Opinion
Case No. 14 C 1416
09-30-2015
Peter Ikai Van Noppen, Plaintiff, v. InnerWorkings, Inc., Eric Belcher and Joseph Busky, Defendants.
Jeremy Alan Lieberman, Pomerantz LLP, New York, NY, Louis Carey Ludwig, Patrick Vincent Dahlstrom, Pomerantz LLP, Chicago, IL, for Plaintiff. Elizabeth Abbene Coleman, Howard Steven Suskin, Jenner & Block LLP, Chicago, IL, for Defendants.
Jeremy Alan Lieberman, Pomerantz LLP, New York, NY, Louis Carey Ludwig, Patrick Vincent Dahlstrom, Pomerantz LLP, Chicago, IL, for Plaintiff.
Elizabeth Abbene Coleman, Howard Steven Suskin, Jenner & Block LLP, Chicago, IL, for Defendants.
MEMORANDUM OPINION AND ORDER
John Robert Blakey, United States District Judge
Plaintiff Peter Van Noppen, individually and on behalf of all others who purchased InnerWorkings, Inc. (“InnerWorkings”) common stock between February 15, 2012 and November 6, 2013, brings this action for securities fraud against InnerWorkings and two of its executives, CEO Eric Belcher and CFO Joseph Busky. Plaintiff alleges violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a), and SEC Rule 10b–5, 17 C.F.R. § 240.10b–5.
Pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6), Defendants now move to dismiss [41] the three-count Amended Complaint [38] in its entirety. That motion is granted in part and denied in part. Plaintiff may proceed with Counts I to III with respect to the statements about Productions Graphics and InnerWorkings' putative class period financials. Conversely, Plaintiff cannot proceed with Counts I to III with respect to the statements about the inside sales group, the internationalization of PPM4 and the enterprise client retention rate.
I. Legal Standard
Under Rule 12(b)(6), this Court must construe the Amended Complaint in the light most favorable to Plaintiff, accept as true all well-pleaded facts and draw reasonable inferences in his favor. Yeftich v. Navistar, Inc., 722 F.3d 911, 915 (7th Cir.2013); Long v. Shorebank Development Corp., 182 F.3d 548, 554 (7th Cir.1999). Statements of law, however, need not be accepted as true. Yeftich, 722 F.3d at 915. Rule 12(b)(6) limits this Court's consideration to “allegations set forth in the complaint itself, documents that are attached to the complaint, documents that are central to the complaint and are referred to in it, and information that is properly subject to judicial notice.” Williamson v. Curran, 714 F.3d 432, 436 (7th Cir.2013).
To survive Defendants' motion under Rule 12(b)(6), the Amended Complaint must “state a claim to relief that is plausible on its face.” Yeftich, 722 F.3d at 915. “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id.
More is required from plaintiffs in actions for securities fraud than is typically required at the motion to dismiss stage. The Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u–4(b), raises the pleading standard for securities fraud claims beyond the requirements of even Rule 9(b). Makor Issues & Rights, Ltd. v. Tellabs, Inc. (“Tellabs I”), 437 F.3d 588, 594 (7th Cir.2006), vacated, 551 U.S. 308, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007); Conlee v. WMS Industries, Inc. (“Conlee II”), No. 113503, 2013 WL 1767648, at *3 n. 1 (N.D.Ill. April 24, 2013); Garden City Employees' Retirement System v. Anixter International, Inc. (“Garden City II”), No. 09–5641, 2012 WL 1068761, at *2 (N.D.Ill. March 29, 2012). In this way, the PSLRA acts as a “check against abusive litigation by private parties,” Tellabs, Inc. v. Makor Issues & Rights, Ltd. (“Tellabs II”), 551 U.S. 308, 313, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007), as Congress implemented the statute's exacting pleading requirements “to screen out frivolous suits, while allowing meritorious actions to move forward,” id. at 313, 324, 127 S.Ct. 2499. In charging misrepresentations or omissions of material fact, Plaintiff must “specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading.” 15 U.S.C. § 78u–4(b)(1).
II. Facts
A. InnerWorkings' Business
InnerWorkings, a global company based in Chicago, Illinois, provides print management and promotional solutions to corporate clients. Amended Complaint (“AC”) ¶¶ 2, 16, 30. InnerWorkings procures printed products from suppliers and sells those products to clients. AC ¶ 3. “Enterprise” clients—with whom InnerWorkings contracts to provide some or substantially all of their printed products on a recurring basis—accounted for 70 to 75 percent of the Company's revenue during the putative class period. AC ¶¶ 3, 45, 50. The putative class period is from February 15, 2012 to November 6, 2013. AC ¶ 242. Conversely, “middle market” clients, also known as the “small to medium-sized business market” or “SMB,” accounted for 25 to 30 percent of revenue during the putative class period. AC ¶¶ 3, 38, 46. As of December 31, 2012, InnerWorkings achieved annual revenue of approximately $800 million and operated globally. AC ¶¶ 30, 40.
During the putative class period, InnerWorkings used a proprietary software system known as “PPM4,” which stored, analyzed and tracked the production capabilities of the Company's supplier network in the United States. AC ¶ 43. PPM4 enabled InnerWorkings to gather job specifications, identify suppliers, establish pricing, manage print production and coordinate purchase and delivery of the finished product. AC ¶ 43.
B. Inside Sales
During the second half of 2010, InnerWorkings began testing and investing in a new telesales project, dubbed “inside sales.” AC ¶ 61. The purpose of inside sales was to generate new SMB clients through an in-house cold-call center. AC ¶ 6. After an initial testing period of 18 months, InnerWorkings was encouraged by the project's preliminary results. AC ¶ 61. In February 2012, the Company announced plans to expand the inside sales group, expecting that its workforce would more than triple, from 60 to 200 sales representatives, by the end of 2012. AC ¶ 61. Although the project was not profitable at the time, InnerWorkings stated its expectation that it would become profitable in 2013. AC ¶ 61.
