Opinion
Civil No. 03-6193 ADM/AJB.
April 12, 2005
Kimberly C. Epstein, Esq., and Sylvia Wahba Keller, Esq., Lerach Coughlin Stoia Geller Rudman Robbins LLP, San Francisco, CA, and Thomas V. Seifert, Esq., Head, Seifert Vander Weide, Minneapolis, MN, argued for and on behalf of Plaintiffs.
Thomas B. Hatch, Esq., Elliot S. Kaplan, Esq., and John P. Morgan, Esq., Robins, Kaplan, Miller Ciresi, L.L.P., Minneapolis, MN, argued for and on behalf of Defendants.
MEMORANDUM OPINION AND ORDER
I. INTRODUCTION
On January 12, 2005, oral argument before the undersigned United States District Judge was heard on Defendants Best Buy Company, Inc., Richard M. Schulze, Bradbury H. Anderson, Allen U. Lenzmeier, and Darren R. Jackson's (collectively, "Best Buy" or "Defendants") Motion to Dismiss [Docket No. 52]. In their Consolidated Class Action Complaint ("Complaint") [Docket No. 47], Plaintiffs Louis Meeuwenberg, David Tkach, Stephen Anish, and Christopher Hinton ("Plaintiffs") allege a securities fraud class action. Because Plaintiffs fail to meet the particularity requirements required for pleading a 10(b) or 10b-5 claim under the Securities Exchange Act, Defendants' Motion is granted.
II. BACKGROUND
For purposes of the instant Motion, the facts are viewed in the light most favorable to the nonmoving party. See Digi-Tel Holdings, Inc. v. Proteq Telecommunications, 89 F.3d 519, 522 (8th Cir. 1996); Hamm v. Groose, 15 F.3d 110, 112 (8th Cir. 1994).
In January 2001, Best Buy acquired Musicland Stores Corporation, including 1,309 Musicland stores, for approximately $700 million. Lewis Decl. [Docket No. 55] Ex. 13. The Musicland stores were acquired for the purpose of attracting new customers to Best Buy, as well as the ability to cross merchandise product. Compl. ¶ 31. At the time of acquisition, Musicland's sales were primarily based on pre-recorded music. Lewis Decl. Ex. 13. Although sales of pre-recorded music were flat or in decline at the time of the purchase, Best Buy intended to return the stores to profitability with a different mix of products, including DVD movies, video games, and expanded hardware offerings. Id. at Exs. 2, 13.
Musicland includes the Sam Goody, On Cue, and Suncoast chains. The stores will collectively be referred to as the "Musicland stores."
Because the exhibits attached to the Lewis Declaration are documents either relied upon by the Complaint or are filed with the Securities and Exchange Commission, the Court will consider these documents, and deny Plaintiffs' Motion to Strike [Docket No. 62]. In re: K-Tel Int'l, Inc. Securities Litigation, 107 F. Supp. 2d 994, 998-99 (D. Minn. 2000), aff'd, 300 F.3d 881 (8th Cir. 2002). The majority of the documents cited by Plaintiffs in their Motion to Strike are not relied upon in the determination of the Motion to Dismiss. Only those cited herein were considered for background factual purposes only.
The market, however, did not share Best Buy's optimism regarding the Musicland purchase. In response to reports of the acquisition, Best Buy's stock price dropped over 20%, from $28.81 to $22.94, apparently over fears that the Musicland store purchase would dilute Best Buy's earnings. Id. at Ex. 27. Over the following year, however, the Musicland stores contributed one cent per share to Best Buy's overall earnings. Id. at Exs. 2, 10. This result was consistent with Best Buy's predictions. Id. Best Buy credited Musicland's contributions to strong sales of DVD movies and video games in the last quarter of the year. Id. at Ex. 10. In fact, for the entire duration that Best Buy owned the Musicland stores, including the class period, Best Buy's earnings met or exceeded forecast expectations. Id. at Exs. 3-7, 9-10, 16, 18, 20-21, 23, 25.
