Upload
others
View
1
Download
0
Embed Size (px)
Citation preview
IN THE UNITED STATES DISTRICT COURTFOR THE EASTERN DISTRICT OF PENNSYLVANIA
- - -
DAVID SCHWARTZ, : CIVIL NO. 13-05978 Individually and on Behalf :of all Others Similarly :Situated, : : : Plaintiff, : : : v : : : :URBAN OUTFITTERS, INC., :RICHARD A. HAYNE, FRANK :J. CONFORTI, TEDFORD G. :MARLOW, DAVID W. McCREIGHT :and DAVID HAYNE, : : Philadelphia, Pennsylvania : September 19, 2014 Defendants. : 1:51 p.m.
- - -
TRANSCRIPT OF HEARINGBEFORE THE HONORABLE L. FELIPE RESTREPO
UNITED STATES DISTRICT JUDGE
- - -
APPEARANCES:
For the Plaintiff: JESSE S. JOHNSON, ESQUIRE STEPHEN R. ASTLEY, ESQUIRE Robbins Geller Rudman & Dowd, LLP 120 East Palmetto Park Road Suite 500 Boca Raton, FL 33432
DEBORAH R. GROSS, ESQUIRE Law Offices of Bernard M. Gross, PC 100 Penn Square East John Wanamaker Building, Suite 450 Philadelphia, PA 19107
Transcribers Limited17 Rickland DriveSewell, NJ 08080
856-589-6100 - 856-589-9005
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 1 of 53
2
APPEARANCES: (continued)
For the Plaintiff: COREY D. HOLZER, ESQUIRE Holzer & Holzer, LLC 1200 Ashwood Parkway Suite 410 Atlanta, GA 30338
For the Defendants: MARC J. SONNENFELD, ESQUIRE KAREN PIESLAK POHLMANN, ESQUIRE JASON H. WILSON, ESQUIRE Morgan, Lewis & Bockius, LLP 1701 Market Street Philadelphia, PA 19103-2921
GLEN A. BODZY, ESQUIRE MICHAEL D. SILBERT, ESQUIRE Urban Outfitters, Inc. 5000 South Broad Street Philadelphia, PA 19112-1495
- - -
Audio Operator: Nelson Malave
Transcribed by: Donna M. Anders
- - -
Proceedings recorded by electronic soundrecording, transcript produced by computer-aidedtranscription service.
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 2 of 53
3
(The following was heard in open court at 1:511
p.m.)2
THE COURT: Sit down, please.3
I just want to make it clear that4
notwithstanding the fact that Chelsea Stine allowed5
everybody into the room, she is one of my law clerks. 6
She recently left Morgan but she’s not working on this7
case, will not work on this case, and I will not discuss8
this case with Ms. Stine.9
Any questions about Ms. Stine?10
MR. SONNENFELD: No.11
MR. JOHNSON: No, sir.12
THE COURT: All right. Okay. So this is13
defense counsel’s motion. Let me hear from defense14
counsel.15
MR. SONNENFELD: If I may proceed, Your Honor,16
I’m Marc Sonnenfeld from Morgan, Lewis and Bockius17
representing the defendants. With me at counsel table18
are my colleagues Karen Pohlmann and Jason Wilson.19
Sitting behind them is Glen Bodzy who is the20
general counsel of the defendant, Urban Outfitters, and21
next to him is Michael Silbert who is the associate22
general counsel.23
This is a claim for alleged violations of the24
Federal Securities Law, Section 10b and 20(a) of the25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 3 of 53
4
Securities Exchange Act of 1934. This case is notable,1
I would submit, Your Honor, for the absence of the2
indicia of fraud that usually accompany a securities3
fraud case. 4
Typically a securities fraud case follows the5
announcement of large problems, such as a restatement, a6
bankruptcy, an indictment, an FDA finding not to approve7
a drug. Here this lawsuit followed the announcement of8
good news as I’ll explain.9
Urban Outfitters last year announced record10
results -- and those two words, record results, are11
important -- record results for the time period through12
July 31st, 2013, more than half of the so-called class13
period. 14
Plaintiff concedes that the Urban Outfitters’15
brand which is one of the Urban brands which plaintiff16
claims was troubled, had comparable store sales that17
increased by six percent and five percent for the first18
and second quarters of 2014, which goes through July of19
2013, and for the fiscal year of 2014, rather, which20
were in 2013 at a time when the competitors were21
struggling and had double digit declines.22
THE COURT: Sorry. Ma’am, are you here for23
the Urban Outfitters’ case?24
(Pause in proceedings.)25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 4 of 53
5
MR. SONNENFELD: The results for the Urban1
Outfitters’ brand were disclosed when the quarterly2
results were announced during the putative class period,3
so there was nothing secret about that. 4
This suit was filed because in the middle of5
the third fiscal quarter of 2014, on September 9th,6
2013, the company stated in an SEC filing that, "Thus7
far during the third quarter of fiscal 2014, comparable8
retail segment net sales are mid-single digit positive." 9
And those are the mid-single digit positive.10
The market apparently had been expecting high11
single digit positive, and Urban Outfitters’ stock price12
declined, but this was just a mid-quarter update and13
ultimately Urban Outfitters did report record sales for14
that quarter which ended October 31st of 2013 and high15
single digit results for the third fiscal quarter of16
2014. In other words, unlike most securities fraud17
cases, the company had not imploded, it had done well.18
Now, having made this brief introduction, I’d19
like to discuss briefly the heightened pleading standard20
that applies here. In evaluating the sufficiency of the21
plaintiff’s complaint, it’s very important to keep in22
mind that this is a securities fraud claim to which the23
heightened pleading requirements of the Private24
Securities Litigation Reform Act of 1995 apply. That25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 5 of 53
6
makes the pleading standard here different from every1
other kind of civil litigation of which I’m aware.2
The plaintiffs’ averments are not just tested3
against the Iqbal and Twombly standard for plausibility. 4
Under the PSLRA’s heightened standards which are even5
higher than Rule 9(b), the plaintiff must plead6
particularized facts based on reliable sources that7
survive the motion to dismiss. The PSLRA was enacted in8
1995 --9
THE COURT: Let me ask you, because10
plaintiff’s counsel is going to stand up here and tell11
me that those particularized facts begin at paragraph12
87.13
MR. SONNENFELD: Well, we would say that the14
particularized facts are not particularized, and they’re15
not particularized because they simply state in16
conclusory terms that -- well, let me say, they rely17
upon the testimony of so-called confidential witnesses. 18
They don’t tie the facts to any witness. 19
THE COURT: Well, the confidential witnesses20
are identified as the store managers at the various21
stores.22
MR. SONNENFELD: They’re identified by the23
store managers.24
THE COURT: I understand you have a problem25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 6 of 53
7
with the Milwaukee manager who wasn’t there at the1
relevant time.2
MR. SONNENFELD: Right. But --3
THE COURT: So let’s discount that for the4
moment. What do you make of the statements or the facts5
as it were tethered to the testimony of the other store6
managers? Is that enough?7
MR. SONNENFELD: That’s not enough, Your8
Honor.9
THE COURT: Why not?10
MR. SONNENFELD: It’s not enough, and when you11
look at the other cases, you look at the -- for example,12
the Avaya case which is the leading case after the13
Supreme Court decided Tellabs, you look at the more14
recent case in the KidsCare, Kids case, the witnesses15
are tethered to the facts. They deal with a degree of16
specificity. They tell how much things were off. 17
Here you have three store managers, 50018
stores, you have two on the West Coast and one on the19
East Coast here. Nothing to say that these are20
generalized trends and nothing -- and this is21
particularly important to show -- that any of them had22
any communications with the senior management or with23
the named defendants here. 24
Unlike the other cases, none of them were25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 7 of 53
8
senior managers reporting to the CEO or the CFO. They1
are instead people at the store manager level. One had2
some lower level responsibilities at the home office,3
but none are reporting to the -- you know, to Mr. Hayne,4
