Chris Lazarini Provides Insight on Pleading Requirements in Securities Fraud Cases

February 5, 2019
Securities Online Litigation Alert

Bass, Berry & Sims attorney Chris Lazarini provided insight on a case brought by investors alleging a company violated certain securities laws by issuing a false registration statement in conjunction with its IPO. In the months following the IPO, the company reported certain financial concerns related to declining sales and declining margins, all of which the plaintiffs felt should have been disclosed in the IPO process. The court granted the defendants’ motion to dismiss, finding that “fraud by hindsight,” or contrasting a defendant’s past optimism with less favorable actual results, does not satisfy the pleading requirements in a securities fraud case.

Chris provided the analysis for Securities Online Litigation Alert (SOLA). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SOLA, please visit the SOLA website to sign up for the newsletter.

The Pension Trust vs. J. Jill, Inc., No. 1:17-cv-11980 (D. Mass., 12/20/18)

“Fraud by hindsight,” or contrasting a defendant’s past optimism with less favorable actual results, does not satisfy the pleading requirements in a securities fraud case.

Jill went public in March 2017. During the following months, the company reported on decelerating sales, competitive pressures, declining margins, and increased store closures, all of which led to “surprisingly conservative guidance” and a drop in the stock’s price. Plaintiffs alleged J. Jill, the company’s IPO underwriters, and others violated Sections 11 and 12(a)(2) of the Securities Act of 1933 by issuing a Registration Statement and Prospectus containing untrue statements of material fact and omitting material information required to be disclosed. The crux of the complaint was that the company’s post-IPO statements supported the inference that the adverse circumstances being discussed existed at the IPO and were omitted from or not properly addressed in the Registration Statement and Prospectus.

The Court grants Defendants’ motions to dismiss. First, the Court rejects Plaintiffs’ argument that statements made by J. Jill’s executive officers during a second quarter conference call were an admission that problems existed at the IPO. Putting the entire conference call in context, the Court explains, shows that the officers were commenting on the then-current adverse general economic conditions and providing cautious guidance for the remainder of the year. The only inference to be drawn from the call, the Court finds, is that the problems being discussed arose in the second quarter and were not known at the IPO.

Second, the Court rejects Plaintiffs’ argument that the company had created the false impression at the IPO that its unique business strategy insulated it from adverse industry trends. The statements highlighted in the complaint, particularly those prefaced with “we believe,” were statements of opinion, not fact. In addition, the Court describes Plaintiffs’ efforts to contrast the company’s past optimism against less favorable actual results as an unsupportable claim of “fraud by hindsight.” Nothing in the complaint supports the conclusion that Defendants knew of facts when they predicted sales and market share growth that would have made those predictions unreasonable.

Finally, the Court rejects Plaintiffs’ allegations of material omissions. The Court highlights the Risk Factors section of the Registration Statement which addressed matters such as the cyclical nature of the industry, competitive pressures, the company’s ability to respond to changing customer preferences, required promotional efforts to reduce excess inventory, anticipated annual closures of underperforming stores, and the impact of adverse economic conditions and other factors on the company’s business.