HOWARD v. LIQUIDITY SERVICES, INC. et al
Filing
53
MEMORANDUM OPINION regarding the defendants' 40 Motion to Dismiss. Signed by Chief Judge Beryl A. Howell on March 31, 2016. (lcbah1)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
LEONARD HOWARD, Individually and on
behalf of all others similarly situated,
Plaintiff,
Civil Action No. 14-1183 (BAH)
Chief Judge Beryl A. Howell
v.
LIQUIDITY SERVICES, INC., et al,
Defendants.
MEMORANDUM OPINION
The co-lead plaintiffs, Caisse de dépôt et placement du Québec (“Caisse”) and the
Newport News Employees’ Retirement Fund (“NNERF”), bring this proposed shareholder class
action lawsuit on behalf of themselves and all others similarly situated, against Liquidity
Services, Inc. (“LSI”), the company’s Chief Executive Officer (“CEO”) William Angrick, and
Chief Financial Officer (“CFO”) James Rallo, pursuant to sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 (the “Exchange Act”), for disseminating “materially false and
misleading information” and omitting “other material information that artificially inflated
Liquidity’s stock price.” Amended Compl. (“Am. Compl.”) ¶ 1, ECF No. 35.1 Relying heavily
on the fact that the “[p]laintiffs do not challenge the accuracy of any of LSI’s reported historical
financial or operating results,” Defs.’ Mem. Supp. Mot. Dismiss (“Defs.’ Mem.”) at 1 (emphasis
in original), ECF No. 40, the defendants have moved to dismiss the plaintiffs’ 145-page
Amended Complaint. 2 For the reasons set forth below, and in accordance with recent guidance
1
The proposed class is defined in the Amended Complaint as “all persons and entities who purchased or
otherwise acquired Liquidity common stock between February 1, 2012, and May 7, 2014, inclusive.” Am. Compl. ¶
1.
2
The defendants have requested oral argument on the pending motion, Defs.’ Mot. Dismiss (“Defs.’ Mot.”)
at 1, ECF No. 40, but given the sufficiency of the parties’ written submissions to resolve the pending motion, this
request is denied. See LCvR 7(f) (stating allowance of oral hearing is “within the discretion of the court”).
1
from the D.C. Circuit, In re Harman Intern. Indus., Inc. Sec. Litig., 791 F.3d 90 (D.C. Cir. 2015),
this motion is denied in part and granted in part.
I.
BACKGROUND
LSI, founded in 1999, is an online auction marketplace for “surplus and salvage assets”
for which service Liquidity retains a percentage of the sale proceeds. Am. Compl. ¶ 37. LSI is
comprised of three business divisions—the retail division, which sells consumer goods, id. ¶ 46;
the capital assets division, which sells “large items such as material-handling equipment, rolling
stock (such as trucks or military tanks), heavy machinery, and scrap metal,” id. ¶ 48; and the
public sector division, which “enables local and state government entities . . . to sell surplus and
salvage assets,” id. ¶ 51. The capital assets division is further divided by type of seller:
commercial sellers and the Department of Defense (“DoD”). Id. ¶ 48. LSI “commonly refers to
the ‘commercial’ capital assets business to describe the non-DoD portion of its capital assets
business. Id.
The plaintiffs allege that the majority of LSI revenue comes from its “exclusive right to
manage and sell substantially all DoD scrap property.” Id. ¶ 2. Consequently, the company’s
relationship with DoD is “vital to the overall health of the Company.” Id. ¶ 3. In 2012, DoD
renewed, until 2014, two contracts with LSI: a non-rolling surplus goods contract and a scrap
goods contract. Id. ¶ 50. As the contract expiration date of 2014 approached, however, “[f]ear
was mounting within all levels of the Company” that the contracts with DoD, which were
“subject to a competitive bidding process,” would not “be renewed on the same favorable terms,
or even renewed at all.” Id. ¶ 3; id. ¶ 58 (“As the renewal period for Liquidity’s lucrative DoD
Surplus Contract loomed, and in the face of growing competition in that marketplace,
Defendants grew increasingly concerned that it would not be renewed or extended.”). Therefore,
2
LSI embarked on an expansion of its business in order to “lessen its substantial dependence on
the government contracts market,” id. ¶ 3, by “acquiring competing businesses,” id. ¶ 4.
Based in part upon information supplied by twenty confidential witnesses, including a
vice-president, directors and other senior managers of LSI components, the plaintiffs allege that
from February 1, 2012 to May 7, 2014 (the “Class Period”), the defendants constructed a story of
sustained growth and expansion of LSI’s business outside of the DoD contracts by making
fraudulent and misleading public statements on fifteen separate days over nine consecutive fiscal
quarters regarding the growth of its non-DoD business—particularly emphasizing the “two
pillars of growth: (1) ‘organic’ growth through sustained margins and improvements in client
penetration and services; and (2) ‘inorganic growth through Liquidity’s acquisition strategy.”
Id. ¶ 5 (emphasis in the original). The plaintiffs allege that these misrepresentations artificially
inflated stock prices throughout the Class Period, id. ¶ 60, and that the defendant CEO exploited
this “wave of artificial stock inflation” with “strategically timed stock sales during the Class
Period” that “paid him $68.2 million,” id. ¶ 18 (emphasis in original).
The plaintiffs quote extensively from public statements made in press releases, earnings
calls, and filings with the Securities Exchange Commission (“SEC”) for each of the nine fiscal
quarters. The pertinent statements are summarized below.
A.
Public Releases in 2012
1.
First Quarter 2012
Starting on February 1, 2012, upon release of its first quarter 2012 financial results, LSI
allegedly began building a narrative that its “[r]ecord GMV [gross merchandising volume]
results were driven by growth in the volume of capital assets sales across our commercial and
government clients, and benefited from improved merchandising, penetration of existing clients
3
and expanding market share.” Am. Compl. ¶ 100 (emphasis in original) (quoting defendant
CEO’s statement accompanying Form 8-K, dated February 1, 2012); Defs.’ Reply Supp. Mot.
Dismiss (“Defs.’ Reply”), Ex. 5 (8-K, dated Feb. 1, 2012), ECF No. 48-6. 3 As such, LSI
suggested that the company’s growth was partially attributable to its non-DoD business and
“organic growth . . . principally from using data and expertise to enhance the value of the assets
we sell, penetrating existing client relationships, and adding new sellers to our platform.” Am.
Compl. ¶ 105 (quoting defendant CEO’s statement during Feb. 1, 2012 earnings call). In
particular, the defendant CEO touted during the February 1, 2012 earnings call with analysts
“[w]e are increasing the demand side of [LSI’s] marketplace to drive higher returns on the
assets we sell,” “we continue to add new Fortune 500 clients, including retailers, manufacturers
and industrial corporations.” Id. (emphasis in original). During the earnings call, the defendant
CFO explicitly attributed LSI’s “strong results for the quarter” to the “record volume in both
[LSI’s] commercial capital assets and retail supply chain verticals,” id. ¶ 106 (emphasis in
original), noticeably leaving out reference to the renewed DoD contracts, id. ¶ 50.
Despite public statements of growth in the non-DoD business, the plaintiffs allege that,
according to a former LSI Senior Sales Executive, margins began to decline in the retail division
“as early as March 2011,” and “declined again during 2012.” Id. ¶ 69. Indeed, a former LSI
Business Analyst and Contact Center Manager observed that “GMV and margins trended
downwards” in the retail division “during his three-year tenure,” from October 2010 through
November 2013, “due to ‘new players on the block,’” and margins were compressed due to
“competition forc[ing] Liquidity to renegotiate with big-box stores.” Id. ¶ 67.
3
Gross Merchandise Volume, or GMV, “is a metric often provided by online sellers and which Liquidity
defines as a measurement of ‘the total sales value of all merchandise sold through [LSI’s] marketplaces during a
given period.’” Am. Compl. ¶ 38.
4
Stock prices surged from $34.51 per share at the close of January 31, 2012 to $39.36 at
the close of February 2, 2012. Id. ¶ 108. The defendant CEO sold a total of 500,000 shares on
February 6, 2012, and February 10, 2012, for $40.35 and $40.02 per share, respectively. Id. ¶
266
2.
Second Quarter 2012
According to the plaintiffs, the public statements touting the financial performance of
LSI’s retail and commercial capital assets divisions continued throughout the Class Period, even
as internal evaluations showed weaker profits. On May 3, 2012, LSI released its financial results
for the second quarter of 2012, which exceeded previous guidance, id. ¶ 110, and the defendant
CEO emphasized in the accompanying statement that the “[r]ecord GMV results were primarily
driven by growth in the volume of goods sold in [LSI’s] retail supply chain and municipal
government marketplaces by existing and new clients,” id. ¶ 111 (quoting LSI Press Release,
dated May 3, 2012) (emphasis in original). Similarly, during the earnings call on the same day,
the defendant CFO stated “[o]ur strong results for the quarter were driven by record volumes
in both our retail supply chain group, which has its seasonable high in the second quarter,
and public sector verticals.”). Id. ¶ 117 (emphasis in original). Despite averments from
multiple confidential witnesses that the retail business was already experiencing deteriorating
margins due to heightened competition, see, e.g., id. ¶ 69, the defendant CFO downplayed the
issue, explaining on an earnings call that “as our mix of business changes . . . more to a
consignment model, if we have higher levels of capital assets under the consignment model, that
margin just mathematically goes down.” Id. ¶ 119. While the defendant CFO admitted that
“margins will bounce around a little bit from quarter-to-quarter,” he opined that “I do believe
that we can maintain the solid margins we have.” Id. (emphasis in original).