In December 2002, Best Buy revised its earnings outlook downward for the fourth quarter, "due to an expected operating loss of $80-85 million from our Musicland stores." Id. at Ex. 21. Best Buy's outlook also included consideration of a sale of the Musicland stores: "A more comprehensive review of the business alternatives is underway to determine the overall profit potential of the business as a whole." Id.
III. DISCUSSION
A. Standard of ReviewA misrepresentation claim brought under § 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 must plead the following elements: (1) misrepresentations or omissions of material fact or acts that operated as a fraud or deceit in violation of the rule; (2) causation, often analyzed in terms of materiality and reliance; (3) scienter on the part of the defendants; and (4) economic harm caused by the fraudulent activity occurring in connection with the purchase and sale of a security. In re: K-Tel Int'l, Inc Securities Litigation, 300 F.3d 881, 888 (8th Cir. 2002). The Private Securities Litigation Reform Act of 1995 ("PSLRA") requires a complaint to "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation . . . is made on information and belief, the complaint shall state with particularity all facts on which the belief is formed." 15 U.S.C. § 78u-4(b)(1). In short, the PSLRA "embodies the pleading requirement of Fed.R.Civ.P. 9(b)." K-Tel, 300 F.3d at 889. Particularity requires an identification of the "who, what, when, where, and how." Id. at 890 (citation omitted).
Although "scienter is not explicitly required by the statutory text of the Exchange Act . . . it is an acknowledged essential element of a section 10(b) and Rule 10b-5 claim." Id. at 893. The PSLRA, therefore, requires that a pleading must "state with particularity facts which give rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). This includes "such matters as the time, place and contents of false representations, as well as, the identity of the person. . . ." K-Tel, 300 F.3d at 890 (citation omitted). Recklessness, as well as intentional conduct, satisfies the scienter requirement. Alpern v. UtiliCorp United, Inc., 84 F.3d 1525, 1534 (8th Cir. 1996) (citation omitted). Recklessness is defined as "an extreme departure from the standards of ordinary care, and . . . present[ing] a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it." K-Tel, 300 F.3d at 893 (citations omitted). Motive and opportunity are both relevant to the scienter inquiry, "but particularly important to establishing scienter is a showing of unusual or heightened motive to meet the Reform Act standard." Id. at 894 (citation omitted). Without a showing of motive and opportunity, the remaining allegations against the defendants must be particularly strong to constitute an inference of recklessness. Id. Specifically, unsupported allegations that defendants had motives common to all officers and directors — such as keeping the stock price high for the general purpose of increasing compensation or the desire to make the corporation appear profitable — are insufficient to establish scienter. Id. However, if the stock price was artificially inflated for the purpose of selling stock, scienter may be established. Id.
In the instant action, Plaintiffs' allegations fail to meet the heightened pleading requirements of the PSLRA and Rule 9(b). Either the allegations made by Plaintiffs fail to state with particularity why a specific statement is misleading, or Plaintiffs fail to adequately state with particularity facts which give rise to a strong inference of scienter. Moreover, Plaintiffs' allegations do not meet the materiality requirements of a 10(b) or 10b-5 claim.
B. 10(b) and 10b-5 Misrepresentations and Omissions
Plaintiffs allege a number of false and misleading misstatements were made by Best Buy between January 9, 2002, and August 7, 2002 (the "Class Period"). Plaintiffs' Complaint also alleges that Best Buy failed to disclose the truth regarding the status of the Musicland remerchandising efforts. According to Plaintiffs, these omissions made Best Buy's positive statements false and misleading, resulting in the instant lawsuit. For purposes of analysis, Plaintiffs' allegations are divided into four categories — general allegations against Defendants, specific allegations against Defendants, the allegations of the Confidential Informants, and the individual Defendants' stock sales.
