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REPLY TO OPP’N TO MOTION TO DISMISS CAC
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
HARRIET S. POSNER (Bar No. 116097)
harriet.posner@skadden.com
PETER B. MORRISON (Bar No. 230148)
peter.morrison@skadden.com
GILA D. JONES (Bar No. 248213)
gila.jones@skadden.com
300 South Grand Avenue
Los Angeles, California 90071-3144
Telephone: (213) 687-5000
Facsimile: (213) 687-5600
Attorneys for Defendant
American Apparel, Inc.
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
IN RE AMERICAN APPAREL, INC.
SHAREHOLDER LITIGATION
This Document Relates To:
ALL ACTIONS
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Case No. CV-10-6352 MMM (RCx)
(1) DEFENDANT AMERICAN
APPAREL, INC.’S REPLY TO
PLAINTIFF’S OPPOSITION TO MOTION
TO DISMISS CONSOLIDATED CLASS
ACTION COMPLAINT;
(2) SUPPLEMENTAL REQUEST FOR
JUDICIAL NOTICE (separate cover);
(3) SUPPLEMENTAL DECLARATION
OF GILA D. JONES (separate cover);
(4) [PROPOSED] ORDER GRANTING
SUPPLEMENTAL REQUEST FOR
JUDICIAL NOTICE (separate cover);
(5) REPLY TO PLAINTIFF’S
OPPOSITION TO REQUEST FOR
JUDICIAL NOTICE (separate cover); and
(6) OPPOSITION TO PLAINTIFF’S
REQUEST FOR JUDICIAL NOTICE
(separate cover).
Date: September 12, 2011
Time: 10:00 a.m.
Courtroom: 780
Hon. Margaret M. Morrow
Complaint Filed: April 29, 2011
Trial Date: TBD
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REPLY TO OPP’N TO MOTION TO DISMISS CAC
TABLE OF CONTENTS
Page(s)
I. PRELIMINARY STATEMENT ......................................................................1
II. ARGUMENT ...................................................................................................1
A. The CAC Fails To Satisfy The PSLRA’s Standards For Pleading Falsity..........1
1. Plaintiff Fails To Plead That Disclosures Regarding
Immigration Compliance Were False ...........................................3
2. The Company’s Forward-Looking Statements About The
Estimated Effect Of ICE-Related Terminations Are
Inactionable..................................................................................6
3. Statements Of Optimism Regarding Company’s Desire To
Improve Controls Were Not False And Misleading As A
Matter Of Law ...........................................................................10
B. Plaintiff Fails To Plead Facts Creating A Strong Inference Of Scienter ...........12
1. Plaintiff’s Suggestive And Hindsight Allegations Are
Insufficient To Show That Company Knowingly Or Recklessly
Misled Investors About Immigration Compliance ......................14
2. Allegations Regarding Effect Of Terminations Are Not
Supported By Requisite Factual Detail And Thus Do Not
Establish Scienter .......................................................................17
3. Groundless Allegations Of “Financial Improprieties” Do Not
Establish Scienter With Respect To Control Issues.....................20
4. The Opposition Continues To Fail To Describe A Motive
Sufficient To Support Scienter Allegations.................................24
III. CONCLUSION .............................................................................................25
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REPLY TO OPP’N TO MOTION TO DISMISS CAC
TABLE OF AUTHORITIES
CASES
PAGE(S)
In re Adaptive Broadband Securities Litigation,
No. C 01-1092 SC,
2002 U.S. Dist. LEXIS 5887 (N.D. Cal. Apr. 2, 2002)....................................... 23
Altas v. Accredited Home Lenders Holding Co.,
556 F. Supp. 2d 1142 (S. D. Cal. 2008) ........................................................ 11, 12
In re Amylin Pharmaceuticals, Inc. Securities Litigation,
No. 01-cv-1455 BTM (NLS),
2003 U.S. Dist. LEXIS 7667 (S.D. Cal. May 1, 2003) ......................................... 8
In re Autodesk, Inc. Securities Litigation,
132 F. Supp. 2d 833 (N.D. Cal. 2000)................................................................. 19
Batwin v. Occam Networks, Inc.,
No. CV 07-2750 CAS (SHx),
2008 U.S. Dist. LEXIS 52365 (C.D. Cal. 2008) ................................................. 20
Brodsky v. Yahoo! Inc.,
630 F. Supp. 2d 1104 (N.D. Cal. 2009)....................................................... 4, 5, 16
Chamber of Commerce of the United States v. Whiting,
131 S. Ct. 1968 (2011)......................................................................................... 14
In re Cornerstone Propane Partners, L.P. Securities Litigation,
355 F. Supp. 2d 1069 (N.D. Cal. 2005)......................................................... 24, 25
In re Countrywide Finance Corp. Securities Litigation,
588 F. Supp. 2d 1132 (C.D. Cal. 2008)............................................................... 15
In re Dauo System, Inc. Securities Litigation,
411 F.3d 1006 (9th Cir. 2005) ............................................................................. 19
Desaigaoudar v. Meyercord,
223 F.3d 1020 (9th Cir. 2000) ............................................................................... 7
In re Downey Securities Litigation,
No. CV 08-3261-JFW (RZx),
2009 U.S. Dist. LEXIS 83443 (C.D. Cal. Aug. 21, 2009) .................................. 17
In re Duane Reade Inc. Securities Litigation,
No. 02 Civ. 6478(NRB),
2003 U.S. Dist. LEXIS 21319 (S.D.N.Y. Nov. 24, 2003) .................................. 12
ECA & Local 134 IBEW Joint Pension Trust of Chicago v. J.P. Morgan Chase
Co.,
553 F.3d 187 (2d Cir. 2009) ................................................................................ 11
Employers Teamsters Local Nos. 175 & 505 Pension Trust Fund v. Clorox Co.,
353 F.3d 1125 (9th Cir. 2004) ............................................................................. 11
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Epstein v. Itron, Inc.,
993 F. Supp. 1314 (E.D. Wash. 1998)................................................................. 19
In re Exodus Communications, Inc. Securities Litigation,
No. C 01-2661 MMC,
2005 U.S. Dist. LEXIS 20222 (N.D. Cal. Aug. 5, 2005) .................................... 24
In re Faro Technologies Securities Litigation,
534 F. Supp. 2d 1248 (M.D. Fla. 2007) .............................................................. 20
In re Foundry Networks, Inc. Securities Litigation,
No. C-00-4823-MMC,
2003 U.S. Dist. LEXIS 18200 (N.D. Cal. Aug. 29, 2003) ................................. 18
Frank v. Dana Corp.,
No. 09-4233,
2011 U.S. App. LEXIS 10437 (6th Cir. May 25, 2011) ............................... 13, 23
Gaylinn v. 3 Com Corp.,
185 F. Supp. 2d 1054 (N.D. Cal. 2000)............................................................... 16
Gelfer v. Pegasystems, Inc.,
96 F. Supp. 2d 10 (D. Mass. 2000)...................................................................... 22
In re Hiengergy Technologies, Inc. Securities Litigation,
No. SACV04-1226-DOC (JTLX),
2005 WL 3071250 (C.D. Cal. Oct. 25, 2005) ..................................................... 16
In re ICN Pharmaceuticals, Inc. Securities Litigation,
299 F. Supp. 2d 1055 (C.D. Cal. 2004)............................................................... 13
In re Immune Response Securities Litigation,
375 F. Supp. 2d 983 (S.D. Cal. 2005) ............................................................... 7, 9
In re Impac Mortgage Holdings, Inc. Securities Litigation,
554 F. Supp. 2d 1083 (C.D. Cal. 2008)................................................................. 8
In re Impax Laboratories, Inc. Securities Litigation,
No. C 04-04802 JW,
2007 U.S. Dist. LEXIS 52356 (N.D. Cal. July 18, 2007) ................................... 23
In re InVision Technologies Inc. Securities Litigation,
549 F.3d 736 (9th Cir. 2008) ............................................................................... 16
In re JDS Uniphase Corp. Securities Litigation,
No. C 02-1486-CW,
2007 U.S. Dist. LEXIS 66085 (N.D. Cal. 2007) ................................................... 7
In re Juniper Networks, Inc. Securities Litigation,
542 F. Supp. 2d 1037 (N.D. Cal. 2008)............................................................... 16
In re Lattice Semiconductor Corp. Securities Litigation,
No. CV04-1255-AA,
2006 U.S. Dist. LEXIS 262 (D. Or. Jan. 3, 2006).............................................. 19
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Lewis v. Straka,
No. 05-C-1008,
2006 U.S. Dist. LEXIS 76716 (E.D. Wis. Oct. 12, 2006)................................... 25
Lipton v. Pathogenesis Corp.,
284 F.3d 1027 (9th Cir. 2002) ............................................................................. 13
Lormand v. US Unwired, Inc.,
565 F.3d 228 (5th Cir. 2009) ............................................................................... 19
Matrixx Initiatives, Inc. v. Siracusano,
131 S. Ct. 1309 (2011)......................................................................................... 13
In re McKesson HBOC, Inc. Securities Litigation,
126 F. Supp. 2d 1248 (N.D. Cal. 2000)............................................................... 23
Meram v. Citizens Title & Trust, Inc.,
No. 10cv1388 L(POR),
2011 U.S. Dist. LEXIS 1657 (S.D. Cal. Jan. 3, 2011) .......................................... 2
Metzler Investment GMBH v. Corinthian Colleges, Inc.,
540 F.3d 1049 (9th Cir. 2008) ......................................................................... 4, 13
Middlesex Retirement System v. Quest Software, Inc.,
527 F. Supp. 2d 1164 (C.D. Cal. 2007)............................................................... 18
New York City Employees' Retirement System v. Berry,
616 F. Supp. 2d 987 (N.D. Cal. 2009)................................................................. 15
In re New Century,
588 F. Supp. 2d 1206 (C.D. Cal. 2008)......................................................... 11, 12
New Mexico State Investment Council v. Ernst & Young LLP,
No. 09-55632,
2011 U.S. App. LEXIS 7680 (9th Cir. Apr. 14, 2011)........................................ 15
Norfolk County Retirement System v. Ustian,
No. 07-C-7014,
2009 U.S. Dist. LEXIS 65731 (N.D. Ill. July 28, 2009) ..................................... 22
In re NorthPoint Communications Group, Inc. Securities Litigation,
221 F. Supp. 2d 1090 (N.D. Cal. 2002)................................................................. 9
Nursing Home Pension Fund, Local 144 v. Oracle Corp.,
380 F.3d 1226 (9th Cir. 2004) ............................................................................... 9
Official Unsecured Creditors Committee of Media Vision Technology, Inc. v.
