Friedman v. Rayovac Corp.

Decision Date30 May 2003
Docket NumberNos. 02-C-0308-C, 02-C-325-C, 02-C-370-C.,s. 02-C-0308-C, 02-C-325-C, 02-C-370-C.
Citation295 F.Supp.2d 957
PartiesEli FRIEDMAN, Individually and on behalf of all Others Similarly Situated, Plaintiffs, v. RAYOVAC CORPORATION, Thomas H. Lee Partners, Kenneth V. Biller, Kent J. Hussey, David A. Jones, Scott A. Schoen, Stephen P. Shanesy, Thomas R. Shepherd, Randall J. Steward, Warren C. Smith, Jr. and Merrell M. Tomlin,<SMALL><SUP>1</SUP></SMALL> Defendants.
CourtU.S. District Court — Western District of Wisconsin

S. Gene Cauley, for Plaintiff.

Donald K. Schott, Quarles & Brady, Madison, WI, James R. Carroll, Skadden, Arps, Slate, Meagher & Flom, Boston, MA, Matthew R. Kipp, Skadden, Arps, Slate, Meagher & Flom, Chicago, IL, for Defendants.


CRABB, District Judge.

In this proposed class action, plaintiffs allege that defendants artificially inflated the price of defendant Rayovac Corporation's stock by making false and misleading statements in violation of the Securities Act of 1933, 15 U.S.C. §§ 77a-77aa, and the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-78mm. Jurisdiction is present under 28 U.S.C. § 1331. In an opinion and order dated September 23, 2002, I granted plaintiffs' motion to appoint Eli Friedman, Lawrence M. Cox, Carol A. LoGalbo and Harold C. Eck as the lead plaintiff group. On November 12, 2002, I granted plaintiffs' motion to appoint Cauley Geller Bowman & Coates LLP as lead counsel.

Presently before the court are two motions to dismiss: one filed by defendant Thomas H. Lee Partners and one filed by the remaining defendants. In both motions, defendants raise multiple grounds for dismissing all of plaintiffs' claims. I agree with defendant Partners that the statute of limitations has expired for plaintiffs' claims against it under the 1933 Act. Thus, I will dismiss these claims against defendant Partners. I disagree with defendants that the heightened pleading standards of the Private Securities Litigation Reform Act and Fed.R.Civ.P. 9(b) apply to claims brought under §§ 11 and 12(a) of the 1933 Act because those claims do not include fraud as an element. Furthermore, I conclude that plaintiffs have stated a claim under Fed.R.Civ.P. 8 with respect to their claims against defendants Rayovac, Jones, Hussey, Shepherd, Schoen, Smith and Steward under § 11 of the 1933 Act, with respect to all defendants (except defendant Partners) under § 12(a)(2) and with respect to defendants Jones, Hussey, Shepherd, Schoen, Smith, Shanesy, Tomlin, Steward and Biller under § 15 of the 1933 Act.

Turning to plaintiffs' claims under the 1934 Act, I conclude that in some respects, plaintiffs have alleged with sufficient particularity the statements that are allegedly false and misleading, the reasons why the statements are false and misleading and the factual basis for plaintiffs' belief, as required by the 15 U.S.C. § 78u-4(b)(1). However, plaintiffs have failed to allege sufficient facts to show that any of the defendants made the allegedly false statements, with the exception of defendants Rayovac, Jones and Hussey. Furthermore, plaintiffs have failed to allege particular facts that would create a strong implication that these defendants knew or recklessly disregarded the possibility that the statements were false or misleading, as required by 15 U.S.C. § 78u-4(b)(2). Thus, plaintiffs have failed to state a claim with respect to any of their claims under the 1934 Act. However, rather than dismiss these claims with prejudice, I will allow plaintiffs an opportunity to amend their complaint to attempt to cure the deficiencies detailed in this opinion.

In setting forth the allegations of fact, I have included not only the allegations in plaintiffs' amended complaint but also facts from documents referred to in the complaint and provided by defendants in their motion to dismiss. See Venture Associates Corp. v. Zenith Data Systems Corp., 987 F.2d 429, 431-32 (7th Cir.1993) ("Documents that a defendant attaches to a motion to dismiss are considered part of the pleadings if they are referred to in the plaintiff's complaint and are central to her claim.")

