Burlington Coat Factory Securities Litigation, In re

Citation114 F.3d 1410
Decision Date10 June 1997
Docket NumberNo. 96-5187,96-5187
PartiesFed. Sec. L. Rep. P 99,485, 38 Fed.R.Serv.3d 557 In re BURLINGTON COAT FACTORY SECURITIES LITIGATION. P. Gregory Buchanan, Jacob Turner and Ronald Abramoff, Appellants.
CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Jeffrey W. Golan (argued), Leonard Barrack, Gerald J. Rodos, Robert A. Hoffman, Barrack, Rodos & Bacine, Philadelphia, PA, David J. Bershad, Sharon Levine Mirsky, Edith M. Kallas, Milberg Weiss Bershad Hynes & Lerach, LLP, New York City, Howard D. Finkelstein, Finkelstein & Associates, San Diego, CA, Alfred G. Yates, Jr., Alfred G. Yates, Jr. & Associates, Pittsburgh, PA, for Appellants.

Robert A. Alessi (argued), Cahill Gordon & Reindel, New York City, John L. Thurman, Mason, Griffin & Pierson, P.C., Princeton, New Jersey, for Appellees.

Before: GREENBERG, ALITO, and ROTH, Circuit Judges.


ALITO, Circuit Judge.

Burlington Coat Factory Warehouse Corporation ("BCF "), a Delaware corporation based in New Jersey, announced its fourth quarter and full fiscal year results for 1994 on September 20, 1994. The results were below the investment community's expectations, and BCF's common stock fell sharply, losing approximately 30% in one day. Within a day of the initial announcement, the first investor suit was filed. In the next few days, the company made additional explanatory disclosures, and the stock price fell even further. More investor suits were filed. The action at hand is the product of the consolidation of these suits.

BCF and certain of its principal officers and directors were sued under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"). 15 U.S.C. §§ 78j(b), 78t(a). Section 10(b) provides a broad prohibition on the use of "manipulative or deceptive devices" in connection with the purchase or sale of a security. 15 U.S.C. § 78j(b). Section 20, in turn, provides liability for "controlling persons." 15 U.S.C. § 78t(a). Plaintiffs assert that they represent the class of investors who purchased BCF common stock between October 4, 1993, and September 23, 1994. Plaintiffs claim that, as a result of BCF's misleading statements and omissions during the class period, the company's stock price was artificially inflated.

The district court dismissed the case both for failure to state claims on which relief could be granted and for failure to plead those claims with adequate particularity. The court also denied plaintiffs' request that they be allowed to amend and replead their claims in the event of a dismissal.

On appeal, plaintiffs challenge the dismissal of four of their six original claims. Since the fourth claim has two distinct parts, we describe the four claims as five. According to plaintiffs, the district court erred in ruling: (1)that the alleged earnings overstatements during fiscal year 1994 were not materially misleading because no violation of GAAP had been shown and that, in any event, the claim stated was, at most, a claim for negligence; (2) that the failure to disclose that the company had not received its usual discounts in its inventory build-up in January and February of 1994 was "largely irrelevant"; (3) that overstatements regarding the sales attributable to an extra, 53rd week in 1993 were not actionable; (4) that management's expression of "comfort" with certain specific earnings forecasts by analysts was not actionable because BCF did not "adopt" the analysts' estimates; and (5) that a statement that the company's earnings would continue to grow faster than revenues was not actionable because it was no more than "puffery." Plaintiffs argue that these were proper, viable claims under Section 10(b) and that they pled facts in support of their claims that met the particularity requirements for fraud claims. As a final matter, plaintiffs contend that even if the district court's dismissal of their claims on particularity grounds was justified, they should have been given leave to amend and replead their claims.

We affirm the district court's dismissals on claims (2), (3), and (5). Claims (1) and (4) were properly dismissed on particularity grounds, but we disagree with the district court's holding that these claims could not be viable. Since leave to amend appears to have been denied on the grounds of futility alone, we hold that plaintiffs may amend their complaint and replead claims (1) and (4).


BCF is one of the leading retailers of coats in the United States. Its specialty is selling brand name clothes at discount prices. By mid-1993, BCF was operating a total of 185 stores in 39 states. The stores ranged in size from 16,000 to 133,000 square feet and featured outerwear (coats, jackets, and raincoats) and complete lines of clothing for men, women, and children.