Jain,
215 F.R.D. 587 (N.D. Cal. 2003) ........................................................................ 14
Patel v. Parnes,
253 F.R.D. 531 (C.D. Cal. 2008)......................................................................... 18
In re PetSmart, Inc. Securities Litigation,
61 F. Supp. 2d 982 (D. Ariz. 1999) ..................................................................... 18
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Provenz v. Miller,
102 F.3d 1478 (9th Cir. 1996) ............................................................................. 14
In re Read-Rite Corp. Securities Litigation,
335 F.3d 843 (9th Cir. 2003) ................................................................... 13, 18, 24
Rombach v. Chang,
355 F.3d 164 (2d Cir. 2004) ................................................................................ 12
Ronconi v. Larkin,
253 F.3d 423 (9th Cir. 2001) ............................................................................... 18
SEC v. Todd,
No. 07-56098,
2011 U.S. App. LEXIS 12692 (9th Cir. Jun. 23, 2011) ...................................... 21
In re SemGroup Energy Partners, L.P. Securities Litigation,
729 F. Supp. 2d 1276 (N.D. Okla. 2010) ............................................................ 15
Siegel v. Lyons,
No. C-95-3588,
1996 U.S. Dist. LEXIS 22982 (N.D. Cal. Sept. 16. 1996).................................. 12
In re Silicon Graphics Inc. Securities Litigation,
183 F.3d 970 (9th Cir. 1999) ............................................................................... 19
Siracusano v. Matrixx Initiatives, Inc.,
585 F.3d 1167 (9th Cir. 2009) ............................................................................. 13
In re Splash Technology Holdings Inc. Securities Litigation,
160 F. Supp. 2d 1059 (N.D. Cal. 2001)..................................................... 8, 11, 23
In re Stac Electronics Securities Litigation,
89 F.3d 1399 (9th Cir. 1996) ................................................................................. 6
Stocke v. Shuffle Master, Inc.,
615 F. Supp. 2d 1180 (D. Nev. 2009) ........................................................... 20, 22
In re Syntex Corp. Securities Litigation,
95 F.3d 922 (9th Cir. 1996) ............................................................................. 6, 18
Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 308 (2007)............................................................................................. 12
In re Turboydyne Technologies, Inc. Securities Litigation,
No. CV-99-00697,
2000 U.S. Dist. LEXIS 23020 (C.D. Cal. Mar. 15, 2000) ........................ 9, 10, 19
In re U.S. Aggregates, Inc. Securities Litigation,
235 F. Supp. 2d 1063 (N.D. Cal. 2002)............................................................... 25
In re UTStarcom Inc. Securities Litigation,
617 F. Supp. 2d 964 (N.D. Cal. 2009)............................................................. 4, 22
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In re Vantive Corp. Securities Litigation,
283 F.3d 1079 (9th Cir. 2002) ......................................................................passim
In re Watchguard Securities Litigation,
No. C05-678J,
2006 WL 2038656 (W.D. Wash. Apr. 21, 2006) ................................................ 22
Weiss v. Amkor Technology, Inc.,
527 F. Supp. 2d 938 (D. Ariz. 2007) ................................................................... 23
In re Wet Seal, Inc. Securities Litigation,
518 F. Supp. 2d 1148 (C.D. Cal. 2007)............................................... 7, 11, 17, 24
Wozniak v. Align Technologies, Inc.,
No. C-09-3671-MMC,
2011 WL 2269418 (N.D. Cal. June 8, 2011)....................................................... 11
Zucco Partners, LLC v. Digimarc Corp.,
552 F.3d 981 (9th Cir. 2009) ......................................................................... 12, 13
STATUTES
8 U.S.C. § 1324a................................................................................................... 3, 5, 17
15 U.S.C. § 78u-4 ....................................................................................................... 2, 6
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REPLY TO OPP’N TO MOTION TO DISMISS CAC
I. PRELIMINARY STATEMENT
In the mistaken belief that he can distract the Court from the insufficiency of the
CAC, Plaintiff’s opposition to American Apparel’s Motion to Dismiss (the “Opposition”)
consists largely of rhetoric more fitting for “Page Six” of the New York Post than a
securities complaint. Starting with page 1 and Exhibit 1,1 and continuing for 50 pages,2
the Opposition continues the tradition started in the CAC of resorting to exaggeration,
innuendo, and misstatements of what Defendants actually said to the market. Under the
PSLRA and applicable Ninth Circuit authority, however, rhetoric unsupported by specific
facts raising a strong inference that American Apparel’s public statements were
knowingly and materially false when made does not give rise to a securities claim.
Because the CAC falls woefully short of meeting this standard, it should be dismissed.
II. ARGUMENT
A. The CAC Fails To Satisfy The PSLRA’s Standards For Pleading Falsity
The Opposition does nothing to cure Plaintiff’s failure to plead the falsity of statements
regarding American Apparel’s efforts to comply with immigration laws (CAC ¶ 73), the
impact that terminations precipitated by the ICE inquiry would have on the Company (CAC ¶
82), and its desire to remediate reported deficiencies in its internal controls. (CAC ¶¶ 108-
1 Exhibit 1 to the Declaration of Ramzi Abadou is a clip of a Today Show interview
of Irene Morales, a plaintiff in a sexual harassment case pending against Charney and the
Company. That interview and the topics covered therein have absolutely nothing to do
with the matters pending before this Court. Plaintiff appears to attempt to make a link
with the following nonsensical sentence:
Moreover, Charney’s dismal defense of his indefensible slur to describe
American Apparel’s female employees likewise pervades the arguments
defendants raise in support of their motions to dismiss the Complaint.
(Opp’n 6.) There is no connection, though, and the Court should disregard Plaintiff’s
diversionary tactics.
2 On June 3, 2011, the Court entered an order based on the parties’ stipulation
regarding excess pages for the Opposition (the “Order”). The Order provided that while
Plaintiff would have 50 pages for the Opposition, “[s]uch Omnibus Brief shall not
contain more than 25 pages in opposition to any one particular motion to dismiss.”
(Order at 1.) In violation of the Order, nearly all of the 48 pages of the Opposition that
pertain to the non-Lion Capital defendants are devoted to addressing American Apparel’s
Motion.
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114.) The PSLRA requires Plaintiff to “specify each statement alleged to have been
misleading [and] the reason or reasons why the statement is misleading . . . .” 15 U.S.C. §
78u-4(b)(1)(B) (emphasis added); In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1086-87
(9th Cir. 2002) (falsity must be pled with particularity); Meram v. Citizens Title & Trust, Inc.,
Civil No. 10cv1388L(POR), 2011 U.S. Dist. LEXIS 1657, at *6 (S.D. Cal. Jan. 3, 2011)
(same). Plaintiff refers the Court to a litany of paragraphs in the CAC wherein he claims the
“reasons” why the statements were false or misleading and the basis for his beliefs are found.
(Opp’n 14 (citing CAC ¶¶ 5-23, 26-29, 34-38, 67-78, 80-81, 84, 86-88, 90-91, 94, 96-99,
101-07, 109-10, 112, 115, 119, 121-27, 129, 132-34).) However, each and every one of these
allegations – several of which misrepresent the content of the Company’s public disclosures3
and statements made by Defendants and third parties to the press – contains only conclusory
assertions of falsity and is void of specific facts explaining why the statements at issue were
false.4
3 For example, Plaintiff alleges that the “Company later revealed that, in fact, 2,500 of
the Company’s garment manufacturing employees had been dismissed. This revelation
directly contradicted Defendants’ unequivocal prior statements that all of the Company’s
manufacturing employees were ‘documented immigrants and authorized to work in the
United States.’” (CAC ¶ 13.) In the Motion, the Company noted that Plaintiff appears to
misquote a November 28, 2007 proxy statement, which states that “[m]any of American
Apparel’s workers are documented immigrants.” In providing an accurate citation of the
proxy, the Company does not suggest that it “implicitly disclosed that the other workers”
were not documented. (Opp’n 15.) Rather, it seeks to dispel the notion that the Company
“contradicted” itself because the allegedly “unequivocal statement” regarding “all”
employees is simply not contained in the Company’s public filings.
4 The Reply addresses the concrete “reasons” and bases for belief. The remaining
allegations are vague, argumentative, and conclusory, and, thus, do not warrant discussion.
(See CAC ¶¶ 6, 7-10, 18, 70, 71, 75-78, 84, 94 (alleging that immigration reform and
unauthorized workforce integral to Company’s brand advantage and financial success); ¶¶ 67,
68, 73 (alleging that Company did not follow Department of Homeland Security (“DHS”)
“best practices”); ¶¶ 74, 81 (alleging that Charney “hired people at random” and considered
his employees to be “family”); ¶¶ 14, 15, 20-23, 69, 97, 101-07 (alleging that termination of
employees impacted Company’s operations); ¶ 11 (alleging Company went public through
blank check company);¶¶ 12, 26, 27-29, 34, 36, 37, 68 109-11, 115, 124-26, 134 (alleging
that Company misrepresented its intention to improve internal control over financial reporting
because Defendants did not have adequate controls in place, withheld February monthly
financials from its auditor, hired “inexperienced” CFO, and, despite reporting positive Q3
2008 quarterly numbers, almost went bankrupt in December 2008); ¶ 35 (alleging that SEC
and DOJ issued subpoenas regarding auditor resignation and internal controls in July and
November 2010); ¶ 38 (alleging resignation of two board members in April 2011); ¶¶ 121,
123 (alleging that Company renegotiated debt terms and restated financials to reclassify debt).