Over the remainder of 2012 and during the first half of 2013, InnerWorkings reiterated its expectation that the Company's continued investment in inside sales would prove successful. E.g., AC ¶¶ 183, 187, 194, 202, 206, 216. This action for securities fraud concerns many of those statements. For example, during the November 8, 2012 earnings call, InnerWorkings' CEO Eric Belcher stated that the project represented a “huge opportunity for the Company” and that the Company was “laying the groundwork” for future success. AC ¶ 194. Likewise, at a May 7, 2013 investor conference, InnerWorkings' Vice President of Corporate Development Brad Moore noted that although inside sales represented “still a relatively small portion of the overall revenue of the Company, and still an overall small portion of the middle-market business for us,” the Company believed that the project would become the future “driver for us in this segment of the business.” AC ¶ 216.
During the August 8, 2013 earnings call, however, Belcher announced that the inside sales group's performance during Q2 2013 had not met InnerWorkings' expectations and that the Company was rethinking its “bigger picture strategic ideas for the group.” AC ¶ 225; 8/8/13 Earnings Call Tr. [43–26] at 4, 7. In the same call, Belcher stated that InnerWorkings had made changes to the inside sales group's management and was looking to align with a partner to bolster the Company's SMB client-acquisition capability going forward. AC ¶ 225; 8/8/13 Earnings Call Tr. [43–26] at 4. Belcher acknowledged that InnerWorkings “had some learnings along the way, which I guess in hindsight would be anticipated, always the case when you try something new and bold like this.” AC ¶ 225.
C. Productions Graphics
On October 24, 2011, InnerWorkings acquired all of the securities of Productions Graphics through a Share Purchase Agreement. AC ¶¶ 102, 104. Productions Graphics was a print management firm based in France with operations in 12 countries and 2011 sales of $30 million that was primarily driven by enterprise clients. AC ¶ 102. At the time of its acquisition, Productions Graphics was fully held by Christophe Delaune, CEO of Productions Graphics, and Winthrop Limited (“Winthrop”), an organization affiliated with Delaune. Share Purchase Agreement at 1, attached to 10/25/11 8–K [43–3]; 2/18/14 8–K [43–29] at 2. Delaune signed a long-term contract with InnerWorkings, agreeing to serve as President of Productions Graphics going forward. AC ¶¶ 8, 116.
Pursuant to the Share Purchase Agreement, InnerWorkings' acquisition of Productions Graphics was valued at 67,911,000. AC ¶ 8; Share Purchase Agreement at 2, attached to 10/25/11 8–K [43–3]. Only a small portion of the deal's value—8%, or 4,191,000—was paid upfront to Delaune and Winthrop. AC ¶ 8; Share Purchase Agreement at 2, attached to 10/25/11 8–K [43–3]. InnerWorkings was to pay the remainder in the form of “earn-outs” only if Productions Graphics met certain financial milestones over a four-year period. AC ¶ 8; Share Purchase Agreement at 2, attached to 10/25/11 8–K [43–3]. In 2011 and 2012, Productions Graphics initially appeared to exceed those targets. Consequently, Delaune and Winthrop obtained their payments for those first two periods: 1.2 million euros and 5.9 million euros for 2011 and 2012, respectively, for a total of 7.1 million euros. AC ¶¶ 9, 16; Share Purchase Agreement at 2, attached to 10/25/11 8–K [43–3]; 11/6/13 8K [43–29] at 3.
In October 2013, InnerWorkings removed Delaune as President of Productions Graphics. AC ¶ 21. Thereafter, InnerWorkings informed the market that the Company had investigated Delaune's conduct relating to certain transactions affecting earn-out payments under the Share Purchase Agreement. 2/18/14 8–K [43–29] at 2. InnerWorkings revealed that, based on the results of the review, “the Company concluded it was the victim of a fraud perpetrated by [Delaune]” and that “[Delaune] artificially inflated results to meet earn-out targets and induce the Company to make earn-out payments relating to the Productions Graphics acquisition.” 2/18/14 8–K [43–29] at 2. To reverse the revenue recognized in connection with Delaune's suspect transactions in 2011 and 2012, the Company issued restated financials, according to the Amended Complaint, on April 21, 2014, see AC ¶ 160—although the correct date apparently is March 18, 2014, see 3/18/14 10–K [43–30] at 3. InnerWorkings has filed a criminal complaint in France “seeking to redress the harm caused by [Delaune's] conduct.” 3/18/14 10–K [43–30] at 53. Delaune, as well as Productions Graphics' Finance Director Jean Philippe Calzolari, have acknowledged their role in the fraud but also have implicated Belcher and InnerWorkings' CFO Joseph Busky as being co-participants. AC ¶¶ 132–34, 139–48, 154–58.
D. Stock Price Drop
After the market closed on November 6, 2013, and following the removal of Delaune and lagging inside sales growth, InnerWorkings announced lower profits than expected that quarter and slashed its revenue guidance for 2013. AC ¶¶ 232–32. The market responded the next day: InnerWorkings' stock price fell 40.57 percent in a day marked by heavy trading volume. AC ¶ 234.
III. Analysis
A. Counts I and II: Section 10(b) and Rule 10b–5
In Counts I and II, Plaintiff alleges that Defendants violated Section 10(b) and Rule 10b–5(a) to (c) through misrepresentations made in SEC filings, earnings calls and investor conferences from February 15, 2012 to August 8, 2013. Counts I and II rise and fall together, see [43] at 37–38, so the parties addressed them together and so will this Court.
Under Section 10(b) and Rule 10b–5, Plaintiff can obtain damages if he can prove: (1) Defendants made a false or misleading statement or omission; (2) of material fact; (3) with scienter; (4) in connection with the purchase or sale of securities; (5) upon which Plaintiff justifiably relied; and (6) that the false statement proximately caused Plaintiff damages. Tellabs I, 437 F.3d at 595; see also Pugh v. Tribune Co., 521 F.3d 686, 693 (7th Cir.2008).
Before addressing these substantive elements of Plaintiff's claims, however, this Court must first resolve two preliminary matters raised by Defendants. Defendants argue that the Amended Complaint cannot get off the ground because Plaintiff did not plead his claims with the particularity required by the PSLRA. Defendants also dispute the scope of the putative class period, arguing that Plymouth County Retirement System, the designated Lead Plaintiff, lacks standing to contest statements made after February 5, 2012, when Plaintiff last purchased InnerWorkings securities.