the CEO, or to Mr. Conforti who was the CFO or to Mr.5
Marlow who is the -- the group president for the Urban6
brand. And --7
THE COURT: What do I make of the analyst8
statements, if anything?9
MR. SONNENFELD: You don’t make anything of10
the analyst statements, Your Honor, and for this reason. 11
The analyst statements are not statements by the12
company, and we know from the teachings of the Supreme13
Court that the company is not responsible for the14
analyst statements. The company is not responsible15
unless there is some showing that the company was16
intertwined with the analyst statements. 17
And the cases from our Third Circuit that deal18
with analyst statements are legion, and we can even go19
back to the Burlington Coat case by -- opinion by then20
Judge, now Justice Alito saying that -- that the company21
is not responsible for -- you know, for the analyst22
statements.23
And we look at the Supreme Court decision in24
the Janus case, Justice Thomas’ case there. Defendants25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 8 of 53
9
in securities cases are only responsible for the1
statements that they make. 2
And I believe we also have the more recent3
decision by -- I think this is discussed in the4
Cabletron case by the First Circuit and I believe in the5
Swanson case by the Third Circuit, that the issuer is6
not responsible for the analyst statements except in7
rare circumstances where you’re intertwined with the8
analyst statements. 9
We don’t have any of that here. So the fact10
that the analyst may have expected double digit sales,11
that is not -- that is not the fault of the company.12
In fact, if I can make a hand-up here, I think13
this may help put some of this in perspective.14
THE COURT: Thanks. Does plaintiff’s counsel15
have a copy?16
MR. SONNENFELD: I have copies for them.17
(Pause in proceedings.)18
MR. SONNENFELD: I have broken out, and this19
appears in the complaint, what was disclosed by the20
company. 21
And here we see for the fourth quarter of22
2013, we have -- which is the period ending January23
31st, 2014, Urban Outfitters as a whole is up 1124
percent. The Urban brand is up 11 percent. For the25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 9 of 53
10
first quarter of 2014, which ends April 30th, 2013,1
Urban Outfitters as a whole is up nine percent. The2
Urban brand is up six percent. Meanwhile, competitors3
are down 11 percent.4
The second quarter, which is the time period5
ending July 31st, 2013, second quarter, 2014, the6
company is up nine percent. The Urban brand is up five7
percent. Competitors are down 10.66 percent. 8
So all of this information is available. It’s9
all disclosed in the quarterly statements filed by the10
company with the Securities and Exchange Commission11
known as the 10-Qs available to the investing public. 12
And this is all disclosed.13
Then, you know, on September 9th in the middle14
of the third quarter, the company did in a 10-Q filing15
announcing the second quarter results, did say that thus16
far during the third quarter comparable retail segment17
net sales are mid-single digit positive. Most people18
would have applauded that as good news in this industry,19
and apparently the market was expecting double digit20
sales.21
That is not because of the company, and, in22
fact, when the -- when the quarter ended on October 31st23
of 2014 -- of ‘13 -- October 31st, 2013, which is the24
third quarter fiscal 2014, the company as a whole is up25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 10 of 53
11
seven percent even though the Urban brand was down one1
percent and competitors were down 11.33 percent.2
So the question is and what it comes back to3
is, you know, where is the fraud here? It’s almost like4
the Burger King commercial several years ago, where’s5
the beef? And where is -- where is the fraud here? 6
And the suggestion that back in March of 20137
which is the beginning of the class period that Mr.8
Hayne or Mr. Conforti, the CEO and CFO, or Mr. Marlow9
are going to know how sales went or are going to go in10
September of 2013 is -- you know, it’s ridiculous.11
THE COURT: But what, if anything, do I make12
in the plaintiff’s argument that Mr. Conforti and Mr.13
Hayne, and I use their words, I believe they say dumped 14
stock in the amount of about $51 million? 15
MR. SONNENFELD: Well, let me deal with that16
both on a legal basis and on a factual basis. On a17
legal basis, let’s go back if we could to the decision18
in the Burlington Coat Factory by then Judge, now19
Justice Alito, so the opinion takes on a greater20
significance because of the position the author --21
THE COURT: I get that, I get that.22
MR. SONNENFELD: -- the author holds today. 23
In Burlington Coat -- and there are a lot of24
similarities in Burlington Coat and this case, you have25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 11 of 53
12
similar industries and similar allegations, and there1
the dismissal was affirmed. It is a pre-PSLRA case,2
although decided after the enactment of the PSLRA. 3
But what Judge Alito said there was that in4
today’s world much of executive compensation comes in5
the form of stock and stock options. That’s how6
executives are compensated. And the mere fact that7
there was a sale of stock is not enough to, by itself,8
to establish scienter, and in Burlington Coat, Judge9
Alito rejected the allegations of scienter based on10
stock sales.11
The first post-PSLRA decision in the Third12
Circuit to address this principle was the Advanta case,13
a decision by then Chief Judge Scirica of the Third14
Circuit, who reiterated what Judge Alito had said in15
Burlington Coat in rejecting stock sales as a basis for16
finding scienter, that this is how executives are17
compensated and rejected that as a basis for finding18
scienter.19
Now, in Advanta, the Third Circuit said that20
scienter could be established either through motive and21
opportunity which can be shown by -- sometimes by stock22
sales or by extreme recklessness and so forth.23
Along came Tellabs and the world changed after24
Tellabs because Tellabs was the Supreme Court25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 12 of 53
13
pronouncement on how we -- how we show the pleading1
stage scienter. And in the first Third Circuit case to2
address the issue of scienter after Tellabs, which is3
the Avaya case, and, again, Chief Judge Scirica and a4
lengthy decision, Chief Judge Scirica abandoned motive5
and opportunity as an avenue for showing scienter and6
said, therefore, that stock sales alone are not enough7
to show scienter. You need something more, something in8
addition to that.9
Now, let’s -- so that’s the standard and the10
backdrop on stock sales, and we see that reiterated, you11
know, most recently as in the -- the Rahman case12
decision quite recently in the last year, 2013. But13
let’s look at the facts here.14
The CFO, Mr. Hayne, is alleged to have sold15
shares in March of 2013.16
THE COURT: After the report was made,17
correct?18
MR. SONNENFELD: March of 2013 which is --19
THE COURT: March 22nd -- March 25th.20
MR. SONNENFELD: Right, right. This is after21
the report of the -- of the fiscal -- of the end of the22
fiscal year for the fourth quarter of 2013. And, again,23
in that quarter in which the shares -- the sales were24
made, sales were up six percent in the Urban brand, up25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 13 of 53
14
nine percent for the company, up five percent in the1
next quarter for the Urban brand, up nine percent for2
the company. 3
There are no sales by Mr. Hayne after March,4
2013. To suggest -- to suggest that Mr. Hayne in March5
of 2013 knew what was going to happen in September of6
2013 in this industry is ridiculous. 7
I mean, just as an aside, where my father had8
a clothing store on Germantown Avenue. We lived above9
it until I was seven years old. He had one store to10
manage. 11
The thought that he would have known in March12
of a year what sales would be in September with one13