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1. Plaintiff Fails To Plead That Disclosures Regarding Immigration
Compliance Were False
Plaintiff relies heavily on the ultimate outcome of the ICE inquiry5 in an attempt to
allege a false statement regarding the Company’s earlier disclosures regarding its efforts to
comply with immigration laws. (See CAC ¶ 5 (Representations that Company made diligent
efforts to comply with all employment and labor regulations” were “utterly false . . . [An ICE]
I-9 audit found that Defendants had unlawfully employed thousands of undocumented
workers6 . . . .”); see also CAC ¶¶ 5, 13, 17, 72, 74, 80, 84, 91.) But the CAC fails to explain
how ICE’s June 2009 conclusion that certain workers 7 did not appear to have proper
documentation is dispositive of the truthfulness of the Company’s prior disclosures regarding
5 Defendants do not “argue that they were under ‘no duty to disclose’ that the Company
was even the subject of an ICE investigation.” (Opp’n 17.) The Company asserts that the
inquiry was timely disclosed in its March 2008 Form 10-K – the first required periodic filing
following receipt of the notice. Plaintiff newly argues that a duty to disclose arose prior to
March 2008, at one point in the Opposition suggesting – without authority – that a Form 8-K
should have been filed “immediately” (Opp’n 7, n.9) or at a minimum, after publication of a
January 18, 2008 New York Times article, reporting that Mr. Charney said the Company
requires necessary documentation of its employees, since Rule 10-b5 mandates “disclosure of
material facts necessary to make disclosed statements not misleading.” (Opp’n 17.) No duty
to disclose arose, however, because Plaintiff does not allege adequately that Charney’s
statements were untrue.
6 Plaintiff, no doubt intentionally, confuses “unauthorized” workers (see 8 U.S.C. §
1324a(a)) with “undocumented” workers. It should not be assumed, and Plaintiff does not
allege, that American Apparel employed people who failed to provide any documentation
whatsoever upon their hiring. Rather, in the disclosure of ICE’s findings, the Company
reported: “ICE notified the Company that it was unable to verify the employment eligibility
of approximately 200 current employees because of discrepancies in these employees’
records. Additionally, ICE notified the Company that another approximately 1,600 current
employees appear . . . to have obtained employment by providing, on Form I-9,
documentation which ICE believes, based on its proprietary databases, to be suspect and not
valid.” (See Jones Decl. Ex. 13 at 57.)
7 Plaintiff attempts to sensationalize his claims by taking liberty with the number of
employees terminated in connection with the ICE inquiry. (See Opp’n 15, 20 (2,500 workers
were terminated); 27 (“American Apparel had been employing thousands of undocumented
manufacturing workers . . . .”); 31 (“half of the Company’s [5,800 person] manufacturing
workforce had been lost . . . .”); CAC ¶ 13).) Where Plaintiff cites to the Company’s actual
disclosures, the number is closer to 1,500. (CAC ¶ 20 (“‘reduction in labor efficiency was a
result of the dismissal of over 1,500 experienced manufacturing employees in the third and
fourth quarters of 2009’”) (quoting May 19, 2010 press release); ¶ 70 (“In fact, the Company
itself later admitted in October 2009 that ‘[c]ompliance with immigration laws has resulted in
the dismissal of about 1,500 of our permanent employees due to alleged discrepancies in their
immigration documentation.’”).)
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its efforts to verify employment eligibility. There are no allegations, for example, that the
Company did not require employees to complete “Employment Eligibility Verification Forms
(‘I-9’),” “review and record a prospective employee’s identity document(s),” “determine
whether the document(s) reasonably appear to be genuine and related to the individual,” or
maintain “each I-9 on file for at least three years, or one year after employment ends,
whichever is longer.” (CAC ¶ 65 (describing requirements of the Immigration Nationality
Act).) And of the eight hiring practices recommended by DHS (CAC ¶ 67), the CAC alleges
only that Defendants did not adopt one (E-Verify). (CAC ¶ 68.)
Recognizing this, Plaintiff improperly attempts to allege in his Opposition that the
Company’s statements concerning its immigration compliance efforts were false because the
ICE investigation was pending for 18 months. (See Opp’n 16-17 (“The Company also argues
that, by relying on ICE’s findings . . . , plaintiff is pleading ‘fraud by hindsight.’ Plaintiff’s
allegations, however, are based on the results of the ICE investigation that was ongoing and
known to defendants from the beginning of the Class Period.”) However, Plaintiff fails to
explain how mere knowledge of an investigation or its pendency renders the Company’s
statements false. Nor does Plaintiff’s cited authority support this notion. In In re UTStarcom
Inc. Securities Litigation, 617 F. Supp. 2d 964 (N.D. Cal. 2009), plaintiff adequately pled that
certain statements were false where the complaint alleged that “Defendants were aware of . . .
adverse circumstances [e.g., “declining demand, declining margins, operational difficulties,
increased costs, and internal control problems”] at the time they made the statements.” Id. at
972 (emphasis added). Here, Plaintiff fails to allege specific, adverse facts regarding the
Company’s compliance efforts, which were contemporaneously known when the disclosures
were made. See Brodsky v. Yahoo! Inc., 630 F. Supp. 2d 1104, 1117 (N.D. Cal. 2009)
(allegations of falsity must be grounded in a “foundation [of] particular facts”).8
8 Plaintiff’s attempt to distinguish Brodsky v. Yahoo! Inc., 630 F. Supp. 2d 1104 (N.D.
Cal. 2009), In re Vantive, 283 F.3d at 1091, and Metzler Investment GMBH v. Corinthian
Colleges, Inc., 540 F.3d 1049, 1070 (9th Cir. 2008) is unavailing. In Brodsky, the alleged
misrepresentations were not “general optimistic statements” about Yahoo!’s business (Opp’n
16, n.15), but rather specific statements pertaining to Yahoo!’s reported revenues and
(cont’d)
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Plaintiff also manipulates statements purportedly made by DHS and ICE employees to
suggest that the Company “knowingly” hired unauthorized workers, and, thus, issued false
statements. (See Opp’n 26 (“[D]efendants do not (and cannot) deny that they knowingly
hired undocumented workers . . . .”); see also CAC ¶ 13 (ICE discovered what it “later
characterized as a ‘scheme’ by the Company to violate U.S. immigration laws . . . .”); ¶¶ 86,
88.)9 The full quotations, however, do not reflect a finding of a “knowing” violation or
“scheme” by the Company. Rather, one official “stated that the ICE action at American
Apparel ‘underscore[s] our commitment to targeting employers that cultivate illegal work
forces by knowingly hiring and exploiting illegal workers.’” (CAC ¶ 88 (emphasis added and
in original).) The second official stated that “‘if there is widespread [mis]use of Social
Security numbers . . . , we have concerns about possibly a scheme to avoid immigration
law . . . .’” (Id.) But the officials’ “commitment” to enforcement and description of
situations where they would have “concerns” do not amount to an actual finding that the
Company “knowingly” hired unauthorized workers or engaged in a “scheme.” Indeed,
Plaintiff cannot deny that he overstates ICE’s findings – at the start of his Opposition, he
claims without factual support, that “two federal agencies accused defendants” of violating
________________________
(cont’d from previous page)
projected revenues from a new product. Brodsky, 630 F. Supp. 2d at 1113-14, 1116-17. In re
Vantive, 283 F.3d at 1091-92, held that, “Under the PSLRA, the plaintiffs bear the burden of
specifying [the reasons] ‘why the statement is misleading.’” 283 F. 3d at 1091-92 (citation
omitted). Here, Plaintiff fails to allege any details about the Company’s actual hiring
practices that would support the conclusion that the Company did not make diligent efforts to
comply with immigration laws. Metzler held that “the PSLRA’s falsity requirement is not
satisfied by conclusory allegations that a company’s class period statements . . . are per se
false based on the plaintiff’s allegations of [the] fraud . . . .” Metzler, 540 F.3d at 1070.
Plaintiff attempts to do just the same, alleging that Class Period statements regarding
immigration compliance were false because “Defendants knew [and failed to disclose] . . .
[that] American Apparel employed 2,500 undocumented workers.” (CAC ¶¶ 74, 77, 78.)
9 Plaintiff also asserts that “ICE and DHS have confirmed the falsity of the Company’s
immigration compliance statements. That is precisely why ICE fined the Company – it
engaged in a knowing scheme to conceal these facts.” (Opp’n 16.) Plaintiff fails to allege,
because he cannot, that employers are only fined for “knowing” violations; that is because
employers may be fined for unknowing violations. See, e.g., 8 U.S.C. § 1324a(g)(5)
(providing civil fines for violation of 8 U.S.C. § 1324a(a)(1)(B), which penalizes non-
compliance – whether knowing or unknowing – with statute’s employment verification
requirements).
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the law. (Opp’n 1-2 (emphasis added).) Nowhere does he point to a determination by DHS,
or any other government agency, that American Apparel knowingly violated immigration
laws or engaged in any type of “scheme.”10
2. The Company’s Forward-Looking Statements About The Estimated
Effect Of ICE-Related Terminations Are Inactionable
Plaintiff alleges that Defendants falsely assured investors that the loss of employees as
a result of the ICE inquiry “would not materially impact the Company’s financial results.”
(Opp’n 19; see also CAC ¶¶ 14, 19, 32, 87, 96.) To the contrary, as detailed in the Motion,
Defendants disclosed in June, July and August 2009 that no assurances could be given as to
the ultimate impact of any ICE-related terminations. (See Mot. at 5-6; Jones Decl. Ex. 13 at
57 (“At the present time, because of the uncertainty regarding how many of these employees
will have their work authorization ultimately verified by ICE, the Company is not able to
accurately assess what the resultant impact of the loss of employees would have on its
operations.”); Ex. 14 at 64 (“As the ultimate impact is difficult to predict at this time, no
assurances can be given as to how, if at all, the loss of a significant number of manufacturing
employees will affect the Company’s business and operations.”); Ex. 15 at 68 (“[I]f we were
forced to reduce our work force, the way we would mitigate that would be by increasing the
days per week of our employees . . . . [But] at this point it’s difficult to estimate [the financial
impact] . . . .”).) These disclosures wholly undermine a finding of falsity. See In re Syntex
Corp. Sec. Litig., 95 F.3d 922, 929 (9th Cir. 1996) (no false statement where “Defendants
expressly acknowledged that the precise effect of the consent decree could not be known and
that the company was merely stating its opinion that the consent decree would not have any
‘material adverse effect.’”); In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1407 (9th Cir. 1996)
10 Plaintiff’s remaining arguments are equally deficient. Peter Schey reported to the New
York Times that “to the best of his knowledge,” the Company’s employees were authorized
to work in the United States. (Opp’n 18 (emphasis added).) The statement is not false,
absent allegations that Schey did not believe the statement when made. See 15 U.S.C. § 78u-
4(b)(1)(B). Schey also stated that ICE would be withdrawing its fine, when, in fact, the
Company disclosed two weeks later that it had paid an immaterial amount to the government.