First, under the PSLRA, Plaintiff is required to “specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading.” 15 U.S.C. § 78u–4(b)(1). While Plaintiff perhaps could have been more artful at times, the Amended Complaint is not so vague or confusing as to warrant dismissal. In the Amended Complaint, Plaintiff sets forth block quotes that are followed by one or more paragraphs that are broken-up by subject matter and that identify the relevant portions of the block quote, often through quoting snippets. E.g., AC ¶ 194 (block quote from 11/8/12 earnings call), ¶¶ 195–96 (two paragraphs broken up by subject matter and quoting snippets from the block quote). In the paragraphs following the block quote (AC ¶¶ 195–96 in this example), Plaintiff explains, with cross-citations to the factual allegations made earlier in the Amended Complaint, why the snippets are false or misleading. This Court can follow that organization. So can other Courts, indeed, Defendants themselves cite a case crediting the organization employed here. [43] at 8 (citing Conlee v. WMS Industries, Inc. (“Conlee I”), No. 11–3503, 2012 WL 3042498, at *4 (N.D.Ill. July 25, 2012)). Furthering this point, the Amended Complaint is better organized than other complaints that have been deemed adequate. For example, the complaint in Davis v. SPSS, Inc. (“Davis I”), 385 F.Supp.2d 697, 708–09 (N.D.Ill.2005), unlike here, lumped statements from press releases and SEC filings together and then provided “a series of reasons why the statements as a whole [were] misleading.” See also Garden City Employees' Retirement System v. Anixter International, Inc. (“Garden City I”), No. 09–5641, 2011 WL 1303387, at *21 & n. 12 (N.D.Ill. March 31, 2011). That was not done here. Second, Defendants argue that Plaintiff lacks standing to challenge statements made after February 5, 2012, when designated Lead Plaintiff Plymouth County Retirement System, last bought InnerWorkings stock. Certification of Plymouth County Retirement System [15–2]. Based on the fraud-on-the-market theory, which Plaintiff relies upon here, AC ¶ 250, the Seventh Circuit has held that shareholders lack standing to bring a Rule 10b–5 claim based on allegedly false or misleading statements or omissions made by corporate defendants after the shareholders purchased their securities. Roots Partnership v. Lands' End, Inc., 965 F.2d 1411, 1416 n. 4, 1420 (7th Cir.1992).
Plaintiff, acknowledging Roots Partnership, responds, and this Court agrees, that the Amended Complaint cures the standing defect by naming State–Boston Retirement System as an “Additional Plaintiff.” AC ¶ 29. State–Boston Retirement System purchased InnerWorkings stock later in the putative class period, on September 26, 2013, than Plymouth County Retirement System. Certification of State–Boston Retirement System [38–2]. Lead plaintiffs can cure standing deficiencies by adding an additional plaintiff who purchased securities later in the putative class period. See, e.g., Ong v. Sears, Roebuck & Co. (“Ong I”), 388 F.Supp.2d 871, 890–92 (N.D.Ill.2004) (Pallmeyer, J.) (finding standing problems); Ong v. Sears, Roebuck & Co. (“Ong II”), No. 03–4142, 2005 WL 2284285, at *24 (N.D.Ill. Sept. 14, 2005) (Pallmeyer, J.) (standing problems from Ong I were cured through an additional plaintiff); Davis I, 385 F.Supp.2d at 705–07 (finding standing problems); Davis v. SPSS, Inc. (“Davis II”), 431 F.Supp.2d 823, 825, 833–34 (N.D.Ill.2006) (Coar, J.) (standing problems from Davis I were cured through an additional plaintiff). In fact, Defendants rely on Davis I to challenge Plaintiff's standing yet omit the subsequent discussion from Davis II.
Defendants also cite Local Rule 83.16(b), but that Rule is unavailing here. Local Rule 83.16(b) requires the attorneys who represent State–Boston Retirement System to have made an appearance. They have. See [3], [4], [6], [22]. This Court, moreover, reviewed the docket in Davis v. SPSS, Inc., Case No. 04–3427, where adding another plaintiff cured standing problems, and observes that no attorney made a separate appearance for the additional plaintiff named in that case. This case thus is analogous to Davis.
Finally, even if there was a technical failure to add State–Boston Retirement System as an additional plaintiff, this Court would have given Plaintiff leave to amend only to correct that deficiency at this initial stage in the proceedings. Fed.R.Civ.P. 15(a)(2); see also In re Guidant Corp. Securities Litigation, 536 F.Supp.2d 913, 925–26 (S.D.Ind.2008), affirmed, 583 F.3d 995 (7th Cir.2009); Greater Pennsylvania Carpenters Pension Fund v. Whitehall Jewellers, Inc., No. 04–1107, 2005 WL 61480, at *7–8 (N.D.Ill. Jan. 10, 2005). For these reasons, naming State–Boston Retirement System as an “Additional Plaintiff” enables Plaintiff to challenge statements and omissions made by InnerWorkings after February 15, 2012.
Having resolved Defendants' two preliminary matters in Plaintiff's favor, this Court now turns to the substantive elements of Plaintiff's securities fraud claim under Section 10(b) and Rule 10b–5. Plaintiff alleges that Defendants made five categories of false or misleading statements or omissions. They are Defendants' statements and omissions about: (1) the inside sales group; (2) Productions Graphics; (3) the internationalization of PPM4; (4) the enterprise client retention rate; and (5) InnerWorkings' putative class period financials. In Subsections 1 to 5 below, this Court addresses each category in turn and concludes that, when Plaintiff's allegations are viewed individually and collectively, only two are viable.
