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denying motion to dismiss with regard to misrepresentation to analyst where senior company executives made statements directly to analysts
Summary of this case from In re NTL, Inc. Securities LitigationOpinion
No. 99 Civ. 10192 (SHS).
March 28, 2001.
Plaintiffs have brought this class action alleging that defendants violated section 10(b) of the Securities Exchange Act of 1 934 (the "1934 Act"). Rule 10b-5 promulgated thereunder, and Section 20(a) of the Securities Act of 1934. Defendants now move pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure to dismiss the complaint for failure to plead fraud with sufficient particularity, for failure to comply with the pleading requirements set forth in the Private Securities Litigation Reform Act of 1995. PUb. L. No. 104-67, 109 Stat. 737 (codified in various sections of 15 U.S.C.) ("PSLRA"), and for failure to state a claim upon which relief can be granted. For the reasons set forth below, defendants' motion is granted in part and denied in part.
I. BACKGROUND AND FACTS
Plaintiffs' Amended Class Action Complaint for Violations of the Federal Securities Laws ("Compl.") alleges the following relevant facts, which the Court presumes to be true for the purposes of this motion:
A. The Parties
Defendant Revlon, Inc. is a Delaware corporation and a major cosmetics company. Compl. ¶ 23. Defendant REV Holdings, Inc. is a holding company that controls approximately 83.0% of the outstanding shares of Revlon. representing approximately 97.4% of the voting power of those shares. Id. ¶ 24. In turn, defendant Ronald O. Perelman indirectly owns and controls REV Holdings and was Chairman of Revlon's Board of Directors during the relevant time period. Id. ¶¶ 25-26.
The other individual defendants are Revlon executives: George Fellows. President and Chief Executive Officer; William J. Fox, Senior Executive Vice President and, until January 15, 1998, Chief Financial Officer; and Frank J. Gerhrmann. Executive Vice President and, after January 15, 1998, Chief Financial Officer. Id. Plaintiffs are investors who purchased Revlon securities between October 29, 1997, and October 1, 1998 (the "Class Period"). Id. ¶ 22.
B. Revlon's Scheme to Inflate Short-Term Results
In 1986. Perelman acquired Revlon through a leveraged buy-out that resulted in Revlon carrying significant amounts of debt. Id. ¶ 2. The debt included $1.115 billion in Senior Secured Discount Notes of Revlon Worldwide Corporation issued by MacAndrews Forbes Holdings, Inc. due March 15, 1998. Id. ¶ 37. According to the complaint, because McAndrews Forbes was owned indirectly by Perelman, these notes were an obligation of Perelman, not Revlon. Id.
In order to maintain Revlon's ability to refinance its debt, defendants intentionally made Revlon's results look better than they were. Id. ¶ 3. Specifically, according to the complaint, defendants: (1) artificially increased sales; (2) improperly delayed issuing credits for customer returns; (3) improperly accounted for inventory; and (4) purposefully deferred and reduced expenses.
I. Artificially Increased Sales
To artificially inflate sales, Revlon allegedly:
• Routinely shipped to customers at the end of quarters product that had either not been ordered at all or that had been ordered with a delivery date in a future quarter, and booked those shipments as revenue in the current quarter, id. ¶ 10(a);
• Shipped to Walmart in December 1997 a substantial order in excess of $40 million. which order Walmart had requested to he shipped at a later date. Revlon booked the revenue in December 1997 with no reserve for returns, and, subsequently, Walmart returned that product to Revlon id. and
• Booked revenue where products had not been shipped, through so-called "bill-and-hold" transactions. In these transactions, Revlon generated an invoice and booked the revenue but the products were held in a Revlon warehouse and not shipped to the customer by the end of the quarter, Id. ¶ 10(b).
