Ford v. VOXX International Corporation et al
MEMORANDUM & ORDER granting 19 Motion to Dismiss for Failure to State a Claim; For the foregoing reasons, Defendants' motion to dismiss (Docket Entry 19) is GRANTED and the Amended Complaint is DISMISSED. However, Plaintiffs are granted le ave to amend and may file a Second Amended Complaint ("SAC") within sixty (60) days of the date of this Memorandum & Order. If Plaintiffs choose to file an SAC, they are directed to file, as an exhibit to the SAC, a redline comparing the SAC to the Amended Complaint. So Ordered by Judge Joanna Seybert on 7/22/2016. C/ECF (Valle, Christine)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
BRIAN FORD, Individually and on
Behalf of All Others Similarly
MEMORANDUM & ORDER
VOXX INTERNATIONAL CORPORATION,
PATRICK M. LAVELLE and CHARLES
Mario Alba, Jr., Esq.
Samuel H. Rudman, Esq.
Robbins Geller Rudman & Dowd, LLP
58 South Service Road, Suite 200
Melville, NY 11747
John A. Neuwirth, Esq.
Caroline Jane Hickey, Esq.
Weil, Gotshal & Manges
767 Fifth Avenue
New York, NY 10153
SEYBERT, District Judge:
Plaintiff Brian Ford commenced this action on July 8,
2014, on behalf of himself and a class of investors (together,
Corporation (“VOXX”), Patrick Lavelle (“Mr. Lavelle”), and Charles
Stoehr (“Mr. Stoehr,” and collectively “Defendants”) engaged in
1 On July 16, 2016 the Asbestos Works Philadelphia Pension Fund,
IBEW Local 98 Pension, and Plumbers Local No. 98 Defined Benefit
Fund were appointed Lead Plaintiffs in this matter. (Docket
securities fraud in violation of Section 10(b) and 20(a) of the
Securities Exchange Act of 1934 between January 9, 2013 and May
14, 2014 (the “Class Period”).
Specifically, Plaintiffs claim
that Defendants provided knowingly false or misleading statements
Pending before the Court is Defendants’ motion to dismiss the
Second Amended Complaint.
(Docket Entry 19.)
For the reasons the
follow Defendants’ motion is GRANTED.
distributor of goods in the automotive, premium audio, and consumer
(Am. Compl., Docket Entry 18, ¶ 2.)
case focuses on VOXX’s premium audio business, which consists
mainly of products manufactured by its wholly owned subsidiary,
Klipsch Holding LLC (“Klipsch”).
(Am. Compl. ¶ 3.)
Klipsch in March 2011 for $166 million. (Am. Compl. ¶ 38.) Klipsch
systems” and provided VOXX with an entry point into the lucrative
(Am. Compl. ¶ 6.)
Plaintiffs claim, however,
that Klipsch had a negative growth rate prior to the acquisition
and cite to Klipsch’s net sales numbers between 2009 and 2010,
2 The following facts are drawn from the Amended Complaint (“Am.
Compl.”) and are assumed to be true for the purposes of this
Memorandum and Order.
which declined from $169.4 million to 162.3 million.
After VOXX purchased Klipsch, Mr. Lavelle--VOXX’s CEO-commented that “Klipsch will stay true to its legacy of high-end,
high-performance products, and we have no intention of changing
the product development, the quality standards or the materials
that go into the manufacturing of the Klipsch products.”
competitors, Lavelle stated during the call that Klipsch’s market
share was generally improving and that there had not been any
material change in the competitive dynamics over the last several
(Am. Compl. ¶ 41.)
Following Klipsch’s acquisition by
VOXX, Klipsch net sales rose to $166.6 million in 2011. (Am. Compl.
Defendants Allegedly False and Misleading Statements
During the Class Period
statements rely, to a large extent, upon information supplied by
a former employee of Klipsch, “FE1.”
According to the Amended
Complaint, FE1 worked at Klipsch from the year 2000 until August
2014, when he was laid off.
(Am. Compl. at 3, n.3.)
“various titles and responsibilities,” including the position of
“Manager of Training Worldwide/Technical Communication Manager”
from 2010 to 2013, and “Marketing Manager, Commercial Audio” from
2013 until he was laid off in 2014. (Am. Compl. at 3, n.3.)
latter position was created by VOXX to “increase commercial audio
(Am. Compl. at 3, n.3.)
