Jones et al v. Party City Holdco, Inc. et al

Filing 97

MEMORANDUM OPINION re: 85 MOTION to Dismiss DEFENDANT ADVENT INTERNATIONAL CORPORATIONS NOTICE OF MOTION TO DISMISS PURSUANT TO FED. R. CIV. P. 8, AND 12(B)(6) filed by Advent International Corporation, 88 MOTION to Dismiss filed by Thomas H. Lee Partners L.P., Goldman Sachs & Co., Michael A Correale, Party City Holdco, Inc., James M Harrison, Morgan Stanley & Co. LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse Securities (USA) LLC. Defendants' motions to dismiss the CAC [DI 85, 88] are granted. (Signed by Judge Lewis A. Kaplan on 2/1/2017) (cla)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
------------------------------------------x
ROY JONES, et al.,
Plaintiffs,

-against-

15-cv-9080 (LAK)

PARTY CITY HOLDCO, INC., et al.,
Defendants.
------------------------------------------x

MEMORANDUM OPINION

Appearances:
Naumon A. Amjed
Ryan T. Degnan
Andrew L. Zivitz
Johnston de F. Whitman, Jr.
Meredith L. Lambert
KESSLER TOPAZ MELTZER & CHECK, LLP
Attorneys for Plaintiffs

Mark C. Hansen
David L. Schwarz
Joshua D. Branson
KELLOGG, HUBER, HANSEN, TODD, EVANS &
FIGEL, P.L.L.C.
Attorneys for Defendants Party City Holdco
Inc., Thomas H. Lee Partners, L.P., Michael A.
Correale, and James M. Harrison

James P. Smith III
Robert Y. Sperling
Joseph L. Motto
WINSTON & STRAWN LLP
Attorneys for Defendants Goldman, Sachs &
Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Credit Suisse Securities (USA)
LLC, and Morgan Stanley & Co. LLC

2
Matthew Solum
Elliot C. Harvey Schatmeier
KIRKLAND & ELLIS LLP
Stuart M. Glass
CHOATE HALL & STEWART LLP
Attorneys for Defendant Advent
International Corporation

LEWIS A. KAPLAN, District Judge.
This putative class action1 arises out of statements made in connection with Party
City’s initial public offering on April 16, 2015. The Consolidated Amended Complaint (the “CAC”)
alleges violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933.2 The matter is
before the Court on defendants’ motions to dismiss the CAC for failure to state a claim upon which
relief may be granted.

Facts
The Parties
M. Erik Meinholz is Lead Plaintiff on behalf of the putative class.3
Defendant Party City Holdco Inc. (“Party City” or the “Company”) is a global party

1

Meinholz brings this action “on behalf of all persons and entities . . . who purchased shares
in or traceable to Party City’s April 16, 2015 initial public offering (‘IPO’) of 25,156,250
shares of Party City common stock offered and sold pursuant to [various offering
documents].” Compl. [DI 51] at 1. The Court assumes for the purposes of this motion the
truth of the well-pleaded factual allegations of the complaint.
2

15 U.S.C. §§ 77k, 77l(a)(2), 77o.
3

DI 37.

3
goods retailer and supplier.4 During the relevant period, defendant Michael A. Correale was the
Company’s chief financial officer, and defendant James M. Harrison was the chief executive
officer.5
Plaintiffs sue also two beneficial owners of Party City common stock—Thomas H.
Lee Partners, L.P. (“THL”) and Advent International Corporation—and Party City’s underwriters:
Goldman Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse Securities
(USA) LLC, and Morgan Stanley & Co. LLC.6

Party City’s Business
Party City is the country’s largest retailer and world’s largest distributor of licensed
(e.g., products featuring movie characters) and non-licensed party supplies, including costumes,
balloons, decorations, and tableware.7

Party City generates revenue from wholesale and retail

operations, with retail sales representing a higher proportion of the Company’s revenue.8
Party City’s retail strategy consists of offering customers a “broad selection of
continuously updated and innovative merchandise at a compelling value” through approximately

4

DI 51 ¶ 17.
5

DI 51 ¶¶ 19-20.
6

DI 51 ¶¶ 22-30.
7

DI 51 ¶ 1.
8

DI 90 at 3-4.