(Opp’n 18; see also CAC ¶¶ 16, 99.) Plaintiff fails to allege how Schey’s error demonstrates
the falsity of the Company’s statements regarding its efforts to comply with immigration laws.
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(statement that “[a]lthough the Company believes that it provides adequate allowances for
returns, there can be no assurance that actual returns in excess of recorded allowances will not
result in a material adverse effect on business, operating results and financial condition” not
misleading) (emphasis added).
Plaintiff now concedes that Defendants warned investors that it could not accurately
estimate the effects of any layoffs on operations. (See Opp’n 19 (“defendants told investors
that the ultimate impact of the terminations might be generally difficult to predict.”).) But he
argues that Defendants’ cautionary language was “generic, boilerplate,” insufficient to
overcome the allegedly false statements.11 (Opp’n 19.) Plaintiff’s assertion should be
summarily rejected. Defendants’ disclosures were couched in a specific cautionary warning:
because the Company had not yet determined how many employees might be terminated, it
could not predict how the loss of any workers would affect the business.12 Furthermore, the
warnings were directly linked to the forward-looking statements, rather than contained in
separate public filings or boilerplate risk factor disclosures. (See Jones Decl. Exs. 13 at 57;
14 at 64; 15 at 68.) For this reason, Plaintiff’s authority is plainly distinguishable. In In re
JDS Uniphase Corp. Sec. Litig., No. C 02-1486-CW, 2007 U.S. Dist LEXIS 66085, at *43-
49 (N.D. Cal. 2007), defendants provided “general warnings about forward-looking
statements” before conference calls and directed investors to safe harbor statements and risk
factors in separate public filings. In In re Immune Response Sec. Litig., 375 F. Supp. 2d 983,
1034-35 (S.D. Cal. 2003), defendant drug company included generic language at the end of a
11 Plaintiff’s authority holds that the Court may resolve on a motion to dismiss the
question of whether cautionary language is adequate to shield statements from liability. See
In re Immune Response, 375 F. Supp. 2d 983 at 1033-34 (dismissal may be granted if
“defendant’s challenged statements include enough cautionary language or risk disclosure,
‘that reasonable minds could not disagree that the challenged statements were not
misleading.’”) (citation omitted); see also In re Wet Seal, Inc. Sec. Litig., 518 F. Supp. 2d
1148, 1169 (C.D. Cal. 2007) (“Whether a statement qualifies for safe harbor protection is a
proper inquiry on a motion to dismiss.”) (citation omitted).
12 As stated aptly in a case cited by Plaintiff, “[f]ailure to disclose information that does
not yet exist cannot be the predicate” for liability under the securities laws. Desaigoudar v.
Meyercord, 223 F.3d 1020, 1023 (9th Cir. 2000).
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press release, stating “[a]ctual results” could vary because “future studies may never be
completed” or “prolonged delays may occur.”13
Plaintiff also contends that, notwithstanding the cautionary statements, the disclosures
were misleading because “defendants simultaneously provided specific, concrete and
misleading reasons why the labor disruption would not materially impact the Company’s
financial results.” (Opp’n 19; CAC ¶ 82 (alleging that Defendants falsely represented that the
Company believed “surplus levels of inventory and manufacturing capability” would mitigate
effects of employee terminations).) Under the PSLRA, forward-looking statements regarding
future events are immunized from liability absent allegations “that the statements were made
with actual knowledge of their falsity.”14 See In re Impac Mortg. Holdings, Inc. Sec. Litig.,
554 F. Supp. 2d 1083, at 1099 (C.D. Cal. 2008); In re Vantive, 283 F.3d at 1089. Here,
Plaintiff fails to allege with any particularity how Defendants’ statements about excess
inventory and manufacturing capacity were false.
Specifically, the Opposition conclusorily claims that Defendants “were well aware that
the Company’s stale excess inventory would cripple its ability to efficiently respond to the
market’s demand for new products” and that “inventory levels [were] [in]sufficient to offset
the diminished efficiency resulting from the terminations.” (Opp’n 20-21.) However, the
CAC contains no allegations about the nature or quantity of the inventory on hand, or how the
Company projected “trends” and “market demand for new products” when the statements
were made. See In re Splash Tech. Holdings Inc. Sec. Litig., 160 F. Supp. 2d 1059, 1072
(N.D. Cal. 2001) (“[T]he complaint must allege that the ‘true facts’ arose prior to the
13 See also In re Amylin Pharm., Inc. Sec. Litig., No. 01cv1455BTM(NLS), 2003 U.S.
Dist LEXIS 7667, *21-22 (S.D. Cal. May 1, 2003) (general “cautionary statements were
included in approximately ten pages of ‘risk factors’” in SEC filings, were not tailored to
statements about a particular product, and thus not sufficient).
14 Incredibly, Plaintiff argues that the PSLRA’s safe harbor provision does not apply to
these statements because they “convey[ed] a misleading picture of the Company’s then-
present business conditions.” (Opp’n 46.) The argument barely merits discussion. The
statements regarding the possible effects of ICE-related terminations (see CAC ¶¶ 14, 15, 81-
83, 89 (describing and quoting June 30, 3009 and July 1, 2009 press releases) and ¶¶ 92, 93
(quoting August 13, 2009 conference call)), preceded the terminations. (Jones Decl. Ex. 18
at 92.) Thus, the disclosures portend conditions that might result in the future.
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allegedly misleading statement. This requirement helps guard against pleading fraud by
hindsight and helps prevent providing a complaint passageway through the pleading stage
merely because it alleges that the allegedly fraudulent statements conflict with the current
state of facts.”) (citations omitted); compare In re Immune Response, 375 F. Supp. 2d at 1019
(falsity pled where complaint “include[d] corroborating details of the internal reports, cite[d]
to specific reports, mention[ed] the dates or contents of reports and allege[d] their sources of
information about reports.”).
Plaintiff further concludes that the Company’s subsequent finding that inventory was
inadequate “did not come as an eleventh-hour surprise [because Defendants] reviewed daily
information about inventory levels and inventory needs.” (Opp’n 21; see also CAC ¶ 98.)
The suggestion is that because Defendants had access to reports between November 10, 2009
(when the Company announced that it had terminated 1,500 employees) and March 25, 2010
(when the adverse effects of the terminations were publicly reported), they should have
known on June 30, July 1, and August 13, 2009 that inventory would be inadequate in the
future. This assertion, in addition to being metaphysically implausible, is no substitute for
specific details about the identity and content of the inventory reports generated around the
time of the disclosures at issue, which would demonstrate the falsity of those disclosures.
Accordingly, Plaintiff’s reliance on Nursing Home Pension Fund¸Local 144 v. Oracle
Corp., 380 F.3d 1226, 1234 (9th Cir. 2004), In re NorthPoint Commc’ns Grp., Inc. Sec. Litig.,
221 F. Supp. 2d 1090, 1104 (N.D. Cal. 2002), and In re Turbodyne Techs., Inc. Sec. Litig.,
No. CV-99-00697, 2000 U.S. Dist. LEXIS 23020, at *70-71 (C.D. Cal. Mar. 15, 2000) is
misplaced. (Opp’n 21.) In each of those cases, plaintiffs did not simply plead that because
executives generally had access to information about the business, they must have known of
the alleged fraud. The complaints went further, alleging that executives had access to
information that contradicted defendants’ public statements. See Nursing Home, 380 F.3d at
1234 (CEO monitored database, which reflected improper revenue recognition); In re
NorthPoint, 221 F. Supp. 2d at 1104 (testimony of 18 confidential witnesses laid “proper
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factual foundation” that certain transactions were accounted for improperly and that
transactions fell “neatly within [defendants’] presumptive bailiwicks”); Turbodyne, 2000 U.S.
Dist. LEXIS 23020, at *70-71 (alleging employee testimony that production facility not
running as of the time defendants disclosed that facility was operational).15 Thus, Plaintiff’s
failure to plead the details of the Company’s internal reports, memoranda, or the like, and that
those details were inconsistent with the public disclosures, is fatal to the CAC.
3. Statements Of Optimism Regarding Company’s Desire To Improve
Controls Were Not False And Misleading As A Matter Of Law
Plaintiff alleges that Defendants falsely stated that the Company was taking financial
compliance and internal controls “‘very seriously,’” “‘pursu[ing] a strict corporate
orthodoxy,’” “‘looking to build a world class financial team,’” “‘going to be remediating []
material weaknesses’” and was “‘commit[ted] to conservatism and maintaining best
practices.’” (Opp’n 22 (emphasis added).) Although Plaintiff attempts to amend the CAC in
his Opposition, contending that “[D]efendants affirmatively characterize[d] management
practices as ‘conservative’ or ‘orthodox’” (id. (emphasis added)), he can point to no
representation by Defendants that the Company’s controls were “conservative” or
“orthodox.” Rather, Defendants used words like “pursuing,” “looking to build,” and “going
to be” to describe the Company’s approach to improving controls in the future, all the while
simultaneously disclosing existing control deficiencies. 16 (See, e.g., Jones Decl. Exs. 4 at 20-
22; 10 at 39-44; 18 at 93-95; 20 at 108-13; 23 at 132-37.) His linguistic gymnastics
15 Plaintiff also argues that Defendants knew that “a new staff of inexperienced workers,
producing new product . . . would materially impact . . . margins” (Opp’n 21) and that
Charney admitted in May 2008 that training new workers was “laborious and time-
consuming.” (CAC ¶ 90.) These allegations miss the mark because Defendants stated that
hiring a substantial number of new employees would not be necessary. (See CAC ¶¶ 19, 81.)