FE1 principally expresses the
following views in the Amended Complaint: (1) “the Company was
experiencing declining headphones sales” and “started to lose
market share with headphone/earbuds [in 2012]” (Am. Compl. 61(a));
(2) he believed VOXX’s products were priced too high relative to
the competition and that the Company’s advertising partnership
with Live Nation Entertainment and its sponsorship of the Klipsch
Music Center “did not generate the recognition or increase in sales
that Klipsch had hoped” (Am. Compl. ¶ 61(b)) ; and (3) Klipsch’s
sales were “flat or declining for several years” and it’s “sales
of home audio speakers had been declining for years” (Am. Compl
On January 10, 2013, the day after the beginning of the
Class Period, VOXX announced that it would change its financial
reporting structure and would report financial results from three
segments: Automotive, Accessories, and Premium Audio.
Addressing VOXX’s Premium Audio segment, Mr. Lavelle made
the following statement: “[w]e expect to do approximately $200
million in high-end audio this year and we see good opportunities
for growth for several of the years to come, especially as market
conditions improve[; t]here is a very loyal and growing customer
base behind the Klipsch brand.”
(Am. Compl. ¶ 59.)
In May 2013, VOXX announced the Company’s financial
results for the fourth quarter of that year.
For the year 2013,
the Company reported net sales of $835.6 million, with Premium
Audio sales of $193 million, gross margin of 28.3%, and earnings
before interest, tax, depreciation and amortization (“EBITDA”) of
(Am. Compl. ¶ 62.)
Out of the $193 million Premium
Audio sale figure, $174 million was attributable to Klipsch.
Compl. ¶ 65.)
The following table shows Klipsch’s sales growth
rate from 2011 to 2013:
(Am. Compl. ¶ 65.)
Commenting on VOXX’s potential financial
performance in the coming year, Mr. Lavelle said “we are estimating
approximately $840 million [in net sales] in fiscal 2014,” “Premium
Audio will be approximately $210 million,” and “[o]ur current
budget calls for fiscal 2014 EBITDA of $62 million . . . [while]
gross margins should come in at 28.8%.” (Am. Compl. ¶ 63.) Further
Lavelle stated that “[o]verall, we believe our Premium Audio
business will be the biggest growth driver in fiscal 2014, with a
growth rate of approximately 9%.”
(Am. Compl. ¶ 64.)
these announcements the stock price rose 3.1%.
(Am. Compl. ¶ 68.)
The Company held a conference call on July 11, 2013,
after VOXX filed its Form 10-Q with the SEC one day earlier.
During the call, Mr. Lavelle reiterated some of the Company’s
guidance for 2014, stating that “we reported sales of $40.2 million
[in the Premium Audio category], an increase of 1.7%, with the
bigger gains coming at Klipsch.”
Mr. Lavelle went on to say, “as
I mentioned last quarter, we are expecting close to a 9% growth in
the Premium audio segment this year, and I believe we are on track
to meet that number, based on our first-quarter results.”
Compl. ¶¶ 72-73.)
Mr. Lavelle also specifically explained that
the Company was “having a very good year with sound bars” and that
the market for headphones was “quite active, and we expect to grow
our overall market share within this space.”
(Am. Compl. ¶ 74.)
Following these pronouncements, the stock price rose 14%.
Compl. ¶ 75.)
On September 19, 2013, Mr. Lavelle touted VOXX’s Premium
capital audio segment at the Imperial Capital Global Opportunities
Conference, saying that “[w]ithin our premium audio space, you’ll
see us introducing new products within sound bars, sound base,
music centers, all new categories that are, in my estimation, set
(Am. Compl. ¶ 78.)
Mr. Lavelle specifically focused
on the growth potential of VOXX’s sound bar and headphones.
respect to the headphones, Mr. Lavelle said that “this is an area
that has grown nicely over the last three years” and “another big
growth category for us are our headphones[, w]e have the number
one rated in the ear headphones in the market.”
¶¶ 78, 98.)
Plaintiffs acknowledge in the Complaint that the
broader market for headphones was growing during the Class Period.
Specifically, Plaintiffs state that “[i]n 2013, retail sales of
headphones rose 16% to $8.4 billion, with 286 million units shipped
worldwide” and “headphones sales were expected to reach $11.3
billion in 2018.”
(Am. Compl. at 2, n.2.)
announcing its financial results for the second quarter of 2014,
the period ending on August 31, 2013.
