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District of New Jersey Dismisses A Putative Securities Class Action Against Food and Snack Company For Failure To Allege Scienter
12/08/2020On November 30, 2020, Judge Noel L. Hillman of the United States District Court for the District of New Jersey dismissed without prejudice a putative securities class action against a food and snack company (the “Company”) and certain of its top executives for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. In Re Campbell Soup Co. Securities Litigation, No. 1:18-cv-14385 (D.N.J. Nov. 30, 2020). Plaintiffs alleged that the Company made material misrepresentations and omissions concerning the profitability of its fresh foods division (the “Fresh Foods Division”). The Court dismissed the complaint with leave to amend because plaintiffs failed to allege scienter.
In recent years, the Company, already a well-established mainstay of the processed foods market, had started developing its Fresh Foods Division. As part of the Fresh Foods Division, the Company acquired a protein shake business whose product was subsequently recalled in June 2016 due to possible spoilage. Plaintiffs alleged that this recall caused the Company’s profits and sales to decline. Throughout 2017 and early 2018, however, the Company indicated that it expected to see the Fresh Foods Division return to profitable growth in 2018. Relying on statements from 13 confidential witnesses (“CWs”), plaintiffs alleged that these statements concerning the Fresh Foods Division’s expected profitability in 2018 were false and misleading because internal financial outlooks contradicted the public-facing optimism. Plaintiffs further alleged that defendants were motivated to misrepresent the financial outlook of its fresh foods division because they wanted to prop up the Company’s credit rating in advance of a high-value acquisition.
The Court rejected plaintiffs’ claims for failure to allege scienter. First, the Court held that plaintiffs failed to allege that defendants knew of and had access to information that allegedly contradicted their positive public outlook concerning the profitability of the Fresh Foods Division. Specifically, the Court held that the CWs’ allegations and the Company’s internal sales data showing declining shelf space and earnings for one of the Fresh Food Division’s beverages did not amount to “actual knowledge that [the Fresh Foods Division’s] projections . . . as a whole were false.”
Second, the Court rejected plaintiffs’ argument that the “core operations” doctrine supported the scienter allegation. Under this doctrine, a plaintiff may plead a strong inference of scienter by alleging that a defendant made misstatements concerning the core matters of central importance to a company. But, to use this doctrine, the Court emphasized that a plaintiff must offer “some additional allegation of specific information conveyed to management and related to the fraud.” Here, the Court noted, plaintiffs had made no such allegations. Having already found that there were no allegations that defendants knew that information they disseminated was false, the Court rejected plaintiffs’ argument based on the core operations doctrine.
Third, the Court held that the Company’s top executives signing Sarbanes-Oxley certifications was not a basis for finding a strong inference of scienter. Although knowingly signing a false certification may give rise to a strong inference of scienter, the Court held the complaint failed to allege facts to support the conclusion that defendants knew the information in the certifications was false or recklessly disregarded any inaccuracies contained in a public securities filing. Furthermore, the Court considered, and rejected, plaintiffs’ contention that the resignation of the Company’s CEO—on the same day that the Company downgraded its 2018 financial guidance and disclosed it was taking a $619 million pretax impairment charge—gave rise to a strong inference of scienter. The Court noted that plaintiffs “merely plead[ed] a link” between the CEO’s resignation and the disclosure of the bad news, but had alleged no basis to infer that the resignation had anything to do with the former CEO’s supposed knowledge or reckless involvement with any fraud.
Finally, the Court acknowledged that some courts in the district have held that a company’s desire to maintain a high credit rating may give a strong inference of scienter. However, the Court stressed that, in those cases, the companies were pursuing “stock-based business acquisitions,” and therefore had a more obvious incentive to prop up the price of the stock in advance of the anticipated acquisitions. Here, where the acquisition was entirely cash-based, the Court found plaintiffs’ allegation “not particularly helpful” in raising the strong inference of scienter that is required.
