City of Sterling Heights Police & Fire Retirement System v. Kohl's Corporation et al

Filing 58

DECISION AND ORDER Granting Motion to Strike 50 , Denying Without Prejudice Motion to Dismiss 43 , and Setting a STATUS CONFERENCE for 4/29/15 at 3:00 PM in Courtroom 222 before Judge Charles N Clevert Jr. (cc: all counsel) ((cef), C. N. Clevert, Jr.)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
CITY OF STERLING HEIGHTS
POLICE & FIRE RETIREMENT SYSTEM,
Plaintiff,
v.

Case No. 13-C-1159

KOHL'S CORPORATION,
KEVIN MANSELL, and
WESLEY S. MCDONALD,
Defendants.
DECISION AND ORDER GRANTING MOTION TO STRIKE (DOC. 50),
DENYING WITHOUT PREJUDICE MOTION TO DISMISS (DOC. 43),
AND SETTING STATUS CONFERENCE
Various shareholders of Kohl’s Corporation filed this securities lawsuit against the
corporation and two of its officers concerning alleged devaluation of shares after the
company disclosed that its accounting for lease agreements had not complied with
Generally Accepted Accounting Principles. The City of Sterling Heights Police and Fire
Retirement System filed this case; however, the Pension Trust Fund for Operating
Engineers later was appointed lead plaintiff. Following its appointment as lead plaintiff, the
Pension Trust Fund filed an Amended Complaint, which is the operative pleading at this
time.
The Amended Complaint raises two causes of action against defendants. First, it
asserts violations of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.
15 U.S.C. § 78j(b); 17 C.F.R. 240.10b–5. Section 10(b) of the Act provides that it is
unlawful “[t]o use or employ, in connection with the purchase or sale of any security . . . [of]
any manipulative or deceptive device or contrivance in contravention of such rules and
regulations as the [SEC] may prescribe as necessary or appropriate in the public interest

or for the protection of investors.” 15 U.S.C. § 78j(b). Rule 10b–5 forbids a company or
an individual “to make any untrue statement of a material fact or to omit 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(b). Second, the
Amended Complaint alleges violations of § 20(a) of the Securities Exchange Act of 1934,
which states that “[e]very person who, directly or indirectly, controls any person liable under
any provision of this chapter or of any rule or regulation thereunder shall also be liable
jointly and severally with and to the same extent as such controlled person.” 15 U.S.C.
§ 78t(a).
Kohl’s, Kevin Mansell, and Wesley McDonald moved to dismiss under Fed. R. Civ.
P. 12(b)(6). Defendants attached twenty-seven exhibits to a declaration of counsel in
support of their motion to dismiss the Amended Complaint. (See Docs. 45–47). The
exhibits total about 500 pages. Plaintiffs filed a brief opposing the motion to dismiss and,
by separate motion and brief, asked the court to strike many of defendants’ submitted
documents.
MOTION TO STRIKE
Generally, Rule 12(b)(6) and (c) motions focus on the allegations in the complaint.
Under Fed. R. Civ. P. 12(d), the district court may exclude documents submitted with a
Rule 12(b)(6) or (c) motion to dismiss or treat the motion as one for summary judgment.
But exceptions to the rule exist for documents that should be considered part of the
pleadings and those that the court can judicially notice.
Documents submitted with a motion to dismiss may be considered part of the
pleadings if they are referred to in the plaintiff’s complaint and are central to a claim.
188 LLC v. Trinity Indus., Inc., 300 F.3d 730, 735 (7th Cir. 2002); see also Tierney v.
Vahle, 304 F.3d 734, 738 (7th Cir. 2002). This rule prevents parties from surviving a
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motion to dismiss by artful pleading or by failing to attach relevant documents to the
complaint. 188 LLC, 300 F.3d at 735. The exception is narrow; it is aimed at situations
in which a plaintiff quotes from a document or the case requires interpretation of an
unattached contract, for instance. Tierney, 304 F.3d at 738. “It is not intended to grant
litigants license to ignore the distinction between motions to dismiss and motions for
summary judgment . . . .” Levenstein v. Salafsky, 164 F.3d 345, 347 (7th Cir. 1998).
The court may take judicial notice of facts that are not subject to reasonable dispute
because they are “generally known within the trial court’s territorial jurisdiction” or “can be
accurately and readily determined from sources whose accuracy cannot reasonably be
questioned.”