1. Inside Sales Group
In response to Defendants' motion, Plaintiff distills his 110–page, 281–paragraph Amended Complaint into six allegations that Defendants made false or misleading statements or omissions about inside sales. In doing so, Plaintiff chose not to respond fully to Defendants, who for their part, responded to every allegedly false or misleading statement about inside sales in their moving papers and summary table [43–2]. Based on Plaintiff's election, this Court declines to address the abandoned statements expressly, yet notes its agreement with Defendants' analysis, and further notes that its present analysis would extend to the abandoned statements too. See McCready v. Title Services of Illinois, Inc., No. 06–6280, 2008 WL 2435933, at *3 (N.D.Ill. June 16, 2008) (citing Seventh Circuit law to discuss principles of waiver and abandonment). The six statements about inside sales that remain are:
1. During the May 3, 2012 earnings call, Belcher said that InnerWorkings' inside sales representatives went through “very extensive training programs.” AC ¶ 183.
2. During the August 10, 2012 earnings call, Belcher said that InnerWorkings' hard work in recruiting and training inside sales representatives “is being rewarded with sharply improving sales and productivity measures.” AC ¶ 187.
3. During the February 13, 2013 earnings call, Belcher said that revenue from inside sales more than doubled in 2012, and that InnerWorkings expected revenue from inside sales “to more than double again this year becoming the equivalent of a top five customer for us in 2013.” AC ¶ 197; see also AC ¶ 202 (similar statement from Belcher during InnerWorkings' annual “Investor Day” nine days later, on February 22, 2013).
4. During a March 11, 2013 investor conference, Belcher said that InnerWorkings had developed an “Internet lead generation solution ... that allows us to prospect in an extremely aggressive and very efficient manner.” AC ¶ 206.
5. During the May 10, 2013 earnings call, Belcher said that InnerWorkings “continue[s] to develop and improve upon our key performance metrics,” and that the Company believed that the inside sales “is going to be ... large and successful.” AC ¶ 219.
6. During the August 8, 2013 earnings call, Belcher noted that, despite the lower than expected revenue from inside sales group and internal reorganization, InnerWorkings remained “very confident about the role this group will play in the long term growth of our business,” and, going forward, the inside sales group will be “as switched on as any part of our business is right now.” AC ¶ 225.
For every statement, Defendants argue that one or more of the first three elements of the securities fraud test is not met. This Court analyzes each statement in turn and concludes that dismissal is warranted.
a) False or Misleading Statement or Omission
Under the PSLRA, Plaintiff must “specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading.” 15 U.S.C. § 78u–4(b)(1). Claiming that a particular statement was untrue is not enough. Plaintiff must explain, with particularity, the factual basis for his assertion that the statement was untrue. Garden City II, 2012 WL 1068761, at *4 (collecting cases); Garden City I, 2011 WL 1303387, at *20 (collecting cases). The relevant question is whether the facts alleged are “sufficient to support a reasonable belief as to the misleading nature of the statement or omission.” Tellabs I, 437 F.3d at 595 (internal quotations omitted). These facts must show that the statements Defendants made were false when made and not incorrect in retrospect. Higginbotham v. Baxter International Inc., 495 F.3d 753, 759–60 (7th Cir.2007); Garden City I, 2011 WL 1303387, at *20.
Here, to substantiate that Belcher's six statements about inside sales were false or misleading, Plaintiff relies exclusively on eight confidential witnesses. This Court refers to the confidential witnesses as “CW1” to “CW8.” Plaintiff generally argues that the confidential witnesses show that Defendants knew that InnerWorkings was hiring inexperienced, unproductive sales personnel, and that InnerWorkings knew that the inside sales group and its sales representatives were not meeting sales targets. See AC ¶¶ 184, 188, 198, 208, 220, 226. This Court first summarizes the allegations from CW1 to CW8; then analyzes Seventh Circuit law about confidential witnesses; and, having parsed the witness allegations and analyzed the relevant law, last concludes that CW1 to CW8 do not show that Statements 1 to 6 are false or misleading.
CW1, a Business Development Consultant from October 2011 to August 2013, alleged that he often saw internal reports that projected sales targets greater than what the inside sales group was able to deliver, with the group being “nowhere near there.” AC ¶ 72. These reports originated from two Vice Presidents of Sales, Lindsey Campbell and Mark Holmes, who replaced their predecessor Brian Simms in July 2013. AC ¶¶ 72, 74. CW1 also referenced emails from Campbell and Holmes “during the last couple of months of [CW1's] tenure,” that is, July and August 2013, showing that the inside sales group was missing sales targets. AC ¶ 72. CW1—as well as CW2 and CW5—further observed that inside sales representatives often were hired straight from college and lacked sales experience. AC ¶¶ 73, 75, 83.
From December 2010 to August 2013, CW2 was first an Account Manager and then a Sales Manager at InnerWorkings. AC ¶ 74. As a Sales Manager, CW2 reported to the Vice President of Sales. AC ¶ 74. Plaintiff did not expressly allege that CW2 was a member of the inside sales group. See AC ¶¶ 72–79.
CW2 alleged that the inside sales group in “no way” met InnerWorkings' goals for 2012. AC ¶ 74. CW2 added that, for an unstated timeframe, no more than 15 percent of middle market account executives met their internal targets, and that those targets were unrealistic. AC ¶ 76. In support, CW2 described an internal InnerWorkings sales report for Q3 2013 that showed the Company's sales targets for each month during July to September 2013; and actual sales for July 2013 and part of August 2013. AC ¶ 77. The report showed: (1) approximately $1 million in sales for July 2013; (2) approximately $900,000 in sales for part of August 2013; and (3) an estimate of approximately $2.9 million in sales for the remainder of the quarter, meaning the remainder of August 2013 and all of September 2013. AC ¶ 77. The report also showed that the average ratio of actual bookings to target bookings across the seven inside sales teams in July 2013 was 47 percent. AC ¶ 77. According to CW2, Senior Vice President of Business Technology Rob Burkart, who reported to Belcher, received an email attaching this report. AC ¶ 78. When Burkart received the email is not pled. See AC ¶ 78.
CW2 also recalled seeing a graph “during his tenure” that showed that the inside sales group achieved $4 million in sales in 2012. AC ¶ 77. Plaintiff contrasts that number with his inference that InnerWorkings had inside sales of $19.9 million. AC ¶ 79. Specifically, InnerWorkings' Form 10–K for 2012 reported $199,424,718 in middle market revenue; and, according to a Barrington Research report, the inside sales group generated approximately 10 percent of middle market revenues. AC ¶ 79. Ten percent of $199,424,718 is approximately $19.9 million.