4
900 superstores, an online website, and over 300 temporary Halloween stores.9 To that end, the
Company maintains a large collection of manufacturing and distribution licenses so that it regularly
may introduce new products to “effectively respond to changes in consumer trends.”10 Although
Party City sells non-licensed products as well, its ability to manufacture products for popular brands,
such as Disney, Marvel, and the NFL, has been key to its industry success.11

The Frozen “Phenomenon”
In November 2013, Disney released the movie Frozen, which became a worldwide
sensation.12 Not only did the film generate impressive ticket sales, but “customers rushed to stores
in droves to purchase licensed Frozen merchandise.”13 Demand for the film’s merchandise was so
high that Disney initially was “caught flat-footed by the massive consumer demand for anything and
everything ‘Frozen’”; there were not enough products on the shelves to meet customer demand
“until well into 2014.”14
Plaintiffs allege that Party City, as a supplier of Disney merchandise, “attempted to

9

DI 51 ¶ 17.
10

DI 51 ¶ 33.
11

See DI 51 ¶¶ 34-39.
12

DI 51 ¶ 41.
13

DI 51 ¶ 41.
14

DI 51 ¶ 42 (internal quotation marks omitted) (quoting ‘Frozen’ Performs for Disney –
Merchandise Tied to Animated Blockbuster Continues to Buoy Media Firm’s Results, Wall
St. J., Feb. 4, 2015).

5
capitalize on what it termed ‘the Frozen phenomenon’ in late 2014” by, for example, promoting its
line of Frozen costumes for Halloween and including prominent images of Frozen merchandise in
an investor presentation.15

The IPO
In 2011, Party City had filed a registration statement with the Securities Exchange
Commission in connection with a planned initial public offering (“IPO”).

Ultimately, however, it

did not go public and instead sold a majority of its shares to THL in a private deal.16
A few years later, on January 21, 2014, Party City filed another registration statement
for a planned IPO of 21,875,000 shares of its common stock.17 In a subsequently filed prospectus,
the Company touted its “differentiated, vertically integrated business model” and stated its belief
that its “superior selection of party supplies, scale, innovation and service position [it] for future
growth across all of [its] channels.”18 Party City completed the IPO on April 21, 2015, at $17.00
per share, with the underwriters exercising their option to purchase additional shares.19

15

DI 51 ¶¶ 43-45.
16

DI 51 ¶ 32.
17

DI 51 at 1; DI 89-1 at 8. In addition, Party City granted the underwriters an option to
purchase up to 3,281,250 additional shares. DI 89-1 at 8.
18

DI 89-4 at 3.
19

DI 51 ¶ 46.

6
The Alleged Misstatement or Omission
Plaintiffs allege that, “unbeknownst to investors at the time of the IPO, the success
of Party City’s licensed goods in 2014 was due in large part to what Defendants later referred to as
the ‘Frozen phenomenon.’”20 Even though the Frozen “phenomenon” contributed to Party City’s
success leading up to the IPO, the Company allegedly “said nothing of the sales-driving license in
the Offering Documents.”21

In fact, Party City, plaintiffs contend, represented the opposite by

stating in the Registration Statement and Prospectus:
“We hold numerous intellectual property licenses from third parties, allowing us to
use various third-party cartoon and other characters and designs on our products, and
the images on our metallic balloons and c[ostumes] are principally covered by these
licenses. None of these licenses is individually material to our aggregate business.”22
Plaintiffs allege that the statement that none of Party City’s third-party licenses
individually was material to its aggregate business was materially false or misleading because
“Frozen’s impact was so material to Party City’s business in the second half of 2014 that it could
not be offset by Party City’s other licenses in the second half of 2015.”23 Plaintiffs contend that
Party City admitted in post-IPO statements that Frozen’s impact on its business was a
“phenomenon” and an “anomaly” that led to significant decline in Party City’s “brand comp

20

DI 51 ¶ 40 (emphasis omitted).
21

DI 51 ¶ 49 (emphasis omitted).
22

DI 51 ¶ 49 (emphasis in original).
23

DI 51 ¶ 54.

7
sales”—i.e., the year-over-year or quarter-over-quarter change in retail sales from Party City’s stores
and online website.24 In sum, plaintiffs claim that
“while the Offering Documents created the misleading impression that Party City
could sustain its impressive sales growth in 2014 as customer demand shifted from
Frozen to other licensed products, Defendants’ subsequent admissions revealed that
because customers were not purchasing Frozen products in lieu of other licensed
merchandise, Party City’s other ‘traditional’ licenses did not underperform at the
expense of Frozen and were therefore not strong enough to offset the ‘anomaly’ of
Frozen’s material impact on the Company’s financial performance.”25
Thus, plaintiffs argue, Frozen in fact was material to Party City’s business, and any Company
statements suggesting otherwise were false or misleading.26
On the last day of trading before plaintiffs filed their complaint, Party City’s shares
closed at $11.80, down from the IPO price of $17.00 per share.

