Novak v. Kasaks

216 F.3d 300 (2nd Cir. 2000)

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Nature of the Case

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Facts

P brought this action on behalf of all purchasers of the common stock of the AnnTaylor Stores Corporation between February 3, 1994, and May 4, 1995. P alleges that Ds made or controlled others that made, materially false and misleading statements and omissions concerning the financial performance of AnnTaylor by failing properly to account for millions of dollars of inventory. P alleges that Ds knowingly and intentionally issued financial statements that overstated AnnTaylor's financial condition by accounting for inventory that they knew to be obsolete and nearly worthless at inflated values and by deliberately failing to adhere to the Company's publicly stated markdown policy. D held a substantial and growing quantity of out-of-date inventory in several warehouses during without marking it down according to company policies. This box and hold inventory grew from 10% to about 34% of total inventory. AnnTaylor's public financial statements did not distinguish between types of inventory, nor did AnnTaylor write off any of the 'Box and Hold' inventory. P alleged this was in violation of Generally Accepted Accounting Principles ('GAAP') that required markdowns under these circumstances. Ds instead made a series of positive statements to the public about the status of AnnTaylor's inventories, describing them at various points during the Class Period as 'under control,' 'in good shape,' and at 'reasonable' or 'expected' levels; stating that 'no major or unusual markdowns were anticipated'; and attributing rising levels of inventory to growth, expansion, and planned future sales. Ps allege that this conduct amounts to securities fraud as its earnings would have been substantially lower. Ds moved to dismiss the action, and on August 16, 1996, the district judge granted a motion by the defendants to stay all discovery pending a ruling on the motions to dismiss pursuant to 15 U.S.C. § 78u-4(b)(3)(B). The court dismissed the action stating that 'the fatal defect in the complaint lies in its allegations of scienter.' Ps had 'fail[ed] to plead facts giving rise to a strong inference of fraudulent intent' in that they did not 'allege with sufficient specificity that . . . defendants . . . were aware that much of their inventory was worthless or seriously overvalued, or were reckless as to whether that was the case.' Ps filed an amended complaint. That complaint was dismissed with prejudice. This appeal resulted.