Gebhardt v. Conagra Foods, Inc.

• Decision Date: 30 June 2003
• Docket Number: No. 02-3130NE.,02-3130NE.
• Citation: 335 F.3d 824
• Parties: John GEBHARDT, Individually and on behalf of all others similarly situated; Jemmco Investment Management; and Plumbers & Pipefitters National Pension Fund, Appellants, v. CONAGRA FOODS, INC.; Bruce C. Rohde; James P. O'Donnell; Kenneth W. Difonzo; and Jay D. Bolding, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

335 F.3d 824

John GEBHARDT, Individually and on behalf of all others similarly situated; Jemmco Investment Management; and Plumbers & Pipefitters National Pension Fund, Appellants, v. CONAGRA FOODS, INC.; Bruce C. Rohde; James P. O'Donnell; Kenneth W. Difonzo; and Jay D. Bolding, Appellees.

No. 02-3130NE.

United States Court of Appeals, Eighth Circuit.

Submitted: April 17, 2003.

Filed: June 30, 2003.

Rehearing and Rehearing En Banc Denied: August 27, 2003.

COPYRIGHT MATERIAL OMITTED

Sanford P. Dumain, argued, New York, NY (Thomas M. White, Omaha, NE, on the brief), for appellants.

Andrew B. Weissman, argued, Washington, DC (Leo A. Knowles, Edward G. Warin and Patrick E. Brookhouser, Jr., Omaha, NE and John A. Valentine of Washington, DC, on the brief), for appellees.

Before BOWMAN, RICHARD S. ARNOLD, and BYE, Circuit Judges.

RICHARD S. ARNOLD, Circuit Judge.

United Agri Products, a wholly owned subsidiary of ConAgra Foods, Inc., engaged in misleading accounting practices throughout the late 1990s. John Gebhardt, on behalf of a class of investors who bought ConAgra stock between August 28, 1998, and May 23, 2001, filed an action against ConAgra and its management under the Securities Exchange Act of 1934 to recover for the fraud allegedly perpetrated by ConAgra's subsidiary with the help or knowledge of the defendants. The District Court dismissed the plaintiffs' suit for failing to state a claim upon which relief could be granted for two reasons: (1) the defendants' misrepresentations were immaterial as a matter of law; and (2) the plaintiffs suffered no loss attributable to the defendants. We disagree as to both conclusions and reverse the judgment of the District Court.

I.

ConAgra concedes that the management of its subsidiary, UAP, began to overstate UAP's earnings. The complaint alleges that throughout the fiscal years 1998, 1999, and 2000, UAP recognized sales when delivery of the goods had not yet taken place — a violation of generally accepted accounting principles (GAAP). UAP also recorded rebates as income in violation of GAAP and made "sales" to non-existent customers. The subsidiary also boosted its bottom line by maintaining inadequate reserves for bad debts and delaying the writing off of uncollectible accounts receivable. Roughly $287 million in revenue was manipulated over the three years at issue. This caused all of UAP's, and hence ConAgra's, earnings statements, usually in the form of 10-K or 10-Q filings with the SEC, to be overstated. Certain ConAgra officers were allegedly aware of UAP's fraud and either encouraged it or turned a blind eye to it.

In February of 2001, ConAgra made the first of two press statements which would play prominent roles in this suit. The company announced that it was expecting reduced profits for the second half of 2001 on account of a tougher business climate. Of special significance to this case was an innocuous-sounding statement at the end of the release noting that the reduced expectations did not take into account the "impact of accounting changes which the company is currently reviewing." In the wake of this news, ConAgra's stock plummeted from $24.86 to $20.01 per share. The plaintiffs allege that this seemingly unrelated announcement was made with the UAP scandal in mind. They argue that the final line of the statement tipped off knowledgeable investors to ConAgra's accounting difficulties, and was made in order to take some of the sting out of the upcoming second announcement.

Three months later, on May 23, 2001, ConAgra announced that, because of UAP's subterfuge, it was going to have to restate its earnings, both past and present. In the announcement, Bruce Rohde, ConAgra's CEO and a defendant in this case, said, "[c]ertain matters were discovered that warranted an investigation into several accounting practices at UAP. Our preliminary findings indicate that certain conduct at UAP circumvented generally accepted accounting practices and violated ConAgra Foods' corporate policy. Those actions will not be tolerated." Most of UAP's fraud involved recognizing income prematurely, so the problem was mostly one of having the money attributed to the wrong year, as opposed to not having ever made the money at all. Consequently, ConAgra's income, before taxes, was reduced by $111 million for the years 1998 through 2000, while its income for 2001 was increased by $127 million.¹ The company's stock dropped from $20.61 to $20.07 on heavy trading the day after the May announcement. However, the stock price quickly recovered and began to trend higher. Its average closing price during the 90 days following was a few cents higher than the stock's price on the day of the May announcement.