1. General Allegations
In its overarching allegations, Plaintiffs claim Best Buy failed to disclose material information pertaining to the failure of the Musicland acquisition, particularly Best Buy's failure to disclose that it was cutting prices on products to overcome the "negative price halo." Compl. ¶¶ 5, 55. Furthermore, Plaintiffs allege Best Buy failed to disclose to the public severe problems with the efforts to remerchandise and remodel the Musicland stores. Id. Plaintiffs contend that as a result of these omissions, Best Buy's positive statements were false and misleading.
In support of dismissal of the action, Best Buy argues that Plaintiffs' claims are conclusory allegations not grounded in specific facts. First, Best Buy argues the allegation that it was experiencing "severe and persistent operational and financial difficulties with Musicland" is not reflected in the financial results of the Musicland stores. Even the Confidential Informants relied upon by Plaintiffs are unable to state that the actual financial performance of Musicland differed from what Best Buy reported to the public. Second, Best Buy cites to Plaintiffs' failure to identify facts to support the claim that the Musicland stores were not performing to "internal expectations." Finally, Best Buy argues that Plaintiffs fail to provide any factual support for the contention that by January 9, 2002, Best Buy was aware the Musicland acquisition was a failure and that Best Buy would have to sell Musicland to avoid ongoing losses. Contrary to this allegation, Best Buy argues it actually increased its earnings forecast for the fourth quarter, and then proceeded to improve upon that forecast by a substantial margin. Again, on April 2, 2002, Best Buy provided earnings guidance for the first quarter, and exceeded those results as well. It was not until August 8, 2002, that Best Buy reported that softening sales across most product categories could affect earnings. Compl. ¶ 78. Plaintiffs do not challenge the reasoning behind the August 8, 2002 announcement, nor do they allege that the reasons given by Best Buy for the tempered forecast were false or misleading.
In fact, before, during, and after the Class Period, Best Buy met or exceeded its most recent predicted earnings. Only once did Best Buy downgrade its earnings forecast, shortly before the end of the second quarter of fiscal year 2003. Defs' Mem. of Law in Support of Motion to Dismiss at 5 [Docket No. 54].
Plaintiffs' general allegations rely on the more specific allegations of false and misleading statements. Therefore, an analysis of the specific allegations must be undertaken to determine whether the general allegations are pled with sufficient particularity.
2. Specific Allegations
In the section "Materially False and Misleading Statements Issued During the Class Period," comprising paragraphs 51-77 of the Complaint, Plaintiffs reference a number of statements it believes to be false and misleading. Many of the paragraphs, however, do not contain allegations of materially false and misleading statements. Only the paragraphs actually containing allegations are analyzed. ¶ 51
In Paragraph 51 of the Complaint, Plaintiffs allege a Best Buy press release containing a statement relating to "the benefits of remerchandising many of the Company's Sam Goody stores . . ." is materially false and misleading. Best Buy correctly contends this statement is a forward-looking statement under Section 10(b) and Rule 10b-5. 15 U.S.C. § 78u-5(c). Forward-looking statements apply to projections regarding revenue, income, earnings, statements about management's plans or objectives, and statements involving future economic performance. 15 U.S.C. § 78u-5(i)(1) (A-C). Consequently, a challenged forward-looking statement must be accompanied by an allegation that the statement was made with actual knowledge that it was false and misleading to survive a motion to dismiss. In re Navarre Corp. Securities Litigation, 295 F.3d 791, 799 (8th Cir. 2002). Plaintiffs make a general allegation that the "safe harbor" for forward-looking statements does not apply because Best Buy either failed to accompany its forward-looking statements with appropriate cautionary language or made the statements at issue with actual knowledge of their falsity. Compl. ¶ 93. However, Plaintiffs' general allegation, which does not specifically reference any single statement by Best Buy, is insufficient to meet the particularity requirements of the PSLRA.
