LATHAM & WATKINS LLP Kegan A. Brown 885 Third Avenue New York, NY 10022 Tel: (212) 906-1200 kegan.brown@lw.com Kevin H. Metz (pro hac vice) Sarah A. Greenfield (pro hac vice) 555 Eleventh Street NW Washington, DC 20004 Tel: (202) 637-2200 kevin.metz@lw.com sarah.greenfield@lw.com Attorneys for Defendants Checkpoint Systems, Inc., George Babich, Jr., Jeffery O. Richard, and James M. Lucania UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY STEPHEN MEIER, Individually and On Behalf of All Others Similarly Situated, Plaintiff, v. CHECKPOINT SYSTEMS, INC., GEORGE BABICH, JR., JEFFERY O. RICHARD AND JAMES M. LUCANIA, Defendants. No. 1:15-cv-08007 (RBK)(KMW) Honorable Robert B. Kugler Oral Argument Requested Motion Day: August 15, 2016 REPLY MEMORANDUM OF LAW IN FURTHER SUPPORT OF DEFENDANTS’ MOTION TO DISMISS PLAINTIFF’S AMENDED COMPLAINT Case 1:15-cv-08007-RBK-KMW Document 20 Filed 08/04/16 Page 1 of 21 PageID: 920 i TABLE OF CONTENTS I. INTRODUCTION .......................................................................................... 1 II. PLAINTIFF FAILS TO IDENTIFY FACTS SUPPORTING A STRONG INFERENCE OF SCIENTER ....................................................... 3 A. “Close Attention” To Tax Accounting ................................................. 4 B. Variances In Tax Results ...................................................................... 6 C. Motive To Maximize Sale Price........................................................... 7 D. The Non-Culpable Inference Is More Compelling ............................ 11 III. PLAINTIFF FAILS TO IDENTIFY FACTS SHOWING FALSITY ...................................................................................................... 12 A. Checkpoint’s Tax Structure Risk Factor ............................................ 12 B. Checkpoint’s EPS Guidance .............................................................. 14 IV. CONCLUSION ............................................................................................. 15 Case 1:15-cv-08007-RBK-KMW Document 20 Filed 08/04/16 Page 2 of 21 PageID: 921 ii TABLE OF AUTHORITIES Page(s) CASES In re Advanta Corp. Sec. Litig., 180 F.3d 525 (3d Cir. 1999) ................................................................................. 5 In re ArthroCare Corp. Sec. Litig., 726 F. Supp. 2d 696 (W.D. Tex. 2010) .............................................................. 13 Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) .............................................................................................. 1 Cheeseman v. Baxter Healthcare Corp., No. 08-4814 (JBS), 2009 WL 1351676 (D.N.J. May 13, 2009) .......................... 4 City of Pontiac Gen. Emps. Ret. Sys. v. Wal-Mart Stores, Inc., No. 12-CV-5162, 2014 WL 4823876 (W.D. Ark. Sept. 26, 2014) .................... 13 City of Providence v. Aeropostale, Inc., No. 11 Civ. 7132, 2013 WL 1197755 (S.D.N.Y. Mar. 25, 2013) ...................... 14 City of Roseville Emps.’ Ret. Sys. v. Horizon Lines, Inc., 713 F. Supp. 2d 378 (D. Del. 2010).................................................................... 13 In re Complete Mgmt. Inc. Sec. Litig., 153 F. Supp. 2d 314 (S.D.N.Y. 2001) .................................................................. 9 Culley v. Cumberland Valley Sch. Dist., No. 15-CV-857, 2016 WL 775091 (M.D. Pa. Feb. 29, 2016) .............................. 6 In re Digital Island Sec. Litig., 357 F.3d 322 (3d Cir. 2004) ................................................................................. 3 In re Exxon Mobil Corp. Sec. Litig., 387 F. Supp. 2d 407 (D.N.J. 2005) ....................................................................... 3 Frater v. Hemispherx Biopharma, Inc., 996 F. Supp. 2d 335 (E.D. Pa. 2014) .................................................................. 12 Gold v. Ford Motor Co., 577 F. App’x 120 (3d Cir. 2014) ........................................................................ 11 Case 1:15-cv-08007-RBK-KMW Document 20 Filed 08/04/16 Page 3 of 21 PageID: 922 iii GSC Partners CDO Fund v. Washington, 368 F.3d 228 (3d Cir. 2004) ......................................................................... 3, 8, 9 In re Heartland Payment Sys., Inc. Sec. Litig., No. 09-1043, 2009 WL 4798148 (D.N.J. Dec. 7, 2009) ...................................... 5 Institutional Investors Group v. Avaya, 564 F.3d 242 (3d Cir. 2009) ......................................................................... 1, 5, 8 In re Intelligroup Sec. Litig., 527 F. Supp. 2d 262 (D.N.J. 2007) ....................................................................... 6 In re ITT Educational Servs., Inc. Sec. & S’holder Deriv. Litig., 859 F. Supp. 2d 572 (S.D.N.Y. 2012) ................................................................ 13 In re NAHC, Inc. Sec. Litig., 306 F.3d 1314 (3d Cir. 2002) ............................................................................. 10 In re Nevsun Res. Ltd., No. 12 Civ. 1845 (PGG), 2013 U.S. Dist. LEXIS 162048 (S.D.N.Y. Sept. 27, 2013) ..................................................................................... 9 In re Oxford Health Plans, Inc., 187 F.R.D. 133 (S.D.N.Y. 1999) ........................................................................ 15 Jones v. Perez, 550 F. App’x 24 (2d Cir. 2013) ............................................................................ 7 Payne v. DeLuca, 433 F. Supp. 2d 547 (W.D. Pa. 2006)................................................................. 11 In re PDI Sec. Litig., No. 02-211 (GEB), 2006 WL 3350461 (D.N.J. Nov. 16, 2006) .......................... 9 Phillips v. County of Allegheny, 515 F.3d 224 (3d Cir. 2008) ................................................................................. 1 Register v. PNC Fin. Servs. Grp., Inc., 477 F.3d 56 (3d Cir. 2007) ................................................................................... 1 Rothman v. Gregor, 220 F.3d 81 (2d Cir. 2000) ................................................................................... 9 Case 1:15-cv-08007-RBK-KMW Document 20 Filed 08/04/16 Page 4 of 21 PageID: 923 iv In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256 (3d Cir. 2006) ................................................................................. 9 Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) ........................................................................................ 2, 11 In re Urban Outfitters, Inc. Sec. Litig., 103 F. Supp. 3d 635, 653-54 (E.D. Pa. 2015) .................................................... 12 Vavro v. Albers, No. 2:05CV321, 2006 WL 2547350 (W.D. Pa. Aug. 31, 2006), aff’d sub nom. Vavro v. A.K. Steel Co., 254 F. App’x 134 (3d Cir. 2007) ................................................................................................................... 10 Witriol v. Conexant Sys., Inc., No. 04-6219 (SRC), 2006 WL 3511155 (D.N.J. Dec. 4, 2006) ........................... 2 STATUTES 15 U.S.C. § 78u-4(b)(1)(B) ...................................................................................... 15 RULES Fed. R. Civ. P. 8 ......................................................................................................... 1 Case 1:15-cv-08007-RBK-KMW Document 20 Filed 08/04/16 Page 5 of 21 PageID: 924 1 I. INTRODUCTION Plaintiff makes three, equally unavailing, arguments that he pleaded scienter to the heightened standard required by the PSLRA. First, he argues that Defendants paid “close attention” to Checkpoint’s financial reporting, and therefore must have known that the quarterly tax results were affected by valuation allowance errors, but decided to publish the financial statements anyway. Opp. at 20. Second, he argues that historically, the Company’s tax results fluctuated from year to year, and fluctuating tax results meant the Company’s quarterly earnings- per-share (“EPS”) data was “unreliable” and should not have been published. Id. at 21. And third, he says that the Company’s CEO and CFOs (including a former CFO, Mr. Richard, who left less than three weeks into the Class Period) hid the errors in order to sell the Company for the highest price. Id. at 22-23, 26 n.4. None of these theories-fueled by speculation in lieu of facts-come close to meeting the heightened pleading standard of the PSLRA.1 A company’s CEO 1 Plaintiff’s Opposition misstates the heightened pleading standard applicable here, quoting non-PSLRA cases with lower standards. See Opp. at 9 (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (Federal Rule of Civil Procedure 8); Phillips v. County of Allegheny, 515 F.3d 224 (3d Cir. 2008) (Section 1983 case); Register v. PNC Fin. Servs. Grp., Inc., 477 F.3d 56 (3d Cir. 2007) (ERISA case)). As stated in Defendants’ Motion to Dismiss, the PSLRA imposes an exacting pleading standard that requires Plaintiff to allege “with particularity facts giving rise to a strong inference” of scienter. Institutional Investors Group v. Avaya, 564 F.3d 242, 253 (3d Cir. 2009) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007)). Case 1:15-cv-08007-RBK-KMW Document 20 Filed 08/04/16 Page 6 of 21 PageID: 925 2 and CFO are expected to pay “close attention” to its financial statements, but the courts do not presume every CEO and CFO is aware of every accounting error. The Third Circuit demands much more. Plaintiff must allege facts showing that Defendants “knew about the [errors] . . . or that the[y] were so obvious that Defendants must have been aware of them,” Witriol v. Conexant Sys., Inc., 2006 WL 3511155, at *4 (D.N.J. Dec. 4, 2006)-not just that they paid attention. Here, the Amended Complaint hardly mentions the tax errors at all, much less whether they were obvious, what the Defendants knew about them, how they came to know, or when. The Opposition spins confusing but ultimately irrelevant tales of “promoting” EPS and the materiality of EPS (a point never raised by Defendants in their Motion to Dismiss), but fails to point to a single fact that suggests any of the Individual Defendants disregarded errors in the financials. Likewise the fact that, historically, the Company’s tax accounting results varied from year to year- something known by everyone reading the publicly-filed financials-does not indicate that the Defendants knew the results in two quarters of 2015 were wrong, the tax “risk factor” was misleading, or the EPS guidance was unreliable. Finally, Plaintiff argues that Defendants were motivated to inflate the Company’s stock price so they could sell the Company for the highest possible price. But a “motive to complete a corporate transaction is generic,” In re Exxon Mobil Corp. Sec. Litig., 387 F. Supp. 2d 407, 428 (D.N.J. 2005), and could be said Case 1:15-cv-08007-RBK-KMW Document 20 Filed 08/04/16 Page 7 of 21 PageID: 926 3 of every corporate officer, and therefore raises no inference of scienter, let alone a strong inference. Only motives that provide a “concrete and personal benefit,” GSC Partners CDO Fund v. Washington, 368 F.3d 228, 237 (3d Cir. 2004) (citation omitted), to defendants raise an inference of intent, and in the Third Circuit, such motives alone (as here) cannot meet the PSLRA’s standard. Plaintiff’s Opposition largely ignores these weaknesses, but instead tries to retool his “false statement” case as a “misleading omission” case, claiming not just that the tax results were wrong but that the Company’s tax “risk factor” and EPS guidance were misleading because they failed to disclose the tax errors and material weakness. Whether cast as a tax restatement case or a contrived truth- omission case, the fatal defect remains the same-the Amended Complaint contains no facts raising a strong inference that any Defendant knew of, or were extremely reckless about, the tax errors or the material weakness in the tax process. II. PLAINTIFF FAILS TO IDENTIFY FACTS SUPPORTING A STRONG INFERENCE OF SCIENTER Plaintiff’s Opposition identifies no facts in the Amended Complaint that, alone or together, support a strong inference of either intentional fraud or recklessness so extreme that it approaches “conscious deception.” Mem. at 10 (citing In re Digital Island Sec. Litig., 357 F.3d 322, 332 (3d Cir. 2004)). Plaintiff fails to point to a single witness or document that suggests that any Defendant was aware of tax errors prior to the end of the third quarter of 2015. Left empty-handed Case 1:15-cv-08007-RBK-KMW Document 20 Filed 08/04/16 Page 8 of 21 PageID: 927 4 on recklessness, Plaintiff’s Opposition falls back on boilerplate motive allegations that are routinely rejected in the Third Circuit as generic and speculative.2 A. “Close Attention” To Tax Accounting Plaintiff’s only attempt to plead recklessness is his assertion (without any attribution) that Messrs. Babich, Lucania, and Richard told investors during the Class Period “that they paid close attention to the calculation of Checkpoint’s tax valuation allowances.” Opp. at 20.3 This allegation is not in the Amended Complaint, and Plaintiff “may not amend [the] complaint through arguments in [a] brief.” Cheeseman v. Baxter Healthcare Corp., 2009 WL 1351676, at *4 (D.N.J. May 13, 2009) (internal quotation omitted). Even if well-pleaded and assumed to be true for the purposes of this Motion, however, Plaintiff fails to explain how paying “close attention” to tax valuation allowances equates to knowledge (or reckless disregard) of material errors in the quarterly tax estimates. 2 Plaintiff notably does not address Defendants’ showing that the Amended Complaint lacks particularized facts supporting each Defendant’s scienter individually, as required by the PSLRA. Mem. at 26. 3 Plaintiff’s Opposition blindly asserts that such comment was made, but he does not identify any such statement in the Amended Complaint. Mr. Babich’s and Mr. Lucania’s quarterly SOX certifications do not reference tax accounting. See Opp. at 20; Ex. X at Exs. 31.1, 31.2, & 32.1; Ex. Y at Exs. 31.1, 31.2, & 32.1. And although Plaintiff asserts that the “Individual Defendants” “demonstrated an intimate familiarity with the [tax valuation allowance] calculation” during investor calls, this is supported solely by the fact that Mr. Luciana gave analysts the Company’s projected tax rate. See Opp. at 20; Ex. Z at 4; Ex. AA at 4. Case 1:15-cv-08007-RBK-KMW Document 20 Filed 08/04/16 Page 9 of 21 PageID: 928 5 As Defendants showed, it cannot be “automatically assumed that a corporate officer is familiar with certain facts just because these facts are important to the company’s business.” In re Heartland Payment Sys., Inc. Sec. Litig., 2009 WL 4798148, at *7 (D.N.J. Dec. 7, 2009); Mem. 13-14 (citing cases). The cases cited by Plaintiff reinforce the principle that to survive dismissal, he must plead with particularity not only that Defendants “paid attention,” but that they saw the errors or other problematic facts known or so obvious that they had to have consciously avoided seeing them, contrary to their public statements. For example, in Institutional Investors Group v. Avaya, Inc., the Third Circuit found that the plaintiffs pleaded a strong inference of scienter through witnesses and internal reports evidencing widespread discounting, while at the same time, the CFO repeatedly and publicly denied any pricing pressure. 564 F.3d at 268-69. In contrast, Plaintiff’s claim that Defendants “closely monitored” tax accounting is the only allegation from which he asks this Court to infer that Defendants had knowledge of the tax errors. Cf. In re Advanta Corp. Sec. Litig., 180 F.3d 525, 539 (3d Cir. 1999) (rejecting attempt to impute knowledge of adverse information “by virtue of [defendants’] positions within the company”). With respect to the Individual Defendants’ SOX certifications, Plaintiff makes no effort to rebut, and thus concedes, that he failed to plead facts showing any Defendant “knew or consciously avoided any meaningful exposure to the Case 1:15-cv-08007-RBK-KMW Document 20 Filed 08/04/16 Page 10 of 21 PageID: 929 6 information that was rendering their SOX certification erroneous.” In re Intelligroup Sec. Litig., 527 F. Supp. 2d 262, 290 (D.N.J. 2007); Mem. at 15-16.4 B. Variances In Tax Results Next, Plaintiff argues that Defendants’ awareness of the “unreliability and volatility of the Company’s tax expense throughout the Class Period” supports an inference of extreme recklessness with regard to the Company’s disclosure of its EPS throughout the Class Period. Opp. at 3, 21. To be clear, Plaintiff’s brief, two- page explanation of how the Amended Complaint pleads recklessness, Opp. at 20- 22, cites no facts supporting an inference that Defendants knew Checkpoint’s reported tax expense results contained errors. Id. Indeed, Plaintiff does not argue that the tax expense “volatility” was a “red flag” of potential errors. Opp. at 21. Instead, Plaintiff appears to argue that the “volatility” caused the “unreliability,” and as a result the Company recklessly “pointed investors to the Company’s earnings-per-share information.” Opp. at 21 (tax calculations “may vary wildly, and therefore, the [EPS] number was inherently unreliable”). This argument not only fails to support an inference of scienter with respect to any allegedly false statement, it is entirely nonsensical. Plaintiff’s theory presumes that 4 Culley v. Cumberland Valley Sch. Dist., 2016 WL 775091, at *4 (M.D. Pa. Feb. 29, 2016) (“[W]hen a plaintiff files a response to a motion to dismiss but fails to address certain arguments made by the defendant, the court may treat those arguments as conceded.”) (internal quotation omitted). Case 1:15-cv-08007-RBK-KMW Document 20 Filed 08/04/16 Page 11 of 21 PageID: 930 7 a public company like Checkpoint could choose not to report historical earnings if the results varied too much. Defendants are aware of no authority that would permit a public company to withhold this information. Further, Plaintiff concedes repeatedly (as he must) that the “volatility” of the Company’s valuation allowances and tax expense was fully disclosed. AC ¶ 24 (“The Company’s valuation allowance varied dramatically from year to year.”); AC ¶ 103 (“Defendant Lucania again spoke about the Company’s tax rate, stating that it ‘varies wildly with [Checkpoint’s] geographic earnings mix.’”).5 But Plaintiff provides no explanation for how Defendants’ (and the world’s) knowledge of that volatility supports, rather than undermines, an inference of scienter. See Jones v. Perez, 550 F. App’x 24, 26 (2d Cir. 2013) (plaintiffs failed to allege a strong inference of scienter regarding defendants’ statement about their comfort level with company’s cash position, where company’s low liquidity was well-known). C. Motive To Maximize Sale Price Lacking any circumstantial evidence of recklessness or conscious intent, the 5 See Ex. X at 31 (disclosing -10.5% tax rate for the first quarter of 2015 compared to 111.8% in the same prior period and attributing the change to revenue mix and decreased losses in entities with valuation allowances); Ex. Y at 32 (disclosing 11.4% tax rate for the second quarter of 2015 compared to 15.3% in the same prior period and attributing the change to revenue mix and increased losses in entities with valuation allowances); Ex. AA at 4 (“The effective tax rate assumed in our earnings guidance . . . varies wildly with our geographic revenue mix.”). Case 1:15-cv-08007-RBK-KMW Document 20 Filed 08/04/16 Page 12 of 21 PageID: 931 8 Amended Complaint relies solely on Defendants’ alleged motives to maximize Checkpoint’s stock price in a proposed sale of the Company and earn severance bonuses, a theory that is inadequate as a matter of law.6 Mem. at 18-25; GSC Partners, 368 F.3d at 237 (“[M]otives that are generally possessed by most corporate directors and officers do not suffice.”) (citation omitted). First, Plaintiff’s Opposition speculates that Defendants committed fraud to “increase financial profits from the Company’s efforts to sell itself.” Opp. at 22. Putting aside the inconsistency of this theory with Plaintiff’s apparently abandoned theory that Defendants defrauded investors to save their jobs,7 motives like this that “are generally possessed by most corporate directors and officers” are entitled to no weight. GSC Partners, 368 F.3d at 237 (“In every corporate transaction, the . . . officers have a desire to complete the transaction, and officers will usually reap financial benefits from a successful transaction. Such allegations alone cannot give rise to a ‘strong inference’ of fraudulent intent.”) (citation omitted). Plaintiff does not allege, as he must, that Defendants benefitted in a 6 Recognizing that even well-pled allegations of “motive and opportunity” cannot establish scienter, see Avaya, 564 F.3d at 277, Plaintiff argues only that his motive allegations “substantiate” scienter. Opp. at 22. But here, there is no evidence of recklessness or intent to substantiate. 7 Plaintiff relegates this argument to a footnote, cites solely out-of-circuit precedent, fails to address any of Defendants’ Third Circuit precedent, Mem. at 23, and ignores the incontrovertible facts identified by Defendants undercutting this theory (for example, that only Mr. Babich even had a seat on the Board and no facts suggest that this position was in jeopardy). See id. at 24; Opp. at 26 n.4. Case 1:15-cv-08007-RBK-KMW Document 20 Filed 08/04/16 Page 13 of 21 PageID: 932 9 “concrete and personal way” from the purported fraud. See id.; Mem. at 22-23. Notably, Plaintiff does not dispute that no insider sold any stock during the Class Period.8 Cf. In re PDI Sec. Litig., 2006 WL 3350461, at *16 (D.N.J. Nov. 16, 2006) (“This Court fails to perceive what possible concrete and personal benefits Defendants were trying to obtain by fraudulently inflating PDI’s stock price if Defendants were not selling their shares.”). The lack of stock sales distinguishes this case from the cases Plaintiff cites, which involved allegations of significant stock sales by defendants supporting an inference of scienter. See Opp. at 23-24 (citing, inter alia, In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 279 (3d Cir. 2006) (defendants sold over 30% of their holdings in the company for unusual profits in a series of suspiciously timed sales)).9 Second, Plaintiff argues that the Defendants hid tax errors so that Defendant Babich10 could “reap a lucrative bonus” if Checkpoint’s stock price were above 8 Plaintiff observes that stock sales are not a “prerequisite to liability,” Opp. at 25, but fails to rebut Defendants’ case law explaining that, while not a “prerequisite,” a lack of stock sales undermines an inference of scienter. Mem. at 25 (citing cases). 9 See also Rothman v. Gregor, 220 F.3d 81, 93 (2d Cir. 2000) (defendant sold stock in company for an approximately $1.6 million profit); In re Nevsun Res. Ltd., 2013 U.S. Dist. LEXIS 162048, at *42 (S.D.N.Y. Sept. 27, 2013) (defendants sold stock holdings in company worth over $1 million); In re Complete Mgmt. Inc. Sec. Litig., 153 F. Supp. 2d 314, 328 (S.D.N.Y. 2001) (defendants sold stock valued at more than $6 million)). 10 Despite ample opportunity, Plaintiff has failed to describe the “personal severance packages” purportedly motivating Messrs. Lucania and Richard to engage in fraud. See AC ¶ 106; Mem. at 22-23. Case 1:15-cv-08007-RBK-KMW Document 20 Filed 08/04/16 Page 14 of 21 PageID: 933 10 $12 per share. Opp. at 23. However, Defendants made clear that Plaintiff’s allegation, AC ¶ 109, relied on an out-of-date employment agreement (executed Feb. 4, 2013), Ex. BB at Ex. 10.1, and that the agreement in effect at the time of the merger negotiations (executed Dec. 31, 2014), Ex. T; see also Ex. CC at 49-50, did not include stock price incentives. Mem. at 22-23. Plaintiff argues that a “conflict” between the facts alleged and the facts contained in the SEC filings should be resolved in Plaintiff’s favor at the motion to dismiss stage, Opp. at 25 n.3, however Plaintiff is not entitled to a presumption in his favor for facts that are “obviously untrue.” Vavro v. Albers, 2006 WL 2547350, at *3 n.8 (W.D. Pa. Aug. 31, 2006) (holding, at the pleading stage, that “[t]he Court is not required to accept as true allegations of fact that are obviously untrue”), aff’d sub nom. Vavro v. A.K. Steel Co., 254 F. App’x 134 (3d Cir. 2007).11 Plaintiff’s Opposition also asserts for the first time that “Checkpoint’s potential acquirers forced Checkpoint to initiate the restatement after discovering the truth concerning the Company’s valuation allowances.” Opp. at 24. This allegation is not pleaded in the Amended Complaint and should be disregarded on that basis alone. Moreover, conclusory arguments like this-based on “speculation 11 Moreover, it is well-established that this Court may consider Mr. Babich’s publicly-filed employment agreement at the pleading stage. See In re NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1331 (3d Cir. 2002) (holding that district court may rely on “documents filed with the SEC, but not relied upon in the Complaint”). Case 1:15-cv-08007-RBK-KMW Document 20 Filed 08/04/16 Page 15 of 21 PageID: 934 11 and hypothesis, not facts”-must be rejected. Payne v. DeLuca, 433 F. Supp. 2d 547, 577 (W.D. Pa. 2006) (rejecting speculation of “secret” restatement).12 D. The Non-Culpable Inference Is More Compelling Plaintiff mischaracterizes Defendants’ Motion to Dismiss, suggesting that Defendants “do not provide a single competing non-culpable explanation for their conduct.” Opp. at 26. First, it is Plaintiff’s burden to plead facts supporting an inference of scienter, Tellabs, 551 U.S. at 323, and his failure to do so requires dismissal. Second, Plaintiff ignores the non-culpable explanation supported by the Amended Complaint and the Company’s SEC filings upon which he relies: that, far from committing fraud, Defendants discovered and promptly corrected an isolated tax accounting error that went undetected for only two quarters. Mem. at 27; Gold v. Ford Motor Co., 577 F. App’x 120, 122 (3d Cir. 2014) (dismissal warranted where plaintiff failed to offer a compelling inference of scienter).13 12 Plaintiff’s new theory is also contravened by Defendants’ disclosures. Cf. Ex. F at Item 4.02(a) (“During the preparation of the third quarter financial statements, the Company discovered financial statement errors attributable to the accounting for its quarterly income tax provision.”) (emphasis added). 13 Plaintiff argues that courts “routinely discount” “good faith” mistake explanations, Opp. at 27, but in Plaintiff’s cases, the courts did not “discount” the non-culpable inference, they simply found the culpable inference more compelling in light of evidence far more substantial than that which Plaintiff presents here. See id. (citing In re Urban Outfitters, Inc. Sec. Litig., 103 F. Supp. 3d 635, 653-54 (E.D. Pa. 2015) (“defendants’ omission of actual circumstances that were contrary to their [public statements presented] ‘an obvious risk of misleading investors’”) (citation omitted); Frater v. Hemispherx Biopharma, Inc., 996 F. Supp. 2d 335, Case 1:15-cv-08007-RBK-KMW Document 20 Filed 08/04/16 Page 16 of 21 PageID: 935 12 III. PLAINTIFF FAILS TO IDENTIFY FACTS SHOWING FALSITY Plaintiff’s claims regarding Checkpoint’s 2014 10-K tax structure “risk factor” and EPS guidance must be dismissed for the additional and independent reason that Plaintiff has failed to plead particularized facts showing how these statements were false or misleading. Mem. at 27-31. A. Checkpoint’s Tax Structure Risk Factor The Amended Complaint challenges as misleading Checkpoint’s “risk factor” warning investors about the Company’s “relatively complex tax structure” and the risk that authorities may “disagree with our tax positions.” AC ¶ 49; Mem. at 28-29. Specifically, in its 2014 Form 10-K, the Company cautioned investors about the “uncertainty and inherent subjectivity” in complying with “transfer pricing standards” in foreign countries and potential changes in the Company’s “assessments about the realizability of our deferred tax assets.” AC ¶ 49. In his Opposition, Plaintiff argues that this risk factor was misleading because Defendants “omitted to disclose that a material weakness already existed with respect to its tax accounting” and “consistently, and contemporaneously with the disclosure of the risk factor, improperly calculated Checkpoint’s tax expense, thus undermining the Company’s earnings statements.” Opp. at 18, 19. 349-50 (E.D. Pa. 2014) (scienter theory “accompanied by “substantial evidence suggesting that the defendants knew or should have known of” misleading nature of their statements)). Case 1:15-cv-08007-RBK-KMW Document 20 Filed 08/04/16 Page 17 of 21 PageID: 936 13 But neither of these “omissions” make the risk factor misleading. For an omission to be actionable, there must be a direct connection between an undisclosed fact and the statement identified as misleading. In re ITT Educational Servs., Inc. Sec. & S’holder Deriv. Litig., 859 F. Supp. 2d 572, 579 (S.D.N.Y. 2012) (granting motion to dismiss where “the connection between the misleading statement . . . and the alleged omission . . . [wa]s too tenuous a connection to render ESI’s statements regarding its financial success misleading”); City of Roseville Emps.’ Ret. Sys. v. Horizon Lines, Inc., 713 F. Supp. 2d 378, 390 (D. Del. 2010) (omission did not render challenged statements misleading because the subject matter was “totally unrelated”).14 Plaintiff cites two cases in response, but both rely on omissions closely connected to the allegedly misleading statements. See Opp. at 18-19 (citing City of Pontiac Gen. Emps. Ret. Sys. v. Wal-Mart Stores, Inc., 2014 WL 4823876, at *1 (W.D. Ark. Sept. 26, 2014) (omission of an investigation of suspected bribery in 2005-2006 made disclosure of 2011 investigation regarding the same subject matter misleading); City of Providence v. Aeropostale, Inc., 2013 WL 1197755, at 14 Plaintiff also argues that Checkpoint’s restatement demonstrates the “falsity” of the risk factor. Opp. at 19. But in the sole case Plaintiff cites for the proposition that a restatement may show the falsity of non-financial information, the company specifically “acknowledged to be incorrect” a prior statement that it did not tell physicians “how to code,” when the company later admitted it had advocated the use of a certain code to physicians. In re ArthroCare Corp. Sec. Litig., 726 F. Supp. 2d 696, 710 (W.D. Tex. 2010). No such circumstances exist here. Case 1:15-cv-08007-RBK-KMW Document 20 Filed 08/04/16 Page 18 of 21 PageID: 937 14 *1-7 (S.D.N.Y. Mar. 25, 2013) (omission of sales and inventory problems made positive depiction of expected performance misleading)). Here, the tax errors concerned “the accounting for our quarterly income tax calculation surrounding the inclusion or exclusion of entities with valuation allowances” and the incorrect calculation of a “valuation allowance related to a non-U.S. entity with a deferred tax liability related to an indefinite lived intangible.” AC ¶ 90 (quoting Ex. J, 2014 Form 10-K/A, at 99). Nothing in the Amended Complaint suggests a connection between the allegedly undisclosed information and the Company’s transfer pricing policies or assessments about the realizability of deferred tax assets. B. Checkpoint’s EPS Guidance Plaintiff’s Opposition argues at length about the importance of EPS to investors, and castigates Defendants for supposedly “touting” EPS during the Class Period. Opp. at 14-18. But through his lengthy discourse, Plaintiff fundamentally fails to respond to the one point actually raised by Defendants in their Opening Memorandum-Plaintiff’s failure to allege with particularity facts indicating that the Company’s EPS guidance was false, as Plaintiff alleged. Mem. at 29-31; AC ¶ 70. Indeed, Plaintiff appears to contend that the content of the guidance-whether the forecast turned out to be accurate or not-was irrelevant, but argues that the fact of providing it at all was misleading because “[EPS] statements (regardless of Case 1:15-cv-08007-RBK-KMW Document 20 Filed 08/04/16 Page 19 of 21 PageID: 938 15 what the statements may have been) did not disclose that [EPS] was not a valuable metric by which to evaluate the Company’s operations.” Opp. at 18. Although required by the PSRLA 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), Plaintiff fails to identify any Class Period statement in which any Defendant said that EPS was a “valuable metric.” Mem. at 29-31. Plaintiff identifies only Mr. Lucania’s statement in November 2015 that Checkpoint “no longer believe[d] that earnings per share [wa]s a valuable metric,” AC ¶ 98 (emphasis added), but no Class Period statements evidence that the Company did consider EPS valuable or “touted” it in any way. Plaintiff responds by arguing that the importance of EPS “is not up for serious debate,” Opp. at 15, but whether Plaintiff, or even the market, thought it was valuable, Plaintiff cannot point to any misleading statement by Defendants during the Class Period.15 IV. CONCLUSION Defendants respectfully request that the Court dismiss the Amended Complaint with prejudice. 