store to manage is ridiculous, much less here to think14
that Mr. Hayne, presiding over 500 stores in disparate15
locations would know what sales would be six months16
later, to attribute any -- any scienter to a sale made17
six months before the so-called truth comes out in the18
words of the plaintiffs, six months before the September19
9th announcement, is just ridiculous.20
Another fact about Mr. Hayne that appears in21
the publically filed documents, if you look in the22
proxy, and I think this is consistent with the teachings23
by Judge Alito in Burlington and reiterated by Judge24
Scirica in the Advanta and Avaya cases, Mr. Hayne25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 14 of 53
15
doesn’t get a salary. He gets a dollar a year. He gets1
his stock, and he sold some stock to do things we do2
with our compensation, but that’s the form of3
compensation. 4
And I think what Judge Alito said about5
compensation in Burlington and Judge Scirica said in6
Avaya is certainly borne out by how Urban Outfitters7
compensates Mr. Hayne here. 8
So the fact that he sold some shares six9
months before the so-called truth comes out in the words10
of the plaintiff, I think is just a leap of faith to tie11
that -- and I would suggest that that would be12
inconsistent with how the issue of stock sales has been13
treated by the Third Circuit consistently even up14
through the Rahman decision last year by Judge15
Greenberg, so -- also affirming the dismissal of the16
10b-5 class action.17
As to Mr. Conforti, one thing that the18
plaintiffs overlook as to Mr. Conforti, and he is the19
CFO, is that Mr. Conforti exercised options. So for20
each of the options that he exercised, he had to pay21
what’s called a strike price and then there’s an22
exercise price, the price at which the options were23
exercised. 24
This all appears on Mr. Conforti’s Form 4s25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 15 of 53
16
which we attached as Exhibit 12 to our motion to1
dismiss. That’s a form filed with the SEC after an2
officer sells shares. 3
And if you look at the Form 4s for Mr.4
Conforti, you’ll see that each of these was the exercise5
of options. They were options that had been vested over6
a five-year period. And when you subtract the strike7
price from the exercise price and total up the sales,8
you come to some $200,000, which is far less than what9
the plaintiffs are attributing was the profit. The10
profit was some $200,000 and you divide that over a11
five-year period and you look at Mr. Conforti’s level of12
compensation to be the CFO of a public company. 13
And, again it reflects the teachings of Judge14
-- of Judge Alito when he decided -- now Justice Alito15
in Burlington and Judge Scirica that this is how16
executives are compensated, and this is not, you know, a17
staggering amount of money. 18
So -- and, again, I believe that the stock19
sales by Mr. Conforti, there was a sale of a small20
amount in, I believe, April, and then some others, you21
know, in September. But, again, very -- you know, very22
small amounts. So -- and, again, if you -- if you go23
back to the hand-up and you look at the chart here, it’s24
not like bad news. 25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 16 of 53
17
I mean, the plaintiffs like to make a big deal1
out of, among other things, the ViroPharma case. It’s a2
recent decision by Judge Jones. There, ViroPharma3
ultimately had to announce that it didn’t get FDA4
approval to extend the period of exclusivity for its5
lead -- its lead drug that it manufactured. That’s bad6
news. 7
And the issue in ViroPharma was, well, you8
knew the FDA wasn’t going to give you exclusivity9
plaintiffs alleged. You knew that you were told five10
times by the FDA you weren’t going to get exclusivity,11
and here are six documents the plaintiff said in12
ViroPharma where the FDA told you that you weren’t going13
to get exclusivity, and, nonetheless, you made these14
optimistic statements about getting exclusivity. 15
We don’t have any of that here. We don’t have16
-- and this goes back to your question on particularity17
-- we don’t have any documents -- we don’t have any18
documents tying the plaintiffs, unlike the half dozen19
documents that Judge Jones cited in ViroPharma. We20
don’t have documents. 21
We don’t have anything other than the22
untethered conclusions that the plaintiff puts in often23
without even tying them to a specific former employer --24
just saying former employee said, and the particular --25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 17 of 53
18
not showing how any particular former employee would1
have had reason to know any -- any particular fact. 2
I think I might have cut you off. I’m sorry,3
Your Honor. 4
THE COURT: No, no. At the end of the day,5
what you’re telling me is the news was -- was not as6
good as it was expected, and that doesn’t lead us to7
action -- something that can be sued over.8
MR. SONNENFELD: That’s right. It was not as9
good as could be expected. It doesn’t render false10
anything that the company had said in the past. I think11
what the plaintiffs have said is, well -- instead of12
making -- even if it’s not in the statement case, the13
plaintiffs may say, well, it’s an omission case. But14
what was -- you know, what was omitted? 15
The company had disclosed what it’s required16
to disclose. It had its quarterly filings with the SEC17
which broke down sales among other metrics, you know, by18
brand, by quarter, that was available. Everything on19
this chart was available to the -- to the investing20
public. And even as it was for the quarter, they wound21
up up seven percent for the company as a whole.22
THE COURT: So what’s the right answer here?23
MR. SONNENFELD: Well, the right answer, Your24
Honor, is the case should be dismissed.25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 18 of 53
19
THE COURT: With or without prejudice?1
MR. SONNENFELD: Well, that’s also a good2
question. I would say it would depend upon the basis on3
which the Court were to dismiss.4
THE COURT: You put me in -- you’re the5
expert.6
MR. SONNENFELD: Okay. I would -- I would7
have to concede, Your Honor, that if the case were8
dismissed for a lack of particularity for having to meet9
-- having failed to meet the pleading standard, if, for10
example, they had not pled fraud with the particularity11
required by the PSLRA or hadn’t pled a strong inference 12
of scienter as required by the PSLRA and the teachings13
of Tellabs and Avaya, if that were the basis, then the14
plaintiffs would be entitled to leave to replead in15
order to try to meet that pleading standard.16
On the other hand, if the Court were to17
dismiss on a variety of other bases which are not18
curable by amendment, then the dismissal, we would urge,19
should be with prejudice. If, for example, we challenge20
some of the statements as being puffery, and that’s a21
term that’s used here -- the statement’s just puffery22
and it’s not capable of having -- being the basis of a23
securities fraud case, well, the statement remains what24
it is. Amendment wouldn’t cure that. 25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 19 of 53
20
We challenged some of the statements on the1
basis of the PSLRA safe harbor for forward-looking2
statements. If the Judge, if Your Honor were to -- or3
the Judge in any case were to grant a motion to dismiss4
based on the -- the safe harbor of the PSLRA, then I5
would submit that’s not curable by amendment, and,6
therefore, leave to amend would not be required. 7
So I think a simple answer to your question is8
it depends upon the basis for dismissal, but if the9
basis for dismissal were the failure to meet the -- the10
heightened pleading requirements, as much as I’d like to11
say the plaintiffs are on their second bite of the12
apple, because they had an original complaint and an13
amended complaint, I think the -- I would not want to14
invite the Court into an error, but --15
THE COURT: Would you suggest that maybe it16
would be futile?17
MR. SONNENFELD: I would suggest it would be18