Here, the statements in the press release are clearly forward-looking. The language itself references future performance, and is accompanied by cautionary language. Specifically, the press release states:
Statements made in this news release . . . should be considered forward-looking and subject to various risks and uncertainties. Such forward-looking statements are based on management's beliefs and assumptions regarding information currently available, and are made pursuant to the "safe harbor" provisions. . . . The Company's actual results could differ materially from those expressed in the forward-looking statements. Factors that could cause results to vary include, among others, those expressed in the Company's filings with the Securities and Exchange Commission. The Company has no obligation to publically update or revise any of the forward-looking statements that may be in this news release.
Lewis Decl. Ex. 8. Here, the cautionary language relates to the future performance of Best Buy; as a result, it addresses the allegedly misleading statement cited by the Plaintiffs. This language is sufficient to render the alleged misrepresentations forward-looking. Parnes v. Gateway 2000, Inc., 122 F.3d 539, 548 (8th Cir. 1997). To survive the Motion to Dismiss, Plaintiffs must allege the statement was made with actual knowledge of its falsity. No such allegation is asserted.
¶ 52
In Paragraph 52, Plaintiffs reference another January 9, 2002 press release in which Best Buy reported sales increases at the Musicland stores, stating: "The increase reflected market share growth and the remerchandising of most Sam Goody stores to include more DVD movies, video gaming hardware and software, and consumer electronics." Lewis Decl. Ex. 7. Nowhere, however, do Plaintiffs allege the statement or earnings summaries are false or misleading, nor do they argue the reasons given by Best Buy for the earnings increase are inaccurate. Therefore, this allegation fails to meet the particularity requirements required by the PSLRA.
¶ 53
In Paragraph 53, Plaintiffs quote a portion of a transcript of the January 9, 2002 analyst conference hosted by Best Buy. Plaintiffs highlight two sentences from that conference. The first sentence reads: "Sam Goody Stores opened are doing substantially better than the On Cue stores, thus enabling the building of a larger brand identity for Sam Goody and expanding the chain at a more rapid rate." The second sentence states: "All the efforts have been successful and have achieved all of the synergies that were expected in the first year which is a big achievement." With the exception of the second half of the first sentence, these contentions are historical statements which Plaintiffs do not allege to be false. In regard to the claim that Sam Goody could be expanded at a more rapid rate, the statement is forward-looking. Again, Plaintiffs fail to allege with particularity facts which give rise to a strong inference of scienter.
¶ 55
In Paragraph 55, Plaintiffs list a number of "adverse facts" or reasons upon which it concludes that Best Buy "lacked a reasonable basis for their positive statements about the Company and their earnings projections, which were materially false and misleading at all times," as alleged in Paragraphs 51-53. Plaintiffs later apply the reasons contained within Paragraph 55 to all the allegations contained within Paragraphs 51-77. However, the averments proffered in Paragraph 55 either do not demonstrate how the referenced allegations are false or fail to demonstrate a strong inference of scienter. Rather, the averments in Paragraph 55 are of a general nature. For example, Plaintiffs allege Best Buy failed to adequately train Musicland personnel in the sale of consumer electronics, the Musicland stores were inadequate in both size and location, and the company was incurring additional costs to rotate inventory. However, the allegations do not reference specific facts sufficient to meet the particularity requirements of the PSLRA or Rule 9(b). Nor do any of the allegations in Paragraph 55 give rise to a strong inference that the Defendants acted with scienter. Plaintiffs' allegations are too vague and general to meet the particularity requirements of the PSLRA.
¶ 59
In Paragraph 59, Plaintiffs allege Best Buy's press release of February 29, 2002, in which Best Buy increased its earnings expectations for the fourth quarter to $1.38 per share, was materially false and misleading. Plaintiffs can not demonstrate that this assertion is material, however, as Best Buy's ultimate earnings for the fourth quarter were a reported $1.62 per share, a figure Plaintiffs do not allege to be inaccurate. As a result, it is unclear how this assertion is material, much less false or misleading, and therefore, the averment fails to meet the particularity requirements.