15 Plaintiff’s citation to In re Oxford Health Plans, Inc., 187 F.R.D. 133 (S.D.N.Y. 1999), Opp. at 18, is misguided. In Oxford, the court held that the PSLRA’s “safe harbor” provision and the “bespeaks caution” doctrines-neither of which Defendants relied upon in their Motion-do not apply to omissions. Id. at 141. Case 1:15-cv-08007-RBK-KMW Document 20 Filed 08/04/16 Page 20 of 21 PageID: 939 16 Dated: August 4, 2016 Respectfully submitted, LATHAM & WATKINS LLP By: s/ Kegan A. Brown Kegan A. Brown 885 Third Avenue New York, NY 10022 Tel: (212) 906-1200 kegan.brown@lw.com Kevin H. Metz (pro hac vice) Sarah A. Greenfield (pro hac vice) 555 Eleventh Street NW Washington, DC 20004 Tel: (202) 637-2200 kevin.metz@lw.com sarah.greenfield@lw.com Attorneys for Defendants Checkpoint Systems, Inc., George Babich, Jr., Jeffrey O. Richard, and James M. Lucania Case 1:15-cv-08007-RBK-KMW Document 20 Filed 08/04/16 Page 21 of 21 PageID: 940 LATHAM & WATKINS LLP Kegan A. Brown 885 Third Avenue New York, NY 10022 Tel: (212) 906-1200 kegan.brown@lw.com Kevin H. Metz (pro hac vice) Sarah A. Greenfield (pro hac vice) 555 Eleventh Street NW Washington, DC 20004 Tel: (202) 637-2200 kevin.metz@lw.com sarah.greenfield@lw.com Attorneys for Defendants Checkpoint Systems, Inc., George Babich, Jr., Jeffery O. Richard, and James M. Lucania UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY STEPHEN MEIER, Individually and On Behalf of All Others Similarly Situated, Plaintiff, v. CHECKPOINT SYSTEMS, INC., GEORGE BABICH, JR., JEFFERY O. RICHARD AND JAMES M. LUCANIA, Defendants. No. 1:15-cv-08007 (RBK)(KMW) APPENDIX OF UNPUBLISHED AUTHORITIES CITED IN DEFENDANTS’ REPLY MEMORANDUM OF LAW IN FURTHER SUPPORT OF DEFENDANTS’ MOTION TO DISMISS PLAINTIFF’S AMENDED COMPLAINT Defendants Checkpoint Systems, Inc. (“Checkpoint”), George Babich, Jr., Jeffrey O. Richard, and James M. Lucania (collectively with Checkpoint, “Defendants”), append the following unpublished authorities cited in Defendants’ Reply Memorandum of Law in Further Support of Defendants’ Motion to Dismiss Plaintiff’s Amended Complaint: Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 1 of 139 PageID: 941 2 CASES TAB NO. Cheeseman v. Baxter Healthcare Corp., No. CIV.NO.08-4814 (JBS), 2009 WL 1351676 (D.N.J. May 13, 2009) .................................1 City of Pontiac General Emps. Ret. Sys. v. Wal-Mart Stores, Inc., No. 12-CV-5162, 014 WL 4823876 (W.D. Ark. Sept. 24, 2014)..............................................2 City of Providence v. Aeropostale, Inc., No. 11 Civ. 7132, 2013 WL 1197755 (S.D.N.Y. Mar. 25, 2013) .............................................3 Culley v. Cumberland Valley Sch. Dist., No. 15-CV-857, 2016 WL 775091 (M.D. Pa. Feb. 29, 2016) ...................................................4 Gold v. Ford Motor Co., 577 F. App’x 120 (3d Cir. 2014) ...............................................................................................5 In re Heartland Payment Sys., Inc. Sec. Litig., No. 09-1043, 2009 WL 4798148 (D.N.J. Dec. 7, 2009) ............................................................6 Jones v. Perez, 550 F. App’x 24 (2d Cir. 2013) .................................................................................................7 In re Nevsun Res. Ltd., No. 12 Civ. 1845 (PGG), 2013 U.S. Dist. LEXIS 162048 (S.D.N.Y. Sept. 27, 2013) ..........................................................................................................................................8 In re PDI Sec. Litig., No. 02-211 (GEB), 2006 WL 3350461 (D.N.J. Nov. 16, 2006) ................................................9 Vavro v. Albers, No. 2:05CV321, 2006 WL 2547350 (W.D. Pa. Aug. 31, 2006)..............................................10 Witriol v. Conexant Sys., Inc., No. 04-6219 (SRC), 2006 WL 3511155 (D.N.J. Dec. 4, 2006) ..............................................11 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 2 of 139 PageID: 942 3 Dated: August 4, 2016 Respectfully submitted, LATHAM & WATKINS LLP By: s/ Kegan A. Brown Kegan A. Brown 885 Third Avenue New York, NY 10022 Tel: (212) 906-1200 kegan.brown@lw.com Kevin H. Metz (pro hac vice) Sarah A. Greenfield (pro hac vice) 555 Eleventh Street NW Washington, DC 20004 Tel: (202) 637-2200 kevin.metz@lw.com sarah.greenfield@lw.com Attorneys for Defendants Checkpoint Systems, Inc., George Babich, Jr., Jeffrey O. Richard, and James M. Lucania Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 3 of 139 PageID: 943 Tab 1 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 4 of 139 PageID: 944 Cheeseman v. Baxter Healthcare Corp., Not Reported in F.Supp.2d (2009) 2009 WL 1351676 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 1 2009 WL 1351676 Only the Westlaw citation is currently available. United States District Court, D. New Jersey. Christine CHEESEMAN & Marta Rodriguez, Plaintiffs, v. BAXTER HEALTHCARE CORPORATION, Defendant. Civil No. 08-4814 (JBS). | May 13, 2009. West KeySummary 1 Civil Rights Employment Practices Former employees' complaint failed to allege enough factual matter to suggest the elements of their hostile work environment claim and failed to provide grounds for their entitlement to relief under the New Jersey Law Against Discrimination. The employees alleged they were subjected to a hostile work environment that included racial harassment by African- American co-workers which continued even after the employees complained to their supervisor. The employees' mere allegations that they were exposed to a hostile work environment amounted to nothing more than labels and conclusions and did not state a claim for relief. Fed.Rules Civ.Proc.Rule 8(a) (2), 28 U.S.C.A.; N.J.S.A. 10:5-1 et seq. Cases that cite this headnote Attorneys and Law Firms Janice L. Heinold, Esq., Rakoski & Ross, P.C., Marlton, NJ, for Plaintiffs Christine Cheeseman & Marta Rodriguez. Christopher H. Lowe, Esq., Seyfarth Shaw, LLP, New York, NY, for Defendant Baxter Healthcare Corporation. OPINION SIMANDLE, District Judge. *1 This matter is before the Court upon the motion [Docket Item 9] of Defendant Baxter Healthcare Corporation (“Baxter”) to dismiss Plaintiffs' Complaint for failure to state a claim. Plaintiffs Christine Cheeseman and Marta Rodriguez filed this action against Baxter, alleging, inter alia, that Baxter terminated their employment in violation of various provisions of New Jersey law. The principal issues to be decided concern the particularity of pleading required to set forth cognizable claims under the New Jersey laws pertaining to employment discrimination, including hostile working environment. For the reasons set forth below, the Court will grant Defendant's motion to dismiss, although, with respect to all but one of Plaintiffs' claims, such dismissal will be without prejudice to Plaintiffs' right to file an Amended Complaint that complies with Rule 8, Fed. R. Civ. P, within ten days of the entry of the Order accompanying this Opinion. I. BACKGROUND A. Facts The few facts that may be derived from Plaintiffs' Complaint are as follows. Plaintiffs Cheeseman and Rodriguez are New Jersey residents who were formerly employed by Defendant Baxter to work as label technicians in Baxter's Cherry Hill facility. (Compl., Count I, ¶¶ 1-3.) According to the Complaint, Plaintiffs “performed their jobs in a workmanlike manner from the dates of hire up to and including May 22, 2008, at which time plaintiffs were terminated by the defendant Baxter.” (Id. at ¶ 4.) Three days prior to their termination, Plaintiffs were suspended “for not doing their work and/ or allegedly sleeping on the job,” charges which Plaintiffs deny. (Id. at ¶ 5.) Plaintiffs allege that they “were also subjected to a hostile work environment, including racial harassment by African American co-workers.” (Id. at ¶ 6.) ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 5 of 139 PageID: 945 Cheeseman v. Baxter Healthcare Corp., Not Reported in F.Supp.2d (2009) 2009 WL 1351676 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 2 Plaintiffs allegedly complained to their supervisor and to Defendant's Human Resources Department about the “harassment,” but no action was taken in response to their complaints. (Id. at ¶ 7.) Plaintiffs allege that they suffered emotional harm as a result of such harassment. (Id. at ¶ 8.) B. Procedural History Plaintiffs filed this action in Camden County Superior Court on August 20, 2008. They allege that Defendant wrongfully terminated them in violation of the New Jersey Law Against Discrimination (“NJLAD”), N.J.S.A. 10:5- 1, et seq. (Count II); created a hostile work environment in violation of the NJLAD (Count III); engaged in action contrary to public policy in violation of New Jersey common law (Count IV); and intentionally and negligently inflicted emotional distress (Counts V and VI). Plaintiffs also assert a claim for punitive damages (Count VII). 1 Defendant timely removed the matter to this Court pursuant to 28 U.S.C. § 1441(a) [Docket Item 1], 2 and subsequently filed the motion to dismiss presently under consideration, to the merits of which the Court now turns. 1 The first count of the Complaint contains a recitation of the background facts, and does not appear to assert a separate cause of action. 2 The Court has jurisdiction over this dispute pursuant to 28 U.S .C. § 1332, as there is perfect diversity between Plaintiffs (who are residents of New Jersey) and Defendant (which is a Delaware corporation). II. DISCUSSION A. Standard of Review *2 On a Rule 12(b)(6) motion to dismiss for failure to state a claim for which relief may be granted, the Court must “accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief.” Phillips v. County of Allegheny, 515 F.3d 224, 231 (3d Cir.2008) (quoting Pinker v. Roche Holdings Ltd., 292 F.3d 361, 374 n. 7 (3d Cir.2002)). While Rule 12(b)(6) does not permit dismissal of a well- pleaded complaint simply because “it strikes a savvy judge that actual proof of those facts is improbable,” the “[f]actual allegations must be enough to raise a right to relief above the speculative level.” Phillips, 515 F.3d at 234. “To survive a motion to dismiss, a civil plaintiff must allege facts that ‘raise a right to relief above the speculative level on the assumption that the allegations in the complaint are true (even if doubtful in fact).’ “ Victaulic Co. v. Tieman, 499 F.3d 227, 234 (3d Cir.2007) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1965, 167 L.Ed.2d 929 (2007)). “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the ‘grounds' of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 127 S.Ct. at 1964- 65 (quoting Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986)). “[S]tating ... a claim requires a complaint with enough factual matter (taken as true) to suggest” the required element. [Twombly, 127 S.Ct. at 1965 n. 3.] This “does not impose a probability requirement at the pleading stage,” but instead “simply calls for enough facts to raise a reasonable expectation that discovery will reveal evidence of” the necessary element. Id. Phillips, 515 F.3d at 234. “In deciding motions to dismiss pursuant to Rule 12(b)(6), courts generally consider only the allegations in the complaint, exhibits attached to the complaint, matters of public record, and documents that form the basis of a claim.” Lum v. Bank of America, 361 F.3d 217, 222 n. 3 (3d Cir.2004) (citation omitted). B. Inadequacy of Factual Allegations Although the Court is mindful that the pleading standards set forth above are not onerous, see Swierkiewicz v. Sorema N.A., 534 U.S. 506, 510-11, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002), it agrees with Defendant that Plaintiffs' skeletal allegations do not contain “enough factual matter (taken as true) to suggest” the required elements of any of Plaintiffs' claims. Twombly, 127 S.Ct. at 1965 n. 3 (emphasis added). As the Court now explains, with the exception of Count VI, which the Court discusses infra, the Court will grant Defendant's motion to dismiss without prejudice to Plaintiffs' right to file an Amended Complaint with sufficient factual matter to state a claim. *3 The Court first addresses Plaintiffs' hostile work environment claim, which contains the most factually ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 6 of 139 PageID: 946 Cheeseman v. Baxter Healthcare Corp., Not Reported in F.Supp.2d (2009) 2009 WL 1351676 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 3 elaborate allegations of Plaintiffs' bare-bones pleading. In support of their hostile work environment claim, Plaintiffs allege that they were “subjected to a hostile work environment, including racial harassment by African American co-workers,” (Compl., Count I, ¶ 6), and that the “hostile work environment continued” even after Plaintiffs complained to their supervisor and to the Human Resources Department. (Id. at ¶ 7.) Plaintiffs argue that such allegations are sufficient to state a claim under a notice pleading system, relying almost exclusively upon Swierkiewicz, wherein the Supreme Court explained that “an employment discrimination plaintiff need not plead a prima facie case of discrimination” pursuant to McDonnell Douglas Corp. v. Green, 411 U.S. 792, 93 S.Ct. 1817, 36 L.Ed.2d 668 (1973), in order to survive a Rule 12(b)(6) dismissal motion. Swierkiewicz, 534 U.S. at 515. Plaintiffs' argument that their invocation of the terms “hostile work environment” and “racial harassment” is sufficient to state a claim for hostile work environment misreads Swierkiewicz and is contrary to law. As the Court of Appeals for the Fourth Circuit explained under almost identical circumstances: In Swierkiewicz v. Sorema, the Court held that a complaint in an employment discrimination lawsuit need not allege specific facts establishing a prima facie case of discrimination .... While a plaintiff is not charged with pleading facts sufficient to prove her case, as an evidentiary matter, in her complaint, a plaintiff is required to allege facts that support a claim for relief. The words “hostile work environment” are not talismanic, for they are but a legal conclusion; it is the alleged facts supporting those words, construed liberally, which are the proper focus at the motion to dismiss stage. Bass v. E.I. DuPont de Nemours & Co., 324 F.3d 761, 764- 65 (4th Cir.2003) (emphasis in original); see also Twombly, 127 S.Ct. at 1964-65 (“a plaintiff's obligation to provide the ‘grounds' of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do”) (quoting Fed.R.Civ.P. 8(a)(2)) (emphasis added). Plaintiffs' allegation that they were exposed to a hostile work environment amounts to no more than “labels and conclusions,” id ., and does not suffice to state a claim under the NJLAD. To state a hostile work environment claim under the NJLAD, a plaintiff “must demonstrate that the defendant's conduct (1) would not have occurred but for the employee's [protected status]; and [that the conduct] was (2) severe or pervasive enough to make a(3) reasonable [person of the same protected class] believe that (4) the conditions of employment are altered and the working environment is hostile or abusive.” Taylor v. Metzger, 152 N.J. 490, 498, 706 A.2d 685 (1998) (quotations omitted); see also Cardenas v. Massey, 269 F.3d 251, 263 (3d Cir.2001) (explaining that alleging a hostile work environment claim under NJLAD tracks the first four elements of a Title VII hostile work environment claim). *4 Plaintiffs' pleadings do not contain “enough factual matter (taken as true) to suggest” any of these elements. Twombly, 127 S.Ct. at 1965 n. 3. First, it is not apparent which protected status underlies Plaintiffs' hostile work environment claim. While the Complaint's reference to “African[-]American coworkers” suggests that Plaintiffs believe that they were targeted for not being African- American, (Compl., Count I, ¶ 6), Plaintiffs' opposition brief appears to suggest that Plaintiffs were targeted on account of their age and gender, (Pls.' Opp'n Br. at 3); Plaintiffs' allegations thus fail to adequately allege that Plaintiffs “would not have occurred but for the employee[s'] [protected status].” Taylor, 152 N.J. at 498, 706 A.2d 685. Nor does Plaintiffs' conclusory reference to “harassment” or a “hostile work environment,” (Compl., Count I, ¶ 6), without more, suffice to satisfy the requirement of alleging that the harassing conduct was severe or pervasive enough to make a reasonable person in the protected class believe that the working environment was hostile or abusive. See, e.g., Bass, 324 F.3d at 765 (recognizing that the words “hostile work environment” are “but a legal conclusion,” and that the word “harassment” is merely an element of the cause of action). “[I]t is the alleged facts supporting those words, construed liberally, which are the proper focus at the motion to dismiss stage.” Id. Because Plaintiffs' Complaint fails to allege “enough factual matter (taken as true) to suggest” the elements of their hostile work environment claim, Twombly, 127 ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 7 of 139 PageID: 947 Cheeseman v. Baxter Healthcare Corp., Not Reported in F.Supp.2d (2009) 2009 WL 1351676 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 4 S.Ct. at 1965 n. 3, and because “a plaintiff's obligation to provide the ‘grounds' of his ‘entitle[ment] to relief’ requires more than labels and conclusions,” id. at 1964-65 (citation omitted), Plaintiffs' hostile work environment claim will be dismissed without prejudice to their right to file an Amended Complaint with adequate factual allegations. Plaintiffs have likewise failed to plead facts sufficient to support the wrongful termination claim asserted in Count II. To state a claim for wrongful termination under the NJLAD, a plaintiff must allege “that he or she: (1) belongs to a protected class, (2) was qualified for the position held, (3) was terminated despite adequate qualifications, and (4) [that the circumstances surrounding the termination] permit an inference of ... discrimination.” Bentley v. Millennium Healthcare Centers II, LLC, No. 06-5939, 2009 WL 211653, at *5 n. 2 (D.N.J. Jan.21, 2009) (quoting Monaco v. Am. Gen. Assurance Co., 359 F.3d 296, 301 (3d Cir.2004)) (internal quotations omitted). Again, it is not apparent whether Plaintiffs allege that they were terminated on the basis of race, gender, age, or a different “protected class.” Id. Moreover, while Plaintiffs spell out a host of unpleaded facts relevant to the issue of whether their termination was the product of discrimination in their brief in opposition to Defendant's motion to dismiss, (Pls.' Opp'n Br. at 3-4), such allegations are absent from the Complaint itself. It is well-settled that “[a] plaintiff may not amend [the] complaint through arguments in [a] brief.” Frohner v. City of Wildwood, No. 07-1174, 2008 WL 5102460, at *9 (D.N.J. Dec.1, 2008) (quoting Shanahan v. City of Chicago, 82 F.3d 776, 781 (7th Cir.1996)). At present, looking only to the allegations contained in the Complaint, the Court finds that Plaintiffs' pleadings contain insufficient factual allegations to “permit an inference of ... discrimination.” Bentley, 2009 WL 211653, at *5 n. 2. If they intend to pursue their wrongful termination claims, Plaintiffs should file an Amended Complaint that includes the factual matter set forth in their opposition brief. Plaintiffs' wrongful termination claim will thus be dismissed without prejudice to their right to file an amended pleading with adequate factual allegations. *5 The same is true of Plaintiffs' “claim for action against public policy, in violation of [Plaintiffs'] common law rights under Pierce v. Ortho Pharmaceutical Corp.[, 84 N.J. 58, 417 A.2d 505 (1980) ].” (Compl., Count IV, ¶ 2.) To the extent that the public policy asserted in Count IV is New Jersey's public policy against discrimination in employment, Defendant is correct that the NJLAD preempts such a claim. See, e.g., DeJoy v. Comcast Cable Communications Inc., 941 F.Supp. 468, 475-76 (D.N.J.1996). In apparent recognition of this fact, Plaintiffs assert for the first time in their opposition brief that they believe that they were terminated for making “OSHA-type complaints regarding unsafe working conditions.” (Pls.' Opp'n Br. at 5.) Such allegations are absent from the Complaint, and, as the Court recognized, supra, Plaintiffs are not permitted to amend their Complaint through arguments raised in their opposition brief. See Frohner, 2008 WL 5102460, at *9. Because the Complaint alleges no facts to support a non- preempted Pierce claim, see DeJoy, 941 F.Supp. at 475- 76, the Court will dismiss Count IV without prejudice to Plaintiffs' right to file an Amended Complaint with facts adequate to support such a claim, including facts supportive of their theory that they were terminated for making “OSHA-type complaints.” (Pls .' Opp'n Br. at 5.) Plaintiffs likewise have failed to allege facts sufficient to support their claim for intentional infliction of emotional distress. [T]o establish a claim for intentional infliction of emotional distress, the plaintiff[s] must establish intentional and outrageous conduct by the defendant, proximate cause, and distress that is severe .... The conduct must be so outrageous in character, and so extreme in degree, as to go beyond all possible bounds of decency, and to be regarded as atrocious, and utterly intolerable in a civilized community. Buckley v. Trenton Saving Fund Soc., 111 N.J. 355, 366, 544 A.2d 857 (1988) (internal quotations and citations omitted). Plaintiffs have not alleged facts suggestive of such outrageous and extreme conduct; the closest Plaintiffs come to pleading such facts is their allegation that they were “harass[ed]” and subjected to a “hostile work environment,” (Compl., Count I, ¶ 6), but, as the Court has already explained, such statements are merely “labels and conclusions” that do not meet even the undemanding requirements of Rule 8, Fed.R.Civ.P. See, e.g., Bass, 324 F.3d at 765. Plaintiffs' claim for intentional infliction of emotional distress will be dismissed without ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 8 of 139 PageID: 948 Cheeseman v. Baxter Healthcare Corp., Not Reported in F.Supp.2d (2009) 2009 WL 1351676 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 5 prejudice to refiling in a factually supported Amended Complaint. C. Negligent Infliction of Emotional Distress Claim Finally, the Court will grant Defendant's motion to dismiss Plaintiffs' claim for negligent infliction of emotional distress. “The New Jersey Workers' Compensation Act, N.J.S.A. § 34:15-8, provides the exclusive remedy by which an employee may recover for injuries caused by workplace negligence.” Smith v. Exxon Mobil Corp., 374 F.Supp.2d 406, 424 (D.N.J.2005) (emphasis added) (citing numerous cases so holding). As courts in this District have recognized, the Workers' Compensation Act precludes an employee from bringing a common law claim for negligent infliction of emotional distress. See, e.g., id. Because Count VI of the Complaint fails to state a claim for which relief may be granted, and because no amendment would cure the deficiency of this claim, the Court will dismiss Count VI of the claim with prejudice. 3 3 Count VII of the Complaint appears to assert a claim for punitive damages. Because Plaintiffs' substantive claims have been dismissed for the reasons explained above, their claim for punitive damages will likewise be dismissed. III. CONCLUSION *6 For the reasons explained above, the Court will grant Defendant's motion to dismiss the Complaint. With the exception of Count VI, Plaintiffs' claims are dismissed without prejudice to their right to file, within ten (10) days of the entry of the Order accompanying this Opinion, an Amended Complaint with “enough factual matter (taken as true) to suggest” the elements of the claims they assert. Twombly, 127 S.Ct. at 1965 n. 3. Count VI is dismissed with prejudice, as no amendment can cure the deficiency of Plaintiffs' negligent infliction of emotional distress claim. The accompanying Order is entered. All Citations Not Reported in F.Supp.2d, 2009 WL 1351676 End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works. ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 9 of 139 PageID: 949 Tab 2 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 10 of 139 PageID: 950 City of Pontiac General Employees' Retirement System v...., Not Reported in... 2014 WL 4823876, Fed. Sec. L. Rep. P 98,194 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 1 2014 WL 4823876 United States District Court, W.D. Arkansas, Fayetteville Division. CITY OF PONTIAC GENERAL EMPLOYEES' RETIREMENT SYSTEM, Individually and on Behalf of All Others Similarly Situated, Plaintiff v. WAL-MART STORES, INC. and Michael T. Duke, Defendants. No. 12-CV-5162. | Signed Sept. 26, 2014. Attorneys and Law Firms Danielle Myers, Darren J. Robbins, David C. Walton, Jason A. Forge, Robbins Geller Rudman Dowd LLP, San Diego, CA, Cynthia J. Billings, Sullivan Ward Asher Patton PC, Southfield, MI, Douglas S. Johnston, Jr., George Edward Barrett, Jerry E. Martin, Timothy L. Miles, Barrett Johnston Martin & Garrison, LLC, Nashville, TN, Geoffrey P. Culbertson, Nicholas H. Patton, Patton Tidwell & Schroeder LLP, Texarkana, TX, for Plaintiff. Jess L. Askew, III, Teresa M. Wineland, Kutak Rock LLP, Little Rock, AR, Alexander Mircheff, Theodore J. Boutrous, Jr., Gibson Dunn Crutcher LLP, Los Angeles, CA, Brian M. Lutz, Jonathan C. Dickey, Gibson Dunn Crutcher LLP, New York, NY, George H. Brown, Gibson Dunn Crutcher LLP, Palo Alto, CA, Mark Andrew Perry, Gibson Dunn, Washington, DC, for Defendants. ORDER SUSAN O. HICKEY, District Judge. *1 Before the Court is the Report and Recommendation (“R & R”) filed May 8, 2014, by the Honorable Erin L. Setser, United States Magistrate Judge for the Western District of Arkansas. ECF No. 133. Judge Setser recommends that Defendants' Motion to Dismiss (ECF No. 89) pursuant to Fed.R.Civ.P. 12(b)(6) be denied. Defendants have responded with timely objections ECF No. 134. Plaintiff has filed a response to the objections. ECF No. 137. Defendants have filed a reply. ECF No. 138. The Court finds that this matter is ripe for its consideration. This case arises out of allegations published by The New York Times in an article describing an alleged bribery scheme that occurred in Mexico prior to 2005. According to the article, certain company officials at Wal-Mart's Mexican subsidiary allegedly paid bribes to obtain permits for new stores in Mexico. Based on this allegation, Plaintiff filed this putative securities fraud class action lawsuit. Plaintiff names as Defendants Wal-Mart and Michael T. Duke, the Vice Chairman and the head of Wal-Mart International from 2005 until 2009, when he became Wal-Mart's Chief Executive Officer and President and a member of Wal-Mart's Board of Directors. Plaintiff alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and 78t(a), and violations of the Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5. On December 8, 2011, Defendants filed with the Securities and Exchange Commission (“SEC”) a form containing the following statement: During fiscal year 2012, the Company began conducting a voluntary internal review of its policies, procedures and internal controls pertaining to its global anti- corruption compliance program. As a result of information obtained during that review and from other sources, the Company has begun an internal investigation into whether certain matters, including permitting, licensing and inspections, were in compliance with the U.S. Foreign Corrupt Practices Act. The Company has engaged outside counsel and other advisors to assist in the review of these matters and has implemented, and is continuing to implement, appropriate remedial measures. The Company has voluntarily disclosed its internal investigation to the U.S. Department of Justice and the Securities and Exchange Commission. We cannot reasonably ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 11 of 139 PageID: 951 City of Pontiac General Employees' Retirement System v...., Not Reported in... 2014 WL 4823876, Fed. Sec. L. Rep. P 98,194 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 2 estimate the potential liability, if any, related to these matters. However, based on the facts currently known, we do not believe that these matters will have a material adverse effect on our business, financial condition, result of operations or cash flows. (ECF No. 89, p. 38.) Plaintiff alleges that this statement deceived the investing public by omitting the fact that Wal-Mart learned of suspected corruption in 2005 and conducted an internal investigation in 2006 (hereinafter referred to as the “2005-2006 events”). According to Plaintiff, the statement was misleading because it could have left investors with the impression that Defendants first learned of the suspected corruption in fiscal year 2012, promptly began an investigation, and then referred the matter to the Department of Justice and SEC. *2 A heightened pleading standard is required by the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b) 1 , which provides that a securities plaintiff must satisfy the following standards: (1) the plaintiff must plead falsity by specifying each allegedly misleading statement and the reasons why each statement is misleading, 15 U.S.C. § 78u-4(b)(1); and (2) the plaintiff must plead scienter by “stat[ing] with particularity facts giving rise to a strong inference that the defendants acted with the required state of mind.” 15 U.S.C. § 78u-4(b) (2). To prevail on a § 10(b)/Rule 10(b)-5 claim, a plaintiff must show: (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation. Stoneridge Inv. Partners, LLC v. Sci.-Atl., Inc., 552 U.S. 148, 157 (2008). 1 Section 10(b) makes it unlawful “to use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors.” 15 U.S.C. § 78j(b). “Rule 10b-5 implements [§ 10(b) ] by making it unlawful to, among other things, ‘make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.’ “ Matrixx Initiatives, Inc. v. Siracusano, 131 S.Ct. 1309, 1317 (2011) (quoting 17 C.F.R. § 240.10b-5(b)). First, Defendants object to Judge Setser's conclusion that the December 2011 statement is actionably false or misleading. An omission is considered false or materially misleading when there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having “significantly altered the total mix of information made available.” See Basic Inc. V. Levinson, 485 U.S. 224, 231 (1988). Here, Judge Setser found that Plaintiff sufficiently alleges that Defendants' omission from their 2011 statement of the 2005-2006 events renders that statement materially misleading to a reasonable investor. The Court agrees. Defendants specifically argue that Judge Setser “confused materiality with a duty to disclose” and imposed a disclosure obligation on the mere basis that investors would have wanted to know this information. ECF No. 134, pp. 12-13. Defendants further assert that Judge Setser improperly held that Defendants owed a duty to disclose the suspected corruption in 2005 and 2006. Judge Setser, however, made no such holding. She properly applied the standard regarding materiality and did not impose any improper disclosure obligation on Defendants. She correctly noted that, without any reference to the 2005 and 2006 events, a reasonable investor could have been left with the impression that Defendants first learned of the suspected corruption in fiscal year 2012, which prompted their investigation and self-reporting to the SEC and Department of Justice. The Court agrees with Judge Setser that it is likely that the disclosure of the 2005-2006 events would have been viewed by a reasonable investor as having significantly altered the total mix of information available. Defendants argue that Judge Setser erroneously found falsity by hindsight when she compared the stock market's reaction to Defendants' 2011 statement to the market's reaction to Defendants' 2012 statement in which they acknowledged the 2005-2006 events. In June 2012, when Wal-Mart disclosed the events of 2005 and 2006, Wal- Mart's stock price fell significantly. This drop in stock price did not happen after the December 2011 statement in which the 2005-2006 events were omitted. ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 12 of 139 PageID: 952 City of Pontiac General Employees' Retirement System v...., Not Reported in... 2014 WL 4823876, Fed. Sec. L. Rep. P 98,194 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 3 *3 Defendants correctly point out that it is improper to use hindsight to establish falsity based on facts that did not occur or were not known by a defendant until after his statement. In re Navarre Corp. Sec. Litig., 299 F.3d 735 742 (8th Cir.2002). Judge Setser, however, did not use this information to find falsity. Instead, she used the information to gauge the materiality of Defendants' omission. “ ‘A significant change in stock price upon disclosure of withheld information is strong evidence that the information was material.’ “ Public Pension Fund Group v. KV Pharm., 679 F.3d 972, 983 (8th Cir.2012) (quoting Detroit Gen. Ret. Sys. v. MedTronic, Inc., 621 F.3d 800, 805 (8th Cir.2010)). Defendants contend that Plaintiff's Amended Complaint should be dismissed because the statement made by Defendants in December 2011 was true and that Judge Setser ignored the “actual wording” of the statement. ECF No. 134, p. 21. Defendants urge a “more reasonable, plain-English reading” of the statement. Id. Far from ignoring the actual wording of Defendants' statement, Judge Setser quoted it in its entirety. ECF No. 133, p. 3. Judge Setser carefully assessed Defendants' actual words and reached the conclusion that they could have been misleading to the reasonable investor even if they might be “technically true.” ECF No. 133, p. 10. Judge Setser correctly identified that the issue here is whether Defendant omitted a material fact from the December 2011 statement. She then found that the statement, because of the omission, could have left a reasonable investor with the impression that Defendants first learned of the suspected corruption during fiscal year 2012-an impression that would be untrue. The Court agrees with Judge Setser's conclusion that Plaintiff sufficiently alleges an actionable materially misleading statement. Moving now to the scienter requirement, Defendants argue that Judge Setser erred in concluding that Plaintiff adequately pled a strong inference of scienter. First, Defendants complain about the length of Judge Setser's scienter analysis, calling it “cursory.” ECF No. 134, p. 23. Then, Defendants, once again, state that Judge Setser was “confused” about the scienter requirement, accepted implausible inferences, failed to properly evaluate competing plausible inferences, and improperly imputed intent to Defendant Duke. The Court disagrees. The inquiry is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter. Minneapolis Firefighters' Relief Ass'n v. MEMC Elec. Materials, Inc., 641 F.3d 1023, 1029 (8th Cir.2011). The Eighth Circuit recognized that “a strong inference of the required scienter may arise where the complaint sufficiently alleges that the defendants ... knew facts or had access to information suggesting that their public statements were not accurate.” Kushner v. Beverly Enters., Inc., 317 F.3d 820, 827 (8th Cir.2003). Scienter can also be established by conduct which rises to the level of severe recklessness. MedTronic, 621 F.3d at 808. In determining whether the pleaded facts give rise to a strong inference of scienter, the Court must take into account plausible opposing inferences. Minneapolis Firefighters' Relief Ass'n, 641 F.3d at 1029. A complaint will only survive if a reasonable person would deem the inference of scienter cogent and at least compelling as any opposing inference one could draw from the facts alleged. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 323-24 (2007). *4 Here, Judge Setser found that Plaintiff sufficiently alleges that when Defendants made the December 2011 statement, they knew certain facts or had access to information suggesting that this statement was not entirely accurate. Plaintiff allege that, in October 2005, a top Wal-Mart attorney gave a detailed description of the suspected corruption allegations to Duke and that Duke rejected calls for a legitimate independent investigation in 2006 and instead assigned the investigation to the very office implicated in the corruption scheme. Plaintiff further alleges that Wal-Mart recognized the materiality of the 2005-2006 events because it reported these events in a June 2012 form. Plaintiff also alleges that Defendants knew that the omission in the December 2011 statement of the 2005- 2006 events was materially misleading. The information that Defendants consciously chose to omit include facts about when and how Defendants first learned of the suspected corruption and how they first responded to these allegations. It was only after the New York Times article was published that Defendants acknowledged that the suspected corruption was the subject of allegations in 2005 and that there were questions about how Defendants handled these allegations in 2005-2006. Plaintiff alleges that this shows that Defendants were concerned about exposure of their alleged mishandling of ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 13 of 139 PageID: 953 City of Pontiac General Employees' Retirement System v...., Not Reported in... 2014 WL 4823876, Fed. Sec. L. Rep. P 98,194 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 4 the suspected corruption. The inference that Defendants intentionally omitted certain information is just as strong, if not stronger, than any competing plausible inference. The Court agrees with Judge Setser's straightforward reasoning and conclusion that Plaintiff sufficiently alleges allegations that both Defendants acted with the requisite scienter. Based on its de novo review and its consideration of the parties' arguments, the Court overrules Defendants' objections and adopts the Report and Recommendation in toto. ECF No. 133. Defendant's Motion to Dismiss is DENIED. IT IS SO ORDERED. MAGISTRATE JUDGE'S REPORT AND RECOMMENDATION ERIN L. SETSER, United States Magistrate Judge. Currently before the undersigned is Defendants' Motion to Dismiss Plaintiff's Amended Complaint (Doc. 89), Plaintiff's Response (Doc. 94), Defendants' Reply thereto (Doc. 98), and Supplements filed by both Plaintiff and Defendants (Docs.129, 130). For the reasons set forth below, the undersigned recommends that Defendants' Motion to Dismiss be DENIED. BACKGROUND Plaintiff City of Pontiac General Employees' Retirement System (“Plaintiff”) brings this securities fraud putative class action on behalf of all persons who purchased or otherwise acquired the common stock of Walmart Stores, Inc. (“Walmart”) between December 8, 2011 and April 20, 2012. Plaintiff names as Defendants Walmart and Michael T. Duke, the Vice Chairman and the head of Walmart International from 2005 until 2009, when he became Walmart's Chief Executive Officer and President and a member of Walmart's Board of Directors. Plaintiff alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and 78t(a), and violations of Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5. *5 Specifically, Plaintiff alleges that on April 21, 2012, the New York Times published an article entitled, “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle.” According to the article, in September 2005, a senior Walmart lawyer received information from a former executive at the company's largest foreign subsidiary, Walmart de Mexico, describing how Walmart de Mexico had orchestrated a bribery scheme (referred to by Plaintiff and hereinafter referred to by the undersigned as “the suspected corruption”) to obtain building permits throughout Mexico. The article reported that within days, Walmart investigators discovered evidence of widespread bribery, with a paper trail of hundreds of suspect payments totaling more than $24 million. According to the article, Duke, who, at that time, had just been put in charge of Walmart International, making him responsible for all foreign subsidiaries, received an e-mail from a top Walmart lawyer on October 15, 2005, with a detailed description of the suspected corruption allegations. The e-mail from Walmart's then general counsel, Thomas Mars, to Duke stated: The attached memorandum summarizes an interview conducted earlier this month with a former WALMEX in-house lawyer. The lawyer was terminated in September 2004 after 28 years with the company. The lawyer asserts in some detail alleged corruption by various WALMEX associates, including senior people. You'll want to read this. I'm available to discuss next steps. PS: Welcome to Wal-Mart International. (Doc. 86 ¶ 32 at pg. 14.) The Times article reported that top executives at Walmart and Walmart International, including Duke, rejected calls for a legitimate investigation and effectively shut down the investigation into the suspected corruption. According to Plaintiff, Defendants “covered up” the suspected corruption by rejecting a proposed independent “Internal Investigation Work Plan” from outside counsel and by assigning the investigation to the very office implicated in executing and/or concealing the corruption scheme- Walmart de Mexico's General Counsel's Office. Plaintiff alleges that in the Fall of 2011, Defendants learned that the New York Times was investigating the ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 14 of 139 PageID: 954 City of Pontiac General Employees' Retirement System v...., Not Reported in... 2014 WL 4823876, Fed. Sec. L. Rep. P 98,194 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 5 suspected corruption. Plaintiff alleges that Defendants, at this juncture, “could have come clean with investors and admitted that they had been aware of the suspected corruption since 2005, ... [but][i]nstead, on December 8, 2011, [D]efendants filed with the Securities and Exchange Commission (the “SEC”) a statement that deceived the investing public....” The Statement to which Plaintiff refers is Walmart's “Form 10-Q” quarterly report to the SEC, which consists of 43 pages. Plaintiff points to a paragraph of the Form 10-Q, under the subsections Legal Proceedings, Other: During fiscal 2012, the Company began conducting a voluntary internal review of its policies, procedures and internal controls pertaining to its global anticorruption compliance program. As a result of information obtained during that review and from other sources, the Company has begun an internal investigation into whether certain matters, including permitting, licensing and inspections, were in compliance with the U.S. Foreign Corrupt Practices Act. The Company has engaged outside counsel and other advisors to assist in the review of these matters and has implemented, and is continuing to implement, appropriate remedial measures. The Company has voluntarily disclosed its internal investigation to the U.S. Department of Justice and the Securities and Exchange Commission. We cannot reasonably estimate the potential liability, if any, related to these matters. However, based on the facts currently known, we do not believe that these matters will have a material adverse effect on our business, financial condition, result of operations or cash flows. *6 (Doc. 89-1 at pg. 38.) Plaintiff alleges that the above statement deceived the investing public by claiming: (a) that Defendants had learned of the Suspected Corruption after February 1, 2011; (b) that their own proactive internal review had uncovered it; and (c) that upon learning of the Suspected Corruption, defendants had hired outside counsel to conduct an internal investigation, implemented appropriate remedial measures, and referred their internal investigation to the U.S. Department of Justice (the “DOJ”) and to the SEC. Not so ... [Defendants] actually learned of the Suspected Corruption in 2005 ... [and] “closed” the matter in 2006, without engaging outside counsel to conduct an internal investigation, without implementing whatever remedial measures were implemented in 2011, and without referring the matter to the DOJ, the SEC, or any other law enforcement agency or third-party entity.... [Defendants] operated to deceive the investing public about (i) the timing of, and circumstances leading to, their awareness of the Suspected Corruption; (ii) their response to the Suspected Corruption; and (iii) the very real possibility that the Times would soon reveal devastating facts that defendants had concealed for so long. (Doc. 86 at ¶ ¶ 7, 24, 32.) Plaintiff asserts that Defendants statements in the Form 10-Q 1 “gave investors the false impression that the last thing they had to fear was that defendants had covered up the Suspected Corruption for years.” (Id. ¶ 34.) 1 Plaintiff points to other misleading statements made by Defendants, but the undersigned finds it unnecessary to address these statements, because, as discussed below, the undersigned believes Plaintiff's allegations regarding the statements made in the Form 10-Q are sufficient to state a claim. Plaintiff alleges that after the New York Times article revealed the facts that Defendants had concealed, “[b]illions of dollars of shareholder value was erased immediately.” (Id. at ¶ 9.) According to Plaintiff, Walmart's stock price fell $2.91 per share on April 23, 2012, the first trading day after the publication of the Times article, and the stock continued to drop another $2.18 on April 25, 2012, amounting to the largest one- and two-days drops since the stock markets had bottomed out over three years earlier. Plaintiff contends that while weeks later the stock price increased “due to a quarterly performance surprise, ... investors never recovered what ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 15 of 139 PageID: 955 City of Pontiac General Employees' Retirement System v...., Not Reported in... 2014 WL 4823876, Fed. Sec. L. Rep. P 98,194 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 6 they had overpaid for Walmart's stock during the Class Period 2 .” (Id.) 2 The class period identified by Plaintiff begins on December 8, 2011, the date Walmart filed its Form 10-Q with the SEC, to April 20, 2012, the day before the New York Times article was published. Plaintiff alleges that six weeks after the New York Times article was published, in Walmart's June 1, 2012 Report on Form 10-Q, Defendants “presented a vastly different portrayal:” The Audit Committee ... of the Board of Directors of the Company, which is composed solely of independent directors, is conducting an internal investigation into, among other things, alleged violations of the U.S. Foreign Corrupt Practices Act (“FCPA”) and other alleged crimes or misconduct in connection with foreign subsidiaries, including Wal- Mart de Mexico ... and whether prior allegations of such violations and/ or misconduct were appropriately handled by the Company. *7 (Id.¶ 34) (emphasis added).) Plaintiff alleges that in its December 4, 2012 Form 10-Q Report, Walmart acknowledged that it was incurring costs of more than $10 million each month due to Defendants' misconduct: The Company has incurred expenses of approximately $48 million and $99 million during the three and nine months ended October 31, 2012, respectively, related to these matters. These matters may require the involvement of certain members of the Company's senior management that could impinge on the time they have available to devote to other matters relating to the business. The Company expects that there will be ongoing media and governmental interest, including additional news articles from media publications on these matters, which could impact the perception among certain audiences of the Company's role as a corporate citizen. (Id.) Plaintiff contends that Walmart is now the subject of multiple probes in Mexico by Mexican authorities and the subject of criminal and congressional investigations in the United States. Plaintiff alleges that after lawmakers received and released several Walmart emails, including the one Duke received on October 15, 2005, the Congressional Committee on Oversight and Government Reform and the Committee on Energy and Commerce sent the following letter to Duke on January 10, 2013: Dear Mr. Duke: We are writing regarding new allegations that Wal-Mart systematically bribed officials throughout Mexico in order to evade zoning, environmental, and permitting laws at the company's Bodega Aurrera store in Teotihuacan, Mexico. We are concerned that your company's public statements that the company was unaware of the allegations appear to be inconsistent with documents we have obtained through our investigation. Contrary to Wal-Mart's public statements, the documents appear to show that you were personally advised of the allegations in October 2005. (Id.¶ 45.) Plaintiff further alleges that analysts, journalists, and academics have all opined that Walmart could face financial penalties for violating the FCPA (based on one analysis, the penalties could be up to $4.5 billion); a slow down in new store openings; and investigation and legal fees of up to $2.76 billion. Defendants move to dismiss Plaintiff's amended complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), arguing that Plaintiff has failed to state a claim. DISCUSSION Rule 12(b)(6) Standard Plaintiff's complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 16 of 139 PageID: 956 City of Pontiac General Employees' Retirement System v...., Not Reported in... 2014 WL 4823876, Fed. Sec. L. Rep. P 98,194 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 7 is plausible on its face. Ashcroft v. Iqbal, 556 U.S. 662, 678; Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). The plausibility of a complaint turns on whether the facts alleged allow the Court to draw the reasonable inference that the Defendants are liable for the misconduct alleged. Minneapolis Firefighters' Relief Ass'n v. MEMC Elec. Materials, Inc., 641 F.3d 1023, 1027 (8th Cir.2011). The Court accepts as true all factual allegations, but is not bound to accept as true a legal conclusion couched as a factual allegation. Iqbal, 556 U.S. at 678. Threadbare recitals of the elements of a cause of action, supported only by conclusory statements, do not suffice. Id. The Court may consider, in addition to the pleadings, materials embraced by the pleadings and materials that are part of the public record. Detroit Gen. Ret. Sys. v. Medtronic, Inc., 621 F.3d 800, 805 (8th Cir.2010). *8 The Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C § 78u-4(b), provides that, to survive a motion to dismiss, a securities plaintiff must satisfy two heightened standards. First, the plaintiff must plead falsity by specifying each allegedly misleading statement and the reasons why each statement is misleading. 15 U.S.C. § 78u-4(b)(1). In addition, the plaintiff must plead scienter by “stat[ing] with particularity facts giving rise to a strong inference that the defendants acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). Count One-Section 10(b)/Rule 10b-5 Claim Section 10(b) makes it unlawful “[t]o use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors.” 15 U.S.C. § 78j(b). “Rule 10b-5 implements [§ 10(b) ] by making it unlawful to, among other things, ‘make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.’ “ Matrixx Initiatives, Inc. v. Siracusano, 131 S.Ct. 1309, 1317 (2011). To prevail, a § 10(b)/Rule 10(b)-5 claimant must show: (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (5) loss causation. See Stoneridge Inv. Partners, LLC v. Sci.-Atl., Inc., 552 U.S. 148, 157 (2008); Minneapolis Firefighters' Relief Ass'n, 641 F.3d at 1028. Actionable False Statement Defendants first argue that Plaintiff's complaint is subject to dismissal because Plaintiff has failed to allege an actionable false statement. Generally, the issue of whether a public statement is misleading is a mixed question of law and fact for the jury. See In re K-tel Intern., Inc. Sec. Litig., 300 F.3d 881, 897 (8th Cir.2002). The Supreme Court has defined a standard of materiality to determine when a statement or omission would be considered false or materially misleading by a reasonable investor. See Basic Inc. v. Levinson, 485 U.S. 224, 231 (1988). The standard is whether there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having “significantly altered the total mix of information made available.” Id. at 231- 32. In Public Pension Fund Group v. KV Pharm., 679 F.3d 972, 981 (8th Cir.2012), the defendant pharmaceutical company filed annual reports with the SEC, making specific representations regarding its compliance with Food and Drug Administration (“FDA”) regulations. The plaintiff investors alleged that these representations were false or misleading because the defendant had been issued “Form 483s” from the FDA, notifying the Defendant of violations observed during inspections. The defendant argued that allegations of the company's receipt of Form 483s did not satisfy the materiality requirement of a securities fraud claim because Form 483s did not implicate a company's compliant status with FDA regulations-they only listed observations from FDA inspections and did not represent a final determination regarding FDA compliance. The Eighth Circuit rejected this contention, holding that there was ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 17 of 139 PageID: 957 City of Pontiac General Employees' Retirement System v...., Not Reported in... 2014 WL 4823876, Fed. Sec. L. Rep. P 98,194 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 8 a substantial likelihood that disclosure of receipt of the Form 483s during the same time period the defendant was representing that it was in material compliance with FDA regulations would have been viewed by the reasonable investor as having significantly altered the total mix of information made available. Id. The Court further held that as the defendant affirmatively represented that it was compliant with FDA regulations, it had a duty to “make a full disclosure of any material facts.” Id. at 983 n. 8. The Court reasoned that the issuance of a Form 483 represents a risk that the FDA may take corrective action against a company, and thus, a company is obligated to assess the seriousness of the risk and disclose such information to potential investors if it also represents it is in compliance with FDA regulations. *9 In the present case, Defendants essentially stated in their December 8, 2011 SEC Form 10-Q quarterly report that “during fiscal 2012 ”: Walmart had begun conducting a “voluntary internal review” and had begun an “internal investigation” into whether permitting, licensing and inspections were in compliance with the FCPA; that Wal Mart had engaged outside counsel and other advisors to assist in the review and had implemented remedial measures; that Walmart had disclosed the internal investigation to the DOJ and SEC; and that Walmart did not believe these matters would have a material adverse effect on the company. Defendants contend that none of these statements were false and that they did not omit any information which they had a duty to disclose. While the statements may have been technically true, the undersigned believes that Plaintiff has sufficiently alleged that omission of the 2005 revelation of the suspected corruption and Defendants' 2005 and 2006 investigation rendered Defendants' statements in the Form 10-Q materially misleading to a reasonable investor. Without any reference to the 2005 and 2006 events, a reasonable investor could have certainly been left with the impression that Defendants only learned of the suspected corruption in fiscal year 2012, and that, upon learning of the suspected corruption at that time, Defendants promptly began investigating and referred the matter to the DOJ and SEC. As in KV Pharmaceutical, the undersigned believes that disclosure of the 2005 and 2006 events would have been viewed by the reasonable investor as having significantly altered the total mix of information made available. This conclusion is supported by the fact that just six months later, after the publication of the New York Times article, Walmart recognized the materiality of the 2005 and 2006 events, as it disclosed them in its June 2012 Form 10-Q, reporting that it was investigating whether prior allegations of violations of the FCPA were appropriately handled by the company. This conclusion is also supported by Plaintiff's allegations regarding the drop in stock price, the significant expenses Walmart incurred as a result of the alleged mishandling of the prior allegations, the criminal and congressional investigation of these matters, and public speculation about the possible financial penalties Walmart could face for allegedly violating the FCPA. Based upon the foregoing, the undersigned concludes that Plaintiff has sufficiently alleged an actionable false statement. Scienter Defendants next argue that even if Plaintiff has sufficiently alleged that certain statements or omissions were actionably false or misleading, Plaintiff has failed to plead scienter under the PSLRA's heightened pleading standard. Scienter can be established in three ways: (1) from facts demonstrating a mental state embracing an intent to deceive, manipulate, or defraud; (2) from conduct which rises to the level of severe recklessness; or (3) from allegations of motive and opportunity. Medtronic, 621 F.3d at 808. The inquiry is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard. Minneapolis Firefighters' Relief Ass'n, 641 F.3d at 1029. In determining whether the pleaded facts give rise to a strong inference of scienter, the Court must take into account plausible opposing inferences. Id. The inference of scienter must be more than merely reasonable or permissible; a complaint will survive only if a reasonable person would deem the inference of scienter 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, 323- 24 (2007). Allegations that a defendant made materially misleading statements, while in possession of conflicting information, support a strong inference of scienter. See Elam v. Neidorff, 544 F.3d 921, 929 (8th Cir.2008). “One of the classic fact patterns giving rise to a strong inference of scienter is that defendants published statements when they knew facts or had access to information suggesting that their public statements were materially inaccurate.” Florida State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 665 (8th Cir.2001) (citing City of Philadelphia ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 18 of 139 PageID: 958 City of Pontiac General Employees' Retirement System v...., Not Reported in... 2014 WL 4823876, Fed. Sec. L. Rep. P 98,194 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 9 v. Fleming Cos., 264 F.3d 1245, 1260-61 (10th Cir.2001), which held that in the case of omissions, scienter is proved by knowledge of omitted fact plus knowledge that the omission would be likely to mislead). *10 The undersigned believes that Plaintiff has sufficiently alleged that Defendants knew the omission in the December 2011 Form 10-Q of the 2005 revelation of the suspected corruption and Defendants' 2005 and 2006 investigation was materially misleading. This conclusion is supported by Plaintiff's allegations that Duke, in an email from a top Walmart lawyer in October 2005, had been given a detailed description of the suspected corruption allegations; that top executives at Walmart and Walmart International, including Duke, rejected calls for a legitimate independent investigation and effectively shut down the investigation by assigning it to Walmart de Mexico's General Counsel's Office, the very office implicated in the corruption scheme; and that Walmart recognized the materiality of the 2005 and 2006 events in its June 2012 Form 10-Q, when it disclosed that it was investigating whether prior allegations of violations of the FCPA were appropriately handled. See Helwig v. Vencor, Inc., 251 F.3d 540, 552 (6th Cir.2001) (factor relevant in determining scienter is closeness in time of an allegedly fraudulent statement or omission and the later disclosure of inconsistent information); Fecht v. Price Co., 70 F.3d 1078, 1083-84 (9th Cir.1995) (shortness in time between original statement and revelations of contrary information is circumstantial evidence that original statement was false when made), cert. denied, 517 U.S. 1136 (1996). Accordingly, the undersigned concludes that Plaintiff has sufficiently alleged that Defendants acted with the requisite scienter. Count Two-Section 20(a) Claim Controlling person liability under § 20(a) of the Securities Exchange Act serves the purpose of preventing entities from using agents acting on their behalf to accomplish ends that would be forbidden directly by the securities laws. See Lustgraaf v. Behrens, 619 F.3d 867, 874 (8th Cir.2010). To that end, the statute provides for liability for those who directly or indirectly control a primary violator of the federal securities laws. See id. Controlling person liability is derivative and requires a plaintiff to prove that the primary violator violated federal securities laws. See id. Defendants argue that because Plaintiff has failed to state a claim for a violation of the Securities Exchange Act by Walmart, Plaintiff likewise has failed to state a claim for controlling person liability against Duke. The undersigned sees no merit to this argument, given the undersigned's above findings that Plaintiff has sufficiently stated a claim against Walmart. CONCLUSION Based upon the foregoing, the undersigned recommends that Defendants' Motion to Dismiss (Doc. 89) be DENIED. The parties have fourteen days from receipt of our report and recommendation in which to file written objections pursuant to 28 U.S.C. 636(b)(1). The failure to file timely objections may result in waiver of the right to appeal questions of fact. The parties are reminded that objections must be both timely and specific to trigger de novo review by the district court. All Citations Not Reported in F.Supp.3d, 2014 WL 4823876, Fed. Sec. L. Rep. P 98,194 End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works. ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 19 of 139 PageID: 959 Tab 3 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 20 of 139 PageID: 960 City of Providence v. Aeropostale, Inc., Not Reported in F.Supp.2d (2013) 2013 WL 1197755, Fed. Sec. L. Rep. P 97,391 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 1 2013 WL 1197755 Only the Westlaw citation is currently available. United States District Court, S.D. New York. The CITY OF PROVIDENCE, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. AEROPOSTALE, INC., Thomas P. Johnson and Marc D. Miller, Defendants. No. 11 Civ. 7132(CM)(THK). | March 25, 2013. DECISION AND ORDER DENYING DEFENDANTS' MOTION TO DISMISS McMAHON, District Judge. *1 This is a securities fraud class action. Lead Plaintiff, The City of Providence (“Providence” or “Plaintiff”), asserts a single claim under section 10(b) of the Securities Exchange Act (the “Exchange Act”) against Aeropostale, Inc. (“Aeropostale”) and two of its officers (collectively, “Defendants”). It also asserts a related “controlling person” claim under section 20(a) of the Exchange Act against the individual defendants. Plaintiff brings these claims on behalf of all persons who purchased the common stock of Aeropostale between March 11, 2011, and August 18, 2011, inclusive (the “putative class period”), and were damaged thereby. Defendants move to dismiss the Amended Complaint pursuant to the safe harbor provisions and heightened pleading standards of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). The motion is DENIED. BACKGROUND I. The Parties Providence purchased Aeropostale common stock during the putative class period and alleges that it was damaged thereby. Defendant Aeropostale is a Delaware corporation with its principal executive offices located in New York, New York. Defendant Thomas P. Johnson (“Johnson”) has served as Aeropostale's Chief Executive Officer (“CEO”) since December 2010. Prior to that, from February 2010 to December 2010, he served as the company's “co-CEO” along with Mindy Meads. From March 2004 through February 2010, he served as Executive Vice President and Chief Operating Officer. He has also been a member of the company's Board of Directors since August 2008. Defendant Marc D. Miller (“Miller”) has served as Aeropostale's Chief Financial Officer (“CFO”) since December 2010. Prior to that, from April 2007 to December 2010, he served as the Senior Vice President of Strategic Planning, Business Development and E- Commerce. II. Jurisdiction This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. §§ 1331 and 1337 and Section 27 of the Exchange Act, 15 U.S.C. § 78aa. III. Allegations in the Amended Complaint Plaintiff alleges that Defendants made materially false and misleading statements in March and May of 2011, painting a much rosier picture of Aeropostale's expected performance for the first and second fiscal quarters of 2011 than they had reason to believe. When the “truth” about the company's actual performance was finally revealed at the close of each quarter, the value of the company's stock dropped significantly. The company's problems began in the second half of 2010, when Mindy Meads, the co-CEO (alongside Defendant Johnson) and Chief Merchandising Officer for Aeropostale, decided to change the design of the women's fashion line to one that (she hoped) would appeal to an older customer. The new styles featured a muted color palate and “mature” designs-in contrast to the bright colors and more “wholesome” styles that had previously formed the “core offering” for the teen women's line. *2 The “mature” designs first appeared in Aeropostale's 2010 back-to-school and holiday merchandise. As it turned out, the new approach did not appeal to ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 21 of 139 PageID: 961 City of Providence v. Aeropostale, Inc., Not Reported in F.Supp.2d (2013) 2013 WL 1197755, Fed. Sec. L. Rep. P 97,391 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 2 Aeropostale's target audience. The new styles sold poorly, leading to a large amount of excess inventory. On December 1, 2010, about halfway through the fourth quarter of 2010 (“4Q2010”), Aeropostale announced Meads' resignation; according to the accounts of several employees, she was fired because her design change was a failure. But Aeropostale's problems with the new designs were not over. Because the company orders most of its merchandise nine months in advance, the spring and summer lines for 2011 had already been ordered. At least 90% of the merchandise ordered through the summer of 2011 was based on Meads' unpopular design choices. The new styles continued to sell poorly through the beginning of the first quarter of 2011 (“1Q2011”). Aeropostale uses a particular metric, known as “comps” or “same store sales,” to track the sales of a particular store or a number of stores on a period-to-period basis. The purpose of the statistic is to allow investors to determine which portion of new sales has come from actual sales growth, as opposed to the opening of new stores. As early as December 2010, same store sales were down 20-30 % over the prior year. According to an employee from the merchandise planning department, sales in February of 2011 were “poor.” Inventory had started to build up in the last two quarters of 2010. Initially, the excess merchandise was moved to the backs of the stores; eventually, Aeropostale had to rent storage space in malls to house all the excess inventory. Aeropostale began discounting slow-moving merchandise and offering various promotions. According to an employee in the merchandise planning department, the planners at Aeropostale knew that they needed to “burn through the inventory glut” at whatever price they could sell it, despite the effect this would have on the company's margins. This employee confirmed that he and other planners were making decisions about promotions without regard to margins. In the beginning of 2011, the company began “chasing product”-continuously marking down the prices in order to move the merchandise-across all product lines. At the beginning of the first quarter of 2011, the women's department started testing a new “buy one, get two free” promotion in the women's department. In May, the “Big 2” promotion, as it was called, was implemented widely at Aeropostale stores. Also in May, the company offered steep discounts on some of its t-shirts, selling more expensive t-shirts for the same price as a cheaper t-shirt. According to a former employee, the discounts and extreme promotions had a significant impact on the margins for those products. Plaintiff argues that Defendants were aware of how poorly the women's line was doing on a near real-time basis because of a “sophisticated management information system” that Aeropostale used to track inventory levels, sales data, pricing, and margins (all in real time). Plaintiff alleges that the information system, “Island Pacific,” allowed Defendants to see which merchandise lines were moving, which lines required added inducements, where and to what extent inventory was backing up, and how profitable the various merchandise lines were. *3 Former Aeropostale employees (who are identified as “confidential witnesses” or “CWs”) provided Plaintiff with information regarding the content of the various analytical reports, covering sales and inventory data, that Defendants would have reviewed, and also with accounts of regular meetings that Defendants attended where the severity of the sales and inventory problems was discussed. According to these CWs, the company held weekly “Executive Committee” meetings, which the individual defendants regularly attended. One CW recalled a specific meeting in February 2011 during which the “very large” inventory “carryover” problem was discussed. At that meeting, the inventory problem was quantified and grouped on reports by “category,” such as denim, knit, sleepwear for women, fleece (sweat suits, hoodies, etc.) as well as in terms of dollar amounts. At another meeting in April 2011, Defendants Johnson and Miller acknowledged that the heavily discounted merchandise was still not selling. Defendants also had access to daily “flash” reports, which consisted of a spreadsheet reporting inventory and sales on a daily basis. Flash reports included a breakdown by product category (e.g ., women's, men's), tracking comp sales and gross margin by department and comparing sales and margins year over year. The individual defendants also received a daily report known as the “Bible,” a snapshot of the company's entire business, including inventory. ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 22 of 139 PageID: 962 City of Providence v. Aeropostale, Inc., Not Reported in F.Supp.2d (2013) 2013 WL 1197755, Fed. Sec. L. Rep. P 97,391 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 3 The individual defendants attended monthly “Unit Q” meetings, which were held for each department separately, and where inventory, production issues, and sales were discussed. According to an employee in merchandise planning who focused on the men's department, the individual defendants would review “Unit Q” reports, which included weekly “sell throughs,” average unit retail (the amount that each unit sold for, or “AUR”), weekly units being sold, and dollars and projections prepared by department directors. At the Unit Q meetings, the members of the particular division at Aeropostale would meet with the executives to discuss forecasting and how the month was going to perform. The attendees “looked a quarter out,” and if it was close to the end of the year, they would begin forecasting for the following year. This employee recalled that the AUR was down for every type of product, including the women's department, throughout the putative class period. Although this employee did not attend the women's division Unit Q meeting, he stated that Defendant Johnson regularly attended his Unit Q meeting and would have the women's department meetings as well. The individual defendants were allegedly aware that the merchandise in the women's line had been ordered in the “mature” designs for the following two quarters because they tracked ordering and inventory. According to various former Aeropostale employees, the content and make- up of the inventory (including style type) was reviewed by them through various reporting methods, including, among other things, the flash reports, Unit Q reports, the Bible, and sales reports. Defendant Johnson in particular would have been aware of any significant merchandising decisions because the heads of planning and merchandise reported directly to him. A. March 10, 2011 Press Release *4 Aeropostale issued a press release on March 10, 2011, which announced the results of the fourth quarter of 2010 (ending on January 29, 2011) and gave guidance for the first quarter of 2011 (ending on April 30, 2011) (“4Q2010 Press Release”). Defendant Miller signed the press release. The individual defendants also gave public comments on the press release, including in an earnings conference call with analysts and investors held on the same day. The Amended Complaint identifies the statements below made in association with the press release as false and misleading. (1) For the first quarter of fiscal 2011, the Company expects earnings in the range of $0.35 to $0.38 per share, compared to earnings of $0.48 per share last year. (4Q2010 Press Release.) (2) Our outlook for the first quarter reflects the impact from clearing through holiday inventories, and our outlook for the full year reflects industry wide inflationary pressures. As we look forward into 2011, we recognize that the entire sector faces near term challenges. We are, however, focused on leveraging our flexible promotional business model to navigate through the current environment and delivering on our initiatives to position ourselves for future growth. (Defendant Johnson's comments on the 4Q2010 Press Release.) (3) I will now discuss our guidance outlook. For the first quarter we expect earnings per share in the range of $0.35 to $0.38 per diluted share, which reflects the impact of the aforementioned markdown liquidation. This compares to record earnings per share of $0.48 last year. (Defendant Miller on the earnings conference call.) (4) Moving into 2011, we recognized our merchandise opportunities and we have taken the necessary steps to give the customers what they want. At the same time, Aeropostale, along with the rest of the industry, is facing inflationary pressures. We are working diligently to mitigate the cost increases by leveraging our vendor relationships, raising ticket prices strategically, offering our customers creative promotions and being more conservative with our initial buys. (Defendant Johnson on the earnings conference call.) (5) So we feel like we are appropriately attacking the inventory problem. Our goal, as always, is to end the quarter as cleanly as possible from an inventory standpoint. (Defendant Miller on the earnings conference call.) (6) We feel very good about the product going forward ... So far for spring we have had some categories doing exceptionally well ... But we have also been very excited about some of the fashion components of what ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 23 of 139 PageID: 963 City of Providence v. Aeropostale, Inc., Not Reported in F.Supp.2d (2013) 2013 WL 1197755, Fed. Sec. L. Rep. P 97,391 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 4 we ‘ re delivering for spring. And the pricing that we have been able to get [out] of some of our fashion. (Defendant Johnson on the earnings conference call.) Additionally, Providence alleges that the individual defendants made a material omission in their response to a direct question from an analyst. The analyst asked, “And it sounds like your inventories are in good shape now; where should we expect inventories at the end of IQ?” According to the Amended Complaint, the company's President, Michael Cunningham (“Cunningham”), and Defendant Miller responded. Defendant Miller gave an “evasive” answer about margin pressure in 1Q2011, but neither Cunningham nor Defendant Miller disclosed the “known inventory crisis” or the fact