Discussion
“Sections 11, 12(a)(2), and 15 of the Securities Act impose liability on certain
participants in a registered securities offering when the publicly filed documents used during the
offering contain material misstatements or omissions.”27

Section 11 applies to registration

24

DI 51 ¶¶ 54-66; DI 51 ¶ 6 (defining “brand c omp sales”); DI 89-2 at 14 n.10 (clarifying
scope of “brand comp sales”).
25

DI 51 ¶ 65.
26

DI 51 ¶ 65.
27

In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 358 (2d Cir. 2010).

8
statements, Section 12(a)(2) to prospectuses and oral communications, and Section 15 creates
liability for certain “control persons.”28
In order to state a sufficient claim under Section 11, a plaintiff must allege that: “(1)
she purchased a registered security, either directly from the issuer or in the aftermarket following
the offering; (2) the defendant participated in the offering in a manner sufficient to give rise to
liability under section 11; and (3) the registration statement ‘contained an untrue statement of a
material fact or omitted to state a material fact necessary to make the statements therein not
misleading.’”29
Section 12(a)(2) requires a plaintiff to allege that: “(1) the defendant is a ‘statutory
seller’; (2) the sale was effectuated ‘by means of a prospectus or oral communication’; and (3) the
prospectus or oral communication ‘include[d] an untrue statement of a material fact or omit[ted] to
state a material fact necessary in order to make the statements, in the light of the circumstances
under which they were made, not misleading.’”30
Section 15 imposes liability on individuals or entities that “control[] any person
liable” under Sections 11 and 12.31 Thus to establish Section 15 liability, “a plaintiff must show a
‘primary violation’ of” Sections 11 and 12 “and control of the primary violator by defendants.”32
28

City of Westland Police & Fire Ret. Sys. v. MetLife, Inc., 928 F. Supp. 2d 705, 716, 720
(S.D.N.Y. 2013).
29

Morgan Stanley, 592 F.3d at 358-59 (quoting 15 U.S.C. § 77k(a)).
30

Id. at 359 (quoting 15 U.S.C. § 77l(a)(2)).
31

Id. at 358.
32

In re Lehman Bros. Mortg.-Backed Sec. Litig., 650 F.3d 167, 185 (2d Cir. 2011).

9
For each Securities Act claim, then, a plaintiff first must allege adequately a material
misstatement or omission.33 Here, plaintiffs are unable to do so. Accordingly, the CAC must be
dismissed in its entirety.

I.

Material Misstatement
To state a claim under Section 11 or 12(a)(2) on the basis of a false statement,

plaintiffs must allege that Party City’s registration statement or prospectus “contained an untrue
statement of a material fact.”34 Plaintiffs contend that Party City’s statement that “[n]one of [our
third-party] licenses is individually material to our aggregate business” was false because “Frozen’s
impact was so material to Party City’s business in the second half of 2014 that it could not be offset
by Party City’s other licenses in the second half of 2015.”35 Essentially, plaintiffs assert that it is
plausible to infer from Company statements “demonstrating the unprecedented role and impact that
Frozen played in Party City’s business leading up to the IPO” that the statement in question was
false at the time it was made. The argument is unpersuasive.

33

For a misstatement or omission to qualify as material, “there must be a substantial
likelihood that a complete and truthful disclosure would have been viewed by [a] reasonable
investor as having significantly altered the total mix of information made available.” N.J.
Carpenters Health Fund v. Royal Bank of Scotland Grp., PLC, 709 F.3d 109, 126 (2d Cir.
2013) (internal quotation marks omitted) (quoting Basic v. Levinson, 485 U.S. 224, 231-32
(1988)). To dismiss a complaint on the basis of lack of materiality, the alleged misstatement
or omission must be “so obviously unimportant to a reasonable investor that reasonable
minds could not differ on the question of their importance.” Id. (internal quotation marks
omitted) (quoting Ganino v. Citizens Utils. Co., 228 F.3d 154, 162 (2d Cir. 2000)). The
Court assumes without deciding that plaintiffs have alleged adequately materiality at this
stage in the proceedings.
34

15 U.S.C. §§ 77k(a), 77l(a).
35

DI 51 ¶ 54.