futile, and it certainly would be futile if the19
dismissal were on the basis of the safe harbor or20
puffery or a variety of other bases that we have made in21
our motion. I would --22
THE COURT: Could these -- could the pleadings 23
in this, because they’re not particular enough, could24
they be recast and make it particular enough to do what25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 20 of 53
21
we have to?1
MR. SONNENFELD: You know, I don’t know what 2
-- I’d say what they have here, no, based on what they3
have here, no, they couldn’t be recast. 4
But remember the legendary lawyer, Nate5
Richter, if you remember, he was a personal injury6
lawyer, he died just before I clerked for Judge Lord on7
this Court and Judge Lord had been one of his partners8
and told this story where Nate Richter had a slip and9
fall case before the Superior Court of Pennsylvania.10
The law in Pennsylvania at the time was in11
order to recover for a slip and fall you had to show12
that there were hills and ridges on the ice which would13
have put the property owner on notice. 14
And there was nothing in the record about15
hills and ridges, and Mr. Richter appealed, and the16
argument in the Superior Court, the panel said to Mr.17
Richter, well, it’s not in the record. What good is it18
going to do if we give you a new trial? And he said,19
you give me a new trial and I’ll find hills and ridges.20
So I -- I have never been able to fail to be21
amazed by the inventiveness of the plaintiffs. So I22
would submit an amendment would be futile, but I’m sure23
that when they stood up, they would give you reasons why24
an amendment would not be futile. And they would point25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 21 of 53
22
to cases where, in the event of the failure to meet the1
heightened pleading requirements at least in the first2
instance, the plaintiffs were given a chance at the bat3
to try again, although it would be in this instance4
their third bite at the apple. So -- okay.5
THE COURT: Thank you, sir.6
MR. SONNENFELD: -- so I could go on, but I7
think if that -- if that --8
THE COURT: I think you’ve answered my9
question.10
MR. SONNENFELD: Okay. One other point I will11
point out as well, if I could, is the plaintiff here is12
an individual who purchased 100 shares. This isn’t like13
many of the securities cases these days that are brought14
by institutional plaintiffs with large holdings. This15
is a plaintiff with 100 shares. 100 shares is six16
hundred thousandths of a percent of the 146 million17
shares that are outstanding. This really is an18
infinitesimal amount of stock.19
THE COURT: So what do I make of that?20
MR. SONNENFELD: It’s just --21
THE COURT: What if I just --22
MR. SONNENFELD: -- it’s a point of23
practicality here. It’s simply -- it’s simply a point24
of practicality to this, and it -- it just demonstrates25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 22 of 53
23
that we’re off on an exercise that makes no economic1
sense. 2
Thank you, Your Honor.3
THE COURT: Thank you.4
(Pause in proceedings.)5
THE COURT: Good afternoon.6
MR. JOHNSON: Your Honor, good afternoon, may7
it please the Court, my name is Jesse Johnson. I’m with8
the law firm of Robbins, Geller, Rudman and Dowd.9
THE COURT: Right.10
MR. JOHNSON: We are the Court appointed lead11
counsel in this action. We represent -- I’m sorry. 12
With me today is Stephen Astley also of Robbins, Geller,13
Deborah Gross of the law offices of Bernard M. Gross --14
THE COURT: How are you?15
MR. JOHNSON: -- and also Corey Holzer of16
Holzer and Holzer.17
THE COURT: How are you?18
MR. JOHNSON: We represent the lead plaintiff19
here who is Mr. David Schwartz. Mr. Schwartz invested20
his hard-earned money into the common stock of Urban --21
of Urban Outfitters. 22
Your Honor, respectfully, I would -- I would23
think it’s a bit tacky to suggest that even a 100 share24
purchase by Mr. -- by Mr. Schwartz is somehow not good25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 23 of 53
24
enough to bring an action.1
THE COURT: I don’t think that’s what counsel2
suggested. I think I understand what he suggested. So3
let’s talk about the specificity or lack thereof.4
MR. JOHNSON: Sure, Your Honor.5
THE COURT: So point to me with some clarity,6
start at paragraph A, what specific misrepresentations7
do you attribute to the defendant and not to the8
analysts. I have other questions about the analysts. 9
MR. JOHNSON: Understood.10
THE COURT: So very specifically, what was11
misrepresented by the defendants? 12
MR. JOHNSON: I’d be happy to, Your Honor.13
Just to take a step back for one second,14
leading -- so the class period begins on March 12th,15
2013, and it goes through September 9th of 2013. 16
There’s references earlier, Urban Outfitters is a17
retailer. Like many retailers do, its fiscal year18
starts -- or, I’m sorry -- ends on January 31st. So19
even though we’re in the year 2013, there was the first20
quarter and the second quarter of fiscal year, 2014.21
THE COURT: Right. 22
MR. JOHNSON: And so Urban Outfitters has a23
number of brands under the corporate umbrella. The24
Urban Outfitters’ Namesake Brand is the center of the25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 24 of 53
25
fraud here. It’s the largest of -- they have five1
brands -- of the even the three larger brands. To give2
you an idea, Your Honor --3
THE COURT: I read the complaint. I get it.4
MR. JOHNSON: Okay. Fine.5
THE COURT: Let’s get -- tell me with6
specificity what was the -- what misrepresentations do7
you rely on?8
MR. JOHNSON: Understood. So with9
specificity, and I’m happy to point Your Honor to a few10
examples.11
THE COURT: Yes.12
MR. JOHNSON: So, for instance, on -- this is13
paragraph 94, on March 11th of 2013 --14
THE COURT: Hold on. 15
MR. JOHNSON: Sure.16
THE COURT: 94. Okay. 17
MR. JOHNSON: Defendant Hayne stated, "I would18
say overall sales trends continue to be strong and very19
much like what we saw in the fourth quarter and in the20
holiday sales, and Urban," meaning the Urban brand, "is21
basically on par with what we saw in the fourth22
quarter."23
Now, Your Honor, what’s going on here is that24
the Urban Outfitters’ brand is coming off a very solid25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 25 of 53
26
fourth quarter of 2013 and that’s leading into --1
THE COURT: Paragraph 94.2
MR. JOHNSON: 94, Your Honor. I’m sorry, 94.3
THE COURT: I’m at 94.4
MR. JOHNSON: This is defendant Hayne.5
THE COURT: Yes. Is --6
MR. JOHNSON: It’s during a -- I would say7
overall --8
THE COURT: Okay. "Sales trends continue to9
be strong"?10
MR. JOHNSON: Correct, correct. So that’s11
what I’m pointing the Court to right now.12
THE COURT: So that -- and you’re telling me13
that the sales trends at that point were not strong?14
MR. JOHNSON: That’s correct, Your Honor. In15
the -- in the complaint, we’ve spoken to numerous former16
-- former employees of the Urban Outfitters’ brand. 17
These are store managers, department managers. 18
These are major metropolitan areas throughout19
the country. We’re talking New York, New Jersey, Los20
Angeles, California, even the Midwest in Milwaukee. All21
of these employees reported the same thing to us, they22
all saw these -- these struggling trends at the store23
level, and that began in early 2013. 24
So in other words, Your Honor, you’re coming25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 26 of 53
27
off in the Urban brand a very strong fourth quarter and1
the defendants are bragging going into March that the2
sales momentum was continuing, and in reality, what3
these -- what these employees are telling us is that the4
sales trends had actually started to decline going into5
this -- going into the class period.6
THE COURT: Your papers, I think, suggest --7
there are 500 stores, 500 retail --8
MR. JOHNSON: Well, Your Honor, the entire9
company may very well have 500. The Urban brand has10
about 230 stores. Of those 230 stores, about 175 are11
located in the U.S. Another 15 are in Canada. So North12
