United States District Court, S.D. New York
In re FAIRWAY GROUP HOLDING CORP. SECURITIES LITIGATION
For Jacksonville Police & Fire Pension Fund, Lead Plaintiff: Adam David Hollander, Gerald H. Silk, John Christopher Browne, Lauren Amy Ormsbee, LEAD ATTORNEY, Bernstein Litowitz Berger & Grossmann LLP, New York, NY.
For Renee Blumstein, Individually and On Behalf of All Others Similarly Situated, Plaintiff: Jeremy Alan Lieberman, Pomerantz LLP, New York, NY.
Bruce H. Paul, Consolidated Plaintiff, Pro se.
For Kevin Lind, Movant: Kim Elaine Miller, LEAD ATTORNEY, Kahn Swick & Foti, LLC, Madisonville, LA.
For Joe Felcher, Movant: Phillip C. Kim, LEAD ATTORNEY, The Rosen Law Firm P.A., New York, NY.
For Austin Power, Movant: Gregory M. Egleston, Thomas James McKenna, Gainey McKenna & Egleston, New York, NY.
For William Fassbender, Gregory Bradley Linkh, Movant: Gregory Bradley Linkh, LEAD ATTORNEY, Glancy Binkow & Goldberg LLP (NYC2), New York, NY.
For Martin Bertisch, M.D. David Amar, Movants: Jeremy Alan Lieberman, Pomerantz LLP, New York, NY.
For Fairway Group Holdings Corp., Herbert Ruetsch, Edward C Arditte, Kevin McDonnell, Defendants: Joseph S. Allerhand, Stacy Nettleton, LEAD ATTORNEY, Weil, Gotshal & Manges LLP (NYC), New York, NY.
For Sterling Investment Partners L.P., Sterling Investment Partners II, L.P., Sterling Investment Partners Side-by-Side, L.P., Sterling Investment Partners Advisers, LLC, Defendants: Joseph S. Allerhand, LEAD ATTORNEY, Weil, Gotshal & Manges LLP (NYC), New York, NY.
For Linda M. Siluk, charles w santoro, Howard Glickberg, William Selden, Stephen Key, Consolidated Defendants: Joseph S. Allerhand, Weil, Gotshal & Manges LLP (NYC), New York, NY.
REPORT AND RECOMMENDATION
Andrew J. Peck, United
States Magistrate Judge.
To the Honorable Lewis A. Kaplan, United States District Judge:
Plaintiff Jacksonville Police and Fire Pension Fund alleges that defendants made material misstatements and omissions in order to make the Fairway Group Holdings Corp. IPO more attractive to investors. (See generally Dkt. No. 59: Am. Compl.) The misstatements and omissions concern three primary issues: (1) Fairway's expansion to new stores (Am. Compl. ¶ ¶ 53-58); (2) Fairway's sales growth at existing store locations (Am. Compl. ¶ ¶ 59-63); and (3) Fairway's deferred tax asset and adjusted earnings before interest, taxes, depreciation and amortization (Am. Compl. ¶ ¶ 64-69). Plaintiff brings claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. (Am. Compl. ¶ ¶ 18, 24-36, 205-13, 283-304.)
Presently before the Court are the defendants' motions to dismiss. (See Dkt. No. 61: Underwriters Notice of Motion; Dkt. No. 63: Fairway & Sterling Notice of Motion; see also Dkt. No 62: Underwriters Br.; Dkt. No. 64: Fairway & Sterling Br; Dkt. No. 71: Underwriters Reply Br.; Dkt. No. 72: Fairway & Sterling Reply Br.) The Underwriter Defendants move to dismiss the amended complaint pursuant to Rules 8(a), 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure. (Underwriters Notice of Motion; see also Underwriters Br. at 1.) The Fairway and Sterling Defendants move to dismiss the amended complaint pursuant to Rules 8, 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure, and the Private Securities Litigation Reform Act of 1995. (Fairway & Sterling Notice of Motion; see also Fairway & Sterling Br. at 1.)
For the reasons set forth below, the defendants' motions to dismiss (Dkt. Nos. 61 & 63) should be GRANTED dismissing plaintiff's Exchange Act Section 20(a) claim and Securities Act Section 15 claim against defendant Sterling Advisors, and dismissing plaintiff's Securities Act Section 12(a)(2) claim, and in all other respects should be DENIED.
Lead plaintiff Jacksonville Police and Fire Pension (" Jacksonville P& F") is a public pension plan established for police and firefighters in Jacksonville, Florida. (Dkt. No. 59: Am. Compl. ¶ 23.) Plaintiff purchased shares of Fairway securities between April 17, 2013 and February 7, 2014 (the " Class Period"). (Am. Compl. Intro. & ¶ 23.) Plaintiff brings this claim on behalf of itself and all others who purchased or acquired Fairway common stock during the Class Period. (Am. Compl. Intro.)