The Company reported net
sales of $183.8 million, gross margin of 29.4%, and EBITDA of $13.4
million. VOXX reported Premium Audio sales of $40.8 million. (Am.
Compl. ¶ 82.)
Commenting on the results, Mr. Lavelle stated,
“[o]ur results through the first half of the year are tracking in
line with our plan and we are anticipating a strong second half
based on several new product launches across all three of our
(Am. Compl. ¶ 82.)
The next day, Mr. Lavelle
“[g]ross margins continue to track in line with our prior guidance
of 28.8%” and “we are comfortable with our EBITDA guidance of $62
(Am. Compl. ¶ 84.)
With respect to the Company’s Premium Audio segment, Mr.
Lavelle explained that “[w]hile our sales were off in 2Q and are
. . .
approximately 9% growth based on the introductions of our new sound
Commenting on the decline in Premium Audio sales, Mr. Stoehr-VOXX’s CFO--stated that “[w]hile that category year to date is
down, we still anticipate high single digit growth for the year,
as we have a host of new products coming to market, very strong
third-quarter load-ins and several new promotional campaigns,
primarily at Klipsch. (Am. Compl. ¶ 85.) Elaborating on potential
growth at Klipsch, Mr. Lavelle emphasized its “recently announced
strategic partnership [with] the Kings of Leon’s world tour, one
of the hottest bands in the world” and “its partnership with Live
Nation.” (Am. Compl. ¶ 86.) On October 10, 2013, VOXX stock price
rose 3.3%, closing at $14.40.
January 8, 2014.
(Am. Compl. ¶ 87.)
VOXX reported net sales of $245.8 million, gross
margin of 28%, and EBITDA of $27.7 million, with Premium Audio
sales totaling $65.6 million. (Am. Compl. ¶ 90.) Mr. Lavelle again
stated that the quarter’s results were “tracking in line with our
plan” and explained that “as a result of other income recorded
this past quarter, we are raising our EBITDA guidance to $65
(Am. Comp. ¶ 90.)
However, VOXX lowered its sales
guidance from $840 million to $825-$830 million.
Mr. Lavelle cautioned that the Company “lowered sales
guidance slightly . . . due to higher exited product category sales
and a strategic decision to transition away from some online
Discussing anticipated holiday sales, Mr. Lavelle explained that
“[r]eports on holiday spending thus far have been mixed, with
growth in smartphones and tablets continuing to drive industry
(Am. Compl. ¶ 90.)
On the Premium Audio front, Mr.
Lavelle stated that “sales were up 3% for the three months and
down less than 1% year to date.”
(Am. Compl. ¶ 94.)
commented that “[n]ewer products are selling well, and recent
promotions have resulted in greater sales and increased brand
awareness.” (Am. Compl. ¶ 94.)
Following the Company’s third-
quarter results, VOXX stock price fell 18%, closing at $14 per
share on heavy trading volume.
(Am. Compl. ¶ 95.)
VOXX announced its fourth-quarter financial results on
May 14, 2014.
(Am. Compl. ¶ 100.)
The Company reported total net
sales of $187.1 million, bringing the net sales for the year to
$809.7 million, gross margin was 28.4%, and the company suffered
a quarterly EBITDA loss of $54.5 million.
(Am. Compl. ¶ 100.)
Premium Audio sales in the fourth quarter totaled $42.7 million.
(Am. Compl. ¶ 100.)
million in net sales for the year 2014, with $167.5 million
attributable to Klipsch.
(Am. Compl. ¶ 104.)
Thus, net sales at
Klipsch declined by 3.7% in 2014 instead of rising by 9%, as
(Am. Compl. ¶ 104).
Mr. Lavelle blamed
the company’s less than stellar financial performance in the fourth
quarter on poor retail sales and the weather, explaining that
“[r]etail was the primary reason for our miss” and “[s]evere
weather conditions throughout the country impacted the entire
performance.” (Am. Compl. ¶ 101.) However, Mr. Lavelle reiterated
that the company had been “tracking in line with [its] plan”
leading into the fourth quarter and “had very strong load-in’s for
the holiday season.”
(Am. Compl. ¶ 101.)
In reaction to the
announcement of the Company’s fourth-quarter financial results,
VOXX common stock fell $2.56 per share, or 25% to close at $7.51.
(Am. Compl. ¶ 107.)
In the fourth quarter, VOXX also reported an impairment
charge of $57.6 million.
