Beaver Cnty. Employees' Ret. Fund v. Tile Shop Holdings, Inc.
| Decision Date | 04 March 2015 |
| Docket Number | Civil No. 14–786 ADM/TNL. |
| Citation | 94 F.Supp.3d 1035 |
| Parties | BEAVER COUNTY EMPLOYEES' RETIREMENT FUND; Erie County Employees' Retirement System; and Luc De Wulf, Individually and on Behalf of All Others Similarly Situated, Plaintiffs, v. TILE SHOP HOLDINGS, INC.; Robert A. Rucker; The Tile Shop, Inc.; Timothy C. Clayton; Peter J. Jacullo III; JWTS, Inc.; Peter H. Kamin ; Todd Krasnow; Adam L. Suttin; William E. Watts ; Robert W. Baird & Co. Incorporated; Citigroup Global Markets Inc.; CJS Securities, Inc. ; Houlihan Lokey Capital, Inc. ; Piper Jaffray & Co.; Sidoti & Company, LLC; Telsey Advisory Group LLC ; and Wedbush Securities, Inc., Defendants. |
| Court | U.S. District Court — District of Minnesota |
Matthew L. Mustokoff, Esq., Kessler Topaz Meltzer & Check, LLP, Radnor, PA; Joseph Russello, Esq., Robbins Geller Rudman & Dowd LLP, Melville, NY; Bryan L. Bleichner, Esq., Jeffrey D. Bores, Esq., and Karl L. Cambronne, Esq., Chestnut Cambronne, PA, Minneapolis, MN, on behalf of Plaintiffs.
Wendy J. Wildung, Esq., Faegre Baker Daniels LLP, Minneapolis, MN; David Pearson, Esq., Winthrop & Weinstine, PA, Minneapolis, MN; Scott A. Edelman, Esq., Milbank Tweed Hadley & McCloy LLP, New York, NY; Daniel J. Supalla, Esq., Briggs & Morgan, PA, Minneapolis, MN, on behalf of Defendants.
On December 12, 2014, the undersigned United States District Judge heard oral argument on Defendants Tile Shop Holdings, Inc., Robert A. Rucker, The Tile Shop, Inc., and Timothy C. Clayton's (collectively, the “Tile Shop Defendants”) Motion to Dismiss [Docket No. 81]; Defendants Peter J. Jacullo III, Peter H. Kamin, Todd Krasnow, Adam L. Suttin, William E. Watts, and JWTS, Inc.'s Motion to Dismiss [Docket No. 86]; and Defendants Robert W. Baird & Co., Inc., Citigroup Global Markets Inc., CJS Securities, Inc., Houlihan Lokey Capital, Inc., Piper Jaffray & Co., Sidoti & Company, LLC, Telsey Advisory Group LLC, and Wedbush Securities, Inc.'s (collectively, the “Underwriter Defendants”) Motion to Dismiss [Docket 90]. Beaver County Employees' Retirement Fund (“Beaver County”), Erie County Employees' Retirement System (“Erie County”), and Luc De Wulf (collectively, the “Plaintiffs”) oppose the motion. For the reasons set forth below, the motions are granted in part and denied in part.
This securities class action seeks relief under the Securities Act of 1933 on behalf of all individuals who purchased Tile Shop Holdings, Inc. (“Tile Shop” or the “Company”) common stock pursuant or traceable to the registration statements and prospectuses issued in connection with secondary public offerings on December 12, 2012 (the “December Offering”) and June 5, 2013 (the “June 2013 Offering”) (collectively, the “Offerings”). Claims are also asserted under the Securities and Exchange Act of 1934 for those who purchased stock between August 22, 2012 and January 28, 2014 (the “Class Period”). All of Plaintiffs' claims are generally premised on Tile Shop's failure to disclose related-party transactions and relationships.
This action is a consolidation of two cases originally filed in the United States District Court for the Southern District of New York that were transferred to the District of Minnesota on March 13, 2014. Order Defs'. Mot. Transfer [Docket No. 42]. Pursuant to a consolidation order, a Consolidated Amended Complaint [Docket No. 66] (“CAC”) was filed on May 23, 2014.
Plaintiffs Beaver County, Erie County, and Luc De Wulf purchased Tile Shop common stock during the Class Period and were appointed as co-lead Plaintiffs on February 13, 2014 by the Honorable Katherine Polk Failla, United States District Judge for the Southern District of New York. CAC ¶ 14; Order [Docket No. 35].
Tile Shop is a speciality retailer of manufactured and natural stone tiles, setting, and maintenance materials headquartered in Plymouth, Minnesota. CAC ¶ 15. As of October 1, 2013, Tile Shop operated 80 stores in 25 states. Id. Robert A. Rucker is—and was, at the time of the Offerings and throughout the Class Period—the Chief Executive Officer (“CEO”), President, director, and co-founder of Tile Shop. Id. ¶ 16. Rucker signed the registration statements issued with the Offerings. Id. The Tile Shop, Inc. (“TSI”) is a Minnesota corporation wholly owned and operated by Rucker, who is its sole director and has sole voting and investment power in the securities it holds. Id. ¶ 17.
Timothy C. Clayton is—and was, at the time of the Offerings and throughout the Class Period—Tile Shop's Chief Financial Officer (“CFO”) and Senior Vice President. Clayton also signed the registration statements issued with the Offerings. Id. ¶ 18. Together, Rucker and Clayton are referred to as the “Officer Defendants.”