that the inventory overhang would continue through the end of the first quarter and beyond. *5 Providence alleges that all these statements were false and misleading at the time they were made for a number of reasons. First, the earnings guidance understated the sales and inventory problems, providing guidance that suggested only a slight diminution in performance year to year. Second, the statements led the market to believe that Aeropostale had “sufficiently” cleared through the holiday inventory when it had not-as evidenced by the fact that excess inventory had to be moved into storage spaces at malls and that the holiday inventory was not selling despite promotions. Third, the statements failed to disclose that the sales and inventory problems would only get worse through the first and second quarters of 2011 because the poorly-selling “mature” styles had already been ordered through the spring and summer of 2011, and to sell that merchandise, Aeropostale would have to offer more substantial promotions-which would “massively” affect the company's margins and earnings. B. May 5, 2011 Business Update Aeropostale issued a press release announcing its “preliminary” first quarter financial results on May 5, 2011 (the quarter ended on April 30, 2011). Defendant Miller signed the press release, and Defendant Johnson commented on the results. In the press release, the company reported that “same store sales” had decreased 7%-in contrast to a same store sales increase of 8% the year before. The release also revised the company's expected earnings for the first quarter of 2011 to approximately $0.20 per diluted share (down from $0.35-$0.38 in the 4Q2010 Press Release), “based on lower than expected sales and margins for the quarter.” Plaintiff identifies the following statements as false and misleading: (7) Clearly we are not satisfied with our sales and margin performance for the first quarter. We were more promotional than anticipated on our spring assortment and clearance merchandise. Additionally, our core customers continue to be pressured by challenging macroeconomic conditions while, at the same time, the teen retail sector remains intensely promotional. As we move forward through the year, our entire management team is keenly focused on our key initiatives: regaining the balance and clarity of our merchandise assortment, managing our cost structure, and leveraging our strong financial position. We remain very confident in our business model, in the ability and determination of our organization, and in the strength and positioning of our brand. (Defendant Johnson's comments on the press release.) Plaintiff alleges that these statements were false and misleading at the time they were made because they gave the false impression that Defendants did not anticipate having low sales and poor margins during the first quarter and were surprised by how promotional Aeropostale would have to be to clear through its product-when in fact they had long known that they had poorly-selling merchandise on hand. Defendants already knew, and discussed internally, the massive inventory problem and ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 24 of 139 PageID: 964 City of Providence v. Aeropostale, Inc., Not Reported in F.Supp.2d (2013) 2013 WL 1197755, Fed. Sec. L. Rep. P 97,391 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 5 had visibility into the poor sales of carryover inventory at normal discount prices. Additionally, at the time the statements were made, large, unprecedented promotions such as “buy one, get two free” had already “hit the shelves.” *6 After this announcement, the price of Aeropostale stock fell $4.20 per share, or 16.5%, to close at $21.29 per share, on heavy trading volume (approximately 14 million shares when average daily volume during the putative class period was approximately 2.8 million). C. May 19, 2011 Press Release Aeropostale issued a third press release on May 19, 2011, which included its actual first quarter financial results and gave second quarter (“2Q2011”) financial guidance (“1Q2011 Press Release”). Defendant Miller signed the press release. The individual defendants commented on the release, including on an earnings conference call with analysts and investors held on the same The company confirmed the preliminary 1Q2011 financial performance it had provided in the May 5, 2011 business update. Plaintiff identifies the following statements made in association with the press release as false and misleading: (8) For the second quarter of fiscal 2011, the Company expects earnings in the range of $0.11 to $0.16 per share. (1Q2011 Press Release.) (9) Our outlook for the second quarter reflects our plans to aggressively clear through spring inventories to position ourselves appropriately for the important back to school selling season. While we are disappointed with our current performance, we are confident that our entire organization is focused on the right initiatives to regain market share. Our goals for the remainder of the year remain very clear-regain balance and clarity in our merchandise assortments, mitigate industry wide cost increases, and manage our cost structure conservatively and carefully. (Defendant Johnson's comments on 1Q2011 Press Release.) (10) The first quarter was clearly very disappointing. While our February started off well, we experienced a significant deceleration in the business as we moved through March and April. Sales were affected more severely than we originally anticipated during the Easter shift, and we did not experience the recovery that we had expected during the month of April. (Defendant Johnson on the earnings conference call.) (11) Thank you again, everyone, for your support. We know that coming off of a tough quarter like this it's never a great position to be in. I think that the positive outlook that we have is grounded in the fact that we know that the mistakes that we made and that we have taken steps to rectify those and to get this brand back on course. And we have the team to do that. So I'm confident in our ability to be back on track. (Defendant Johnson on the earnings conference call.) Plaintiff alleges that these statements were materially false and misleading for many of the same reasons outlined above, including that the earnings guidance understated the sales and inventory problems; that the spring and summer lines were selling poorly and would continue to sell poorly; that markdowns and promotions were not helping to sell the merchandise; that Aeropostale would therefore not be able to clear through all of the inventory by the end of the second quarter; and that the markdowns and promotions would adversely affect the company's margins and earnings more substantially than Defendants advised. Also as noted above, promotions like the “buy one, get two free” promotion were already being implemented. *7 Additionally, according to two former employees, sales in February were just as low as sales in March and April. It was well known internally that sales were down throughout the entire first quarter. D. August 4, 2011 Business Update Defendants issued a press release on August 4, 2011, which provided a business update for the second quarter (the quarter ended on July 31, 2011). The press release was signed by Defendant Miller. For the quarter, Aeropostale preliminarily reported a same store sales decrease of 14% in contrast to a same store sales increase of 4% the year prior. It also reported preliminary earnings per share for the second quarter in the range of $0.02 to $0.03 per share (down from the guidance of $0.11-$0.16 given in the 1Q2011 Press Release.) However, this included a one-time pre-tax ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 25 of 139 PageID: 965 City of Providence v. Aeropostale, Inc., Not Reported in F.Supp.2d (2013) 2013 WL 1197755, Fed. Sec. L. Rep. P 97,391 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 6 benefit of $0.06 per share, resulting from the favorable resolution of a dispute with a vendor. According to the Amended Complaint, the non-adjusted earnings per share based on net sales, without taking into consideration the pre-tax benefit, was negative, in the range of-$0.04 to -$0.03, and the actual adjusted diluted net earnings per share for the second quarter was -$0.02 per diluted share. After the announcement, on August 4, 2011, the price of Aeropostale stock fell $3.99 per share, or 24%, to close at $12.53 per share, on extremely heavy trading volume (approximately 14 million shares where the putative class period volume averaged 2.4 million shares). E. August 18, 2011 Press Release Aeropostale issued a press release on August 18, 2011 announcing its actual second quarter financial results (“2Q2011 Press Release”). Defendant Miller signed the press release. The company announced the actual 2Q2011 earnings per share of $0.04. Due to the aforementioned pre-tax benefit, according to the Amended Complaint, the actual adjusted diluted net earnings per share for the second quarter was - $0.02 per diluted share. The company also confirmed the earlier guidance in the August 4, 2011 business update regarding the same store sales decrease of 14%. At that time, Defendants finally told the public that the “muted” color styles had been ordered up until the fall of 2011; that Aeropostale had been forced to engage in excessive markdowns and promotions in order to sell the spring and summer merchandise; and that the company was now returning to the “color palette” of its “core offering.” Defendant Johnson also commented that Aeropostale tracks pricing closely, “on a daily basis,” so that the company can react quickly to change the price of products when they are not selling fast enough. Cunningham confirmed this, stating, “We have invested heavily in the data warehouse internally to be able to capture, analyze and report in real time, as well as as [sic ] often as we need the data to understand the business in every possible way.” On August 19, 2011, the price of Aeropostale stock fell another $1.78 per share, or 14% on heavy trading volume (approximately 8.5 million shares where the putative class period volume averaged 1-3 million shares). F. Plaintiffs Industry Expert *8 The Amended Complaint also contains opinion evidence from an expert in the retail and wholesale industry, Allan Zwerner. Zwerner reviewed publicly available news articles, confidential witness reports, and SEC filings to form his opinion. In Zwerner's view, Defendants had no reasonable basis to believe that Aeropostale could meet the guidance they issued on March 10, 2011 and May 19, 2011, for the first and second quarters of 2011, respectively. The confidential witness testimony that sales continued to be down throughout the first and second quarters of 2011, combined with the guidance “miss” of $0.15-$0.18 per share for the first quarter and $0.15-$0.20 per share for the second quarter, demonstrated that the “miss” was too large for Defendants not to have known about when they issued the guidance. Zwerner also concluded that all of the various reporting available to Defendants, which included daily sell- through data, would have given Defendants a clear indication of whether inventory was being liquidated in a timely manner. Because large markdowns like the “buy one, get two free” promotion take time to plan, Zwerner found that management would have known about such promotions at least two weeks before they were implemented. In the case of the “buy one, get two free” promotion that was implemented in the end of the first and beginning of the second quarter of 2011 (around April or May), Defendants would have known about the promotion by mid-April. In Zwerner's opinion, this provided an additional reason to conclude that the second quarter guidance issued on May 19, 2011 lacked a reasonable basis when made. DISCUSSION I. Standard for Determining the Motion Even under the PSLRA, which establishes heightened pleading requirements for securities fraud claims, the usual rules for determining motions to dismiss pertain: the well-pleaded allegations of the complaint are deemed true and all reasonable inferences are drawn in favor of the pleader. See Cargo Partner AG v. Albatrans, Inc., 352 F.3d 41, 44 (2d Cir.2003); see also Roth v. Jennings, 489 F.3d 499, 510 (2d Cir.2007). To survive a motion to dismiss, “a complaint must contain sufficient factual ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 26 of 139 PageID: 966 City of Providence v. Aeropostale, Inc., Not Reported in F.Supp.2d (2013) 2013 WL 1197755, Fed. Sec. L. Rep. P 97,391 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 7 matter ... to ‘state a claim to relief that is plausible on its face.’ “ Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555 (internal quotations, citations, and alterations omitted). The gloss imposed by the PSLRA involves what allegations can be deemed “well-pleaded.” In addition to the long-standing requirements of Fed.R.Civ.P. 9(b), which requires the plaintiffs to state “the circumstances constituting fraud ... with particularity,” the PSLRA requires them to “state with particularity all facts on which [information and belief that defendants have violated Rule 10(b)(5) ] is formed.” 15 U.S.C. § 78u-4(b)(l). The Second Circuit has ruled that the word “all” as used in the PSLRA means that plaintiffs must plead “sufficient” facts to support a reasonable belief as to the misleading nature of defendants' statements or omissions. Novak v. Kasaks, 216 F.3d 300 (2d Cir.2000). The PSLRA also requires the plaintiffs to “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). *9 In deciding a motion to dismiss pursuant to Rule 12(b) (6), a court may consider the full text of documents that are quoted in or attached to the complaint, or documents that the plaintiff either possessed or knew about and relied upon in bringing the suit. Rothman v. Gregor, 220 F.3d 81, 88-89 (2d Cir.2000) (citing Cortec Indus. Inc. v. Sum Holding L.P., 949 F.2d 42 (2d Cir.1991)); San Leandro Emergency Med. Grp. Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 808 (2d Cir.1996). In this case, because the Amended Complaint quotes and relies upon statements made in the press releases and the two investor calls, the Court may properly consider the complete referenced press releases, the full transcripts of those calls, and the Aeropostale Form 10-Ks referenced and incorporated in those calls in connection with the Rule 12(b)(6) motion, without converting it to one for summary judgment. See Fort Worth Employers ‘ Ret. Fund v. Biovail Corp., 615 F.Supp.2d 218, 232 n. 3 (S.D.N.Y.2009). II. Section 10(b) and Section 20(a) of the Securities and Exchange Act Plaintiff brings claims under sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§ 78a et seq. To state a claim under section 10(b), and the accompanying regulation Rule 10b-5, the plaintiff must allege that Defendants (1) made misstatements or omissions of material fact, (2) with scienter, (3) in connection with the purchase or sale of securities, (4) upon which the plaintiff relied, and (5) that the plaintiff's reliance was the proximate cause of its injury. Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161, 172 (2d Cir.2005). Section 20(a) of the Exchange Act establishes joint and several liability (subject to a good faith exception) for every person who, directly or indirectly, controls any person liable under any provision of the Act. 15 U.S.C. § 78t(a). The PSLRA establishes a statutory safe harbor for forward-looking statements. Under the safe harbor, a defendant will not be liable for a forward-looking statement if (1) the statement is “identified as a forward- looking statement, and accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement,” (2) the statement is immaterial, or (3) if “the plaintiff fails to prove that the forward-looking statement ... was ... made or approved by [an executive officer] with actual knowledge by that officer that the statement was false or misleading.” 15 U.S.C. § 78u-5(c). “The safe harbor is written in the disjunctive; that is, a defendant is not liable if the forward-looking statement is identified and accompanied by meaningful cautionary language or is immaterial or the plaintiff fails to prove that it was made with actual knowledge that it was false or misleading.” Slayton v. American Exp. Co., 604 F.3d 758, 766 (2d Cir.2010) (emphasis in original). *10 Defendants argue that the statements identified in the Amended Complaint as materially misleading were in fact not misleading; that these statements are all forward- looking and fall within the PSLRA safe harbor; and that even if these arguments fail, the Amended Complaint does not allege scienter. III. The Amended Complaint Alleges Material Misstatements and Omissions With Sufficient Particularity The Amended Complaint specifies each statement alleged to have been misleading, outlines separately the reasons why each statement is misleading, and where applicable, states with particularity all facts on which “information ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 27 of 139 PageID: 967 City of Providence v. Aeropostale, Inc., Not Reported in F.Supp.2d (2013) 2013 WL 1197755, Fed. Sec. L. Rep. P 97,391 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 8 or belief” is formed. See 15 U.S.C. 78u-4(b)(1); (Compl.¶¶ 79-110.) This is not a complaint that can be dismissed for failure to plead fraud with particularity; Defendants do not contend otherwise. Defendants, however, argue that Providence has failed to allege material misstatements or omissions because, in light of the “total mix” of information available to the investing public-including public disclosures made at the same time as the alleged misstatements and publicly available information regarding sales and promotions at Aeropostale stores-the alleged misstatements or omissions (i) were not misleading and (ii) were forward-looking statements accompanied by meaningful cautionary language. To the extent the Court might find that some of the statements were not forward- looking, Defendants claim they are a combination of non- actionable statements, such as expressions of puffery or corporate optimism, or of belief or opinion, which are non-actionable unless the speaker does not genuinely or reasonably believe the statement at the time it was made. In every respect, Defendants are wrong. Section 10(b) requires a plaintiff claiming securities fraud to allege, inter alia, a material misstatement or omission in a public disclosure. See 15 U.S.C. § 78(j). The meaning of materiality in the context of securities litigation is long settled-the key to the inquiry is whether there is a “substantial likelihood” that the alleged misstatement or omission would be deemed significant by a reasonable investor in light of the “total mix” of information available at such time about the investment. Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). As a general matter, “an omission is actionable under the securities laws only when the corporation is subject to a duty to disclose the omitted facts.” In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 267 (2d Cir.1993) (citing Basic Inc. v. Levinson, 485 U.S. 224, 239 n. 17 (1988) and Glazer v. Formica Corp., 964 F.2d 149, 157 (2d Cir.1992)). “A corporation is not required to disclose a material fact merely because a reasonable investor would very much like to know that fact.” In re Optionable Sec. Litig, 577 F.Supp.2d 681, 692 (S.D.N.Y.2008) (quoting Time Warner, 9 F.3d at 267) (internal alteration marks omitted). Nevertheless, a duty to disclose “arises when disclosure is necessary to make prior statements not misleading.” Beleson v. Schwartz, 599 F.Supp.2d 519, 525 (S.D.N.Y.2009) (quoting Time Warner, 9 F.3d at 268). A plaintiff in that instance need only demonstrate the materiality of the omitted facts and need not separately address the misleading nature of the statements that were actually made. See Time Warner, 9 F.3d at 267-68. “If a reasonable investor would so regard the omitted fact as material, it is difficult to imagine a circumstance where the prior statement would not be rendered misleading in the absence of the disclosure.” In re Sanofi-Aventis Sec. Litig., 774 F.Supp.2d 549, 564 (S.D .N.Y.2011) (quoting Time Warner, 9 F.3d at 267-68) (internal alteration marks omitted). *11 Plaintiff here has alleged that Defendants omitted to disclose material facts without which the statements that were made were materially misleading. On several occasions, for example, Defendants disclosed that they were taking steps to get their problems behind them by being “promotional” with 4Q2010 and 1Q2011 inventory (e.g., “Our outlook for the first quarter reflects the impact from clearing through holiday inventories” (statement 2), “So we feel like we are appropriately attacking the inventory problem” (statement 5), “Our outlook for the second quarter reflects our plans to aggressively clear through spring inventories” (statement 9), “we have taken steps to rectify [our mistakes] and to get this brand back on course” (statement 11)). They made such statements as late as May 19, 2011, when Defendants announced that the problem was “primarily impacted by missteps ... in the back half of last year.” But facts are alleged in the Amended Complaint-facts that I must presume are true-that, if proved, demonstrate that Defendants knew that this was not a problem limited to inventory overhang for 4Q2010, or even 1Q2011, at the time those statements were made. Even assuming that Defendants could not be certain early in 2011 that the merchandise ordered for the spring and summer of 2011 would not sell just because holiday sales (or lack of sales) were weak (although they were certain enough about the failure of Meads' strategy to fire her and reverse course on teen apparel), they had the ability to track sales on a daily basis, and so could undoubtedly surmise relatively early in the spring selling season (February through April) that the spring line was going to be no more successful than the winter line had been. And from those results, it is not at all illogical to infer that the summer was highly likely to be problematic as well. The supposedly “forward- ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 28 of 139 PageID: 968 City of Providence v. Aeropostale, Inc., Not Reported in F.Supp.2d (2013) 2013 WL 1197755, Fed. Sec. L. Rep. P 97,391 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 9 looking” statements, fairly read, imply that the company's lower earnings are the product of a temporary inventory problem (in the case of some statements, a 4Q2010 inventory problem) that would be resolved imminently- without disclosing that the company anticipated that the problem might well extend into succeeding quarters (as it did) because the merchandise that had proved unpopular had been pre-ordered and would continue to be stocked until fall of 2011, when a different “look” arrived at stores. The May 19 statement quoted above, fairly read, does not suggest to a rational investor that the “problems ... in the back half of last year” included merchandise orders for merchandise that would not even hit the stores until the second quarter of this year. A rational investor would want to know that the merchandising misstep that led to the firing of a merchandise director and a sudden and precipitous downturn in same store sales-all of which did indeed occur “in the back half of last year”-was going to have considerable impact on the profitability during the first two quarters of this year. For that reason alone, Plaintiff has exceeded the materiality threshold, and by a considerable margin. *12 The safe harbor also offers Defendants no protection. Under the first prong of the safe harbor, a defendant will not be liable for a forward-looking statement if the statement is “identified as a forward- looking statement, and accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement.” 15 U.S.C. § 78u-5(c). Defendants assert that all of the alleged misstatements are “forward-looking” and accompanied by “meaningful cautionary statements.” But the safe harbor does not apply to material omissions. See, e.g., In re Complete Mgmt. Inc. Sec. Litig, 153 F.Supp.2d 314, 340 (S.D.N.Y.2001); In re Oxford Health Plans Sec. Litig., 187 F .R.D. 133, 141 (S.D.N.Y.1999). Nor does it apply to statements of current or historical fact. In re Vivendi Universal, S.A. Sec. Litig., 765 F.Supp.2d 512, 569 (S.D.N.Y.2011) ( “[S]tatements about present or historical facts, whose accuracy can be determined at the time they were made, are not forward-looking statements falling within the PSLRA's safe harbor.”). Defendants' failure to disclose that the unpopular designs-the source of the poor sales and inventory problems in the “back half of last year”-had been ordered through summer of 2011 is unprotected by the safe harbor, regardless of whether the statements thereby rendered misleading were forward-looking. See Complete Mgmt., 153 F.Supp. at 340. The forward-looking statements are also not protected by the first prong of the safe harbor because they are not accompanied by “meaningful cautionary statements” that are sufficiently specific to address the material omission. See Slayton, 604 F.3d 758, 769-72 (2d Cir.2010). Vague or boilerplate disclaimers do not suffice as cautionary statements. See id.; Schottenfeld Qualified Associates, L.P. v. Workstream, Inc., No. 05 Civ. 7092(CLB), 2006 WL 4472318, at *3 (S.D.N.Y. May 4, 2006). To be meaningful, cautionary statements must be “substantive and tailored to the specific future projections, estimates or opinions which the plaintiffs challenge.” Slayton, 604 F.3d at 772 (quoting Inst. Investors Group v. Avaya, Inc., 564 F.3d 242, 256 (3d Cir.2009)); see also In re Regeneron Pharm., Inc. Sec. Litig., No. 03 Civ. 3111(RWS), 2005 WL 225288, at *18 (S.D.N.Y. Feb. 1, 2005). In this case, there is no question that the forward-looking statements made on the conference calls and in the press releases were specifically identified as “forward-looking” and were accompanied by cautionary language, 1 so the only issue is whether those statements were sufficient to warrant protection under the PSLRA. 1 Plaintiff contends that the oral statements, made on conference calls with investors, were not sufficiently identified by Defendants' statement at the beginning of the calls that “certain statements and responses to questions may contain forward- looking statements such as forecasts of financial performance” and directing the participants to the risks as described in Aeropostale's Form 10-K. Under the PSLRA, oral forward-looking statements require an accompanying statement “that the particular oral statement is a forward-looking statement.” 15 U.S.C. § 78u-5(c)(2)(A)(i). But courts have held that a statement like Defendants' at the beginning of a conference call is sufficient to identify the oral forward-looking statements, and I find that to be the case here. See, e.g., Biovail, 615 F.Supp.2d at 232-33. Defendants point to cautionary language concerning “consumer spending patterns,” “fashion preferences and trends,” and “the effectiveness of our inventory management” as effectively cautioning investors of the risks identified by Plaintiffthe merchandising missteps, ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 29 of 139 PageID: 969 City of Providence v. Aeropostale, Inc., Not Reported in F.Supp.2d (2013) 2013 WL 1197755, Fed. Sec. L. Rep. P 97,391 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 10 inventory build-up, and increased promotional activities (i.e., sales and markdowns to reduce inventory). However, Plaintiff argues that these factors were not “meaningful” or “sufficiently specific” because Aeropostale did not disclose that the risk factors were not merely hypothetical (i .e., they “could” happen), but were in fact happening -indeed, had already happened-that is, Aeropostale did not reveal that, at that time, Meads' designs were ordered through the summer of 2011 and that the poor performance would necessarily continue through then. *13 Nor can many of the alleged misstatements be fairly characterized simply as “forward-looking.” The PSLRA gives several definitions of a forward-looking statement, including “a statement containing a projection of ... income (including income loss), earnings (including earnings loss) per share, ... or other financial items”; “statement of the plans and objections of management for future operations, including plans or objectives relating to the products or services of the issuer”; and “a statement of future economic performance.” 15 U.S.C. § 78u-5(i)(1(A)- (C). But statements that the company had “taken the necessary steps to give the customers what they want” (statement 4), was “appropriately attacking the inventory problem” (statement 5), and that Defendants “know the mistakes that we made and ... have taken steps to rectify those” (statement 11) are not “forward- looking.” They are statements about present or historical fact, whose “accuracy can be determined at the time they were made.” Vivendi Universal, 765 F.Supp.2d at 569. Statements that Aeropostale had taken the “necessary steps” to rectify the problems are another excellent example of a statement that, while technically true, is materially misleading (or could well be) without disclosing that the “necessary steps” did not involve undoing already-planned orders for spring and summer merchandise, and so would not lead to better results until 3Q of 2011. Moreover, “mixed” statements that have both a forward- looking aspect and a representation of present or historical fact are not protected with respect to the latter. See, e.g., Schottenfeld, No. 05 Civ. 7092(CLB), 2006 WL 4472318, at *3; Regeneron Pharms., No. 03 Civ. 3111(RWS), 2005 WL 225288, at *13. Viewed in isolation, Aeropostale's earnings projections fall within the definition of a forward-looking statement under the PSLRA as “statements containing a projection of ... earnings [ ] per share.” 15 U.S.C. § 78u-5(i)(1(A)-(C). But these statements are accompanied by statements that the projections and “outlook” incorporate the effect of clearing through the inventory, sometimes even within the same sentence (see statements 1, 2, 3, 8, and 9). Such statements imply that the earnings projections accurately reflect the sales and inventory problems that Defendants were aware of at the time the statements were made, demonstrating that the statements are not solely forward- looking, but instead incorporate a present fact “whose accuracy could be determined at the time the statements were made.” Vivendi Universal, 765 F.Supp.2d at 569. Appreciating that these statements are not properly characterized as mere forward-looking projections makes their misleading nature, and the materiality of the omissions regarding Meads' designs in the company's earnings guidance, all the more apparent. Plaintiff does not need to rely on the falsity of Aeropostale's financial projections in order to show that they fail to disclose facts that impacted the reliability of those statements. See, e.g., Oxford, 187 F.R.D. at 141. Plaintiff's position is analogous to that of the plaintiffs in Oxford, where the court explained, “[P]laintiffs point out that they are not relying on the falsity of Oxford's financial projections and estimates, but rather the defendants' failure to disclose historical and existing material facts about Oxford's computer problems and the impact of those problems on the reliability of the financial statements.” Id. As in Oxford, “The safe harbor and bespeaks caution doctrines do not apply to these omissions.” Id. Moreover the same- day sales data-assuming (as I must) that it showed nothing was getting better-meant that any pretense that these statements were “predictions” that might or might not work lost all force at some point (what that point is we need not decide now). Aeropostale knew what the problem was. By the summer, well after the holiday “inventory glut” had passed, sales were so poor that they were a negative number, and only an accounting gambit could get the earnings onto the positive side of the ledger. *14 Finally, it speaks volumes that the ultimate corrective statement-the one that was finally made on August 18, 2011-was the only one to disclose the true scope of a problem that had been identified months earlier. As it became more and more certain that Aeropostale customers were not going to accept Meads' design concept, there undoubtedly came a point at which ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 30 of 139 PageID: 970 City of Providence v. Aeropostale, Inc., Not Reported in F.Supp.2d (2013) 2013 WL 1197755, Fed. Sec. L. Rep. P 97,391 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 11 investors were entitled to know that the merchandising misstep committed in the fall of 2010 would ripple through Aeropostale's earnings for virtually an entire year. They certainly could not be told that the misstep had occurred last year and nothing more; only by knowing for how long Aeropostale's inventory would be “infected” with unpopular “mature” designs and colors could investors make rational decisions about purchasing and/or selling the company's stock. I agree with Plaintiff that these allegations, if proven, would take the forward-looking disclosures out of the PSLRA's safe harbor. “[W]arnings of specific risks ... do not shelter defendants from liability if they fail to disclose hard facts critical to appreciating the magnitude of the risks described.” In re AIG 2008 Sec. Litig., 741 F.Supp.2d 511, 531 (S.D.N.Y.2010) (quoting Credit Suisse First Boston Corp. v. ARM Financial Group, Inc., No. 99 Civ. 12046, 2001 WL 300733, at *8 (S.D.N.Y. Mar. 28, 2001)). Even assuming that Defendants sufficiently identified the correct risk factors for the public, the disclosures failed to warn investors that the risks were not hypothetical-which, of course, dramatically increased the possibility of adverse consequences. That is what makes the forward-looking disclosures misleading (if they are misleading-an issue that must abide discovery). As Judge Pollack presciently noted some years ago, in the context of the judicially-created “bespeaks caution” doctrine (analogous to and a predecessor of the PSLRA's safe harbor provision): “To warn that the untoward may occur when the event is contingent is prudent; to caution that it is only possible for the unfavorable events to happen when they have already happened is deceit.” In re Prudential Securities Inc. Ltd. Partnerships Litigation, 930 F.Supp. 68, 72 (S.D.N.Y.1996); see also Rombach v. Chang, 355 F .3d 164, 173 (2d Cir.2004). Of course, if the evidence reveals that Plaintiff's allegations about the existence of unfavorable events are unfounded, the safe harbor provision may yet absolve Defendants of liability for any forward-looking statement, identified as such, that was accompanied by meaningful cautionary language. Asher v. Baxter International Inc., 377 F.3d 727, 735 (7th Cir.2004). This will, however, depend on facts that remain to be developed. The alleged misstatements are also misleading to the extent that they led the market to believe Aeropostale had sufficiently cleared through its holiday inventory as of March 10, 2011; “February started off well” in terms of performance; or Aeropostale was “more promotional” in the first and second quarters of 2011 “than anticipated.” Defendands argue that many of the statements amount to “puffery” or “expressions of corporate optimism,” or belief or opinion, and are not actionable misrepresentations on those grounds (e.g., “We feel very good about the product going forward” and “we have also been very excited about some of the fashion components ... for spring”). *15 A plaintiff may not rely on statements that constitute puffery or ordinary expressions of corporate optimism which are “too general to cause a reasonable investor to rely upon them.” ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 206 (2d Cir.2009); see also Rombach, 355 F.3d at 174. Statements of belief or opinion are also not actionable unless they are both objectively false and disbelieved by the speaker at the time the statements were made. Sanofi- Aventis, 774 F.Supp.2d at 567; see also Time Warner, 9 F.3d at 267. But the rosy predictions that might otherwise be puffery are rendered problematic for the very same material omissions outlined above. See Time Warner, 9 F.3d at 267. Moreover, statements of belief or opinion are actionable upon a showing of knowing falsity and the fair implication of the holding discussed in the preceding page is that Aeropostale's executives, including the individual defendants, well knew that their half-true expressions of optimism were both overly rosy and highly unlikely. IV. The Amended Complaint Raises a Strong Inference of Scienter Under the PSLRA, a complaint must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). In Tellabs Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007), the Supreme Court interpreted this provision of the PSLRA to require a court to consider “plausible, nonculpable explanations for the defendant's conduct, as well as inferences favoring the plaintiff.” Tellabs, 551 U.S. at 323-24. Under this rubric, a complaint will survive “only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” Id at 324. The inference need not, however, be “irrefutable, i.e., of the ‘smoking-gun’ genre, ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 31 of 139 PageID: 971 City of Providence v. Aeropostale, Inc., Not Reported in F.Supp.2d (2013) 2013 WL 1197755, Fed. Sec. L. Rep. P 97,391 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 12 or even the most plausible of competing inferences.” Id. at 324 (citation and internal quotation marks omitted). In determining whether a strong inference exists, the court must consider “whether all of the facts alleged, taken collectively, ... [and] not whether any individual allegation, scrutinized in isolation, meets that standard .” Id. at 551 U.S. at 322-23 (emphasis in original). The requisite state of mind in a Rule 10b-5 action is “intent to deceive, manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12 (1976). In the Second Circuit, a strong inference of scienter can be established in two ways: by alleging particularized facts that show that defendants had both motive and opportunity to commit the fraud, or by alleging particularized facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness. ATSI Commc ‘ ns, Inc. v. Wolfson, 493 F.3d 87, 99 (2d Cir.2007). In either case, the court must be convinced that the inference of scienter is “at least as compelling” as any competing inferences. Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 194 (2d Cir.2008). *16 As indicated above, Defendants urge the Court to adopt a finding that the alleged misstatements are all forward-looking, and so would be subject to the higher standard of “actual knowledge” for scienter under the second prong of the PSLRA. See 15 U.S.C. § 78u-5(c); Slayton, 604 F.3d at 773 (“[T]he scienter requirement for forward-looking statements is stricter than for statements of current fact. Whereas liability for the latter requires a showing of either knowing falsity or recklessness, liability for the former attaches only upon proof of knowing falsity.”) (quoting Avaya, Inc., 564 F.3d at 274). I have declined to find that the misleading nature of the statements rests on the forward-looking aspects of the statements; instead, it is the omissions that make the alleged misstatements materially misleading. The standard that applies to material omissions is “conscious misbehavior or recklessness.” See, e.g., ATSI, 493 F.3d at 99. A generalized desire to maintain a company's stock price or to sustain “the appearance of corporate profitability” does not constitute sufficient evidence of motive to support a securities fraud claim. Chill v. Gen Elec. Co., 101 F.3d 263, 268 & n. 5 (2d Cir.1996). Plaintiff does not plead or argue that Defendants personally profited by selling Aeropostale stock while the price was artificially inflated-though, ironically, Defendants admitted in their responsive papers that they had previously made elections to sell stock during the putative class period to satisfy their tax liability, thereby giving them a personal motive to keep the stock price inflated that would satisfy the “motive” prong of scienter analysis. See ECA, 553 F.3d at 198 (“[T]he ‘motive’ showing is generally met when corporate insiders allegedly make a misrepresentation in order to sell their own shares at a profit.”) (citations and internal quotation marks omitted). But Plaintiff definitely pleads particularized facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness. “[W]here the plaintiffs cannot make a motive showing, ... their circumstantial evidence of fraud must be correspondingly greater.” Slayton, 604 F.3d at 776; see also Kalnit v. Eichler, 264 F.3d 131, 142 (2d Cir.2001). The inquiry regarding scienter is necessarily case-specific, and the conclusion rests on a practical judgment about whether, taking all of the allegations collectively, it is at least as likely that Defendants acted with scienter. See Tellabs, 551 U.S. at 322-23; Avaya Inc., 564 F.3d at 269. In order to demonstrate “conscious misbehavior or recklessness,” Plaintiff alleges that Defendants knew or had access to information suggesting that their public statements were not accurate. Defendants argue that Plaintiff has failed to both plead its facts with sufficient particularity and to raise a strong inference of scienter. It is well settled that plaintiffs can plead conscious misbehavior or recklessness by alleging that defendants “knew facts or had access to information suggesting that their public statements were not accurate.” Novak, 216 F.3d at 311; see also In re AIG, 741 F.Supp.2d at 532-33; In re Bayer AG Sec. Litig., No. 03 Civ. 1546, 2004 WL 2190357, at *15 (S.D.N.Y. Sept. 30, 2004). “Where plaintiffs contend defendants had access to contrary facts, they must specifically identify the reports or statements containing this information.” Novak, 216 F.3d at 309 (2d Cir.2000). With respect to sales data and reports, pleadings are sufficiently specific where the plaintiffs have alleged who prepared the reports, how frequently they were prepared, who reviewed them, and the issues discussed in the reports. See New Orleans Emps. Ret. Sys. V. Celestica, Inc., 455 F. App'x 10, 14 (2d Cir. Dec. 29, 2011); see also In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 72-73 (2d Cir.2001) ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 32 of 139 PageID: 972 City of Providence v. Aeropostale, Inc., Not Reported in F.Supp.2d (2013) 2013 WL 1197755, Fed. Sec. L. Rep. P 97,391 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 13 (allegations with respect to company-generated statistics held sufficient where plaintiffs specified “who prepared internal company reports, how frequently the reports were prepared and who reviewed them”). *17 In this case, Plaintiff has pleaded such facts with sufficient particularity. Plaintiff has pleaded facts tending to show that Defendants knew they had made a huge merchandising mistake-indeed, they fired the merchandising director whose fashion sense was so disastrously wrong and set about correcting it. It pleads facts tending to show that Defendants knew that her poor decisions were not limited to Aeropostale holiday results, but would have longer term consequences. Defendants could see that sales, not just of the holiday inventory, but of spring inventory, were poor and getting poorer. They could see it on a daily basis. Consumer distate for Meads' lines was not hypothetical and it was not confined to the holiday season-it was real and demonstrable and ongoing. These issues were discussed at meetings as early as February 2011, as well as at monthly Unit Q meetings. Plaintiff, moreover, has pleaded facts tending to show Defendants knew the kind of impact these failures would have on the company's overall performance-the women's fashion division was recognized as the “core” of Aeropostale's business and constituted approximately 70% of the company's annual net sales. I decline to accept Defendants' invitation to overlook the law in this circuit regarding confidential sources, as articulated in Novak, in favor of the Seventh Circuit's decision in Higginbotham v. Baxter Int ‘ l, 495 F.3d 753 (7th Cir.2007). See Higginbotham, 495 F.3d at 756-57.; see Novak, 216 F.3d at 313-14. If the confidential employees turn out to have given Plaintiff's counsel false information, or have axes to grind that renders implausible their testimony about what Defendants knew and when they knew it, so be it-but that is an issue for trial, not on a motion to dismiss. Here, sufficient facts are disclosed to allow, at the pleading stage, an inference of scienter. The CWs included the director of visual merchandising, who was responsible for inventory issues and routinely discussed the inventory overhang with Defendants (CW1); a director of planning and allocation primarily focused on the P.S. from Aeropostale brand, responsible for preparing financials for his group and presenting products to the Executive Committee (CW2); an associate merchant in the merchandising department, responsible for ordering clothing in the long-sleeve women's knit line (CW3); an assistant designer, responsible for fashion line development in women's woven outerwear (CW4); an associate merchant, responsible for women's sweaters and dresses (CW5); a senior planner for e- commerce primarily focused on the P.S. from Aeropostale brand, responible for managing the P.S. line on the company's website (CW6); a freelance merchandise assistant in the merchandising department, who worked in women's accessories (CW7); a senior programmer/analyst, responsible for the upgrade and coding of Aeropostale's internal systems (CW8); and a merchandiser at the company (CW9). *18 Their evidence gives rise to the following findings. • The women's line changed direction during the second half of 2010, with the introduction of Meads' new “mature” designs and muted color palette. Defendants knew about the change, and Meads was fired in December 2010 as a result of the designs' failure. • As of December 2010, the women's department had ordered almost all of the merchandise in Meads' unpopular styles through spring and summer of 2011. Since inventory at Aeropostale is ordered six to nine months before the clothing hits the shelves, it is impossible to rectify an excess inventory problem in one or two quarters. • The “inventory crisis” began in the second half of 2010 and intensified in early 2011 and throughout the putative class period. Aggressive markdowns and promotions were not proving successful at clearing the inventory, and Aeropostale had to rent additional storage space to house the excess inventory. • Aeropostale employed aggressive and unprecedented discounts and promotions during the putative class period, which severely affected Aeropostale's margins throughout the putative class period. • Defendants had access to, reviewed, and discussed flash reports, Unit Q reports, the Bible, and sales reports, which contained detailed information regarding sales, inventory, and other performance metrics on a “real time basis.” Daily flash reports showed that all of the 2011 sales figures were “dismal,” and weekly sales reports made it clear that ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 33 of 139 PageID: 973 City of Providence v. Aeropostale, Inc., Not Reported in F.Supp.2d (2013) 2013 WL 1197755, Fed. Sec. L. Rep. P 97,391 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 14 Aeropostale was not reaching its sales goals during the putative class period. • The inventory crisis was discussed at weekly Executive Committee meetings, as early as February 2011. At a meeting in April 2011, Defendants acknowledged that the “heavily discounted merchandise was still not selling.” From this, one can infer that Defendants, having access to all this information and watching the downward trend, omitted to disclose all the information necessary to make their statements true and did so either recklessly or consciously-more likely the latter. And those inferences are “at least as” compelling as any non-fraudulent inference. This is a case where, assuming the pleaded facts to be true, it is hard to come up with a non-fraudulent inference. In view of the daily sales data available to Defendants, and the ongoing nature of the problem as the weeks and months passed with no visible improvement (indeed, with a deterioration) in the company's prospects for consumer acceptance of Meads' styles and colors-in a business segment that accounted for 70% of the company's revenue-it is difficult to infer that Defendants really and reasonably thought that the company's problem would not persist until all of Meads' influence on Aeropostale's teen fashions had dissipated. The inference that Defendants failed to apprise the market that “last year's problem” could not be fully corrected until halfway through “this year,” even though they knew otherwise, is highly compelling on this record. *19 The opposing inference of non-fraudulent intent is that Defendants were aware that the “mature” designs were not selling, and that they had problems with excess inventory as a result. But they reasonably believed that the problems would not persist throughout the first and second quarters, and that the effect on financial performance would not be “as bad” as it proved to be. This inference is supported by Defendants “early” disclosures -several weeks before their financial reporting on the quarter at issue was due under SEC regulations-that the actual earnings per share results would be much lower than the projected earnings given at the beginning of the quarter. It is also supported by the fact that Defendants significantly lowered the expected earnings per share for the second quarter (from $0.35-$0.38 in the first quarter, to $0.11-$0.16 in the second quarter, and compared to $0.46 earnings per share in the second quarter of the previous year), presumably after they saw how poorly the designs ended up selling through the spring. “Later disclosures that timely raise questions about the reliability of financial information ... lend weight to an inference that contemporaneous financial statements were made in good faith.” Slayton, 604 F.3d at 777 (quoting Matrix Capital Management Fund, LP v. Bearing Point, Inc., 576 F.3d 172, 187 (4th Cir.2009)). But in this case, the facts as alleged by Plaintiff do not indicate that these disclosures made by Defendant were “timely;” in fact, they suggest the opposite. And the lowered “earnings per share” guidance for the second quarter also supports an inference that Defendants, recognizing that actual earnings would eventually be disclosed, merely understated the severity of the problems as a way to avoid revealing the full extent of the problem-the poor designs purchased through the summer of 2011-until the fall. At that time, Aeropostale could comfortably report that the problems arising from the “merchandising missteps” were over. Defendants argue vigorously that the “real time” data available to Defendants was not a “magic black box” that could perfectly predict performance for the quarter. But that need not be the case in order for Plaintiff to raise a strong inference of scienter. In assessing whether Plaintiff has met its burden to raise such an inference -one that is at least as compelling as any opposing inference-I must consider whether all of the facts, taken collectively, meet that standard, and not scrutinize any one fact in isolation. See Tellabs, 551 U.S. at 322-23. I am, of course, not privy to what the actual data revealed, aside from the reports of the confidential witnesses that appear in the Amended Complaint. But I find that here, the access to real time data, at a minimum, bolsters Plaintiff's allegation that Defendants were aware of the severity of the “inventory crisis,” as recounted by the confidential witnesses (in addition to and separate from the witnesses' reports that Defendants attended various meetings and were aware of the inventory problems). And the bevy of information provided by those witnesses suggests that the crisis was severe and that it would not abate for the next two quarters, because of the material fact, omitted from Defendants' statements, that the poorly- received “mature” designs had been purchased through the summer of 2011. ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 34 of 139 PageID: 974 City of Providence v. Aeropostale, Inc., Not Reported in F.Supp.2d (2013) 2013 WL 1197755, Fed. Sec. L. Rep. P 97,391 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 15 *20 We are only at the pleading stage, and discovery may well undermine the seeming strength of Plaintiff's position. But precisely because we are at the pleading stage, where -even under the PSLRA-we have to assume the truth of well-pleaded facts, it would be inappropriate to grant the motion to dismiss. 2 2 The Court did not consider any of the “expert testimony” that was included-inappropriately, in the Court's view-in the pleading. V. The Amended Complaint Sufficiently Alleges Section 20(a) Liability Because Plaintiff has sufficiently pled a primary violation that the individual defendants controlled Aeropostale and acted with conscious misbehavior or recklessness, Plaintiff's control person claims against Defendants Johnson and Miller are actionable. See 15 U.S.C. § 78(f); In re AIG, 741 F.Supp.2d at 534-36. CONCLUSION For the foregoing reasons, Defendant's motion to dismiss the Amended Complaint is denied. The Clerk of the Court is directed to remove the motion at Docket No. 23 from the Court's list of pending motions. Plaintiff has 30 days to move for class certification. Meanwhile, merits discovery will commence; it will not be stayed, since whether a class is certified or not we will be litigating the merits. All merits discovery, including expert discovery, must be complete by September 30, 2013. Plaintiff's expert report is due June 7, 2013; if Defendants retain an expert the report is due August 23, 2013. These dates will not be extended. Class discovery must proceed simultaneously. All Citations Not Reported in F.Supp.2d, 2013 WL 1197755, Fed. Sec. L. Rep. P 97,391 End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works. ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 35 of 139 PageID: 975 Tab 4 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 36 of 139 PageID: 976 Culley v. Cumberland Valley School District, Slip Copy (2016) 2016 WL 775091 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 1 2016 WL 775091 Only the Westlaw citation is currently available. United States District Court, M.D. Pennsylvania. KEVIN AND DENISE CULLEY on behalf of J.C., Plaintiffs, v. THE CUMBERLAND VALLEY SCHOOL DISTRICT, Defendant. 1: 15-cv-857 | 02/29/2016 Hon. John E. Jones III MEMORANDUM February 29, 2016 *1 Plaintiffs Kevin and Denise Culley bring this action appealing the Order of a Due Process Special Education Hearing on behalf of their child, J.C., against Defendant Cumberland Valley School District. Presently pending before the Court is Defendant's Motion to Dismiss Plaintiffs' Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. (Doc. 7). For the reasons that follow, this motion shall be granted. I. PROCEDURAL HISTORY This procedural history shall be abbreviated, as it is recited solely for the benefit of the parties. On May 3, 2015, Plaintiffs filed a Complaint against Defendant Cumberland Valley School District, appealing the Order of the Due Process Special Education Hearing of February 3, 2015, with regard to their child, J.C. (Doc. 1). Plaintiffs' cause of action arises under the Individuals with Disabilities Education Act, (hereafter “IDEA”), 20 U.S.C. § 1400 et seq. and Section 504 of the Rehabilitation Act of 1973, (hereafter “Section 504”), 29 U.S.C. § 794 et seq., and their implementing regulations. Defendant filed the instant motion to dismiss on July 22, 2015. (Doc. 7). It filed a brief in support on the same day. (Doc. 8). The administrative record was filed under seal on September 9, 2015. (Doc. 16). Upon prompting from the Court, Plaintiffs filed a very late brief in opposition to the motion on January 31, 2016. (Doc. 20). No reply brief was filed during the permitted time. The motion has been fully briefed and is thus ripe for our review. II. STANDARD OF REVIEW In considering a motion to dismiss pursuant to Rule 12(b) (6), courts “accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief.” Phillips v. County of Allegheny, 515 F.3d 224, 231 (3d Cir. 2008) (quoting Pinker v. Roche Holdings, Ltd., 292 F.3d 361, 374 n.7 (3d Cir. 2002)). In resolving a motion to dismiss pursuant to Rule 12(b)(6), a court generally should consider only the allegations in the complaint, as well as “documents that are attached to or submitted with the complaint,...and any matters incorporated by reference or integral to the claim, items subject to judicial notice, matters of public record, orders, [and] items appearing in the record of the case.” Buck v. Hampton Twp. Sch. Dist., 452 F.3d 256, 260 (3d Cir. 2006). A Rule 12(b)(6) motion tests the sufficiency of the complaint against the pleading requirements of Rule 8(a). Rule 8(a)(2) requires that a complaint contain a short and plain statement of the claim showing that the pleader is entitled to relief, “in order to give the defendant fair notice of what the claim is and the grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). While a complaint attacked by a Rule 12(b)(6) motion to dismiss need not contain detailed factual allegations, it must contain “sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). To survive a motion to dismiss, a civil plaintiff must allege facts that ‘raise a right to relief above the speculative level....” Victaulic Co. v. Tieman, 499 F.3d 227, 235 (3d Cir. 2007) (quoting Twombly, 550 U.S. at 555). Accordingly, to satisfy the plausibility standard, the complaint must indicate that defendant's liability is more than “a sheer possibility.” Iqbal, 556 U.S. at 678. “Where a complaint pleads facts that are ‘merely consistent with’ a defendant's liability, it ‘stops short of the line between possibility ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 37 of 139 PageID: 977 Culley v. Cumberland Valley School District, Slip Copy (2016) 2016 WL 775091 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 2 and plausibility of entitlement to relief.’ ” Id. (quoting Twombly, 550 U.S. at 557). *2 Under the two-pronged approach articulated in Twombly and later formalized in Iqbal, a district court must first identify all factual allegations that constitute nothing more than “legal conclusions” or “naked assertions.” Twombly, 550 U.S. at 555, 557. Such allegations are “not entitled to the assumption of truth” and must be disregarded for purposes of resolving a 12(b) (6) motion to dismiss. Iqbal, 556 U.S. at 679. Next, the district court must identify “the ‘nub’ of the...complaint - the well-pleaded, nonconclusory factual allegation[s].” Id. Taking these allegations as true, the district judge must then determine whether the complaint states a plausible claim for relief. See id. However, “a complaint may not be dismissed merely because it appears unlikely that the plaintiff can prove those facts or will ultimately prevail on the merits.” Phillips, 515 F.3d at 231 (citing Twombly, 550 U.S. at 556-57). Rule 8 “does not impose a probability requirement at the pleading stage, but instead simply calls for enough facts to raise a reasonable expectation that discovery will reveal evidence of the necessary element.” Id. at 234. III. FACTUAL SUMMARY In accordance with the standard of review applicable to a motion to dismiss, the following facts are derived from Plaintiffs' Complaint and viewed in the light most favorable to Plaintiffs. Plaintiffs' child, J.C., has a “life threatening illness” which has caused J.C.'s physical and cognitive abilities to deteriorate since 2004. (Doc. 1, ¶¶ 9-10). J.C.'s academic performance and behavior have deteriorated since 2004, as well. Plaintiffs allege that the Defendant failed to evaluate J.C. for IDEA eligibility or Section 504 Services from 2004 to 2014 when Plaintiffs requested an IDEA evaluation. The Defendant responded to J.C.'s behavior, which resulted from J.C.'s medical condition, with punitive disciplinary actions and ignored his academic needs. (Id., ¶ 13). Defendant ultimately conducted an expulsion hearing in response to J.C.'s behavior. (Id., ¶ 15). J.C. attended a vocational school for half the school day during the 2013-2014 school year and received direct support, which resulted in more success academically and no behavior-related incidents. (Id., ¶ 14). The Defendant found J.C. to be eligible for a Section 504 Service Plan in March of 2014. (Id., ¶ 16). The Defendant issued an Initial Evaluation Report in May of 2014, which contained the conclusion that J.C. was not eligible for IDEA special education services. (Id., ¶ 17). Plaintiffs then requested, and the Defendant approved, an IDEA Independent Educational Evaluation, (“IEE”). The IEE Evaluator found J.C. to have dual eligibility as an eligible student in the categories of “Other Health Impairment” and “Specific Learning Disability.” (Id., ¶¶ 18-19). J.C. subsequently moved to a neighboring school district for the 2014-2015 school year, where he was determined to be eligible for IDEA services. (Id., ¶ 20). In January of 2014, Plaintiffs filed for a Due Process Hearing, seeking IDEA and/or Section 504 eligibility for services for J.C., a determination concerning acts of discrimination pursuant to Section 504, and compensatory education. (Id., ¶ 21). Brian Ford, a Special Education Hearing Officer, was assigned to the Parents' Complaint by the Office for Dispute Resolution. (Id., ¶ 22). Three Due Process Hearing sessions were held in August, October, and December of 2014. (Id., ¶ 24). Special Educator Officer Brian Ford issued a decision on February 3, 2015, denying all relief requested by Plaintiffs. (Id., ¶ 25). IV. DISCUSSION Defendant first argues that the Complaint should be dismissed because Plaintiffs merely assert they are appealing the ruling of the Hearing Officer, but provide no facts to suggest they are entitled to relief. Further, Defendant argues that Plaintiffs make no allegation that the Hearing Officer committed an error of factfinding or an error of law. Second, Defendant argues that Plaintiffs' claim seeking monetary damages also fails because of a failure to plead facts showing an entitlement to this form of relief. We shall address each argument in turn. *3 “The IDEA is a comprehensive scheme of federal legislation designed to meet the special educational needs of children with disabilities.” M.A. v. State- Operated Sch. Dist. of City of Newark, 344 F.3d 335, 338 (3d ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 38 of 139 PageID: 978 Culley v. Cumberland Valley School District, Slip Copy (2016) 2016 WL 775091 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 3 Cir.2003). In order for states to receive federal funding for the provision of educational services to children with disabilities, they must “meet a number of substantive and procedural criteria.” Id. at 338. In order to receive such funding, states must ensure that each student with a disability receives a free and appropriate public education, or “FAPE.” See James S. ex rel. Thelma S. v. School Dist. of Philadelphia, 559 F.Supp.2d 600, 612 (E.D. Pa. 2008) (citing 20 U.S.C. § 1412(a)(1)). In order for a student to be eligible for IDEA services, then, the student must have a disability. The IDEA defines a “child with a disability” as a child: (i) with intellectual disabilities, hearing impairments (including deafness), speech or language impairments, visual impairments (including blindness), serious emotional disturbance (referred to in this chapter as “emotional disturbance”), orthopedic impairments, autism, traumatic brain injury, other health impairments, or specific learning disabilities; and (ii) who, by reason thereof, needs special education and related services. 20 U.S.C. § 1401(3)(A). Section 504 of the Rehabilitation Act provides that “[n]o otherwise qualified individual with a disability...shall, solely by reason or her or his disability, be excluded from the participation in, be denied the benefits of, or be subjected to discrimination under any program or activity receiving Federal financial assistance ....” 29 U.S.C. § 794(a). To state a claim under Section 504, then, Plaintiffs must allege that (1) J.C. “is disabled as defined by the Act”; (2) J.C. “is ‘otherwise’ qualified to participate in school activities”; (3) the Defendant school district “receives federal financial assistance”; and (4) J.C. “was excluded from participation in, denied the benefits of, or subject to discrimination at, the school.” See Tereance D. ex rel. Wanda D. v. School Dist. of Philadelphia, 548 F.Supp.2d 162, 168 (E.D. Pa. 2008) (citing W.B. v. Matula, 67 F.3d 484, 492 (3d Cir. 1995)). The Rehabilitation Act defines an “individual with a disability” as, “inter alia, any person who ‘has a physical or mental impairment which substantially limits one or more of such person's major life activities.’ ” D.G. v. Somerset Hills School Dist., 559 F. Supp. 2d 484, 496 (D.N.J. 2008) (citing 29 U.S.C. § 705(20) (B)). Additionally, Plaintiffs must allege that the District “must know or be reasonably expected to know of” J.C.'s disability. Matula, 67 F.3d at 492 (quoting Nathanson v. Medical College of Pennsylvania, 926 F.2d 1368, 1380 (3d Cir. 1991)). In the matter sub judice, the Complaint states that Plaintiffs are appealing the Hearing Officer's conclusions that J.C. is not eligible for special education services and compensatory education pursuant to IDEA; that J.C. was not eligible for Section 504 services prior to March of 2014 and was not eligible for Section 504 compensatory education; and that J.C. has not been discriminated against pursuant to Section 504. (Doc. 1, ¶ 1). Beyond that, the Complaint provides very few factual allegations that would rise to the level of stating a plausible claim for relief under IDEA or Section 504. Indeed, the Complaint fails to even allege that J.C. is disabled as defined by IDEA or the Rehabilitation Act-the Complaint continually refers to J.C. as having a “life threatening illness” or a “medical condition,” which is not synonymous with being classified as disabled under the relevant statutes. See James S. ex rel. Thelma S., 559 F.Supp.2d at 620 (citing to multiple references in plaintiff's complaint alleging the student had specific disabilities and concluding that the “disability” requirement of a Section 504 claim had been satisfied). With regard to the IDEA claim, even assuming J.C.'s medical condition rises to the level of a disability, Plaintiffs have also failed to allege that this disability caused J.C. to need special education services. Thus, Plaintiffs have failed to allege facts stating a plausible claim that J.C. is a “child with a disability” under IDEA. *4 With regard to Plaintiffs' claim(s) under Section 504, they have also failed to allege that J.C. is otherwise qualified to participate in school activities and that the Defendant receives federal financial assistance. Cf. D.G., 559 F. Supp. 2d at 497-498 (finding that plaintiffs had adequately alleged the elements of a Section 504 claim against the defendant school district). Because Plaintiffs have not adequately pled J.C. has a disability, they also fail to establish the fourth element of a Section 504 claim. Plaintiffs assert that J.C. was discriminated against, insofar as persons “who were not trained us[ed] inappropriate physical restraint and assault[ed] the student....” (Doc. 1, ¶ 23), but, as Defendant argues and Plaintiffs do not contest in their brief, they fail to provide any facts showing that such alleged discrimination was due to J.C.'s disability, assuming for the sake of this argument that J.C. has one. See Andrew M. v. Delaware Cnty. Office of Mental Health and Mental Retardation, ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 39 of 139 PageID: 979 Culley v. Cumberland Valley School District, Slip Copy (2016) 2016 WL 775091 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 4 490 F.3d 337, 350 (3d Cir. 2007) (citing Menkowitz v. Pottstown Mem'l Med. Ctr., 154 F.3d 113, 124 (3d Cir. 1998) (“holding that the disability must be the cause of the discrimination or denial of benefits or services” for a Section 504 claim). Additionally, as Defendant contends, the Complaint does not allege any specific errors of fact or law made by the Hearing Officer. Even though it is clear that Plaintiffs disagreed with the ultimate conclusions of the Hearing Officer, Plaintiffs provide this Court with no factual allegations or even legal argument as to why this Court should reach different conclusions. In order to survive a motion to dismiss, a complaint must state a plausible claim for relief; at this juncture, Plaintiffs' right to relief is entirely speculative. We further note that Plaintiffs made no effort in their brief in opposition to the motion - consisting of only a two- paragraph argument -- to explain why their Complaint states a plausible claim. They fail to cite to any case law or to their Complaint to show the Court why the Complaint in its current iteration should survive. We are not here to do Plaintiffs' job for them. Plaintiffs' only argument is that this Court was presented with a “nearly identical” motion to dismiss by the same Defendant in a prior case, I.H. ex rel. D.S. v. Cumberland Valley School Dist., No. 11- cv-574, 842 F. Supp. 2d 762 (M.D. Pa. 2012), and there the Court granted in part and denied in part the motion to dismiss. However, the complaint in that matter was much more detailed and comprehensive in its factual allegations. Further, the complaint specifically referenced how the Hearing Officer had erred. We also note that Defendant in that matter raised very different arguments in its motion to dismiss-the Court is unclear on what grounds Plaintiffs believe the motion to dismiss to be “nearly identical” to the one before the Court now. Accordingly, because the bare-bones Complaint fails to state any plausible claim for relief, we shall grant Defendant's motion to dismiss. Also, because we are dismissing the Complaint, we will not address at this juncture Defendant's additional argument that Plaintiffs fail to state a claim for monetary damages. But we do note that because Plaintiffs' brief wholly fails to address this argument, they have in effect waived their opposition to Defendant's request for dismissal of their monetary damages claim. See Hanoverian, Inc. v. Pa. Dep't of Envtl. Prot., No. 1:07-cv-00658, 2008 WL 906545, at *16 (M.D. Pa. Mar. 31, 2008) (“[W]hen a plaintiff files a response to a motion to dismiss but fails to address certain arguments made by the defendant, the court may treat those arguments as conceded.”) (quoting Williams v. Savage, 538 F. Supp. 2d 34, 41 (D.D.C. 2008)). Indeed, Plaintiffs failed to address any of the specific arguments raised by Defendant in its motion and brief. V. CONCLUSION For the reasons stated herein, the Court shall grant Defendant's motion to dismiss. Our initial inclination was to dismiss this case without leave to amend; however, out of an abundance of caution, we shall grant such leave to Plaintiffs, in the event they possess factual allegations which cure the pleading deficiencies detailed above. *5 An appropriate Order shall follow. All Citations Slip Copy, 2016 WL 775091 End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works. ase 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 40 of 139 PageID: 980 Tab 5 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 41 of 139 PageID: 981 Gold v. Ford Motor Co., 577 Fed.Appx. 120 (2014) Fed. Sec. L. Rep. P 98,150 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 1 577 Fed.Appx. 120 This case was not selected for publication in the Federal Reporter. Not for Publication in West's Federal Reporter. See Fed. Rule of Appellate Procedure 32.1 generally governing citation of judicial decisions issued on or after Jan. 1, 2007. See also Third Circuit LAR, App. I, IOP 5.7. (Find CTA3 App. I, IOP 5.7) United States Court of Appeals, Third Circuit. Bradd GOLD, individually and on behalf of all others similarly situated, Appellant v. FORD MOTOR COMPANY; Ford Motor Company Capital Trust II. No. 13-2328. | Argued on April 8, 2014. | Opinion Filed Aug. 15, 2014. Synopsis Background: Individual shareholder brought putative class action against issuer of trust preferred securities and capital trust, alleging securities fraud in connection with distributions to holders of securities. The United States District Court for the District of Delaware, 852 F.Supp.2d 535, Leonard P. Stark, J., dismissed. Plaintiff appealed. Holding: The Court of Appeals, Roth, Circuit Judge, held that even assuming private right of action under rule, shareholder failed to allege scienter. Affirmed. West Headnotes (1) [1] Securities Regulation Scienter Even assuming rule governing dividends and distributions provided private right of action, such that rule could serve as basis for action under section 10(b) of Securities Exchange Act, individual shareholder failed to allege scienter in connection with issuer's alleged material misrepresentation or omission and shareholder's loss of distributions resulting from sale of trust preferred securities, and thus, shareholder failed to state claim against issuer or trust for violation of section 10(b) premised on noncompliance with rule governing dividends and distributions. Securities Exchange Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b); Private Securities Litigation Reform Act of 1995, § 101(b)(2), 15 U.S.C.A. § 78u-4(b)(2). 