In re Patterson Companies, Inc. Securities

• Decision Date: 20 March 2007
• Docket Number: No. 05cv2119(DSD/JJG)(Securities Fraud Actions).,No. 05cv1891(DSD/JJG).,No. 05cv2032(DSD/JJG).,No. 05cv2383(DSD/JJG)(ERISA Action).,No. 05cv1757(DSD/JJG).,No. 05cv1853(DSD/JJG).,No. 05cv2155(DSD/JJG)(Derivative Action).,05cv1757(DSD/JJG).,05cv1853(DSD/JJG).,05cv1891(DSD/JJG).,05cv2032(DSD/JJG).,05cv2119(DSD/JJG)(Securities Fraud Actions).,05cv2155(DSD/JJG)(Derivative Action).,05cv2383(DSD/JJG)(ERISA Action).
• Citation: 479 F.Supp.2d 1014
• Parties: In re PATTERSON COMPANIES, INC. SECURITIES, Derivative & ERISA Litigation. This Document Relates to: All Actions.
• Court: U.S. District Court — District of Minnesota

479 F.Supp.2d 1014

In re PATTERSON COMPANIES, INC. SECURITIES, Derivative & ERISA Litigation.

This Document Relates to: All Actions.

No. 05cv1757(DSD/JJG).

No. 05cv1853(DSD/JJG).

No. 05cv1891(DSD/JJG).

No. 05cv2032(DSD/JJG).

No. 05cv2119(DSD/JJG)(Securities Fraud Actions).

No. 05cv2155(DSD/JJG)(Derivative Action).

No. 05cv2383(DSD/JJG)(ERISA Action).

United States District Court, D. Minnesota.

March 20, 2007.

COPYRIGHT MATERIAL OMITTED

Andrew J. Brown, Benny C. Goodman, III, Randall H. Steinmeyer, Lerach Coughlin Stoia. Geller Rudman & Robbins LLP, San Diego, CA, David A. Rosenfeld, Lerach Coughlin Stoia Geller Rudman & Robbins LLP, Melville, NY, Garrett D. Blanchfield, Jr., Reinhardt Wendorf & Blanchfield, St. Paul, MN, Brian L. Williams, Bryan L. Crawford, Stacey L. Mills, Heins Mills & Olson, PLC, Jack L. Chestnut, Karl L. Cambronne, Stewart C. Loper, Chestnut & Cambronne, Minneapolis, MN, Joshua B. Silverman, Patrick V. Dahlstrom, Pomerantz Haudek Block Grossman & Gross LLP, Chicago, IL, Kenneth J. Vianale, Vianale & Vianale LLP, Boca Raton, FL, Thomas J. McKenna, Gainey & McKenna, New York, NY, for Plaintiff's.

Vance Cadd, pro se.

Frank A. Taylor, Margaret A. Goetze, Patrick S. Williams, Briggs & Morgan, PA, Minneapolis, MN, Jeffrey A. Abrahamson, Jessica R. Rosenberg, Briggs & Morgan, PA, St. Paul, MN, for Defendants.

DOTY, District Judge.

This matter is before the court upon defendants' motions to dismiss the consolidated securities class action complaint; to dismiss, or in the alternative for summary judgment on, the amended ERISA class action complaint; and to dismiss the verified amended shareholder derivative complaint. In addition, lead plaintiff's in the consolidated securities action move to strike defendants' exhibits 2, 4 and 9 presented during oral arguments. Based upon a review of the file, record and proceedings herein, and for the reasons stated, the court denies lead plaintiffs' motion to strike as moot, grants defendants' motions and dismisses the consolidated securities class action, the shareholder derivative action and the ERISA class action.

BACKGROUND

Before the court are three actions consolidated for pretrial purposes — a putative consolidated securities fraud class action, a shareholder derivative action and a putative ERISA class action — each of which arose out of the failure of Patterson Companies, Inc., to attain its earnings and revenue projections for fourth quarter 2005 and fiscal year 2005. On the evening of May 24, 2005, Patterson common stock traded at a record high of $53.58 per share. (Consol.Sec.Compl. ¶ 9.) Following the announcement that Patterson missed its fourth quarter and fiscal year 2005 guidance, Patterson common stock traded on record volume of over 10 million shares and dropped approximately 17% in price, resulting in an estimated $1.1 billion loss in market capitalization. Each action before the court is predicated on allegations that Patterson knew prior to May 2005 that the price of Patterson common stock was artificially inflated and the company could not attain its financial guidance, but continued to publicly tout growth and maintain previously issued earnings-per-share projections.

I. Factual Background¹

Patterson Companies, Inc. ("Patterson"), is a publicly held Minnesota-based distribution company, incorporated in the state of Minnesota. Throughout the time period relevant to this litigation, Peter L. Frechette was Patterson's Chief Executive Officer ("CEO"); James W. Wiltz was President, Vice President and Chief Operating Officer ("COO"); and R. Stephen Armstrong was Executive Vice President, Treasurer and Chief Financial Officer ("CFO"). Frechette also served as Chairman of the Patterson Board of Directors, comprised of directors Ronald E. Ezerski, David K. Beecken, Ellen A. Rudnick, Andre B. Lacy, Harold C. Slavkin and James W. Wiltz ("Patterson Board").