Neither CW3 nor CW4 add much relevant to Plaintiff's inside sales claim. CW3, a Financial Account Manager from August 2012 to March 2014, stated that Belcher and Busky could access the PPM4 reports generated by inside sales. AC ¶ 80. CW4, a Brand Delivery Associate from May 2012 to August 2013, made no allegations about the inside sales group's performance. AC ¶ 81.
CW5, a Sales Manager from 2012 to January 2014 who supervised an inside sales team and reported to the Vice President of Sales, alleged that, at an undisclosed time, he spoke with Belcher about “growing pains” in the group, managerial issues and strategy. AC ¶ 82. Plaintiff did not elaborate on the nature of CW5's “growing pains.” See AC ¶ 82. CW5 alleged that inside sales representatives were not making much money because there was an extended period of time when sales were “bad.” AC ¶ 83. CW5 believed that Belcher and Busky had access to “information” about SMB quotes and sales that “were regularly discussed via email.” AC ¶ 83.
CW6, a Business Development Specialist from May 2012 to January 2014, alleged that Simms was terminated in July 2013 because “SMB” had been missing their sales goals by “millions” every quarter. AC ¶¶ 84–85. CW6 estimated that only 5 percent of SMB sales representatives met their quotas for any given month. AC ¶ 85. CW6 reported to sales managers who reported to the Vice President of Sales. AC ¶ 85.
CW7, a Sales Executive and Lead Generation Manager from September 2011 to December 2012, recalled that “SMB was consistently not meeting revenue goals.” AC ¶¶ 87, 91. CW7 further recalled that “by the end of summer 2012, SMB was only at 20 percent of sales goals for the year, and only at 40 percent by the end of that year.” AC ¶ 91.
CW8 was a Senior Sales Manager from January 2013 until his resignation in August 2013. AC ¶ 92. CW8 alleged that he resigned because “the writing was on the wall,” and InnerWorkings had given up on its investment in the “SMB division.” AC ¶ 92. CW8 alleged that it became apparent by June 2013 that the Company had stopped investing in “SMB,” as CW8 recalled receiving pushback when he asked for more personnel. AC ¶ 92.
Defendants argue that, as a categorical matter, these allegations are subject to a “heavy discount” because CW1 to CW8 are not named. Not so. There is no categorical discount of confidential witness allegations where, as here, Plaintiff has described the witnesses with enough detail that this Court can determine that the confidential witnesses have a foundation for their allegations. See City of Sterling Heights General Employees' Retirement System v. Hospira, Inc., No. 11–8332, 2013 WL 566805, at *17 (N.D.Ill. Feb. 13, 2013) (reaching the same conclusion); see also Ross v. Career Education Corp., No. 12–276, 2012 WL 5363431, at *4 (N.D.Ill. Oct. 30, 2012); Davis II, 431 F.Supp.2d at 828, 831. In 2006, the Seventh Circuit noted that when plaintiffs support their allegations with confidential sources, they “must ... describe their sources with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged.” Tellabs I, 437 F.3d at 596. That decision was vacated by the Supreme Court's decision in Tellabs II, and, following Tellabs II, the Seventh Circuit, in 2007, reasoned that the Tellabs II “competing inference” analysis required Courts to “discount allegations that the complaint attributes to ... confidential witnesses.” Higginbotham, 495 F.3d at 757.
The next year, however, the Seventh Circuit clarified that a particularly troubling use of the confidential sources prompted the holding in Higginbotham. Makor Issues & Rights, Ltd. v. Tellabs, Inc. (“Tellabs III”), 513 F.3d 702, 711–12 (7th Cir.2008). In Higginbotham, as explained by Tellabs III, 513 F.3d at 711–12, the plaintiffs described their confidential witnesses “merely as three ex-employees of Baxter and two consultants,” but gave no further detail, such as their job descriptions.
Consistent with Higginbotham and Tellabs III, six years later in City of Livonia Employees' Retirement System & Local 295/Local 851 v. Boeing Co., 711 F.3d 754, 759 (7th Cir.2013), the Seventh Circuit discounted a reference to internal emails. The reference implied that someone inside the corporate defendant was aiding plaintiffs, but no person was identified and described in the initial complaint, so neither the district court nor the Seventh Circuit could evaluate those allegations. Boeing, 711 F.3d at 759. While those allegations could not survive a motion to dismiss, when the complaint was amended to describe the confidential witness, including giving his job title and describing the information the witness had access to, the district court denied the motion to dismiss. Id. at 759–60. That result stood until the district court learned that the confidential witness' allegations had been falsified. Id. at 760–61. In reviewing the district court's decision, the Seventh Circuit did not suggest that the district court had erred at any stage. See id. at 759–61.
In light of this law, this Court declines to discount categorically the allegations from CW1 to CW8. Yet, where particular allegations lack a sufficient foundation, they will be discounted on an allegation-by-allegation basis. See Hospira, 2013 WL 566805, at *17 (adopting the same approach). Having parsed each confidential witness' allegations and found that they are not subject to a categorical discount, this Court now turns to the challenged statements:
Statement 1: Beginning with Statement 1 (that inside sales personnel went through “very extensive training programs”), Plaintiff makes no allegation that InnerWorkings' training programs were not in fact extensive. Plaintiff nowhere alleges that inside sales representatives did not undergo extensive training after they were hired. To the contrary, Plaintiff's own confidential witness, CW5, credited InnerWorkings' training program for its length—five to six weeks long. AC ¶ 83. Thus Plaintiff has offered no specific information known to Belcher and contradicting Statement 1, so this Court has no basis to conclude that it was false or misleading. See Garden City II, 2012 WL 1068761, at *5–6, *8 (reaching the same conclusion for certain statements at issue there).
Statements 2 to 5: Statements 2 to 5 (which are Belcher's optimistic statements from August 2012 to May 2013 about the direction of the inside sales group's performance) are not false or misleading for multiple, independent reasons.
