In re Fairway Grp. Holdings Corp.

• Decision Date: 19 August 2015
• Docket Number: 14 Civ. 0950 (LAK)(AJP)
• Parties: In re FAIRWAY GROUP HOLDINGS CORP. SECURITIES LITIGATION
• Court: U.S. District Court — Southern District of New York

In re FAIRWAY GROUP HOLDINGS CORP. SECURITIES LITIGATION

14 Civ. 0950 (LAK)(AJP)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

August 19, 2015

REPORT AND RECOMMENDATION

ANDREW J. PECK, United States Magistrate Judge:

To the Honorable Lewis A. Kaplan, United States District Judge:

Plaintiff Jacksonville Police and Fire Pension Fund alleges that defendants made material misstatements and omissions in order to make the Fairway Group Holdings Corp. IPO more attractive to investors. (See generally Dkt. No. 83: 2d Am. Compl. ("SAC").) The alleged misstatements and omissions concern three primary issues: (1) Fairway's expansion to new stores ( SAC ¶¶ 53-58, 144-47, 262); (2) Fairway's sales growth at existing store locations including the effect of Hurricane Sandy (SAC ¶¶ 59-64, 148-51, 263); and (3) Fairway's deferred tax asset and adjusted earnings before interest, taxes, depreciation and amortization (SAC ¶¶ 65-67, 152-55, 266-68). Plaintiff brings claims under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and §§ 11, 12(a)(2) and 15 of the Securities Act of 1933. (SAC ¶¶ 18, 216-25, 295-315)

Presently before the Court are the defendants' renewed motions to dismiss. (See Dkt. No. 87: Underwriters Notice of Motion; Dkt. No. 88: Fairway & Sterling Notice of Motion; see also Dkt. No 62: Underwriters Br.; Dkt. No. 64: Fairway & Sterling Br.; Dkt. No. 71: Underwriters Reply Br.; Dkt. No. 72: Fairway & Sterling Reply Br.; Dkt. No. 89: Fairway, Sterling & Underwriters Suppl. Br.; Dkt. No. 93: Fairway, Sterling & Underwriters Suppl. Reply Br.) The Underwriter Defendants move to dismiss pursuant to Rules 8(a), 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure. (Underwriters Notice of Motion; see also Underwriters Br. at 1; Fairway, Sterling & Underwriters Suppl. Br. at 1.) The Fairway and Sterling Defendants move to dismiss pursuantto Rules 8, 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure, and the Private Securities Litigation Reform Act ("PSLRA"). (Fairway & Sterling Notice of Motion; see also Fairway & Sterling Br. at 1; Fairway, Sterling & Underwriters Suppl. Br. at 1.)

For the reasons set forth below, the defendants' motions to dismiss (Dkt. Nos. 87 and 88) should be GRANTED.

FACTS

The Parties

Lead plaintiff Jacksonville Police and Fire Pension Fund is a public pension plan established for police and firefighters in Jacksonville, Florida. (Dkt. No. 83: SAC ¶ 23.) Plaintiff purchased shares of Fairway securities between April 17, 2013 and February 7, 2014 (the "Class Period"). (SAC Intro. & ¶ 23.) Plaintiff brings this claim on behalf of itself and all others who purchased Fairway common stock during the Class Period. (SAC Intro.)

Defendant Fairway Group Holdings Corp. is a food retailer in the greater New York City Area. (SAC ¶ 24.) Fairway became a publicly traded company through an April 2013 IPO. (Id.)

Defendant Charles W. Santoro was Fairway's Executive Chairman of the Board. (SAC ¶ 25.) Santoro is a co-founder and managing partner of Sterling Investment Partners and is a member and general partner of the Sterling Funds discussed below. (Id.) Defendant Herbert Ruetsch was Fairway's Chief Executive Officer until his resignation on February 6, 2014. (SAC ¶ 26.) Defendant Edward C. Arditte was Fairway's Executive Vice President and Chief Financial Officer, and served as a consultant to Fairway in October and November 2012. (SAC ¶ 27.) According to Fairway's SEC filings, Santoro, Ruetsch and Arditte were "'key personnel'" during the Class Period, and were "'primarily responsible for determining the strategic direction of [Fairway's]business and for executing [Fairway's] growth strategy.'" (SAC ¶ 28.) Fairway, Ruetsch, Arditte and Santoro are defendants to the Exchange Act and Securities Act claims. (SAC ¶¶ 18, 24-27, 220-25.)

The Sterling Defendants acquired an 80.1 % stake in Fairway on January 24, 2007 for approximately $150 million. (SAC ¶¶ 29, 253.) The Sterling Funds collectively sold 1,898,909 shares of Fairway Class A common stock in the IPO for approximately $23 million. (SAC ¶¶ 29-33, 253-56.)

Defendant Sterling Advisors, a Sterling affiliate, entered into a management agreement with Fairway in 2010. (SAC ¶¶ 34, 257.) Sterling Advisors consulted with Fairway's Board of Directors and management on business and financial matters, including Fairway's corporate strategy and the IPO. (SAC ¶¶ 34, 257.) Between 2010 and the April 17, 2013 IPO, Fairway paid Sterling Advisors approximately $20 million for these services. (SAC ¶¶ 34, 257.) Sterling Advisors also received $9.2 million in the IPO as a fee to terminate the management agreement. (SAC ¶¶ 34, 257.) Sterling Advisors and the four Sterling Funds (collectively the "Sterling defendants") are defendants to the Exchange Act and Securities Act claims. (SAC ¶¶ 18, 29-34, 253-58.)