Plaintiff does not plead any facts – internal reports or corroborating witness statements – to
suggest that statements about the Company’s manufacturing capacity or lack of need for
additional workers were false.
16 Plaintiff tries to give short shrift to these disclosures (Opp’n 47) and acknowledges
only the Company’s March 31, 2011 disclosure regarding internal controls, as if to suggest
that the deficiencies were previously concealed. (CAC ¶ 37; see also Opp’n 38.) But the
disclosures were numerous and comprehensive, and described in great detail the nature of the
deficiencies and the associated risks.
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notwithstanding, Plaintiff cannot transmute optimistic statements about future endeavors into
concrete statements about current events. Wozniak v. Align Tech., Inc., No. C-09-3671-
MMC, 2011 WL 2269418, at *6 (N.D. Cal. June 8, 2011) (statements that “we are going to
continue to drive the expansion,” “[o]ur key goals . . . are to generate strong, topline growth,”
“[we] will continue to execute our plan” were forward-looking).
However, even if the Court were to consider Plaintiff’s newly minted argument,
Defendants’ statements are inactionable puffery. See In re Wet Seal, 518 F. Supp. 2d at 1168
(vague statements, such as “measurable progress” and “continuing improvements,” not
actionable) (citation omitted); In re Splash, 160 F. Supp. 2d at 1077 (statements that results
were “strong,” “robust,” “improved,” and “solid” constituted “vague assessments [], on which
no reasonable investor would rely”); ECA & Local 134 IBEW Joint Pension Trust of
Chicago v. J.P. Morgan Chase Co., 553 F.3d 187, 205-06 (2d Cir. 2009) (statements that
defendant had “‘risk management processes [that] are highly disciplined and designed to
preserve the integrity of the risk management process,’” “‘set the standard’ for ‘integrity,’”
and would “‘continue to reposition and strengthen [its] franchises with a focus on financial
discipline,’” inactionable). Moreover, contrary to Plaintiff’s assertion, cases immunizing
corporate puffing from liability do involve “actual business practices.” (Opp’n 23, n.19.) See
In re Impac 554 F. Supp. 2d at 1097, n.10 (defendant’s statements that business
“fundamentals, loan acquisitions, and originations” were “solid” is “too vague to be
actionable”); In re Wet Seal, 518 F. Supp. 2d at 1168 (statements conveying confidence in
new products and aggressiveness in promotional activity not actionable); Emp’rs Teamsters
Local Nos. 175 & 505 Pension Trust Fund v. Clorox Co., 353 F.3d 1125, 1132 (9th Cir. 2004)
(approximation that inventory problems would be corrected by year end inactionable).
Likewise, In re New Century, 588 F. Supp. 2d 1206 (C.D. Cal. 2008) and Altas v.
Accredited Home Lenders Holding Co., 556 F. Supp. 2d 1142 (S.D. Cal. 2008) do not hold,
as Plaintiff suggests, that statements containing words like “conservative” and “orthodox” are
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categorically “material,” and thus cannot be puffery. 17 (Opp’n 22.) In those cases,
statements about “conservative” practices were misleading because they conflicted with
defendants’ actual, existing business practices. See In re New Century, 588 F. Supp. 2d at
1226 (“Plaintiffs offer New Century’s statements that it observed standards of high-quality
credit and underwriting, and set those statements against detailed allegations of practices that
utterly failed to meet those standards.”); Altas, 556 F. Supp. 2d at 1155 (“As a result of the
alleged accounting improprieties, statements during the class period regarding [defendant’s]
projections were rendered false and misleading.”). Here, investors were repeatedly apprised
that, notwithstanding the Company’s objective of improving its internal control over financial
reporting, American Apparel’s control environment was materially deficient. (See, e.g.,
Jones Decl. Exs. 4 at 20-22; 10 at 39-44; 18 at 93-95; 20 at 108-13; 23 at 132-37.)
B. Plaintiff Fails To Plead Facts Creating A Strong Inference Of Scienter
To plead scienter under the PSLRA, Plaintiff must allege with particularity “that the
defendant made false or misleading statements either intentionally or with deliberate
recklessness or, if the challenged representation is a forward looking statement, with ‘actual
knowledge . . . that the statement was false or misleading’” when made. In re Vantive, 283
F.3d at 1089 (citation omitted). Evidence of scienter must be more than “reasonable” or
“permissible” – it must be “cogent” and “at least as compelling as any opposing inference one
could draw from the facts alleged.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S.
308, 324 (2007). While Tellabs introduced a “holistic” review of scienter allegations, it
remains the law of the Ninth Circuit that the adequacy of each scienter allegation must be
17 The fact that Defendants’ statements were parroted back in analyst reports does not
make them material, as Plaintiff suggests. (Opp’n 23 (“Certainly, analysts . . . did not
dismiss these statements as material [sic] expressions of optimism.”).) See Siegel v.
Lyons, No. C-95-3588, 1996 U.S. Dist. LEXIS 22982, at *19-20 (N.D. Cal. Sept. 16.
1996) (statements attributed to defendants and published in analyst reports constituted
inactionable puffery); Rombach v. Chang, 355 F.3d 164, 175 (2d Cir. 2004) (“Like the
press releases, the analysts’ reports contain . . . statements of guarded optimism . . . .
‘[P]uffery or ‘misguided optimism’ is not actionable as fraud.); see also In re Duane
Reade Inc. Sec. Litig., No. 02 Civ. 6478, 2003 U.S. Dist. LEXIS 21319, at *26 (S.D.N.Y.
Nov. 25, 2003) (“Plaintiff’s assertion that defendants’ alleged misstatements and
omissions ‘swayed stock market analysts’ hardly reaches the level of the required
particularized allegations.”).
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tested. Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 987 (9th Cir. 2009) (Tellabs
“does not materially alter the particularity requirements for scienter claims established in our
previous decisions, but instead only adds an additional ‘holistic’ component to those
requirements.”).18
The infirmity of the CAC is Plaintiff’s total failure to provide any concrete factual
allegations supporting an inference of scienter. Specifically, Plaintiff has failed to plead
particularized facts that the Company had “contemporaneous knowledge” of the falsity of its
statements. In re Read-Rite Corp. Sec. Litig., 335 F.3d 843, 847 (9th Cir. 2003) (citation
omitted); In re Vantive, 283 F.3d at 1090-91 (complaint must contain allegations of “specific
contemporaneous conditions known to the defendants that would strongly suggest that the
defendants understood” what the impact of their actions would be); In re ICN Pharm. Inc. Sec.
Litig., 299 F. Supp. 2d 1055, 1065 (C.D. Cal. 2004) (same). “Contemporaneous knowledge”
is evidenced by access to specific information, such as internal reports, communications, or
financial data, that reveal the fraud. See Metzler, 540 F.3d at 1067-68 (scienter not
established “absent some additional allegation of specific information conveyed to
management and related to the fraud.”); Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1036
(9th Cir. 2002) (no scienter where plaintiffs failed to identify internal reports or specific
18 The Supreme Court did not “teach” in Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct.
1309 (2011) that “the only appropriate approach following Tellabs’s mandate [is] to review
scienter pleadings based on the collective view of the facts, not the facts individually.”
(Opp’n 25, quoting Frank v. Dana Corp., No. 09-4223, 2011 U.S. App. LEXIS 10437, at
*14-15 (6th Cir. May 25, 2011).) Rather the Sixth Circuit, observing that the Court in
Matrixx “addressed the allegations collectively, did so quickly, and [] did not parse out the
allegations for individual analysis,” concluded that “conducting an individual review of
myriad allegations is an unnecessary inefficiency.” (Id.) Under Ninth Circuit authority,
however, the Court must determine whether “any of the plaintiff’s allegations, standing alone,
are sufficient to create a strong inference of scienter.” Zucco, 552 F. 3d at 992. If not, the
Court must consider whether the allegations “combine to create a strong inference.” Id.
Significantly, Matrixx was appealed to the Supreme Court from the Ninth Circuit, which
applied the two-step approach to plaintiff’s scienter allegations. See Siracusano v. Matrixx
Initiatives, Inc., 585 F.3d 1167, 1180 (9th Cir. 2009). The Supreme Court did not pass on the
Ninth Circuit’s two-step approach, and addressed the scienter allegations “quickly” because
the case involved a narrow question of law. Matrixx, 131 S. Ct. at 1324 (deciding whether
scienter is adequately alleged based on internal scientific reports that conflict with public
statements, where there is no allegation that reports were statistically significant).
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content of reports allegedly revealing fraud). No such information is alleged to have been in
Defendants’ possession when the purportedly misleading disclosures were made.19
1. Plaintiff’s Suggestive And Hindsight Allegations Are Insufficient To
Show That Company Knowingly Or Recklessly Misled Investors
About Immigration Compliance
The CAC fails to plead facts indicating that Defendants knew they were not making
“diligent efforts” to comply with immigration laws. (CAC ¶ 73.) Absent are specific
allegations about what practices American Apparel followed to determine employees’ work
eligibility. While Plaintiff contends that “American Apparel[] refus[ed] to use industry
practices to identify these workers” (Opp’n 30), he does not allege what industry he speaks of,
and if the garment business, what standard practices therein American Apparel did not
adopt.20 And although Plaintiff alleges that the Company did not participate in the voluntary
E-Verify program, he fails to allege – because he cannot – that E-Verify is the only means to
verify employment eligibility documents.21 Instead, Plaintiff boldly argues that he “need not”
plead details, such as “contemporaneous internal reports” reflecting the Company’s
compliance efforts, because the “ICE investigation concluded, contemporaneously, that
19 Plaintiff suggests that he can plead scienter by alleging that Defendants “violated the
Company’s own Code of Ethics” (Opp’n 30), but his authority does not support this assertion.
See Provenz v. Miller, 102 F.3d 1478, 1490 (9th Cir. 1996) (revenue recognition violated
internal policy and GAAP); Official Unsecured Creditors Comm. of Media Vision Tech., Inc.
v. Jain, 215 F.RD. 587, 588 (N.D. Cal. 2003) (in discovery dispute, granting motion to
compel production of audit manual because deviation from policies may be probative of
scienter).
20 Notably, and despite Plaintiff’s rhetoric to the contrary, ICE’s audit of American
Apparel was not an outlier event in the history of the agency’s enforcement efforts. The Wall
Street Journal reported that between October 2010 and June 2011, ICE had launched over
2,300 audits, and, in the previous year, approximately 2,200. (Jones Decl. Ex. 26 at 2.)
21 Plaintiff’s characterization of Chamber of Commerce of the United States v. Whiting,
131 S. Ct. 1968 (2011) is dishonest. The Supreme Court did not “determine” that E-Verify is
the “best means available to determine employment eligibility of new hires.” (Opp’n 29,
citing Whiting, 131 S. Ct. at 1986.) The Court, in observing that the federal government has
touted the track record of E-Verify, quoted a DHS manual stating that the program is the
“best means available to determine the employment eligibility of new hires.” (Id.) The
Court also observed that others, including petitioner Chamber of Commerce and Justice
Breyer, have expressed concerns about the accuracy of E-Verify. (Id.) In fact, only five
months before the Class Period ended, ICE announced “initiatives to strengthen the efficiency
and accuracy of the E-Verify system.” (See Jones Decl. Ex. 27 at 5 (Press Release, DHS,
DHS Unveils Initiatives to Enhance E-Verify (Mar. 17, 2010).)
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defendants knowingly hired undocumented workers.” (Opp’n 26-27.) This is both factually
wrong and temporally illogical. First, as explained above, Plaintiff fails to cite to any finding
by ICE that American Apparel knowingly violated immigration laws. (See supra II.A.1.)
Second, it cannot be that the conclusion of the investigation was “contemporaneous[]” with
the Class Period. ICE’s second notice to the Company was received 18 months after the
investigation commenced. (See Jones Decl. Ex. 13 at 57.) The CAC does not allege that ICE
apprised the Defendants of the status of the investigation, or that the Company was not
complying with immigration laws, at any time during the Class Period. Thus, the fact that the
investigation was ongoing is not illuminating.
Plaintiff also suggests that scienter should be inferred from the magnitude of the
terminations. (Opp’n 27, 30 (“[G]iven American Apparel’s massive undocumented
workforce, . . . defendants, at the very least, were reckless in not knowing that the Company
was employing undocumented workers.”).) Plaintiff’s authority does not support this circular
and conclusory result. Rather, in each case, plaintiffs alleged specific acts of malfeasance that
placed defendants on notice of the alleged fraud. New Mexico State Inv. Council v. Ernst &
Young LLP, No. 09-55632, 2011 U.S. App. LEXIS 7680, at *26 (9th Cir. Apr. 14, 2011) (in
stock option backdating case, auditor allegedly accepted unsigned minutes and
“documentation that could not possibly have been valid”); N.Y. City Emps.’ Ret. Sys. v.
Berry, 616 F. Supp. 2d 987, 1001 (N.D. Cal. 2009) (in stock option backdating case,
defendant “oversaw the granting of backdated options”); In re Countrywide Fin. Corp. Sec.
Litig., 588 F. Supp. 2d 1132, 1194, n.77 (C.D. Cal. 2008) (confidential witnesses reported
that defendant “led the charge to abandon sound underwriting” practices); In re SemGroup
Energy Partners, L.P. Sec. Litig., 729 F. Supp. 2d 1276, 1300 (N.D. Okla. 2010) (defendants
likely had knowledge of billion dollar fraud where they allegedly directed or participated in
questionable accounting activity, including the payment of undisclosed bonuses to
themselves). By contrast, there are no allegations in this case regarding the Company’s hiring
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procedures and efforts to confirm employee eligibility, and, thus, there is no support for the
conclusion that Defendants knew they were not complying with the law.
Next, Plaintiff argues that because defendants had “day-to-day ‘intimate[]
involve[ment]’” with their manufacturing employees and their “offices were located in the
same building [as the factory]” they must have known that the Company employed
unauthorized workers.22 (Opp’n 28 (“Defendants do not explain how working alongside
American Apparel’s thousands of undocumented workers on a daily basis, over the course of
a decade, would not have alerted them of Charney’s immigration violations.”).) This “must
have known” pleading tactic fails to satisfy the PSLRA. See In re InVision Techs. Inc. Sec.
Litig., 549 F.3d 736, 748 (9th Cir. 2008) (allegation defendant should have known fails to
meet requirements of the PSLRA); Brodsky v. Yahoo! Inc., 630 F. Supp. 2d 1104, 1118 (N.D.
Cal. 2009) (conclusory allegations that executives “must have known” statements were false
due to high level positions at the company do not provide a strong inference of scienter);
Gaylinn v. 3Com Corp., 185 F. Supp. 2d 1054, 1065 (N.D. Cal. 2000) (same). Furthermore,
Plaintiff does not allege that Charney collected documents from manufacturing workers, and
his position as CEO does not support the inference that he would have done so. See In re
Juniper Networks, Inc. Sec. Litig., 542 F. Supp. 2d 1037, 1047 (N.D. Cal. 2008) (Chief
Technology Officer would not have knowledge of accounting and thus no scienter); In re
Hiengergy Techs., Inc. Sec. Litig., No. SACV04-1226-DOC(JTLx), 2005 WL 3071250, *6
(C.D. Cal. Oct. 25, 2005) (defendant signed financial statements but primary position as
Chief of Science undercut assertion that he acted with scienter). Nor does Plaintiff allege that
workers presented their documents or any other indicia of employment eligibility to the
22 Plaintiff also alleges that the Company’s payroll system, which purportedly separates
retail employees from manufacturing employees (CAC ¶ 74), was an “overt attempt to
conceal the thousands of undocumented workers from the Company’s vendors.” (Opp’n 28.)
The Company did not “ignore this allegation” because it is damning. (Id.) Rather, it simply
fails to see how organization of the payroll system is informative. Plaintiff does not allege,
for example, that the payroll contains any information about work authorization or that
“vendors and other sources of potential scrutiny” (id.) could look at the system and confirm
whether employment bona fides were authentic.
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Company, let alone to its CEO, on a “day-to-day” basis. Plaintiff appears to be of the mind
that one can look at a person and tell whether they are an “illegal immigrant.”23 Such
profiling, of course, is offensive and unlawful.24
2. Allegations Regarding Effect Of Terminations Are Not Supported
By Requisite Factual Detail And Thus Do Not Establish Scienter
Plaintiff fails to allege any facts supporting the conclusion that “[d]efendants knew but
failed to disclose that losing one-third of the Company’s manufacturing employees had an
immediate and severely negative impact on the Company’s financial performance.” (CAC ¶
85.) As detailed above, the Company’s disclosures regarding the potential impact of any
terminations repeatedly stated that no assurances could be given as to the ultimate effects of
any ICE-related terminations. (See Jones Decl. Exs. 13 at 57; 14 at 64; 15 at 68.) In re Wet
Seal, 518 F. Supp. 2d at 1172 (finding no inference of scienter where “information was
disclosed to the market and therefore [it is] not any more likely that Defendants’ statements”
were designed to defraud); see also In re Downey Sec. Litig., No. CV 08-3261-JFW(RZx),
2009 U.S. Dist. LEXIS 83443, at *17-18 (C.D. Cal. Aug. 21, 2009). Moreover, the timely
and fulsome disclosures issued after the effects of the terminations were known do not
establish that Defendants misled the market with respect to their beliefs before the
23 This argument is akin to Plaintiff’s allegation that one can infer whether a person is an
unauthorized alien under the immigration laws because she does not “speak English and was
scantily clothed.” (CAC ¶ 68.) The Opposition does not even attempt to address the
deficiencies of this allegation, i.e., that the hearsay statement of one witness regarding a single
alleged employee is insufficient to show scienter. (See Mot. at 19-20.)
24 Plaintiff argues that if the Company had made “diligent efforts,” it “would have had an
affirmative defense [under 8 U.S.C. § 1324a(a)(3)] to ICE’s findings.” (Opp’n 29.) It is no
surprise that the Company did not invoke the defense because 8 U.S.C. § 1324a(a)(3) is
triggered when an employer has been charged with a knowing violation of the immigration
laws under 8 U.S.C. § 1324a(1)(A) (making it unlawful to hire “an alien knowing the alien is
an unauthorized alien”). See 8 U.S.C. § 1324a(a)(3) (An “entity that establishes that it has
complied in good faith with [the hiring requirements of] subsection (b) [regarding
employment verification] . . . has established an affirmative defense that the . . . entity has not
violated paragraph (1)(A) with respect to such hiring . . . .). Here, Plaintiff does not allege
that ICE charged the Company with a violation of 8 U.S.C. § 1324a(1)(A). Indeed, as the
Company disclosed, and Plaintiff cannot refute, “ICE’s notification provided no indication
that the Company knowingly or intentionally hired unauthorized aliens and no criminal
charges have been filed against the Company or any current employees.” (See Jones Decl.
Ex. 18 at 92.)
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terminations were completed. Defendants are not liable under the securities laws for making
predictions that later turn out to be incorrect. See In re Syntex Corp., 95 F.3d at 929 (“the fact
that a prediction proves to be wrong in hindsight does not render the statement untrue when
made”); Patel v. Parnes, 253 F.R.D. 531, 560 (C.D. Cal. 2008) (“In effect, by arguing that
defendants’ predictions and forecasts were not low enough, plaintiffs improperly attempt to
allege ‘fraud by hindsight.’”); In re PetSmart, Inc. Sec. Litig., 61 F. Supp. 2d 982, 992 (D.
Ariz. 1999) (“defendants’ lack of clairvoyance simply does not constitute securities fraud.”)
