Plaintiffs Prevail Over Motion to Dismiss Due to Factual Record of Misleading Representation and the Effect on Stock Price

In Marcus v. J.C. Penney Co., No. 6:13-cv-736-MHS-KNM (Sep. 29, 2015), the United States District Court for the Eastern District of Texas overruled J.C. Penney Company, Inc., Kenneth Hannah, and Myron Ullman III’s (collectively, “Defendants”) objections to the Magistrate Judge’s Report and Recommendation (“Recommendation”) denying Defendants’ motion to dismiss. The court’s decision affirmed the Magistrate Judge’s ruling and denied Defendants’ request for oral hearing. The court also granted Alan B. Marcus’s (“Plaintiff”) request for judicial notice. 

According to the allegations, Defendants made statements on August 20, 2013 stating that inventory was sufficient in size and availability. Plaintiff asserted that statement referred to the status of the company’s inventory on August 3, the end of the second quarter, rather than the date of the statement “without informing investors of the temporal distinction.”  In Sept. 2013, an officer further stated at an “investor meeting” that the company ended the year with “sufficient liquidity.” On September 24, 2013, Goldman Sachs, Inc. issued a report including information regarding J.C. Penney’s need to build “a bigger liquidity buffer.”  J.C. Penney’s stock “dropped to a 13-year intra-day low.”

On July 18, 2014, Plaintiff filed suit alleging violations of Rule 10b-5 under the Securities Exchange Act of 1934. Defendants filed a motion to dismiss.  The magistrate recommended a denial of the motion.  Defendants filed three objections to the magistrate recommendation:  (1) the complaint contained no actionable statements; (2) Plaintiff did not demonstrate causation regarding the drop in stock price; and (3) the Magistrate Judge erroneously applied safe harbor law. 

The court held the complaint: (1) adequately alleged Defendants made a misleading representation regarding inventories at the end of the second fiscal quarter (“Plaintiffs have alleged enough facts to plausibly show that Defendants represented that they had sufficient inventory as of the end of 2Q13 and that this statement was misleading when made”); (2) the “cautionary warnings” were insufficient to result in the application of the safe harbor for forward looking statements “as a matter of law” and (3) that causation had been adequately alleged.  Id. (“The Complaint further states that the ‘decline cannot properly be attributed to any market or industry event or force, but rather was a direct result of the disclosure.” Id. Plaintiffs clearly pled sufficient facts to show causation.’”). 

Accordingly, the court affirmed the Recommendation, denied Defendant’s motion to dismiss, and granted Plaintiff’s request for judicial notice.

The primary materials for this post can be found on the DU Corporate Governance website.

Austin Chambers