The charge consisted of a write-down in
the goodwill value of Klipsch in the amount of $32.2 million, and
the impairment of certain trademarks in the amount of $22.8
million, and an additional impairment charge of $2.6 million. (Am.
Compl. at 15, n.7.)
Plaintiffs claim that Defendants “knowingly
or recklessly” delayed in writing down these charges.
Back in January 9, 2013, VOXX reported that its goodwill
and trademark assets collectively totaled $294.8 million.
Compl. ¶ 48.)
Plaintiffs claim that “it is implausible that
Defendants believed that the Company’s goodwill and trademark
assets collectively totaled $294.8 million” at that time because
“the market valued the entire VOXX enterprise at $158 million” as
of November 30, 2012.
(Am. Compl. ¶ 53.)
statements during the Class Period that inflated VOXX’s common
stock and allowed Company insiders to sell personal holdings at
inflated prices. (Am. Compl. ¶¶ 100-12.)
Pending before the Court
is Defendants’ motion to dismiss the Amended Complaint. Defendants
principally argue that (1) the Amended Complaint must be dismissed
because it fails to allege that Defendants made any false or
(Defs.’ Br., Docket Entry 20, at 8, 12.)
Legal Standard under Rule 12(b)(6)
In deciding a Rule 12(b)(6) motion to dismiss, the Court
applies a “plausibility standard,” which is guided by “[t]wo
Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.
Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009); Harris v. Mills, 572
F.3d 66, 71–72 (2d Cir. 2009).
First, although the Court must
accept all allegations as true, this “tenet” is “inapplicable to
3 Although Defendants make a number of additional arguments, the
Court need not address them in the Memorandum & Order.
legal conclusions;” thus, “[t]hreadbare recitals of the elements
of a cause of action, supported by mere conclusory statements, do
Iqbal, 556 U.S. at 678, 129 S. Ct. at 1949-50;
Harris, 572 F.3d at 72.
Second, only complaints that state a
“plausible claim for relief” can survive a Rule 12(b)(6) motion to
Iqbal, 556 U.S. at 679, 129 S. Ct. at 1950.
whether a complaint does so is “a context-specific task that
requires the reviewing court to draw on its judicial experience
and common sense.”
Id.; Harris, 572 F.3d at 72.
In deciding a motion to dismiss, the Court is confined
to “the allegations contained within the four corners of [the]
Pani v. Empire Blue Cross Blue Shield, 152 F. 3d 67,
71 (2d Cir. 1998).
However, this limitation has been interpreted
broadly to include any document attached to the complaint, any
reference, any document on which the complaint heavily relies, and
anything of which judicial notice may be taken.
See Chambers v.
Time Warner, Inc., 282 F.3d 147, 152–53 (2d Cir. 2002) (citations
omitted); Kramer v. Time Warner Inc., 937 F.2d 767, 773 (2d Cir.
Section 10(b) and Rule 10b-5 Claims
Section 10(b) of the Securities and Exchange Act of 1934,
15 U.S.C. §78j(b), and Rule 10b-5, 17 C.F.R. §240.10b-5, prohibit
fraudulent activities undertaken in connection with securities
See Novak v. Kasaks, 216 F.3d 300, 305 (2d Cir.
“To state a claim under Section 10(b) and Rule 10b–5,
plaintiffs must allege that [Defendants] ‘(1) made misstatements
or omissions of material fact; (2) with scienter; (3) in connection
with the purchase or sale of securities; (4) upon which plaintiffs
relied; and (5) that plaintiffs’ reliance was the proximate cause
of their injury.’”
Lattanzio v. Deloitte & Touche LLP, 476 F.3d
147, 153 (2d Cir. 2007) (quoting In re IBM Sec. Litig., 163 F.3d
102, 106 (2d Cir. 1998)).
securities fraud, Plaintiffs must also satisfy the heightened
pleading standards of both Rule 9(b) of the Federal rules of Civil
Procedure and the Private Securities Litigation Perform Act of
1995 (the “PSLRA”).
To comply with 9(b), “the complaint must: (1)
fraudulent, (2) identify the speaker, (3) state where and when the
statements were made, and (4) explain why the statements were
fraudulent.” Lerner v. Fleet Bank N.A., 459 F.3d 273, 290 (2d Cir.
addition, the PSLRA requires that a securities fraud complaint,
“state with particularity facts giving rise to a strong inference
15 U.S.C. § 78u–4(b)(2).
III. False Information
Defendants argue that Plaintiffs’ Amended Complaint must
be dismissed because it does not adequately allege that Defendants
statements were false, as required by Rule 9(b).
