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District Of Minnesota Dismisses Exchange Act Claims Against Mattress Company With Prejudice, Finding Investors Failed To Adequately Plead Falsity And Scienter
08/01/2023On July 10, 2023, Chief Judge Patrick J. Schiltz of the United States District Court for the District of Minnesota granted a motion to dismiss a putative securities fraud class action against a mattress and bedding company (the “Company”) and two of its executives. Steamfitters Local 449 Pension & Retirement Securities Funds v. Sleep Number Corp., et al, No. 21-CV-2669 (PJS/DTS) (D. Minn. July 10, 2010). Plaintiffs alleged that defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder by making material misstatements and omissions regarding an alleged disruption to the Company’s supply chain after a natural disaster that forced certain of the Company’s distributors to temporarily shut down. The Court dismissed the amended complaint with prejudice, holding that plaintiffs failed to adequately plead falsity and scienter.
According to the amended complaint, the Company designs, manufactures, and sells mattresses and bedding, including memory foam products comprised of petroleum-based chemicals that are produced along the Gulf Coast in Texas and Louisiana. From February 13 through February 17, 2021, several states, including Texas and Louisiana, experienced a severe winter storm that forced oil refineries to shutdown, which disrupted the supply of the Company’s petroleum-based chemicals. Plaintiffs alleged that the Company experienced a significant disruption, and that the Company was uncertain about when its supply of petroleum-based chemicals would be restored in order to meet ongoing demand. Plaintiffs alleged that the Company concealed this information through false and misleading statements, which the Court organized into three groups based on the time-period of the purported statements: (1) February 17, 2021 statements regarding the Company’s growing momentum, explosive demand, and improving customer service capabilities (“February 2021 statements”); (2) March 2, 2021 statements in the Company’s Form 10-K for fiscal year 2020, which allegedly “failed to disclose the adverse effects of the storm on [the Company’s] business” (“March 2021 statements”); and (3) April 21, 2021 statements in a press release announcing the Company’s results for the first quarter of 2021 and describing the Company’s temporary foam supply constraints, as well as an earnings call where the Company’s supply-chain challenges and backlog were discussed (“April 2021 statements”). The Court considered each group of statements in turn.
The Court held that plaintiffs failed to adequately plead falsity with respect to the February 2021 statements because plaintiffs had not included any specific allegations that the Company had already experienced the disruptions to its supply chain at that time, and that certain allegations that the Company was “scrambling” to address inventory and delivery problems were insufficient to show that the Company had experienced a severe disruption from the storm that would affect its sales. The Court similarly held that plaintiffs’ allegations concerning defendants’ March 2021 statements failed to adequately plead falsity because each of plaintiffs’ allegations were too vague as to timing of when the Company actually began to experience the effects of the storm, and that the confidential witness upon whose statements some allegations were purportedly based was too far removed from the “executive” meetings where any such disruptions were allegedly discussed. Finally, the Court held that plaintiffs failed to adequately plead that the April 2021 statements were false when made, finding that plaintiffs’ allegations that the Company continued to experience supply-chain problems through the second quarter amounted to nonactionable fraud by hindsight. According to the Court, “[b]ecause plaintiffs have failed to allege that any of defendants’ statements were false when made, their securities-fraud claims fail.”
The Court nevertheless turned to plaintiffs’ allegations regarding scienter and held that the amended complaint fell “far short” of pleading facts that give a “strong inference” of scienter. The Court noted that there were no allegations of motive or opportunity to commit fraud and that, as the Court had already found, the complaint “contained little in the way of specific factual allegations suggesting defendants’ statements were even false at the time they were made.” The Court stated that, standing alone, the fact that at most the statements might have been false or misleading when made is insufficient to adequately plead scienter under the requirements of the PSLRA. Accordingly, the Court held that the complaint failed to adequately plead facts giving rise to a strong inference of scienter.
Having found that plaintiff failed to plead an underlying securities fraud violation, the Court dismissed plaintiff’s Section 20(a) control person liability claims. The Court also denied plaintiffs’ request for leave to amend the complaint, finding plaintiffs had not identified any additional facts they could allege to establish falsity or scienter. Therefore, the Court dismissed the amended complaint with prejudice.