2. Improperly Delayed Credits
In late 1997, Revlon contracted with Genco Distribution Systems, a third-party return center, to process and hold returned product. Id. ¶ 13. Genco graded returned Revlon product into three categories: "A", pristine product; "B", product with minor damage to packaging; and "C", seriously damaged or open product. Id. ¶ 14. Stan Hirsh, a Revlon employee who spent several days per week on site at Genco, directed Genco to hold "A" grade returns for long periods of time before shipping them to Revlon manufacturing centers for redistribution. Id. This practice allegedly intentionally delayed the issuance of credits by Revlon, because Revlon did not issue the customer a credit until it received the returned product at its facilities. Id.
There were extremely high levels of returns to Genco in late 1998 and 1999. Id. ¶ 15. Many of the returns arrived at Genco in their original shipping cartons and in immaculate condition. Id. The returned product had never been opened by the customer and, in some cases, had never been unloaded from its original shipping containers. Id.
For example, in October 1998, Genco allegedly received a return from Marc Glassman Inc. of Ohio consisting of thirty pallets of unopened and untouched Revlon merchandise. Id. This large, unopened return contained enough Revlon product to supply the needs of 120 stores — more stores than there were in the entire Marc Glassman chain. Id. At the direction of Revlon. Genco held this return for months before it was finally shipped to a Revlon manufacturing center. Id. Similarly, in early 1999 a trailer load of' lipstick was returned completely unopened from Israel. Id. Again, Genco was allegedly instructed to hold this returned product for many months before Genco shipped it to a Revlon manufacturing center for redistribution and for credits to be issued. Id.
3. Improper Accounting for Inventory
One of Revlon's subsidiaries, Prestige, operated 198 retail stores selling cosmetics and related products in outlet malls nationwide. Id. ¶ 45. In October 1996, Revlon announced the acquisition of Cosmetic Center Inc. ("CCI"), an operator of 68 specialty cosmetics retail stores, representing that it intended to combine Prestige's and CCI's operations and ultimately sell those businesses. Id. ¶¶ 46-47. The merger was completed in mid-1997. Id. ¶ 47.
Revlon allegedly used CCI as a dumping ground for old, outdated products. Id. ¶ 6. Two weeks before the end of every quarter, Revlon instructed the senior vice president of marketing and merchandising at CCI to purchase more products from Revlon regardless of whether CCI needed the products. Id. Indeed, Revlon was aware, through weekly reports sent by CCI to Revlon's Operations Committee, that CCI's inventory was growing by a material amount. Id. At least some of the products sold to CCI were obsolete and nearly worthless, although Revlon sold them to CCI at full value. Id. ¶ 48. The weekly reports listed the obsolete products that CCI was holding. Id. 6.
Because CCI did not need the products it was buying for Revlon, CCI could not pay for it and Revlon arranged for and guaranteed a line of credit for CCI so that CCI could continue to absorb excess and obsolete Revlon inventory. Id. Revlon eventually sold its ownership interest in CCI, after which Revlon took charges against income. and CCI filed for bankruptcy. Id.
Despite the weekly reports showing the deteriorating inventory situation at CCI, Revlon allegedly failed to write down the value of CCI's inventory and failed to disclose that the value of that inventory was impaired by at least $5 million during the third quarter of 1997, by at least $10 million during the fourth quarter of 1997, and by at least $5 million during the first quarter of 1998. Id. ¶ 48. In addition, Revlon allegedly failed to timely recognize additional impairment losses of at least $10 million in connection with the sale of CCI in the second quarter of 1998. Id. Belatedly (and after the class period), Revlon took additional write-downs of $32.7 million on the disposal of CCI in the fourth quarter of 1998. Id.