Fed. R. Evid. 201(b).

Judicial notice “is an adjudicative device that

substitutes the acceptance of a universal truth for the conventional method of introducing
evidence.” Gen. Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1081
(7th Cir. 1997). However, the device “merits the traditional caution it is given, and courts
should strictly adhere to the criteria by the Federal Rules of Evidence before taking judicial
notice of pertinent facts.“ Id.
Plaintiffs move to strike Exhibits 3, 9, 12, 19, 20, 21, 22, 23, 24, 25, 26, and 271 in
their entirety. Moreover, they move to strike portions of Exhibits 2 and 7.2 In addition, they
ask the court to strike those portions of defendants’ briefs filed in support of the motion to
dismiss that discuss or rely upon the challenged exhibits.
Defendants contend that the motion to strike is procedurally improper. Civil L.R. 7(i)
provides that any motion not authorized by the Federal Rules of Civil Procedure or local
rules or court order must be accompanied by a motion requesting leave to file it, and

1

All exhibits referenced with respect to plaintiffs’ m otion to strike are attached to Docum ents 45, 46,
and 47 of the record.
2

Plaintiffs do not challenge the rem aining exhibits.

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plaintiffs did not seek permission under Civil L.R. 7(i) to file their motion to strike. Further,
motions to strike are generally disfavored. See Civil L.R. 56(b)(9) (stating that regarding
summary judgment motions, collateral motions such as motions to strike are disfavored).
In addition, defendants contend that by briefing the motion to strike plaintiffs have
expanded their page limitations, as they should have addressed the documentation issues
within the confines of the brief in opposition.
Nevertheless, the court will consider the motion to strike. Defendants’ submission
of 500 pages of documentation raised the court’s concerns as to whether defendants seek
summary judgment rather than a Rule 12(b)(6) ruling. The court would have scrutinized
defendants’ submissions even without a motion to strike. Further, it is true that Fed. R.
Civ. P. 12(f) permits motions to strike from pleadings “an insufficient defense or any
redundant, immaterial, impertinent, or scandalous matter.” But to the extent defendants
justify their submissions on the incorporation doctrine (i.e., that the documents should be
considered part of the pleadings because they are referred to in the plaintiff’s complaint
and central to a claim), Rule 12(f) seems to apply. And to the extent defendants argue
judicial notice, “a party is entitled to be heard on the propriety of taking judicial notice and
the nature of the fact to be noticed.” Fed. R. Evid. 201(e). Finally, though plaintiffs’ motion
may, for practical purposes, allow them to exceed the page limits to discuss the use of the
submitted documents, defendants’ opposition brief on the motion to strike evens out any
page-limit concerns.
Defendants’ documentary submissions are rejected for several reasons. First, the
Declaration of Robert J. Giuffra, Jr. is insufficient to authenticate them. Affidavits and
declarations must be based on personal knowledge, set out facts that would be admissible
in evidence, and show that the affiant or declarant is competent to testify about the matter.
See Fed. R. Civ. P. 56(c)(4). Giuffra states that he is admitted to practice in this district
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and is a member of the law firm Sullivan & Cromwell LLP, counsel to the defendants. He
swears that the documents he attached to the declaration are true and correct copies.
(See Doc. 45 at 1.) However, these attestations fail to describe any personal knowledge
concerning the attachments. What personal knowledge does he have to swear to the
analysts’ reports, for instance? Where did he get them? Are they publicly available? How
can he vouch that they are true and correct copies of the originals? Similarly, how does
he have personal knowledge of McDonald’s 10b5-1 trading plans, which reference what
is said to be contracts between McDonald and the Charles Schwab firm? Where did he
find the letter from the chief accountant of the Securities Exchange Commission?
Second, the submitted documents are not incorporated in the Amended Complaint.
For instance, the analyst reports are neither mentioned nor central to plaintiffs’ claims,
which concern alleged misrepresentations regarding lease accounting and internal
procedures. Defendant cites three places within the Amended Complaint where the
reports are referenced. (Doc. 52 at 26 (citing Doc. 42, ¶¶ 25, 93, 162).) However, none
of the allegations rely on such reports or specifically mention them. Paragraph 25 of the
Amended Complaint states that the individual defendants controlled Kohl’s reports and
information provided to securities analysts. (Doc. 42, ¶ 25.) Paragraph 93 states that
Kohl’s provided information to analysts. (Doc. 42, ¶ 93.) And paragraph 162 states that
analysts from major brokerage firms wrote reports on Kohl’s and made them publicly
available. (Doc. 42, ¶ 162.) That the defendants provided information to analysts and that
analysts generally wrote reports in no way incorporates the specific analyst reports
submitted with the motion to dismiss. None of the references in the Amended Complaint
imply that the analyst reports attached to defendants’ motion to dismiss are central to
plaintiff’s claims.

