Judge Douglas P. Woodlock of the Massachusetts District Court Wednesday granted online retailer Wayfair’s motion to dismiss, finding that the plaintiffs failed to make adequate allegations that the individual defendants misled investors with their forward-looking projections before the defendants collectively sold $69 million worth of stock.
Wayfair allegedly “missed its quarterly financial projection by .002% one quarter, several individuals who say they consequently lost money in the stock market” sued Wayfair and three senior officers to recover these losses. Judge Woodlock found that the “Plaintiffs have not adequately alleged material misstatements of fact, demonstrated actionable scienter, or shown loss causation.”
The retailer allegedly experienced worse advertising-revenue leverage during the class period, which the plaintiffs asserted that the defendants knew about, but concealed from investors and made false statement to the public about Wayfair’s finances. The plaintiffs alleged four material omissions and twelve misstatements; for example, statements that show defendants’ confidence in Wayfair’s performance. The court noted that these are general immaterial statements and are not actionable. The plaintiffs claimed that the defendants make forward-looking projections and forecasts for Wayfair, but the court held that these “are covered by the safe-harbor provision of the Private Securities Litigation Reform Act.”
The court also determined that the plaintiffs have not alleged facts that give rise to a strong inference of scienter. A strong inference of scienter “must be more than merely plausible or reasonable – it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” The court accepted that the individual defendants were familiar with Wayfair’s financial condition, given their positions in the company, however, the court noted that this does not mean that they failed to disclose information to the public. The court said the plaintiffs essentially allege that “because Defendants said that they paid close attention to their financial position and their financial position ended up being different than Defendants said it was, Defendants must have been lying.” The court found that this argument is an incorrect interpretation of securities fraud law and “presents precisely the kind of pleading the Private Securities Litigation Reform Act was designed to prevent.”
Finally, the plaintiffs argued that the sale of the defendants’ stock was “suspiciously timed.” The court disagreed and stated that Form 4 shows that two of the defendants retained 98 percent of their stock and the third defendant increased his stake in Wayfair by 22 percent, thus the court finds this inadequate evidence of scienter.
The plaintiffs use the fall of Wayfair’s stock the day of and the day after the company issued a press release about its negative advertising leverage to illustrate loss causation, however, the court states that the press release was not a “corrective disclosure” because the plaintiffs did not adequately plead scienter and there is not sufficiently alleged “concealed” or “obscured” allegations. The court stated that while the plaintiffs adequately allege that their losses were connected to the press release, they did not adequately allege that the press release was connected to a prior false or misleading statement of the defendants. Thus, they have not adequately pleaded loss causation.
Wayfair is represented by Goodwin Procter LLP. The plaintiffs are represented by Hutchings Barsmian Mandelcorn, LLP; and Robbins Geller Rudman & Dowd LLP.