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(Article from Securities Law Alert, March 2018) 

For more information, please visit the Securities Law Alert Resource Center

On March 8, 2018, the Middle District of Tennessee dismissed in its entirety a securities fraud action alleging that a low-cost retailer misrepresented the business impact of the expiration of government benefits received by certain of its customers. Iron Worker Local Union No. 405 v. Dollar General Corp., Nos. 3:17 CV 63, 3:17 CV 275, and 3:17 CV 276 (M.D. Tenn. 2018) (Zouhary, J.).[1] The court rejected plaintiffs’ contention that defendants should have known that the benefits expiration “would have the same, foreseeable impact” as a “very different” benefits reduction several years prior. The court further held that plaintiffs could not plead scienter based on defendants’ access to data that allegedly would have shown the financial impact of the benefits expiration, absent allegations that the data had been analyzed and reported to senior management.

Plaintiffs Failed to Allege That Defendants Should Have Predicted and Disclosed the Negative Impact of the Benefits Expiration

Plaintiffs claimed that a number of statements made by the company’s CEO in March and May 2016 were misleading in light of an expiration of benefits for certain recipients of the federal government’s Supplemental Nutritional Assistance Program (SNAP) earlier that year (the “2016 Expiration”). Plaintiffs contended that the CEO should have addressed the actual and expected financial impact of the 2016 Expiration because an across-the-board reduction in SNAP benefits in 2013 (the “2013 Reduction”) had an adverse effect on the company’s sales.

The court held that even though the 2016 Expiration may have ultimately resulted in reduced sales, plaintiffs did not adequately allege that the company “could or should have predicted that result” based on the 2013 Reduction. The court pointed out that plaintiffs themselves “acknowledge[d] that the 2013 Reduction was very different from the 2016 Expiration.” The court found plaintiffs alleged “no facts supporting an inference that [the company] should have forecasted the same result in 2016 as in 2013.”

Plaintiffs Could Not Plead Scienter Based Solely on Defendants’ Access to Real-Time Financial Data 

During an analyst call on May 26, 2016, the CEO indicated that the company’s “core consumer” was “probably about the same” as she was “coming out of Q4.” Plaintiffs contended that this statement was materially misleading because the 2016 Expiration had already begun to impact sales by that point. Plaintiffs alleged that the CEO knew or should have known of the sales decline because the company employed “Moneyball”-style data analytics, which allegedly provided the CEO with “access to critical sales information at all times.”

Plaintiffs attempted to bolster this claim by pointing to the CEO’s August 2016 statement that “you could see it immediately in the numbers.” The CEO made this statement on the same day that the company issued a press release reporting lower-than-expected second quarter sales that the company attributed in part to “a reduction in both SNAP participation rates and benefit levels.”

The court found plaintiffs’ allegations insufficient to plead scienter. Although plaintiffs claimed that the CEO had access to real-time financial data, plaintiffs did “not allege that anyone in the [c]ompany actually analyzed or reported the impact of the 2016 Expiration to senior management before [the May 2016] call.” The court also held that plaintiffs could not rely on the CEO’s August 2016 statement to support an inference of scienter. The court explained that “a statement made with the benefit of hindsight does not plausibly suggest either [the CEO or the company] was actually aware of the negative trend at the time of the May 26 conference call.” 

CEO’s Statements Were Not Misleading When Considered in Context

Plaintiffs challenged as misleading a number of the CEO’s statements concerning the company’s “core customer.” The court found plaintiffs’ claims rested on the “unwarranted factual inference[ ]” that the company’s “core customers” were those who lost benefits in the 2016 Expiration. The court explained that “those individuals made up only a small portion (about 2%) of all SNAP participants, [and] a correspondingly smaller percentage of [the company’s] ‘core customers.’”

The court found that the other alleged misstatements were either inactionable corporate optimism, or “inherently forward looking.” The court emphasized that when considering whether a statement is misleading, “[c]ontext matters.” The court explained that “[i]t is [p]laintiffs’ responsibility to connect the dots,” which the court found plaintiffs here failed to do.