(Defs.’ Br. at
Defendants point to the allegations levied by Plaintiffs’
sole confidential witness, who supplied nearly all of the material
information that Defendants allegedly misrepresented or failed to
disclose in connection with their public statements about the
Company’s financial performance.
(Defs.’ Br. at 8.)
It is common in securities fraud actions for plaintiffs
to rely upon information supplied by confidential sources in the
See, e.g., Emps.’ Ret. Sys. of Gov’t of the V.I. v.
Blanford, 794 F.3d 297, 305 (2d Cir. 2015).
need not name their witnesses, to properly rely upon information
they supply in the complaint, the sources must be described “with
sufficient particularity to support the probability that a person
Novak, 216 F.3d at 314.
In addition, to
the extent a complaint relies upon confidential witnesses to show
demonstrate that the insiders’ statements were actually false.
See FED. R. CIV. P. 9(b); Cf. In re Scottish Re Grp. Sec. Litig.,
524 F. Supp. 2d 370, 391-93 (S.D.N.Y. 2007) (plaintiffs properly
alleged that defendants made misleading statements about their
company’s internal controls based upon information supplied by
Thus, courts have dismissed securities fraud claims
confidential sources. For example, in City of Roseville Employees’
Retirement System v. Energysolutions, Inc., 814 F. Supp. 2d 395,
413 (S.D.N.Y. 2011), plaintiffs claimed that statements made in a
company’s registration statement falsely overstated the value of
a trust fund.
The allegations were based on information supplied
by a confidential witness, who stated that the “value in the trust
fund had declined by May 2008, and that the trust fund had declined
to $727 million by November 2008.” Id. Dismissing the plaintiffs’
allegations, the court found the information supplied by the
confidential witness to be overly vague because the witness did
not provide any information about the period over which the balance
declined, the amount of the decline, or the accuracy of the
addition, the confidential witness’s allegations were not directly
contradicted by the information in the registration statement.
Id.; see also Caiafa v. Sea Containers Ltd., 525 F. Supp. 2d 398,
411 (S.D.N.Y. 2007) (finding that allegations from a confidential
containers were inadequate because, inter alia, the witness failed
to “specify the amount by which the containers were overvalued,
and at what times”).
In this case, nearly all of the information Defendants
allegedly failed to disclose in their public statements is derived
from information provided by a single confidential witness, FE1,
a former employee of VOXX.
(See Am. Compl. at 3.)
the Amended Complaint, FE1 worked at VOXX from the year 2000 until
including the position of “Manager of Training Worldwide/Technical
Communication Manager” from 2010 to 2013, and “Marketing Manager,
Commercial Audio” from 2013 until he was laid off in 2014. (Am.
Compl. at 3, n.3.)
The latter position was created by VOXX to
“increase commercial audio sales.”
(Am. Compl., n.3.)
the Amended Complaint, FE1 provides three key pieces of information
Defendants’ public statements materially false or misleading.
Specifically, FE1 claims in the Amended complaint that: (1) “the
Company was experiencing declining headphones sales” and “started
to lose market share with headphone/earbuds [in 2012]” (Am. Compl.
¶ 61(a)); (2) he believed VOXX’s products were priced too high
relative to the competition and that the Company’s partnership
with Live Nation Entertainment and its sponsorship of the Klipsch
Music Center “did not generate the recognition or increase in sales
that Klipsch had hoped” (Am. Comp. ¶ 61(b)); and (3) Klipsch’s
sales were “flat or declining for several years” and it’s “sales
of home audio speakers had been declining for years” (Am. Compl.
Although FE1 is described in the Amended Complaint with
disclosed about VOXX’s marketing efforts, the Court finds that the
statements and opinions attributed to him are too vague to form
the basis of a fraud claim. First, FE1’s statements that Klipsch’s
sales were “flat or declining for years” does not provide enough
detail to render any of Defendants’ public statements false.
Klipsch net sales figures during the Class Period were publicly
disclosed and Plaintiffs provide no reason to believe that those
figures were incorrectly stated. Fried v. Lehman Bros. Real Estate
(S.D.N.Y. Mar. 29, 2011), aff’d, 506 F. App’x 5 (2d Cir. 2012)
(“Where, as here, the allegedly omitted statements were actually
disclosed, the § 10(b) claim fails.”).