5
On May 9, 2012, LSI announced its acquisition of GoIndustry. Id. ¶ 122. Between May
23, 2012 and June 12, 2012, the defendant CEO sold 170,300 shares of stock at prices ranging
from $63.01 to $64.69, up more than $9 per share from the per share price of $54.93 on May 2,
2012, immediately prior to the announcements. Id. ¶¶ 120, 266.
3.
Third Quarter 2012
On July 5, 2012, LSI announced the completion of its acquisition of GoIndustry. Id. ¶
126. Later that month, on July 31, 2012, LSI announced its third quarter financial results. Id. ¶
129. During the earnings call with analysts on the same day to discuss the third quarter results,
defendant CFO stated that the company’s “strong results for the quarter were driven by record
volumes in both our retail supply chain group, which did not slow down from its seasonal high
in the second quarter as we continued to add new clients and further penetrate existing clients,
and continued growth in our public sector verticals,” id. ¶ 135 (emphasis in original). The
defendants noted the company’s “organic growth” through market share expansion in the
commercial market, id. ¶ 137 (quoting defendant CFO on July 31, 2012, earnings call) but
omitted reference to compressed margins and the resulting decline in profitability, id. ¶ 67. In
contrast to the positive public statements, a former LSI Business Analyst and Contact Center
Manager “observed that as the market grew increasingly crowded, Liquidity was forced to
renegotiate contracts at a much lower level of profitability—sometimes to the point where the
Company was merely breaking even, sometimes to the point where the Company was losing
money—just to keep contracts away from competitors.” Id.
In the same release for its 2012 third quarter financial results, LSI described its recent
acquisition of GoIndustry as “enhanc[ing] Liquidity Services’ ability to deliver . . . services to
large multinational enterprises across North America, Europe and Asia,” and that
6
GoIndustry’s “blue chip corporate clients are already being integrated into [LSI’s] commercial
business.” Id. ¶ 130 (quoting LSI Press Release, dated July 31, 2012) (emphasis in original).
Contrary to this positive public image of GoIndustry’s prospects, the plaintiffs allege that several
former insiders knew that GoIndustry had deep structural problems, such as “overpromising its
clients—i.e., promising to obtain a certain price for its clients’ products, but having to sell them
for substantially less than the promised price—leading to missed expected revenue targets,” id. ¶
79, and fixed high salaries for the sales representatives, id. ¶ 80, resulting in “$3 million in debt”
at the time GoIndustry was acquired, id. ¶ 79. Moreover, the plaintiffs allege that the defendants
downplayed the difficulty of transforming GoIndustry into a growth asset, since “three of the top
sales reps in the European division left GoIndustry following the acquisition, taking their
accounts to competing companies, including a ‘million dollar’ energy account in Germany.” Id.
¶ 80.
4.
Fourth Quarter 2012
On November 29, 2012, LSI released financial results for the fourth quarter of 2012 as
well as for full fiscal year 2012. Id. ¶ 140. The defendant CEO, on the earnings call with
analysts on the same day, repeated that LSI “enjoyed broad-based organic growth” due to market
share expansion within the commercial, non-DoD, market, id. ¶ 146, and that acquisitions, such
as GoIndustry will drive growth by allowing LSI to expand globally, id. ¶ 147. The defendant
CEO noted, however, that “the integration of GoIndustry will require significant upfront
investments to fully realize the global assets market opportunity, which will result in a drag on
earnings in the first half of fiscal ’13 but will benefit the second half of fiscal ’13 and our longterm growth prospects.” Id. ¶ 146 (emphasis in original).
7
On December 12, 2012, during LSI’s Investor Day presentation, LSI again promoted its
“positioning in the market,” beyond its DoD contracts, by noting “strong customer loyalty,”
“[s]ignificant expansion with F1000 commercial clients,” and “[b]uyer annual growth rate of
41.6% over past 10 years,” id. ¶ 155 (quoting the Investor Day Powerpoint presentation, dated
Dec. 12, 2012) (alterations in original), while omitting information that “Liquidity was, in fact,
selling merchandise at lower values in an attempt to stay ahead of the competition,” id. The
defendant CFO downplayed competitive forces, stating during the Investor Day presentation that
“when you look to the competition, there is a lot of it, but it’s not very formidable.” Id. ¶ 165
(emphasis in original). Investor analysts picked up on these positive messages about LSI’s
capability for growth outside of the DoD contracts, and one analyst report noted “[k]ey
takeaways include: (1) the Capital Asset business represents a significant global
opportunity with GOI, (2) Commercial Retail has significant growth opportunities through
deeper client engagement while sales cycle remain long due to complexity/changing
industry behavior.” Id. ¶ 167 (quoting analyst report from Janney Montgomery Scott, a
financial services firm, dated Dec. 13, 2012) (emphasis in original).
The plaintiffs allege that LSI’s statements in connection with the release of the financial
statements for fiscal year 2012 were false and directly contradicted by internal assessments.
Multiple confidential sources noted that “as the market grew increasingly crowded, Liquidity
was forced to renegotiate contracts at a much lower level of profitability—sometimes to the point
where the Company was merely breaking even, sometimes to the point where the Company was
losing money—just to keep contracts away from competitors.” Id. ¶ 67; id. ¶¶ 68–70. Several
sources revealed that not only were margins “trending downward throughout 2012,” goods were
“often sold at a loss during 2012” in order to keep customers. Id. ¶ 70. In around October 2012,
8
during the Class Period, LSI lost a contract with “a large overstock company to a competitor,”
and the loss led to a ten percent reduction in work force at LSI’s customer Contact Center. Id. ¶
67.
B.
Public Releases in 2013
The plaintiffs allege that the defendants continued to release publicly positive financial
news through 2013 even as the defendants knew about weak financial performances in the nonDoD businesses.
1.
First Quarter 2013
On January 31, 2013, the defendants released first quarter results for fiscal year 2013.
Id.¶ 173. During the earnings call with analysts, the defendant CFO lauded the “retail business”
for “perform[ing] extremely well during the first quarter.” Id. ¶ 179 (emphasis in original). In
the face of decreased GMV, however, the defendant CFO admitted that product flows from
“existing clients . . . are lower than the flows received last year,” but explained that despite the
slower-than-anticipated “ramping up” of new clients, “low double-digit growth in the retail
supply . . . business for the rest of the year” was expected as these new clients were brought fully
onboard. Id. ¶ 180. While the defendant CFO again touted the “vast opportunities” presented by
the GoIndustry marketplace, he also admitted that to take advantage of the opportunity, LSI will
be required “to make more investments and restructure an organization that has not had any
investments in the last four years.” Id. ¶ 180. On news of the GMV decrease, stock prices
dropped more than twenty-two percent. Id. ¶ 182.
On March 5, 2013, when heightened competition had already decreased LSI’s margins,
the defendant CFO, on a conference call hosted by Deutsche Bank, repeated the company’s
position stated first during the December 12, 2012 Investor Day presentation that “we don’t
9
really have a lot of formidable competition, but we certainly have a lot of competition.” Id. ¶
185 (emphasis in original).
2.
Second Quarter 2013
On May 2, 2013, LSI released the second quarter 2013 financial results. Id. ¶ 187.
During the earnings call with analysts, the defendant CEO again attributed the increase in GMV
to “the growth in the volume of capital assets in our commercial and government
marketplaces” and the “nice growth in the retail side of our business, driving efficiencies
there.” Id. ¶ 191 (emphasis in original). In particular the CFO explained that LSI has “signed
several large clients during the year,” that it has “increase[d] the number of programs [LSI is]
doing with existing clients,” and “that’s really driving the growth.” Id. ¶ 193. The defendant
CEO, in his statement accompanying LSI’s Form 10-Q, continued to promote the “significant
progress” LSI made “integrating GoIndustry, including the award of several new client
engagements,” and anticipated that “[LSI] will exit this fiscal year with GoIndustry operating
profitability.” Id. ¶ 189 (emphasis in original).
The plaintiffs allege that the defendants misrepresented material facts about the weakness
of LSI’s non-DoD business during this period. According to LSI’s former Director of Global
Compensation, between March 2013 and November 2013, the retail segment was “sinking fast,”
and “revenue was only coming in from existing contracts, as Liquidity was unable to secure new
contracts.” Id. ¶ 65. At the same time, a “former Director of Global Sales who was employed in
Liquidity’s retail division from 2009 through May 2014, observed that even the addition of new
business did not translate into profitability for the business segment, as the Company had to
purchase the retail products it would sell and then warehouse them at its own cost.” Id.
Increasingly, the defendants were forced to “renegotiate contracts” with existing clients at “much
10
lower level of profitability.” Id. ¶ 67; see also id. ¶ 68 (a former Director of Global Sales “noted
that competitors were vying for the same business as Liquidity, and thus the Company was
forced to accept lower margins, which negatively impacted profitability”). An LSI Inventory
Control Quality Assurance Analyst pointed out that, in April 2013, LSI renegotiated a contract
with Amazon.com with such unfavorable terms that “[m]argins were so low . . . it was not even
profitable enough to support labor costs.” Id. ¶ 72.
On June 6, 2013, LSI reported “lower than expected growth in GMV for the month of
May,” and share prices dropped nearly $8 dollars in the following week, from $39.12 on June 6,
2013 to $31.46 on June 13, 2013. Id. ¶ 199. Immediately prior to this release, on June 3, 4, and
5, the defendant CEO sold 200,000 shares at prices ranging from $39.15 to $40.13. Id. ¶ 198.
3.