4. Reduced Costs Deferred Expenses
In order to boost its short-term results, Revlon allegedly undertook to reduce its short term expenses without regard to the long term effects of those reductions. For example,
• In October 1997, Revlon stopped servicing smaller accounts directly and instructed them by form letter that they would thereafter have to purchase product through a distributor. As a result, the smaller stores were faced with paying higher prices to the distributor than they had paid to Revlon, and many of them began to reduce Revlon shelf space and/or cancel purchases of Revlon product id. ¶ 10;
• Also in October 1997, Revlon fired its "rotators" — employees that visited each of the mass merchandisers and cleaned and stocked their Revlon display racks. As a result, Revlon's relationships with mass merchandisers deteriorated, and some mass merchandiser stores had old Revlon merchandise on the shelves and boxes of unopened, unpacked Revlon merchandise in storage, Id. ¶ 11; and
• In the summer of 1997, Revlon drastically decreased its advertising and marketing budgets, id. ¶ 12.
C. Specific Misrepresentations
Revlon made two types of affirmative misrepresentations in connection with the above practices: (1) overstated financial results; and (2) false attribution of increased sales to higher demand for its products. In addition, Revlon mislead the investing public by misleading analysts, and failed to disclose the existence of a known trend of customers' growing inventories of Revlon products.
I. Overstated Financial Results
Revlon's financial results were allegedly falsified through the improper recognition of "revenue" from false sales and the failure to timely write down excess and obsolete inventory as detailed above. Id. ¶ 95. These practices violated generally accepted accounting principles. Id. ¶¶ 96-109. As a result, Revlon's financial results for at least three quarters were overstated by the following amounts:
THIRD QUARTER 1997: (000's)Reported Restated % Overstated Income from $71,200 $55,700 28% Operations
Net Income (Loss) $31,100 $17,600 88%
FOURTH QUARTER 1997: (000's)Reported Restated % Overstated Income from $81,200 $45,200 80% Operations
Net Income (Loss) $41,500 ($ 5,500) 655%
FIRST QUARTER 1998: (000's)Reported Restated % Overstated Income from $24,500 $12,000 104% Operations
Net Income (Loss) ($58,100) ($70,600) 22%
Id. ¶¶ 55-56, 61.
Similarly, Revlon's financial results for the year ended December 31, 1997, were allegedly overstated as follows:
(000's) Reported Restated % Overstated Income from $213,300 $172,300 24% Operations
Net Income (Loss) $43,500 $8,500 412%
Id. ¶ 61. In addition, for the second quarter of 1998, Revlon's improper accounting resulted in an overstatement of income from operations by at least $20 million, or 63%, and an understatement of Revlon's net loss by $16 million. Id. ¶ 81.
2. False Reasons Given for Operating Performance
When reporting operating results enhanced by these activities, defendants allegedly falsely told the investing public that Revlon's improved performance was due to increasing demand for its products, rather than cost-cutting or artificially increased sales. For example, in the quarterly reports for the third and fourth quarters of 1997 and the first and second quarters of 1998, Revlon falsely attributed the reported increase in net sales to "increased demand in the United States" and "increased distribution internationally." Id. ¶¶ 52, 59, 69, 78. In addition, in a press release accompanying the release of Revlon's full-year operating results for 1997, Fellows commented:
We are extremely proud to report record earnings per share for the year. . . . By all significant measures, including net sales and operating income, EBITDA and net income before non-recurring charges, Revlon grew at double-digit rates. . . . Our U.S. operation continued its strong growth based upon our existing products and introduction of successful new product offerings.Id. ¶ 58 (emphasis added).
3. Misleading Statements to Analysts
Revlon was covered by securities analysts from several firms during the class period, including Bear, Sterns Co.; Credit Suisse First Boston Corp.; J.P. Morgan Securities Inc. Merryl Lynch Capital Markets. PaineWebber, Inc., and Prudential Securities. Inc. Id. ¶ 28. In writing reports about Revlon, these analysts relied in substantial part upon information provided to them by Revlon and assurances by Revlon that information in the analysts' reports was consistent with the company's internal knowledge of its operations and prospects. Id. ¶ 29. Such analysts' reports are instantaneously disseminated worldwide to investors over the First Call computer network and otherwise. Id. ¶ 30.