America has 190 of the 230 stores. That was as of the13
most recent Form 10-K filed in April of this year.14
THE COURT: And you have four in the --15
MR. JOHNSON: Your Honor, we have what I would16
-- what I would say is a representative sample, and it’s17
also important, Your Honor, to keep in mind, so we’ve18
only got witnesses from a handful of stores, fair19
enough. But, Your Honor, these witnesses have access,20
like all Urban Outfitters’ employees to an internal21
computer system called the Intranet. 22
Now, that Intranet connects all of the stores23
together around the country, North America, even the24
world, and what it shows in the Intranet is it shows25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 27 of 53
28
every day updated daily sales figures. And so any1
employee from any store can access the Intranet on the2
computer within the store and they can see not only3
their store sales but also sales at other stores across4
town --5
THE COURT: Show -- where is that in the6
complaint?7
MR. JOHNSON: I’m sorry. So this -- you can8
find this at paragraphs 68 to 73, and in those9
paragraphs, Your Honor, it explains how the Intranet --10
not Internet but Intranet is set up and it explains the11
information available on that Intranet system. And so12
the employees that we spoke to could see not only their13
store sales but also sales throughout the rest of the14
company at all the other stores. 15
In fact, there was what was called an Urban16
sales page which was an aggregate of the total sales17
within the company right there on one page. You could18
see all of the North American segment, European segment,19
right there for everyone to see. 20
And so, Your Honor, when, back in March, when21
defendant Hayne is saying overall sales trends are22
great, continue to be very strong, in fact, we’ve been23
told by the witnesses and we’ve put in detail in the24
complaint that that really was not the case.25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 28 of 53
29
Moving on to another example of a false1
statement, Your Honor, at paragraph 95, and this is also2
March 11, defendant Hayne again. He says, "There is no3
reason to believe that we couldn’t see a continued4
decrease in markdowns."5
So right now he’s speaking to gross margins. 6
Urban Outfitters is coming to the market saying that7
their profitability is as great as ever and that the8
gross margins are up and the markdowns -- they don’t9
have to institute as many sales. 10
Again, Your Honor, on the Intranet, every week11
there’s a newsletter called "The Slant". It’s -- and12
this is in the complaint. This is at -- again, within13
paragraphs 68 to 73, and "The Slant" would disseminate14
on a weekly basis what sales and promotions were being15
dictated by the corporate executives here in16
Philadelphia at the corporate offices, and that would go17
to all the stores. 18
And our witnesses also told us that beginning19
in 2013 continuing through the year that "The Slant" was20
dictating greater markdowns, more promotional campaigns,21
greater sale activity, and, again, this is to compensate22
for the declining sales trends that the stores were23
seeing. And, again, Your Honor, everyone had access to24
the Intranet, to "The Slant" and including the25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 29 of 53
30
individual defendants would have access to the same1
system.2
Excuse me. Another example for a false3
statement for you, sir. Defendant Marlow on -- this is4
paragraph 98, and this is March 11, 2013. 5
"So I think we are in a pretty healthy place6
right now, and I like it the way the trends that we see7
in the market fashion-wise marry with the stories that8
we are telling at point of sale."9
What defendant Marlow is saying is that we10
have the right product mix, the right fashion assortment11
in our stores and it’s resonating with the consumer. 12
And, in fact, as I’ve just explained, the sales trends13
and the need for markdowns and the need for promotional14
activities says just the opposite.15
Another statement, Your Honor, on paragraph16
103, and this is from a UBS retail industry conference17
on March 13th. This is defendant Conforti. Again18
referring to the product mix, "Both Urban Outfitters and19
Anthropologie will tell you that they, as we talk about20
the archery target, that they are on target now."21
And then quickly, Your Honor, just a couple22
more examples. At paragraph 120, and this is the middle23
of the class period, this is May 20th of 2013. Again,24
defendant Marlow, "In regard to the overall content of25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 30 of 53
31
the Urban brand mix" -- again, the fashion mix -- "we1
had good performance out of the fashion businesses in2
North America and in Europe."3
And then again, one last example, Your Honor,4
paragraph 133, and this is from late in the class5
period, from August 19th, defendant Hayne in talking6
about the second quarter financial results.7
"Turning to profits, higher sales, better8
initial margins, more compelling product and effective9
expense control all combined to create record earnings. 10
The improvements in product led to higher full price11
sell-throughs and lower merchandise markdowns."12
Again, that stands in contrast to what the13
witnesses are telling us what was going on on the ground14
level, among the stores and what was obvious from the15
sales data available on the Intranet. 16
And, Judge, these -- we know that these17
statements were material -- I know that was brought up18
before -- these statements were material to the market19
and the analysts proved so. These analysts that are20
following the company’s stock day in and day out,21
quarter in, quarter out, they’re issuing reports every22
quarter or so, after every, you know, earnings release,23
after every 10-Q. They consistently pointed and praised24
the fact that Urban Outfitters as a company and Urban25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 31 of 53
32
Outfitters as a brand was performing very strongly. 1
They highlighted the comparable sales growth,2
which I haven’t explained that yet. Sorry, it’s in the3
-- it’s in the amended complaint. This is at paragraphs4
38 to 42. Comparable sales growth is a key measure in5
the retail industry. 6
What it does is, it -- it shows the organic7
growth occurring within the organization. So, in other8
words, you factor out any growth from new store9
openings, from acquisitions, from remodeling stores to10
make them bigger. You’re looking at one store base from11
one year, that same store base the next year, how much12
have the sales grown? That’s the comparable. It’s even13
called the same store’s growth or even comps.14
And so what was going on here is that the15
analyst reports quarter in and quarter out were16
highlighting that Urban Outfitters’ comps were much17
higher, you know, counsel had from the complaint what18
the numbers broke down in terms of the company, the19
brand and its competitors. 20
The numbers were much higher than the21
competitors, and the analysts praised the company for22
the fact that it was able to rise above the quagmire of23
the teen retail market during the class period because24
its fashion content was selling, its product mix was on25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 32 of 53
33
the mark, all these various things that the market was1
being told by the defendants. 2
And in terms of materiality, Your Honor, the3
question is whether the disclosure of an omitted fact4
would have been viewed by the reasonable investor as5
having significantly altered the total mix of6
information. That comes from the Supreme Court’s recent7
case, Matrixx Initiatives vs. Siracusano. 8
Here, Your Honor, the real sales trends going9
on, the real markdowns, the real promotional activities,10
those were all very material. And these are investors11
looking to invest in a retail company. It’s very12
important to know if that company is, in fact,13
maintaining sales growth, hitting the right marks with14