In fact, Plaintiffs rely
upon Klipsch’s reported sales figures as evidence in the Amended
(See, e.g., Am. Compl. ¶¶ 42, 65.)
In addition, FE1’s
claims that “sales of home audio speakers had been declining for
sales” are overly vague because there is no indication of the time
period to which the statements refer, the magnitude of the alleged
decline in sales, or the extent to which the decline impacted the
Company’s reported sales figures. (Am. Compl. ¶ 61(a), (c).)
Caiafa, 525 F. Supp. 2d at 411; In re MSC Indus. Direct Co., Inc.,
plaintiffs failed to state fraud with particularity when the
complaint did not set forth the “amounts at which the alleged
. . . or
Grandon v. Merrill Lynch & Co., Inc., 147 F.3d 184, 193–94 (2d
Cir. 1998) (“A plaintiff’s conclusory allegation that markups are
excessive is similar to a barroom generality; it is insufficient
to state a securities fraud claim.”).
Moreover, the Amended
Complaint provides no facts to support the conclusion that FE1 had
individuals with knowledge of the Company’s Premium Audio sales
See In re MSC Indus. Direct Co., Inc., 283 F. Supp. 2d
838, 847 (E.D.N.Y. 2003)
For similar reasons, FE1’s opinions that (1) VOXX’s
products were too expensive relative to the competition, and (2)
that its advertising campaigns “did not generate the recognition
or increase in sales that Klipsch had hoped” cannot, without more
detail, support a fraud claim.
(Am. Compl. ¶ 61(b).)
As a general
matter, the “mere opinions of confidential witnesses . . . are not
actionable” in securities fraud cases.
Kemp v. Universal Am. Fin.
Corp., No. 05-CV-9883, 2007 WL 86942, at *13 (S.D.N.Y. Jan. 10,
Here, FE1’s opinions about the price point of VOXX Premium
Audio products and the effectiveness of its advertising campaigns,
untethered to any particular facts about how VOXX’s pricing and
necessary to allege that Defendants’ public statements about the
Company’s Premium Audio business were false.
See City of Dearborn
Heights Act 345 Police & Fire R v. Axonyx, Inc., 374 F. App’x 83,
85 (2d Cir. 2010) (explaining that “appellants rel[ied] on opinions
of confidential witnesses to support their allegations, but they
failed to offer any factual underpinnings for those opinions”).
The only information supplied by FE1 that raises a
concern is his statements that the Company “started to lose market
share with headphone/earbuds [in 2012].”
(Am. Compl. ¶ 61(a).)
As a manager in charge of marketing Premium Audio merchandise at
VOXX, FE1 was plausibly in a position to know the Company’s
standing in the market for headphones relative to competitors.
See Blanford, 794 F.3d at 301.
Moreover, Defendants made a number
of statements touting the Company’s past and anticipated growth in
the market for headphones as a basis for its 2014 financial
guidance, including statements, like “another big growth category
for us are our headphones[, w]e have the number one rated in the
ear headphones in the market” and “this is an area that has grown
nicely over the last three years.”
¶¶ 78, 98.)
However, FE1’s market share claims also are too vague to support
a cause of action under Rule 9(b).
Plaintiffs acknowledge in the
Complaint that the broader market for headphones was growing during
the Class Period.
Specifically, Plaintiffs state that “[i]n 2013,
retail sales of headphones rose 16% to $8.4 billion, with 286
expected to reach $11.3 billion in 2018.”
(Am. Compl. at 2, n.2.)
Although FE1 claims that the Company began losing market share in
2012, the Amended Complaint provides no information about whether
VOXX’s position in the market changed during the Class Period or
to what extent its reported sales figures during the Class Period
were impacted by its market position.
Moreover, as previously
discussed, FE1’s conclusory assertion that VOXX “was experiencing
declining headphone sales,” (Am. Compl. ¶ 61(a)) without more
information about the timing and magnitude of the decline is
insufficient to cure Plaintiffs’ claims based upon VOXX’s position
in the headphones market.
Plaintiffs place great weight upon Defendants’ 2014
allegations. (Pl.’s Opp. Br., Docket Entry 22, at 2.) And indeed,
“‘[s]tatements regarding projections of future performance may be
actionable under Section 10(b) or Rule 10b–5 if . . . the speaker
does not genuinely or reasonably believe them.’”