¶ 61
In Paragraph 61, Plaintiffs cite a March 7, 2002 press release which states in part: "The change in product mix — including more video gaming hardware and software, and devices that play movies and music — drove an increase in the average purchase per customer." Again, Plaintiffs fail to allege with particularity why this statement is inaccurate.
¶ 64
In Paragraph 64, Plaintiffs quote an April 2, 2002 press release in which Best Buy announced its financial results for the fourth quarter of fiscal year 2002. The press release states that the Musicland stores met profitability targets, and that the strong finish to the quarter built Best Buy's optimism for the year ahead, with expectations of growth in revenues. The press release contains historical statements, which Plaintiffs do not allege were inaccurate, as well as forward-looking statements, which are not alleged with facts sufficient to give rise to a strong inference of scienter.
¶ 65
In Paragraph 65, Plaintiffs extensively quote various individual Defendants from an investment analyst conference call. The call had been prefaced by cautionary language regarding forward-looking statements. Lewis Decl. Ex. 11. In the transcript of the conference call, the Defendants discuss the past performance results of the Musicland stores, whose earnings exceeded management expectations in the first year. Defendants also noted that sales at Musicland stores outpaced mall traffic figures. Additionally, the Defendants made statements indicating Best Buy expected modest sales growth over the coming year, and intended on continuing to invest and reposition the Musicland stores. As with the other alleged misrepresentations, Plaintiffs fail to allege the historical figures cited by Best Buy were inaccurate, or that Best Buy's forward-looking statements were made with recklessness, much less the actual knowledge of their falsity required for forward-looking statements. Furthermore, in other portions of the same conference call, Defendants state that due to a reduction in the number of Musicland stores, it expected Musicland's operating results to drop by $40 million in fiscal year 2003. Lewis Decl. Ex. 11. As a result, Plaintiffs fail to adequately allege with particularity that the conference call statements were false or misleading.
¶ 66
In Paragraph 66, Plaintiffs cite an April 2, 2002 press release in which Best Buy discusses a marketing test in which the Sam Goody name outperformed the On Cue name in rural areas, and, as a result, On Cue stores would be renamed Sam Goody. Plaintiffs fail to allege the marketing test was false or misleading. The press release also states the name change would allow Best Buy to capitalize on the name change. Moreover, this is a forward-looking statement, accompanied by cautionary language, wherein scienter is not alleged with particularity. Lewis Decl. Ex. 10.
¶ 67
Paragraph 67 of the Complaint references an analyst conference call later in the day on April 2, 2002, in which Defendants stated they did not believe transforming the On Cue stores to Sam Goody stores would cause "a lot of disruption." Again, the conference call was prefaced by cautionary language. Lewis Decl. Ex. 11. Plaintiffs fail to allege this statement was made with actual knowledge of its falsity. Additionally, the vague nature of the statement at issue makes it difficult to identify facts sufficient to establish a strong inference of recklessness in the actions of Defendants, much less actual knowledge of its falsity.
¶ 70
In Paragraph 70 of the Complaint, Plaintiffs quote a number of forward-looking statements from Best Buy's annual 10-K form filed on May 30, 2002. The paragraphs quoted include a number of statements regarding the prospects, intentions, and business strategies for Best Buy and the Musicland stores. However, the 10-K is accompanied by cautionary language stating that the information contained therein was forward-looking, and subject to numerous factors. As a result, Plaintiffs' failure to allege the 10-K statements were made with actual knowledge of their falsity is fatal to these allegations.
¶ 72
In Paragraph 72, Plaintiffs cite to a June 6, 2002 press release in which Best Buy reported on the latest Musicland results, which included a slight drop in sales. The press release also contains Best Buy's earnings growth expectations for fiscal year 2003. Plaintiffs do not allege the Musicland loss was inaccurate, nor do they state with particularity how the earnings estimates report is false or misleading.