their -- with their product line and getting their15
customers in the door. 16
And investors were led to believe just that. 17
The analysts confirmed it as they -- and if I could just18
highlight for you a few of the analysts’ statements19
during the class period.20
On March 12th, it’s the beginning of the class21
period, this is paragraph 62(b). Janney Capital Markets22
wrote, "We believe the trends for spring are squarely in23
Urban Outfitters’ sweet spot." Again, that’s paragraph24
62(b), Your Honor.25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 33 of 53
34
Moving further into the class period, on May1
21st, RBC Capital Markets --2
THE COURT: You’re telling me that these3
analysts relied on misrepresentations?4
MR. JOHNSON: Correct. They -- correct. The5
defendants would have the market believe that coming off6
a strong -- a strong holiday sales, you know, period in7
December and January, that that momentum carried right8
on through the class period. And this is at a time when9
there was no momentum whatsoever in the teen retail10
market which is the Urban Outfitters’ demographic, the11
brand demographic. 12
Free People and Anthropologie skew strictly to13
a female clientele, strictly to women and typically14
older in their late twenties, thirties, forties. So the15
market forces are much different for Free People and for16
Anthropologie versus the Urban Outfitters’ brand. 17
And so while its competitors in the malls,18
companies like Abercrombie and Fitch, Aeropostale, these19
are the competitors we have in the complaint, they had 20
-- they were averaging quarterly comparable sales growth21
of negative 11 percent. Their business was contracting. 22
At the same time, the defendants are saying that Urban23
Outfitters’ brand business is -- is great, has continued24
momentum, you know, great margins and that the product25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 34 of 53
35
assortment was right on the mark.1
THE COURT: So the purpose of including the 2
analysts’ comments as it were as was suggested, they3
were relying on misrepresentations by the defendants? 4
MR. JOHNSON: Yes, Your Honor. It shows the5
materiality, which is the first element in the 10b6
claim, that these statements were material and that7
investors were absolutely paying attention to these8
statements.9
And if I could, Your Honor, turning to the10
second element of the 10b claim which would be scienter. 11
Here, given what the -- the witnesses have told us,12
there can be no doubt the defendants either knew or they13
were reckless in not knowing which does suffice for14
pleading scienter, in not knowing that --15
THE COURT: Knew what?16
MR. JOHNSON: I’m sorry?17
THE COURT: Knew what?18
MR. JOHNSON: They -- they knew of the Urban19
brand struggles throughout the class period, from March20
all the way through September. They knew -- and there’s21
numerous indicia that have been pled into the amended22
complaint. 23
Again, at paragraph 68 to 73, the detail I24
previously went over about what was available on the25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 35 of 53
36
Intranet and what the store managers or the department1
managers saw. They saw weakening sales performance2
beginning in early 2013. They saw stores consistently3
unable to meet their sales targets. 4
They saw increased promotional activities and5
markdowns to the extent where one of the former managers6
thought that, given how many more markdowns and7
promotions there were, that the entire culture of the8
Urban Outfitters that he had known had now changed. 9
They saw that promotions were frequently being10
extended on the back end and even started earlier than11
expected. For instance, a three-day sale may turn into12
a six-day or a week-long sale because they were trying13
to counteract these declining sales trends. 14
They were trying to somehow get this product15
off the shelves, and, in fact, the witnesses also16
reported that they had storerooms, they had overflowing17
sale racks. They didn’t have enough racks for the sale18
items. They had product bursting at the seams, coming19
out of closets and out of back storerooms. And they20
reported just a general desperation by managers that --21
that things just were not going well and that somehow22
they needed to pick up the business. 23
And, again, defendants would have known about24
this through the data available on the Intranet. They25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 36 of 53
37
would have known about the markdowns and the promotional1
campaigns necessary during the class period because they2
-- those very markdowns and promotional campaigns3
emanated from corporate headquarters here in4
Philadelphia and were sent to the stores using the5
Intranet.6
Also, Your Honor, in Urban Outfitters’ Form7
10-K for the last couple of years, the defendants brag8
about a sophisticated computer system that links9
literally every cash register in every store in the10
Urban Outfitters’ brand with the home office. And by11
having this communication line, the defendants were12
getting daily updates on exactly what was selling, how13
the inventory levels were changing, how sales prices14
would change and just the sales trends more generally. 15
And so, Your Honor, we would submit that when16
you -- when you look at all of these facts collectively,17
these indicia of scienter collectively which is what the18
Supreme Court counsels in Tellabs and in Matrixx that I19
cited earlier, they more than supply that strong20
inference of scienter that defendants did know or at a21
minimum were reckless, and recklessness suffices, that22
what they were saying to the market was not true and was23
misleading in that what was happening at the ground24
level with the stores was much different than what was25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 37 of 53
38
being relayed to the market.1
And one last indicia of scienter, Your Honor,2
is that the defendants did sell $51 million worth of3
stock during this class period. It’s -- it’s absolutely4
one of the -- the indicia of scienter to be considered. 5
There’s no debate about that.6
THE COURT: Well, what do you make of Mr.7
Sonnenfeld’s argument, his rationale argument as to the8
sale of the stock? 9
MR. JOHNSON: I think that they’re red10
herrings. I think that the fact that -- to be probative11
of --12
THE COURT: He would tell me that including13
that fact is a red herring.14
MR. JOHNSON: That’s not true at all. The15
motive and opportunity allegations are certainly to be16
considered in looking at the picture being painted by17
the complaint, looking at all of the indicia of18
scienter. And so you can absolutely and you should look19
at what stock sales happened during the class period,20
what is alleged.21
Now, these stock sales were also unusual in22
both scope and in timing. As Your Honor pointed out23
earlier, in March just a few days after the class period24
begins, there were hundreds of thousands of shares sold,25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 38 of 53
39
bringing in millions of dollars, and then defendant1
Conforti, just a few days before the class period ends2
or a week or two before the class period ends, he then3
liquidates all but one percent of his holdings. 4
And so we have $50 million, which is a massive5
amount of money by defendant Hayne. Then we have6
another million dollars-plus from defendant Conforti who7
also liquidated 99 percent of his holdings during the8
class period. And in the meantime, there hadn’t been a9
single share of Urban stock sold by either of those10
defendants in the 18 months prior to the class period.11
And so what happened here, Your Honor, was12
that these defendants cashed in on their fraud. What13
they did was when the share price was artificially14
inflated because of their misrepresentations to the15
market, as you alluded to earlier, they dumped 1.316
million shares of common stock onto the market, and17
investors, such as my client, Mr. David Schwartz, then18
used their retirement savings to purchase those shares19