In re Nortel
Networks Corp. Sec. Litig., 238 F. Supp. 2d 613, 627 (S.D.N.Y.
2003) (quoting In re Int’l Bus. Machines Corp. Sec. Litig., 163
F.3d 102, 107 (2d Cir. 1998)).
Plaintiffs correctly point out
that Defendants’ estimated 9% growth rate was lofty in light of
Klipsch’s 1.7% growth rate in 2012 and 2.6% growth rate in 2013.
However, Klipsch’s past performance was publicly known at the time
Defendants issued their 2014 financial guidance.
To allege fraud,
Plaintiffs must do more than merely claim Plaintiff’s financial
Rather, Plaintiff must set forth specific facts
showing why Defendants’ fiscal guidance was false or misleading,
defendant’s conduct was fraudulent or deceptive are not enough.”).
Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 114 (2d Cir. 1982)
Here, Plaintiffs failed to meet this burden
in the Amended Complaint.
VOXX’s Alleged Fraudulent Statements Concerning its
Plaintiffs claim that VOXX’s disclosures regarding the
value of its goodwill and trademark assets during the Class Period
were materially false or misleading because the reported values
were inflated, and Defendants should have tested these assets for
impairment “no later than third quarter of fiscal 2013.”
Opp. Br., at 14.)
Instead of recognizing an impairment charge in
the third quarter, VOXX reported an impairment charge of $57.6
million in the fourth quarter, consisting primarily of a write21
down in the goodwill value of Klipsch in the amount of $32.2
million, and the impairment of certain trademarks in the amount of
Plaintiffs claim Defendants should have known that
January 9, 2013, the market value of VOXX’s entire enterprise was
$158 million, but the Company nevertheless reported that its
goodwill and trademark assets were worth $294.8 million; (2) VOXX
was forced to lower its fiscal guidance in the third quarter of
2013; and (3) FE1 reported that Klipsch was experiencing various
problems, as discussed above.
(Pls.’ Opp. Br. at 14-16.)
A company’s goodwill and trademark holdings are both
See In re Soup Kitchen Int’l Inc., 506 B.R. 29, 41
intangible assets is a “complicated issue that is subject to
interpretation”); Playboy Enters., Inc. v. Chuckleberry Pub.,
Inc., 486 F. Supp. 414, 429 (S.D.N.Y. 1980) (discussing the
valuation of trademarks assets). In the context of the acquisition
of a business, “goodwill is ‘an asset representing the future
economic benefits arising from other assets acquired in a business
combination that are not individually identified and separately
Fait v. Regions Fin. Corp., 655 F.3d 105, 110 (2d
acquisition, goodwill is measured as any excess of the purchase
price over the value of the assets acquired and liabilities
Id. at 108, n.1.
Under generally accepted accounting
principles (“GAAP”)4, companies are required to test the goodwill
More specifically, under GAAP, “[g]oodwill of
a reporting unit shall be tested for impairment between annual
tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below
its [reported] amount.”
SFAS No. 142 ¶ 285; see Id. at 110.
Circumstances that would trigger a company’s obligation to test
for an impairment prior to the annual test include, for example,
“[a] significant adverse change in legal factors or in the business
climate” or “[u]nanticipated competition.”
SFAS No. 142 ¶ 28.
The parties both agree that VOXX’s statements during the
Class Period regarding the value of its intangible assets were
statements of opinion, rather than statements of fact.
Br. at 15; Pls.’ Opp. Br. at 14.)
To state a fraud claim based
upon a misstatement of opinion following the Supreme Court’s recent
4 “‘[F]inancial statements filed with the [SEC] which are not
prepared in accordance with generally accepted accounting
principles will be presumed to be misleading or inaccurate.’”
In re Fannie Mae 2008 Sec. Litig., 742 F. Supp. 2d 382, 408-10
(S.D.N.Y. 2010) (quoting 17 C.F.R. § 210.4–01(a)(1)) (second
alteration in original); see Ganino v. Citizens Utils. Co., 228
F.3d 154, 160 (2d Cir. 2000) (defining GAAP).
SFAS 142 is available at: http://www.fasb.org/jsp/
holding in Omnicare, Inc. v. Laborers Dist. Council Const. Indus.