First, Plaintiff relies on circumstantial evidence, namely, the confidential witnesses allegations that inside sales hired inexperienced sale personnel “right out of college” and that the group was not meeting sales goals, to infer that Statements 2 to 5 are false. See AC ¶¶ 188, 198, 208, 220. Perhaps in hindsight there were more productive salesmen than recent college graduates, but it does not follow that Statements 2 to 5 were false or misleading when made. Inside sales could have been growing and improving in spite of not having the best sales personnel.
To Plaintiff's next point, CW2 was the only confidential witness who offered any information about the inside sales group's ability to meet internal sales targets during August 2012 to May 2013—the relevant timeframe for Statements 2 to 5. AC ¶ 74. CW2 generally alleged that the group in “no way” met InnerWorkings' goals for 2012. AC ¶ 74. Plaintiff did not plead sufficient detail, however, to lay the foundation that CW2 was a member of the inside sales group or that he knew the information alleged. There is simply no support for CW2's broad allegation. Absent that support, this Court finds that Statements 2 to 5 do not meet the exacting pleadings requirements of the PSLRA.
Beyond CW2, Plaintiff argues that CW6 and CW7 also provided information about unmet sales goals during the relevant timeframe. CW6 alleged that “SMB” had been missing their sales goals by “millions of dollars each quarter,” and that “SMB” sales representatives had not met their sales quotas for any given month. AC ¶¶ 84–85. CW7 alleged that “SMB” failed to meet its sales goals in 2012. AC ¶ 91.
Defendants respond by distinguishing the performance of “SMB” with the performance of inside sales. Defendants, citing to AC ¶ 79, argue that inside sales generated just 10 percent of SMB's revenue during 2012 and 2013, so CW6 and CW7's allegations that “SMB” fell short of sales targets does not mean that each of its segments, such as inside sales, also fell short. This Court agrees. Poor performance by a department does not necessarily translate to poor performance by each of its segments. Another Court in this District echoed this same principle, finding that evidence of a worsening economic climate in Europe in 2008 did not render false or misleading a company's statement that it had a “solid backlog of orders” in that region. Garden City I, 2011 WL 1303387, at *21.
Plaintiff responds that it was “entirely plausible” that CW6 and CW7 meant inside sales when they said “SMB.” Plaintiff explains that employees at InnerWorkings, such as CW5, used the acronym “SMB” also to refer to inside sales. AC ¶ 82. Plaintiff continues that, in a February 2013 call, Belcher said that the inside sales group had been placed on the sixth floor of a new facility, and that confidential witnesses, including CW6, referred to the “sixth floor” as “SMB.” AC ¶¶ 68, 81, 86. This chain of inferences spanning multiple people may or may not be plausible, but it remains insufficient at this stage of the proceedings.
Indeed, Plaintiff's interpretation of “SMB” is unlikely based upon the current allegations. Plaintiff did not plead that CW6 and CW7 were members of the inside sales group and, in fact, the opposite may be true where the relevant witnesses were not members of the group they were discussing. CW6's responsibilities did include “telephonically developing and maintaining both small and mid-level customers,” AC ¶ 84, and inside sales made cold-calls to prospective clients, AC ¶¶ 6, 61, but this Court cannot infer from CW6's telephonic activity alone that he was a member of the inside sales group. Plaintiff did not plead that only SMB members in the inside sales group conducted telephonic sales calls. The evidence that CW7 was not a member of inside sales is even stronger. CW7 was responsible for generating new leads for large accounts, AC ¶ 87, whereas inside sales focused on small to mid-sized customers, AC ¶¶ 6, 62. CW7 also did not report to the Vice President of Sales who ran the inside sales group. AC ¶¶ 68, 87.
There are further obstacles in the allegations preventing this Court from simply inferring that CW6 and CW7 used the word “SMB” to mean inside sales. Neither one gave any basis for their recollection that “SMB” was not meeting sales goals. See AC ¶¶ 85, 91. This Court reviewed the testimony about the “sixth floor,” AC ¶¶ 68, 81, 86, and finds no strong basis to draw Plaintiff's inference. Belcher did not say that the sixth floor was exclusive to inside sales, so “sixth floor” and “inside sales” are not necessarily coterminous. AC ¶ 68. Even if coterminous, inside sales is part of SMB, so CW6 is correct to say that “SMB had moved to the 6th floor in February 2013,” even if he meant inside sales specifically. AC ¶ 86. Calling “inside sales” “SMB,” however, does not prove the converse—that references to “SMB” necessarily mean “inside sales.”
Even if CW6 and CW7 referenced inside sales, their allegations that “SMB” was performing poorly are insufficient to meet the PSLRA's exacting pleadings requirements. CW6 and CW7 failed to supply the detail this Court requires under the PSLRA to conclude that their recollections are based on personal knowledge. Neither specified when SMB was “consistently” below sales goals or when SMB sales goals were doubling. See AC ¶¶ 85, 91. And neither gave a basis, such as pointing to a particular document, for those allegations. See AC ¶¶ 85, 91.
At bottom, the PSLRA requires more than what CW6 and CW7 (as well as CW2) have supplied. For example, the confidential witnesses in In re Zumiez Inc. Securities Litigation, No. 07–1980, 2009 WL 901934, at *8–9 (W.D.Wash. March 30, 2009), made broad allegations about the corporate defendants' performance without laying the required foundation to show they were positioned to make those assessments. The statements in that case mirror the ones here, such as that the company: (1) was “expanding too rapidly and ... everyone knew it,” and (2) “did not have enough experienced employees to expand as fast as [it] did.” Id. at *8.
Second, even assuming that InnerWorkings missed internal sales targets, this fact does not, without more, render Belcher's public statements false. Internal sales targets may be designed as incentives as much as predictions, In re Smith & Wesson Holding Corp. Securities Litigation, 669 F.3d 68, 75 (1st Cir.2012), so unmet sales targets do not imply that the company's performance was actually poor. Even if poor, unmet sales targets do not deny that sales were improving. Plaintiff overlooks this distinction. Statements 2 and 3—that unidentified “sales and productivity metrics” were “sharply improving,” and that inside sales revenue was expected to “double”—regard only the directional performance of sales (improving or declining) and not their absolute level (good or bad). Those are far different claims. See In re Smith & Wesson, 669 F.3d at 75; Garden City I, 2011 WL 1303387, at *24 n. 21.
