of the class, (the "typicality requirement") and (2) be able to fairly and adequately protect the interests of the class, (the "adequacy requirement"). See Fed.R.Civ.P. 23(a); In re Cendant Corp. Litig., 264 F.3d 201, 263 (3d Cir. 2001); Lewis, 2016 ...

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