Pension Fund, 135 S. Ct. 1318, 1332, 191 L. Ed. 2d 253 (2015),
Plaintiffs must allege material facts that call the basis for the
Company’s opinion into question and “whose omission makes the
opinion statement at issue misleading to a reasonable person
reading the statement fairly and in context.” For example, Justice
Kagan indicated that “facts about the inquiry the [Defendants] did
or did not conduct or the knowledge it did or did not have” could
be sufficient to state a claim based upon a misstatement of
Before the Circuit’s decision in Omnicare, the Second
Circuit recognized in Fait v. Regions Fin. Corp., 655 F.3d 105,
misstatements of intangible assets do “not involve misstatements
or omissions of material fact,” but rather statements of opinion.
Similar to Justice Kagan’s holding in Omnicare, the Second Circuit
ruled that to state an actionable claim based upon a misstatement
of a company’s goodwill assets, the complaint must “plausibly
allege that defendants did not believe the statements regarding
goodwill at the time they made them.”
Id. at 112.
Circuit’s decision one year after Fait in City of Omaha, Neb.
Civilian Emps.’ Ret. Sys. v. CBS Corp., 679 F.3d 64, 66 (2d Cir.
2012) is instructive in this case.
There, the plaintiffs claimed
CBS and various insiders made fraudulent statements in their
impairment charge to the company’s goodwill assets.
caused the defendants to perform an impairment test four months
Id. at 69.
These red flags included (1) the widening
gap between CBS’s book value and its market capitalization, (2)
negative outlook on the advertising market.
Id. at 69.
the precedent set by Fait, the Court held that the plaintiffs
failed to state a claim because they did not plead any facts which
reason to know . . . it was more likely than not that the goodwill
of any specific reporting unit was overvalued.”
Id. at 68.
Plaintiffs’ Amended Complaint in this case falls short
of what is needed to plead an actionable misstatement of opinion.
Similar to the complaint in CBS, Plaintiffs’ Amended Complaint
does not contain facts suggesting that Defendants knew at any point
during the Class Period that VOXX’s goodwill or trademark assets
Moreover, the fact that VOXX lowered its sales guidance in the
third quarter of 2013 by $15 million because of lower than expected
sales does not implicate the kind of adverse market conditions
that should have triggered an impairment test. Cf. Dudley v. Haub,
No. 11-CV-05196, 2013 WL 1845519, at *11-12 (D.N.J. Apr. 30, 2013)
(finding that a supermarket chain should have tested for impairment
earlier because, inter alia, the company’s former CEO acknowledged
the company was operating in “one of the worst environments I have
ever experienced in my career in the supermarket industry” and
Similarly, the observation that the reported value
of VOXX’s intangible assets exceeded its market capitalization is
insufficient to show Defendants made an actionable misstatement of
opinion absent factual allegations regarding “the inquiry the
[Defendants] did or did not conduct or the knowledge it did or did
Omnicare, 135 S. Ct. at 1332.
Finally, as discussed
earlier, the information supplied by FE1 is too vague support
Plaintiffs’ claims regarding the statement Defendants made about
VOXX’s intangible assets are DISMISSED.
Leave to Amend
The Second Circuit has stated that “[w]hen a motion to
dismiss is granted, the usual practice is to grant leave to amend
Hayden v. Cnty. of Nassau, 180 F.3d 42, 53 (2d
Cir. 1999) (citing Ronzani v. Sanofi S.A., 889 F.2d 195, 198 (2d
Cir. 1990)); see also FED. R. CIV. P. 15(a)(2) (“The court should
“However, a district court has the discretion to deny leave to
amend where there is no indication from a liberal reading of the
complaint that a valid claim might be stated.” Perri v. Bloomberg,
No. 11–CV–2646, 2012 WL 3307013, at *4 (E.D.N.Y. Aug. 13, 2012)
(citing Chavis v. Chappius, 618 F.3d 162, 170 (2d Cir. 2010)).
Because the Court finds that the bulk of Plaintiffs’ claims must
be dismissed due to the vagueness of the allegations, Plaintiffs
are granted a final opportunity amend their Complaint.
For the foregoing reasons, Defendants’ motion to dismiss
However, Plaintiffs are granted leave to amend and may
file a Second Amended Complaint (“SAC”) within sixty (60) days of
the date of this Memorandum & Order.
If Plaintiffs choose to file
an SAC, they are directed to file, as an exhibit to the SAC, a
redline comparing the SAC to the Amended Complaint.
/s/ JOANNA SEYBERT______
Joanna Seybert, U.S.D.J.
July 22, 2016
Central Islip, New York
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