As part of Revlon's efforts to maintain Revlon's ability to refinance its debt, certain Revlon executives, including defendants Fellows, Fox, and Gehrmann, regularly communicated with securities analysts. Id. These executives knew that their statements would be publicly disseminated by securities analysts to the market. Id. Indeed, copies of drafts of some analysts' reports were provided to Revlon before they were released, and those drafts were reviewed and approved by senior Revlon executives. Id. ¶ 32. Thus, the role of securities analysts who wrote reports on Revlon became that of conduits by and through which defendants provided information to the marketplace. Id. ¶ 33.
Throughout the class period, securities analysts issued glowing reports about Revlon and its prospects based on detailed information received from Revlon executives. For example, on both May 1, 1998, and August 3. 1998, PaineWebber issued reports citing Revlon's "solid fundamentals . . ., backed by new product activity, increased distribution, marketing savvy. and the lack of serious competition, [and] improved operational efficiencies." Id. ¶¶ 73(a), 82. Prudential issued a report following the appearance of senior Revlon management at a Prudential conference on May 15, 1998, citing, among other things, "robust category growth," rating Revlon stock a "Buy," and setting a 12-month price target of $60 for the stock. Id. ¶ 74.
As late as September 11, 1998, Revlon executives appeared at a J.P. Morgan conference to provide analysts. with information concerning Revlon's operations. performance, systems controls and current and future business practices. Id. ¶ 83. No information was disclosed by Revlon that contradicted any of the previous favorable statements by analysts.Id.
4. Failure to Disclose the Trend of Customers' Growing Inventories
In addition to reporting artificially inflated sales, as outlined above, Revlon allegedly undertook to increase its short-term actual sales through large discounts and promotions, which induced Revlon's customers to buy more Revlon products. Id. ¶¶ 4-5. Consumer demand, however, could not keep up with the increasing sales to Revlon's customers, and Revlon's customers' inventories of Revlon products began to grow. Id. ¶ 4(a).
Defendants maintained close relationships with Revlon's customers, were kept apprised of Revlon's customers' sell-through (i.e sales to consumers) of Revlon products, and continually monitored and assisted in the management of such customers' inventories of Revlon products. Id. ¶ 42. Accordingly, defendants knew the effect of the discounts and promotions on the Revlon inventory held by Revlon's customers. Id. They also knew that the inventory of Revlon product in the channel was materially growing and that Revlon's sales to its customers greatly exceeded its customers' sales of Revlon products. Id.
Allegedly, the inventories of Revlon's customers eventually ballooned to extraordinary' levels, as a result of which Revlon's customers would inevitably have to return material amounts of Revlon products and significantly decrease orders in the future so as to bring their inventory levels in line with actual sell-through of Revlon products.Id. ¶ 43. Nevertheless, Revlon allegedly failed to disclose the trend of increasing inventories and the fact of the inevitable correction to investors. Id. ¶ 112(h).
D. The Aftermath
On October 2, 1998, only three weeks after Revlon executives appeared at the J.P. Morgan conference, Revlon issued a press release announcing that third quarter results would fall short of analysts' published expectations. Id. ¶ 84. Revlon announced that it would miss its expected quarterly sales figure by almost $100 million and its expected earnings per share by 90%. Id. ¶ 17. Among the reasons cited by Revlon for these results were "flattening [sales] . . . caused by a shift in advertising and promotional activities" and "reduc[ed] inventory levels" by retailers. Id. ¶ 84. That same day, Revlon's stock price declined 44% to close at $15.44 per share, a 52-week low and 70% off its April 1998 peak. Id. ¶ 86.
Since October 1998, and through the filing of the complaint. Revlon has posted continuing losses and its stock price has not recovered. Id. ¶ 94.
II. DISCUSSION
A. Standard of Review
When deciding a motion to dismiss pursuant to Rule 12(b)(6), the Court must accept all of the well-pleaded facts as true and draw all reasonable inferences from those allegations in favor of the plaintiffs. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). The complaint will survive the defendants' motion to dismiss unless "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." See Conley v. Gibson, 355 U.S. 41, 45-46 (1957).