And if the analyst reports are not incorporated in the Amended

Complaint, defense counsel’s summary of the reports surely is not.
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The argument that the Amended Complaint incorporated the 10b5-1 trading plan
rests on a single paragraph in the Amended Complaint (see Doc. 52 at 17) stating in part:
“to the extent that any of the Individual Defendants’ sales took place pursuant to a Rule
10b5-1 trading plan, they consciously or recklessly disregarded adverse information
concerning the Company’s erroneous lease accounting practices, and the conformity of its
financial statements with GAAP, to allow their sales to take place as scheduled.” (Doc. 42,
¶ 157). This allegation does not rely on any trading plans. Neither within this paragraph
nor elsewhere in the Amended Complaint do plaintiffs ever explicitly reference either of the
two specific 10b5-1 plans submitted as Exhibit 25. The Amended Complaint simply states
that if a plan existed, defendants acted consciously or recklessly. McDonald’s 10b5-1
trading plans are not incorporated within the Amended Complaint.
Defendants argue that proxy statements for the years 2009, 2010, 2011, and 2012
are incorporated in the Amended Complaint, but the Amended Complaint does not cite or
reference the proxy statements.
Certain allegations in the Amended Complaint may contain similar or identical to
information within the Form 4s submitted by defendants. (Compare Doc. 42, ¶¶ 155-57
with Doc. 47, Ex. 24.) However, it is not clear from the pleadings whether plaintiffs used
the Form 4s as the source of their information. Nothing in the Amended Complaint
suggests that plaintiffs relied on the Form 4s to form the basis of any claim. See In re
Shopko Sec. Litig., No. 01-C-1034, 2002 U.S. Dist. LEXIS 23887, *3–*5 (E.D. Wis. Nov.
5, 2002) (Adelman, J.) (declining to consider as incorporated documents that did not supply
the source for a Rule 10b-5 claim but only evidence in support or denial of such a claim).
Third, several of the challenged submissions go beyond what can be judicially
noticed. Counsel’s summary of the analyst reports, chart of beneficial ownership, and
chart of dispositions of Kohl’s stock (Exs. 9, 22, 23) are not items that can be accurately
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and readily determined from sources whose accuracy cannot reasonably be questioned.
The court cannot be confident that errors did not occur in summarizing the information or
that the summaries include all information the plaintiffs or the court would find pertinent.
Additionally, the court is unable to find that the analyst reports are beyond reasonable
dispute. As documents, the reports are not facts generally known and whose accuracy
cannot reasonably be questioned. It may well be that the reports are publicly available and
reliably produced, but that is not self-evident. At trial the court would expect a party to
authenticate such a document and explain its production.3
And fourth, even though the court could judicially notice the existence of some
documents (such as Forms 10-K, 10-Q, 8-K, and 4 that Kohl’s filed with the SEC) and what
they say, the content of the documents cannot be used for the truth of the matters asserted
(as defendants use them in their motion to dismiss). See City of Sterling Heights Gen.
Emps.’ Ret. Sys. v. Hospira, Inc., No. 11C8332, 2013 U.S. Dist. LEXIS 19156, *35-*38
(N.D. Ill. Feb. 13, 2013) (St. Eve, J.) (discussing cases and concluding that the court may
take judicial notice of the fact that proxy statements exist and contain certain statements,
but not the truth of the statements themselves); In re Shopko Sec. Litig., 2002 U.S. Dist.
LEXIS 23887, at *5–*7 (“Courts have taken judicial notice of SEC filings and considered
them in ruling on motions to dismiss. However, in these cases, the courts did not consider
the SEC filings for the truth of the defendants’ disclosures asserted therein; they
considered them only to determine what disclosures defendants made.” (citations
omitted)).