Third Quarter 2013
On July 16, 2013, LSI announced preliminary financial results for the third quarter that
were below previous guidance. Id. ¶ 200. In the accompanying press release, LSI revealed that
the poorer results were due to its “lower product flows from existing clients and slower than
expected rollout of new client programs,” and “the continued repositioning of the GoIndustry
marketplace to focus on the key global Fortune 1000 relationships that we expect will drive
sustained profitable growth in this business.” Id. Stock prices decreased by over eight percent
on this news. Id. ¶ 202.
On August 7, 2013, the defendants released final financial results for the third quarter,
which were, as expected, below guidance. In the accompanying statement on LSI’s Form 10-Q,
the defendant CEO announced that LSI “made good progress with the integration of [its]
GoIndustry acquisition, which is now operating near breakeven,” but acknowledged the
decreased performance, explaining this was “due to significant integration efforts and the timing
11
of new large commercial programs coming on line.” Id. ¶ 205 (emphasis in original). The
defendants did not attribute the decline to any fundamental softness due to overall
competitiveness. To the contrary, during the earnings call with analysts, the defendant CFO
indicated that “the relationships that [LSI is] developing with these clients,” whose “programs
have not ramped up as fast as [] originally expected,” “will drive strong results for shareholders
over the long-term.” Id. ¶ 208. Share prices returned to the same levels as before the July 16,
2013 release. Id. ¶ 212. The defendant CEO sold a total of 600,000 shares between September
9, 2013, and September 12, 2013. Id. ¶ 266.
4.
Fourth Quarter 2013
On November 21, 2013, LSI issued fourth quarter and full fiscal year results for 2013,
which met or exceeded previous guidance. Id. ¶ 216. The defendant CEO’s statement
accompanying LSI’s Form 10-K stated that the “improved results . . . [were] based on the
expansion of our services with retail supply chain clients and strong growth in our public sector
business highlighted by 33% growth in our GovDeals marketplace this quarter.” Id. ¶ 218.
During the earnings call with analysts, the defendant CFO touted the “strong sequential growth
in our retail supply chain marketplaces driven primarily from new consumer electronic
programs with existing clients.” Id. ¶ 220 (emphasis in original). Both the defendants CEO and
CFO spoke positively about the operation of GoIndustry. The CEO stated that LSI “continue[s]
to make progress with [its] integration of GoIndustry to deliver profitable growth going
forward,” id. ¶ 221 (emphasis in original), and the CFO attributed the “significant sequential
growth in our commercial capital assets marketplaces” to the “new programs from our
GoIndustry global platform.” Id. ¶ 223 (emphasis in original). While the defendant CFO stated
that LSI has “completed the restructuring of the GoIndustry organization,” it was “entering the
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second phase of the integration process during fiscal 2014, which is investing for growth,” by
“combining the best attributes of the LSI technology platform with that of the GoIndustry
technology platform while [it] continue[s] to invest in the sales and marketing team to drive
long-term growth.” Id. (emphasis in original).
C.
Public Releases in 2014
1.
First Quarter 2014
On February 7, 2014, the defendants released the first quarter financial results for fiscal
year 2014, which exceeded previous guidance, but these financial results decreased from those in
the same period in the prior fiscal year period. Id. ¶ 226. Echoing previous press releases, the
accompanying statement from the defendant CEO stated that the “better than expected financial
results” were “driven by strong topline performance in our retail supply chain and municipal
government businesses,” and that the “retail supply chain business saw sequential growth in
GMV.” Id. ¶ 227 (emphasis in original). During the earnings call with analysts, the defendant
CEO stated “we are signing . . . impressive [business] . . . both relative to the competition and
relative to change in the behavior of some of the large Fortune 1000s.” Id. ¶ 230. In his
statement accompanying the financial results, the defendant CEO explained that the strong
performance in the retail supply chain “were partially offset by a sharp decline in our DoD
Surplus business due to changing property mix which has impacted margins.” Id. ¶ 227. The
market reacted to this optimistic financial report about the retail supply chain, and the stocks rose
over fifteen percent. Id. ¶ 232.
The DoD surplus contract was set to expire in February 2014, id. ¶ 50, and by April 2014,
LSI lost this contract to a competitor at the same time its DoD scrap contract was renewed on
restructured terms that were less lucrative than its previous contract, Defs.’ Mem., Ex. 21
13
(“Merrill Lynch Analyst Report, dated April 3, 2014”) at 2 (LSI lost a high-margin rolling
surplus goods contract from the Defense Logistics Agency), ECF No. 40-22; id., Ex. 23 (LSI 8K, dated May 8, 2014) at 3 (announcing a new six-year contract with the DoD “for all useable
surplus items other than rolling stock”), ECF No. 40-24.
2.
Second Quarter 2014—The Corrective Disclosure
On May 8, 2014, LSI announced financial results for the second quarter of fiscal year
2014, which were below guidance. Id. ¶ 233. GMV decreased by 12 percent, while adjusted
EBITDA and adjusted diluted EPS suffered 43 percent and 46 percent declines, respectively,
from the prior year period.4 Id. In the statement accompanying LSI’s Form 8-K, filed with the
Securities Exchange Commission (“SEC”), the defendant CEO attributed the lower results to the
loss of the DoD surplus contract, the restructured, less profitable DoD scrap contract, “mix
changes in our . . . retail businesses and delayed capital asset projects in both the U.S. and
Europe,” and “unusual softness in our energy vertical due to an industry wide decline in line
pipe and related equipment.” Id. ¶ 234 (emphasis in original); Merrill Lynch Analyst Report,
dated April 3, 2014 at 2–3. On this news, LSI stock prices plummeted nearly thirty percent. Id.
¶ 239.
The plaintiffs allege that this announcement of “drastic deline[s],” id. ¶ 233, revealed the
underlying weakness of LSI’s non-DoD business once the company lost the lucrative DoD
contracts. An LSI employee, who served as the Director of Development from March 2009
through October 2013, and then as the Director of Global Sales from October 2013 through May
2014, explained that “the government business tended to prop up many of the Company’s less
4
“EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization.” Am. Compl. ¶ 38
n.5. Adjusted EBITDA refers EBITDA adjusted “for stock based compensation expense and acquisition costs such
as transaction expenses and changes in earn out estimates.” Id. ¶ 38 n.6 (citing LSI’s 2012 Form 10-K). EPS stands
for earnings per share. Id. ¶ 7.
14
profitable business units.” Id. ¶ 59. The Vice President of Business Development confirmed
that, throughout the Class Period, non-DoD “‘margins [were] tighter . . . . and were nowhere near
as aggressive as on the government side of the business.” Id. ¶ 71.
The plaintiffs allege that the defendants’ public statements about the financial
performance of LSI through the February 7, 2014, release were materially misleading and led
investors to believe that the company was growing its non-DoD contracts business. Contrary to
LSI’s public statements, the plaintiffs allege that the very segments publicly touted as driving the
organic and inorganic growth were actually suffering from negative performance. Throughout
the Class Period, confidential witnesses, including senior executives, observed that LSI
experienced increasing competition and consequently accepted contracts with decreasing
margins, sometimes to the point of actually losing money. Id. ¶¶ 65, 67–73. In fact, the
plaintiffs allege that the retail segment may have only appeared to be doing well due to
manipulation of sales figures by the Vice President of the Retail Supply Chain Group. Id. ¶ 74.
A former Director of Global Compensation “believed that the sales numbers for the retail
segment in 2013 were inflated by at least 10%,” and, as a result, “more money was being paid
out in compensation and bonuses . . . than was being brought in.” Id. A former Business
Analyst and Contact Center Manager observed that the “problem was more widespread than the
retail division,” and that “Liquidity had a Company-wide ‘culture’ of overstating sales goals.”
Id. ¶ 76.
The plaintiffs also allege that LSI’s acquisitions also encountered difficulties throughout
the Class Period, contrary to the defendants’ statements. Id. ¶ 78. GoIndustry never turned a
profit during the Class Period. Id. ¶ 82. Network International, another acquired business in the
“Company’s energy-vertical capital assets business,” which was historically “‘the most
15
profitable’ business segment” for LSI, id. ¶ 83, faced challenges as early as August 2013, id. ¶
84, with worsening performance through the end of 2013 and early 2014, id. ¶ 86.
On July 14, 2014, an LSI shareholder, Leonard Howard, filed a lawsuit against the
defendants pursuant to “Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 on
behalf of all persons and entities who purchased or otherwise acquired Liquidity stock between
February 1, 2012, and May 7, 2014, inclusive.” Compl. ¶ 1, ECF No. 1. Several other
shareholders entered appearances to move for appointment as lead plaintiffs. See Motions to
Appoint Counsel and for Appointment as Lead Plaintiff, ECF Nos. 25, 26, 29, 31. The Court
appointed Caisse and NNERF as co-lead plaintiffs, Order Appointing Lead Plaintiff and
Approving Selection of Counsel, ECF No. 32, 5 and they, on behalf of a proposed class, filed the
Amended Complaint, see generally Am. Compl.
The defendants’ motion to dismiss the amended complaint is now ripe for resolution. See
generally Defs.’ Mot.
II.
