Hall v. The Children's Place Retail Stores, Inc.
| Decision Date | 18 July 2008 |
| Docket Number | No. 07 Civ. 8252(SAS).,07 Civ. 8252(SAS). |
| Citation | 580 F.Supp.2d 212 |
| Parties | Debra HALL, Individually and on Behalf of All Others Similarly Situated, Plaintiffs, v. THE CHILDREN'S PLACE RETAIL STORES, INC., Ezra Dabah & Susan Riley, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Samuel H. Rudman, Esq., David A. Rosenfeld, Esq., Mario Alba, Jr., Esq., Coughlin Stoia Geller Rudman & Robbins LLP, Melville, NY, Nathan M. Jenkins, Esq., Jenkins & Carter, Reno, NV, for Lead Plaintiff and the Class.
Jonathan D. Polkes, Esq., David R. Fertig, Esq., Weil, Gotshal & Manges LLP, Robert J. Jossen, Esq., Michael J. Gilbert, Esq., Dechert LLP, Richard P. Swanson, Esq., Arnold & Porter LLP, New York, NY, for Defendants.
This putative class action is brought on behalf of a class of shareholders of The Children's Place Retail Stores, Inc. ("TCP" or the "Company") against (1) TCP; (2) its Chief Executive Officer ("CEO"), Ezra Dabah; and (3) its Chief Financial Officer ("CFO"), Susan Riley. Debra Hall and all other similarly situated shareholders (the "Shareholders") allege in the Consolidated Class Action Complaint (the "Complaint") that defendants violated federal securities laws in connection with the Company's accounting for stock options in its financial statements and its certifications of the adequacy of the Company's internal controls. Plaintiffs further assert that the defendants fraudulently misstated the Company's financial statements by reporting artificially inflated financial results, failing to disclose significant problems with a major business partner, and knowingly violating the Company's internal control policies. The defendants now move to dismiss the Complaint. For the reasons discussed below, the motion is denied.
During the period from March 9, 2006 through August 23, 2007 (the "Class Period"), TCP operated as a specialty retail company.2 Throughout the Class Period, the Company was registered with the Securities and Exchange Commission ("SEC") pursuant to the Securities Exchange Act of 1934 ("Exchange Act") and was traded on the NASDAQ National Market ("NASDAQ").3 Dabah served as CEO of TCP throughout the Class Period.4 Riley served as Senior Vice President and CFO of TCP from April 2006 until January 2007 and has been Executive Vice President of Finance and Administration of TCP since January 2007.5
In 2004, TCP entered into a License and Conduct of Business Agreement ("License Agreement") with the Walt Disney Company ("Disney") that provided TCP with the exclusive right to operate the Disney Store North America, a total of 313 retail operations (the "Disney Stores").6 Pursuant to the License Agreement and in exchange for the sum of $101 million, TCP acquired the Disney Stores which sell Disney-related merchandise in malls and shopping centers throughout the country.7 Under the License Agreement, TCP was obligated to maintain the "quality, appearance and presentation standards" of the Disney Stores.8 In April of 2006, the License Agreement was amended, requiring TCP to: (1) completely remodel each Disney Store within a specified time after lease renewals; (2) completely remodel each Disney Store at least once every twelve years; and (3) completely remodel a minimum of 160 of the 313 acquired Disney Stores by January 1, 2009 ("Remodeling Initiative").9 The Disney Franchise Board ("Franchise Board") regularly interacted with TCP and its subsidiary, Hoop, to ensure that the company complied with all terms of the License Agreement.10
Seven confidential witnesses ("CW 1-7") have provided relevant information about the procedures and practices carried out by the Company during the Class Period.11 Each CW was either an employee of the Company or worked closely with the Company, providing them with access to the information they have alleged in the Complaint.12 According to CW 4, a long-time Disney Stores employee, the Franchise Board approval process was an integral element of the License Agreement.13 Following the signing of the License Agreement and during the Class Period, TCP experienced ongoing problems and delays in developing merchandise to sell in the Disney Stores and in carrying out the Remodeling Initiative.14 According to CW 1, the Franchise Board frequently disapproved of the manner in which TCP was carrying out the design and remodeling of the Disney Stores, as well as the development and selection of Disney merchandise under the License Agreement.15 "According to CW 5, many of Dabah's decisions created problems for Hoop ... because Dabah disregarded the desires and expectations of Disney, as set forth in the License Agreement and communicated by the Franchise Board."16
