Southern District Of New York Rejects Plaintiffs’ Reliance On “Buzz Words” In Lieu Of Financial Metrics In Dismissing Securities Class Action
02/07/2017On February 1, 2017, United States District Judge Lewis A. Kaplan of the United States District Court for the Southern District of New York dismissed a putative securities class action against Party City Holdco Inc., a global party goods retailer and supplier, two of its officers, the underwriters of its 2015 initial public offering, and two beneficial owners of Party City’s common stock who had purchased a majority of the company in a private transaction prior to the IPO. Jones, et al. v. Party City Holdco, Inc. et al., No. 1:15-cv-9080 (S.D.N.Y. Feb. 1, 2017). Plaintiffs alleged that the registration statement filed by Party City with the Securities Exchange Commission in advance of its IPO misled investors by failing to disclose that Party City’s success was heavily dependent on revenues from one particular license—in connection with sales of products related to Disney’s 2013 movie, Frozen—thereby causing Party City’s stock to drop more than 30% from the $17 per share IPO price to $11.80 per share when the materiality of that license allegedly was later disclosed. Plaintiffs brought claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (the “Securities Act”).
In support of their claims under Sections 11 and 12(a)(2) of the Securities Act, plaintiffs point to a statement in Party City’s registration statement and prospectus that none of the licenses it holds “is individually material to our aggregate business.” Plaintiffs allege that this statement was materially false or misleading because the impact of Frozen was, in fact, material to Party City’s business in 2014 that the decline in Frozen sales in 2015 could not be offset by revenue from Party City’s other licenses. Moreover, plaintiffs contend that Party City’s post-IPO statements that Frozen’s impact on its business was a “phenomenon” and an “anomaly” that led to a decline in Party City’s “brand comp sales” provide further support that the offering materials in connection with the IPO contained untrue statements of material fact or omitted a material fact necessary to make the statements therein not misleading.
While noting that the Court must draw all reasonable inferences in plaintiffs’ favor at the motion to dismiss stage, Judge Kaplan concluded that plaintiffs had failed to state a claim under Section 11 or 12(a)(2) because there were no alleged facts from which the Court “plausibly could infer” that the alleged misstatement—that sales under the Frozen license were material to Party City’s business as a whole—was false. The Court noted that Party City’s description post-IPO of the performance of its Frozen’s merchandise as “extraordinary,” “anomalous,” and “phenomen[al]” did not mean that such performance had a material impact on Party City’s aggregate business. Further, citing the complaint’s absence of any allegations concerning Party City’s Frozen-licensed sales in 2014 or the percentage those sales represented over the overall business, the Court rejected plaintiffs’ reliance on “a handful of buzz words and a single financial metric, brand comp sales,” noting that plaintiffs failed to allege any connection between that metric and Party City’s total business. Consequently, the Court concluded that plaintiffs’ Section 11 and 12(a)(2) claims must be dismissed. Having found that plaintiffs failed to plead a primary violation under Section 11 or 12(a)(2), the Court also dismissed plaintiffs’ Section 15 claims.
This decision serves as an important reminder of the high bar plaintiffs must meet in pleading securities claims. In particular, it demonstrates the willingness of courts to uphold the materiality standards required to plead such claims, and serves as a warning to plaintiffs that reliance on “buzz words” is not a substitute to pleading facts that can demonstrate the plausible existence of materially misleading statements or omissions.