LEGAL STANDARD
To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the
“complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that
is plausible on its face.” Wood v. Moss, 134 S. Ct. 2056, 2067 (2014) (quoting Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009)). A claim is facially plausible when the plaintiff pleads factual content
5
Six groups of plaintiffs submitted motions to be appointed lead plaintiff and lead counsel but, subsequently,
all but two of these motions were withdrawn. See The Bricklayers Group’s Motion for Appointment of Lead
Plaintiff and Lead Counsel, ECF No. 20; Jonathan P. Rode’s Motion for Appointment as Lead Plaintiff and
Approval of His Selection of Counsel, ECF No. 21; Caisse de Dépôt et Placement du Québec and the Newport News
Employees’ Retirement Fund’s Motion for Appointment as Co-Lead Plaintiffs and Approval of their Selection of
Counsel as Co-Lead Counsel, ECF No. 22; Twin City Pipe Trades Pension Trust’s Motion for Appointment as Lead
Plaintiff and for Approval of Selection of Counsel, ECF No. 24; The Devlin Investor Group’s Motion to Appoint
Lead Plaintiff and Approve the Selection of Counsel, ECF No. 25; Notice of Withdrawal of Motion by Twin City
Pipes Trade Pension Trust, ECF No. 26; Notice of Withdrawal of Motion by Jonathan P. Rode, ECF No. 29; Notice
of Withdrawal of Motion by the Bricklayer Group, ECF No. 31.
16
that is more than “‘merely consistent with’ a defendant’s liability,” and “allows the court to draw
the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S.
at 678 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007)); see also Rudder v.
Williams, 666 F.3d 790, 794 (D.C. Cir. 2012). Where, as here, the plaintiff alleges fraud, the
complaint must “state with particularity the circumstances constituting fraud or mistake.” FED.
R. CIV. P. 9(b). This heightened pleading standard is designed to ‘discourage[] the initiation of
suits brought solely for their nuisance value, and safeguard [] potential defendants from frivolous
accusations of moral turpitude,” as well as “guarantee all defendants sufficient information to
allow for preparation of a response.” United States ex rel. Williams v. Martin-Baker Aircraft
Co., 389 F.3d 1251, 1256 (D.C. Cir. 2004) (quoting United States ex rel. Joseph v. Cannon, 642
F.2d 1373, 1385 (D.C. Cir. 1981)). “In addition, ‘because fraud encompasses a wide variety of
activities,’ the complaint must be particular enough to ‘guarantee all defendants sufficient
information to allow for preparation of a response.’” U.S. ex rel. Heath v. AT&T, Inc., 791 F.3d
112, 123 (D.C. Cir. 2015) (quoting Williams, 389 F.3d at 1256).
In considering a motion to dismiss for failure to plead a claim on which relief can be
granted, the court must consider the complaint in its entirety, accepting all factual allegations in
the complaint as true, “even if doubtful in fact.” Twombly, 550 U.S. at 555; see also Harris v.
D.C. Water & Sewer Auth., 791 F.3d 65, 68 (D.C. Cir. 2015). At the same time, the Court “is not
required to accept the plaintiff’s legal conclusions as correct.” Sissel v. HHS, 760 F.3d 1, 4 (D.C.
Cir. 2014); see Harris, 791 F.3d at 68 (“[T]he tenet that a court must accept as true all of the
allegations contained in a complaint is inapplicable to legal conclusions.” (quoting Iqbal, 556
U.S. at 678)). Courts may “ordinarily examine” other sources “when ruling on Rule 12(b)(6)
motions to dismiss, in particular, documents incorporated in the complaint by reference, and
17
matters of which a court may take judicial notice.” Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 308, 322 (2007).
III.
DISCUSSION
The plaintiffs assert two claims: (1) that the defendants violated Section 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and the corresponding implementing
regulation Rule 10b-5, which prohibits, in connection with the purchase or sale of any security,
“mak[ing] any untrue statement of a material fact or [] omit[ting] to state a material fact
necessary in order to make the statements made, in the light of the circumstances under which
they were made, not misleading,” 17 C.F.R. § 240.10b-5; and (2) that the individual defendants,
LSI’s CEO and CFO, are jointly and severally liable, under Section 20(a) of the Exchange Act,
as persons “who, directly or indirectly, controls any” violator of Section 10(b), 15 U.S.C. §
78t(a). See Am. Compl. ¶¶ 292–306. The defendants’ challenges to each of these claims are
discussed below.
A.
Count I—Violation of Section 10(b)
To survive the pending motion to dismiss, the plaintiffs must sufficiently allege the
following elements of a claim under Rule 10b-5, “‘(1) a material misrepresentation or omission
by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and
the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5)
economic loss; and (6) loss causation.’” In re Harman, 791 F.3d at 99 (quoting Janus Capital
Grp., Inc. v. First Derivative Traders, 131 S. Ct. 2296, 2301 n.3 (2011)). The Securities
Exchange Act, as amended by the Private Securities Litigation Reform Act of 1995 (“PSLRA”),
demands a heightened pleading standard, and, construed together with the heightened pleading
standard required under Fed. R. Civ. P. 9(b), plaintiffs alleging securities fraud must “‘specify
18
each statement alleged to have been misleading [and] the reason or reasons why the statement is
misleading,’ and to ‘state with particularity facts giving rise to a strong inference that the
defendant acted with the required state of mind.’” Id. at 100 (quoting 15 U.S.C. § 78u-4(b)).
The defendants move to dismiss Count I on grounds that the plaintiffs fail to allege
adequately (a) any “material misrepresentation or omission,” (b) “scienter,” and (c) “loss
causation.” 6 See Defs.’ Mem. at 17, 29, 32. Each of these challenges is addressed seriatim
below.
1.
Material Misrepresentations
Actionable misstatements under Section 10(b) and Rule 10b-5 “must be ‘material’ in the
sense that it would have ‘been viewed by the reasonable investor as having significantly altered
the total mix of information made available.’” In re Harman, 791 F.3d at 108 (quoting
Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398, 2413 (2014)). Moreover,
“‘statements of reasons, opinions or beliefs’” regarding material facts can be actionable, id.
(quoting Va. Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1091 (1991)), even if these
statements contain “‘conclusory terms [like ‘high’ value and ‘fair],’” because these terms, when
used “‘in a commercial context[,] are reasonably understood to rest on a factual basis that
justifies them as accurate, the absence of which renders them misleading,’” id. at 108–109
(quoting Va. Bankshares, 501 U.S. at 1093).
As noted, the plaintiffs’ lengthy Amended Complaint quotes extensively from the
defendants’ various public statements made throughout the two-year Class Period, see generally
Am. Compl. ¶¶ 99–232, but the allegedly false and misleading statements fall into two
categories: (1) public statements regarding the “organic growth” of LSI’s retail and commercial
6
The defendants do not dispute that the plaintiffs have adequately alleged reliance and economic loss. See
generally Defs.’ Mem.
19
capital assets divisions; and (2) public statements and omissions regarding LSI’s “inorganic
growth” through its acquisitions, including GoIndustry and Network International.
a.
Public Statements Regarding the Organic Growth of LSI’s
Retail and Commercial Capital Assets Divisions
The plaintiffs allege that the defendants made a series of public material
misrepresentations during nine fiscal quarters of the Class Period regarding the financial
performance of LSI’s retail and commercial capital assets divisions, touting them as drivers of
LSI’s overall growth, despite internal knowledge that those divisions were, in fact, troubled and
suffering from deteriorating margins due to heightened competition. The plaintiffs’ Amended
Complaint is replete with public statements from both individual defendants, the CEO and CFO,
attributing “strong results” for the fiscal quarters to “record volumes in both [LSI’s]
commercial capital assets and retail supply chain vertical.” Am. Compl. ¶ 106 (during the
February 1, 2012, earnings call discussing financial results for first fiscal quarter of 2012)
(emphasis in original). 7 Likewise, the plaintiffs point to public statements by the defendants
repeatedly down-playing the competition. See, e.g., id. ¶ 165 (defendant CFO stating during the
December 12, 2012 Investor Day presentation, “when you look to the competition, there is a lot
of it, but it’s not very formidable”) (emphasis in original); id. ¶ 185 (defendant CFO’s statement
during the March 5, 2013 earnings call discussing second quarter 2013 financial results).
7
See also Am. Compl. ¶ 111 (defendant CEO’s statement accompanying May 3, 2012 press release of
second quarter 2012 financial results); id. ¶ 135 (defendant CFO’s statement during the July 31, 2012 earnings call
discussing third quarter 2012 financial results); id. ¶ 146 (defendant CEO’s statement during the November 29, 2012
earnings call discussing fourth quarter and full fiscal year 2012 financial results); id. ¶ 179 (defendant CFO’s
statement during the January 31, 2013 earnings call discussing first quarter 2013); id. ¶ 191 (defendant CFO’s
statement during the May 2, 2013 earnings call discussing second quarter 2013); id. ¶ 206 (defendant CEO’s
statements during the August 7, 2013 earnings call discussing third quarter 2013); id. ¶ 220 (defendant CFO’s
statements during the November 21, 2013 earnings call discussing fourth quarter and full fiscal year 2013 financial
results); id. ¶ 227 (defendant CEO’s statement accompanying press release of first quarter 2014 financial results).
20
The plaintiffs allege that contrary to the defendants’ positive public statements
throughout the Class Period regarding growth from non-DoD segments of LSI’s business,
internal information showed negative performance from these divisions, specifically seven
confidential witnesses, from various departments holding different levels of positions, spoke of
decreasing margins and profits in the retail and commercial capital assets segments, and
purposeful inflation of sales figures within the retail segment. For example, the former Director
of Global Sales, “who was with the Company for a five-year period encompassing 2009 through
the end of Class Period, observed that the market became more sophisticated with an influx of
competition . . . [and] noted that competitors were vying for the same business as Liquidity, and
thus the Company was forced to accept lower margins, which negatively impacted profitability.”
