On October 26, 2020, Judge John A. Gibney, Jr. of the Eastern District of Virginia denied motions to dismiss a putative securities class action asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) against a building products company (the “Company”), certain of its executives, and an institutional majority shareholder of the Company. Cambridge Retirement System v. Jeld-Wen Holding, Inc., et al., No. 3:20-cv-112 (E.D. Va. Oct. 26, 2020). Plaintiffs alleged defendants made material misstatements and omissions concerning the Company’s pricing strategy, alleged anti-competitive conduct, and the impact of a finding of liability in a separate antitrust private suit. The Court denied defendants’ motions to dismiss the amended complaint, holding that plaintiffs adequately pled material misrepresentations or omissions, falsity, scienter and loss causation.
The amended complaint alleges that the Company—a manufacturer and seller of doors and windows—engaged in an anticompetitive scheme when it acquired one of its two competitors and then conspired with its remaining competitor to raise prices of doorskins, which account for up to 70% of the cost to manufacture a molded door. Plaintiffs asserted that the Company failed to disclose this alleged anticompetitive scheme while publicly touting its “highly competitive business environment,” and attributing its success to “strategic” and “favorable” pricing. In February 2018, a jury returned a verdict of $176 million against the Company in a separate suit brought against the Company by one of its competitors for alleged violations of federal antitrust law. That same day, the Company stated in a press release that the verdict did not establish a violation of antitrust laws, and that the outcome would not materially impact the Company. In October 2018, the judge who presided over the antitrust suit issued a lengthy opinion making detailed factual findings regarding the Company’s anticompetitive conduct and ordering divestiture of a doorskins manufacturing facility of the Company. The Company’s stock price dropped by 5%. The Company “firmly maintain[ed] that it ha[d] not violated any antitrust laws,” referring to the court’s ruling as “incorrect.” Less than a week later, the Company’s stock dropped further when it announced that it expected to incur $76.5 million in liability due to the verdict in the antitrust suit.
In this securities action, the Court first addressed plaintiffs’ allegations that defendants materially misrepresented a “highly competitive” environment and ultimately failed to disclose the Company’s anticompetitive conduct to the market. In rejecting defendants’ argument that the Company did not need to “confess to the wrongdoing alleged in [the antitrust suit] while that litigation was ongoing,” the Court held that because the Company had publicly touted its “strategic” pricing strategies to explain its success, “it acquired ‘a duty to tell the whole truth[]’ including the truth about its anticompetitive behavior.” The Court held that by failing to do so, the prior statements regarding pricing strategy became materially misleading. The Court also stated that “disclosing a lawsuit’s existence and allegations while also vigorously denying their validity does not satisfy a company’s duty to make full, honest disclosures.”
The Court next held that plaintiffs adequately pled falsity with sufficient particularity. The Court rejected defendants’ argument that the Company accurately described its strategy and products’ quality, holding that defendants “had an obligation to reveal both their legal and illegal behavior as it related to pricing.” The Court also rejected defendants’ argument that the allegedly false pricing and quality statements were puffery and not actionable, holding that defendants’ statements attributing the Company’s success to “pricing strategy and quality products, when read alongside their failure to disclose their anticompetitive conduct, ‘would have misled a reasonable investor about the nature of’ [the Company’s] securities.”
Next, the Court held that plaintiffs “sufficiently pled scienter because they ‘stated with particularity facts giving rise to a strong inference that [defendants] acted with the required state of mind.’” Specifically, the Court found plaintiffs’ allegations that defendants engaged in an anticompetitive scheme, made misleading statements concerning the scheme, and the temporal proximity between the statements at issue and the decision in the antitrust litigation were sufficient to plead scienter. The Court further held that plaintiffs adequately pled scienter with respect to the individual defendants by alleging facts regarding their position at the Company, as well as information indicating they “implemented and oversaw the anticompetitive scheme.” In addition, the Court held that, while one of the individual defendants’ resignation was not sufficient by itself to establish scienter, the Court considered that factor as part of its “holistic analysis” in concluding that plaintiffs adequately alleged scienter.
Finally, the Court held that plaintiffs adequately pled loss causation, under either a “concealed risk” theory or a “corrective disclosure” theory, based on plaintiffs’ allegations that the decision in the antitrust suit revealed the truth about the alleged misstatements and the value of the Company’s stock declined very shortly thereafter, which was sufficient to plead a causal connection between the alleged misstatements and the subsequent stock drop. Therefore, the Court found that plaintiffs sufficiently pled Exchange Act claims against defendants.
Having found that plaintiffs adequately alleged primary liability under Section 10(b), the Court considered whether plaintiffs adequately pled Section 20(a) liability by alleging that the institutional investor, as a majority shareholder, exerted control over the Company. In particular, the Court noted plaintiffs had provided to the Court two allegedly misleading Forms 10-K that employees of the institutional investor signed. The Court concluded that plaintiffs had sufficiently pled facts from which it could be reasonably inferred that the majority shareholder was a control person.
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Cambridge Retirement System v. Jeld-Wen Holding, Inc.
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