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On June 28, 2022, Judge Kevin McNulty of the United States
District Court for the District of New Jersey granted a motion to
dismiss a putative class action against a retail clothing brand
(the “Company”) and two of its executives
(“Individual Defendants”) alleging violations of Section
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule
10b-5. In re Ascena Retail Grp., Inc. Sec. Litig., No.
CV1913529KMJBC, 2022 WL 2314890 (D.N.J. June 28, 2022). Plaintiffs
alleged that the Company knowingly or recklessly overstated the
value and business prospects of the Company and its subsidiaries in
public statements and SEC filings. The Court dismissed
plaintiffs’ complaint for failure to plead an actionable
misrepresentation or allegations sufficient to support a strong
inference of scienter.
According to plaintiffs, the Company, a publicly traded retailer
of clothing and apparel, engaged in an “expansion-driven
strategy” of acquiring other women’s clothing companies
during the period from December 2015 to May 2017. The Company
reported in SEC filings that the value of the Company’s
goodwill and tradenames were generally stable, and that the value
of its goodwill ranged from $1.268 billion to $1.29 billion while
the value of its other intangible assets, such as tradenames,
ranged from $1.263 billion to $1.283 billion. Plaintiffs alleged
that, during the same period, “key metrics underlying the
value of [the Company’s] goodwill and other intangible
assets” eroded due to factors such as declining sales and
store traffic, a shift in consumer spending, a significantly
altered competitive environment, and a steady decline in the
Company’s stock price and market capitalization. The Company
allegedly acknowledged the impact of these key metrics on the value
of the Company’s goodwill and tradenames in June 2017 when the
Company reported an impairment charge of over $1.3 billion.
Plaintiffs alleged, however, that the Company knew that these
metrics demonstrated the need for an impairment analysis and a
concomitant impairment charge much sooner under Generally Accepted
Accounting Principles (“GAAP”).
The Court first considered whether the alleged misstatements
were actionable, noting that the challenged statements regarding
the value of the Company’s goodwill and tradenames were opinion
statements that were properly analyzed under the Supreme
Court’s holding in Omnicare, Inc. v. Laborers District
Council Construction Industry Pension Fund, 575 U.S. 175
(2015). According to the Court, although the Company’s
statements about goodwill and tradenames “rest on the
accounting procedures outlined by GAAP for evaluating and testing
these assets,” it “require[s] the exercise of subjective
judgment.” Applying Omnicare, the Court held that the
challenged statements about the Company’s valuation were not
false or misleading because, even though the Company allegedly knew
of its challenging business environment (and said so publicly),
GAAP leaves it to the Company’s judgment when to reevaluate the
value of its intangible assets. And even though the size of the
impairment when taken “suggests that Defendants’
valuations were overly optimistic and that the impairment could or
even should have been recorded earlier,” the impairment charge
appears better explained as a result of Defendants’ mistakes,
bad luck, or poor performance, not a longstanding effort by
Defendants to dupe investors. Accordingly, plaintiffs failed to
show that Defendants “disbelieved their own statements;
conveyed false statements of fact; or omitted material facts going
to the basis of their opinions.”
The Court also held that plaintiffs failed to plead allegations
sufficient to support a strong inference of scienter. The Court
rejected plaintiffs’ argument that Individual Defendants’
statements “in press releases and investor conference calls .
. . showed [the Company’s] goodwill and tradenames [were]
overvalued and demonstrated the need for an impairment
analysis.” Instead, the Court held that plaintiffs’
“allegations more plausibly yield the inference that
Defendants’ valuations of [the Company’s] goodwill and
tradenames were judgment calls—reasonable at the times they
were made, even if ultimately shown to be overly optimistic.”
According to the Court, although the Company’s “rosy
assessments” “may bespeak mistakes in [the Company’s]
management . . . they . . . do not constitute culpable conduct
demonstrating the necessary scienter for securities
fraud.”
Finally, the Court granted plaintiffs’ request for leave to
amend their complaint to incorporate new allegations from
confidential witnesses that plaintiffs had recently identified.
In re Ascena Retail Grp., Inc. Sec.
Litig.0
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