Id. ¶ 68. 8 A Senior Sales Executive, “whose seven-year tenure spanned August 2007 through
October 2014, first noticed a decline in margins in his B2B group as early as March 2011,”
which then “declined again during 2012 and 2013, and then were flat in 2014.” Id. ¶ 69
(emphasis in original). The former Director of Compensation also noted problems in the nonDoD business, indicating his belief “that the sales numbers for the retail segment in 2013 were
inflated by at least 10% and did not support the commissions being paid to sales representatives.”
Id. ¶ 74.
8
See also, Am. Compl. ¶ 65 (“[A] former Director of Global Compensation who was employed by Liquidity
from March 2013 through November 2013, characterized the retail business as a ‘mess,’ and that it was ‘tanking,’
and ‘sinking fast.’); id. ¶ 67 (“[A] former Business Analyst and Contact Center Manager from October 2010 through
November 2013 . . . observed that as the market grew increasingly crowded, Liquidity was forced to renegotiate
contracts at a much lower level of profitability—sometimes to the point where the Company was merely breaking
even, sometimes to the point where the Company was losing money—just to keep contracts away from
competitors.”); id. ¶ 70 (a former “Channel Optimization Specialist in Liquidity’s DC headquarters from February
2008 through November 2012 . . . noted that sales margins in the electronics vertical for Global Accounts clients
were ‘definitely’ trending downwards throughout 2012,” and “recalled, for instance, that in his electronics vertical,
televisions were often sold at a loss during 2012”); id. ¶ 66 (“a former Senior Corporate Recruiter whose December
2011 through June 2014 tenure encompassed the entire Class Period,” shared that his director supervisor who
“reported directly to CEO Defendant Angrick[,] would emerge from quarterly meetings and discuss their shared
view that Liquidity’s prospects were not as strong as what was being publicly portrayed”).
21
Taking the plaintiffs’ factual allegations as true, misrepresentations regarding the
financial performance of the two business components that the defendants have publicly touted
as growing with healthy margins is clearly material even if the plaintiffs do not allege that the
overall financial results are inaccurate. In In re Harman, the D.C. Circuit reversed the dismissal
of a complaint, where the plaintiffs alleged that the defendants made “materially false and
misleading statements about the Company’s financial condition” by misrepresenting the strength
of sales of a particular line of products, personal navigational devices, also known as PNDs. 794
F.3d at 97–98, 112. Notwithstanding that, as here, no allegation was made that the released
financial results were inaccurate, the D.C. Circuit found that the plaintiffs adequately alleged
material misrepresentations actionable under Rule 10b-5, where the defendants stated that
“[s]ales of . . . PNDs[] were very strong during fiscal 2007,” when, in fact, the PNDs had already
become obsolete. Id. at 109–110. The Circuit reasoned, while the PNDs were “only a ‘rather
small component of [the Company’s] total portfolio,’” they were “part of the Company’s largest
division and had been the focus of recent public statements,” and so the “‘very strong’ statement
could have had the same effect on an investor in the Company’s stock and is therefore
actionable.” Id. at 109.
Similarly here, the strength of the retail and commercial capital assets divisions were
publicly touted by the defendants during every fiscal quarter throughout the Class Period.
Moreover, by misstating the key drivers of LSI’s apparent overall health, the defendants actively
concealed LSI’s unsuccessful attempt to “diversify away from its dependence on its DoD
relationship,” which permitted investors to believe that “revenue growth [i]s robust,” in the event
that LSI lost the lucrative DoD contracts when they expired in 2014, near the end of the Class
Period. Am. Compl. ¶ 60; see also id. ¶ 59 (a confidential witness explained that “the
22
government business tended to prop up many of the Company’s less profitable business units”).
Therefore, even if the financial statements were not themselves inaccurate, the defendants’
public statements publicizing the strong performance of divisions, which were in fact doing
poorly, are material because these statements “would be viewed by the reasonable investor as
having significantly altered the ‘total mix’ of information made available.” Basic Inc. v.
Levinson, 485 U.S. 224, 231–32 (1988).
Other courts confronted with similar types of misrepresentations have also found them
material and actionable under Rule 10b-5. See In re Gilead Sciences Secs. Litig., 536 F.3d 1049,
1052–53 (9th Cir. 2008) (reversing a dismissal where the defendants allegedly misrepresented
what was really driving strong sales, not that the sales figures themselves were misrepresented);
City of Roseville Employees’ Ret. Sys. v. Horizon Lines, Inc., 713 F. Supp. 2d 378, 389 (D. Del.
2010) aff’d, 442 F. App’x 672 (3d Cir. 2011) (“A statement regarding successful financial
performance, even when accurate, is still misleading under the securities laws if the speaker
‘attribut[es] the performance to the wrong source.’” (quoting In re ATI Techs., Inc. Sec. Litig.,
216 F. Supp. 2d 418, 436 (E.D. Pa. 2002))).
Moreover, statements regarding the positive performance of LSI’s retail division are
particularly material because the plaintiffs have alleged that the sales numbers may in fact have
been inflated, by as much as ten percent, and thereby affected earnings reports, even if that
division was a small portion of Liquidity’s source of revenue. See New Orleans Employees
Retirement Sys. v. Celestica, Inc., 455 Fed. App’x. 10, 15–16 (2d Cir. 2011) (finding material
“purported misstatements” regarding “inventory buildup,” even if the potential write-offs “were
minuscule in comparison to Celestica’s global assets and annual revenues” because they may
affect “Celestica’s net earnings statements,” which “‘are among the pieces of data that investors
23
find most relevant to their investment decision” (quoting Ganino v. Citizens Utils. Co., 228 F.3d
154, 164 (2d Cir. 2000)).
b.
PSLRA’s Safe Harbor Provision Provides No Protection
The defendants rely heavily on the argument that the alleged misrepresentations are
subject to the PSLRA’s statutory safe harbor provision. See Defs.’ Mem. at 22–28; Defs.’ Reply
at 9–11. Codified at 15 U.S.C. § 78u-5(c)(1)(A)(i), the safe harbor provision protects any
“forward-looking statements” that are “identified as [] forward-looking statement[s,] and [are]
accompanied by meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those in the forward-looking statements.” This reliance is
misplaced. While the defendants are correct that the Amended Complaint recounts numerous
LSI forward-looking statements, these statements simply provide context for other, specific
statements that the plaintiffs allege are false and misleading. In other words, the forward-looking
statements are not the gravamen of the plaintiffs’ allegations. In fact, none of the statements
outlined supra in Part III.A.1.a indicate any prediction of the future but, instead, describe past
performance of the retail and commercial capital assets divisions. See, e.g., Am. Compl. ¶ 179
(“the retail business performed extremely well during the first quarter”) (emphasis in original);
id. ¶ 191 (“we had nice growth in the retail side of our business, driving efficiencies there”)
(emphasis in original); id. ¶ 221 (“Both our retail supply chain and capital assets businesses grew
sequentially during a seasonally low quarter for the company . . . .”).
In any event, even if the alleged misrepresentations can be considered as forwardlooking, they would not be subject to protection under the safe harbor because they were not
accompanied by “meaningful cautionary statements.” As the D.C. Circuit explained in In re
Harman, meaningful cautionary language “‘calls for substantive company-specific warnings,’”
24
791 F.3d at 102 (quoting Southland Sec. Corp. v. INSpire Ins. Sols., Inc., 365 F.3d 353, 372 (5th
Cir. 2004), “‘tailored to the specific future projections, estimates or opinions in the [statements]
which the plaintiffs challenge,’” id. (quoting Institutional Inv’rs Grp. v. Avaya, Inc., 564 F.3d
242, 256 (3d Cir. 2009)). In other words, a “mere boilerplate” warning “does not meet the
statutory standard because by its nature it is general and ubiquitous, not tailored to the specific
circumstances of a business operation, and not of ‘useful quality.’” Id. (quoting NEW OXFORD
AMERICAN DICTIONARY 1052). Additionally, “cautionary language cannot be ‘meaningful’ if it
is ‘misleading in light of historical fact[s.]’” Id. (quoting Slayton v. Am. Exp. Co., 604 F.3d 658,
770 (2d Cir. 2010)) (alteration in original).
The cautionary language cited by the defendants either amounts to boilerplate or are
“misleading in light of historical facts.” The defendants cite to the standard cautionary language
accompanying SEC filings and announced prior to each earnings call: “The outcome of the
events described in these forward-looking statement is subject to known and unknown risks,
uncertainties and other factors that may cause our actual results . . . to differ materially from
any future results . . . . These risks and other factors include but are not limited to those listed in
Part I, Item 1A (“Risk Factors”) and in our other filings with the Securities and Exchange
Commission (SEC) from time to time . . . .” Defs.’ Mem. at 24 (emphasis in original). This
cautionary warning, citing to “known and unknown risks,” is clearly too general and “not specific
regarding the business at issue.” In re Harman, 791 F.3d at 102.
To the extent the defendants cite to more specific cautionary language regarding the
possibility that “increased competition may result in reduced operating margins and loss of
market share,” Defs.’ Mem. at 11, 24, these are not “meaningful” because they are “misleading
in light of historical facts.” The plaintiffs allege that during the Class Period, the increased
25
competition had already resulted in reduced margins and loss of certain customers. See Pls.’