B. Failure to Plead Fraud with Particularity
With respect to allegations of fraud, Rule 9(b) of the Federal Rules of Civil Procedure requires that "the circumstances constituting fraud or mistake shall be stated with particularity." A complaint alleging a violation of section 10(b) must satisfy the particularity requirement of Rule 9(b), see Stevelman v. Alias Research Inc., 174 F.3d 79, 84 (2d Cir. 1999), as well as the pleading requirements of the PSLRA. Pursuant to Rule 9(b) plaintiffs "must: (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker. (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Stevelman, 174 F.3d at 84 (quoting Acito v. IMCERA Group Inc., 47 F.3d 47, 51 (2d Cir. 1995)); see also McLaughlin v. Anderson, 962 F.2d 187, 191 (2d Cir. 1992). Similarly, the PSLRA requires that the complaint "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); see In re Health Mgmt. Sys. Inc. Sec. Litig., No. 97 Civ. 1865, 1998 WL 283286, at *2 (S.D.N.Y. June 1, 1998), as well as "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind," 15 U.S.C. § 78u-4(b)(2).
1. Misrepresentations in Reported Financial Results and Press Releases
Excepting the statements or omissions in communications with analysts, each of the misrepresentations alleged in the complaint were made in specifically identified financial disclosures or press releases discussing financial disclosures. Thus, for each of these misrepresentations, plaintiffs have satisfied the first three Rule 9(b) requirements. The only remaining issue as to these misrepresentations is whether plaintiffs have sufficiently pleaded "why" they were fraudulent.
To satisfy the "why" prong, plaintiffs must plead both that defendants made false statements and that they did so with the requisite scienter.See San Lenadro v. Emergency Medical Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801. 812-13 (2d Cir. 1996). When, ho'vever, as here information contrary to the alleged misrepresentations is alleged to have been known by defendants at the time the misrepresentations were made, the falsity and scicnter requirements are essentially combined. See Rothman v. Gregor, 220 F.3d 81, 89-90 (2d Cir. 2000). Accordingly, if plaintiffs in this action have sufficiently pled facts to support scienter, they have also met the pleading requirements for falsity. See id. at 90.
To allege scienter with sufficient particularity to survive a motion to dismiss, plaintiffs must plead facts giving rise to a "strong inference" of fraudulent intent. See Novak v. Kasaks, 216 F.3d 300, 311 (2d Cir.),cert. denied, 121 S.Ct. 567 (2000); Stevelman, 174 F.3d at 84. Although courts in this circuit have often spoken about satisfying the "strong inference" standard by either (a) alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness, or (b) alleging facts to show that defendants had both motive and opportunity to commit fraud, see, e.g., Stevelman, 174 F.3d at 84, the United States Court of Appeals for the Second Circuit has more recently cautioned against the invocation of "magic words such as `motive and opportunity,'" and has clarified that the "strong inference" may arise where the complaint sufficiently alleges that defendants: "(1) benefitted in a concrete and personal way from the purported fraud . . .; (2) engaged in deliberately illegal behavior . . .; (3) knew facts or had access to information suggesting that their public statements were not accurate . . .; or (4) failed to check information they had a duty to monitor."Novak, 216 F.3d at 311.
In this case, plaintiffs have alleged that defendants "knew facts or had access to information suggesting that [Revlon's] public statements were not accurate." As to the overstated financial results, plaintiffs point to: (1) the routime practice of shipping to customers at the end of a quarter product that had not been ordered or ordered for shipment in a future quarter, such as the $40 million Walmart order; (2) the practice of booking revenue where products had not been shipped; (3) the practice of delaying credits on returned merchandise; and (4) improper accounting for CCI inventory despite weekly reports showing that an inventory problem existed and was growing. As to the reasons stated for Revlon's improved operating performance, plaintiffs point to the artificially inflated sales and to Revlon's drastic cost-cutting efforts. As to the failure to disclose growing inventories, plaintiffs allege that defendants continually monitored and helped maintain Revlon's customers' inventories of Revlon products during the period of time those inventories were ballooning to extraordinary levels. Thus, plaintiffs have alleged sufficient facts to support a "strong inference" of fraudulent intent. See Novak, 216 F.3d at 311.