(citation omitted). 25
Rather, the CAC must plead contemporaneous facts demonstrating the falsity of
Defendants’ statements. See In re Read-Rite, 335 F.3d at 847. Here, Plaintiff alleges that
Defendants knew that terminations would adversely affect the business because “surplus
inventory” would not mitigate potential inefficiencies arising from losing or hiring new
workers. (Opp’n 32.) However, the CAC contains no allegations that when the forward-
looking statements were made, Defendants had contemporaneous facts that would or should
have led them to believe that inventory would be inadequate to meet demand. While
Defendants may have had access to inventory reports,26 the CAC neither alleges what the
25 Plaintiff also argues that scienter may be inferred because disclosures regarding the
adverse effect of the terminations came “just four months” after the November 10, 2009
disclosure. (Opp’n 34.) However, proximity between disclosures “in and of itself, is
insufficient” to evidence scienter. See Ronconi v. Larkin, 253 F.3d 423, 437 (9th Cir. 2001)
(Since “none of the plaintiff’s other allegations are sufficiently specific, we now conclude that
the five week period between the optimistic statements and the below-expectation earnings
report is not enough to sustain the complaint.”); In re Foundry Networks, Inc. Sec. Litig., No.
C-00-4823-MMC, 2003 U.S. Dist. LEXIS 18200, at *42 (N.D. Cal. Aug. 29, 2003) (two
month interval between disclosures “alone is not sufficient to satisfy the requirements of the
PSLRA). Plaintiff further contends, citing Middlesex Ret. Sys. v. Quest Software, Inc., 527 F.
Supp. 2d 1164, 1189 (C.D. Cal. 2007), that scienter can be inferred when a later statement
“directly contradicts or is inconsistent with the earlier statement.” (Opp’n 35.) But there is
no inconsistency here since the earlier statements did not assure investors that layoffs would
have no impact on the business. Moreover, In re Read-Rite Corp. Securities Litigation, 335
F.3d 843 (9th Cir. 2003) completes the rule stated in Middlesex: “‘[i]t is clearly insufficient
for plaintiffs to say that a later, sobering revelation makes an earlier, cheerier statement a
falsehood.’” Read-Rite, 335 F.3d at 848 (citation omitted). Given the vacuum of adequately
supported allegations, that is precisely what Plaintiff attempts here.
26 The Opposition states that “‘these contemporaneous reports’ are buttressed by many
additional specific facts corroborating these allegations.” (Opp’n 27.) Curiously, Plaintiff
does not direct the Court to where these “many additional” facts are found, but rather cites a
(cont’d)
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reports stated nor that the reports were inconsistent with the Company’s disclosures.27 As
stated in In re Silicon Graphics, Inc. Securities Litigation, 183 F.3d 970, 985 (9th Cir. 1999)
without such information, the Court cannot “ascertain whether there [was] any basis for the
allegation that the officers had actual or constructive knowledge of [the company’s] problems
[and] that . . . their optimistic representations to the contrary [were] consciously misleading.”
Id. (where plaintiff alleged internal reports reflected production and sales issues, scienter not
pled without allegations regarding content of reports or indicia of reports’ reliability); In re
Autodesk, Inc. Sec. Litig., 132 F. Supp. 2d 833, 844 (N.D. Cal. 2000) (plaintiff failed to make
“specific allegations . . . about the contents of the reports,” “how the contents contradict
defendants’ public statements,” or “how they know what was in the reports”); see also In re
Foundry Networks, 2003 U.S. Dist. LEXIS 18200, at *31 (although described with
specificity, reports not contemporaneous with disclosures, thus no scienter; information about
shipments in first few weeks of October “insufficient to show that either revenue or profit
forecasts [issued at end of October] were false or misleading.”).28
________________________
(cont’d from previous page)
discussion in In re Dauo Sys., Inc. Sec. Litig., 411 F.3d 1006, 1015 (9th Cir. 2005), regarding
reliance on confidential witness statements. (Opp’n 27.) He does allege elsewhere that
because the Company reported on March 25, 2010 that the labor “disruption was already
‘extended’ and ‘substantial,’ it is reasonable to infer that defendants had knowledge of that
effect just months earlier.” (Opp’n 35.) Such an inference is untenable since just months
earlier, the workers were still in the Company’s employ.
27 Plaintiff claims that the “monitored metric [i.e., inventory reports] evidenced a
significant discrepancy.” (Opp’n 34.) However, he does not describe or attach to the CAC
any inventory reports, or plead other bases for asserting that the reports or some other
“metric” indicated an issue, let alone a “significant discrepancy,” with inventory.
28 The insufficiency of Plaintiff’s allegations sharply contrasts with the cases cited in the
Opposition. (Opp’n 33.) See Turbodyne, 2000 U.S. Dist. LEXIS 23020, at *70-71 (alleging
testimony of employees that assembly line not operational until months after public
statements that facility was functional); Epstein v. Itron, Inc., 993 F. Supp. 1314, 1326 (E.D.
Wash. 1998) (inferring defendants knew statements about integration of existing and new
technologies were false where defendants acknowledged that existing products were
incompatible with new technology); Lormand v. US Unwired, Inc., 565 F.3d 228, 252 (5th
Cir. 2009) (alleging private statements and internal memorandum indicating that transition to
different network would be detrimental to company, despite contrary public statements); In re
Lattice Semiconductor Corp. Sec. Litig., No. CV04-1255-AA, 2006 U.S. Dist. LEXIS 262, at
*38-39 (D. Or. Jan. 3, 2006) (“For allegations based on the defendants’ regular receipt of . . .
business reports . . . , plaintiff must provide such ‘adequate corroborating details,’ as who
(cont’d)
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3. Groundless Allegations Of “Financial Improprieties” Do Not
Establish Scienter With Respect To Control Issues
The CAC alleges that Defendants knowingly misled investors that they were “taking
[SOX compliance] very seriously’” and “‘pursu[ing] a strict corporate orthodoxy as far as
financial accounting issues.’” (Opp’n 36.) Notwithstanding that the Company disclosed its
control deficiencies throughout the Class Period (see supra II.A.3)29 and that Defendants’
optimistic statements about financial compliance are inactionable corporate puffing (see id.),
Plaintiff insists that Defendants knew, or were reckless in not knowing, that the statements
were false because the Company was “engaged in a pattern of financial improprieties and
misrepresentations about the Company’s fiscal health.” (Opp’n 37.) Plaintiff’s potpourri of
conclusory allegations, however, fails to support the assertion that the Company was engaged
in any such “financial shenanigans.” (Opp’n 26.)
First, Plaintiff alleges that Defendants violated GAAP by “intentionally withholding
adverse material information from the Company’s auditor.” (Opp’n 39, 40, n.38.) Plaintiff’s
description of the Deloitte resignation grossly mischaracterizes events and is unsupported by
the allegations of the CAC. For example, in the few instances where Plaintiff offers specific
details about the resignation, he cites the Company’s July 28, 2010 and December 21, 2010
________________________
(cont’d from previous page)
drafted the reports, who received them, an ‘adequate description of their contents,’ and from
whom the plaintiffs obtained information about them.”) (citation omitted).
29 Contrary to Plaintiff’s suggestion, Stocke v. Shuffle Master, Inc., 615 F. Supp. 2d 1180
(D. Nev. 2009), Batwin v. Occam Networks, Inc., No. CV-7-2750CAS(SHx), 2008 U.S. Dist.
LEXIS 52365 (C.D. Cal. Jul. 1, 2008), and In re Faro Technologies Securities Litigation, 534
F. Supp. 2d 1248 (M.D. Fla. 2007) do not hold that “failure to maintain effective controls is
itself indicative of scienter.” (Opp’n 38, n.33.) In Stocke, defendants’ failure to implement a
plan to remedy control weaknesses, developed after an earlier restatement, led to the
recurrence of the improper accounting practices and a second restatement. See Stocke, 615 F.
Supp. 2d at 1191. In Batwin, defendants’ auditor “identified certain internal control
deficiencies relating to revenue recognition, . . . defendants falsely represented that they had
implemented measures to correct these deficiencies and continued to recognize revenue
prematurely.” Batwin, 2008 U.S. Dist. LEXIS 52365, at *40-41. Accordingly, the initial
disclosure of control weaknesses did not negate an inference of scienter because defendants
misled investors about the company’s remediation efforts. Id. In In re Faro, “Defendants . . .
knowingly or recklessly attested to the adequacy of the internal controls system, when they
knew that the system was, in fact, seriously inadequate.” In re Faro, 534 F. Supp. 2d at 1264
(emphasis added).
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Form 8-Ks. (CAC ¶¶ 34, 36, 124.) These disclosures do not state the Company
“intentionally” withheld information, nor do they characterize the February financials as
“material.”30 (Opp’n 33.) The words “intentionally” and “material,” as well as “fraudulently
withheld” (Opp’n 24, n.20), “deliberately withheld” (Opp’n 27), and “misrepresented the
Company’s financial health” (Opp’n 39, n.36), have been inserted liberally by Plaintiff and
his counsel after the fact.31 Plaintiff also claims that the December 21, 2010 disclosure
“belatedly provided additional facts about Deloitte’s resignation.”32 (Opp’n 12-13 (emphasis
added).) But Plaintiff omits what facts the Company should have disclosed about the
resignation at any earlier time. Plaintiff also asserts that Deloitte “reported defendants to
federal authorities” (Opp’n 13), but points to no documents, witness statements, or other facts
to support that claim. Finally, and perhaps most importantly, the Company’s new
independent auditor, Marcum, re-audited the Company’s 2009 financial statements. (Jones
Decl. Ex. 24 at 140.) Marcum’s new audit report was contained in a Form 10-K/A for fiscal
year ended 2009 and removed the notation that the 2009 financials were unaudited (Id.)
Tellingly, Plaintiff does not allege that Marcum’s re-audit resulted in a restatement of any
kind.
Second, Plaintiff asserts that a restatement in 2009 of the Company’s FYE 2008
financials to reclassify one of its debt obligations (CAC ¶ 121) serves as an indicia of scienter
because a Company that seeks to improve its internal controls does not restate its financials.
30 See Jones Decl. Ex. 28 at 7 (“Deloitte further indicated that . . . [based on] their
professional judgment . . . they are no longer willing to rely on management’s representations
due to Deloitte’s belief that management withheld from Deloitte the February 2010 monthly
financial statements until after the filing of the 2009 10-K and made related
misrepresentations.”); id. at 11 (“Specifically, we believe that we requested the February
2010 financial information prior to issuing our reports and that management informed us that
such information was not available.”).