Defendant Fairway Group Holdings Corp. is a food retailer in the greater New York City Area. (Am. Compl. ¶ 24.) Fairway became a publicly traded company through an April 2013 IPO. (Id.)
Defendant Charles W. Santoro was Fairway's Executive Chairman of the Board. (Am. Compl. ¶ 25.) Santoro is a co-founder and managing partner of Sterling Investment Partners and is a member and general partner of the Sterling Funds discussed below. (Id.) Defendant Herbert Ruetsch was Fairway's Chief Executive Officer until his resignation on February 6, 2014. (Am. Compl. ¶ 26.) Defendant Edward C. Arditte was Fairway's Executive Vice President and Chief Financial Officer, and served as a consultant to Fairway in October and November 2012. (Am. Compl. ¶ 27.) According to Fairway's SEC filings, Santoro, Ruetsch and Arditte were " key personnel" during the Class Period, and were " primarily responsible for determining the strategic direction of [Fairway's] business and for executing [Fairway's] growth strategy." (Am. Compl. ¶ 28.) Fairway, Ruetsch, Arditte, and Santoro are defendants to both the Exchange Act claims and the Securities Act claims. (Am. Compl. ¶ ¶ 24-27, 220-25.)
The Sterling Defendants acquired an 80.1 percent stake in Fairway on January 24, 2007 pursuant to an original equity investment of approximately $150 million. (Am. Compl. ¶ 29.) The Sterling Funds collectively sold 1, 898, 909 shares of Fairway Class A common stock in the IPO for approximately $23 million. (Am. Compl. ¶ ¶ 29-33.)
Defendant Sterling Advisors, a Sterling affiliate, entered into a management agreement with Fairway in 2010. (Am. Compl. ¶ 34.) Sterling Advisors consulted with Fairway's Board of Directors and management on business and financial matters, including Fairway's corporate strategy and the IPO. (Id.) Between 2010 and the April 17, 2013 IPO, Fairway paid Sterling Advisors approximately $20 million for these services. (Id.) Sterling Advisors also received $9.2 million in the IPO as a fee to terminate the management agreement. (Id.) Sterling Advisors and the four Sterling Funds (collectively the " Sterling defendants") are defendants to the Exchange Act claims and the Securities Act claims. (Am. Compl. ¶ ¶ 29-34, 242-49.)
Defendant Linda M. Siluk served as Fairway's Vice President-Finance and Chief Accounting Officer since October 2011. (Am. Compl. ¶ 223.) Defendant Michael Barr is a principal of Sterling Investment Partners and has served as a Fairway director since 2007. (Am. Compl. ¶ 226.) Defendant Howard Glickberg has served as a Fairway director since January 2007 and as Fairway's Vice Chairman of Development since January 1, 2012. (Am. Compl. ¶ 227.) Defendant Stephen L. Key has served as a Fairway director since August 2012 and has served as a member of the Senior Executive Advisory Board of Sterling Investment Partners. (Am. Compl. ¶ 228.) Defendant William Selden is a co-founder and managing partner of Sterling Investment Partners, and has served as a Fairway director since January 2007. (Am. Compl. ¶ 229.) Defendant Farid Suleman has served as a Fairway director since August 2012 and has served as a member of the Senior Executive Advisory Board of Sterling Investment Partners. (Am. Compl. ¶ 230.) Siluk, Barr, Glickberg, Key, Selden and Suleman are defendants only to the Securities Act claims. (Am. Compl. ¶ ¶ 223, 226-30.)
Defendants Credit Suisse Securities (USA) LLC, Merrill Lynch, Pierce, Fenner & Smith Inc., Jefferies LLC, William Blair & Company L.L.C., BB& T Capital Markets, Guggenheim Securities, LLC, Oppenheimer & Co. Inc., Wolfe Trahan Securities, and Morgan Joseph TriArtisan LLC (collectively, the " Underwriter Defendants") each acted as an underwriter in the Fairway IPO; they are defendants only to the Securities Act claims. (Am. Compl. ¶ ¶ 232-41.)