Defendants' argument that the allegations regarding Revlon's cost cutting efforts merely reflect disagreement over matters of "business judgment," see Def.'s Mem. at 8 n. 5, misses the mark. Plaintiffs do not allege that the cost cutting itself was a violation of the securities laws. Rather, these allegations form the factual basis for plaintiffs' contention that statements regarding the reasons for Revlon's improved operating performance were knowingly false and fraudulent.
Defendants contend that because certain details pertaining to the alleged transactions or practices are missing, plaintiffs have failed to satisfy Rule 9(b). For example, defendants point out that no date of any particular "bill and hold" transaction is alleged, and, similarly, that the exact date that the $40 million Walmart order was returned is not alleged. Def.'s Mem. at 8-9, 14-15. To satisfy Rule 9(b), however, "a plaintiff need not plead dates, times and places with absolute precision, so long as the complaint `gives fair and reasonable notice to defendants of the claim and the grounds upon which it is based.'" International Motor Sports Group Inc. v. Gordon, No. 98 Civ 5611, 1999 WL 619633. at *3 (S.D.N.Y. Aug. 16, 1999) (quoting Spear, Leeds Kellog v. Public Serv. Co., 700 F. Supp. 791, 793 (S.D.N.Y. 1988)); see also Novak, 216 F.3d at 314 ("The primary purpose of Rule 9(b) is to afford defendant fair notice of the plaintiffs claim and the factual ground upon which it is based."). The allegations as pled are sufficient to enable the defendants to interpose an answer and prepare for trial.
Similarly unavailing, at least at this stage of the litigation, are defendants' contentions that the allegations regarding the CCI inventory are "arbitrar[y] . . . numbers on a piece of paper" and that the scheme to delay credits for returns did not actually affect Revlon's financial reporting. Def.'s Mem. at 14-16. Those arguments raise disputed issues of fact, which are not resolveable on a motion to dismiss the complaint.See, e.g., In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 268 (2d Cir. 1993); Doehla v. Wathne Ltd., No. 98 Civ. 6087, 1999 WL 566311, at * 10 (S.D.N.Y. Aug. 3, 1999).
2. Misrepresentations to Analysts
The United States Court of Appeals for the Second Circuit has recently explained that "[u]nder the law of this circuit, plaintiffs may state a claim against corporate officials for false and misleading information disseminated through analysts' reports by alleging that the officials either: (1) `intentionally foster[ed] a mistaken belief concerning a material fact' that was incorporated into reports; or (2) adopted or placed their `imprimatur' on the reports." Novak, 216 F.3d at 314 (quotingElkind v. Liggett Myers Inc., 635 F.2d 156, 163-64 (2d Cir. 1980)). Thus, to satisfy the "why" prong of the Rule 9(b) inquiry with respect to those claims, plaintiffs must plead facts giving rise to an inference that defendants engaged in that fostering or adoption.
In this case, plaintiffs have averred that defendants reviewed "some" reports and "regularly communicated" with securities analysts. Compl. ¶¶ 30, 32. But these allegations do not "(1) specify the statements that the plaintiff contends were fraudulent. (2) identify the speaker, [or] (3) state where and when the statements were made" and, thus, fail to satisfy Rule 9(b). See Stevelman, 174 F.3d at 84. Even where plaintiffs have identified specific reports, but have only generally alleged that defendants communicated with the analysts before those reports, See Compl. ¶¶ 73, 82. plaintiffs have not satisfied Rule 9(b), as they have neither identified the Revlon executive responsible for any particular communication to an analyst nor stated where and when a particular communication to an analyst took place.