¶ 73
Paragraph 73 of the Complaint details Best Buy's press release of the first quarter results for the fiscal year 2003, which contained Best Buy's usual cautionary language regarding forward-looking statements. Plaintiffs highlight a statement which reads:
"Our strong beginning for the year builds our confidence that we can continue to achieve top-quartile growth rates in sales and earnings," Schulze added. "We expect contributions from new store openings, comparable stores sales gains and improved operating efficiency to drive our growth."
Lewis Decl. Ex. 16. The statement is not material to Plaintiffs' claims. The statement appears in a press release about Best Buy as a whole, and is not directed to Musicland stores. Id. The results also stated Best Buy's expectations for growth in the second quarter, which included remerchandising efforts at Sam Goody stores. However, Plaintiffs do not allege with particularity how this statement was false or misleading, and fail to allege Defendants had actual knowledge of its falsity.
¶ 74
Paragraph 74 of the Complaint details an investment analyst conference call in which Defendant Schulze explains that Best Buy recently switched to a new management system, and had increased inventory to address anticipated problems with the transition. Once again, Plaintiffs fail to allege how this statement is false or misleading; moreover, it is unclear how this general statement about Best Buy inventory is material to the Musicland stores.
¶ 75
In Paragraph 75 of the Complaint, Plaintiffs cite a July 12, 2002, Amendment No. 3 to SEC Form S-3 filed by Best Buy. In the Amendment, Best Buy stated the Musicland acquisition provided Best Buy access to new distribution channels, customers, and the ability to leverage Best Buy's core competencies to the new operations. Plaintiffs fail to particularly allege what is false and misleading about these statements. Additionally, the statement is so general as to render it immaterial. Lasker v. New York State Elec. Gas Corp., 85 F.3d 55, 59 (2d Cir. 1996).
¶ 76
Finally, in Paragraph 76 of the Complaint, Plaintiffs extensively quote from Best Buy's 10-Q filed for the first quarter of fiscal year 2003. The 10-Q contains a number of forward-looking statements, none of which are alleged with facts sufficient to satisfy scienter requirements.
3. Confidential Informant Allegations
The Plaintiffs reference a number of allegations made by Confidential Informants ("CIs"). The cumulative effect of these allegations with the above-cited alleged misrepresentations still falls short of the particularity requirements of the PSLRA.
The allegations attributed to the CIs, far from meeting the PSLR requirements of particularity, are rather vague claims made by the CIs. For example, in Paragraphs 39 and 40 of the Complaint, CI 1 states that it was "well-known" throughout the company that the majority of Musicland stores were in "level C or D" locations, and the Musicland real estate was "really bad." Assuming this statement to be true, it does not adequately demonstrate that Best Buy's statements regarding the prospects were false or misleading, much less that Best Buy acted with scienter. The who, what, when, where and how are missing from these statements which would allow a strong inference to be made that the Defendants acted recklessly, or with actual knowledge that their statements were misleading. K-Tel, 300 F.3d at 891.
Plaintiffs also allege, in Paragraph 41, that Best Buy's practice of discounting products in the Musicland stores was misleading since the Defendants knew the practice could not be sustained, and was merely a charade to give the Musicland stores a short-term boost. Again, the specifics of these allegations are missing — in fact, Paragraph 41 merely makes bare assertions, with no apparent facts, much less specifics, to support the allegations. As a result, these allegations also fail to meet the particularity requirements.
Paragraph 43 of the Complaint is slightly more specific in that it names Defendants Schulze and Anderson, and alleges they participated in conference calls updating them on the remerchandising of the Musicland stores. However, CI 2 merely reports that problems occurred during the remerchandising effort requiring substantial modifications. Updates and changes to the remerchandising plan are not sufficient to make Best Buy's general statements regarding the plan false, or demonstrate a strong inference of recklessness on behalf of the Defendants. CI 2 also alleges, in Paragraph 4, that Defendants Schulze and Anderson were aware of the problems regarding the "negative price halo," or the perception that Musicland products were overpriced, as well as the failure of various strategies to correct the problem. Again, however, the existence of the "negative price halo," coupled with the Defendants' awareness of it and attempts to alleviate the problem, do not meet the particularity requirements to raise a strong inference that the general statements regarding Musicland were false. Best Buy was not required to report every nuance of the remerchandising strategy, and the vague allegations reported by CI 2 are not sufficiently particular to raise a strong inference of recklessness on behalf of Best Buy.