at artificially inflated prices.20
And then, Your Honor, I’d also like to address21
the last element which would be loss causation. Loss22
causation, ever since the Supreme Court’s decision in23
Dura Pharmaceuticals vs. Broudo, it’s been abundantly24
clear that there’s no heightened pleading requirement25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 39 of 53
40
for loss causation. It’s a Rule 8(a) notice pleading. 1
It’s -- the standard requires that plaintiff fairly put2
defendants on notice of what his theory of loss3
causation is. And in the amended complaint, we’ve done4
just that. 5
By September, 2013, defendants could no longer6
hide the struggles of the Urban brand. So, as was7
referenced earlier, the second quarter Form 10-Q was8
filed with the SEC on September 9th. September 9th9
falls right in the middle of the third quarter. And so10
in that 10-Q, defendants provided an update that11
comparable sales growth, again, the most important12
metric as one retail consultant firm has confirmed, the13
most important metric in evaluating a retail -- you14
know, a retail business’ stock. 15
The comparable sales growth for the third16
quarter was tracking at mid-single digit positive. This17
comes after three consecutive quarters of nine to 1118
percent comparable sales growth.19
THE COURT: So they weren’t doing as well as20
they had hoped?21
MR. JOHNSON: They weren’t -- they weren’t22
doing as well. And what’s important here, Your Honor,23
is that the analysts that same day immediately24
pinpointed that it was the Urban brand that was dragging25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 40 of 53
41
down the sales growth at Urban as an entire company. 1
There were a few different analysts’ reports issued2
between September 9th and 10th that pinpointed that. 3
These are at -- I can point Your Honor to paragraph 1474
of the amended complaint.5
Wells Fargo on September 9th issued a report6
entitled "Urban Stalling but Anthro, Free People7
Cruising." And that report stated, "Urban Outfitters8
running a fever. Our talks with management indicate9
that Urban Outfitters may have suffered from fashion10
misses."11
Oppenheimer that same day, September 9th,12
noted in a report that, "The Urban Division was13
lagging."14
And Janney Capital Markets on September 10th15
declared, "We believe the entire issue for Urban’s16
slowing sales stems from the Urban Outfitters’17
Division."18
Your Honor, when -- when this announcement was19
made on September 9th, it was after the market had20
closed. The very next day, on September 10th, the stock21
plunged more than ten percent. It fell from $42 and22
change per share to $38 and change per share. There23
were 14.1 million shares traded that day on September24
10th. That was eight times the average trading volume25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 41 of 53
42
of the previous two weeks. In fact, those 14.1 million1
shares, that’s more shares traded on a single day than2
any other day in 2013 and in any other day since then in3
2014.4
And so the amended complaint pleads the clear5
causal link between what the defendants disclosed on6
September 9th, which is that the comparable sales growth7
was now way below what was expected and it was -- and it8
had fallen precipitously from what it had been the9
previous few quarters, contrasting that to what the10
defendants had told us throughout the class period,11
that, in fact, the assortment was selling well, that the12
assortment was spot-on, that growth margins were up,13
that markdowns were down and that generally the -- the14
sales momentum had continued from the successful holiday15
season right on through into the year 2013 which was --16
THE COURT: But what about every time the17
companies don’t meet their numbers, don’t meet their18
expectations? Does every time a company doesn’t meet19
its expectations, is that actionable?20
MR. JOHNSON: Not necessarily, Your Honor. 21
But here the fraud isn’t that they didn’t meet22
expectations. The fraud is that throughout the class23
period, during those six months, they gave the market24
every indication to believe that --25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 42 of 53
43
THE COURT: They would hit their numbers. 1
They were going to hit their numbers.2
MR. JOHNSON: It wasn’t just that they were3
going to hit their numbers, Your Honor. It was that4
they had picked out the right product assortment, that5
they had continued sales momentum and that generally the6
company and the brand in particular were doing well. 7
But, in reality, as the witnesses have told us and as8
we’ve pled in detail in the complaint, that was not the9
case. 10
When you look at the sales data that’s11
available on the Intranet, when you look at "The Slant"12
which is the weekly newsletter that -- that gives the13
promotions and the markdowns for each quarter, it was14
getting worse and worse. It was significantly worse in15
all of the year 2013 than it had been in the months16
prior, and that’s the fraud, Your Honor.17
THE COURT: So where do we go from here?18
MR. JOHNSON: Your Honor --19
THE COURT: What’s the right answer? Same20
question, what’s the right answer?21
MR. JOHNSON: -- the right answer is that22
we’ve -- that the amended complaint has met the23
heightened pleading requirements, that we’ve pled in24
particularized detail exactly what the plausible claim25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 43 of 53
44
of fraud is, that the amended complaint should be1
sustained and that we get to move forward with discovery2
so that we can get the evidence to prove these claims.3
THE COURT: All right. 4
MR. JOHNSON: Thank you, Your Honor.5
MR. SONNENFELD: Well, if I may reply briefly,6
Your Honor, I think that Mr. Johnson’s argument shows an7
amendment would be futile. So in answer to Your Honor’s8
last question to me, I think if that is what he seeks to9
do and then it would truly be futile.10
Turning to the stock sales, and Mr. Johnson11
referred to motive and opportunity. Motive and12
opportunity was under Advanta, 1999, a route to scienter13
in the Third Circuit, but post-Tellabs, as a result of14
Avaya, motive and opportunity is no longer a route to15
scienter. And Chief Judge Scirica made that clear in16
his Avaya decision which overruled Advanta to the extent17
that motive and opportunity was an alternative route to18
scienter.19
As far as the sales themselves, if you look at20
the three individual defendants, Mr. Marlow, who was the21
president and is the president of the Urban Outfitters’22
brand made no sales, he had zero sales. Mr. Hayne, the23
CEO, while he sold -- I believe it was five percent of24
his holdings, he still holds 95 percent. 25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 44 of 53
45
So to suggest that he was involved in this1
fraud here, when 95 percent of his holdings he still has2
in the company is just illogical when you couple that3
with -- and offensive -- with -- you know, with the six-4
month earlier time period when these sales were made. 5
And then finally, Mr. Conforti, the CFO, while6
Mr. Johnson refers to a million dollars, that really is7
disingenuous. These are the exercise of options. You8
have to subtract the -- the strike price from the9
exercise price and you get a net of around $200,000 for10
options that had vested over a period of five years, and11
he has many other unvested options. He may have sold12
the -- most of his vested options. He has many other13
unvested options, and this appears in the -- in the14
public filing. So I think that is disingenuous.15
Mr. Johnson directed our attention to many16
paragraphs of the complaint, but when you look at these17
paragraphs of the complaint, for the most part, they’re18
not tethered to any particular witness. They just refer19
to "former employees told us." It isn’t like most of20
the --21
THE COURT: Do you need to identify which22
employees said what?23
MR. SONNENFELD: Yes. In most of these cases,24