2 Cases that cite this headnote *120 On Appeal from the United States District Court for the District of Delaware, (D.C. No. 1-10-cv-00587), District Judge: Honorable Leonard P. Stark. Attorneys and Law Firms Norman M. Monhait, Esquire, (Argued), P. Bradford deLeeuw, Esquire, Rosenthal, Monhait & Goddess, Wilmington, DE, for Appellant. Sean M. Marotta, Esquire, (Argued), Christopher T. Handman, Esquire, Hogan Lovells US, Washington, DC, Stuart J. Baskin, Esquire, Christopher R. Fenton, Esquire, Jerome S. Fortinsky, Esquire, Shearman & Sterling, New York, NY, Jon E. Abramczyk, Esquire, Morris, Nichols, Arsht & Tunnell, Wilmington, DE, for Appellees. Before: AMBRO, JORDAN and ROTH, Circuit Judges. OPINION ROTH, Circuit Judge: Bradd Gold appeals the District Court's orders granting defendants', Ford Motor Company (Ford) and Ford Motor Company Capital Trust II (the Trust), motion to dismiss under Fed.R.Civ.P. 12(b)(6) and denying Gold's motion to amend. We will affirm. Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 42 of 139 PageID: 982 Gold v. Ford Motor Co., 577 Fed.Appx. 120 (2014) Fed. Sec. L. Rep. P 98,150 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 2 *121 I. Background This case concerns whether Ford and the Trust violated Section 10(b) of the Securities Exchange Act of 1934 by failing to comply with a ten-day notice requirement under SEC Rule 10b-17. 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-17, before they announced a distribution of trust preferred securities. In 2002, Ford created a Delaware statutory business trust to raise capital through the issuance of 90 million trust preferred securities. Gold purchased approximately 21,800 trust preferred securities. The Trust used the proceeds from the sale to purchase debentures from Ford. Under the debenture contract, Ford makes quarterly interest payments to the Trust on the debentures, and then the Trust distributes the interest payments in quarterly payments to the holders of the trust preferred securities. In addition, Ford can exercise an option to defer quarterly interest to the Trust for a maximum of 20 quarters. In April 2009, Ford exercised its right to defer interest payments on the debentures to the Trust; the Trust then deferred the quarterly payments to the security holders, including Gold. On June 30, 2010, at 8:59 a.m., Ford announced that it would resume payments to the Trust and make payments on the previously deferred distributions on July 15, 2010, to the June 30 record holders-the owners listed in the Trust's books as of June 30. The record holder of a security on the record date, however, is not necessarily entitled to retain a distribution. Rather, the New York Stock Exchange (N.Y.S.E), or other relevant exchange, independently sets what is known as an “ex-distribution date,” which determines who is entitled to a distribution when a security is sold close in time to the distribution. If the security is purchased on or after the ex-distribution date, the seller may retain the distribution; however, if the security is purchased before the exdistribution date, the seller must give the distribution to the buyer. Although the NYSE traditionally sets the ex-distribution date as two business days prior to the record date, it has discretion to set a different ex-distribution date. NYSE Rule 235. The NYSE announced on June 30, 2010, at 1:20 p.m., that the ex-distribution date for the Trust's distribution would be July 1, 2010. Sales on June 28, 29, and 30 would include a “due bill,” requiring the sellers of the Trust's securities on those three days to pass on the distribution payments to the buyers of their securities. On June 30, after Ford's distribution announcement, but before the NYSE set the ex-distribution date, Gold sold 13,800 trust securities. Because his sales occurred before the July 1 ex- distribution date set by the NYSE, and during the “due bill period,” Gold was not entitled to the July 15, 2010, distribution for the 13,800 trust securities he sold. On July 8, 2010, Gold filed a Complaint in the District of Delaware in his capacity as an individual shareholder and on behalf of a purported class, alleging that Ford and the Trust violated Section 10(b) of the Securities Exchange Act of 1934. 15 U.S.C. § 78j(b). On November 15, 2010, Gold filed an Amended Complaint asserting that Ford's decision to announce the July distribution on the same day as the record date violated Rule 10b-17, which requires the issuer to inform the National Association of Securities Dealers, Inc., now the Financial Industry Regulatory Authority (FINRA), of the record date for a distribution “no later than 10 days prior to the record date.” 17 C.F.R. § 240.10b-17. Ford and the Trust moved to dismiss the Amended Complaint. The District Court granted the motion, holding that Gold failed to plead loss causation. See Gold v. *122 Ford Motor Co., 852 F.Supp.2d 535, 541 (D.Del.2012). On April 27, 2012, Gold moved to amend his Complaint, submitting a Proposed Amended Complaint. The District Court denied the motion, determined that there is no private right of action under Rule 10b-17, and found that the Proposed Amended Complaint failed to adequately plead loss causation and scienter. See Gold v. Ford Motor Co., 937 F.Supp.2d 526, 532 (D.Del.2013). Gold appealed. II. Standard of Review 1 1 The District Court had jurisdiction under 28 U.S.C. § 1331 and 15 U.S.C. § 78aa; we have jurisdiction under 28 U.S.C. § 1291. We exercise plenary review over a District Court's grant of a motion to dismiss under Fed.R.Civ.P. 12(b)(6). Eid v. Thompson, 740 F.3d 118, 122 (3d Cir.2014). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). We review a district court's denial of leave to amend a complaint for abuse of discretion. Renchenski v. Williams, 622 F.3d 315, 324-25 (3d Cir.2010). Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 43 of 139 PageID: 983 Gold v. Ford Motor Co., 577 Fed.Appx. 120 (2014) Fed. Sec. L. Rep. P 98,150 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 3 III. Discussion Gold argues that Ford and the Trust violated section 10(b) of the Securities Exchange Act by failing to comply with SEC Rule 10b-17. Section 10(b) makes it unlawful (1) to “use or employ ... any manipulative or deceptive device or contrivance,” (2) “in connection with the purchase or sale of any security,” and (3) “in contravention of [Securities and Exchange Commission] rules and regulations.” 15 U.S.C. § 78j (b); see also McCabe v. Ernst & Young, LLP, 494 F.3d 418, 424 (3d Cir.2007) (citing and quoting 15 U.S.C. § 78j(b)). The Supreme Court has identified six required elements of a Section 10(b) action: (1) a material misrepresentation or omission, (2) scienter, (3) a connection with the purchase or sale of a security, (4) reliance, (5) economic loss, and (6) loss causation. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005). We hold that Gold's Amended Complaint fails to plead scienter. In addition, his Proposed Amended Complaint fails to adequately plead scienter and, thus, amendment would be futile. 2 See In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1434 (3d Cir.1997) (internal citations omitted). 2 Because we hold that Gold failed to plead scienter, we need not reach whether Rule 10b-17 includes a private right of action or whether Gold adequately pleaded loss causation. See Brightwell v. Lehman, 637 F.3d 187, 191 (3d Cir.2011) (internal citations omitted) (“We may affirm a district court for any reason supported by the record.”). The Private Securities Litigation Reform Act (PSLRA) established a heightened pleading requirement for Section 10(b) securities fraud cases: “the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). The “PSLRA alters the normal operation of inferences under Fed.R.Civ.P. 12(b)(6)” by requiring a strong inference of scienter. In re Digital Island Securities Litig., 357 F.3d 322, 328 (3d Cir.2004) (internal citations omitted). A complaint survives a motion to dismiss “only if a reasonable person would deem the inference of scienter cogent and at *123 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, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). Under the PSLRA, a plaintiff properly pleads scienter by alleging facts that “constitute circumstantial evidence of either reckless or conscious behavior.” Institutional Invs. Grp. v. Avaya, Inc., 564 F.3d 242, 276-77 (3d Cir.2009) (internal citation and quotation marks omitted). Indeed, “motive and opportunity may no longer serve as an independent route to scienter.” Id. at 277. Gold argues that Ford and the Trust acted recklessly or consciously disregarded an obvious risk of misleading the public by failing to provide the ten-day notice to FINRA. Gold points to Ford's history of complying with the Rule 10b-17 notice requirement as showing Ford and the Trust's knowledge of a “bright line legal rule” and a “deliberate choice to disregard a known legal requirement.” We disagree. Ford's prior compliance with the ten-day notice requirement does not reasonably allow a “strong inference” that its failure to provide the notice on one occasion was the result of conscious misbehavior. This speculation is insufficient under Twombly/Iqbal and Rule 12(b)(6)-let alone the heightened pleading requirements under the PSLRA. Simply put, missing a deadline is not scienter. Gold contends that, because the SEC regulation states that it constitutes a “manipulative or deceptive device or contrivance” to fail to give notice, it follows that Ford's failure to provide the notice must also be conscious misbehavior. This assertion speaks too broadly about Rule 10b-17, and would mean that every violation of the notice requirement establishes scienter. Scienter, however, is an additional statutory requirement imposed by the PSLRA. 15 U.S.C. § 78u-4(b)(2). We cannot accept that every violation of Rule 10b-17 is manipulative or deceptive such that it constitutes conscious misbehavior that establishes scienter. Nor do we accept Gold's argument that Ford and the Trust acted recklessly. Recklessness is “an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.” Avaya, 564 F.3d at 267 n. 42 (internal citation and quotation marks omitted). The facts in the Amended Complaint and Proposed Amended Complaint do not allege an extreme departure from ordinary care. Ford missed a deadline, but negligence is Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 44 of 139 PageID: 984 Gold v. Ford Motor Co., 577 Fed.Appx. 120 (2014) Fed. Sec. L. Rep. P 98,150 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 4 not scienter. See McLean v. Alexander, 599 F.2d 1190, 1198 (3d Cir.1979). Thus, we conclude that the District Court did not err in dismissing Gold's Amended Complaint and did not abuse its discretion in denying Gold's leave to amend. III. Conclusion For the foregoing reasons, we will affirm the judgment of the District Court. All Citations 577 Fed.Appx. 120, Fed. Sec. L. Rep. P 98,150 End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works. Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 45 of 139 PageID: 985 Tab 6 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 46 of 139 PageID: 986 In re Heartland Payment Systems, Inc. Securities Litigation, Not Reported in F.Supp.2d... 2009 WL 4798148 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 1 2009 WL 4798148 Only the Westlaw citation is currently available. NOT FOR PUBLICATION United States District Court, D. New Jersey. In re HEARTLAND PAYMENT SYSTEMS, INC. SECURITIES LITIGATION. Civ. No. 09-1043. | Dec. 7, 2009. West KeySummary 1 Securities Regulation Matters to Be Disclosed Shareholders failed to state a claim under the Private Securities Litigation Reform Act (PSLRA) that a corporation misrepresented the state of its computer network security. Executives did not fail to disclose a structured query language (SQL) attack during an earnings conference call. In stating that there was no security incident that prompted certain security expenditures during the fourth quarter of that year, the executives were being truthful because the SQL attack occurred at the end of the year, after the expenditure had been made. Securities Exchange Act of 1934, § 21D(b)(2), 15 U.S.C.A. § 78u-4(b)(2). Cases that cite this headnote Attorneys and Law Firms Douglas Wilens, Paul Jeffrey Geller, Coughlin Stoia Geller Rudman & Robbins LLP, Sabrina E. Tirabassi, Boca Raton, FL, Emily C. Komlossy, Jamie R. Mogil, Faruqi & Faruqi, New York, NY, Peter S. Pearlman, Cohn, Lifland, Pearlman, Herrmann & Knopf, LLP, Saddle Brook, NJ, Olimpio Lee Squitieri, Squitieri & Fearon, LLP, Jersey City, NJ, Daniel S. Sommers, Cohen, Milstein, Sellers & Toll, PLLC, Washington, DC, for Plaintiff. David C. Kistler, Stephen M. Orlofsky, Blank Rome, LLP, Princeton, NJ, Seth J. Lapidow, Blank Rome, LLP, Cherry Hill, NJ, for Defendant. OPINION THOMPSON, District Judge. INTRODUCTION *1 This matter comes before the Court upon Defendants' Motion to Dismiss [20]. The Court has decided the motion upon the parties' written submissions and without oral argument. For the reasons given below, the motion is GRANTED. BACKGROUND For purposes of deciding this motion, the Court accepts the following allegations, which are set out in the Complaint, as true. Heartland Payment Systems, Inc. (“Heartland”) provides bank card payment processing services to merchants in the United States. (Compl. at ¶ 18.) The company facilitates the exchange of information and funds between merchants that accept credit and debit card payments and the cardholders' financial institutions. (Id.) In the course of administering these services, Heartland maintains millions of credit and debit card numbers on its computer network. In December 2007, a group of hackers now under criminal indictment launched a “Structured Query Language” Attack 1 (“SQL attack”) on Heartland's computer network, specifically the company's payroll manager application. (Id. at ¶¶ 5, 74.) The payroll manager application does not contain data on cardholders' credit and debit card accounts; rather, it contains internal corporate information such as employees' names, addresses, social security numbers, and other confidential information. (Id. at ¶ 76.) Technology personnel at Heartland spent much of January “putting out fires” related to the attack, but no information was ever stolen off of the payroll manager. (Id. at ¶ 76.) Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 47 of 139 PageID: 987 In re Heartland Payment Systems, Inc. Securities Litigation, Not Reported in F.Supp.2d... 2009 WL 4798148 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 2 1 A technical understanding of how a structured query language attack works is not necessary in this case. It suffices to say that the attack enabled hackers to inject foreign code into Heartland's computer systems. Unfortunately, while the SQL attack targeted the payroll manager application, the damage was not confined to this part of Heartland's computer network. The SQL attack resulted in hidden, malicious software being placed on Heartland's network. This malware ended up infecting not just the payroll manager application, but also the payment processing system, which was responsible for storing credit card data and debit card data. (See id. at ¶ 5.) Over the course of 2008, the hackers managed to steal 130 million credit card and debit card numbers. (Id.) Heartland did not discover the breach until January 12 or 13, 2009. (Id. at ¶ 109.) The company immediately notified the U.S. Department of Justice, the U.S. Secret Service, and the credit card companies whose account numbers had been stolen. (Id.) Then, on January 20th, Heartland publicly disclosed the theft. (Id. at ¶¶ 108- 09.) Following this disclosure and subsequent disclosures about the possible impact that the thefts might have on Heartland's business, Heartland's stock price dropped from more than $15 per share on January 19 to $5.34 per share by February 24. (Id. at ¶¶ 110-115.) If measured from its highest price during 2008, Heartland's stock suffered a total decline in value of almost 80%. (Id. at ¶ 133.) Plaintiffs, who purchased stock during 2008, suffered significant losses as a result of this decline in value. *2 The alleged fraudulent acts took place in 2008, after Heartland had suffered the SQL attack but before it discovered the credit and debit card number thefts in January 2009. Plaintiffs claim that Heartland misrepresented the state of its computer network security through statements that Defendants Carr and Baldwin made on earnings conference calls and statements made in its 2007 Form 10-K report, which was filed with the Securities and Exchange Commission (“S.E.C .”) in March of 2008. (Id. at ¶¶ 91-107.) Specifically, Plaintiffs contend that when asked about security incidents that occurred in 2007, Defendants concealed the SQL attack. (Id.) They also contend that Defendants made statements to the effect that Heartland had adequate security systems and that Heartland took the issue of computer network security very seriously. (Id.) Plaintiffs argue that these statements concerning the general state of security at Heartland are fraudulent because Carr and Baldwin were aware that Heartland had poor data security and had not remedied the problem. (Id.) ANALYSIS I. Standard of Review Private securities fraud actions brought as class action lawsuits are subject to heightened pleading standards under the Private Securities Litigation Reform Act of 1995 (“PSLRA”). 15 U.S.C. § 78u-4(b). In cases governed by the PSLRA, “the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b) (1). These requirements are substantially similar to the heightened pleading standards under Fed.R.Civ.P. 9(b), requiring the plaintiff to plead the “who, what, when, where, and how” of the allegedly fraudulent statements. Institutional Investors Group v. Avaya Inc., 564 F.3d 242, 252 (3d Cir.2009). The PLSRA also requires that the complaint “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). The complaint will meet this standard only if the facts alleged support an inference of scienter that is “cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). As the Supreme Court has explained, this is an “inherently comparative” analysis, requiring courts to “consider plausible nonculpable explanations for the defendant's conduct, as well as inferences favoring the plaintiff.” Id. at 324. In other words, “the reviewing court must ask: When the allegations are accepted as true and taken collectively, would a reasonable person deem the inference of scienter at least as strong as any opposing inference?” Id. at 325. If the complaint does not satisfy these pleading requirements, the case must be dismissed. 15 U.S.C. § 78u- 4(b)(3)(A). *3 Only the misrepresentation and scienter elements of a private securities law claim are subject to heightened pleading standards under the PSLRA; the Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 48 of 139 PageID: 988 In re Heartland Payment Systems, Inc. Securities Litigation, Not Reported in F.Supp.2d... 2009 WL 4798148 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 3 other elements of the claim are governed by the general pleading standards set out in Fed.R.Civ.P. 8(a). Dura Pharmaceutials Inc. v. Broudo, 544 U.S. 336, 346, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005). A court determining whether a complaint meets the requirements of Rule 8(a) must undertake the following two-step analysis: First, the factual and legal elements of a claim should be separated. The District Court must accept all of the complaint's well-pleaded facts as true, but may disregard any legal conclusions. Second, a District Court must then determine whether the facts alleged in the complaint are sufficient to show that the plaintiff has a “plausible claim for relief.” Fowler v. UPMC Shadyside, 578 F.3d 203, 210-11 (3d Cir.2009) (citing Ashcroft v. Iqbal, --- U.S. ----, ---- - ----, 129 S.Ct. 1937, 1949-50, 173 L.Ed.2d 868 (2009)). For purposes of resolving a motion to dismiss, “plausible” does not mean “probable,” but it requires more than “sheer possibility.” Iqbal, 129 S.Ct. at 1949; see also Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). In other words, if the factual allegations are more likely explained by lawful behavior than illegal activity, then the complaint should be dismissed. Iqbal, 129 S.Ct. at 1950. A claim for securities fraud requires the Plaintiff to prove six elements: (1) a material misrepresentation or omission, (2) scienter, (3) a connection with the purchase or sale of a security, (4) reliance, (5) economic loss, and (6) loss causation. Dura Pharmaceuticals, 544 U.S. at 341-42. Defendants attack the sufficiency of only three of these elements: misrepresentation, scienter, and loss causation. II. A Material Misrepresentation or Omission Plaintiffs' allegations of fraud fall into two general categories: allegations that Defendants fraudulently concealed the 2007 SQL attack and allegations that Defendants fraudulently misrepresented the general state of data security at Heartland. This Court's analysis will track the chronology of the allegedly fraudulent acts, first determining whether Plaintiff's failure to disclose the SQL attack in a specific February 2008 conference call was fraudulent, then analyzing whether any of Defendants' affirmative representations later on in 2008 were false, and finally discussing whether any of these affirmative representations-even if not literally false-nonetheless created a duty to disclose the SQL attack. A. Defendants' Failure to Disclose the 2007 SQL Attack During the February 2008 Earnings Conference Call On February 13, 2008, Defendants Carr and Baldwin participated in an earnings conference call with several financial analysts to discuss Heartland's fourth quarter 2007 financial results. Plaintiffs allege that Carr's and Baldwin's statements concealed the 2007 SQL attacks and related security problems. (Compl.¶¶ 91-94.) During the conference call, Carr and Baldwin discussed certain information technology and security expenditures that Heartland made during the last quarter of 2007. These general remarks prompted a couple analysts to ask whether there was any specific security incident that prompted Heartland to make those expenditures, to which Defendants basically answered, “No.” Plaintiffs allege that this was untruthful because it conceals the fact that Heartland suffered the SQL attack. *4 However, careful attention to context demonstrates that Defendants' statements and omissions on this conference call are not fraudulent. 2 The analysts' questions concerned certain expenditures that Heartland made during the fourth quarter of 2007. Obviously, any incident that prompted those expenditures would have occurred before the expenditures were made. The SQL attack occurred on December 26, far too late in the quarter to have been the cause for the million-plus dollar expenditure that was the subject of the analysts' questions. If the analysts had simply asked “Did you suffer a security lapse in fourth quarter 2007?” then Defendants' answers might very well have been misleading. But the analyst was specifically asking whether Heartland suffered a security incident that caused the large fourth quarter IT expenditure. Since the SQL attack did not cause the fourth quarter security expenditure, Defendants answered truthfully when they answered in the negative. 2 This conclusion is buttressed by the full transcript of the earnings call, which Defendants attached as Exhibit D to their Motion to Dismiss. A court ordinarily only considers the Complaint in deciding a motion to dismiss, but when the Complaint relies on other documents, the court may consider those documents as well. In re Burlington Coat Factory, 114 F.3d, 1410, 1426 (3d Cir.1997) (“[A] ‘document Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 49 of 139 PageID: 989 In re Heartland Payment Systems, Inc. Securities Litigation, Not Reported in F.Supp.2d... 2009 WL 4798148 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 4 integral to or explicitly relied upon in the complaint’ may be considered ‘without converting the motion [to dismiss] into one for summary judgment.’ ”) (quoting Shaw v. Digital Equipment, 82 F.3d 1194, 1220 (1996)). Since the Complaint relies heavily and extensively on excerpts from the February 13 conference call, this Court has examined the full transcript to ensure that it fully understands the meaning of Defendants' statements. Plaintiffs allege that Defendant Baldwin made one other misrepresentation on the February 13 conference call- the following statement: With IT security you're either pregnant or you're not. And I think it would be irresponsible for us to know that we have vulnerabilities in our system where we could have something really bad happen that would put the Company in a TJ Maxx position. Now fortunately we've never had anything close to that happen but we could see a scenario where that could have happened. We don't see that anymore. (Compl.¶ 93.) Plaintiff argues that this statement is untrue because Heartland had in fact suffered a significant security breach-the SQL Attack. However, this Court does not read the above paragraph as concealing that fact. A “TJ Maxx position” presumably refers to an incident in 2005 when hackers breached the T.J. Maxx Corporation's computer network and gained information on 45 million credit and debit card accounts. See “TJX Says Theft of Credit Card Data Involved 45.7 Million Cards,” New York Times, March 30, 2007, at C2. As of February 2008, hackers had not stolen any credit card information from Heartland. So at the time the above statement was made, Heartland had not suffered the sort of security problem to which Baldwin was alluding. In other words, in the above-quoted passage, Baldwin was talking about security breaches that resulted in major financial problems. There are no allegations to the effect that, as of February 2008, Heartland had suffered any major headline-making problems of the sort T.J. Maxx experienced in 2005. Furthermore, Baldwin did not categorically assert that Heartland had never suffered any security problems; he merely stated that Heartland had not suffered anything “close to” what T.J. Maxx had suffered. His statement was therefore truthful. B. Affirmative Statements Concerning the General State of Data Security at Heartland 1. The 2007 Annual Report (S.E.C. Form 10-K) Filed on March 10, 2008 *5 Heartland filed its annual report for the year 2007 with the S.E.C. on March 10, 2008. In one part, the report discussed Heartland's network security situation. The report stated that Heartland “place[d] significant emphasis on maintaining a high level of security” and maintained a network configuration that “provides multiple layers of security to isolate our databases from unauthorized access.” (Compl.¶ 95.) The report also warned that Heartland's “computer systems could be penetrated by hackers” and that “[i]f the Company's network security is breached or sensitive merchant or cardholder data is misappropriated, the Company could be exposed to assessments, fines or litigation costs.” (Id.) Plaintiffs argue that these statements are untruthful because Heartland had suffered the SQL attack and had not fully resolved security issues arising out of that attack. (Id. at ¶ 96.) However, there is nothing inconsistent between Defendants' statements and the fact that Heartland had suffered an SQL attack. The fact that a company has suffered a security breach does not demonstrate that the company did not “place significant emphasis on maintaining a high level of security.” It is equally plausible that Heartland did place a high emphasis on security but that the Company's security systems were nonetheless overcome. In fact, given all the money that Heartland spent on security in late 2007 and the fact that Heartland did take steps to fix its security after the SQL breach (id. at ¶ 79), the latter explanation seems much more plausible. Since the alleged facts are more plausibly explained by lawful behavior than illegal deception, the claim does not satisfy Rule 8(a), let alone the PSLRA. Iqbal, 129 S.Ct. at 1949. The fact that there may have been unresolved security issues remaining in the wake of the 2007 attack does not contradict the 10-K either. Once again, the fact that a company faces certain security problems does not of itself suggest that the company does not value data security. Plaintiffs attempt to bolster their allegations by relying on information provided by their confidential witness, a former Senior Developer at Heartland. Plaintiffs Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 50 of 139 PageID: 990 In re Heartland Payment Systems, Inc. Securities Litigation, Not Reported in F.Supp.2d... 2009 WL 4798148 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 5 admit that “Heartland seemed focused on educating its developers about SQL Injection Attacks and figuring out a way to make those attacks less likely in the future” but argue that not enough was done to contain the breach that had already occurred. (Compl.¶ 79.) The former Senior Developer opines that “the Company should have built a new server with a clean copy of the operating system.” (Id.) The former Senior Developer also complained of a variety of other practices at Heartland -unrelated to the 2007 breach or the 2008 data theft- that he felt put Heartland's data security at risk. (Id. at ¶¶ 45-65.) However, one former employee's opinion that Heartland did not do everything it could have done to address the security breach does not render the statement “We place significant emphasis on maintaining a high level of security” false. Furthermore, the cautionary statements in the Form 10-K-warning of the possibility of a breach and the consequences of such a breach-make clear that Heartland was not claiming that its security system was invulnerable. *6 The facts alleged in the complaint do not support an inference that Heartland did not make serious efforts to protect its computer network from security breaches. Furthermore, the 10-K did not make any statements to the effect that the company's network was immune from security breaches or that no security breach had ever occurred. Therefore, the statements in the 10-K were not false or misleading. 2. The November 4, 2008 Conference Call On November 4, 2008, Heartland held another conference call with analysts, this time to discuss third quarter 2008 financial results. On that call, Defendant Carr spoke about Heartland's need to adopt more secure technology for processing transactions. (Id. at ¶ 106.) These statements were a mix of general observations concerning trends in encryption standards as well as indications that Heartland was going to adopt new technology being developed by American Express. (Id.) There is nothing in the Complaint that suggests that these forward-looking statements turned out to be false. They have nothing to do with Heartland's then-existing security situation or the SQL attack, which is the basis for Plaintiffs' fraud claims. (See id. at ¶ 107.) The statements have nothing to do with whether security is a “major driver” of Heartland's interests, and even if they did, they would not be misleading. As discussed above, allegations that Heartland had certain security problems do not by themselves support an inference that Heartland did not take the issue of data security seriously. C. Did Defendants' Statements Concerning the General State of Security at Heartland Trigger a Duty to Disclose the SQL Attack? Plaintiffs also argue that, even if Defendants' affirmative statements concerning the state of data security at Heartland are not in themselves misleading, those statements created a duty to disclose the SQL attack. In general, an omission is only fraudulent in the presence of a duty to disclose, which usually arises “only when there is insider trading, a statute requiring disclosure, or an inaccurate, incomplete, or misleading prior disclosure.” Winer Family Trust v. Queen, 503 F.3d 319, 329 (3d Cir.2007). One affirmative statement does not automatically create a duty to simultaneously disclose all related material information. Rather, an affirmative statement will only create a duty to disclose additional facts if additional disclosures are required to make the affirmative statement not misleading. See id. (citing Brody v. Transitional Hospitals Corp., 280 F.3d 997, 1006 (9th Cir.2002)); Blackman v. Polaroid Corp., 910 F.2d 10, 16 (1st Cir.1990) (en banc)). In this case, none of the allegedly fraudulent statements were rendered misleading by Defendants failure to disclose the SQL attack. Heartland's 10-K only sought to describe how Heartland's security system functioned in a general way; the report did not imply that Heartland had never experienced any security problems. (See Compl. at ¶ 95.) Therefore, the failure to disclose the SQL attack was not misleading in that context. Similarly, the statements on the November 4 conference call only dealt with Heartland's intention to pursue certain security measures in the future. (See Compl. at ¶ 106.) These statements did not become misleading just because Heartland did not disclose past security incidents that might or might not have been relevant to the company's decision to pursue new security measures. The Court does not deny the fact that knowledge of the 2007 breach might have been material to Plaintiffs' investment decisions. If Plaintiffs had known of the SQL attack, they might not have purchased Heartland securities. However, there is no general duty on the part of issuers to disclose every material fact to investors. In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1432 (3d Cir.1997). Since Defendants are not alleged to have made any misleading Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 51 of 139 PageID: 991 In re Heartland Payment Systems, Inc. Securities Litigation, Not Reported in F.Supp.2d... 2009 WL 4798148 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 6 statements, they never had a duty to disclose the 2007 breach. *7 In sum, the Complaint does not identify any material misrepresentations or omissions. The statements Plaintiffs identify do not paint a misleading picture of Heartland's security systems. Defendants were never asked whether they suffered a security breach in late 2007, and the existence of such a breach does not make any of Defendants' statements concerning their security systems misleading. The Complaint therefore fails to allege one of the essential elements of a securities fraud claim and must be dismissed. III. Scienter To the extent that Plaintiffs' claims rest on allegations that Defendants misrepresented the general state of security at Heartland, 3 the Complaint is additionally deficient because it fails to allege scienter. To survive a motion to dismiss, the Complaint must allege facts sufficient to support an inference that Defendants made statements with knowledge that they were false or with recklessness as to whether or not they were false. Avaya, 564 F.3d at 267. Simply put, Plaintiffs do not allege that Defendants knew or had reason to suspect that Heartland's security systems were so deficient that it was false to say that Heartland “place[s] significant emphasis on maintaining a high level of security.” (See Compl. ¶ 95.) According to the Complaint, the only people at Heartland who believed that the company had not adequately addressed the SQL attack were the former Senior Developer quoted above, another Senior Developer named George Duke, and a former Business Analyst. (Id. at ¶¶ 77-83.) Furthermore, none of these people are alleged to have expressed any reservations about security until after the credit card theft was discovered in January 2009. (Id.) This after-the-fact speculation by a handful of lower-level employees does not support the inference that Heartland and its corporate officers were consciously or recklessly dissembling when they stated that the company treated security as one of its central concerns. 