During the Class Period, TCP regularly represented that its relationship with Disney was a positive one and that it was working closely with Disney to carry out the Remodeling Initiative.17 However, according to CW 1, the Franchise Board continuously disapproved of store and merchandise designs, particularly relating to one "design theme" known as the Mickey Store format.18 Fifty existing Disney Stores were scheduled to be remodeled to the Mickey Store Format within the first calendar year after the acquisition.19 CW 2 confirmed that "Hoop executives regularly 'butted heads' with representatives of the Franchise Board."20 Moreover, according to CW 5, Hoop did not conduct any maintenance or repair on any of the stores as required by the License Agreement.21 At all times, TCP was aware of the problems Hoop was experiencing.22 As of February 3, 2007, TCP had only remodeled thirty-two of the approximately 145 stores. As a result of its failure to meet certain deadlines and other violations of the License Agreement, TCP was "in breach of the License Agreement throughout 2006 and most of 2007."23 In 2007, Disney notified TCP that it had committed one hundred and twenty breaches of the License Agreement.24 As a consequence, TCP and Disney entered into a letter agreement (the "June Letter Agreement") that imposed new obligations on TCP.25 In August 2007, TCP disclosed that it had fallen behind on its obligations under the June Letter Agreement and would likely miss upcoming deadlines.26 As a result of the violation, Disney was free to terminate the License Agreement.27
TCP granted stock options to its officers, directors, and employees pursuant to at least two stock option plans.28 From 1997 through 2005, TCP engaged in the improper practice of backdating these stock options.29 Stock option backdating involves intentionally altering the stock option grant dates to an earlier date when the stock's price was lower.30 A key purpose of stock options is to give recipients an incentive to improve their employer's performance, including its stock price.31 Backdating them so they carry a lower exercise, or strike, price gives the recipient a "paper profit" right from the start.32 The difference between the stock's current market price and the option's exercise price represents the amount of profit per share gained upon the exercise or the sale of the option.33 For example, if a company grants options on May 22, when the stock's market price is twenty dollars, but records the grant date as April 22, when its market price was only fifteen dollars, the intrinsic value of the option would be the difference between its market price on May 22 and its strike price on April 22— five dollars.34
The Company's 2005 Form 10-K, filed with the SEC on or about April 12, 2006, falsely represented that the Company applied Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees" ("APB 25") to its stock option grants.35 The provisions of APB 25 mandate use of the intrinsic value method which determines an asset's true value regardless of its market price.36 The 2005 Form 10-K stated that TCP uses the intrinsic value method under APB 25 to account for its stock option plans.37 The Company has since disclosed that its APB 25 measurement dates were incorrect. The options were backdated, many times just before a sharp increase in the trading price of TCP stock, i.e., the options were spring-loaded.38 Spring-loaded options are granted immediately preceding a company announcement that is expected to have a positive result on the stock price.39 The value of the options is spring-loaded because after they are granted there is a high likelihood that the options will be "in the money," i.e., the market price will be above the strike price.40 Because positive news typically causes the market price of a company's stock to surge in value, timing an option grant to precede the public news release will allow the recipient to receive an immediate paper profit.41 "Defendants have now admitted that certain option grant dates were set with a view towards upcoming disclosures."42 TCP has now disclosed that "as a result of the Company's governance, internal financial reporting and other controls over the option grant process, the APB 25 measurement dates used by the Company for a significant portion of the stock options granted during the Review Period were incorrect."43 The Company further represented that "[o]ptions granted under the [Stock Option] Plans have exercise prices established by the Compensation Committee [which] provided that the exercise price of incentive stock options may not be less than the fair market value of the underlying shares at the date of grant."44 This statement, and all related statements, are materially false and misleading because TCP granted stock options to insiders at exercise prices that were below their fair market value on the grant date.45 The options backdating scheme caused TCP's 2005 Form...
To continue reading
Request your trial
-
In re Cannavest Corp. Sec. Litig.
...633 (S.D.N.Y. 2014) ("A lack of adequate internal controls may support the inference of scienter."); Hall v. The Children's Place Retail Stores. Inc., 580 F.Supp.2d 212, 233 (S.D.N.Y. 2008) ("[T]he Company admitted that it had material weaknesses in its internal controls—weaknesses probativ......
-
Wilson v. Dalene
...the plaintiff relied, and (5) that the plaintiff's reliance was the proximate cause of its injury.” Hall v. The Children's Place Retail Stores, Inc., 580 F.Supp.2d 212, 225 (S.D.N.Y.2008) (quoting ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 105 (2d Cir.2007)). Federal Rule of Civi......
-
Deangelis v. Corzine (In re MF Global Holdings Ltd.)
...Rule 9(b). See In re Bristol Myers Squibb Co. Sec. Litig., 586 F.Supp.2d 148, 170–71 (S.D.N.Y.2008); Hall v. The Children's Place Retail Stores, Inc., 580 F.Supp.2d 212, 235 (S.D.N.Y.2008). Instead, control may be pled in accordance with the notice pleading standard prescribed in Rule 8(a).......
-
Freudenberg v. E*trade Financial Corp.
...to a loan's existing quality and risks were false and misleading when made. See Hall v. The Children's Place Retail Stores, Inc., 580 F.Supp.2d 212, 229 (S.D.N.Y.2008) (rejecting “fraud by hindsight” argument where undisclosed breaches of license agreement, which placed agreement at risk of......