By August, purchasers of ConAgra stock had filed suit against the company. On January 11, 2001, the District Court appointed lead plaintiffs in this case and allowed the investors to file an amended class-action complaint that alleged ConAgra had knowingly or recklessly misrepresented its financial results for the years in question in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). The class period began on August 28, 1998, when ConAgra filed its Form 10-K for 1998 with the SEC, and ran until May 23, 2001, when ConAgra fully revealed its accounting problems. The plaintiffs also claimed that the managers of ConAgra — Bruce Rohde, James O'Donnell, Kenneth DiFonzo, and Jay Bolding — were liable as controlling persons under Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a).

In response, ConAgra filed a 12(b)(6) motion to dismiss. The plaintiffs suggested in a brief that they should be granted leave to amend their complaint should any part of it be dismissed. The District Court did not address the amendment issue; instead, the Court dismissed plaintiffs' complaint because, in the Court's view, the plaintiffs failed to allege either transaction or loss causation, both being essential elements of a 10(b) lawsuit. Arthur Young & Co. v. Reves, 937 F.2d 1310, 1327-28 (8th Cir.1991).

With regard to transaction causation (which can be thought of as reliance), the District Court noted that the amount of earnings misrepresented was merely 0.4 per cent. of ConAgra's total revenues during the years in question. Further, this money was earned by the company; ConAgra merely reported it prematurely. The Court concluded that "[a] reasonable investor with complete knowledge of the UAP accounting issues would have realized that ConAgra's overall earnings were basically unaffected by any of those issues." Dist. Ct. Op. 11. This conclusion set off a chain of legal conclusions: without a material misstatement, the plaintiffs could not invoke the fraud-on-the-market theory,² and without that theory, they had not shown transaction causation, an essential element of their claim.

The District Court also held that the plaintiffs' pleadings failed to allege loss causation. The plaintiffs alleged that UAP's accounting had artificially inflated the value of ConAgra's stock and thus the plaintiffs paid too much for it and suffered damages. However, because the misrepresentations had been immaterial, the District Court reasoned, it followed that ConAgra's stock was not affected by the misrepresentations and hence was not inflated. The District Court buttressed this conclusion with the fact that the stock's price was virtually unaffected by the May announcement, which suggested that most investors were not concerned about the earnings restatement. The District Court declined to attach any significance to the February decline because that "announcement had no possible connection to the UAP accounting issues." Plaintiff's other cause of action, the Section 20(a) claim, relied on the 10(b) action, and the dismissal of that action necessarily resulted in the dismissal of the other. After having all of their claims dismissed, the plaintiffs filed a timely appeal to this Court.

II.

We review the District Court's grant of a 12(b)(6) motion to dismiss de novo. Romine v. Acxiom Corp., 296 F.3d 701, 704 (8th Cir.2002). Our review is stringent — we will affirm only if the plaintiffs can prove no set of facts that would entitle them to the relief requested. Id. We have said, "as a practical matter, dismissal under Rule 12(b)(6) is likely to be granted only in the unusual case in which a plaintiff includes allegations that show on the face of the complaint that there is some insuperable bar to relief." Parnes v. Gateway 2000, Inc., 122 F.3d 539, 546 (8th Cir.1997). We will assume the facts pleaded are true and will construe those facts in the light most favorable to the plaintiffs. United States v. Aceto Agr. Chemicals Corp., 872 F.2d 1373, 1376 (8th Cir.1989). After viewing the facts in this light, we respectfully disagree with the District Court's decision.

A.

We first address the materiality of UAP's misrepresentations. A fact is deemed material if there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as substantially altering the mix of information available to the investor. Parnes, 122 F.3d at 546, citing Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). Ordinarily, materiality is a question of fact for the jury; however, we have recognized an exception in cases where the false information is so insignificant, in relation to the total mix of data available, that it would not have mattered to a reasonable investor. Parnes, 122 F.3d at 547.

We addressed the propriety of deciding materiality as a matter of law in Parnes v. Gateway 2000, Inc., supra, in which we affirmed the grant of a motion to dismiss a 10(b) claim. The defendant in Parnes overstated its assets by $6.8 million. We observed that the information misrepresented was insignificant because of its context — the investment at issue was a rapid-growth company that presented investors...