Roots Partnership v. Lands' End, Inc.

• Decision Date: 12 June 1992
• Docket Number: No. 91-1927,91-1927
• Citation: 965 F.2d 1411
• Parties: Fed. Sec. L. Rep. P 96,633 The ROOTS PARTNERSHIP, individually and on behalf of all others similarly situated, Plaintiff-Appellant, v. LANDS' END, INC., Gary C. Comer, Richard C. Anderson, Paul C. Kramer, and David L. Schlotterback, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1411

965 F.2d 1411

Fed. Sec. L. Rep. P 96,633

The ROOTS PARTNERSHIP, individually and on behalf of all

others similarly situated, Plaintiff-Appellant, v. LANDS' END, INC., Gary C. Comer, Richard C. Anderson, Paul

C. Kramer, and David L. Schlotterback, Defendants-Appellees.

No. 91-1927.

United States Court of Appeals,

Seventh Circuit.

Argued Sept. 17, 1991.

Decided April 29, 1992.

As Amended April 29, 1992.

As Amended on Denial of Rehearing

and Rehearing In Banc June 12, 1992.

Marvin A. Miller, Patrick E. Cafferty, Chertow & Miller, Chicago, David B. Zlotnick, Susan Schneider Thomas (argued), Zlotnick & Thomas, Bala Cynwyd, Pa., for plaintiff-appellant.

Garrett B. Johnson (argued), Jeffrey A. Hall, Jeffrey L. Willian, Kirkland & Ellis, Chicago, Ill., for defendants-appellees.

Before CUDAHY and MANION, Circuit Judges, and REYNOLDS, Senior District Judge. ^*

REYNOLDS, Senior District Judge.

This case requires us to address first whether an issuer's forward-looking statements of its financial goals fall within SEC Rule 175, 17 C.F.R. § 230.175 (1991), one of the "safe harbors" established by the SEC on the authority of the Securities Act of 1933, Title 15 United States Code § 77s(a); second, whether an issuer's inaccurate prediction of financial performance gives rise to a viable fraud-on-the-market claim under § 10(b) of the Securities Exchange Act, when the issuer's failure to achieve the predicted performance was already public knowledge prior to the plaintiff's purchase; third, whether an issuer's misstatement of its historical performance gives rise to a viable fraud-on-the-market claim when the company's actual historical performance was already public information at the time the misstatement was made; and fourth, whether a securities fraud claim may be based upon statements made by an issuer following the plaintiff's purchase. We conclude that none of these sets of circumstances gives rise to a § 10(b) claim, and accordingly we affirm the district court's dismissal of plaintiff-appellant's amended complaint.

PROCEDURAL BACKGROUND

Defendant-appellee Lands' End, Inc. ("Lands' End") is a publicly held company headquartered in Dodgeville, Wisconsin, whose stock is traded on the New York Stock Exchange. During periods relevant to this action, defendant-appellee Gary Comer ("Comer") was Chairman and CEO of Lands' End, and defendants-appellees Richard Anderson, Paul Kramer, and David Schlotterback were senior officers of the company.

Plaintiff-appellant The Roots Partnership ("Roots") is a Missouri partnership which purchased 20 shares of Lands' End common stock on July 25, 1989.

In March 1990, Roots filed this action, purporting to represent a class of persons who purchased Lands' End common stock during the period from March 7, 1989, through December 11, 1989. Roots alleges that during this period Lands' End and the named Lands' End officers made several materially false and misleading statements that artificially inflated Lands' End's stock price. Roots does not allege that it actually relied upon the alleged misstatements but rather proceeds under a fraud-on-the-market theory.

On March 25, 1991, without reaching Roots' motion for class certification, the district court dismissed Roots' federal claims with prejudice on the ground that the amended complaint failed to state a viable claim under §§ 10(b) and 20 of the Securities Exchange Act of 1934. ¹ The district court also dismissed Roots' pendent state claims without prejudice for lack of subject matter jurisdiction. On April 22, 1991, Roots filed the instant appeal.

FACTS ²

Lands' End is primarily a catalog merchandiser of clothing, accessories, and domestic goods. During the late 1980's Lands' End established itself as a leading competitor in its field and enjoyed rapid growth in its net sales revenue and net income. The company received favorable publicity for its growth, and by early 1989 the company's common stock rose to over $30 per share. The amended complaint alleges that from March 7, 1989, through December 11, 1989, defendants-appellees made several different materially false and misleading statements. Roots alleges this roughly nine-month span as its putative class period.

A. Roots' Pre-Purchase Allegations

On March 7, 1989, Lands' End announced its results for fiscal 1989 (ending January 31, 1989), reporting sales of $455 million and net income of $32 million, or $1.61 per share.