Patterson currently sells high-end merchandise to retailers and professionals in three markets: North American dental supplies, United States pet and veterinary supplies and worldwide rehabilitative, nonwheelchair assistive products. Patterson's oldest and largest business, however, is Patterson Dental Supply, which accounted for, approximately 76% of its revenues in 2005. Patterson Dental Supply is the largest distributor of dental products in North America and supplies dentists, professionals, laboratories and healthcare institutions with an expansive variety of consumable dental supplies, dental equipment, software, educational programs and office supplies.

In the early 2000s, Patterson began to expand through an aggressive growth and acquisition plan and acquired Webster Veterinary Supply in 2001, AbilityOne Products Corp. (rehabilitation supplies) in 2003, ProVet (pet food and supplies) in April 2004, Medco Supply Co., Inc. (medical products) in May 2004, CAESY Education Systems Inc. (dental supplies and equipment) in May 2004 and Milburn Distributions Inc. (equestrian supplies) in October 2004. In 2004, analysts viewed Patterson as a growth company and it was rewarded by increased stock prices and high price-to-earnings multiples. In addition to growth by acquisition, Patterson emphasized internal growth initiatives and accomplishments within Patterson Dental Supply.

In January 2004, the company reported that one reason behind an 11.6% rise in dental segment sales was "the positive impart-of continued strengthened market focus, new sales training, tools and programs, and the addition of territory sales representatives to the sales force." (Consol.Sec.Compl. ¶ 27.) In February 2004, Frechette disclosed a strategy to continue internal growth by motivating the sales force through incentives while contemporaneously hiring and training more field sales personnel, noting the company's sales growth and market share gains historically correlated with the strength of its sales force. In April 2004 the company reiterated an intent to continue growth and expand its customer base through continued internal expansion of its sales force and acquisitions of distributors in new markets, believing itself to be "well positioned to take advantage of expected continued consolidation in the dental distribution market." (Id. ¶ 24.)

On August 26, 2004, Patterson released its first quarter fiscal year 2005 earnings and reported that sales of consumable dental supplies and printed office products increased 14%, led by a 15% growth in United States consumables, which equated to a 7% internal sales growth after accounting for an extra week in first quarter 2005. According to Frechette, all dental consumables sales growth was internally generated and the growth rate of consumable dental supplies had begun accelerating during the third quarter of fiscal year 2004 in response to the strengthened focus that Patterson placed on this portion of its business. The sales growth was noted by analysts, who reported the company's renewed focus on improvements, in, and increased incentives for, its sales force.

On November 24, 2004, Patterson released its second quarter 2005 earnings and reported consolidated sales 21% higher than the year-earlier quarter. The company reported a 12% sales growth in Patterson Dental Supply, substantially all of which was internally generated. Patterson predicted third quarter earnings of $0.36 to $0.37 per diluted share, and maintained its previously issued financial guidance of $1.34 to $1.36 for fiscal year 2005. On November 24, Patterson common stock traded approximately 3.6% higher and closed at $40.37. During the company's third quarter 2005, the stock price continued to trend upwards, closing at approximately $44 at the end of December 2004.

On February 24, 2005, Patterson released its third quarter 2005 earnings and reported consolidated sales 22% higher than the year-earlier quarter, with internally generated sales up approximately 15%. The company reported that Patterson Dental Supply attained an 18% sales growth, substantially all of which was internally generated, and a 10% increase in sales of consumable dental supplies and printed office products. The company forecasted fourth quarter earnings of $0.38 to $0.40 per diluted share and again maintained its previously issued fiscal year guidance. The market again reacted favorably. By March 1, the stock began to trade over $50.00 per share.

On March 30, 2005, Patterson held an institutional investor conference and conveyed a positive financial outlook noting continued demand for dental equipment and forecasting continued growth. (Id. ¶ 66.) On May 6, Frechette and Armstrong presented at the Morgan Stanley Global Healthcare Unplugged Conference ("Morgan Stanley Conference") and the company reported that it would continue to deliver solid earnings growth "but that in the near term current, valuations account for much of this potential." (Id. ¶ 69.) On May 26, Patterson released its fourth quarter and fiscal year 2005 earnings and announced that Frechette was stepping down as CEO. For fourth quarter 2005, Patterson common stock earned $0.36 per diluted shared, short of the company's guidance of $0.38 to $0.40 per diluted share. For fiscal year 2005, Patterson common stock earned $1.32 per diluted shared, short of the company's financial guidance of $1.34 to $1.36. Despite missing its guidance, Patterson grew during fiscal year 2005 and reported an overall increase in net sales both company wide and within Patterson Dental Supply. (See Rosenberg Aff. Ex. 7 at 23.)

Patterson reported that its missed earnings were the result of a combination of business factors, including expenses associated with personnel incentive programs, increased inventories, that fourth quarter dental consumables sales were affected by the sale of a wholesale business and that Canada's dental operation turned in a relatively weak fourth quarter performance. At the time it announced its 2005 earnings, Patterson revised its guidance for first...