United States: Fifth Circuit Affirms Dismissal Of Putative Securities Class Action Against Home Furnishings Retailer For Failure To Adequately Allege Scienter

On August 19, 2019, the United States Court of Appeals for the Fifth Circuit affirmed the dismissal by a Northern District of Texas court of a putative securities class action asserting a Section 10(b) claim under the Securities Exchange Act of 1934 (the “Exchange Act”) against a home furnishings retailer (the “Company”) and two of its senior officers.  Municipal Employees’ Retirement System of Michigan v. Pier 1 Imports Inc. et al., No. 18-10998 (5th Cir. Aug. 19, 2019).  Plaintiff alleged that defendants failed to disclose that the Company’s inventory was too high and was subject to significant “markdown risk” because it had too much inventory that was too “seasonal” and “subject to changing consumer tastes.”  The Court affirmed the district court’s decision that plaintiff’s allegations did not adequately support the required strong inference of scienter.

Plaintiff contended that after the Company’s online service proved unsuccessful, the Company became “severely flooded with excess merchandise” that, according to plaintiff, could only be sold by dramatically reducing prices.  Slip op. at 2.  Plaintiff further contended that in late 2015, the Company’s stock price dropped significantly after it made a series of corrective disclosures that acknowledged inventory-related issues resulting from “unplanned supply chain expenses,” “inventory-related inefficiencies,” the Company’s need to resort to clearance sales and that the Company would require at least 18 months to reduce inventory to appropriate levels.  Id. at 3.

At the outset, the Court rejected plaintiff’s argument that the district court failed to follow the Fifth Circuit’s prior directive in Owens v. Jastrow, 789 F.3d 529 (5th Cir. 2015), that a district court “may best make sense of scienter allegations by first looking to the contribution of each individual allegation to a strong inference of scienter,” and if any “single allegation, standing alone, create[s] a strong inference of scienter,” then the court may stop there without proceeding to a “holistic look at all the scienter allegations.”  Id. at 537.  The Court determined that the district court’s analysis was fully consistent with Owens because it had in fact considered the scienter allegations individually, and that it was not an error for the district court to separately consider—and reject—the possibility of special circumstances that might permit “a defendant’s corporate title coupled with a severe problem with the company” to establish an inference of scienter.  Id. at 6-7.

The Court then addressed in turn plaintiff’s three categories of scienter allegations:  (1) allegations of motive; (2) allegations that the officer defendants knew that the Company’s inventory was high and (3) allegations that those officers knew that the Company had significant markdown risk.  Id. at 7.  The Court determined that each set of allegations fell short of establishing the “strong inference” of scienter required under the Private Securities Litigation Reform Act (“PSLRA”).

Concerning motive, plaintiff alleged that the officer defendants had two distinct motives to mislead:  (1) that they “staked their careers” on the Company, which allegedly “drove them to overstate” the Company’s success and (2) that their employment contracts promised them cash bonuses based on the Company’s earnings.  The Court held that, particularly in the absence of any allegation that defendants profited from the alleged fraud, an allegation of scienter based on career prospects is insufficient.  In particular, the Court cited to its prior precedent holding that “the desire ‘to protect [one’s job in an] executive position [] was not the type [] of motive that support[s] a strong inference of scienter.’”  Id. at 8 (citing Abrams v. Baker Hughes Inc., 292 F.3d 424, 434 (5th Cir. 2002) (alternations in original).  Likewise, the Court held that allegations concerning incentive compensation could not support an inference of scienter because “the vast majority of corporate executives receive such compensation,” and there were no allegations in the amended complaint that the potential bonuses of the officers were particularly high.  Slip op. at 8-9. 

With respect to plaintiff’s allegations relating to alleged high inventory levels, the Court emphasized that plaintiff fundamentally failed to allege that the executives misrepresented the Company’s inventory, and, in fact, the amended complaint itself contained several public disclosures concerning the Company’s problem with high inventory.  Id. at 10.  In addition, while plaintiff attempted to argue that knowledge of the inventory levels equated to knowledge of the markdown risk, the Court rejected that inference and concluded that “an equally plausible inference is that [the executives] reasonably believed they could fix the excessive inventory problem without resorting to markdowns.”  Id.  The Court also determined that plaintiff’s other allegations relating to inventory levels failed to meet the PSLRA’s heightened pleading standard, including because they were based on alleged statements about events outside of the putative Class Period, knowledge of information that was in fact publicly disclosed, “vague” and “amorphous” allegations from confidential witnesses or allegations that otherwise were not sufficiently tied to defendants in question.  Id. at 10-14.  Notably, the Court cited to Fifth Circuit precedent to hold that “‘courts must discount allegations from confidential sources.’”  Id. at 12 (citing Ind. Elec. Workers’ Pension Tr. Fund IBEW v. Shaw Grp, Inc., 537 F.3d 535, 543 (5th Cir. 2008)). 

Lastly, the Court considered and rejected plaintiff’s theory of scienter based on other allegations regarding high inventory markdown risk.  First, while plaintiff argued that the Company was “particularly subject to markdown risk” as a “trend-based fashion retailer,” the Company argued that a large percentage of its products were “long-standing collections” that do well “day in and day out,” and further that the Company kept ordering more inventory which it would not have done if it knew it would be unable to sell its existing inventory.  Slip Op. at 16.  The Court concluded that plaintiff’s allegations were conclusory or vague, and did not create a “strong inference” that all or most of the inventory was so trend-driven that it “could not be sold without significant markdowns.”  Id.  Second, the Court rejected as “weak circumstantial evidence” the allegation that defendants should have known about the markdown risk because of certain clearance sales that the Company held after the alleged statements in question.  In addition to rejecting plaintiff’s argument because it was only first raised in plaintiff’s reply brief and not alleged in the amended complaint, the Court found that such a “temporal-proximity” argument is “weak circumstantial evidence of fraud.”  Id. at 17.  Third, the Court declined to assess various alleged “red flags” of a “looming markdown risk,” as they were set out in an expert report attached to the amended complaint that had been stricken from the record by the district court.  Id. at 14.  Fourth, the Court declined to adopt the theory that Item 303 of Regulation S-K creates a duty under the Exchange Act to disclose “known trends or uncertainties” that a company “reasonably expects will have a material . . . unfavorable impact . . . on revenues.”  Id. at 17-18.  The Court noted that it had never addressed this issue, while observing that other circuits were split on this issue—the Second Circuit has held that there is a duty to disclose (see Stratte-McClure v. Morgan Stanley, 776 F. 3d 94, 102 (2d Cir. 2015)), while the Ninth Circuit has held that no such duty exists (see In re NVIDIA Corp. Sec. Litig., 768 F.3d 1036, 1056 (9th Cir. 2014)).  Moreover, the Court noted that plaintiff failed to allege any independent facts showing that the officer defendants reasonably expected, prior to the time of disclosure, that inventory levels would have a material unfavorable impact on revenues.  Slip Op. at 18.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions