On March 30, 2024, Judge Victoria Marie Calvert of the United States District Court for the Northern District of Georgia granted a motion to dismiss a putative securities class action against an optical retail company and certain of its executive officers (the "Individual Defendants"). City of Southfield General Employees Retirement Sys. v. National Vision Holdings, et al., No. 23-cv-00425-VMC (N.D. Ga. Mar. 30, 2024). Plaintiff alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making false and misleading statements and omissions regarding staffing and wage pressures faced by the Company leading up to and through the Covid-19 pandemic. The Court granted defendants' motion to dismiss with prejudice, holding that plaintiff failed to adequately plead falsity and scienter.
Plaintiff, representing a putative class of stockholders who purchased the Company's common stock between May 13, 2021 and February 28, 2023 (the "Class Period"), alleged that defendants made false and misleading statements about the Company's ability to navigate its growing demand for optometrists resulting from the increased demand for eye exams during the pandemic. Plaintiff alleged that while the Company was actually experiencing a labor shortage crisis due in part to high turnover of its optometrists, the Company repeatedly stated publicly that it had largely avoided labor disruptions faced by similar retailers. Plaintiff alleged that while the stock price was inflated, the Individual Defendants "suspiciously" sold more than $34 million of their personally-held Company shares, and that the truth about the Company was gradually revealed through three partial disclosures in which the Company announced disappointing financial projections and results resulting from, among other things, "not having enough doctors for the demand" faced by the Company.
The Court dismissed plaintiff's claims for failure to adequately plead falsity and scienter. With respect to falsity, the Court divided its analysis into three groups of allegedly false statements by defendants: (1) statements regarding the Company's wage inflation and retention issues; (2) statements about the success of the Company's remote medicine initiative; and (3) statements regarding the Company's post-pandemic business and sustainability.
The Court held that plaintiff failed to allege falsity with respect to the statements about the Company's wage and retention issues because plaintiff repeatedly categorized certain alleged statements as false in a conclusory manner, without identifying facts that showed the statements were in fact false when made. The Court further held that plaintiff's allegations with respect to certain alleged statements by defendants were misstated or contradictory. For example, plaintiff alleged that the Company's CEO stated the Company was experiencing "record high retention rates," when in fact the CEO had stated the Company was continuing to invest in retention programs to keep "high retention rates near record levels."
The Court similarly held that plaintiff failed to adequately allege falsity with respect to alleged statements in which defendants allegedly overstated the success of the Company's remote optometry option—a work-from-home pilot program that the Company launched to combat some of the retention issues it was allegedly facing. Specifically, plaintiff repeatedly alleged that the Company "misleadingly emphasized" the growth of this initiative; however, the Court highlighted several disclosures in which defendants actually reported minimal, "incremental," and "sequential" progress with the pilot initiative. Plaintiff also alleged that the Company's pilot remote medicine program was "inefficient and flawed" and that defendants failed to take steps "to seriously implement" the program, which the Court held amounted, at most, to "an allegation of non-actionable corporate mismanagement, not securities fraud."
Finally, with respect to plaintiff's allegations that the Company misleadingly stated that it was "well-positioned to navigate the rest of the pandemic and beyond," the Court held that plaintiff failed to plead particularized facts that demonstrate why profitability was unsustainable or how the Company's labor crisis and exam capacity constraints were allegedly different from what they disclosed to investors. The Court held that plaintiff, "in a conclusory fashion and with the benefit of hindsight, . . . criticized Defendants for their inaccurate predictions regarding the COVID-19 pandemic and its impact on the Company," and that "Courts have routinely rejected this kind of hindsight pleading in the wake of the pandemic."
Turning to the issue of scienter, the Court held that plaintiff could not establish that defendants acted with the required state of mind in making the allegedly false statements about the Company's labor shortage and future outlook by simply alleging that defendants received reports and attended meetings discussing recruiting, retention, and exam capacity, because plaintiff "never alleged particularized facts demonstrating how the content of those metrics, reports, or calls differed materially from what was contemporaneously disclosed by the Company."
Having found no primary liability under Section 10(b), the Court dismissed plaintiff's derivative claim under Section 20(a) against the Individual Defendants. The Court did not grant leave to amend, holding plaintiff's request, which was imbedded in the last sentence of its opposition brief was not raised properly, and that, in any event, any amendment would be futile.
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