CI 3 alleges that during a meeting in September or October, 2001, Defendant Schulze became upset when told of remodeling issues. He is alleged to have thrown papers at another employee, and stated he was "sick and tired" of "reading reports every day about what is going wrong." While inflammatory, these statements are too vague to be considered evidence of a strong inference of recklessness. Acknowledging one's frustration with business issues is not the same as making misrepresentations. The statements do not give rise to the requisite strong inference of recklessness. Moreover, business problems alone are not sufficient to establish scienter. See Ronconi v. Larkin, 253 F.3d 423, 430 (9th Cir. 2001).
The remaining CIs also make allegations about the remodeling and remerchandising efforts. Many of these allegations relate to movement of inventory between Musicland and Best Buy, while others relate to alleged disruptions in individual stores during the remerchandising efforts. Other CIs allege other miscellaneous claims, including problems with "inventory shrinkage" due to shoplifting, and problems at individual stores. Even assuming these allegations are true, they identify isolated issues that can not support a strong inference of scienter in regard to the much broader allegations of fraud alleged by the Plaintiffs.
Because Plaintiffs fail to allege their general, specific, and Confidential Informant claims with the particularity required of the PSLRA, the Complaint fails.
4. Stock Sales and Convertible Debentures
As evidence of motive, Plaintiffs rely on the stock sales of various Best Buy directors and officers during the Class Period. It is undisputed, however, that Defendant Anderson was the only individual Defendant to sell stock during the Class Period. It is highly disputed whether Defendant Anderson's sales were sufficiently unusual to raise an inference of wrongdoing. The Eighth Circuit has held that while "alleging the defendants misrepresented corporate performance in order to keep stock prices inflated while selling stock is sufficient" to demonstrate scienter, the benefit must be more than of a generalized nature to the defendants. K-Tel, 300 F.3d at 894-95.
Here, although Defendants allege a number of officers and directors sold shares of stock during the Class Period, they do not allege that Defendants Schulze, Lenzmeier, or Jackson sold any stock or exercised any options during the Class Period. As a result, no inference of scienter can be found against these Defendants in relation to their stock sales. Although Defendant Anderson did sell stock during the Class Period, the vast majority of his sales are part of his apparent pattern of selling stock on a weekly basis. Such regularity in the sale of stock over a long period of time — both before, during, and after the Class Period — does not raise an inference of scienter. Although Defendant Anderson did make one additional sale of stock in April 2002, comprising 20,000 shares of stock, it is not of a sufficient amount to constitute a strong inference of scienter, as that amount represented less than 2% of Defendant Anderson's holdings at the end of the year. Lewis Decl. Ex. 15.
As the Eighth Circuit has held, "general allegations of a desire to increase stock prices . . . are too generalized and are insufficient" to satisfy the PSLRA particularity requirement.Id. at 895. As a result, Plaintiffs' allegations that Defendants acted with the intent to raise stock prices are insufficient to satisfy the scienter requirements. Similarly, Plaintiffs' allegations regarding Best Buy's offering of convertible debentures announced in January 2002 also fail. Although Plaintiffs discuss the offering, they do not allege how it benefitted the individual Defendants, nor do they state with particularity how any statements made in connection with the offering were false or misleading.