Plaintiff relies most heavily on In re St. Jude Medical, Inc. Securities Litigation, 836 F.Supp.2d 878 (D.Minn.2011), where the Court denied a motion to dismiss in a securities fraud action, but that case is distinguishable. Unlike here, there was direct evidence in St. Jude Medical contradicting St. Jude Medical's rosy financial guidance to investors. Id. at 884, 898–99. In particular, internal financial forecasts and daily reports that were circulated among the company's management showed that sales of St. Jude Medical's principal product (CRM devices, which accounted for 60 percent of sales) were falling and, more generally, market conditions were weakening. Id. at 898–99, 903. This stark contrast between public guidance and internal knowledge is not present here.
Statement 6: Turning last to Statement 6, in the August 8, 2013 earnings call, Belcher said that, despite the lower than expected revenue from inside sales, he was “very confident about the role this group will play in the long term growth of our business.” AC ¶ 225. Belcher added that the initiative, going forward, will be “as switched on as any part of our business is right now.” AC ¶ 225. Plaintiff argues that these statements are false, and further adds that Belcher omitted two material pieces of information from the call: (1) Defendants had terminated Vice President of Sales Brian Simms in July 2013; and (2) Defendants were planning to terminate 40 inside sales employees, which Defendants did in fact do on or around August 30, 2013. AC ¶¶ 72, 75, 81, 92, 226.
Addressing first the alleged misstatements, in the context of the entire August 8, 2013 earnings call, neither one is false or misleading within the meaning of the PSLRA. Belcher acknowledged the inside sales group's disappointing performance on the call, but he reaffirmed InnerWorkings' confidence in the group's long-term trajectory, including by outlining a strategy to turnaround the group's performance. On the earnings call, the public specifically learned that: (1) inside sales had not met InnerWorkings' “expectations;” (2) InnerWorkings had “recently reorganized the management of the group;” (3) InnerWorkings was looking to align with a channel partner to enhance the Company's client acquisition capability; and (4) InnerWorkings had “some bigger picture strategic ideas for the group ... that will be coming online here later in the year.” 8/8/13 Earnings Call Tr. [43–26] at 1, 4, 7. Analysts reporting on the earnings call took away that InnerWorkings had made a management change, which was Simms' termination, and inside sales had been performing below expectations. See AC ¶¶ 228–30.
Turning now to the purported omissions, as stated above, material omissions can be actionable. Tellabs I, 437 F.3d at 595. The first one, that Belcher omitted that InnerWorkings had terminated Simms, was in fact addressed on the August 8, 2013 earnings call; Belcher said that InnerWorkings had “recently reorganized the management of the group.” AC ¶ 225. The omission of Simms' name does not render the statement materially false or misleading.
The second omission, Belcher not saying that the Company was going to terminate 40 inside sales employees, also fails. Beyond general allegations that inside sales was not meeting sales goals, Plaintiff made no showing that Belcher, or anyone else at InnerWorkings for that matter, knew that layoffs were forthcoming on August 8, 2013. Nor does Plaintiff suggest when InnerWorkings decided to conduct layoffs—which may very well have occurred after August 8, 2013. Plaintiff's strongest allegations perhaps come from CW8. CW8, a member of the inside sales group, alleged that “it was apparent by at least June 2013 that the Company had stopped investing in SMB.” AC ¶ 92. CW8 recalled “receiving pushback when he asked for certain resources like more personnel.” AC ¶ 92. Receiving pushback for wanting more personnel is consistent with an underperforming group, but that does not substantiate the far broader claim that InnerWorkings had “stopped investing” in the inside sales group. This Court parsed the remaining allegations about the layoffs, see AC ¶¶ 72, 75, 81, 226, and finds nothing else supporting that Belcher omitted material knowledge known to him. Based on this factual record, this Court finds that, whether framed as an omission or Belcher's lack of scienter, Plaintiff has not satisfied the PSLRA's exacting pleading requirements.
Even had Belcher known that layoffs were possible, and there are no allegations suggesting that he did, the Seventh Circuit has found this failure of candor to be inactionable under circumstances more compelling than here. In Boeing, 711 F.3d at 757–59, the Seventh Circuit, based on the principle that there is a “difference ... between a duty of truthfulness and a duty of candor, or between a lie and reticence,” affirmed dismissal of a securities fraud action, finding that Boeing's failure to disclose the risk that the first flight of the new 787–8 Dreamliner, an important developmental milestone for an aircraft, may be delayed was not fraudulent under the PSLRA. The Seventh Circuit reached this decision even though, worse than here, Boeing executives made public predictions that the Dreamliner would fly in June 2009 despite knowing that the Dreamliner had failed a recent, May 17, 2009 internal test. Id. at 757–58. On June 1, 2009, Boeing's CEO stated publicly that he thought the Dreamliner would fly in June 2009. Id. at 757. Later that month and without reservation, the head of Boeing's commercial aircraft division told Bloomberg that the Dreamliner “definitely will fly” this month. Id. Shortly thereafter, on June 23, 2009, Boeing announced an indefinite postponement of the first flight because of an anomaly revealed by internal tests. Id. at 757–58.
Instructive here, the Seventh Circuit did not find the inference of scienter cogent in Boeing. Indeed, that inference was less plausible than the innocent explanation: Boeing was reluctant to tell the world “we have a problem and maybe it will cause us to delay the First Flight and maybe not, but we're working on the problem and we hope we can fix it in time to prevent any significant delay, but we can't be sure, so stay tuned.” Id. at 758–59. The Seventh Circuit further found that Boeing lacked any incentive to delay the announcement of the indefinite postponement. Id. at 758. Had Boeing known on May 17 (the date of the internal test) that the first flight would necessarily be postponed, then Boeing risked undermining its credibility with customers and exposing itself to a securities fraud lawsuit by delaying that postponement five weeks, until June 23. Id. Conversely, Boeing had nothing to gain financially during those five weeks. Id.