3

Defendants m ay be correct that they do not offer the reports for the truth of what they state but rather
to show what inform ation the public m ay have been aware of during the relevant tim e period. (See Doc. 44
at 13-15, 34). Nevertheless, the defendants fail to persuade the court that judicial notice of the reports is
proper.

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The New York Times article (Ex. 12) is the clearest offender here. Defendants cite
the article as evidence that a market-wide decline (rather than Kohl’s announcement of
accounting errors) caused a decrease in Kohl’s stock value. In their brief, defendants
state: “Kohl’s August 4, 2011 share price decline occurred in conjunction with a broader
market downturn caused by concerns of the sovereign debt crisis in Europe, the potential
downgrade of the U.S. credit rating, and the general weakness of the U.S. economy.”
(Doc. 44 at 34.) The statements within the article are subject to reasonable dispute; the
court has no basis for knowing whether the author’s assessment of the market was
accurate or disputed by knowledgeable persons. The possible causes of stock market
decline or Kohl’s stock-price decline as discussed in the article are not capable of accurate
and ready determination.
In Hennessy v. Penril Datacomm Networks, Inc., 69 F.3d 1344 (7th Cir. 1995), the
Seventh Circuit refused to take judicial notice of a company’s annual report because “the
fact in question . . . was not capable of accurate and ready determination by resort to the
[filing].” Id. at 1355. The court determined judicial notice was improper because
“indisputability is a prerequisite” and the facts were in dispute. Id. at 1354. Defendants’
attempt to use proxy statements and other SEC filings here makes this case analogous to
Hennessy. Defendants use the proxy statements, for instance, for the truth of their
contents, to establish the amount of Kohl’s stock holdings of the individual defendants.
(See Doc. 44 at 21-26). Moreover, plaintiffs contest the accuracy of the information within
the documents. The information within the proxy statements was reported by defendants
to the SEC; there is no way for the court to accurately and readily determine at this time
whether that information as reported was correct.
Similar to the proxy statements, defendants attached SEC Form 4s for the relevant
time period. The Form 4s reflect Kohl’s reporting of securities transactions. For reasons
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similar to those for the proxy statements, it is improper for the court to consider the
contents for their truth. Defendants cite the Form 4s not to show what they say, but instead
to show that defendants bought or sold an amount of stock during the class period. (See
Doc. 44 at 21-26). Plaintiffs have not had the opportunity to engage in discovery to
disprove these numbers. Kohl’s personnel reported those amounts, and it is impossible
at this stage of the case for the court to determine whether they are correct.
Defendants seek to use McDonald’s 10b5-1 trading plans for the truth of their
contents and for what is said. (See generally Doc. 44). But there is nothing indicating that
these documents are available to the public or allowing the court to readily determine
whether the documents are authentic and their contents are true.
Defendants attached documents relating to a program for Kohl’s to repurchase stock
from its stockholders. Defendants seek to use the exhibits to establish that Kohl’s
announced the repurchase program, the terms of the announcement, and the total
amounts of stock that were eventually bought. (See Doc. 44 at 30). To establish the third
point, the court must accept the truth of what the documents say. But the truth of such
facts is not readily and accurately determined; it is impossible for the court to know from
these SEC forms whether stock was eventually purchased following the announcement.4
For all of these reasons, the motion to strike will be granted. All submitted exhibits
will be disregarded and the court will disregard all references to them in the defendants’
briefs.

