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Northern District Of Georgia Largely Denies Uniform Rental Company’s Motion To Dismiss Securities Fraud Claims Arising From Post‑Spinoff Disclosures
10/21/2025On September 30, 2025, Judge Steven D. Grimberg of the United States District Court for the Northern District of Georgia substantially denied a motion to dismiss a putative securities class action arising out of the spinoff of a uniform-rental and workplace supplies company (the “Company”) from its former parent (the “Parent”). Plumbers, Pipefitters & Apprentices Loc. No. 112 Pension Fund v. Vestis Corp., No. 1:24-cv-02175-SDG (N.D. Ga. Sept. 30, 2025). Plaintiffs asserted claims against the Company and certain of its Executives (the “Executives”), and the former Parent and the Parent’s CEO (collectively, the “Defendants”) under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, claiming that Defendants made false and misleading statements about the Company’s business prospects. The Court sustained claims against the Company, the Executives, and the Parent, but dismissed the Rule 10b-5 claim against the Parent CEO for lack of strong inference of scienter. The case will proceed on the primary claims and related control-person claims.
Plaintiffs, a group of public pension funds who purchased stock in the Company following its spinoff in September 2023, allege that Defendants misstated and concealed facts about the Company’s customer retention, operational issues, and financial stability to paint a rosy picture about the Company’s spinoff and independent financial prospects. Plaintiffs allege that these misstatements began before the spinoff, when the Parent made statements in filings with the SEC and investor day about the optimistic prospects about the Company’s launch. Plaintiffs alleged that the Company continued to tout its anticipated success and underlying strengths in customer retention and service once it became an independent entity. However, Plaintiffs allege that the truth began to emerge in February 2024, when the Company announced disappointing financial results that it allegedly attributed to the never-before disclosed loss of a major client in 2023, and fully revealed itself in May 2024, when the Company adjusted its revenue outlook and growth projections allegedly due to customer retention and service issues dating back to fourth quarter 2023.
Noting that the purchaser-seller rule does not require defendant to be the issuer, and that Exchange Act liability extends to secondary actors who commit primary violations, the Court rejected the Parent’s standing argument. It held that the Parent’s alleged misstatements were made in connection with the purchase or sale of the Company’s securities because they were made to market the soon-to-be independent Company and were alleged to have inflated the Company’s stock price.
The Court next held that Plaintiffs had adequately alleged that Defendants made optimistic statements about the Company’s business, while failing to include material information about its past performance regarding customer retention, business operations, and underlying fiscal status. In particular, the Court found Plaintiffs adequately alleged that: (1) Defendants allegedly stated that customer retention was the “centerpiece” of the Company’s growth strategy despite allegedly “bleeding” customers before, during, and after the spinoff; (2) Defendants allegedly touted the Company’s operational excellence despite allegedly being plagued by significant “service gaps” going back to its pre-spinoff days; (3) Defendants allegedly described the lack of growth in its uniform business as “intentional” but later conceded that the lack of growth was due to the very customer retention issues and service gaps about which Defendants allegedly had been untruthful. The Court observed that these statements triggered a duty to disclose the defects that existed within the Company’s business and that Defendants’ failure to disclose the defects “rendered their statements materially misleading.”
On scienter, the Court held Plaintiffs alleged a strong inference as to the Company’s CEO and CFO—and, thus, via respondeat superior—as to the Company and the Parent. Considering the alleged facts, collectively, the Court found it to be particularly significant that the Company’s CEO and CFO allegedly admitted in May 2024 that customer retention and service gap issues had been known before the spin-off, and that Plaintiffs alleged, including through confidential witness testimony, that information consistently flowed to senior Company leadership regarding customer churn and pervasive service issues. The Court also found that the timing of the allegedly misleading statements regarding the Company’s optimistic outlook suggested motive, because they were made around the Company’s launch, it’s most critical time. The Court noted the alleged spinoff payment to the Parent as a potential motive but gave it minimal weight. By contrast, the Court did not find a strong inference of scienter as to the Parent’s CEO, finding the scienter allegations rested upon generalized and insufficient position-based “must-have-known” theories and motives, not particularized facts showing the CEO had knowledge or access to the Company’s true metrics.
Because the 10b-5 claims against the Company and the Parent survived, the Court found that the Section 20(a) claims could likewise proceed.
