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Middle District Of Tennessee Dismisses Securities Fraud Claims Against Discount Retailer Chain
07/02/2025On June 24, 2025, Judge Aleta A. Trauger of the Middle District of Tennessee granted a motion to dismiss a putative securities class action brought against a discount retailer chain (the “Company”) and certain of its officers. Washtenaw Cnty. Emps.’ Ret. Sys. v. Dollar Gen. Corp., et al., No. 3:23-cv-01250 (M.D. Tenn. June 24, 2025). Plaintiffs asserted claims under Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, alleging that defendants made false or misleading statements regarding the Company’s inventory management, staffing, pricing practices, and related accounting metrics. The Court dismissed the complaint without prejudice, stating that its analysis “begins and ends with scienter.”
The Court organized the 113 alleged misstatements purportedly made during the four-year putative class period into four categories regarding alleged mismanagement: (i) inventory, (ii) staffing, (iii) pricing, and (iv) accounting. Relying largely on allegations concerning statements by former employees, plaintiffs alleged that defendants misrepresented the Company’s ability to manage inventory, adequately staff stores, avoid widespread discrepancies between advertised prices and actual prices, and properly account for inventory and related financial metrics, which allegedly came to light through a series of partial corrective disclosures that allegedly revealed the truth and led to significant share price declines. Defendants moved to dismiss on the basis that plaintiffs failed to plead material misrepresentations or omissions by defendants, scienter, and loss causation.
The Court focused its analysis on the scienter allegations by conducting a holistic review of the non-exhaustive factors that the Sixth Circuit set out in Helwig v. Vencor, Inc. (the “Helwig factors”). Plaintiffs relied on the following six Helwig factors as supporting a strong inference of scienter: (i) insider trading at suspicious times or in unusual amounts, (ii) divergence between internal reports and external statements, (iii) disregard of the most current factual information before making statements, (iv) existence of an ancillary lawsuit charging fraud by a company and the company’s quick settlement of that lawsuit, (v) disclosure of accounting information in such a way that its negative implications could only be understood by someone with a high degree of sophistication, and (vi) the self-interested motivation of defendants in the form of saving their salaries or jobs.
As to the insider trading allegations, the Court found that even assuming the truth that two of the four individual defendants engaged in significant stock sales, the lack of any allegations that the other individual defendants engaged in insider trading undermined any inference of scienter. According to the Court, the Complaint “alleges no facts to explain why, in an alleged securities fraud scheme, half of the Individual Defendants did not engage in insider trading.”
With respect to divergence between internal reports and external statements, the “key factor to a finding of scienter,” the Court found that no inference could be made from the alleged internal emails, noting that several post-dated the alleged misstatements and that the complaint did not allege that any of the individual defendants actually read or responded to the emails. As to the alleged internal meetings and calls, the Court found that the complaint did not allege that any individual defendant attended the meetings in question and that the complaint did not allege a single meeting’s date, any individual attendee, or any statement from any attendee.
The Court further noted that the disregard of the most current factual information before making the statements is often considered in tandem with the divergence between internal reports and external statements, and that plaintiffs’ allegations as to this factor amounted to invoking the “core operations” theory of scienter, which cannot establish a strong inference of scienter by itself but can be one relevant part of a complaint supporting the inference. The Court found that plaintiffs otherwise did not sufficiently allege the disregard of current factual information to support a strong inference of scienter.
As to ancillary lawsuits, the Court found that the complaint did not allege that the Company settled any lawsuit related to fraud and that the Company’s settlements with two states regarding claims it overcharged customers and a settlement with OSHA related to citations for unsafe working conditions did not concern fraud or facts that significantly overlap to the degree necessary to support an inference of scienter.
The Court next found that the complaint “lack[ed] allegations that only someone with a high level of sophistication could have understood negative implications from [the Company’s] accounting disclosures.”
Finally, the Court found that the individual defendants’ desire to keep their jobs and high salaries, without more, did not contribute to a strong inference of scienter.
Because the complaint did not adequately plead scienter, the Court held that the Section 10(b) claim failed, and, as a result, the derivative Section 20(a) control person and Section 20A insider trading claims also failed. The Court dismissed the complaint in its entirety without prejudice, granting plaintiffs leave to amend to address the identified deficiencies.