Defendant Linda M. Siluk has served as Fairway's Vice President-Finance and Chief Accounting Officer since October 2011. (SAC ¶ 234.) Defendant Michael Barr is a principal of Sterling Investment Partners and has served as a Fairway director since 2007. (SAC ¶ 237.) Defendant Howard Glickberg has served as a Fairway director since January 2007 and as Fairway's Vice Chairman of Development since January 1, 2012. (SAC ¶ 238.) Defendant Stephen L. Key has served as a Fairway director since August 2012 and has served as a member of the Senior Executive Advisory Board of Sterling Investment Partners. (SAC ¶ 239.) Defendant WilliamSelden is a co-founder and managing partner of Sterling Investment Partners, and has served as a Fairway director since January 2007. (SAC ¶ 240.) Defendant Farid Suleman has served as a Fairway director since August 2012 and has served as a member of the Senior Executive Advisory Board of Sterling Investment Partners. (SAC ¶ 241.) Siluk, Barr, Glickberg, Key, Selden and Suleman (collectively, the "Director Defendants") are defendants only to the Securities Act claims. (SAC ¶¶ 234, 237-42.)

Defendants Credit Suisse Securities (USA) LLC, Merrill Lynch, Pierce, Fenner & Smith Inc., Jefferies LLC, William Blair & Company L.L.C., BB&T Capital Markets, Guggenheim Securities, LLC, Oppenheimer & Co. Inc., Wolfe Trahan Securities, and Morgan Joseph TriArtisan LLC (collectively, the "Underwriter Defendants") each acted as an underwriter in the Fairway IPO; they are defendants only to the Securities Act claims. (SAC ¶¶ 18, 243-52.)

Factual Allegations in the Amended Complaint

Plaintiff alleges that during the Class Period, defendants made material misstatements and omissions regarding Fairway's growth potential to make Fairway's IPO attractive to investors, because "[d]efendants knew that [was] the only chance that Fairway had to complete an IPO of any size." (Dkt. No. 83: SAC ¶ 53) The alleged misstatements and omissions concern three primary issues: (1) Fairway's expansion to new stores; (2) Fairway's sales growth at existing store locations and the effect of Hurricane Sandy; and (3) Fairway's deferred tax asset ("DTA") and adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA"). (SAC ¶¶ 53-67, 261-70.) Plaintiff's allegations are based upon SEC and other regulatory filings, press releases, and statements by Fairway's directors and officers during conference calls and the IPO roadshow. (SAC ¶¶ 51-80, 261-77.) Plaintiff's allegations also are based upon the knowledge of ten confidential witnesses who are former Fairway employees (SAC ¶¶ 40, 64, 85-98), including: manager offinancial planning ("CW 1"); assistant controller ("CW 2"); employee in the accounts payable department ("CW 3"); supervisor of several stores ("CW 4"); store controller ("CW 5"); assistant general manager ("CW 6"); director of internal audit ("CW 7"); general manager of the Woodlawn Park, New Jersey store ("CW 8"); bakery manager for several stores ("CW 9"); and director of training and recruitment ("CW 10"). (SAC ¶¶ 85-97.)

After purchasing a majority stake in Fairway in 2007, Sterling assumed full operational control and placed its representatives on the Fairway board of directors and in executive positions. (SAC ¶ 4.) In November 2009, Sterling announced plans to take Fairway public. (Id.) Between 2009 and 2012, Sterling positioned Fairway as a growth company, by rapidly expanding Fairway's footprint in New York City and the surrounding area from three to twelve stores. (SAC ¶ 5.) Fairway's expansion was costly, forcing it to take on $260 million in debt. (SAC ¶ 6.) Defendant Santoro predicted that the expansion would be worth the cost, and stated to the Wall Street Journal in July 2011 that he expected Fairway to triple its net sales to more than $1 billion by the end of 2012. (Id.) Fairway's expansion did not prove to be as profitable as Santoro predicted, and in 2012 Fairway generated only $555 million in net sales. (SAC ¶ 7.) In August 2012, Sterling accelerated plans for Fairway's IPO, and filed for a confidential IPO pursuant to the Jumpstart Our Business Startups Act of 2012. (SAC ¶ 8.)

Defendants conducted an IPO roadshow prior to Fairway's April 17, 2013 IPO. (SAC ¶¶ 9-10.) Defendants told potential investors that Fairway was "'in the early innings of growth'" and would open three stores in the coming year, and three to four stores annually thereafter, ultimately growing to be a national food retailer rivaling Whole Foods and Trader Joes, with ninety stores in the northeast region and three hundred nationwide. (SAC ¶ 10.) Investor concerns about Fairway's historical losses were allayed by Fairway's $26 million DTA, which indicated management's beliefthat Fairway would "'more likely than not'" generate at least that much profit over five years. (SAC ¶ 11.) Investors further "believe[d] that Fairway's pre-IPO results would have been much stronger without the impact of Hurricane Sandy" in the third quarter of fiscal 2013. (Id.)

On April 17, 2013, Fairway completed the IPO. (SAC ¶ 9.) Fairway sold 15,697,500 shares of common stock...