Mizzaro v. Home Depot, Inc.

• Decision Date: 08 October 2008
• Docket Number: No. 07-13812.,No. 07-13813.,No. 07-13859.,No. 07-13811.,No. 07-13810.,07-13810.,07-13811.,07-13812.,07-13813.,07-13859.
• Citation: 544 F.3d 1230
• Parties: John MIZZARO, on behalf of himself and all others similarly situated, Bucks County Retirement Board, Lead Plaintiff, Plaintiffs-Appellants, v. HOME DEPOT, INC., Robert L. Nardelli, et al., Defendants-Appellees. M. Brad Bickerstaff, Individually and on behalf of all others similarly situated, Bucks County Retirement Board, Lead Plaintiff, Plaintiffs-Appellants, v. Home Depot, Inc., Robert L. Nardelli, et al., Defendants-Appellees. Bruce B. Belodoff, Individually and on behalf of all others similarly situated, Bucks County Retirement Board, Lead Plaintiff, Plaintiffs-Appellants, v. Home Depot, Inc., Robert L. Nardelli, et al., Defendants-Appellees. Robert D. Jaffee, As trustee of the Robert D. Jaffee Revocable Trust, on behalf of plaintiff and all others similarly situated, Bucks County Retirement Board, Lead Plaintiff, Plaintiffs-Appellants, v. Home Depot, Inc., Robert L. Nardelli, et al., Defendants-Appellees. Paul Coble, On behalf of plaintiff and all others similarly situated, Bucks County Retirement Board, Lead Plaintiff, Plaintiffs-Appellants, v. Home Depot, Inc., Robert L. Nardelli, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

544 F.3d 1230

John MIZZARO, on behalf of himself and all others similarly situated, Bucks County Retirement Board, Lead Plaintiff, Plaintiffs-Appellants, v. HOME DEPOT, INC., Robert L. Nardelli, et al., Defendants-Appellees.

M. Brad Bickerstaff, Individually and on behalf of all others similarly situated, Bucks County Retirement Board, Lead Plaintiff, Plaintiffs-Appellants, v. Home Depot, Inc., Robert L. Nardelli, et al., Defendants-Appellees.

Bruce B. Belodoff, Individually and on behalf of all others similarly situated, Bucks County Retirement Board, Lead Plaintiff, Plaintiffs-Appellants, v. Home Depot, Inc., Robert L. Nardelli, et al., Defendants-Appellees.

Robert D. Jaffee, As trustee of the Robert D. Jaffee Revocable Trust, on behalf of plaintiff and all others similarly situated, Bucks County Retirement Board, Lead Plaintiff, Plaintiffs-Appellants, v. Home Depot, Inc., Robert L. Nardelli, et al., Defendants-Appellees.

Paul Coble, On behalf of plaintiff and all others similarly situated, Bucks County Retirement Board, Lead Plaintiff, Plaintiffs-Appellants, v. Home Depot, Inc., Robert L. Nardelli, et al., Defendants-Appellees.

No. 07-13810.

No. 07-13811.

No. 07-13812.

No. 07-13813.

No. 07-13859.

United States Court of Appeals, Eleventh Circuit.

October 8, 2008.

Michael K. Yarnoff, John A. Kehoe, Benjamin J. Hinerfeld, Christopher L. Nelson, Schiffrin, Barroway, Topaz & Kessler, LLP, Radnor, PA, Robert Ware Killorin, Krissi T. Gore, Atlanta, GA, for Plaintffs-Appellants.

John P. Brumbaugh, David E. Meadows, Michael R. Smith, Benjamin Lee, King & Spalding, Atlanta, GA, for Defendants-Appellees.

Appeals from the United States District Court for the Northern District of Georgia.

Before CARNES and MARCUS, Circuit Judges, and BUCKLEW,^* District Judge.

MARCUS, Circuit Judge:

To survive a motion to dismiss under the Private Securities Litigation Reform Act of 1995, the factual allegations contained in a private securities fraud class action complaint must raise a "strong inference," one that is "cogent and compelling," that the named defendants acted with the requisite scienter. The question presented in this appeal is whether lead plaintiff Bucks County Retirement Board's ("Bucks County's") Amended Class Action Complaint ("ACAC" or "amended complaint") against Home Depot, Inc. and six of its officers and directors has met this demanding standard. The district court said "no," dismissed the complaint for failure to state a claim, and denied as futile a motion for leave to amend. After thorough review, we affirm.

I.