you look at the ones that we have cited, they’ll say25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 45 of 53
46
that CW-1 told us that on July 1st, 2013, he attended a1
meeting with the CEO at which the CFO said you’re not2
going to make the numbers, or CW-2 told us that when you3
looked at the Intranet online on date X it would show4
you that sales were declining by whatever. You don’t5
have it tethered to any individuals. 6
And even in his argument today, Mr. Johnson7
didn’t tie his argument to what was alleged in the8
complaint. It’s what he claims witnesses told him,9
without regard to whether they’re in the complaint or10
not. The complaint only references six so-called11
confidential witnesses. But then when you get into the12
allegations of the paragraphs, it just says "former13
employees told us." 14
It doesn’t say CW-1 said this, CW-2 said that. 15
It then doesn’t have documents. He refers to this16
Intranet. He doesn’t say what the Intranet would have17
shown. He doesn’t say what the sales would have been on18
any particular day or the numbers or anything else. And19
you look at the cases that we have cited for this20
proposition, there is a great degree of specificity of21
what the CWs claim was told or what would have -- what22
they would have seen if they had looked or whatever. We23
don’t have any of that.24
What we do have is the hand-up I made here25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 46 of 53
47
which comes from the complaint, and the hand-up that we1
have here that comes, you know, from the complaint shows2
that sales were up for the Urban brand, you know, in the3
first and second quarters, that is for the time period4
ending April 30th, 2013 and July 31st, 2013. We have5
periods of record sales. There is no allegation that6
this is wrong. 7
There’s no allegation that anything -- and by8
this, I’m putting my hand up -- but this is based on the9
allegations in the complaint which are based on the10
public filings of the company and the 10-Q. There’s no11
allegation that it’s wrong, either as to the fourth12
quarter of 2013 or the first and second quarters of13
2014. You have periods of record sales. And the irony14
here ultimately is that for the third quarter of 201415
ending October 31st, you again have record sales and16
they’re up seven percent.17
Now, Mr. Johnson tells us well, the analysts18
were expecting more. Well, you look at Justice Thomas’19
position in Janus, he says you’ve got to make a20
statement to be liable for it. You see some discussion21
in Judge -- in Judge Alito’s decision in Burlington22
about liability for analysts. 23
There’s discussion in the Third Circuit about24
a First Circuit decision, the telephone case that we25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 47 of 53
48
cite in our brief, a recent First Circuit decision,1
about entanglement. You have to show how the issuer was2
sort of entangled with the analyst. We have none of3
that here. The company is not responsible for what4
analysts said or didn’t say.5
And just a final point is, Mr. Johnson6
referred to the August 19th statement by the company. 7
The August 19th statement by the company was made after8
-- after the date that the plaintiff here had purchased9
his hundred shares, so he couldn’t possibly have relied10
on the August 19th statement. 11
And under the teachings of the Third Circuit12
in the Klein case and the decision by Judge McLaughlin13
in the NutriSystem case, plaintiff doesn’t have standing14
to challenge a statement made by the company after he15
purchased his shares because he couldn’t have relied on16
it. So --17
THE COURT: I’m sorry, go ahead.18
MR. SONNENFELD: -- so unless Your Honor has19
any questions, I think we’ve covered everything else in20
our briefs.21
THE COURT: Yes. Mr. Johnson, just22
specifically with respect to Mr. Sonnenfeld’s argument23
that in the complaint the statements aren’t tethered to24
any specific witness. Do you need to do that?25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 48 of 53
49
MR. JOHNSON: Well, Your Honor, that’s simply1
-- that’s not required. If I can just quickly go2
through what the Third Circuit has said on the3
confidential witness front. It’s not required. There’s4
no -- there’s no requirement that the complaint give the5
specific witness and what he or she said. 6
THE COURT: Because we’ll agree that that --7
that doesn’t appear in this complaint, correct?8
MR. JOHNSON: Yes, yes, we will agree there. 9
Here -- what’s in the complaint is that there10
are -- there are six confidential witnesses of which11
five worked at various stores around the country. And12
those five reported the same sales trends as I -- as I13
indicated earlier, and they also had access to the14
Intranet which showed sales trends, not just for their15
stores, but for all the stores.16
And so there’s really -- even if the complaint17
did say this -- you know, this former store manager at18
this store or that former manager at that store saw this19
at that store or that at that store, it wouldn’t make a20
difference, because what the complaint relies on is the21
fact that the -- among all of the stores --22
THE COURT: The aggregate knowledge.23
MR. JOHNSON: Correct. And that aggregate24
knowledge is available through the Intranet. 25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 49 of 53
50
What the Third Circuit standards require is1
that you plead enough information within the amended2
complaint so that you can trust and rely on who the3
witnesses were and what they provided. Here we give the4
stores where they worked. We give the time periods5
where they worked. We give the -- their reporting6
structure and we give their job responsibility. There’s7
no reason to question or to in any way discredit that8
those witnesses would have known what we’re pleading in9
the amended complaint in terms of, as I said, the sales10
data and whatnot.11
And, Your Honor, just one last thing on the12
stock sales front. There’s a Third Circuit case, In re13
Suprema, Inc. Securities Litigation. In that case,14
there were stock sales by two of the six named15
individual defendants and those stock sales totaled $716
million. 17
The Third Circuit found that was a strong18
inference of scienter and that the strong inference of19
scienter was not negated by the fact that those same two20
defendants still maintained 62 and 69 percent of their21
holdings. 22
So counsel makes a big deal out of the fact23
that defendant Hayne sold $50 million worth of stock but24
still retained 94 percent of his holdings. That25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 50 of 53
51
retention of holdings does not negate the strong1
inference there is from the actual $50 million sold2
during the class period.3
Unless the Court has any additional questions,4
I’ve --5
THE COURT: Just a comment here.6
MR. SONNENFELD: I have two very quick7
comments, Your Honor. I’m not bringing any notes up.8
Suprema was pre-Avaya. Suprema was pre-9
Tellabs, and I think it has to be discounted by that10
fact.11
With respect to the degree of particularity12
required as to a CW, I would respectfully direct the13
Court’s attention to the Third Circuit’s decision in the14
Chubb case. Chubb, Judge Cowen goes through the indicia15
of particularity required of the CW there. 16
The Court was troubled by the lack of17
particularity of the CWs in the Chubb case. And then18
Avaya -- and the Chubb, it was I think two or three19
years before Avaya, but then Avaya -- and Avaya, Judge 20
-- Chief Judge Scirica cites Chubb with approval and21
says it is still good law were his words in the Third22
Circuit. So I think both Chubb and Avaya are the best23
statement of what is required of the CWs in the24
complaint.25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 51 of 53
52
THE COURT: All right. We’ll take about a1
five-minute recess. I’ll be right back.2
MR. SONNENFELD: Thank you, Your Honor.3
(Recess taken at 2:51 p.m.)4
* * *5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 52 of 53
Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 53 of 53