Factual Allegations in the Amended Complaint
Stated briefly, plaintiff alleges that during the Class Period defendants made material misstatements and omissions regarding Fairway's growth potential to make Fairway's IPO attractive to investors. (See generally Dkt. No. 59: Am. Compl.) The misstatements and omissions concern three primary issues: (1) Fairway's expansion to new stores; (2) Fairway's sales growth at existing store locations; and (3) Fairway's deferred tax asset (" DTA") and adjusted earnings before interest, taxes, depreciation and amortization (" EBITDA"). (Am. Compl. ¶ ¶ 53-69.) Plaintiff's allegations are based upon SEC and other regulatory filings, press releases, statements made by Fairway's directors and officers during conference calls and the IPO roadshow, and analysts' reports. (Am. Compl. ¶ ¶ 51-79.) Plaintiff's allegations also are based upon the knowledge of seven confidential witnesses who are former Fairway employees (Am. Compl. ¶ ¶ 84-93, 123, 127), including: manager of financial planning (" CW 1"); assistant controller (" CW 2"); employee in the accounts payable department (" CW 3"); supervisor of several stores (" CW 4"); store controller (" CW 5"); assistant general manager (" CW 6"); and director of internal audit (" CW 7). (Am. Compl. ¶ ¶ 84-93, 123, 127.)
The amended complaint is voluminous and its specific factual allegations will be discussed in conjunction with the relevant legal analysis.
I. LEGAL STANDARDS GOVERNING MOTIONS TO DISMISS
A. The Standard Pursuant to Fed.R.Civ.P. 12(b)(6)
1. The Twombly-Iqbal " Plausibility" Standard
In the Twombly and Iqbal decisions in 2007 and 2009, the Supreme Court significantly clarified the standard for a motion to dismiss, as follows:
Under Federal Rule of Civil Procedure 8(a)(2), a pleading must contain a " short and plain statement of the claim showing that the pleader is entitled to relief." As the Court held in Twombly, the pleading standard Rule 8 announces does not require " detailed factual allegations, " but it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation. A pleading that offers " labels and conclusions" or " a formulaic recitation of the elements of a cause of action will not do." Nor does a complaint suffice if it tenders " naked assertion[s]" devoid of " further factual enhancement."
To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to " state a claim to relief that is plausible on its face." A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a " probability requirement, " but it asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are " merely consistent with" a defendant's liability, it " stops short of the line between possibility and plausibility of 'entitlement to relief.'"
Two working principles underlie our decision in Twombly. First, the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice. Rule 8 marks a notable and generous departure from the hyper-technical, code-pleading regime of a prior era, but it does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions. Second, only a complaint that states a plausible claim for relief survives a motion to dismiss. Determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense. But where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged--but it has not " show[n]" --" that the pleader is entitled to relief."
In keeping with these principles a court considering a motion to dismiss can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth. While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations. When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.
Ashcroft v. Iqbal, 556 U.S. 662, 677-79, 129 S.Ct. 1937, 1949-50, 173 L.Ed.2d 868 (2009) (citations omitted & emphasis added) (quoting Bell A. Corp. v. Twombly, 550 U.S. 544, 556-57, 570, 127 S.Ct. 1955, 1965-66, 1974, 167 L.Ed.2d 929 (2007) (retiring the Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957), pleading standard that required denying a Rule 12(b)(6) 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")).
Even after Twombly and y, the Court's role in deciding a motion to dismiss " is merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof." Bison Capital Corp. v. ATP Oil & Gas Corp., 10 Civ. 0714, 2010 WL 2697121 at *5 (S.D.N.Y. June 24, 2010) (Peck, M.J.) (quotations omitted), report & rec. adopted, 2010 WL 3733927 (S.D.N.Y. Sept. 16, 2010).
2. Consideration of Documents Attached to the Amended Complaint
A Rule 12(b)(6) motion to dismiss challenges only the face of the pleading. Thus, in deciding such a motion to dismiss, " the Court must limit its analysis to the four corners of the complaint." Vassilatos v. Ceram Tech Int'l, Ltd., 92 Civ. 4574, 1993 WL 177780 at *5 (S.D.N.Y. May 19, 1993) (citing Kopec v. Coughlin, 922 F.2d 152, 154-55 (2d Cir. 1991)). The Court, however, may consider documents attached to the complaint as an exhibit or incorporated in the complaint by reference. E.g., ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007);
Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002) (" Because this standard has been misinterpreted on occasion, we reiterate here that a plaintiff's reliance on the terms and effect of a document in drafting the complaint is a necessary prerequisite to the court's consideration of the document on a dismissal motion; mere notice or possession is not enough.");
Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000) (" For purposes of a motion to dismiss, we have deemed a complaint to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference . . . .").
" However, before materials outside the record may become the basis for a dismissal, several conditions must be met. For example, even if a document is 'integral' to the complaint, it must be clear on the record that no dispute exists regarding the authenticity or accuracy of the document. It must also be clear that there exists no material disputed issue of fact regarding the relevance of the document." Faulkner v. Beer, 463 F.3d at 134 (citations omitted). In this case, the documents that plaintiff incorporated ...