In one instance, however, plaintiff has alleged that: (1) senior Revlon executives, including Fox and Gehrmann, attended a specific analysts' conference on May 15, 1998; (2) the Revlon representatives made statements to analysts at that conference regarding "the current condition of the Company and known trends affecting the Company"; (3) the Revlon representatives failed to disclose certain material adverse information on those subjects, as discussed above, to the analysts; and (4) a specific analysts' report was issued based on the conference. See Compl. ¶¶ 74-75. This allegation meets the requirements of Rule 9(b), including the Novak requirement that plaintiffs allege that defendants "intentionally foster[ed] a mistaken belief concerning a material fact."Novak, 216 F.3d at 314. Accordingly, plaintiffs' claims regarding misrepresentations to analysts will be dismissed with the exception of the claim relating to defendants' statements at the May 15, 1998, conference.
C. Failure to State a Section 10(b) Claim
In order to state a claim for securities fraud pursuant to section 10(b) of the 1934 Act a "plaintiff must plead that the defendant made a false statement or omitted a material fact, with scienter, and that plaintiff's reliance on defendant's action caused plaintiff injury." San Leandro. 75 F.3d at 808; In re Oxford Health Plans Inc., 187 F.R.D. 133, 138 (S.D.N.Y. 1999) (citing Wright v. Ernst Young LLP, 152 F.3d 169, 177 (2d Cir. 1998)).
For the reasons discussed above, the Court finds that plaintiffs have pled that the defendants made false statements with scienter. See supra Part II. B. Defendants do not dispute that plaintiffs have pleaded reliance, injury, and causation. Thus, the only remaining issue is whether the alleged false statements were material.
"At the pleading stage, a plaintiff satisfies the materiality requirement of Rule 10b-5 by alleging a statement or omission that a reasonable investor would have considered significant in making investment decisions." Gianino v. Citizens Utilities Co., 228 F.3d 154, 161 (2d Cir. 2000). A motion to dismiss a claim on the grounds that the misstatements alleged are not material may not be granted unless the misstatements "are so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance."Id. at 162 (quoting Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985)).
Defendants contend that plaintiffs have not established that each individual fact alleged to have artificially inflated Revlon's financial results is material. See, e.g., Def.'s Mem. at 9, 16. But the materiality of those facts may not be considered in isolation; "whether an alleged misrepresentation or omission is material necessarily depends on all relevant circumstances" of a particular case. Gianino, 228 F.3d at 162. A bill and hold transaction here, an improperly delayed customer credit there, "and pretty soon you're talking about real money."
Partial quotation attributed to Senator Everett McKinley Dirksen in John Bartlett, Familiar Quotations 694 (Justin Kaplan ed., 16th ed. 1992).
The various improper accounting practices in this case are alleged to have resulted in overstatements of income from operations as low as 28% and as high as 104%. and overstatements of net income (or understatements of net losses) as low as 22% and as high as 655%. It is not possible to determine at this stage of the litigation that these amounts were immaterial as a matter of law. See Gianino, 228 F.3d at 167. Similarly, the Court cannot say that Revlon's customers' allegedly ballooning inventories and the fact that Revlon's improved operating results resulted from drastic cost-cutting that could imperil the company's future sales rather than from increased demand "are so obviously unimportant to a reasonable investor that reasonable minds could not differ" on the issue of materiality. See id. at 162. Accordingly, the Court finds that plaintiffs have pled that the false statements alleged were material, and that, therefore, plaintiffs have stated a section 10(b) claim.
D. Failure to State Section 20(a) Claims
Defendants have based their motion to dismiss the section 20(a) claims on plaintiffs' failure to state an underlying section 10(b) claim. Because the Court finds that plaintiffs have sufficiently pled a section 10(b) claim, the Court denies defendants' motion to dismiss the section 20(a) claims.
III. CONCLUSION
For the reasons set forth above, defendants' motion to dismiss the Amended Class Action Complaint is granted only as to claims arising from the alleged misrepresentations to analysts set forth in paragraphs 31-33, 66-67, and 73 of the amended complaint, and is in all other respects denied.