31 SEC v. Todd, No. 07-56098, 2011 U.S. App. LEXIS 12692, at *7, 20 (9th Cir. Jun. 23,
2011) is factually distinguishable. In that case, defendants failed to disclose to its auditors
that it accounted for a $47 million transaction as revenue (without which the company would
not have met analysts’ expectations) until after the release of quarterly financials. The
transaction was later restated. Id. at *7, 19.
32 Plaintiff incorrectly alleges that the Company waited until March 31, 2011 to disclose
these “additional facts.” (CAC ¶¶ 124, 134). The same language found in CAC ¶¶ 124, 134
is included in the December disclosure. (See Jones Decl. Ex. 28 at 7.)
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(Opp’n 37-38.) Plaintiff provides no authority for this proposition. 33 Each of the cases cited
in the Opposition involved multiple restatements and a failure to correct control deficiencies
that were identified after an earlier restatement. See Stocke, 615 F. Supp. 2d at 1191
(alleging two restatements and failure to correct control deficiencies that caused first
restatement); Norfolk Cnty. Ret. Sys. v. Ustian, No. 07-C-7014, 2009 U.S. Dist. LEXIS
65731, at *26-27 (N.D. Ill. Jul. 28, 2009) (same); Gelfer v. Pegasystems, Inc., 96 F. Supp. 2d
10, 16 (D. Mass. 2000) (multiple restatements arising from same improper accounting).
Additionally, each of the foregoing cases – as in most cases holding that a restatement may
support an inference of scienter – involved a restatement of revenue or income. See Stocke,
615 F. Supp. 2d at 1185 (earnings overstated by 30%); Norfolk, 2009 U.S. Dist. LEXIS
65731, at *4 (defendant overstated income by $677 million); Gelfer, 96 F. Supp. 2d at 16 (net
income overstated by 110%); accord In re UTStarcom, 617 F. Supp. 2d at 975 (“The Ninth
Circuit has held that ‘if properly pled, overstating of revenues may state a claim for securities
fraud, as under GAAP, revenue must be earned before it can be recognized.’”) (citation
omitted). Plaintiff does not allege what effect the 2009 restatement – which had nothing to do
with the substance of Plaintiff’s claims in this case – had on the Company’s financial
statements. That is no doubt because, as the Company disclosed contemporaneously with the
restatement, the restatement “did not have any impact on the Company’s previously reported
net cash flows, cash position, revenues, net income or comparable store sales.” (See Jones
Decl. Ex. 16 at 76.)
Third, changes in the Company’s CFOs over the last three years do not support an
inference of scienter. In contrast with the cases he cites in the Opposition, Plaintiff does not
allege that the changes were made in connection with the revelation of accounting
33 This is because, as stated in In re Watchguard Securities Litigation, No. C05-678J,
2006 WL 2038656, at *12 (W.D. Wash. Apr. 21, 2006), “corporate restatements of earnings
are commonplace. There can be little doubt that the investing public would prefer that
corporations correct their errors rather than suppress[] them.”
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improprieties.34 See In re Adaptive Broadband Sec. Litig., No. C01-1092SC, 2002 U.S. Dist.
LEXIS 5887, at *42-43 (N.D. Cal. Apr. 2, 2002) (resignations and reassignment of
executives supported inference of scienter where “changes occurred as Adaptive’s financials
were being restated”); Frank, 2011 U.S. App. LEXIS 10437, at *13 (CFO retired within
months of discovery of “accounting errors and at the same time as [company’s] bankruptcy
filing”); In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248, 1273-74 (N.D. Cal.
2000) (terminations followed restatement); see also In re Impax Labs, Inc. Sec. Litig., No.
C04-04802JW, 2007 U.S. Dist. LEXIS 52356 at *26-27 (N.D. Cal. Jul. 18, 2007) (“when
corporate reshuffling occurs in tandem with financial restatements, these changes ‘add one
more piece to the scienter puzzle.’”) (citation omitted).
Fourth, Plaintiff alleges that “just six days before the misleading 2009 10-K was
issued,35 on March 25, 2010, Charney misrepresented that [he thought] ‘the outlook for
American Apparel is strong,’ [was] ‘very confident about the business’ . . . [and] ‘looking
forward to a great year.’” (Opp’n 39-40.) Again, these statements are inactionable puffery.
See In re Splash, 160 F. Supp. 2d at 1076 (use of words “strong,” “well positioned,” “solid,”
and “improved” are “vague and nonactionable.”); Weiss v. Amkor Tech., Inc., 527 F. Supp.
2d 938, 956 (D. Ariz. 2007) (statement that “‘[w]e believe that 2004 will present exceptional
growth opportunities’” constituted puffery) (citation omitted). Additionally, the allegations of
the CAC contradict the assertion that Charney made these statements “while intentionally
withholding adverse trends in American Apparel’s business.” (Opp’n 47, n.52.) On March
25, 2010, the Company made several disclosures of adverse financial information.36
34 Plaintiff states that the Company “had at least three CFOs” during the Class Period
(Opp’n 41), which ended on August 17, 2010. This is wrong. As Plaintiff acknowledges in
the CAC, Mr. Luttrell succeeded Mr. Kowalewski in February 2011. (CAC ¶ 26.)
35 Plaintiff fails to identify how the 2009 10-K was misleading, and there are no
allegations that the Company restated its 2009 financials.
36 See CAC ¶ 101 (“[O]n March 25, 2010, Defendants were forced to admit that the
effects of the [ICE-related] terminations had been “substantial” and that the “extended
disruption on [the Company’s] operations has been unprecedented.”); ¶¶ 102, 147 (same);
¶148 (March 25, 2010 press release reported that given “certain restrictive financial covenants
under the company’s credit facilities, the company has determined to defer providing annual
financial guidance for 2010”).
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Finally, Plaintiff intimates that Defendants misrepresented the state of the Company’s
condition on a November 2008 investor call by concealing that it was on the verge of
bankruptcy. (Opp’n 37 (“[O]n December 24, 2008, Kowalewski sent an internal Company e-
mail explaining that American Apparel ‘almost went bankrupt last Friday’ . . . . Yet, just a
month earlier, on November 10, 2008, Charney had touted the Company’s financial
health . . . .”).) However, Defendants’ statements during the call could not be misleading
under the securities laws unless the Company was on the verge of bankruptcy in November.
See In re Exodus Commc’ns, Inc. Sec. Litig., No. C 01-2661 MMC, 2005 U.S. Dist. LEXIS
20222, at *123 (N.D. Cal. Aug. 5, 2005) (where company filed for bankruptcy on September
26, but CEO stated that company was in good health as late as September 3, scienter not
alleged because “[no] facts suggesting [CEO’s] statements about Exodus’s finances were
false at the time they were made.”); In re Read-Rite, 335 F.3d at 847. Significantly, Plaintiff
does not allege that the Company ultimately filed for bankruptcy, or that it restated its
revenues or net income for fiscal year 2008. Moreover, Defendants’ statements did not
constitute an actionable misrepresentation, since comments that “[w]e’re confident in the
numbers we’ve put out there,” the Company would “weather the economic storm,” and
“we’re pleased with our financial results” (Opp’n 37) – are puffery. See In re CornerStone
Propane Partners, L.P. Sec. Litig., 355 F. Supp. 2d 1069, 1087 (N.D. Cal. 2005) (statements
about “accomplishments we have achieved” and “resilience in the face of mounting debt” not
“actionable material misstatements of fact”); In re Wet Seal, 518 F. Supp. 2d at 1167-68
(statements that “[w]e remain confident,” “[w]e are pleased with the continuation of the
month-over-month improvement in our sales trends,” and “we will deliver a better operating
performance in the second half of the year” inactionable).
4. The Opposition Continues To Fail To Describe A Motive Sufficient
To Support Scienter Allegations
Plaintiff has failed to plead any logical or compelling motive for the alleged fraud. He
alleges that Defendants had a choice to “disclose the Company’s large undocumented work
force” and damage the brand, or mislead investors in the hope that a new administration
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would grant amnesty. (Opp’n 42.) The CAC alleges, however, that the brand value is
derived from the fact that the Company’s products are “Made in U.S.A.” (CAC ¶ 70) – not
“Made by Undocumented Immigrants.” Given, as Plaintiff concedes, that the Company paid
all of its workers above minimum wage and offered generous benefits (CAC ¶¶ 6, 64), there
was no need for the Company to employ persons ineligible to work in the United States.
Additionally, Plaintiff’s own cases demonstrate that pecuniary motive allegations
alone are insufficient to raise an inference of scienter. See In re Cornerstone, 355 F. Supp. 2d
at 1092 (granting defendant’s motion to dismiss when plaintiff alleged bonus programs that
“incentivized the specific form of accounting malfeasance alleged by the complaint” because,
although allegations contributed to inference of scienter, they were “legally and factually
insufficient to carry that burden alone.”) (emphasis added); In re U.S. Aggregates, Inc. Sec.
Litig., 235 F. Supp. 2d 1063, 1071-1072 (N.D. Cal. 2002) (granting defendant’s motion to
dismiss when plaintiff alleged “concrete, particular and corroborated” allegations concerning
defendant’s motive to defraud to remain compliant with loan agreements because “motive is
not sufficient to raise a strong inference of scienter”); Lewis v. Straka, No. 05-C-1008, 2006
U.S. Dist. LEXIS 76716, at *19-23 (E.D. Wis. Oct. 12, 2006) (granting motion to dismiss as
to some defendants for failure to adequately plead scienter despite allegations that defendants
were “motivated by their wish to continue to collect fees, salaries and bonuses and in some
cases loans on favorable terms”). In light of the deficiencies of Plaintiff’s other scienter
allegations, Charney’s compensation and stock purchases are inconsequential to the scienter
analysis.
III. CONCLUSION
For the foregoing reasons, the Court should dismiss the CAC.
DATED: July 14, 2011
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
By: /s/Harriet S. Posner
Harriet S. Posner
Attorneys for Defendant
American Apparel, Inc.
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