Here, as in Boeing, Belcher recognized during the August 8, 2013 earnings call that the inside sales group was facing challenges. See AC ¶ 225; 8/8/13 Earnings Call Tr. [43–26] at 1, 4, 7. Yet, even if Belcher suspected that layoffs would be forthcoming as a result of those challenges, Boeing shows that Belcher had no obligation to be candid about the worst case scenario while InnerWorkings was trying to avoid that outcome. Belcher, to be sure, did have an obligation not to speak falsely, see Boeing, 711 F.3d at 759, and Hospira, 2013 WL 566805, at *17, and he did not. Whereas Belcher was painting a mixed picture of the inside sales group's performance three weeks before the layoffs, the head of Boeing's commercial aircraft division could not have been more optimistic by comparison, saying less than two weeks before the Dreamliner's first flight was indefinitely postponed that the Dreamliner “definitely will fly.”
Moreover, Plaintiff has not shown that Belcher had any incentive to omit information about layoffs on the August 8, 2013 earnings call. If the layoffs were coming, then, as in Boeing, Plaintiff has not shown what Belcher had to gain from delaying the inevitable. Belcher did make stocks sales in the interim—two sales on August 16 and 19, 2013 with net proceeds of $146,412.80, AC ¶ 236—but those sales were made automatically pursuant to Belcher's Rule 10b5–1 trading plan that he had entered into months earlier. SEC Form 4 [43–31] at 2 n.1; Garden City II, 2012 WL 1068761, at *13. Plaintiff also has not shown that the sales were profitable or otherwise part of a scheme to defraud.
For these reasons, Statements 1 to 6 are not false or misleading statements or omissions. Thus they are not actionable.
b) Material
Separate from whether a statement is false or misleading, statements also are not actionable under the PSLRA unless they are material. Statements are material if they affect an investor's perception of the security, “significantly altering the total mix of information.” Searls v. Glasser, 64 F.3d 1061, 1065–66 (7th Cir.1995); see also Tellabs I, 437 F.3d at 596. Each statement must be viewed in context. Tellabs I, 437 F.3d at 597. As a general matter, one consequence of this construction of “material” is that predictions and forecasts which are not of the type subject to objective verification are “rarely” actionable under the PSLRA. Searls, 64 F.3d at 1066.
One kind of immaterial statement is “puffery”—“loosely optimistic statements that are so vague, so lacking in specificity, or so clearly constituting the opinions of the speaker, that no reasonable investor could find them important to the total mix of information available.” In re Midway Games, Inc. Securities Litigation, 332 F.Supp.2d 1152, 1164 (N.D.Ill.2004); see also Tellabs I, 437 F.3d at 596; Conlee II, 2013 WL 1767648, at *6; Anderson v. Abbott Laboratories, 140 F.Supp.2d 894, 902, 905, 908 (N.D.Ill.2001), affirmed, 269 F.3d 806 (7th Cir.2001). Analysts rely on facts in determining the value of a security, not mere expressions of optimism from company spokesmen. In re Midway Games, 332 F.Supp.2d at 1165. Puffery can take multiple forms, and, from reviewing Seventh Circuit law, e.g., Tellabs I, 437 F.3d at 596–98, and Searls, 64 F.3d at 1066–67, this Court has discerned four categories of puffery relevant here: (1) indefinite predictions of growth; (2) optimistic rhetoric and hype; (3) subjective statements; and (4) vague statements.
In Searls, 64 F.3d at 1066–67, the Seventh Circuit found that two statements were puffery. In the first, GATX Corporation's (“GATX”) CEO James Glasser said that the GATX was “recession-resistant” in the company's 1990 annual report, and repeated that message in later communications to shareholders. Id. at 1064, 1066. The following year, however, GATX's net income fell below expectations. Id. at 1065. The Seventh Circuit found that the phrase “recession-resistant” was “simply too vague to constitute a material statement of fact.” Id. at 1066. The statement was “optimistic rhetoric” used to champion GATX but “devoid of any substantive information.” Id.
As for the second statement, Glasser twice assured investors that GATX would maintain a “high” level of “disposition gains,” which accrued from selling used aircrafts and railcars at a price in excess of the equipment's accounting value. Id. at 1064, 1066–67. Disposition gains played “significant roles” in GATX's success. Id. at 1064. Despite investors having a vested interest in GATX's disposition gains, Glasser's “high” statements remained puffery according to the Seventh Circuit. See id. at 1067. It was nothing more than an indefinite, “loose prediction” that was of no help to investors. Id. No investor could determine, for example, if disposition gains would be “high” relative to the previous year or previous few years. Id. Nor could any investor determine how far into the future “high” disposition gains would last. Id. More was required. See id.
Indeed, the Seventh Circuit contrasted Glasser's statement with the even more definite comments from other cases that nonetheless were found to be puffery. Id. (collecting cases). For example, the Seventh Circuit cited Raab v. General Physics Corp., 4 F.3d 286, 289–90 (4th Cir.1993), where the Fourth Circuit found that a projection of annual growth in the range of “10% to 30% over the next several years” was too indefinite to support a claim for securities fraud. That statement in Raab, according to the Seventh Circuit, was not at all definite: the range of rates was broad and the period over which the growth was to occur was left open. Searls, 64 F.3d at 1067.
The Court's decision in Anderson also is informative. In that case, Abbott's annual report said the company was a leader and had grown in certain market segments, potentially suggesting future performance. 140 F.Supp.2d at 905. The Court described those vague statements about industry leadership and unquantified growth as “classic puffery.” Id. A public statement from Abbott's CEO Miles White also was not actionable. White said Abbott had a goal of reaching a “higher level of performance,” and that the company was “building on the strength established over the decades.” Id. at 908 (internal brackets omitted). That, according to the Court, was “incredibly vague puffery,” and “even that stretches the words' meanings.” Id. Many other cases also show that loosely optimistic statements about a company's present or future performance are puffery, e.g., In re Midway Games, 332 F.Supp.2d at 1164 (collecting examples), but this Court can end its discussion of case law here.
These cases, and others, show that Statements 4 to 6 are immaterial puffery. Consider the following table which matches each statement with their types of puffery. Plaintiff, for his part, omits discussing these statements in the puffery section of his motion papers.