-
Central District Of California Dismisses Purported Class Action For Failure To Adequately Allege Misstatements Or Scienter
08/01/2016On July 25, 2016, Judge David Carter of the United States District Court for the Central District of California dismissed, without prejudice, a putative class action brought by shareholders of El Pollo Loco Holdings, Inc. (“El Pollo”). See Turocy v. El Pollo Loco Holdings, Inc. No. SA CV 15-1343-DOC (KESx) (C.D. Cal. July 25, 2016). Plaintiffs alleged that El Pollo and certain of its executives made false statements concerning expected sales by failing to disclose the negative sales impact of recent changes in menu prices and offerings, in violation of Section 10(b) of the Securities Exchange Act of 1934. The Court held, however, that plaintiffs had not alleged any actionable false statements, nor pleaded particularized facts creating a sufficiently compelling inference that El Pollo executives made the challenged statements with scienter.
The Court first assessed whether the statements plaintiffs identified as materially false and misleading, which were made in a company press release and in analyst calls and presentations, were actionable under the securities laws. Defendants argued that these statements were protected under the safe harbor provision of the Private Securities Litigation Reform Act (“PSLRA”), were otherwise puffery, and that the facts plaintiffs alleged were omitted concerning the company’s sale performance were otherwise disclosed. The Court first determined that El Pollo’s statements concerning projected sales growth were protected under the PSLRA as “forward-looking” statements and were accompanied by meaningful cautionary language. The Court observed that although the cautionary language in the challenged press release and conference call may have been boilerplate, the cautionary language taken as a whole was sufficiently meaningful because investors were also referred to the “Risk Factors” in the company’s SEC filings, which disclosed that the company’s menu pricing and menu options could impact its sales performance. The Court further concluded that company statements noting that the menu offered customers a “great value,” included items described as “fan favorite[s],” and that the company was “excited” about its operating performance, were vague optimistic assertions and mere puffery. (Slip Op. at 14-15). Finally, the Court held that plaintiffs’ allegations failed to establish that specific information known to the company regarding its pricing and menu changes was inconsistent with the company’s statements in the challenged press release and analyst presentations.
Separately, the Court assessed whether plaintiffs had adequately pleaded scienter, which under the enhanced pleading requirements of the PSLRA requires a “strong inference that the defendant acted with the required state of mind.” (Slip Op. at 17). Plaintiffs argued that certain of the defendant executives’ stock sales during the putative class period were “suspicious in timing and amount” because the executives had not sold other shares recently and the sales were not made pursuant to a 10(b)-5 trading plan. The Court, however, applying Ronconi v. Larkin, 253 F.3d 423, 430 (9th Cir. 2001), found these allegations insufficient, given that plaintiffs had failed to allege the executives’ sales as a percentage of their total holdings. The Court further observed that the complaint failed to allege that the sales were “out of line” with the executives’ prior trading history, to explain why not every executive with equal knowledge sold their shares, or to provide any information as to whether there were restrictions on the executives’ ability to trade. Accordingly, the Court found plaintiffs’ allegations failed to create the required “strong inference” of scienter.