On April 4, 1989, Lands' End publicly predicted that its earnings for the first quarter of fiscal 1990, ending April 30, 1989, would be approximately 8-9% of net sales and lower than prior year results. The company also stated that these results were aberrational and that it historically achieved 60% of its sales and 70-75% of its profits in the second half of the year, which half includes the Christmas season. The April 4th statement was accurate with respect to historical net sales, but was partially inaccurate with respect to historical net profits: during fiscal years ending in January 1986 through January 1989, Lands' End's second-half earnings accounted for 73%, 72%, 67%, and 68%, respectively, of its full-year earnings. In an April 4, 1989 press release, Comer added that Lands' End's "goal" for fiscal 1990 was still to earn 10% net pretax profits on a 15-20% increase in net sales. As of April 30, 1989, Lands' End's internal projection for fiscal 1990 pretax income as a percentage of sales was 9.9%, .1% less than the company's stated goal.

On May 1, 1989, Lands' End filed its 1989 Form 10-K and Annual Report with the SEC. The Annual Report stated, in part, that: (1) fiscal 1989 net sales were $456 million, up 35% for the year and double that of fiscal 1986; (2) net income was $32.3 million, up 42% from 1988 and nearly triple that of 1986; (3) Lands' End's "goal" was to "increase the size of [its] business by an average of 15-20% per year[,]" which rate the company had exceeded in the recent preceding years, and (4) Lands' End's "long-term goal" was to double its sales over a five-year period (Am.Compl. pp 30, 31).

On May 18, 1989, Lands' End announced its actual first quarter results. In the accompanying press release, Comer stated that in the "long-term" he was "confident" that Lands' End "should meet [its] minimum goal of doubling sales in the [following] five-year period ... and that [Lands' End] can achieve a minimum 10 percent pretax return on sales in the process" (Am.Compl. p 33(c)). Comer cautioned, however, that "until we begin to see results from the critical Christmas season, I'm not sure how [fiscal year 1990] will end up" (Id.).

On May 20, 1989, at Lands' End's annual meeting, Comer again cautioned that Lands' End could not predict its Christmas sales, but he reiterated that the company's "purpose is to live up to [its] goal ... to double sales in the five-year period ahead and to produce a 10% net before-tax profit" (Id. p 33(d)).

As of June 15, 1989, Lands' End internally projected that its fiscal 1990 pretax income would be 9.6% of net sales, a figure only .4% less than its long-term earnings goal.

In a June 19, 1989 letter included in a First Quarter Report to shareholders, Comer essentially repeated his May 20th statement to the effect that Lands' End's goal was to double sales in the upcoming five-year period and to earn a 10% net pretax profit. He also "reiterated that the [c]ompany could not predict what its performance would be in the critical Christmas season...." (Id. p 33(e)).

On June 27, 1989, a Lands' End executive vice-president stated at an investor conference that despite Lands' End's "slow start," the company's "long-term goals remain unchanged--to increase sales an average of 15-20% annually and maintain a minimum pretax return of 10% on those sales" (Id. p 33(f)). As of June 27, 1989, Lands' End's internal projection for its fiscal 1990 pretax income was 9.38%.

On July 25, 1989, Roots purchased 20 shares of Lands' End common stock.

B. Roots' Post-Purchase Allegations

Lands' End representatives made other allegedly false and misleading statements following Roots' July 25th stock purchase. For example, in a letter to shareholders dated August 28, 1989, Comer acknowledged the company's poor first-half performance, but stated "in the context of what we are trying to accomplish and in line with our long-term goals, we are not too disappointed. In fact, I believe the course we're on is correct" (Id. p 33(h)).

The putative class terminates on December 11, 1989, on which date Lands' End announced that its fiscal 1990 earnings were likely to fall 13% from the prior year and that its net pretax profit as a percentage of net sales might prove as low as 8.3%. The company also announced that it expected only a 4% increase in sales during the Christmas season, a figure below previous expectations. Following the December 11 announcement, Lands' End stock dropped until it fell to $18 per share, roughly one-half of the level it had traded nine months earlier.

ANALYSIS

Roots' amended complaint contains two federal securities claims. First, Roots contends that the defendants violated § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 ³ by issuing false and misleading public reports and statements concerning Lands' End's profit goals, expected profits, and historical profits in order to inflate the price of Lands' End common stock. Roots premises this claim upon a fraud-on-the-market theory, asserting that the defendants' fraudulent statements artificially inflated the market price of Lands' End's common stock and that Roots suffered injury by purchasing the stock at such an inflated price (which later dropped when the truth became known to the market). ⁴ Second, Roots claims that the individual defendants exercised power as "control persons" to cause Lands' End to engage in illegal practices in violation of § 20 of the Securities Exchange Act. Roots' § 20 claim is thus derivative of the § 10(b) claim...