On July 10, 2023, Chief Judge Patrick J. Schiltz of the United
States District Court for the District of Minnesota granted a
motion to dismiss a putative securities fraud class action against
a mattress and bedding company (the "Company") and two of
its executives. Steamfitters Local 449 Pension & Retirement
Securities Funds v. Sleep Number Corp., et al, No. 21-CV-2669
(PJS/DTS) (D. Minn. July 10, 2010). Plaintiffs alleged that
defendants violated Section 10(b) and 20(a) of the Securities
Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5
promulgated thereunder by making material misstatements and
omissions regarding an alleged disruption to the Company's
supply chain after a natural disaster that forced certain of the
Company's distributors to temporarily shut down. The Court
dismissed the amended complaint with prejudice, holding that
plaintiffs failed to adequately plead falsity and scienter.
According to the amended complaint, the Company designs,
manufactures, and sells mattresses and bedding, including memory
foam products comprised of petroleum-based chemicals that are
produced along the Gulf Coast in Texas and Louisiana. From February
13 through February 17, 2021, several states, including Texas and
Louisiana, experienced a severe winter storm that forced oil
refineries to shutdown, which disrupted the supply of the
Company's petroleum-based chemicals. Plaintiffs alleged that
the Company experienced a significant disruption, and that the
Company was uncertain about when its supply of petroleum-based
chemicals would be restored in order to meet ongoing demand.
Plaintiffs alleged that the Company concealed this information
through false and misleading statements, which the Court organized
into three groups based on the time-period of the purported
statements: (1) February 17, 2021 statements regarding the
Company's growing momentum, explosive demand, and improving
customer service capabilities ("February 2021
statements"); (2) March 2, 2021 statements in the
Company's Form 10-K for fiscal year 2020, which allegedly
"failed to disclose the adverse effects of the storm on [the
Company's] business" ("March 2021 statements");
and (3) April 21, 2021 statements in a press release announcing the
Company's results for the first quarter of 2021 and describing
the Company's temporary foam supply constraints, as well as an
earnings call where the Company's supply-chain challenges and
backlog were discussed ("April 2021 statements"). The
Court considered each group of statements in turn.
The Court held that plaintiffs failed to adequately plead falsity
with respect to the February 2021 statements because plaintiffs had
not included any specific allegations that the Company had already
experienced the disruptions to its supply chain at that time, and
that certain allegations that the Company was
"scrambling" to address inventory and delivery problems
were insufficient to show that the Company had experienced a severe
disruption from the storm that would affect its sales. The Court
similarly held that plaintiffs' allegations concerning
defendants' March 2021 statements failed to adequately plead
falsity because each of plaintiffs' allegations were too vague
as to timing of when the Company actually began to experience the
effects of the storm, and that the confidential witness upon whose
statements some allegations were purportedly based was too far
removed from the "executive" meetings where any such
disruptions were allegedly discussed. Finally, the Court held that
plaintiffs failed to adequately plead that the April 2021
statements were false when made, finding that plaintiffs'
allegations that the Company continued to experience supply-chain
problems through the second quarter amounted to nonactionable fraud
by hindsight. According to the Court, "[b]ecause plaintiffs
have failed to allege that any of defendants' statements were
false when made, their securities-fraud claims fail."
The Court nevertheless turned to plaintiffs' allegations
regarding scienter and held that the amended complaint fell
"far short" of pleading facts that give a "strong
inference" of scienter. The Court noted that there were no
allegations of motive or opportunity to commit fraud and that, as
the Court had already found, the complaint "contained little
in the way of specific factual allegations suggesting
defendants' statements were even false at the time they were
made." The Court stated that, standing alone, the fact that at
most the statements might have been false or misleading
when made is insufficient to adequately plead scienter under the
requirements of the PSLRA. Accordingly, the Court held that the
complaint failed to adequately plead facts giving rise to a strong
inference of scienter.
Having found that plaintiff failed to plead an underlying
securities fraud violation, the Court dismissed plaintiff's
Section 20(a) control person liability claims. The Court also
denied plaintiffs' request for leave to amend the complaint,
finding plaintiffs had not identified any additional facts they
could allege to establish falsity or scienter. Therefore, the Court
dismissed the amended complaint with prejudice.
Steamfitters Local 449 Pension & Retirement Securities Funds v. Sleep Number Corp.
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