On August 8, 2023, the United States Court of Appeals for the Eleventh Circuit affirmed the dismissal of a putative class action asserting claims under the Securities Exchange Act of 1934 against a direct-to-consumer marketing company and certain of its officers. In re Tupperware Brands Corp. Sec. Litig., 2023 WL 5091802 (11th Cir. Aug. 8, 2023). Plaintiff alleged that the company misrepresented its financial performance as a result of a fraudulent sales scheme orchestrated at the company's subsidiary. The Eleventh Circuit affirmed the lower court's dismissal of plaintiff's third amended complaint with prejudice, holding that plaintiff failed to allege scienter on the part of the makers of the challenged statements and failed to allege scheme liability.
Plaintiff alleged that the company had misstated various financial metrics as a result of a fraudulent scheme at the company's subsidiary, through which the subsidiary immediately recognized revenue from shipping excess product that had not been ordered and was likely to be returned. Id. at *2. Plaintiff argued that the parent company should be held liable based on the knowledge of lower-level corporate officials who allegedly "knew of or orchestrated the fraud." Id. at *1.
The Court explained that, to adequately allege scienter with respect to a corporation, "we first look 'to the state of mind of the individual corporate official or officials who make or issue the statement'" and, "[f]ailing that, we look to the state of mind of the corporate officials who 'order or approve it or its making or issuance, or who furnish information or language for inclusion therein, or the like." Id. at *4. The Court rejected plaintiff's argument for what the Court referred to as a "broader (and novel) standard"—that scienter should be imputed to a corporation if a "corporate official's fraudulent act is a proximate cause of a materially false or misleading statement." Id. The Court emphasized that alleged misconduct, standing alone, is not enough to render a statement actionable where there is no connection between the misconduct and the maker of the challenged statement. Id. at *4.
In applying this standard, the Court first assumed, without deciding, that three officials at either the subsidiary or the parent acted with the requisite intent in connection with the fraudulent revenue scheme. Nevertheless, the Court concluded that plaintiff failed to allege "the requisite connection between these corporate officials and the public statements" made by the parent and therefore failed to adequately allege scienter with respect to the parent company. Id. at *5.
For one official, the managing director of the company's subsidiary, the Court discounted allegations of confidential employees that "it would be unusual for any communications from [the subsidiary] to [the parent corporation] to occur without [his] knowledge and approval" and that he "approved the sales figures before they could be furnished to [the parent corporation]." Id. The Court concluded that these allegations were insufficient to create a "strong inference that [the official] was directly involved in [the parent company's] public statements" because they lacked particularized facts and failed to show why the confidential witnesses would be familiar with the parent company's financial reporting. Id. at *6. The Court emphasized that "engaging in fraudulent conduct is not the same as being responsible for public statements with material misrepresentations or omissions about that fraudulent conduct." Id. The Court similarly rejected plaintiff's allegations with respect to the company's group president for the region, holding the allegations from a confidential witness who worked in a different region lacked "any proximity to the offending conduct." Id. at *7. While plaintiff argued that the official had ordered employees to continue the sales scheme, the Court again emphasized that this was "not the same as commanding a false or misleading public statement." Id. Regarding a third official, a vice president of operations at the company, the Court rejected the allegation of a confidential witness that he had "visited [the subsidiary] quarterly to review its operations and financial results." Id. at *8. The Court noted that plaintiff had not explained the basis for the confidential witness's conclusion or described the official's activities with particularity. Id.
The Court also rejected plaintiff's claim for "scheme" liability. While the lower court dismissed this claim for failure to allege that defendants engaged in a "scheme aimed at deceiving or defrauding investors," the Eleventh Circuit affirmed on different grounds—that plaintiff's complaint failed to separate into a different count each cause of action and therefore amounted to an improper "shotgun pleading," which makes it "virtually impossible to know which allegations of fact are intended to support which claim(s) for relief." Id. The Court noted that the dismissal was with prejudice because plaintiff had multiple opportunities to amend and had notice of the pleading deficiency from the lower court's order on a prior motion to dismiss. Id.
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