4
The court notes that the copy of the letter sent from the SEC’s chief accountant to the chairm an of
the Am erican Institute of Certified Public Accountants m ay be subject to judicial notice. Defendants seek to
show a change in accounting guidelines and offer the letter for what it says rather than for its truth, and
plaintiffs do not dispute the authenticity of the letter. (See Doc. 51 at 16-18.) Moreover, the letter appears
to be publicly available based on the website address printed on it. However, as set forth above, Giuffra’s
affidavit is insufficient regarding the letter’s origins.

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MOTION TO DISMISS
Striking the portions of the defendants’ briefs referencing the exhibits is problematic,
as defendants rely so heavily upon them. Defendants say their statement of facts was
drawn from their exhibits and the Amended Complaint (Doc. 44 at 4 n.1), but a review of
the citations in their statement of facts reveals that all but a handful are to their exhibits
(see id. at 4-14). Unsurprisingly, much of their argument relies on the exhibits as well.
Because the stricken portions of defendants’ brief are so prevalent, the court cannot
consider the motion as presently briefed.
Motions to dismiss, even in Private Securities Litigation Reform Act cases, must
focus on the allegations in the complaint rather than on documents that essentially convert
the motion into one for summary judgment. Because the defendants’ motion to dismiss
depends so heavily on documentary support that the court is striking, the motion to dismiss
as briefed must be denied.
AMENDED COMPLAINT
The court has ongoing concerns about the prolixity of the Amended
Complaint—sixty-one pages, with 173 numbered paragraphs. See UPS Store, Inc. v.
Hagan, No. 14cv1210, 2015 U.S. Dist. LEXIS 36971 (S.D.N.Y. Mar. 24, 2015) (addressing
a 175-paragraph complaint and 1263-paragraph amended answer). Federal Rule of Civil
Procedure 8 requires “a short and plain statement of the claim showing that the pleader
is entitled to relief.” The Amended Complaint is repetitive in many respects. Allegations
regarding the adjustments and restatements of financial information could have been more
concise, block quotes could have been shortened, and repetitive quotations from the Form
10-Qs might have been avoided. In the event defendants choose to answer the Amended
Complaint rather than filing a new motion to dismiss, the court wishes to avoid an equally
lengthy answer. Consequently, before defendants answer the Amended Complaint,
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see Fed. R. Civ. P. 12(a)(4), the parties must attend a conference to discuss pleadings and
further proceedings in this case.
CONCLUSION
Therefore,
IT IS ORDERED that plaintiffs’ motion to strike (Doc. 50) is granted.
IT IS FURTHER ORDERED that defendants’ motion to dismiss (Doc. 43) is denied
without prejudice.
IT IS ORDERED that the parties participate in a status conference set for April 29,
2015, at 3:00 p.m., in Courtroom 222, 517 E. Wisconsin Avenue, Milwaukee, WI 53202.
The parties are to notify the court within two weeks regarding whether out-of-town counsel
will participate in the status conference. If so, the conference may be conducted by
telephone at the parties’ request.
Dated at Milwaukee, Wisconsin, this 31st day of March, 2015.
BY THE COURT
/s/ C.N. Clevert, Jr.
C.N. CLEVERT, JR.
U.S. DISTRICT JUDGE

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