BCF opened in 1924, under the management of Abe Milstein, and specialized in wholesale outerwear. In the 1950's, Abe's son, Monroe, joined the business. In 1972, BCF acquired a coat factory and outlet store in Burlington, New Jersey, and began operation as a retailer.

BCF is a public company traded on the New York Stock Exchange. During the class period for this case, the average daily trading volume for BCF common stock was 100,000 shares. Plaintiffs assert that BCF's securities are actively followed by numerous analysts and that the market in BCF stock was "efficient" at all periods relevant to this case. 1

BCF's fortunes have been on the rise over the past decade. BCF's 1992 Annual Report stated that "[t]he Company's revenues have increased each year for the past 13 years, from $24 million in 1978 to over $1 billion in 1992." Further, BCF's earnings per share rose from $0.60 in 1990 to $1.06 in 1993.

BCF's top corporate officers, some of whom are defendants in this case, hold large portions of BCF's outstanding common stock. This seems especially true of those officers who are members of the Milstein family, which as a whole owned approximately 55% of BCF's common stock. 2

The defendant-officers are: (1) Monroe G. Milstein, BCF's chief executive officer and chairman of the board, who owned approximately 30.7% of the stock; (2) Stephen E. Milstein, a vice-president, director, and general merchandise manager, who owned approximately 4.9% of the stock; (3) Andrew R. Milstein, a vice-president, director, and executive merchandise manager, who owned approximately 5.4% of the stock; (4) Robert R. LaPenta, controller, and chief accounting officer; and (5) Mark A. Nesci, vice-president for store operations, director, and chief operating officer.

This case was brought as a class action on behalf of all purchasers of BCF common stock during the period from October 4, 1993, through and including September 23, 1994. 3 Plaintiffs claim that during this period defendants (the company and the individual officer-defendants), through a number of misstatements in and omissions from disclosures made to the public, defrauded plaintiffs into purchasing BCF stock at artificially high prices.

Plaintiffs explain that the individual defendants, as a result of their positions of control in the company, were able to manipulate BCF's press releases and other disclosures so as to deceive the market into overpricing the company's stock. Allegedly, the individual defendants behaved in this manner so as to:

(i) artificially inflate and maintain the market price of BCF's common stock during the Class Period and thereby cause plaintiffs and the other members of the Class to purchase such common stock at artificially inflated prices and, in the case of certain of the defendants, to personally gain from the sale of inflated stock; and

(ii) protect, perpetuate and enhance their executive positions and the substantial compensation, prestige and other perquisites of executive compensation obtained thereby.

Complaint, p 15.

Defendants who are alleged to have personally gained from selling their stock during the class period are Andrew R. Milstein (who sold 10,000 shares on March 17 and March 21, 1994, at $27.75 per share), Mark A. Nesci (who sold 10,000 shares on March 18 and March 25, 1994, at $27.50), and Robert R. LaPenta (who sold 1,500 shares on March 4, 1994 at $28.00 per share and 2,500 shares on April 6, 1994, at $26.25 per share). The price drop between September 20 and September 23, 1994--the days of the announcements that allegedly caused a correction in the stock price to reflect the true state of BCF's fortunes--was from a high of $23.25 to a low of $13.63. Assuming that the price drop of approximately $10 was due entirely to the correction of false information, Andrew Milstein's and Mark Nesci's trading gains would each amount to approximately $100,000, and Robert LaPenta's gains would be approximately $40,000.


On September 20, 1994, BCF reported its year-end revenues and earnings for fiscal 1994. These results were below the market's expectations, with the earnings per share for fiscal 1994 being $1.12 as compared to the $1.37 that analysts had been predicting. On September 20 itself, the price of BCF stock fell almost 30%, from $23.25 to $15.75 per share. Between September 20 and September 23 both BCF and outside analysts attempted to explain the reasons for the worse-than-expected results. By the close of the market on September 23, 1994, the price of BCF stock had fallen to $13.63.

The first of plaintiffs' three suits was filed within a day of the first price drop on September 20, alleging that BCF had violated Sections 10(b) and 20(a) of the Exchange Act. Two other similar actions were filed two days later, on September 23, 1994. The three actions were consolidated, and the consolidation resulted in the filing, in January 1995, of the "Consolidated Amended and Supplemental Class Action Complaint" (the "Complaint").

Defendants moved to dismiss the Complaint under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief could be granted...

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