This case began on May 12, 2006, when John Mizzaro, an individual investor in Home Depot stock, filed a securities fraud class action complaint against Home Depot, Inc. and several of its officers and directors in the United States District Court for the Northern District of Georgia. In short order, four more individual investors filed essentially identical complaints. The district court consolidated the cases "for the purposes of discovery and case management only," Doc. 30 at 2, and appointed Bucks County, a major investor in Home Depot stock, as the sole lead plaintiff, see 15 U.S.C. § 78u-4(a)(3)(B)(i) (requiring the district court to appoint as lead plaintiff "the member or members of the purported plaintiff class that the court determines to be most capable of adequately representing the interests of class members"). The defendants then moved to dismiss each of the five pending cases. Rather than defend the existing complaints (which it presumably had no part in drafting), Bucks County filed a 150-page Amended Class Action Complaint, which became the operative pleading in all five cases.

The amended complaint is a putative class action on behalf of every shareholder who purchased Home Depot stock between May 29, 2001 and February 22, 2005 (the "class period"). In a nutshell, the amended complaint alleges that (1) Home Depot obtained excessive rebates from its vendors, and (2) violated the securities laws by not informing investors that the financial results it reported for fiscal years 2001-2004 were inflated by these excessive rebates. In addition to Home Depot, Inc., the amended complaint names six high-ranking Home Depot officials as defendants—senior executives Robert Nardelli, the President, Chief Executive Officer, and Chairman of the Board; Carol Tomé, an Executive Vice President and the Chief Financial Officer; and Larry Mercer, the Executive Vice President of Store Operations and board members Kenneth Langone, Berry Cox, and John Clendenin— and claims that their failure to disclose the alleged earnings inflation violated § 10(b) of the Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. The amended complaint also asserts that the individual defendants are liable for the § 10(b) and Rule 10b-5 violations by Home Depot, Inc., because they qualify as "control persons" under § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a).

Rather than answer Bucks County's lengthy pleading, all of the defendants moved to dismiss the amended complaint, arguing, among other things, that it failed to create a "strong inference" that they acted with the requisite scienter. 15 U.S.C. § 78u-4(b)(2). While the motion to dismiss was pending, Bucks County moved for leave to amend if the district court concluded that the amended complaint failed to state a claim. The district court granted the defendants' motion to dismiss in a lengthy order and denied leave to amend, concluding that, under controlling law, the amended complaint had failed to adequately plead scienter, and that granting leave would be futile because the additional facts presented in the motion for leave would not change that result.

II.

We review de novo an order granting a motion to dismiss for failure to meet the heightened pleading standards embodied in the PSLRA. Garfield v. NDC Health Corp., 466 F.3d 1255, 1261 (11th Cir.2006). Moreover, because denial of leave to amend based on futility is a legal conclusion, we review the denial de novo as well. St. Charles Foods, Inc. v. America's Favorite Chicken Co., 198 F.3d 815, 822 (11th Cir.1999).

An understanding of the nature of the legal claims asserted by Bucks County and the special pleading rules that apply to them is essential to deciding this case. Bucks County's primary claim is that Home Depot and the six individual defendants violated § 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder by making material misrepresentations or omissions in press releases and in the company's financial statements. Section 10(b) makes it unlawful to

use or employ, in connection with the purchase or sale of any security registered on a national securities exchange ..., any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission 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, in turn, forbids

any person, directly or indirectly, ...

(a) To employ any device, scheme, or artifice to defraud,

(b) 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, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5.

Under these provisions, a securities fraud claim based on failure to reveal information to investors, as Bucks County has alleged here, has six elements: (1) a material misrepresentation or omission; (2) made with scienter; (3) a connection with the purchase or sale of a security; (4) reliance on the misstatement or omission; (5) economic loss; and (6) a causal connection between the material misrepresentation or omission and the loss, commonly called "loss causation." Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005).

Bucks County also claims that the six individual defendants are liable as "control persons" under § 20(a) of the Exchange Act. Section 20(a) provides:

Every 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 to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.

15 U.S.C. § 78t(a). This statute "imposes derivative liability on persons that control primary violators of the Act." Laperriere v. Vesta Ins. Group, Inc., 526 F.3d 715, 721 (11th Cir.2008) (per curiam). To state a claim under § 20(a), Bucks County must allege three elements: (1) that Home Depot, Inc. committed a primary violation of the securities laws; (2) that the individual defendants had the power to control the general business affairs of Home Depot; and (3) that the individual defendants "had the requisite power to directly or indirectly control or influence the specific corporate policy which resulted in primary liability." Theoharous v. Fong, 256 F.3d 1219, 1227 (11th Cir.2001) (quotation marks omitted); accord Brown v. Enstar Group, Inc., 84 F.3d 393, 396-97 (11th Cir.1996). Because a primary violation of the securities laws is an essential element of a § 20(a) derivative claim, we have held that a plaintiff adequately pleads a § 20(a) claim only if the primary violation is adequately pleaded. See, e.g., Garfield, 466 F.3d at 1261; Theoharous, 256 F.3d at 1227. Therefore, the pivotal issue in this case remains whether Bucks County adequately pleaded a violation of § 10(b) and Rule 10b-5.

Ordinarily, a complaint is...