Opp’n Defs.’ Mot. Dismiss (“Pls.’ Opp’n”) at 19 (citing Am. Compl. ¶¶ 10–11, 13–14, 64–73,
78–90). “If a company were to warn of the potential deterioration of one line of its business,
when in fact it was established that that line of business had already deteriorated, then . . . its
cautionary language would be inadequate to meet the safe harbor standard.” In re Harman, 791
F.3d at 102–03 (citing Slayton, 604 F.3d at 769–70). Moreover, the meaningfulness and
sufficiency of these warnings are undermined by conflicting statements by the defendants that
the competition LSI faced was not at all “formidable.” Am. Compl. ¶ 165. Therefore, consistent
with the holding of the D.C. Circuit in In re Harman, this Court finds that even if the alleged
fraudulent statements are forward-looking, they would not be subject to the protection of the safe
harbor provision because they are not accompanied by meaningful cautionary language.
In sum, the plaintiffs have adequately alleged that statements concerning the strong
growth and margins of the retail and commercial capital assets segments are material
misrepresentations, even though the plaintiffs do not dispute the accuracy of reports regarding
LSI’s overall financial results.
c.
Public Statements Regarding LSI’s Acquisitions
In addition to the defendants’ public statements regarding the organic growth of LSI’s
retail and commercial capital assets divisions, the plaintiffs allege that the defendants made
material misrepresentations and omissions regarding the financial benefits to LSI from its
acquisitions of GoIndustry and Network International. Specifically, the plaintiffs allege that the
defendants made affirmative misrepresentations about the growth of GoIndustry and material
omissions about the challenges faced by Network International.
26
First, the plaintiffs argue that the defendants misrepresented the positive financial impact
on LSI of the GoIndustry acquisition by making statements that LSI was “ma[king] significant
progress . . . integrating GoIndustry,” Am. Compl. ¶ 189 (emphasis in original), and that
GoIndustry will “have better profits” in the near future, id. ¶ 137 (emphasis in original); see also
id. ¶¶ 149, 189, while omitting facts such as: “GoIndustry was historically unprofitable and about
to ‘shut their doors’ when Liquidity acquired it; [] GoIndustry’s computer platforms were
incompatible with Liquidity’s systems, which would result in an extended and expensive
logistical integration process; [] GoIndustry’s European division was not having success in that
market; and [] GoIndustry paid its sales staff unsustainably high salaries and commission that
Liquidity would not continue to pay, resulting in GoIndustry’s top European sellers leaving the
Company, taking their top accounts with them,” id. ¶ 138.
The plaintiffs have not sufficiently alleged that these misrepresentations are material,
such that “it would have ‘been viewed by the reasonable investor as having significantly altered
the total mix of information made available.’” In re Harman, 791 F.3d at 108 (quoting
Halliburton, 134 S. Ct. at 2413). As the defendants point out, all of the aforementioned
omissions have been disclosed in some form. GoIndustry was a public company, and, as a result,
its precarious financial situation leading up to the acquisition would have been public
knowledge. Defs.’ Mem. at 25. Moreover, soon after its acquisition of GoIndustry in July 2012,
LSI disclosed that it “expect[ed] the integration of GoIndustry [to] require significant upfront
investments,” Am. Compl. ¶ 146, and observed at the same time that GoIndustry was a
“disparate organization . . . one that has not been run historically with common systems and
common processes, which is a departure from the normal Liquidity Services Philosophy,” id. ¶
148. Throughout the Class Period, the defendants continued to make disclosures about the
27
significant costs required to fully integrate GoIndustry into LSI, and to acknowledge that
GoIndustry was not operating at a profit. 9 In short, the defendants disclosed to the public
sufficient information regarding the ongoing integration efforts of GoIndustry, which lasted the
entire Class Period, and quarter-after-quarter of reports of GoIndustry operating just short of
breakeven, to render the alleged misrepresentations immaterial because it would not have
“significantly altered the total mix of information made available.”
Second, the plaintiffs allege that the defendants made material omissions by failing to
disclose “known negative developments” within Network International. Id. ¶ 14; see also id. ¶
239. The Supreme Court held in Basic Inc. v. Levinson that an omitted fact is actionable under
Section 10(b) if the defendants have a duty to disclose, 485 U.S. at 239 n.17, and it is material,
defined to mean that “there must be a substantial likelihood that the disclosure of the omitted fact
would have been viewed by the reasonable investor as having significantly altered the ‘total’ mix
of information made available,” id. at 231–32. “Section 10(b) and Rule 10b-5(b) do not create
an affirmative duty to disclose any and all material information,” however, and “disclosure is
required . . . only when necessary ‘to make . . . statements made, in the light of the circumstances
under which they were made, not misleading.’” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S.
27, 45 (2011) (quoting 17 C.F.R. § 240.10b-5(b)).
9
See id. ¶ 174 (the defendant CEO stated in the press release of LSI’s first quarter 2013 financial results that “the
pace of integrating our GoIndustry acquisition is currently slower than expected and will require more investment”);
id. ¶ 193 (during the May 2, 2013 conference call, the defendant CEO discloses that integration efforts continue into
the second quarter of 2013, that LSI continues to “mak[e] investments to integrate the sales and marketing
organization, IT and back office systems,” and admits that GoIndustry was not yet operating at a profit though he
“expect[ed] to exit this fiscal year with GoIndustry operating profitably”); admitted that GoIndustry was not
operating as efficiently as the rest of LSI’s business); id. ¶ 200 (the defendants again admit in the July 16, 2013
press release that GoIndustry is still operating only at “near breakeven”); id. ¶ 205 (explaining lower year-over-year
results were, in part, due to “the continued repositioning of our GoIndustry marketplace”); id. ¶ 223 (the defendant
CFO stating during the November 21, 2013 earnings call that while LSI has “completed the restricting of the
GoIndustry organization,” it was “entering the second phase of the integration process during fiscal 2014, which is
investing for growth” by “combining the best attributes of the LSI technology platform with that of the GoIndustry
technology platform while we continue to invest in the sales and marketing team to drive long-term growth”).
28
“Material facts include those that ‘affect the probable future of the company and [that]
may affect the desire of investors to buy, sell, or hold the company’s securities.’” Castellano v.
Young & Rubicam, Inc., 257 F.3d 171, 180 (2d Cir. 2001) (quoting SEC v. Texas Gulp Sulphur
Co., 401 F.2d 833, 849 (2d Cir. 1968)). By contrast, information regarding a small business
segment that is unlikely to affect the future of the entire company is generally not material,
particularly where the defendants have not put such information “in play.” City of Edinburgh
Council v. Pfizer, Inc., 754 F.3d 159, 174 (3d Cir. 2014) (holding the defendant was “under no
duty to provide additional details about” a subject that was not “in play”); see also In re Boston
Scientific Corp. Sec. Litig., 686 F.3d 21, 29 (1st Cir. 2012) (“In any case, an undisclosed
speculative chance of an event that affects only a very small proportion of revenues is not
material.”); City of Roseville Employees’ Ret. Sys. v. Nokia Corp., No. 10 CV 00967, 2011 WL
7158548, at *8 (S.D.N.Y. Sept. 6, 2011) (“Defendants are not required, however, to disclose
production delays or software problems with a particular product ‘merely because a reasonable
investor would very much like to know the fact.’” (quoting In re Time Warner Inc. Sec. Litig., 9
F.3d 259, 267 (2d Cir. 1993)); cf. In re Harman, 791 F.3d at 109 (the financial health of products
representing “only a ‘rather small component of [the Company’s] total portfolio’” was
considered material because those products “had been the focus of recent public statements”).
Here, any omissions regarding any business challenges within Network International
were not material. As the plaintiffs concede, Network International represented “a small
business segment,” though “key part of Liquidity’s business” because of its high profitability.
Am. Compl. ¶ 83. Additionally, unlike with GoIndustry, the defendants “said relatively little
about Network International.” Id. A small business segment, no matter how profitable, is
unlikely to affect the future of an entire company, by contrast to alleged misstatements regarding
29
entire divisions of a business, such as retail and commercial capital assets, which essentially
captured all of Liquidity’s business other than DoD contracts. Therefore, the alleged omissions
regarding Network International are not actionable under Section 10(b).
In conclusion, the plaintiffs have adequately alleged that the defendants made material
misrepresentations regarding the health of LSI’s retail and commercial capital assets divisions—
the non-DOD portion of LSI’s business—but the plaintiffs have not alleged that the defendants
made material misrepresentation regarding GoIndustry and Network International.
Consequently, the Court will discuss the remaining elements of the plaintiff’s Section 10(b)
claim only as they relate to public statements made regarding LSI’s retail and commercial capital
assets divisions.
2.
Scienter
The plaintiffs have alleged facts that, “taken collectively, give rise to a strong inference
of scienter,” Tellabs, 551 U.S. at 323, which is “‘a mental state embracing intent to deceive,
manipulate, or defraud,’” id. at 319 (quoting Ernsts & Ernst v. Hochfelder, 425 U.S. 185, 193–94
(1976)), while taking “into account plausible opposing inferences,” id. at 323. “The inference
that the defendant acted with scienter need not be irrefutable, i.e., of the ‘smoking-gun’ genre, or
even the ‘most plausible of competing inferences,’” though it must be “more than merely
‘reasonable’ or ‘permissible.’” Id. at 324. Therefore, “a complaint will survive . . . only if a
reasonable person would deem the inference of scienter cogent and at least as compelling as any
opposing inference one could draw from the facts alleged.” Id.
The requisite scienter is defined “as a mental state embracing intent to deceive,
manipulate, or defraud.” Koch v. SEC, 793 F.3d 147, 152 (D.C. Cir. 2015) (internal quotations
and citation omitted); see also Hochfelder, 425 U.S. at 193. The D.C. Circuit has explained that
30
“[e]ither intentional wrongdoing or ‘extreme recklessness’ satisfies the standard.” Liberty Prop.
