On November 26, 2018, Judge Colleen McMahon of the United States District Court for the Southern District of New York denied a motion to dismiss a putative securities class action against Signet Jewelers Limited (the "Company") and certain of its officers and directors. In re Signet Jewelers Limited Sec. Litig., No. 16-cv-6728 (S.D.N.Y. Nov. 26, 2018). Plaintiffs—purchasers of the Company's shares between August 2013 and March 2018—claimed that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making materially false and misleading statements relating to (1) the health and management of the Company's credit portfolio and (2) the Company's corporate culture of "pervasive" sexual harassment, leading to a sharp drop in the Company's share price when the truth allegedly was revealed. The Court held that plaintiffs adequately alleged false and misleading statements, scienter and loss causation, and denied defendants' motion to dismiss.
The Court first considered plaintiffs' allegations that defendants made materially false or misleading statements concerning the Company's credit portfolio, which was run by the Company's in-house credit business. In particular, plaintiffs alleged that the Company aggressively pushed credit on customers, internally referred to the Company's credit underwriting and application review process as "garbage," ignored warnings from members of the credit risk department, and gave direction not to raise reserves in an effort to avoid raising attention and hurting the Company's bottom line. Additionally, plaintiffs pointed to several allegedly false and misleading statements, made both orally and in SEC filings, describing the Company's credit portfolio as "very strong," "very stringently controlled," and with "minimize[d] risk," among other statements. Defendants argued that the qualitative misstatements did not give rise to a cause of action because they were either puffery or inactionable statements of opinion. The Court disagreed, holding that because many of the challenged statements were made in response to direct questions about the Company's credit portfolio and in an effort to reassure investors about the portfolio's health, the statements would be important to a reasonable investor and thus not puffery. Additionally, the Court held that the statements were not opinions, since they "spoke to a present state of affairs, not a belief about future events," and that even if they were opinions, plaintiffs had properly alleged particularized and material facts to demonstrate that defendants had misrepresented their opinions or omitted facts to support their beliefs, and therefore were actionable under Omnicare, Inc. v. Laborers Dist. Counsel Const. Indus. Pension Fund, 135 S. Ct. 1318 (2015). The Court also found that plaintiffs sufficiently alleged at the motion to dismiss stage that the Company knew its reserve figures provided a misleading picture of its credit portfolio. Specifically, the Court cited to alleged statements from confidential witnesses "that give rise to an inference of falsity," and it also highlighted the fact that the Company had sold the sub-prime portion of its credit business at a significant loss as "plainly relevant to assessing the sufficiency of [plaintiffs'] allegations on a motion to dismiss."
Turning next to the issue of scienter, the Court held that plaintiffs had adequately pleaded scienter by alleging defendants' intimate familiarity with the Company's portfolio and underwriting. The Court cited to several of plaintiffs' allegations that defendants had touted their careful monitoring and understanding of the Company's credit exposure, and that having made such representations, defendants "had a duty to discharge that function so as not to render their earlier representations misleading." The Court also found that allegations concerning the size of the Company's loss on the sale of its subprime book supported an inference that management had acted recklessly in its earlier financial reporting. Regarding loss causation, the Court found that plaintiffs had adequately pleaded loss causation, noting that defendants may challenge at a later stage the impact that the allegedly corrective disclosures purportedly had on the market.
The Court next turned to plaintiffs' allegations that defendants had misleadingly described litigation arising from the Company's alleged corporate culture of "pervasive" sexual harassment. In March 2018, a purported class of current and former female Company employees filed a separate putative class action alleging that employees of one of the Company's wholly-owned entities faced pervasive sexual harassment and discrimination (the "Jock Litigation"). In the public disclosures regarding the litigation, the Company disclosed that the claims related to "store-level employment practices" that were supposedly "discriminatory as to compensation and promotional opportunities" with respect to "gender." Plaintiffs argued that the allegations in the litigation were not limited to store-level harassment at the subsidiary, but rather concerned pervasive sexual harassment that reached the highest offices in the Company. Based on the content of the declarations of hundreds of Company employees, the Court held that plaintiffs had adequately alleged particularized facts to sustain a claim that the Company's statements were materially misleading. Notably, the Court found that plaintiffs had not adequately pleaded that defendants' generalized statements emphasizing the importance of the Company's relationship with its employees and "consumer" trust in the Company brand were materially false or misleading, as they constituted immaterial puffery.
In addition, the Court held that plaintiffs had adequately pleaded scienter with respect to their allegations concerning corporate culture because they alleged that defendants had knowledge of or access to information pertaining to the serious nature of the Jock Litigation allegations and therefore knew about or were reckless as to the misleading nature of the Company's disclosures regarding the litigation and the Company's policy against sexual harassment. The Court also held that plaintiffs had adequately pleaded loss causation because they identified allegedly materially misleading statements relating to the Jock Litigation and connected them with a purported loss—a decline in the Company's share price following disclosure to the market—and accordingly denied defendants' motion to dismiss.
Finding that plaintiffs had adequately pleaded a primary violation under Section 10(b), the Court denied the motion to dismiss the individual defendants' Section 20(a) control person liability claims.
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