Peter J. Jacullo, Peter H. Kamin, Todd Krasnow, Adam L. Suttin, and William E. Watts are—and were at the time of the Offerings and throughout the Class Period—directors of Tile Shop who signed the registration statements issued with the Offerings. Id. ¶¶ 19, 21–24. Jacullo, Kamin, Krasnow, Suttin, and Watts are referred to as the “Director Defendants.”
JWTS, Inc. (“JWTS”) is a Delaware corporation wholly owned by Jacullo, who is its sole director and may be deemed to have sole voting and investment power over the securities it holds. Id. ¶¶ 19–20.
Robert W. Baird & Co., Citigroup Global Markets Inc., CJS Securities, Inc., Houlihan Lokey Capital, Inc., Piper Jaffray & Co., Sidoti & Company, LLC, Telsey Advisory Group LLC, and Wedbush Securities, Inc. (collectively, the “Underwriter Defendants”) are investment banking firms that served as underwriters for the Offerings. Id. ¶¶ 26–34.
Tile Shop was co-founded by Rucker and Rodney Sill in or about 1985. Id. ¶ 67. Rucker and Sill co-owned the Company until Rucker acquired Sill's interest in or around 2002. Id. ¶ 41. As CEO and President, Rucker claimed to be personally involved in establishing international supplier relationships and sourcing materials for use in manufacturing Tile Shop products. Id. ¶ 176. Rucker traveled to Turkey, China, and other locations. Id. ¶¶ 40, 135. According to a former Tile Shop employee, Tile Shop's pre-Class Period CFO, Jim Beukelman, was responsible for setting up foreign entities to serve as middlemen with vendors based in Turkey and China. Id. ¶ 40. According to the same former employee, sometime during 2002, Rucker's brother-in-law, Fumitake Nishi, began working for the Company. Id. ¶ 41. Around this time, Rucker tasked Nishi to scout vendors in China and they traveled to China together to negotiate with sourcing vendors. Id. ¶ 40.
Beijing Pingxiu (“BP”), a Chinese export trading company, was formed on March 3, 2008 and was at that time owned by Jian and Pan Zhang (together, the “Zhangs”). Id. ¶¶ 4, 43. Jian is related through marriage to Rucker's wife and Pan, who is Jian's son, is Rucker's nephew. Id. ¶ 168. As early as 2009, Tile Shop began receiving product from BP in China. Id. ¶ 48. Beginning in fiscal year 2011 and continuing until 2013, Nishi was employed as a purchasing supervisor for Tile Shop. Id. ¶ 169.
Late in 2011, Nishi purportedly acquired BP and Tile Shop began purchasing greater amounts of product from BP. Id. ¶ 43. In fiscal year 2011, 8.3 percent of Tile Shop product sold was purchased from BP. Id. This percentage grew to 32.2 percent in fiscal year 2013. Id. ¶ 159. In this time period, Nanyang Helin Stone Co. Ltd. (“Nanyang”), a Tile Shop vendor, also began selling stone accessory products to Tile Shop. Id. ¶ 4. Nishi owned a majority interest in Nanyang. Id. ¶ 164. Tile Shop purchased $1.7 million, $2.1 million, and $2.8 million of product from Nanyang in fiscal years 2011, 2012, and 2013, respectively.Id. ¶ 164.
Tile Shop began trading on the NASDAQ on August 22, 2012 under the ticker symbol TTS. Id. ¶¶ 83–85. Interests in The Tile Shop LLC were exchanged for cash, promissory notes, and 32 million shares of Tile Shop common stock. Id. ¶ 85. Tile Shop conducted the Offerings to provide an opportunity for certain stock holders to cash out. Id. ¶ 89.
On about November 28, 2012, Tile Shop filed a Form S–1 Registration Statement, which, after amendment, was declared effective by the SEC on December 12, 2012. Id. ¶ 103. The following day, certain selling stockholders, including Tile Shop executives and directors, sold 5.175 million shares of common stock at $15 per share to the public. Id. ¶ 104. Of these shares, Rucker and TSI, Jacullo and JWTS, Suttin, and Watts sold 1,823,937 shares, in exchange for $27,359,055 in gross proceeds. Id. ¶¶ 105, 109.
On or about May 24, 2013, Tile Shop filed a Form S–1 Registration Statement, which, after amendment, was declared effective by the SEC on June 4, 2013. Id. ¶ 106. Again, on the following day, certain selling stockholders, including Tile Shop executives and directors, sold 4,887,500 shares of common stock at $24.25 per share to the public. Id. ¶ 107. Of these shares, Rucker and TSI, Jacullo and JWTS, Kamin, and Krasnow sold 1,715,000 shares, for $27,359,055 in gross proceeds. Id. ¶¶ 108–09.
On November 14, 2013, Gotham City Research (“Gotham”) published a report that identified connections between Rucker, Nishi, Tile Shop, and BP that Tile Shop had not previously disclosed. Id. ¶¶ 159–61. Gotham's report claimed that Tile Shop's margins and profits were inflated and that its earnings were overstated due to favorable transactions between the related parties. Id. ¶ 160. That same day, ostensibly in response to the Gotham report, Tile Shop issued a press release announcing an investigation into its relationship with BP. Id. ¶ 162. The market reacted by Tile Shop's share price dropping by almost 39% on an unusually high volume of trading. Id. ¶ 163.
On January 28, 2014, Tile Shop filed a Form 8–K and an attached press release dated the previous day with the SEC. Id. ¶ 164. The press release...
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