In re Campbell Soup Co. Securities Litigation, CIV A 00-152 JEI.
| Decision Date | 19 June 2001 |
| Docket Number | No. CIV A 00-152 JEI.,CIV A 00-152 JEI. |
| Citation | 145 F.Supp.2d 574 |
| Parties | In re CAMPBELL SOUP COMPANY SECURITIES LITIGATION. |
| Court | U.S. District Court — District of New Jersey |
Rodriguez & Richards by Lisa J. Rodriguez, Haddonfield, NJ, Counsel for Plaintiffs.
Berger & Montague by Sherrie R. Savett, Stuart J. Guber, Darin R. Morgan, Philadelphia, PA, Counsel for Plaintiffs.
Schatz & Nobel by Andrew M. Schatz, Jeffrey S. Nobel, Patrick A. Klingman, Robert W. Cassot, Hartford, CT, Counsel for Plaintiffs.
Riker, Danzig, Scherer, Hyland & Perretti by Alan E. Krause, Morristown, NJ, Counsel for Defendants.
Cravath, Swaine & Moore by Paul C. Saunders, Max R. Shulman, Worldwide Plaza, New York, NY, Counsel for Defendants.
Presently before the Court is Defendants' Campbell Soup Company, Dale F. Morrison, and Basil L. Anderson's Motion to Dismiss Plaintiffs' Consolidated Amended Class Action Complaint alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1331 and 1337. For the reasons set forth below, Defendants' motion to dismiss is denied.
In considering this Motion to Dismiss pursuant to Fed.R.Civ.P. 12(b)(6), the Court must accept as true the facts as alleged in the Amended Complaint and any reasonable inferences that can be drawn therefrom. See Nami v. Fauver, 82 F.3d 63, 65 (3d Cir.1996). Accordingly, the following recitation does not represent findings of fact by the Court.
Plaintiffs brought this putative class action on behalf of all persons who purchased the common stock of Campbell Soup Company ("Campbell" or "the Company") between September 8, 1997, and January 8, 1999, with the exception of defendants, the Company's officers and directors, their families, and any controlled entities.
Defendant Campbell, which is headquartered in Camden, New Jersey, is the world's largest manufacturer and marketer of soup products, with reported fiscal year 1998 sales of approximately $6.7 billion. (Am. Compl. at ¶ 18). The Company's primary customers are wholesalers and grocery store chains. (Id. at ¶ 40). Campbell's stock trades on the New York Stock Exchange. (Id. at ¶ 18). At all times relevant to the Amended Complaint, Defendant Dale F. Morrison ("Morrison") was President and Chief Executive Officer of Campbell and a member of its Board of Directors. (Id. at ¶ 19). Defendant Basil L. Anderson ("Anderson") was, at all relevant times, Executive Vice President and Chief Financial Officer of the Company. (Id. at ¶ 20).
In the years leading up to 1997, when Morrison was appointed President and CEO, Campbell experienced great success, with increasing sales, gross margins, and profits, and a consequent increase in its stock price. (Id. at ¶ 32-33). In its 1997 Annual Report, the Company disclosed that the increases in 1997 and 1996 "were due principally to continued productivity gains in manufacturing and higher selling prices." (Id. at ¶ 33). Analysts noted that, because the retail price of Campbell's soup was approaching $1.00 per can, which was viewed as a break point for retail consumers, further growth would need to come primarily from increased sales volume. (Id.) Thus, Plaintiffs allege, when Morrison took over the Company in June 1997, he faced the substantial challenge of maintaining Campbell's impressive growth while finding new avenues for that growth. (Id.)
Plaintiffs claim that, while the Company looked for new opportunities for growth in foreign markets, Defendants pursued a plan to dramatically increase the volume of domestic soup sales. However, in early 1997, Campbell's customers, in anticipation of an imminent price increase, had bought large quantities of soup to take advantage of the then-current price. (Id. at ¶ 36). Plaintiffs allege that this bulge in purchases reduced subsequent demand and that, faced with this reduced demand, Defendants sought to spur purchases by offering significant quarter-end discounts. (Id. at ¶ 37).
This sales effort was directed by William Toler ("Toler"), the head of marketing, and Ron Gable ("Gable"), Vice President of Supply Chain. Toler reported to Mark Leckie ("Leckie"), President of the U.S. Grocery Division, who reported to Morrison. Gable reported directly to Morrison. (Id. at ¶ 38). Plaintiffs allege that Morrison and William O'Shea, who served under Anderson as Comptroller, would give Toler revenue targets that the Company needed to report in order to meet analyst estimates. (Id. at ¶ 39). Toler, through frequent and sometimes daily conference calls, would discuss these targets with his marketing team and would authorize ever larger "discounts" necessary to induce customers to take product which the Company would then "load" onto trucks by the end of each fiscal quarter. (Id. at ¶ 40).