C. Alleged Exchange Act Section 20(a) Violations
In addition to the 10(b) and 10b-5 claims, Plaintiffs allege violation of Section 20(a) of the Exchange Act against the individual Defendants. "Section 20 of the Exchange Act extends liability for fraudulent conduct under Section 10(b) to individuals controlling persons found to have committed securities fraud." In re: Xcel Energy, Inc., 286 F. Supp. 2d 1047, 1059 (D. Minn. 2003) (citing 15 U.S.C. § 78t(a)). Like a 10(b) or 10b-5 claim, the primary violation under Section 20 must be plead with particularity as required by the PSLRA. Vohs v. Miller, 323 F. Supp. 2d 965, 973 (D. Minn. 2004). Because Plaintiffs based their Section 20(a) claims on the same allegations as the 10(b) and 10b-5 claims, the Section 20(a) claims fail for the same reasons as previously discussed.
D. Plaintiffs' Request to Amend and Materiality
Anticipating that Defendants' Motion to Dismiss might be granted, Plaintiffs request leave to amend their Complaint. Although leave is generally granted when justice requires, in the instant case, it is not apparent that amendment will cure the Complaint's defects. Frey v. City of Herculaneum, 44 F.3d 667, 672 (8th Cir. 1995). Plaintiffs argue that, if allowed to amend, they would add: (1) additional details establishing Defendants' knowledge of the remerchandising issues; (2) more details regarding the remerchandising problems; (3) additional details establishing the credibility of the CIs; and (4) additional details concerning the Musicland stores inventory buildup. Additional details in these areas, however, will not remedy the key issues of lack of particularity in the present allegations. The Complaint does not fail for lack of details regarding the alleged remerchandising problems so much as it fails for a lack of particularity of falsity or scienter.
The Plaintiffs have, in fact, already had an opportunity to recast and recharacterize their Complaint. The initial Complaint was filed on November 20, 2003 [Docket No. 1]. Following the consolidation of a number of individual cases, the Consolidated Class Action Complaint was filed on August 19, 2004. Although both pleadings allege securities fraud, the Consolidated Complaint for the first time raises allegations by the CIs.
Plaintiffs' allegations do not meet 10(b) and 10b-5 materiality requirements. As Defendants noted in their brief and at oral argument, the Plaintiffs have not alleged that any specific financial disclosure or statement from Best Buy was false or misleading, including the August 8, 2002 press release in which Best Buy downgraded its earnings forecast. Although securities lawsuits are not confined to misrepresentations and omissions regarding financial information, Plaintiffs have been unable to provide any Eighth Circuit law as authority for the proposition that misrepresentations of the type alleged by Plaintiffs are material to a 10(b) or 10b-5 claim. The single case Plaintiffs produced where omissions were found to be the basis of a 10b or 10(b)-5 claim, Rodney v. KPMG Peat Marwick, is not analogous to the instant litigation. 143 F.3d 1140 (8th Cir. 1998). In Rodney, Plaintiffs alleged that KPMG, in discussions related to fund investments and risks contained within prospectuses, violated three of its internal investment restrictions. Id. at 1141. Here, it is not alleged Best Buy violated any internal rules. Moreover, the omissions in Rodney related directly to assumptions regarding investments. Here, the alleged omissions regarding the remerchandising program do not directly relate to investments.
A fact is deemed material if there is "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." Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1998) (citation omitted). Even if Best Buy were to have specifically stated there were difficulties with the integration of the Musicland stores, it is not clear that this would alter the mix of information available and important to investors. Musicland's performance and earnings were reflected within Best Buy's overall earnings. Plaintiffs do not allege that these figures were false or that the true figures were omitted. Therefore, the mix of information available to investors would not have significantly changed; and as a result, Best Buy's alleged omissions were not material. Thus, Defendants' Motion to Dismiss must be granted, and Plaintiffs' request for leave to amend the Complaint will be denied.
IV. CONCLUSION
Based upon the foregoing, and all the files, records, and proceedings herein, IT IS HEREBY ORDERED that:1. Defendants' Motion to Dismiss [Docket No. 52] is GRANTED; and
2. Plaintiffs' Motion to Strike [Docket No. 62] is DENIED; and
3. Plaintiffs' Complaint [Docket No. 47] is DISMISSED WITH PREJUDICE.
LET JUDGMENT BE ENTERED ACCORDINGLY.