10
As an initial matter, defendants claim that plaintiffs’ case “rests on an implausible,
out-of-context reading of the alleged misstatement.”36 Plaintiffs, they argue, read “Party City’s
statement not as a discussion of intellectual property risks, but as an implied promise of sustained
‘impressive sales growth.’”37 Such a reading is implausible, defendants contend, because the alleged
misstatement—“which appears in sections of the Offering Documents discussing intellectualproperty rights and risks”—“said nothing about sales figures . . . and suggested nothing about retail
demand for licensed products.”38
While it is axiomatic that “a statement or omission must be considered in context,”39
it is true also that the Court “draw[s] all reasonable inferences in the plaintiff’s favor” on a motion
to dismiss.40 Certainly the alleged misstatement could be interpreted, as defendants urge, simply as
“a statement about the possible risks Party City would face should it lose one or more of its product
licenses.”41 But it is plausible to infer too that the statement implied something about Party City’s
sales. As the prospectus made clear, Party City acquires third-party licenses so that it may sell

36

DI 90 at 13.
37

DI 90 at 15.
38

DI 90 at 15.
39

Iowa Pub. Emps.’ Ret. Sys. v. MF Glob., Ltd., 620 F.3d 137, 141 (2d Cir. 2010) (internal
quotation marks omitted) (quoting In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357,
364 (3d Cir. 1993)).
40

City of Westland Police & Fire Ret. Sys. v. MetLife, Inc., No. 12-cv-0256 (LAK), 2016 WL
6652731, at *7 (S.D.N.Y. Nov. 10, 2016) (internal quotation marks omitted) (quoting ATSI
Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007)).
41

DI 90 at 13 n.7.

11
products bearing those images or marks.42 In other words, these third-party licenses represent some
quantity of sales because an integral part of Party City’s business is selling licensed products to
customers.

In consequence, it is reasonable to infer a related conclusion from the alleged

misstatement: that the sales attributed to any single Party City license were not material to the
Company’s aggregate business.
Even drawing all reasonable inferences in plaintiffs’ favor, however, they have not
alleged adequately that the alleged misstatement was false—in other words, that Frozen in fact was
material to Party City’s aggregate business. To be sure, they allege that Frozen merchandise was
very popular and a big seller. But just because the Company described Frozen’s performance as
“extraordinary,” “anomalous,” or “phenomen[al]” does not mean that it had a material impact on
the Company’s aggregate business. As defendants point out, the CAC contains no allegations about
the total amount of Frozen-licensed sales in 2014 or the percentage those sales represented of Party
City’s aggregate business. Instead, plaintiffs rely on a handful of buzz words and a single financial
metric, brand comp sales. Yet they fail to allege any connection between that metric and the
Company’s aggregate business. In short, plaintiffs offer no facts from which the Court plausibly
could infer that Frozen sales were material to Party City’s business as a whole. For that reason,
plaintiffs have failed to allege that the Company’s registration statement or prospectus contained a
material misstatement.

42

DI 89-2 at 88 (“We hold numerous intellectual property licenses from third parties, allowing
us to use various third-party cartoon and other characters and designs on our products, and
the images on our metallic balloons and costumes are principally covered by these
licenses.”).

12
II.

Materially Misleading Omission
Sections 11 and 12(a)(2) impose liability also when a registration statement or

prospectus omits to state a material fact necessary to make the statements therein not misleading.43
“The test for whether a statement is materially misleading . . . is . . . whether [the defendants’]
representations, viewed as a whole, would have misled a reasonable investor.”44
Plaintiffs contend that “Party City’s representation that none of its ‘licenses is
individually material to [its] aggregate business’ was materially misleading by omitting that the
‘phenomenal’ and ‘anomalous’ success of Party City’s Frozen merchandise was in fact critical to
the Company’s business leading up to the IPO.”45 As explained above, however, the CAC does not
allege adequately that Frozen in fact was material to Party City’s aggregate business. Accordingly,
no reasonable investor could have been misled by the challenged statement given that the CAC lacks
any factual allegations that call the statement’s accuracy into question.46 In consequence, plaintiffs
have failed to allege an actionable omission.

III.

Section 15 Claims
Having failed to plead a primary violation under Section 11 or 12(a)(2), plaintiffs’

Section 15 claims too must be dismissed.

43

City of Westland, 129 F. Supp. 3d at 88.
44

Rombach v. Chang, 355 F.3d 164, 178 n.11 (2d Cir. 2004).
45

DI 94 at 13.
46

See In re IndyMac Mortg.-Backed Sec. Litig., 718 F. Supp. 2d 495, 511-12 (S.D.N.Y. 2010).

13
Conclusion
Defendants’ motions to dismiss the CAC [DI 85, 88] are granted.
SO ORDERED.
Dated:

February 1, 2017