A. Parties

Lead plaintiffs Eli Friedman, Lawrence M. Cox, Carol A. LoGalbo, Harold C. Eck and the other proposed class members are investors who purchased shares of Rayovac common stock between April 26, 2001, and September 19, 2001. Defendant Rayovac Corporation is a Wisconsin corporation that manufactures batteries. Defendant David A. Jones is chairman of the board and chief executive officer of Rayovac. Defendant Kent J. Hussey is president, director and chief financial officer. Defendant Steven P. Shanesy is executive vice-president of global brand management. Defendant Merrell M. Tomlin is executive vice president of sales. Defendant Randall J. Steward is executive vice-president of administration and chief financial officer. Kenneth V. Biller is executive vice-president of operations.

Defendant Thomas H. Lee Partners is a firm located in Massachusetts; it owned approximately 26% of Rayovac's issued and outstanding common stock between April 26, 2001, and September 19, 2001. Defendant Thomas R. Shepherd is a director of Rayovac and special partner of defendant Partners. Defendants Scott A. Schoen and Warren C. Smith are directors of Rayovac and managing partners of defendant Partners.

Each defendant participated directly in the day-to-day operations of Rayovac. Each had access to confidential information about the company's business and operations. Each directly and indirectly controlled the conduct of the company's business, the information contained in its filings with the Securities and Exchange Commission and public statements about its business and financial results.

B. Representations Regarding Sales Growth

From September 1996 until December 2000, defendant Rayovac reported continuous sales growth, increasing from $417.9 million to $675.3 million. However, on December 19, 2000, Rayovac announced that its sales for the current quarter would be lower than anticipated. Rayovac stated that the demand in the previous year had been unusually high because of "Y2K" and an "active storm season." In addition, Rayovac stated that sales were hurt by retailers' reluctance to carry a "normal" inventory.

Consistent with the December 2000 prediction, Rayovac announced on January 25, 2001, that its sales and earnings were down for the first time since 1996. Rayovac's CEO, defendant Jones, stated that although the decrease was expected, "we remain confident that beginning in our second fiscal quarter, Rayovac will return to its history of strong growth."

On April 26, 2001, defendant Rayovac issued a press release announcing results for the second fiscal quarter of 2001. It reported that sales rose 4%, from $140.1 million to $145.2 million as compared to the same quarter in the previous year. In the same press release, defendant Jones stated that Rayovac had achieved "strong growth" in the second quarter and that "the market data suggests that the battery category is returning to its historical annual growth rate of six to seven percent in recent years."

Rayovac held a conference call on the same day of the press release. It began:

This broadcast may include forward-looking statements which are based in part on management's estimates, assumptions, and projections as of today. These statements are subject to certain risks and uncertainties and other factors that can cause results to materially differ from what we currently expect. Actual results may differ due to changes in external competitive market factors, changes in our industry or the economy in general, as well as various other factors including those we discuss today and those discussed in our securities filings, including our most recent annual report on form 10-K. We assume no obligations to update these statements.

During the conference call, defendant Jones stated again that "the market continues to rebound and is quickly returning to its strong historical growth trends." With regard to Rayovac's performance outside the United States, defendant Jones stated:

Around the world, retailers are experiencing strong battery growth as a result of adding Rayovac high performance value array and products to their assortments. Our strategy is not only working, but also gaining significant momentum in all important geographic regions. And we expect more major wins to come our way in the near future. After all, why wouldn't every retailer carry Rayovac, the fastest growing battery company in the world? Overall, we are very encouraged that industry growth trends are returning in virtually all important segments of the battery industry and Rayovac continues to outperform the market in all key segments.

Next, defendant Jones discussed the company's future performance:

Rayovac's long-term top line sales growth should be in the 8-9% range, outperforming the overall industry growth rates of 6-7%. Gross margins and operating margins should continue to improve 50-100 basis points annually in the future. We confirm our previous fiscal year ending 9/30/01 guidance from $1.30 to $1.32 cents earnings per share. Our guidance for calendar year '01 would be in a range of $1.36 to $1.38 EPS. Our preliminary guidance for fiscal year '02 is in a range of $1.50 to $1.55 earnings per share in line with our previously communicated long term EPS growth rate target of 15-18%.

In response to several questions regarding the rate of sales growth, defendant Jones confirmed that "we believe that sales growth over the second half of '01 should be about that 8-9% range and we feel actually pretty comfortable with that number" and that "a good assumption for modeling" during the second half of the year "would be high single digit sales." When asked how...

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