In the following guest post, Tim Hoeffner and Paul Ferrillo of the McDermott Will & Emery law firm take a look at the Eighth Circuit’s April 10, 2020 decision in the Target Corporation securities class action lawsuit, in which the appellate court affirmed the lower court’s dismissal of the case. I would like to thank Tim and Paul for allowing me the opportunity to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Tim and Paul’s article.
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The fact pattern of Target is not unlike many event driven cases. The issuer announces a new product, initiative or launch to great expectations. The new initiative does not go right from the first moment it is released. Despite an attempt by the issuer to correct the course, the initiative still does not get any better and has to be closed. Losses are suffered and investors bring suit.
That was the case in Carpenters Pension Fund v Target Corporation, No. 1831 (8th Cir., April 10, 2020) (“the Target Decision”), where the parent company Target, tried and failed to successfully open Target Canada because of inventory and distribution problems. After Target successfully moved to dismiss the case at the District Court level, the plaintiffs appealed claiming their complaint alleged dozens of misleading statements during the class period regarding Target Canada’s supply chain problems. The Eighth Circuit disagreed, noting “blanket allegations” of scienter do not satisfy the PSLRA’s pleading standard, and affirmed the decision of the District Court. We discuss the decision below, noting its familiarity to other event driven cases.
The Facts of Target
In or about 2013, Target was already a monster in the U.S. retail sector, but at that time had no international presence. To address that gap and for other reasons, the parent company opened 124 Target Canada stores, and developed the supply chain and infrastructure to support them. There were immediate problems with the new IT inventory software and how employees were supposed to input each store’s 75,000 items. There were further problems concerning its inventory and warehouse management system. Compounding the problem, when the Canadian stores did open, they were bursting with inventory at their distribution centers, which stayed there instead of making it onto the shelves. Two years later, Target shuttered the stores in Canada and filed for bankruptcy protection.
Investors brought suit alleging that Target’s executives misled investors by understating the seriousness of the problems with Target Canada and overstating their ability to fix them. Though the District Court granted the defendants’ motion to dismiss the complaint, the plaintiffs appealed claiming their complaint more than adequately alleged fraud based not only on its earlier statements, but on later statements evidencing the seriousness of Canada’s problems down the road even after remediation attempts had occurred.
The Decision
Though obviously Target Canada was a failure, the Eighth Circuit noted, in sum, that the failure does not mean that scienter was pled adequately in the complaint. One such statement was “[Target Canada] needed to build out the supply chain [and] build the technology…we achieved all…of those objectives…We’re right where we want to be right now.” The Court held this statement was insufficient since there was “no particularized explanation of how or when Target’s executives learned this statement was false.” Another statement was “Things like replenishment systems, they take a while to tune, so we’re tuning.” To this statement, the Court noted that “the PSLRA does not allow “pleading fraud by hindsight. Nothing in the complaint makes a compelling case for fraud and we believe the more compelling inference, which is fatal to the investors’ case, is that the Target executives did not understand the magnitude of the problems they faced.” The Court then rejected allegations of insider selling, nothing that the “timing in this case does not demonstrate that the sales were made when executives would maximize the personal benefit from undisclosed information.”
The court concluded:
Allegations that executives ‘absolutely have to had known’ of the depth of Target’s problems are conclusory and perfectly consistent with the narrative that Target had serious problems that none of its executives understood. That every time one issue was fixed, other sprang up hydra-like to replace it further supports the non-fraudulent explanations for Target’s explanations to investors.
Conclusion:
The D&O Diary has for months talked about event driven litigation fueling the D&O claims book and recent securities law filings. See “Guest Post: Avoiding Event Driven Litigation through Good Cybersecurity Governance,” and “Corporate Mismanagement Becomes Event-Driven Securities Litigation.” Though the Target Canada case was filed some years ago, it is the perfect example of an event gone wrong. But as the Eighth Circuit held, events gone wrong without more do not always equate to fraud; they also can equate to a misstep or misjudgment which is not actionable under our securities laws.