This "loading," as the practice was called, included discounts of up to fifteen to twenty percent. (Id. at ¶ 41). Plaintiffs contrast these large discounts with the modest two to three percent discounts that Campbell traditionally offered its customers in exchange for in-store advertising and promotions of Campbell's products. (Id.). Although the "loading" discounts were significantly larger than the traditional discounts and were not offered in exchange for marketing concessions, Plaintiffs allege that Defendants nevertheless reported these discounts as "sales, general and administrative expenses" ("SG & A") — in other words, marketing expenses — rather than as deductions from gross revenue, as, Plaintiffs claim, is required under generally accepted accounting principles ("GAAP"). (Id. at ¶ 86(h)).
Plaintiffs further allege that, after Campbell's customers indicated that they did not have enough space to store the product that Campbell was pushing them to buy, Defendants implemented a plan to ship and warehouse product for its customers. (Id. at ¶ 42). As Plaintiffs claim, Defendants used forty to fifty warehouses, owned or leased by Campbell, to store the product. (Id.). Defendants also arranged for trucks to pick up the product, drive to other areas of the lots at Campbell facilities, and wait there until the product was to be delivered to the customers. (Id.). Up to one hundred trucks may have been involved in this process. (Id.). Plaintiffs allege that, because Campbell did not have enough trucks to handle the large amount of product "loaded" at the end of each quarter, the Company, specifically Gable, arranged for third party shipping companies to provide assistance. (Id. at ¶ 43).
Plaintiffs allege that Campbell realized the revenue from this product during the quarter in which it was "loaded," even though: (i) the product was not delivered until after the quarter ended; (ii) Campbell paid for the additional shipping, storage, and handling of the product; (iii) there was no transfer of risk of loss; and (iv) there was no legitimate business reason for the customers to purchase products under those conditions. (Id. at ¶ 85(c)). As a result, Plaintiffs contend, Defendants improperly reported the "sales" as legitimate revenue earlier than they should have. (Id. at ¶ 44).
Plaintiffs claim that Defendants further induced Campbell's customers to take additional product by offering a "guaranteed sales" policy, whereby customers could return unsold product within a reasonable period of time. (Id. at ¶ 46). Although Defendants allegedly believed that the customers would not return product because of its long shelf life, Plaintiffs contend that the returns ended up being quite significant. (Id.). Plaintiffs indicate that return levels were so high that Toler sent out a memorandum stating that his approval was required before any further "guaranteed sales" were made. (Id.). Plaintiffs claim that Campbell's "guaranteed sales" policy violated GAAP because Defendants recognized these sales as revenue even though future returns could not be reasonably estimated and Defendants did not provide a reserve for returns in their financial statements. (Id. at ¶ 85(d)).
As a result of these sales practices, Plaintiffs allege, several of Campbell's major customers had almost a year or more of advance inventory of Campbell's soup products. (Id. at ¶ 47).
Plaintiffs allege that these practices, and concerns about their propriety, were discussed among senior management, including Morrison and Anderson, and that Morrison received memoranda reviewing the practices. Plaintiffs also claim that Morrison rejected recommendations that the Company stop such improper practices. (Id. at ¶ 45).
Throughout this period, the Company reported impressive, often record, growth. (Id. at ¶¶ 49-75). As Defendants disclosed in quarter-end press releases, SEC filings, and annual reports, reported sales and earnings steadily increased, due to, Defendants claimed, "volume-driven growth" and increased advertising and marketing, among other factors. (Id.). Defendants also represented in their filings that "shipments are made promptly by the company after receipt and acceptance of orders." (Id. at ¶¶ 52, 71). As the Company consistently met analysts' expectations, the stock price rose accordingly. (Id. at ¶¶ 49-75). However, Plaintiffs allege, Defendants never disclosed in its public releases or SEC filings its engagement in, nor the extent of, its allegedly improper sales and accounting practices.
On January 11, 1999, Defendants announced that fiscal year earnings would fall short of analysts' estimates due to "unusually warm weather" and "major inefficiencies throughout the supply chain, including procurement, manufacturing, shipping and storage of products." (Id. at ¶¶ 76, 78). As a result of the announcement, Campbell's stock price dropped almost sixteen percent from the previous close, from a high of $53.9375 per share on January 8, 1999 to a closing price of...
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