On December 10, 2019, the United States Court of Appeals for the
Second Circuit affirmed the dismissal of a putative class action
asserting claims under Section 10(b) of the Securities Exchange Act
of 1934 against a chicken producing company and certain of its
executives. Gamm v. Sanderson Farms, Inc.,
—F.3d—, 2019 WL 6704666 (2d Cir. 2019).
Plaintiffs alleged that defendants' SEC filings contained
misrepresentations because they failed to disclose an illegal
antitrust conspiracy to drive up chicken prices by reducing supply
and to manipulate a chicken price index. The Court held that
the complaint was properly dismissed because plaintiffs failed to
plead with sufficient particularity facts supporting the alleged
antitrust conspiracy, explaining that "when a securities fraud
complaint claims that statements were rendered false or misleading
through the nondisclosure of illegal activity, the facts of the
underlying illegal acts must be pleaded with particularity in
accordance with the requirements of Rule 9 and the
PSLRA." Id. at *9.
Plaintiffs acknowledged that their allegations of misstatements and
omissions had to be pleaded with particularity under the PSLRA and
Rule 9(b) of the Federal Rules of Civil Procedure, but they argued
that facts of the underlying antitrust conspiracy only needed to
meet the plausibility standard of Rule 8. Id. at
*6. The Court rejected that argument, holding that, because
plaintiffs' nondisclosure and material omission claims were
entirely dependent upon the predicate allegation that defendants
participated in a collusive antitrust conspiracy, plaintiffs'
allegations "must also provide particularized facts about the
underlying conspiracy" in order to properly allege with the
requisite particularity "all facts" upon which
their securities fraud claim was based. Id.
The Court reasoned that "[u]ntil and unless they have done so,
appellants' complaint had not met the burden of explaining what
rendered the statements materially false or misleading."
Id. On this basis, the Court held that the facts of
the underlying anticompetitive conduct needed to be pleaded with
particularity. Id. at *7.
The Court then assessed whether plaintiffs had alleged the basic
elements of an antitrust conspiracy. Id. at *8.
With respect to the alleged collusive activities to reduce
supply, the Second Circuit determined that "[a]lthough
appellants do allege that [defendants] engaged in
'anticompetitive' conduct, there is virtually no
explanation as to how that collusive conduct occurred, and whether
and how it affected trade." Id. The Court
noted that plaintiffs failed to allege that defendants or any other
chicken producers were successful in reducing the supply of
chicken, or that any reduction in supply resulted from an
anticompetitive agreement. Id. Moreover, the
Court emphasized that plaintiffs failed to allege
"when [the company] decided on its course of
supply reduction, which industry peers were a part of that
decision, how specific supply reductions were
performed by each of the different poultry
producers, what information [the company] knew
about its peers' supply reductions, if any, and — perhaps
most basic of all — whether [the company] actually
reduced chicken supply, and if so, by what volume."
Id.
With respect to the alleged conspiracy to manipulate the chicken
price index, plaintiffs alleged that the company and other chicken
producers submitted artificially high prices to the government
agency that maintained the index, and coordinated these activities
by learning about the prices other producers were submitting
through a service that collected such information for the
industry. The Court held, however, that plaintiffs'
allegations failed to show "when and how" the company
used this service, or to allege what communications the company had
with the government agency that maintained the index, when that
information was provided, and whether it was false.
Id. And the Court concluded that "[t]he
complaint is entirely silent" as to whether the alleged
manipulative conduct "unreasonably restrained trade, and
whether that restraint affected interstate commerce."
Id.
This decision confirms that securities fraud plaintiffs within the
Second Circuit are required to allege with particularity the
elements of the alleged illegal conduct supposedly giving rise to a
securities violation, and is likely to serve as persuasive
authority outside of the Second Circuit.
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