Trust v. Republic Props. Corp., 577 F.3d 335, 342 (D.C. Cir. 2009) (quoting Steadman, 967 F.2d
at 641). “The kind of recklessness required, however, is not merely a heightened form of
ordinary negligence; it is an ‘extreme departure from the standards of ordinary care, . . . which
presents a danger of misleading buyers or sellers that is either known to the defendant or is so
obvious that the actor must have been aware of it.” Steadman, 967 F.2d at 641–642 (quoting
Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1045 (7th Cir. 1977)). Additionally,
“the presence of insider trading can be used, in combination with the other evidence, to establish
scienter.” New Jersey Carpenters Pension & Annuity Funds v. Biogen IDEC Inc., 537 F.3d 35,
55 (5th Cir. 2008) (citations omitted).
Here, the plaintiffs have alleged facts “‘constituting strong circumstantial evidence of
conscious misbehavior or recklessness.’” Celestica, 455 Fed. App’x. at 13 (quoting ATSI
Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007)). To support scienter, the
complaint contains information from eleven confidential witnesses, who provided sufficient
information about the defendants’ knowledge of the retail and commercial capital assets
divisions’ weak financial performance at the time the defendants made the alleged
misrepresentation. 10
“In the case of confidential witness allegations, we . . . evaluat[e] the ‘detail provided by
the confidential sources, the sources’ basis of knowledge, the reliability of the sources, the
corroborative nature of other facts alleged, including from other sources, the coherence and
plausibility of the allegations, and similar indicia.’” Avaya, 564 F.3d at 263 (quoting Cal. Pub.
10
Out of the twenty confidential witnesses cited in the Amended Complaint, only eleven confidential
witnesses made statements relevant to the scienter inquiry regarding the defendants’ statements about LSI’s retail
and commercial capital assets divisions.
31
Employees’ Ret. Sys. v. Chubb Corp., 394 F.3d 126, 146 (3d Cir. 2004)). The defendants
discount these confidential witnesses as “low-level employees” who may have “‘axes to grind,’”
but this characterization is unconvincing. Defs.’ Mem. at 35, 37. The plaintiffs have
painstakingly detailed every one of the confidential witnesses’ previous positions and length of
employment. See Am. Compl. at 1–8. Contrary to the defendants’ characterization, some of
these confidential witnesses were not merely low-level employees but former Directors and Vice
Presidents, who were either in close contact with the defendants or reported to a person who
reported to the defendants. See, e.g., id. at 3 (CW 4 is a “former Director of Global
Compensation” who “reported to the Vice President of Human Resources, who reported directly
to Defendant [CEO]”); id. at 4 (CW 7 is a former “Director of Business Development from
March 2009 through October 2013” before transitioning to “Director of Global Sales from
October 2013 through May 2014”); id. (CW 9 is “a former Vice President of business
Development,” who “reported to the Vice President of Retail Supply Chain Group, who reported
directly to Defendant [CEO]”). Importantly, despite hailing from different divisions, at different
levels of seniority, the confidential witnesses provide corroborating information that problems
with LSI’s retail and commercial capital assets segments were well known within the company.
See id. ¶¶ 64–90; see also In re Harman, 791 F.3d at 97 (reversing dismissal of the complaint
where the inside whistleblowers were a former sales engineer and a former accounting manager);
Celestica, 455 Fed. App’x at 14 (“Although the witnesses are not identified by name in the
complaint, plaintiffs’ descriptions of these persons are sufficiently particular to permit the strong
inference of scienter necessary for plaintiffs to sustain their burden on a motion to dismiss.”).
For example, a former Vice President of Business Development from November 2007
through April 2014, who observed that “‘margins [were] tighter during the Class Period and
32
were nowhere near as aggressive as on the government side of the business,” and that new
acquisitions did not “enhance margins” as hoped, id. ¶ 71, reported directly to the Vice President
of the Retail Supply Chain Group, who, in turn, reported to the defendants CEO and CFO, id. ¶
252. This confidential witness alleged that the Vice President of the Retail Supply Chain Group
“had a standing one-on-one meeting with Defendant [CEO] every Monday to discuss day-to-day
issues in the Consumer business.” Id. (emphasis added). A former Senior Manager of Client
Services from July 2006 through January 2013 avers that weekly spreadsheets containing such
specific sales metrics as “items sold, inventory, sales, sales margins, GMV, cost input and other
metrics” were reported to the Vice President of the Retail Supply Chain Group, who then shared
this information weekly with the defendant CEO. Id. ¶ 253. Notably, a former Director of
Global Compensation from March 2013 through November 2013 stated that not only did the
Vice President of Retail Supply Chain Group intentionally inflate sales numbers for the retail
segment in 2013, inflating them by at least ten percent, he was told specifically by the defendant
CEO to stop looking deeply into these numbers. Id. ¶ 263.
Not only did the defendants have ample opportunity to learn that these non-DoD business
segments were not doing well, but the plaintiffs also allege that the defendants must have known
about the specifics of each of these segments because they often referred to metrics such as
GMV and margins in their public statements. See, e.g., id. ¶ 100 (defendant CEO stating
“Record GMV results were driven by growth in the volume of capital assets sales across our
commercial and government clients”) (emphasis in original); id. ¶ 106 (defendant CFO stating
“Our strong results for the quarter were driven by record volumes in both our commercial
capital assets and retail supply chain verticals”) (emphasis in original). As other courts have
33
found, “the perceived importance of margins support an inference that [the defendants were]
paying close attention to these numbers.” Avaya, 564 F.3d at 271.
Furthermore, the plaintiffs have alleged that the individual defendants made suspiciously
timed sales of their own stocks in suspiciously high quantities. The defendant CEO sold twice as
much stock during the two year period of the Class Period than the prior two years. Am. Compl.
¶ 267. While this quantity, representing a quarter of the defendant CEO’s entire holding, alone
would not be suspicious, the timing of the sales are. During the two-year period prior to the
Class Period, the defendant CEO sold roughly the same amount of stocks, generally around
10,000 shares, almost daily. Id. During the Class Period, however, these quantities were much
larger than previous sales, including several sales of 100,000 shares or more, and the sales
offered occurred on days right after public releases of good results or right before releases of bad
results. See id. ¶¶ 266, 268–270. The defendant CEO earned $68 million from his stock sales
during the Class Period. Id. ¶ 266. In contrast, he earned only $15.3 million from stock sales in
the two years prior to the Class Period. Id. ¶ 267
The defendants attempt to provide a nonculpable reason for the defendant CEO’s sales by
pointing to a publicly disclosed Rule 10b5-1 plan, announced in June 2012, to sell up to 2.5
million shares. Defs.’ Mem. at 44. The plaintiffs, however, allege that the defendant CEO “did
not engage in a single purchase or sale, save for exercising options on a mere 4,567 shares on
July 5, 2012” according to the plan. Am. Compl. ¶ 271. Instead, six weeks after announcing the
plan in June 2012, the defendant “severed the plan, simultaneously making the vague (and
ultimately empty) promise that he was exploring options to purchase shares of the Company’s
common stock.” Id. The plaintiffs allege that the defendant CEO does adopt a new Rule 10b5-1
34
plan on August 8, 2013, but “a mere three sales of stock were effected pursuant to [this] plan.”
Id. The defendants do not address these allegations. Defs.’ Mem. at 44. 11
Instead the defendants dispute whether the sales are indeed as suspiciously timed as the
plaintiffs allege, pointing out, for example, that the defendant CEO did not make any sales in the
last six months of the Class Period. See Defs.’ Reply at 24–25. This is a close case, though the
change from the CEO’s previous selling behavior raises at least a whiff of foul play. Regardless
of whether the allegations of insider trading are persuasive however, “all of the facts alleged,
taken collectively” permit a strong inference of scienter. Tellabs, 551 U.S. at 323 (emphasis in
original); see also Avaya, 564 F.3d at 270–273 (finding scienter based solely on circumstantial
evidence including statements from confidential witnesses, without any allegations of improper
insider trading). The defendants worked in a culture focused on tracking sales and other metrics,
which were conveyed to them in weekly meetings. The defendants themselves have
demonstrated an interest and familiarity with figures like sales volume and margins coming out
of the retail and capital assets segments based on statements made to the public. Therefore, the
Court finds that there is a strong and cogent inference of scienter.
3.
Loss Causation
A plaintiff may adequately plead loss causation “‘either by alleging (a) the existence of
cause-in-fact on the ground that the market reacted negatively to a corrective disclosure of the
fraud; or (b) that . . . the loss was foreseeable and caused by the materialization of the risk
concealed by the fraudulent statement.’” In re Harman, 791 F.3d at 110 (quoting Carpenters
11
The plaintiffs also argue, for the first time in opposition, that the defendant CFO made similarly suspicious
sales of Liquidity stock during the Class Period by exercising stock options and selling the converted shares. Pls.’
Opp’n at 38. The plaintiffs did not allege with sufficient specificity why these sales are suspicious, and they do not
appear so on their face. For example, defendant CFO may have exercised all of his stock options as they became
available, rather than waiting for more opportune moments. Thus, the defendant CFO’s sales of LSI stock are not
considered for the purposes of determining the sufficiency of pleading scienter.
35
Pension Tr. Fund. of St. Louis v. Barclays PLC, 750 F.3d 227, 232–33 (2d Cir. 2014)) (emphasis
in the original). The plaintiffs adequately plead the former.
The plaintiffs posit that throughout the Class Period, the defendants, from time to time,
made partial corrective disclosures that the growth from the retail and commercial capital assets
segments were overstated before the final reveal on May 8, 2014. Pls.’ Opp’n at 41. For
example, on January 31, 2013, the defendants announced first quarter 2013 results that exceeded
previous guidance for adjusted EBITDA and adjusted diluted EPS per share, but did not meet
previous guidance for GMV. Am. Compl. ¶ 172. The defendants, in order to explain the gap
between expected and actual GMV for the quarter, made the mild admission that the “growth
rate for the retail business” is “lowering” “for the rest of the year,” primarily because product
flows from “existing clients . . . are lower than the flows received last year.” Id. ¶ 180. Stock
prices dropped from $41.07 on the prior day’s close, to $31.87 after this news was released. Id. ¶
182.
On July 16, 2013, the defendants announced preliminary financial results for the third
quarter of fiscal year 2013, which were likely to miss previous guidance. Id. ¶ 200. The
defendants revealed, again, that “[r]esults were impacted by lower than expected GMV in the
Company’s capital assets and retail supply chain verticals as a result of lower product flows from
existing clients and slower than expected rollout of new client programs,” id., while confirming
that “[o]verall margins in our business remain strong,” id. ¶ 201 (alteration in original). Upon
this news, stocks declined from $32.38 to $29.60. Id. ¶ 202. On August 6, 2013, when actual
third quarter results were released, which were indeed below previous guidance, id. ¶ 203, share
prices actually increased from $28.97 to $32.56, id. ¶ 212. During the August 6, 2013
announcement, however, the defendants noted that “GMV continues to diversify due to the
36
continued growth in our commercial business and state and local government business,” and the
defendants represented that “the percentage of GMV derived from our DoD Contracts during
Q3-13 decreased to 21.9%.” Id. ¶ 206.
Finally, on May 8, 2014, after losing the more lucrative DoD surplus contract, and
receiving a new and less lucrative DoD scrap contract, LSI was allegedly unable to hide the
weak state of its non-DoD business anymore and revealed second quarter fiscal year 2014
financial results that were far below guidance. Id. ¶ 233. Notably, while GMV decreased by
only twelve percent, adjusted EBITDA declined forty-three percent, and adjusted diluted EPS
declined forty-six percent, year-over-year. Id. After years of enjoying “aggressive” margins on
the government business, id. ¶ 71, which “prop[ped] up many of the Company’s less profitable
business unit,” id. ¶ 59, the defendants finally had to reveal that the remaining segments simply
did not enjoy the same type of attractive margins to which the investors were accustomed. The
defendants, explaining the decrease in performance, stated “[w]hile GMV was within our
expected results, our Adjusted EBITDA and Adjusted EPS were lower than expected due to mix
changes in our DoD surplus and retail businesses and delayed capital asset projects in both the
U.S. and Europe. We also experienced unusual softness in our energy vertical due to an industry
wide decline in line pipe and related equipment.” Id. ¶ 234. The defendants at last admitted,
though in halting and vague terms, that its retail business has been plagued by lower-margin
sales. On this news, the share prices plunged nearly thirty percent. Id. ¶ 239.
The defendants contend that the May 8 release did not constitute a corrective disclosure
because it “did not reveal or correct any prior misstatement, nor did it restate any financial
results,” instead, “it reported an entirely new event—the DoD declining to renew a previously
profitable contract—a risk that LSI warned might occur.” Defs.’ Mem. at 31. The defendants’
37
argument is unavailing for two reasons. First, “‘a corrective disclosure need not be a ‘mirrorimage’ disclosure—a direct admission that a previous statement is untrue,’ although it ‘must
relate to the same subject matter as the alleged misrepresentation.’” In re Harman, 791 F.3d at
110 (quoting Mass. Ret. Sys. v. CVS Caremark Corp., 716 F.3d 229, 240 (1st Cir. 2013)); see
also Freudenberg v. E*Trade Fin. Corp., 712 F. Supp. 2d 171, 202 (S.D.N.Y. 2010 (“[N]either
the Supreme Court in Dura, nor any other court addressing the loss causation pleading standard
require a corrective disclosure be a ‘mirror image’ tantamount to a confession of fraud [b]ecause
corporate wrongdoers rarely admit that they committed fraud . . . . Thus, the ‘relevant truth’
required under Dura is not that a fraud was committed per se, but that the ‘truth’ about the
company’s underlying condition, when revealed, caused the ‘economic loss.’”). Therefore, the
plaintiffs need not allege that the defendants corrected any prior misstatements or restated any
financial results. Instead, plaintiffs need only show that the retail and commercial capital assets
segments were not as strong as previously indicated, which the May 8 release, as well as the
aforementioned other releases, does. See in re Harman, 791 F.3d at 111 (finding the plaintiffs
sufficiently alleged loss causation where the corrective disclosure stated that the challenged
portion of the Company’s business “was not flourishing as the Company had indicated”
previously).
Second, the defendants’ loss of the DoD contract was previously publicized. See Defs.’
Mem. at 22 (“On April 3, 2014 . . . LSI announced in real-time that while it was the ‘apparent
high bidder’ for the Non-Rolling Stock Contract, it had ‘withdr[awn] from the live auction
bidding’ for the Rolling Stock Contract after it had determined that ‘[b]idding reached a level
that . . . would [have] be[en] economically unsustainable[.]” (quoting Defs.’ Mem., Ex. 20 (LSI
8-K dated April 3, 2014) at 6, ECF No. 40-21)). In other words, May 8, 2014 was not the first
38
time the market would have been advised of the defendants’ loss of the DoD contract. In fact,
the defendants’ May 8, 2014, press release does not even address the issue that LSI lost the DoD
surplus contract to a competitor. See Am. Compl. ¶ 234 (referencing only “mix changes in
[their] DoD surplus” business and their “multi-year transition of [their] DoD surplus contract”).
In any event, whether the drop in share prices is due to the reveal that the non-DoD business was
weaker than previously stated or due to the loss of the DoD contract need not be proven at the
pleading stage. See in re Harman, 791 F.3d at 111 (“‘[P]laintiffs need not demonstrate on a
motion to dismiss that the corrective disclosure was the only possible cause for decline in the
stock price.’” (quoting Carpenters, 750 F.3d at 233)). Consequently, the plaintiffs adequately
plead loss causation.
Accordingly, for the reasons stated above, the defendants’ motion to dismiss is denied as
to the plaintiffs’ Section 10(b) claim regarding the alleged misrepresentations about LSI’s
growth in the retail and commercial capital assets business during the Class Period.
B.
Count II—Liability Under Section 20(a)
Section 20(a) of the Securities Exchange Act provides that individuals who are in
“control of the primary violator” may be held jointly and severally liable. In re Harman, 791
F.3d at 111. “A claim under Section 20(a) can exist only if there is a viable claim against the
corporation.” Id. Here, the plaintiffs have alleged a viable Section 10(b) claim against the
corporation.
Circuits differ on “whether the plaintiff must show that the alleged control person
‘culpably participated’ in the underlying fraud” or whether “the plaintiff need only show the
defendant is a ‘controlling person,’” with the burden then shifting “to the defendant to show the
actions were taken in good faith and did not directly or indirectly induce the act or acts
39
constituting the violation or cause of action.” In re Harman, 791 F.3d at 111–12 (internal
quotations and citations omitted). The D.C. Circuit has declined “which approach to adopt.” Id.
In this case, the plaintiffs have sufficiently alleged that the defendants CEO and CFO are
“controlling persons,” who also culpably participated in the underlying fraud. See, e.g., Am.
Compl. ¶ 252 (a confidential witness describing the individual defendants as “the ‘center of
power’ at the Company, and ultimately all management decisions were made by the two of
them”). Indeed, many of the offending statements were made by the individual defendants,
whose involvement in the day-to-day operations of LSI would have made them aware of the
falsity of their statements. See, e.g., id. ¶ 106 (defendant CFO stating that “[o]ur strong results
for the quarter were driven by record volumes in both our commercial capital assets and retail
supply chain verticals” (emphasis in original)); id. ¶ 111 (defendant CEO stating “[r]ecord
GMV results were primarily driven by growth in the volume of goods sold in our retail supply
chain and municipal government marketplaces by existing and new clients” (emphasis in
original)). Furthermore, the plaintiffs allege that the defendant CEO was complicit in the
inflation of sales figures from the retail division. Id. ¶ 74 (the former Director of Global
Compensation alleging that when he observed that “the sales numbers for the retail segment in
2013 were inflated by at least 10%,” his supervisor was instructed by the defendant CEO to
“leave the retail sales figures alone” (emphasis in original)).
Accordingly, the defendants’ motion to dismiss the plaintiff’s Section 20(a) claim is
denied.
IV.
CONCLUSION
For the reasons stated above, the defendants’ motion to dismiss is granted in part and
denied in part. The defendants’ motion to dismiss Count I based on misrepresentations regarding
40
the growth of LSI’s retail and commercial capital assets segments is denied. The defendants’
motion to dismiss the plaintiff’s Count I based on alleged misrepresentations regarding
GoIndustry and Network International is granted. The defendants’ motion to dismiss Count II is
denied.
An Order consistent with this Memorandum Opinion will issue contemporaneously.
DATE: March 31, 2016
Digitally signed by Hon. Beryl A. Howell
DN: cn=Hon. Beryl A. Howell, o=U.S.
District Court for the District of
Columbia, ou=Chief Judge,
email=Howell_Chambers@dcd.uscourt
s.gov, c=US
Date: 2016.03.31 19:46:30 -04'00'
___________________________
BERYL A. HOWELL
Chief Judge
41
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