On October 2, 2024, Judge William J. Martini of the United States District Court for the District of New Jersey dismissed a putative class action against a pool equipment company (the "Company"), its private equity majority shareholders, an investment advisor for one of the private equity firms, and two of the Company's senior executives (the "Individual Defendants") alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5. City of Southfield Fire & Police Ret. Sys. v. Hayward Holdings, Inc., No. 2:23-CV-04146 (WJM) (D.N.J. Oct. 2, 2024). The Court dismissed the complaint because it did not plead with specificity which portions of the Company's or Individual Defendants' statements were actionable, why they were actionable, or whether the Individual Defendants acted with the required state of mind.
The Company designs and manufactures pool products such as pumps, heaters, and filters. The Company was acquired by a private equity fund in 2017. The fund introduced a new management team (including the Individual Defendants) and conducted an initial public offering ("IPO") in March 2021. The majority of the Company's sales are generated by distributions through "channels" such as specialty distributors that in turn sell to pool builders, retailers, and servicers. Plaintiff alleged that demand for the Company's products surged at the start of the COVID-19 pandemic. Plaintiff further alleged that distributors placed double orders and "loaded up" on inventory in 2021 to avoid logistics and supply chain challenges. According to plaintiff, demand dropped significantly beginning in mid-2021. The Company, however, was contractually obligated to continue purchasing raw materials and continued to manufacture at a high rate in excess of demand, allegedly resulting in over $100 million of excess inventory. Plaintiff alleged that defendants knew about these issues but minimized and concealed them in the Company's prospectus filed in connection with the IPO and in quarterly earnings calls and press releases while selling shares at inflated prices.
In evaluating plaintiff's claims, the Court first stated that the PSLRA requires a securities fraud complaint to specify each statement that allegedly was misleading and the reasons why and that plaintiff must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." Plaintiff's complaint failed to meet these requirements for several reasons.
First, the Court dismissed the complaint without prejudice because plaintiff failed to allege which statements were false and why. Specifically, the Court observed that the complaint included "lengthy block quotes that are at places highlighted with bold and italics," which were then followed by the same or substantially similar conclusory allegations that the statements were misleading because they did not disclose that the market was saturated and demand was declining. These allegations, however, left the Court and defendants to speculate which portions of the block quotes were being challenged and why. The Court held that "[i]dentifying [p]laintiff's claims should not be conjecture" and that it "should not be forced 'to play connect-the-dots in order to identify the facts and trends upon which plaintiffs base their claim.'"
Second, the Court also dismissed the complaint without prejudice for failure to sufficiently allege scienter because it relied on impermissible group pleading, "attribut[ing] misstatements to all [d]efendants without showing each [d]efendant's involvement in those misstatements."
Third, the Court dismissed the claims against the private equity shareholders with prejudice because plaintiffs could not allege that either defendant "made" the allegedly misleading statement. In reaching this conclusion and dismissing these claims with prejudice, the Court rejected plaintiff's argument that the statements were attributable to private equity firms because (i) the Individual Defendants who signed the relevant SEC filings were affiliated with these defendant entities, holding that they signed the SEC filings in their capacity as board members of the Company and not in their roles with the other defendants, and (ii) neither the private equity firm nor the investment advisor had ultimate authority over the alleged misstatements or SEC filings.
Finally, the Court dismissed with prejudice the claims against the investment advisor for one of the private equity firms on the additional ground that it is a registered investment advisor that does not, and never has, owned any Company stock. The Court rejected arguments that the investment advisor and private equity firm should be treated as a single entity.
City of Southfield Fire & Police Ret. Sys. v. Hayward Holdings, Inc.
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