3 As discussed in Part II, Plaintiffs allege two general types of fraud-fraudulently omitting to disclose the 2007 SQL attack and fraudulently affirmatively misrepresenting the general state of security at Heartland. This opinion addresses scienter only as it pertains to the latter of these two categories-the affirmative misrepresentations. Plaintiffs seek to bolster their scienter allegations by appealing to what they call the “core business doctrine”- the idea that facts concerning a company's core business will be imputed to corporate officers. However, the cases to which Plaintiffs cite do not establish a rule of law. They simply confirm the uncontroversial proposition that a person's status as a corporate officer, when considered alongside other allegations, can help support an inference that that person is familiar with the company's most important operations. In other words, it is not automatically assumed that a corporate officer is familiar with certain facts just because these facts are important to the company's business; there must be other, individualized allegations that further suggest that the officer had knowledge of the fact in question. See, e.g., In re Advanta Corp. Sec. Litig., 180 F.3d 525, 539 (3d Cir.1999); In re Bio-Technology General Corp. Sec. Litig., 380 F.Supp.2d 574, 596 (D.N.J.2005). *8 Taking into account the Complaint in its entirety, this Court finds that Plaintiffs have not alleged facts sufficient to support an inference that Defendants knew that Heartland was not paying proper attention to its security problems. The allegations do not create the impression that there was any kind of widespread concern that Heartland had not adequately addressed the SQL attack. Therefore, even if there were a handful of lower-level employees who were worried about ongoing problems created by the attack, there is nothing in the Complaint that supports an inference that these concerns were ever relayed to any of the Defendants. And if the Defendants lacked knowledge of any ongoing security problems at Heartland, they could not have acted with the requisite culpability when they claimed that Heartland was taking the issue of data security seriously. Since the Complaint does not adequately allege scienter, it must be dismissed. It is worth noting that the Complaint at times appears to conflate knowledge of the SQL attack with the belief that Heartland faced ongoing security problems as a result of the attack. Assuming that Defendants were aware of the SQL attack, it does not follow necessarily that they believed that Heartland's security systems were deficient or that any problems created by the SQL attack had not been addressed. The Complaint contains no allegations- beyond bare awareness of the SQL attack-that support Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 52 of 139 PageID: 992 In re Heartland Payment Systems, Inc. Securities Litigation, Not Reported in F.Supp.2d... 2009 WL 4798148 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 7 an inference that Defendants believed Heartland had serious ongoing security problems. CONCLUSION Since Plaintiffs have failed to allege the existence of a material misstatement or omission, the Complaint fails to state a claim upon which relief may be granted. To the extent that the Complaint rests on allegations that Defendants misrepresented the general state of security at Heartland, the Complaint is additionally deficient because it fails to allege scienter adequately. Since these failures alone warrant dismissal, the Court will not reach the further questions of whether the Complaint adequately alleges loss causation or whether any of Defendants' statements fall within the PSLRA safe-harbor provision for forward-looking statements. The Complaint will be DISMISSED. It appearing that further specificity would not cure the Complaint's deficiencies, amendment would be futile, so the dismissal will be with prejudice. An order to that effect will follow this opinion. All Citations Not Reported in F.Supp.2d, 2009 WL 4798148 End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works. Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 53 of 139 PageID: 993 Tab 7 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 54 of 139 PageID: 994 Jones v. Perez, 550 Fed.Appx. 24 (2013) Fed. Sec. L. Rep. P 97,777 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 1 550 Fed.Appx. 24 This case was not selected for publication in the Federal Reporter. Not for Publication in West's Federal Reporter. RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT'S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE(WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL. United States Court of Appeals, Second Circuit. Brett S. JONES, individually and on behalf of all others similarly situated, Plaintiff-Appellant, Timothy A. Hutchinson, individually and on behalf of all others similarly situated, Plaintiff, v. Antonio M. PEREZ, Philip J. Faraci, Antoinette P. McCorvey, and Pradeep Jotwani, Defendants-Appellees. No. 13-2195-cv. | Dec. 26, 2013. Synopsis Background: Investor brought putative securities class action against officers of camera and film manufacturing corporation. Defendants moved to dismiss for failure to state a claim. The United States District Court for the Southern District of New York, Harold Baer, Jr., J., 2013 WL 1775374, granted motion. Investor appealed. [Holding:] The Court of Appeals held that defendants' misguided optimism did not support an inference of fraud, as required to state securities fraud claims. Affirmed. West Headnotes (3) [1] Securities Regulation Forecasts, estimates, predictions or projections Camera and film manufacturer's officers' misguided optimism regarding corporation's transition from film to digital did not support an inference of fraud, as required to state securities fraud claims, where public was generally aware that manufacturer was experiencing difficulties making the transition, and investors were aware that manufacturer was encountering liquidity challenges. Private Securities Litigation Reform Act of 1995, § 101(b), 15 U.S.C.A. § 78u-4(b). Cases that cite this headnote [2] Securities Regulation Misrepresentation Investor's conclusory and speculative assertion that camera and film manufacturing corporation's officers lacked a reasonable basis for expressing “comfort” with corporation's current cash position, because they should have known that corporation was experiencing a liquidity crisis was insufficient to raise an inference of fraud, as required to state claim of securities fraud. Private Securities Litigation Reform Act of 1995, § 101(b), 15 U.S.C.A. § 78u-4(b). Cases that cite this headnote [3] Securities Regulation Misrepresentation Allegations that camera and film manufacturing corporation's officers had access to reports showing that its consumer inkjet sales were missing internal forecasts, were not sufficiently particular to state a claim of securities fraud, absent allegation of divergence from publicly disclosed Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 55 of 139 PageID: 995 Jones v. Perez, 550 Fed.Appx. 24 (2013) Fed. Sec. L. Rep. P 97,777 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 2 information. Fed.Rules Civ.Proc.Rule 9(b), 28 U.S.C.A.; Private Securities Litigation Reform Act of 1995, § 101(b), 15 U.S.C.A. § 78u-4(b). Cases that cite this headnote *25 Appeal from a judgment of the United States District Court for the Southern District of New York (Harold Baer, Jr., Judge). UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that the judgment entered on May 1, 2013, is AFFIRMED. Attorneys and Law Firms Andrew S. Love (Susan K. Alexander, Aelish M. Baig, Sunny S. Sarkis, Robbins Geller Rudman & Dowd LLP, San Francisco, CA; Michael I. Fistel, Jr., Marshall P. Dees, Holzer Holzer & Fistel, LLC, Atlanta, GA, on the brief), Robbins Geller Rudman & Dowd LLP, San Francisco, CA, for Appellant. Mark A. Perry (Jonathan C. Dickey, Jennifer L. Conn, Gabrielle Levin, Gibson, Dunn & Crutcher LLP, New York, NY, on the brief), Gibson Dunn & Crutcher LLP, Washington, D.C., for Appellees. PRESENT: REENA RAGGI, DENNY CHIN and CHRISTOPHER F. DRONEY, Circuit Judges. SUMMARY ORDER Plaintiff Brett S. Jones, on behalf of himself and a putative class of investors who acquired Eastman Kodak Company (“Kodak”) securities between July 26, 2011, and January 19, 2012, appeals from the dismissal of his second amended complaint for failure to state securities fraud claims against defendants Antonio M. Perez, Kodak's Chief Executive Officer, and Antoinette McCorvey, Kodak's former Chief Financial Officer, in violation of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, see 15 U.S.C. §§ 78j(b), 78t(a), and Securities and Exchange Commission (“SEC”) Rule 10b-5, see 17 C.F.R. § 240.10b-5. We review a Rule 12(b)(6) dismissal de novo, accepting all factual claims in the complaint as true, and drawing all reasonable inferences in the plaintiff's favor. See ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir.2007). In doing so, we may consider written instruments attached to the complaint, statements or documents incorporated therein by reference, legally required public disclosure documents filed with the SEC, and documents possessed by or known to the plaintiff and upon which he relied in bringing suit. See id. We assume the parties' familiarity with the facts and the record of prior proceedings, which we reference only as necessary to explain our decision to affirm. 1. Section 10(b) and Rule 10b-5 Claims Generally To survive dismissal, securities fraud complaints must satisfy the heightened *26 pleading requirements of Fed.R.Civ.P. 9(b), which requires that the circumstances constituting fraud be “state[d] with particularity,” and the Private Securities Litigation Reform Act (“PSLRA”), see 15 U.S.C. § 78u-4(b), which requires that scienter, i.e. a defendant's “intention to deceive, manipulate, or defraud,” also be pleaded with particularity. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007) (internal quotation marks omitted). To satisfy the PSLRA, a complaint must, “ ‘with respect to each act or omission alleged to [constitute securities fraud], state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.’ ” ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d at 99 (quoting 15 U.S.C. § 78u- 4(b)(2)). That strong inference 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. at 324, 127 S.Ct. 2499. The determination is made by considering “all of the facts alleged, taken collectively,” not by scrutinizing individual allegations in isolation. Id. at 323, 127 S.Ct. 2499. [1] Applying these principles here, we conclude, as the district court did, that the second amended complaint and documents incorporated therein do not permit an inference of the requisite scienter. Jones acknowledges that “the public was generally aware that Kodak was experiencing difficulties making the transition from film to digital,” and that “investors were aware that Kodak was encountering liquidity challenges” in the process. Appellant's Reply Br. 3, 16. Jones does not challenge the accuracy of any of Kodak's financial disclosures, and his allegations of recklessness are undermined by the abundance of disclosures and warnings issued by Kodak both before and throughout the class period regarding Kodak's deteriorating financial condition and Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 56 of 139 PageID: 996 Jones v. Perez, 550 Fed.Appx. 24 (2013) Fed. Sec. L. Rep. P 97,777 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 3 liquidity problems. See Rombach v. Chang, 355 F.3d 164, 176-77 (2d Cir.2004). While defendants arguably took a more optimistic view of Kodak's prospects than many analysts viewing the same publicly available information, “misguided optimism is not a cause of action, and does not support an inference of fraud.” Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1129 (2d Cir.1994); accord Stevelman v. Alias Research Inc., 174 F.3d 79, 85 (2d Cir.1999). Thus, like the district court, we conclude that the more compelling inference from the facts alleged in the second amended complaint is that “[d]efendants properly disclosed relevant information to the public while Kodak was struggling to avoid bankruptcy and that [d]efendants' best efforts did not materialize.” Hutchinson v. Perez, No. 12 Civ. 1073(HB), 2013 WL 1775374, at *4 (S.D.N.Y. Apr. 25, 2013). As to specific statements cited by Jones to claim securities fraud, he has failed to “allege facts and circumstances that would support an inference that defendants knew of specific facts that are contrary to their public statements.” Rombach v. Chang, 355 F.3d at 176. 2. July 26, 2011 Investor Conference Call Jones claims that during a July 26, 2011 investor conference call, defendants misled investors about Kodak's true financial condition by responding to analyst questions about liquidity with statements that they were “comfortable” with Kodak's current and projected cash position, despite knowing “critical facts” concealed from the public: that 70% of Kodak's cash was tied up overseas, that Kodak was experiencing difficulty selling its patents, and that Kodak's consumer inkjet business was missing internal targets. *27 [2] As to the overseas cash holdings, Jones fails to allege why disclosure was necessary absent a basis to think that Kodak would need these funds to meet its year-end projections. Kodak's eventual disclosure of its overseas cash holdings warrants no different conclusion given our rejection of “fraud by hindsight.” Novak v. Kasaks, 216 F.3d 300, 309 (2d Cir.2000). Further, the assertion that defendants lacked a reasonable basis for expressing “comfort” with Kodak's current cash position, because they should have known that Kodak was experiencing a liquidity crisis, is conclusory and speculative and, thus, cannot raise an inference of fraud. See ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d at 99 (“Allegations that are conclusory or unsupported by factual assertions are insufficient.”). 1 Insofar as defendants' comfort with Kodak's cash position was based on a more optimistic view of otherwise publicly available financial information, that alone cannot be deemed “an extreme departure from the standards of ordinary care” capable of establishing scienter through recklessness. Novak v. Kasaks, 216 F.3d at 308 (internal quotation marks omitted). 1 Because we conclude that the July 26, 2011 statements do not raise an inference of scienter, we need not decide whether expressions of “comfort” in this context were “forward-looking” or “puffery.” 3. September 30, 2011 Press Release Jones submits that Kodak's September 30, 2011 press release stating “no intention to file for bankruptcy” can plausibly be viewed as an attempt to mislead investors to think “that bankruptcy was not a possibility at al l.” Appellant's Br. 22. The text of the press release belies this construction because it identifies “bankruptcy” expectations in the release as a “forward-looking statement[ ] as defined in the [PSLRA],” and cautions that “[a]ctual results may differ from those expressed or implied in forward-looking statements” depending on factors adversely affecting Kodak's financial performance and liquidity, including its ability to raise cash and maintain a cash balance sufficient to fund continued investments, capital needs, restructuring payments, and to service debt. J.A. 666-67. Jones's urged construction is further undermined by news reports referenced in the second amended complaint, which indicate that Perez and the media understood the press release to refer to Kodak's present intentions. See, e.g., Mike Spector & Dana Mattioli, Kodak Seeks Help as Fears Mount, Wall St. J., Oct. 1, 2011, J.A. 690-91 (stating that Perez told Kodak employees “the company had no intention of filing for bankruptcy at that time” (emphasis added)). In sum, when the press release is viewed in context, it cannot plausibly be alleged that a reasonable investor would understand defendants to have represented that there was no possibility of Kodak filing for bankruptcy. Rather, the release indicated only that Kodak had no present intention of doing so. Cf. Kleinman v. Elan Corp., plc, 706 F.3d 145, 153 (2d Cir.2013) (holding that even if plaintiff's definition of “top-line results” was correct, “given the context of the statements, no reasonable Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 57 of 139 PageID: 997 Jones v. Perez, 550 Fed.Appx. 24 (2013) Fed. Sec. L. Rep. P 97,777 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 4 investor could have understood the headline to mean anything other than the positive subgroup results”). That Kodak's stock price temporarily increased by 47% following the press release does not compel a different conclusion, where, as here, another plausible reason explains a movement in stock price-i.e., confirmation that a bankruptcy filing was not imminent-because “market reaction is [not] a gauge for falsity.” Id. at 155. Moreover, because the press release *28 cannot plausibly be read to deny the possibility of a bankruptcy, Jones's second interpretation-that defendants' denial of an intention “to file” for bankruptcy was a denial of any intention to “prepare” for a possible bankruptcy-is equally implausible. The same conclusion obtains with respect to Jones's contention that defendants, having chosen to speak on the issue of bankruptcy, were under a continuing duty to disclose the likelihood of bankruptcy. Because the September press release did not suggest that Kodak would not file for bankruptcy in the future, it “lack[ed] the sort of definite positive projections that might require later correction.” In re Time Warner Inc. Secs. Litig., 9 F.3d 259, 267 (2d Cir.1993). [3] Allegations in the second amended complaint, based on statements by confidential witnesses and declarations by defendant McCorvey and Lazard Freres Co., LLC (“Lazard”) in the bankruptcy proceedings, also do not support an inference of scienter. At most, they confirm what was already known to the market, i.e., that Kodak's consumer inkjet business was underperforming, and that Kodak's precarious financial condition was hampering the sale of its digital patents. Jones alleges that defendants had access to reports showing that consumer inkjet sales were missing internal forecasts, but absent any pleading indicating a divergence from publicly disclosed information, this allegation fails the specificity requirements of the PSLRA and Rule 9(b). See Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 196 (2d Cir.2008) (“[W]here plaintiffs contend defendants had access to contrary facts, they must specifically identify the reports or statements containing this information.” (internal quotation marks omitted)). Further, confidential witnesses' assertions that, “internally,” people viewed Kodak's financial state and defendants' actions as indicative of a present intent to file for bankruptcy, do not support a cogent and compelling inference of fraud because none of the confidential witnesses assert direct knowledge that this view was held by defendants. SAC ¶¶ 73, 106, 113, J.A. 127, 139, 142. Cf. New Jersey Carpenters Health Fund v. Royal Bank of Scotland Grp., PLC, 709 F.3d 109, 124 (2d Cir.2013) (holding confidential witness allegations insufficient to support probability that unnamed prior employees would have knowledge attributed to them). While the Lazard Declaration, incorporated into the complaint, states that “on September 12, 2011,” Lazard's engagement was expanded to encompass various possible strategic, financing, and restructuring alternatives, including, “if necessary, a restructuring through chapter 11,” SAC ¶ 92, J.A. 134 (emphasis added), the second amended complaint alleges no fact supporting an inference that, between September 12, 2011, and September 30, 2011, defendants became aware that a bankruptcy restructuring was in fact necessary. This omission, moreover, is fatal to Jones's contention that scienter can plausibly be inferred from defendants' motive to downplay Kodak's liquidity problems in order “to convince the public, and particularly potential buyers of Kodak's patents, that Kodak was not in desperate financial straits and not contemplating bankruptcy.” Appellant's Br. 24. As Jones acknowledges, Kodak was in a “Catch-22 situation,” where negative publicity about its viability was hampering its ability to complete the very transactions that would allow Kodak to avoid bankruptcy. Id. at 31. In this context, where it would defy economic reason for Kodak to make statements that would accelerate a bankruptcy filing, thereby causing more harm to investors, no reasonable inference of fraudulent intent can be drawn from the alleged motive. *29 See Kalnit v. Eichler, 264 F.3d 131, 140-41 (2d Cir.2001) (“Where plaintiff's view of the facts defies economic reason, it does not yield a reasonable inference of fraudulent intent.” (alterations and internal quotation marks omitted)). 4. November 3, 2011 Investor Conference Call Like the district court, we conclude that Jones has failed to allege adequately that Perez made knowing or even reckless misstatements during the November 3, 2011 investor conference call. Jones's allegation of falsity with respect to Perez's statement-“keep in mind that our expected year end cash position does not contemplate a new financing or the sale of [its] IP Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 58 of 139 PageID: 998 Jones v. Perez, 550 Fed.Appx. 24 (2013) Fed. Sec. L. Rep. P 97,777 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 5 portfolio”-conflates Kodak's “year-end cash position” with its ultimate viability. Throughout the class period, Kodak and defendants made clear that the company's 2011 outlook was based on intellectual property licensing transactions, cash generating businesses, and sales of Kodak's non-core assets, and that the projected 2011 year- end cash position did not factor in the sale of digital imaging patents. Thus, because Jones does not allege facts suggesting that Perez was aware that the year-end cash projection depended on the sale of the digital patent portfolio, there is no basis from which to infer that his statement was made with fraudulent scienter. The same conclusion obtains with respect to Perez's statements that quarterly results reflected “continued progress toward establishing digital growth business that will form the nucleus of a new Kodak” and that he had a “high degree of confidence in [Kodak's] ability to execute” its digital growth transformation and a sale of the patents. While subjective opinions may be actionable as fraud if the speaker does not “genuinely and reasonably believe” the professed opinion or if it is totally “without a basis in fact,” the second amended complaint contains no allegations to support such an inference. In re IBM Corporate Secs. Litig., 163 F.3d 102, 109 (2d Cir.1998); see also Kleinman v. Elan Corp., plc, 706 F.3d at 153; In re Time Warner Inc. Secs. Litig., 9 F.3d at 267. The same confidential witness statements and bankruptcy declarations that were insufficient to raise an inference of fraud with respect to September 30, 2011, are equally lacking as to November 3, 2011. Indeed, the Lazard Declaration states that an alternative to bankruptcy was pursued for “several months” after the September 12, 2011 expansion of its engagement, specifically, “an attempt to supplement or replace [Kodak's] $400 million prepetition asset-based revolving credit facility ... with incremental prepetition first lien financing of up to $500 million.” Lazard Decl. ¶ 11, J.A. 174. The Wall Street Journal publicly reported this effort as Kodak's attempt to obtain “rescue financing” in order to “calm investors and quell bankruptcy rumors as the company tries to sell its patents,” Mike Spector & Dana Mattioli, Eastman Kodak Seeks Rescue Financing, Wall St. J., Oct. 25, 2011, J.A. 693-94; see also Dana Mattioli & Mike Spector, Kodak's Dwindling Cash Pile in Focus, Wall St. J., Oct. 31, 2011, J.A. 696-97, and the attempt, its attendant risks, and the failure of other cash generating efforts were disclosed in Kodak's November 3, 2011 SEC filings. Only after a first lien financing transaction could not be arranged did Kodak determine that “a reorganization of [its] operations under chapter 11 protection might be in the best long-term interests of [Kodak] and [its] stakeholders” and, therefore, on “December 8, 2011, [Kodak] authorized Lazard to initiate the process of securing DIP financing to fund a potential [bankruptcy] filing.” Lazard Decl. ¶ 12, J.A. 174. Jones has pleaded no facts to the contrary and, thus, has failed to allege plausibly that Perez lacked a reasonable basis for believing on November 3, 2011, that financing could be obtained *30 to allow Kodak to sell its digital patent portfolio and complete its digital growth transformation without resorting to bankruptcy. In sum, because Jones has failed to plead securities fraud with the particularity required by Rule 9(b) and the PSLRA, the district court correctly dismissed his § 10(b) and Rule 10b-5 claims, as well as his § 20(a) claims for lack of a primary violation. We have considered Jones' remaining arguments on appeal and conclude that they are without merit. Accordingly, the judgment of the district court is AFFIRMED. All Citations 550 Fed.Appx. 24, Fed. Sec. L. Rep. P 97,777 End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works. Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 59 of 139 PageID: 999 Tab 8 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 60 of 139 PageID: 1000 Positive As of: Aug 03, 2016 IN RE: NEVSUN RESOURCES LTD. 12 Civ. 1845 (PGG) UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK 2013 U.S. Dist. LEXIS 162048 September 27, 2013, Decided September 27, 2013, Filed COUNSEL: [*1] For Craig F. Piazza, on behalf of himself and all others similarly situated, Lead Plaintiff: Brian D. Long, Roda & Nast, P.C., Lancaster, PA; Frederic Scott Fox, Sr, Jeffrey Philip Campisi, Pamela A. Mayer, Robert N. Kaplan, Kaplan Fox & Kilsheimer LLP (NYC), New York, NY; Scott Jason Farrell, Rigrodsky & Long, P.A. (GARDEN CITY), Garden City, NY; Seth David Rigrodsky, Rigrodsky & Long, P.A., Wilmington, DE; Timothy John MacFall, Rigrodsky & Long, P.A.(LIS), Garden City, NY. For Scott F. Colebourne, Plaintiff: Brian D. Long, Roda & Nast, P.C., Lancaster, PA; Frederic Scott Fox, Sr, Jeffrey Philip Campisi, Robert N. Kaplan, Kaplan Fox & Kilsheimer LLP (NYC), New York, NY; Seth David Rigrodsky, Rigrodsky & Long, P.A., Wilmington, DE; Timothy John MacFall, Rigrodsky & Long, P.A.(LIS), Garden City, NY. For Nevsun Resources Ltd., Clifford T. Davis, Peter J. Hardie, Scott Trebilcock, Defendants: Jonathan Cobb Dickey, LEAD ATTORNEY, Gabrielle Frances Levin, Gibson, Dunn & Crutcher, LLP (NY), New York, NY; Lee Gordon Dunst, Gibson, Dunn & Crutcher, L.L.P., New York, NY. JUDGES: Paul G. Gardephe, United States District Judge. OPINION BY: Paul G. Gardephe OPINION ORDER PAUL G. GARDEPHE, U.S.D.J.: This is a consolidated putative [*2] class action brought on behalf of purchasers of Defendant Nevsun Resources Ltd.'s common stock between March 31, 2011 and February 6, 2012 (the "Class Period"). According to the Consolidated Class Action Complaint ("Complaint"), Nevsun and its senior management issued materially false and misleading statements concerning operations at Bisha Mine ("Bisha"), in which Nevsun holds a controlling interest. The Complaint alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 Page 1 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 61 of 139 PageID: 1001 and Rule 10b-5. Defendants have moved to dismiss, arguing that the challenged statements are non-actionable forward-looking statements and that Plaintiffs have not pled facts supporting a strong inference of scienter. For the reasons stated below, Defendants' motion to dismiss will be denied. BACKGROUND Nevsun is a "natural resource" company based in Vancouver, British Columbia. (Cmplt. ¶¶ 18, 22) Its common shares are traded on both the New York Stock Exchange Amex and the Toronto Stock Exchange. (Id. ¶ 18) Nevsun's only revenue-producing property is the Bisha Mine, a gold and base metal (copper and zinc) mine in Eritrea. (Id. ¶¶ 2, 24) On February 7, 2012, Nevsun issued a press release announcing [*3] that (1) it had overstated gold ore reserves at the Bisha Mine by 30-35%, (or approximately 1.2 million tons); and (2) 2012 gold production at Bisha Mine would be "about half of what Nevsun was previously expecting." (Cmplt. ¶¶ 4, 14, 92-93) Nevsun blamed a "resource estimate used for mine planning" for the overstatement. (Id. ¶ 93) The value of Nevsun's stock dropped nearly 31% in one day, wiping out approximately $388 million in market capitalization. (Id. ¶¶ 96, 166) Plaintiffs allege that Nevsun; its President and Chief Executive Officer, Cliff F. Davis; its Chief Financial Officer, Peter Hardie; and its Vice President of Business Development and Investor Relations, Scott Trebilcock, violated the Securities Exchange Act through a series of false statements and omissions of material fact about the gold reserves at Bisha. (Id. ¶¶ 27, 31, 34) The alleged Class Period begins on March 28, 2011 -- when Defendants issued what Plaintiffs assert is a misleading press release concerning gold ore reserves at Bisha -- and ends on February 6, 2012 the day before the announcement concerning Bisha's reduced gold production. (Cmplt. ¶¶ 4, 14, 93, 107, 183) The Complaint alleges that Defendants false [*4] statements of material fact and omissions of material fact include the following: (a) Nevsun's reported gold ore reserves were materially overstated by approximately 1.2 to 1.3 million tons, or by 35%, an overstatement of approximately 190,000 to 230,000 ounces of gold, (representing lost sales of approximately $303 to $368 million based on the price of gold per ounce as reported by Nevsun as of June 30, 2012 ($1,599 per ounce)); (b) Defendants failed to disclose that they caused Nevsun to progress through Bisha's Oxide zone materially faster than reported because Defendants encountered pockets of worthless waste rock instead of gold ore, as reflected in an ever increasing Strip Ratio, indicating that Bisha's gold ore reserves would be exhausted sooner than Defendants reported; (c) Defendants failed to disclose that Bisha's three most senior executives left Nevsun/Bisha Mining Share Company; (d) Defendants failed to disclose that the Company's Oxide reserve model was materially defective, as evidenced by routine reconciliation reports, actual production at the Bisha Mine and mining statistics that showed the gold ore mined in the Oxide zone at Bisha was materially less than the gold ore [*5] reserves Defendants reported to investors. Indeed, Defendants knew that Nevsun's resource Oxide reserve model was so deficient that in the Fall 2011, Defendants caused two outside engineering firms to review and "rebuild" the model; and (e) Defendants failed to disclose that, as a result of the overstatement of gold ore reserves, the Company's gold production in 2011 was unsustainable and Nevsun's 2012 and 2013 cash flows were materially negatively affected. Bisha's gold production was ultimately revised downward, to 280,000 to 300,000 ounces for 2012, a decline of between 79,000 to 99,000 ounces (32% to 37%) from the Bisha Mine's 2011 production level of 379,000 ounces, representing a loss of between approximately $126 to $158 million in sales and cash flows in 2012 (at $1,599 per ounce). Page 2 2013 U.S. Dist. LEXIS 162048, *2 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 62 of 139 PageID: 1002 (Id. ¶ 106) I. FACTUAL BACKGROUND1 1 The Court's statement of facts is drawn from the Complaint's factual allegations, which are presumed to be true for purpose of this motion. In deciding a motion to dismiss, a Court "may consider any written instrument attached to the complaint, statements or documents incorporated into the complaint by reference, legally required public disclosure documents filed with [*6] the SEC, and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit." ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007). Accordingly, in connection with this motion, the Court has considered the exhibits attached to the Levin Declaration, which fall within this rule. In December 2007, Nevsun entered into an agreement with the Eritrean National Mining Company ("ENAMCO") in which ENAMCO took a 10% stake in the mine and agreed to purchase an additional 30% interest at market value, once Bisha made its first gold shipment. (Id. ¶ 64) On January 4, 2011, Nevsun issued a press release announcing the "successful first gold pour" at the Bisha Mine, and the first gold shipment from Bisha took place on January 28, 2011. (Id. ¶¶ 66-67) This shipment triggered a 90-day valuation period for ENAMCO's 30% stake. (Id. ¶ 67) Nevsun began commercial production of gold at the Bisha Mine on February 22, 2011. (Id. ¶ 68) Bisha has three mining zones: the top or "Oxide" zone, which contains gold ore; the middle or "Supergene" zone, which contains copper; and the lowest or "Primary" zone, which primarily contains zinc. (Id. ¶ 5) After beginning commercial [*7] production of gold on February 22, 2011, the Complaint alleges that Defendants quickly learned that the Oxide Zone -- where the gold ore was located -- contained a much high percentage of waste rock, and a lower percentage of gold ore, than had been anticipated and reported. (Id. ¶¶ 9, 73) This discovery meant that Bisha's gold ore reserves would be exhausted sooner than had been reported, negatively affecting Nevsun's cash flow and valuation. (Id. ¶ 74) On March 28, 2011, Defendants issued a press release stating that Bisha Mine had gold ore reserves of 4.651 million tons and that there were 919,000 ounces of gold in the Oxide zone of the mine. (Id. ¶ 107) Defendants further represented that Bisha's 2011 Strip Ratio -- the ratio of waste rock mined compared to valuable gold ore -- was 2.71, and that Defendants planned a reserve "restatement" by the end of 2011 that would reflect further increased gold reserves. (Id. ¶¶ 7, 111) The Complaint alleges that the Strip Ratio is an important metric for investors and affects the value of a mining company's stock, because it reflects the time and expense necessary to mine a certain amount of gold. (Id. ¶¶ 7, 57) "A material increase in Strip Ratio [*8] was a red flag because it indicates an increase in expenses, including increased costs and expenses for labor, water and diesel fuel, and importantly, exhaustion of the Oxide zone sooner than reported." (Id. ¶ 57) Plaintiffs allege that the March 28, 2011 press release contains several materially false statements. Plaintiffs claim that Bisha's gold ore reserves in the Oxide zone were overstated by approximately 1.2-1.3 million tons, or by 35%, and that the ounces of gold in Bisha's Oxide zone were overstated by approximately 190,000 to 230,000 ounces. (Id. ¶ 108) Plaintiffs further represent that, as of late March 2011, Bisha's strip ratio was actually 4.9, approximately 81% higher than the Strip Ratio reported in Defendants' press release. (Id. ¶ 72) On April 1, 2011, Nevsun filed its 2010 Annual Report with the SEC. The Annual Report represented that Bisha's gold ore reserves were 28.3 million tons, that the mine held 919,000 ounces of gold in the Oxide zone, and "that Bisha's life time Strip Ratio was 4.2." (Id. ¶ 113) Plaintiffs claim that all of these statements were false, for the reasons stated above. (Id. ¶ 114) On April 6, 2011, Defendants issued a press release discussing operating [*9] highlights for the quarter ending March 31, 2011. (Id. ¶ 117) The press release states that "[t]he Bisha mine continues to perform very well and is now producing over 1,000 oz gold per day." (Id.) On April 14, 2011, Defendant Trebilcock made a presentation at the Denver Gold Group European Gold Forum in Switzerland in which he stated that Nevsun had increased its estimate of gold reserves at Bisha "from 20 to 28 million tonnes," and that Nevsun's "plan is to bring the total reserve table up to 40 million tonnes by the end Page 3 2013 U.S. Dist. LEXIS 162048, *5 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 63 of 139 PageID: 1003 of the year." (Id. 119) Plaintiffs claim that Trebilock's statements were false and misleading because Bisha's gold reserves were not increasing, and in fact were overstated. (Id. ¶¶ 108, 110, 120) On May 11, 2011, Nevsun announced its results for the first quarter of 2011. Nevsun reported that the strip ratio for the three-month period ending March 31, 2011 was 4.9, which was "in line with expectations." (Levin Decl., Ex. I (5/11/11 6-K) Management Discussion and Analysis ("MD&A"), at 3) By June 30, 2013, however, the Strip Ratio had increased to 5.1,2 but Defendants did not disclose the increase to investors. (Cmplt. ¶ 77) Indeed, when asked about the strip ratio [*10] during an August 11, 2011 conference call with investors, Defendant Davis falsely represented that Bisha was stripping 20,000 tons of rock per day, indicating that the strip ratio was unchanged at 4.9. (Id. ¶ 137) Plaintiffs allege that Bisha was actually stripping 23,000 tons of rock per day -- approximately 15% more than Davis represented -- and that when compared with the amount of gold ore that was mined per day, correlates to a strip ratio of 5.1. (Id.) Throughout the fall of 2011, Defendants represented to investors that Bisha "continues to perform very well" and "in excess of plan," despite knowing that conditions at the mine had deteriorated, as reflected in a steadily increasing strip ratio. (Id. ¶¶ 109-110, 112, 117, 130, 139, 158) 2 Defendants dispute that the strip ratio in June 30, 2011 was 5.1, arguing that Plaintiff's math is wrong. (Def. Br. 15 n.17) However, Defendants disclosed the 5.1 number in their August 8, 2012 6-K. (See Levin Decl., Ex. Z at MD&A -- 2012 Second Quarter, at 5) The Complaint further alleges that Defendants were aware of the true nature of the gold reserves and the true strip ratios because they received real-time information concerning "the Bisha Mine's [*11] mining statistics and production records" through use of specialized computer software. (Id. ¶¶ 58-63, 75) Plaintiffs further allege that the negative trend in strip ratio would have been obvious to Defendants "based on routine reconciliations of actual production to the reported reserves and through the day to day observation of production." (Id. ¶ 75) In addition, the mine's on-site General Manager -- Stanley C. Rogers -- reported directly to Defendants. (Id. ¶ 53) Plaintiffs allege that Defendants' material misstatements and omissions about the Bisha Mine's gold reserves and the ever-increasing strip ratio were motivated in part by their then ongoing negotiations with ENAMCO to sell it a 30% stake in the mine. The amount of gold reserves and the strip ratio would affect the purchase price. (Id. ¶¶ 4, 78-80) In August 2011, Defendants and ENAMCO agreed to a purchase price of $253 million for ENAMCO's 30% stake, resulting in a personal gain to Defendants Davis, Hardie, and Trebilcock, because their compensation was affected by the sale. (Id. ¶¶ 78-80, 177-179; Levin Decl., Ex. Y (May 2012 Form 6-K), at 5-6) By September 2011, Defendants' transaction with ENAMCO had caused Nevsun's stock [*12] price to reach Class Period-highs. (Id. ¶ 82) While the stock was trading at record highs, the negative trend in the Strip Ratio and in the amount of gold reserves continued, and no disclosure of this trend was made to investors. For example, Defendants knew that the true Strip Ratio for the second half of 2011 was 6.6, but did not disclose that to investors. (Id. ¶ 160) Meanwhile, Defendants Davis and Hardie sold their holdings in Nevsun's common stock. On September 2 and 6, 2011, Hardie sold all of his 180,000 shares of Nevsun common stock for approximately $1.3 million. (Id. ¶ 82) On September 18, 2011, Davis sold 224,600 shares for $1.5 million. (Id. ¶ 83) In late 2011, Defendants hired AGP Mining Consultants ("AGP") and another engineering firm to "rebuild Bisha's Oxide reserve model." (Id. ¶ 86) Plaintiffs argue that this step -- which was not disclosed to investors -- demonstrates that Defendant knew that their current model for determining Bisha's gold ore reserves was not reliable. (Id. ¶¶ 86, 144) By November 2011, the three senior executives on-site at the Bisha Mine -- Rogers, Vickers, and Pretorius -- had all left the Company. Their departure was likewise not publicly disclosed. [*13] (Id. ¶¶ 11, 84-85) On January 10, 2012, Nevsun issued a press release stating that "[t]he Bisha Mine continued to operate in excess of plan for gold recovery and maintained planned milling and gold production rates in Q4." (Id. ¶ 90) Defendant Davis "congratulate[d] the Bisha team for a strong performance." (Id.) The press release did not disclose the overstatement of the gold reserves, the steady increase in Strip Ratio, Defendants' decision to hire two engineering firms to rebuild the Company's model for determining gold ore reserves at the Bisha Mine, or that Bisha's entire on-site senior management team had left Page 4 2013 U.S. Dist. LEXIS 162048, *9 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 64 of 139 PageID: 1004 the Company. (Id. ¶ 91) Less than a month later, on February 7, 2012, Defendants disclosed to investors that Nevsun's gold ore reserves in the Oxide zone had been overstated by 35%; that the amount of gold that Bisha would produce in 2012 would be about half of what Nevsun had previously represented to investors; and that they had hired engineers to rebuild their gold ore reserve model. (Id. ¶¶ 14, 92-93) On a conference call with analysts that day, Davis offered this explanation for the overstatement: "we were progressing through the [Oxide zone] much more quickly" and "there [*14] were significant pockets that we would have hoped had been grade and [gold] ore previously that we ended up sending to the waste pile." (Id. ¶ 95) An analyst on the call asked Davis whether what he was "saying is [that] the strip ratio was basically a lot higher in 2011 than you thought?" Davis answered, "Exactly." (Id.) The overstatement of gold reserves represents a loss of sales and cash flows of approximately $126 to $158 million for 2012 and 2013. (Id. ¶ 106(e)) By the next day -- February 8, 2012 -- Nevsun's stock had fallen 31%. (Id. ¶ 14) II. PROCEDURAL HISTORY On March 13, 2012, the first of two putative securities fraud class action lawsuits was filed on behalf of investors in Nevsun common stock during the Class Period. (Dkt. No. 1) On June 28, 2012, this Court consolidated the two actions and appointed Lead Plaintiff and Lead Counsel. (Dkt. No. 16) The Consolidated Class Action Complaint was filed on August 12, 2012. (Dkt. No. 18) Defendants filed their motion to dismiss on November 7, 2012. (Dkt. No. 19) DISCUSSION I. LEGAL STANDARD A. Motion to Dismiss "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief [*15] that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007)). "In considering a motion to dismiss . . . the court is to accept as true all facts alleged in the complaint," Kassner v. 2nd Ave. Delicatessen Inc., 496 F.3d 229, 237 (2d Cir. 2007) (citing Dougherty v. Town of N. Hempstead Bd. of Zoning Appeals, 282 F.3d 83, 87 (2d Cir. 2002)), and must "draw all reasonable inferences in favor of the plaintiff." Id. (citing Fernandez v. Chertoff, 471 F.3d 45, 51 (2d Cir. 2006)). A complaint is inadequately pled "if it tenders 'naked assertion[s]' devoid of 'further factual enhancement,'" Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 557), and does not provide factual allegations sufficient "to give the defendant fair notice of what the claim is and the grounds upon which it rests." Port Dock & Stone Corp. v. Oldcastle NE., Inc., 507 F.3d 117, 121 (2d Cir. 2007) (citing Twombly, 550 U.S. at 555). "In considering a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6), a district court may consider the facts alleged in the complaint, documents attached to the complaint as exhibits, and documents [*16] incorporated by reference in the complaint." DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010) (citing Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002); Hayden v. County of Nassau, 180 F.3d 42, 54 (2d Cir. 1999)). Moreover, "[w]here a document is not incorporated by reference, the court may never[the]less consider it where the complaint 'relies heavily upon its terms and effect,' thereby rendering the document 'integral' to the complaint." DiFolco, 622 F.3d at 111 (quoting Mangiafico v. Blumenthal, 471 F.3d 391, 398 (2d Cir. 2006)). A court may also consider "legally required public disclosure documents filed with the SEC." ATSI Commc'ns, Inc, 493 F.3d at 98. B. Securities Fraud "A complaint alleging securities fraud pursuant to Section 10(b) of the Securities Exchange Act is subject to two heightened pleading standards." In re Gen. Elec. Co. Sec. Litig., 857 F. Supp. 2d 367, 383 (S.D.N.Y. 2010). First, the complaint must satisfy Federal Rule of Civil Procedure 9(b), which requires that "the circumstances constituting fraud . . . shall be stated with particularity." Fed. R. Civ. P. 9(b). Second, the complaint must meet the pleading requirements of the Private [*17] Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4(b). The heightened pleading requirement under Rule 9(b) "serves to provide a defendant with fair notice of a Page 5 2013 U.S. Dist. LEXIS 162048, *13 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 65 of 139 PageID: 1005 plaintiff's claim, safeguard his reputation from improvident charges of wrongdoing, and protect him against strike suits." ATSI Communications, Inc., 493 F.3d at 99. Thus, a securities fraud complaint based on misstatements must "'(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.'" Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004) (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)). Moreover, under the PSLRA, a plaintiff must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2); see Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313, 127 S. Ct. 2499, 168 L. Ed. 2d 179 (2007) ("The PSLRA requires plaintiffs to state with particularity both the facts constituting the alleged violation, and the facts evidencing scienter, i.e., the defendant's intention to deceive, manipulate, [*18] or defraud."). "To qualify as 'strong' within the intendment of [the PLSRA], . . . an inference of scienter must be more than merely plausible or reasonable -- it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent." Tellabs, 551 U.S. at 314; see also id. ("[T]o determine whether a complaint's scienter allegations can survive threshold inspection for sufficiency, a court governed by [the PLSRA] must engage in a comparative evaluation; it must consider, not only inferences urged by the plaintiff . . . but also competing inferences rationally drawn from the facts alleged."). "A complaint will survive . . . only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged." Id. at 324. I. THE COMPLAINT ADEQUATELY ALLEGES CLAIMS UNDER SECTION 10(B) OF THE EXCHANGE ACT Defendants contend that Plaintiffs' claims under Section 10(b) of the Securities Exchange Act of 1934 must be dismissed because "none of Defendants' alleged misstatements or omissions is actionable as a matter of law." (Def. Br. 8) Defendants argue that the alleged misrepresentations and omissions [*19] concerning Bisha's gold reserves, Strip Ratio, and expected gold production for 2012 are non-actionable "forward-looking statements" and are protected by the "bespeaks caution" doctrine. (Def. Br. 9 & n.11) Defendants further argue that statements that Bisha "continues to perform well" and is operating "in excess of plan" are non-actionable statements of corporate optimism or puffery. (Id. at 11-12) With respect to alleged omissions, Defendants assert that they had no duty to disclose that Vickers, Pretorius, and Rogers had left the company, or that there were "negative trends" at the mine. (Id. at 13-16) Finally, Defendants argue that they did not "make" certain statements pursuant to Janus Capital Group., Inc. v. First Derivative Traders, 131 S. Ct. 2296, 180 L. Ed. 2d 166 (2011). (Id. at 16) A. Statutory Framework Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful "for any person, directly or indirectly . . . [t]o use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance" in violation of the rules set forth by the Securities and Exchange Commission ("SEC") for the protection of investors. 15 U.S.C. § 78j. Pursuant [*20] to SEC Rule 10b-5, promulgated thereunder, it is unlawful: (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-5. To sustain a private cause of action for securities fraud under Section 10(b) and Rule 10b-5 a plaintiff must prove (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission Page 6 2013 U.S. Dist. LEXIS 162048, *17 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 66 of 139 PageID: 1006 and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation. Stoneridge Inv. Partners, LLC v. Scientific--Atlanta, Inc., 552 U.S. 148, 157, 128 S. Ct. 761, 169 L. Ed. 2d 627 (2008) (citing Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S. Ct. 1627, 161 L. Ed. 2d 577 (2005)). B. The Complaint Adequatel Alleges Actionable Misstatements or Omissions 1. The [*21] PSLRA Safe Harbor for Forward-Looking Statements a. Applicable Law "The PSLRA established a statutory safe-harbor for forward-looking statements." Slayton v. Am. Exp. Co., 604 F.3d 758, 765 (2d Cir. 2010). Under the PSLRA, where a private action . . . is based on an untrue statement of a material fact or omission of a material fact necessary to make the statement not misleading, [a defendant] shall not be liable with respect to any forward-looking statement . . . if and to the extent that -- (A) the forward-looking statement is -- (i) identified as a forward-looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement; or (ii) immaterial; or (B) the plaintiff fails to prove that the forward-looking statement -- . . . (ii) if made by a business entity; was -- (I) made by or with the approval of an executive officer of that entity; and (II) made or approved by such officer with actual knowledge by that officer that the statement was false or misleading. 15 U.S.C. § 78u-5(c)(1). "The safe harbor is written in the disjunctive; that is, a defendant is not liable if [*22] the forward-looking statement is identified and accompanied by meaningful cautionary language or is immaterial or the plaintiff fails to prove that it was made with actual knowledge that it was false or misleading." Slayton, 604 F.3d at 766. b. Analysis Defendants argue that the statements Plaintiffs cite in Defendants' March 28, 2011 press release are "forward-looking statements" and are accompanied by "meaningful cautionary language." (Def. Br. 9) For example, Defendants' 2010 Form 40-F warns that the Company's reserve figures are "estimates," "inherently uncertain," and are a "prediction of what mineralization might be found to be present." (Levin Decl., Ex. E (2010 40-F) at 3; Annual Information Form ("AIF") at III, 6, 9; MD&A, at 8-9) The Form 40-F also states that there could be a "material downward or upward revision" of the reserve estimates. (Id., AIF at 6, MD&A at 8) Page 7 2013 U.S. Dist. LEXIS 162048, *20 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 67 of 139 PageID: 1007 Forward-looking statements include only those which "speak predictively about the future, such as . . . a statement of the plans and objectives of management for future operations." Gissin v. Endres, 739 F. Supp. 2d 488, 505 (S.D.N.Y. 2010) Here, the Complaint's factual allegations -- which this Court must accept [*23] as true for purposes of Defendants' motion to dismiss -- include that Defendants knew at the time they issued the March 28, 2011 press release that the gold reserves were overstated and that the Strip Ratio was much less favorable than was represented. (Cmplt. ¶ 76) The Complaint further alleges that Defendants knew that their representations were false because they had access to real-time mining statistics, and production reconciliation reports, demonstrating that the Strip Ratio was much higher than represented in the press release, and that mining through the Oxide zone was proceeding much faster than reported. (Id. ¶¶ 74-77). Because the statements cited by Plaintiffs are representations of present fact, they do not fall within the PSLRA's safe harbor for forward-looking statements. See Rombach, 355 F.3d at 173 ("Cautionary words about future risk cannot insulate from liability the failure to disclose that the risk has transpired."); see also In re Nortel Networks Corp. Sec. Litig., 238 F. Supp. 2d 613, 629 (S.D.N.Y. 2003). ("'[I]t is well recognized that even when an allegedly false statement has both a forward-looking aspect and an aspect that encompasses a representation of present [*24] fact, the safe harbor provision of the PSLRA does not apply.'" (quoting In re APAC Teleservice, Inc. Sec. Litig., No. 97 Civ. 9145, 1999 U.S. Dist. LEXIS 17908, 1999 WL 1052004, at *7 (S.D.N.Y. Nov. 19, 1999))).3 3 In a footnote, Defendants contend that their statements concerning gold reserves are protected by the "bespeaks caution" doctrine, under which alleged misrepresentations are immaterial and therefore not actionable if "it cannot be said that any reasonable investor could consider them important in light of adequate cautionary language." Halperin v. eBanker USA.com, Inc., 295 F.3d 352, 357 (2d Cir. 2002). (Def. Br. 9 n.11) The doctrine does not apply, however, where, as alleged here, "a defendant knew that its statement was false when made." Gabriel Capital, L.P. v. NatWest Fin., Inc., 122 F. Supp. 2d 407, 419 (S.D.N.Y. 2000); see also Milman v. Box Hill Systems Corp., 72 F. Supp. 2d 220, 231 (S.D.N.Y. 1999) ("[N]o degree of cautionary language will protect material misrepresentations or omissions where defendants knew their statements were false when made."). 2. Representations that are "Puffery" Defendants argue that certain statements Plaintiffs rely on -- including that Bisha "continues to perform well," [*25] "in excess of plan," "ha[s] an impeccable record, and is "well positioned" -- are non-actionable statements of corporate optimism or puffery or non-actionable opinion. (Def. Br. 11-12 (citing Cmplt. ¶¶ 109, 117, 130, 139, 148, 156, 158-59)) Statements of "puffery" are not actionable as securities fraud because investors do not rely on "generalizations regarding integrity, fiscal discipline and risk management." In re JP Morgan Chase Sec. Litig., 363 F. Supp. 2d 595, 633 (S.D.N.Y. 2005) (citing Lasker v. N.Y. State Elec. & Gas Corp., 85 F.3d 55, 59 (2d Cir. 1996) (statements that a company refused to "compromise its financial integrity," that it had a "commitment to create earnings opportunities" and that these "business strategies [would] lead to continued prosperity" constituted "precisely the type of 'puffery' that this and other circuits have consistently held to be inactionable")). "Similarly, statements of 'corporate optimism' do not give rise to securities violations because 'companies must be permitted to operate with a hopeful outlook.'" In re Ambac Fin. Grp., Inc. Sec. Litig., 693 F. Supp. 2d 241, 272 n.35 (S.D.N.Y. 2010) (quoting Rombach, 355 F.3d at 174). Similarly, statements [*26] of opinion are generally not-actionable. See Fait v. Regions Fin. Corp., 655 F.3d 105, 110 (2d Cir. 2011) (holding that under Sections 11 and 12 of the Securities Act of 1933, "liability [for opinions] lies only to the extent that the statement was both objectively false and disbelieved by the defendant at the time it was expressed."); City of Omaha, Neb. Civilian Employees' Ret. Sys. v. CBS Corp., 679 F.3d 64, 67 (2d Cir. 2012) (extending Fait to claims under Section 10(b)). Here, when examined in context, the statements that Defendants challenge as puffery or expressions of opinion are in fact non-actionable. Moreover, none of these statements address Bisha's gold reserves, strip ratio, or life of mine -- the areas in which Plaintiffs allege Defendants made misrepresentations: Page 8 2013 U.S. Dist. LEXIS 162048, *22 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 68 of 139 PageID: 1008 o On October 6, 2011, Defendants issued a press release stating that "[t]he Bisha Mine continues to operate in excess of plan for mill gold recovery" and that Bisha had an "impeccable track record." (Cmplt. ¶ 139 (emphasis added)) o On November 14, 2011, during a conference call with investors, Davis stated: I am going to go through a lot of numbers that truly demonstrate what a great operation the Bisha Mine really [*27] is. We produced 110,000 ounces of gold in Q3 compared to 93,000 in Q2 and 75,000 in Q1. Our total year-to-date production for 2011 is 278,000 ounces to September 30. We continue to produce at a rate of over 1000 ounces of gold per day, and during October we broke through the 300,000 accumulative ounces produced. Things are going very well, indeed. (Id. ¶ 148 (emphasis added)) o On November 21, 2011, Nevsun issued a press release, which quoted Davis as stating: "Nevsun is well positioned to fund growth and provide a dividend return to our shareholders . . . Today's increased dividend further differentiates Nevsun from its peer group and demonstrates our confidence in future cash flow." (Id. ¶ 156 (emphasis added)) o On January 10, 2012, Nevsun issued a press release which quoted Davis as stating "2011 was a very successful year. . . . I would like to congratulate the Bisha team for a strong performance, producing 379,000 ounces of gold in the first year of operations at Bisha. We look forward to 2012. . . ." (Id. ¶ 159 (emphasis added)) Plaintiffs do not contend that Defendants made misleading statements about actual gold production at Bisha in 2011. Accordingly, to the extent that the [*28] above statements address that issue, they do not provide a basis for liability. Moreover, courts have generally not found actionable statements such as "things are going very well," a company is "well positioned," or operations are "successful," unless the statements addressed concrete and measurable areas of the defendant company's performance. For example, in Ambac Financial Group, Inc. Securities Litigation, Defendants reported that "Ambac's CDO portfolio was currently outperforming the market and relevant indices." 693 F. Supp. 2d at 272. The court held that this statement was not "puffery" or "corporate optimism" because it "convey[ed] something concrete and measurable about Ambac's financial situation, and a reasonable investor could certainly find [such a statement] important to the 'total mix' of information available." Id. Likewise, in Novak v. Kasaks, the Second Circuit held that certain statements were not puffery because they were specifically tied to alleged false and misleading statements about retail chain AnnTaylor's inventory. 216 F.3d 300, 315 (2d Cir. 2000). In that case, Plaintiffs alleged that Defendants made materially false and misleading statements about AnnTaylor's [*29] financial performance. Id. at 303. Plaintiffs complained in particular about AnnTaylor's "so-called 'Box and Hold' practice, whereby a substantial and growing quantity of out-of-date inventory was stored in several warehouses during the Class Period without being marked down." Id. at 304. AnnTaylor did not distinguish "Box and Hold" inventory from new inventory, or write-off any of the "Box and Hold" inventory. Instead, the defendants described AnnTaylor's inventory as "'under control,' 'in good shape,' and at 'reasonable' or 'expected' levels; stating that 'no major or unusual markdowns were anticipated'; and attributing rising levels of inventory to growth, expansion, and planned future sales." Id. The Second Circuit held that these statements were not "puffery" or "corporate optimism," noting that the Complaint alleged that the defendants made these statements "while they allegedly knew that the contrary was true. Assuming, as we must at this stage, the accuracy of the plaintiffs' allegations about AnnTaylor's Page 9 2013 U.S. Dist. LEXIS 162048, *26 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 69 of 139 PageID: 1009 "Box and Hold" practices, these statements were plainly false and misleading." Id. at 315. Here, by contrast, Defendants' optimistic statements do not address the subjects about [*30] which Plaintiffs claim Defendants made false and misleading statements: Bisha's gold reserves, strip ratio, and life of mine. Statements addressing matters about which Plaintiffs have not claimed that Defendants made misleading statements -- such as Bisha's actual gold production in 2011 -- or statements expressing a general view that "things are going well," that the company is "well positioned," or that a year was "successful" are generally not actionable. See Lasker 85 F.3d 55 at 59 (general statements such as touting the company's "commitment to create earnings opportunities" and that certain "business strategies [would] lead to continued prosperity" constituted "precisely the type of 'puffery' that this and other circuits have consistently held to be inactionable")). Moreover, statements that "things are going very well," that Bisha had an "impeccable track record," that Nevsun was "well positioned," and that "2011 was a very successful year" are -- in the context in which they were said here -- non-actionable statements of opinion. Accordingly, Plaintiffs cannot base their Section 10(b) claim on these statements. 3. Plaintiffs have Pled Materially False Statements or Omissions about [*31] the Bisha Mine's Operations The Court concludes that Plaintiffs have adequately pled materially false statements relating to the Bisha Mine's strip ratio, gold reserves, and life of mine. Plantiffs have pled facts demonstrating that strip ratio is a critical metric for analysts and investors, and that strip ratio has important implications for calculating reserves and life of mine. They have also pleaded facts demonstrating that Defendants repeatedly issued statements that represented Bisha's strip ratio to be lower than they then knew it to be. See Caiola v. Citibank, N.A., 295 F.3d 312, 331 (2d Cir. 2002) ("upon choosing to speak, one must speak truthfully . . . [and] accurate[ly]"); In re Gen. Elec. Co. Secs. Litig., 857 F. Supp. 2d 367, 387 (S.D.N.Y. 2012) ("once a company chooses to speak . . . 'it has a duty to disclose any additional material fact 'necessary to make the statements [already contained therein] not misleading'") (quoting In re CitiGroup Inc. Bond Litig., 723 F. Supp. 2d 568, 590 (S.D.N.Y.2010)); In re Sanofi-Aventis Secs. Litig., 774 F. Supp. 2d 549, 561 (S.D.N.Y. 2011) (noting that under Section 10(b), "a duty may arise as a result of the ongoing duty to avoid rendering [*32] existing statements misleading by failing to disclose material facts"). As to Defendants' failure to disclose the departure of its entire on-site management team at Bisha, or its retention of two engineering firms to re-build the reserves model on which prior estimates of gold reserves disseminated to investors had been based, the Court cannot say at this stage of the proceedings that such information would not have been material to investors. See ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 197 (2d Cir. 2009) ("'[A] complaint may not properly be dismissed . . . on the ground that the alleged misstatements or omissions are not material unless they are so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance.'" (quoting Ganino v. Citizens Utils. Co., 228 F.3d 154, 162 (2d Cir. 2000)).4 4 The Complaint also alleges that Defendants violated Item 303 of SEC Regulation S-K in failing to disclose the negative trends at the Bisha Mine. (Cmplt. ¶ 194) Defendants argue that Plaintiffs cannot base their Section 10(b) claim on a violation of Item 303, which requires a company in certain [*33] circumstances to disclose "any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations." 17 C.F.R. § 229.303(a)(3)(ii). (Def. Br. 13) This Court agrees. In the Second Circuit, "[i]t is far from certain that the requirement that there be a duty to disclose under Rule 10b-5 may be satisfied by importing the disclosure duties from S-K 303." In re Canandaigua Sec. Litig., 944 F. Supp. 1202, 1209 n.4 (S.D.N.Y. 1996); see also In re Quintel Entm't Inc. Sec. Litig., 72 F. Supp. 2d 283, 293 (S.D.N.Y. 1999) ("In light of the absence of authority for the position that a failure to comply with the disclosure duties under Item 303 can be the basis of a § 10(b) action, this Court refuses so to hold."); accord Oran v. Stafford, 226 F.3d 275, 288 (3d Cir. 2000) (Alito, J.) ("[A] violation of SK-303's reporting requirements does not automatically give rise to a material omission under Rule 10b-5."). Accordingly, Plaintiffs Page 10 2013 U.S. Dist. LEXIS 162048, *29 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 70 of 139 PageID: 1010 cannot base their Section 10(b) claim on a theory that Defendants violated Item 303. 4. Statements Purportedly "Made" by AMEC are Attributable [*34] to Defendants Defendants' March 28, 2011 press release sets forth Bisha Mine gold ore reserve figures, estimates of gold that will be recovered from the Bisha Mine's Oxide zone, and a life of mine estimate of 13 years. These figures are based on a report prepared by AMEC Americas Limited ("AMEC"), an independent engineering firm. (See Levin Decl., Ex. C (Mar. 30, 2011 Form 6-K) at 1-1, 1-10, and 2-1) Relying on Janus Capital Group., Inc. v. First Derivative Traders, 131 S. Ct. 2296, 180 L. Ed. 2d 166 (2011), Defendants argue that AMEC, and not Defendants, was the "maker" of the alleged false and misleading statements concerning Bisha's gold ore reserves, ultimate expected gold production, and life of mine. (Def. Br. 16-17) In Janus, the shareholders of parent company Janus Capital Group ("JCG") sued wholly-owned subsidiary Janus Capital Management ("JCM"), a mutual fund investment advisor, alleging that JCM had made misstatements in fund prospectuses in violation of Rule 10b-5. The prospectuses were filed with the SEC by the Janus Investment Fund, a separate legal entity owned by mutual fund investors that had no assets apart from those owned by fund investors. The Investment Fund had the same officers [*35] as JCM, but had an independent board of trustees. The question for the Court was whether JCM had "made" the allegedly misleading statements in the prospectuses under Rule 10b-5, given its role as investment advisor to the fund. The Supreme Court held that JCM was not liable under Rule 10b-5, because a defendant only "makes" a statement for purposes of a private Rule 10b-5 action if the defendant "is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it." Janus, 131 S. Ct. at 2302. "[I]n the ordinary case, attribution within a statement or implicit from surrounding circumstances is strong evidence that a statement was made by -- and only by -- the party to whom it is attributed." Id. Here, although Defendants purported to rely on AMEC's report for certain of their statements, the Complaint alleges that Defendants adopted those statements, filed them with the SEC, and thereafter repeated them to investors. (See Cmplt. ¶¶ 107, 109, 117, 119, 130, 139, 158) That is sufficient for the Court to find that Defendants "made" the statements under Janus. See Janus, 131 S. Ct. at 2302 ("Even when a speechwriter drafts a speech, [*36] the content is entirely within the control of the person who delivers it. And it is the speaker who takes credit -- or blame -- for what is ultimately said.").5 5 Trebilcock argues in a footnote that Plaintiffs have not alleged facts showing that he "made" the challenged statements in Nevsun's press releases and securities filings, given that he did not sign these materials. Trebilcock further argues that if he "made" the statements during investor presentations, he was merely repeating statements from the filings. (Def. Br. 17 n.20) Plaintiffs rely on the "group pleading" doctrine, "which allows a plaintiff to rely on a presumption that written statements that are 'group-published,' e.g., SEC filings and press releases, are statements made by all individuals 'with direct involvement in the everyday business of the company.'" City of Pontiac Gen. Employees' Ret. Sys. v. Lockheed Martin Corp., 875 F. Supp. 2d 359, 373 (S.D.N.Y. 2012) (quoting Camofi Master LDC v. Riptide Worldwide, Inc., No. 10 Civ. 4020 (CM), 2011 U.S. Dist. LEXIS 31237, 2011 WL 1197659, at *6 (S.D.N.Y. Mar. 25, 2011)). "[M]ost judges in this District have continued to conclude that group pleading is alive and well [after Janus]." Id. at 374. Under [*37] the group pleading doctrine, Trebilcock -- and Davis and Hardie, the other senior executives named in the Complaint -- "made" the statements in Nevsun's press releases and securities filings. As for the statements Trebilcock made to investors during investor conference calls, "[i]n the post-Janus world, an executive may be held accountable . . . where the statement is attributed to the executive." In re Fannie Mae 2008 Sec. Litig., 891 F. Supp. 2d 458, 473 (S.D.N.Y. 2012). In sum, Plaintiffs have adequately alleges that Trebilcock "made" the statements at issue. Page 11 2013 U.S. Dist. LEXIS 162048, *33 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 71 of 139 PageID: 1011 C. The Complaint Adequately Pleads Facts Giving Rise to a Strong Inference of Scienter Defendants argue that "Plaintiffs utterly fail to allege scienter against any Defendant, and therefore fall far short of the stringent pleading requirements of the PSLRA." (Def. Br. 17) 1. Applicable Law Rule 9(b) reflects a "relaxation" of the specificity requirement in pleading the scienter element of fraud claims, requiring that fraudulent intent need only be "alleged generally." See Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994); Fed. R. Civ. P. 9(b). The Second Circuit has made clear, however, that this "relaxation . [*38] . . 'must not be mistaken for license to base claims of fraud on speculation and conclusory allegations.'" Shields, 25 F.3d at 1128 (quoting O'Brien v. Nat'l Prop. Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1991)). Accordingly, the Second Circuit has long required plaintiffs making securities fraud claims to "allege facts that give rise to a strong inference of fraudulent intent." Novak v. Kasaks, 216 F.3d 300, 307 (2d Cir. 2000); see also Shields, 25 F.3d at 1128. The PSLRA adopts the "strong inference" standard set by the Second Circuit, and provides that "where proof of scienter is a required element . . . a complaint must 'state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.'" Slayton v. Am. Exp. Co., 604 F.3d 758, 766 (2d Cir. 2010) (quoting 15 U.S.C. § 78u-4(b)(2)). "Under this heightened pleading standard for scienter, a 'complaint will survive . . . only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.'" Slayton, 604 F.3d at 766 (quoting Tellabs, 551 U.S. at 324). "In determining whether a strong [*39] inference exists, the allegations are not to be reviewed independently or in isolation, but the facts alleged must be 'taken collectively.'" Id. "The 'strong inference' standard is met when the inference of fraud is at least as likely as any non-culpable explanations offered." Id. "The plaintiff may satisfy [the PSLRA's heightened pleading] requirement by alleging facts (1) showing that the defendants had both motive and opportunity to commit the fraud or (2) constituting strong circumstantial evidence of conscious misbehavior or recklessness." ATSI Commc'ns, Inc., 493 F.3d at 99 (citing Ganino, 228 F.3d at 168-69). 2. Analysis a. The Complaint Adequately Alleges that Defendants Had Motive and Opportunity to Commit Fraud Defendants do not argue that they had no opportunity to commit fraud. Instead, they contend that Plaintiffs have not alleged facts demonstrating motive -- i.e., "'concrete benefits that could be realized by one or more of the false statements and wrongful disclosures alleged.'" (Def. Br. 18 (quoting Kalnit, 264 F.3d at 139)) The Court concludes that Plaintiffs have pled sufficient facts to demonstrate that Defendants had both the motive and the opportunity to commit fraud [*40] under the heightened standard set by the PSLRA. The Complaint alleges that Davis, Hardie, and Trebilcock "derived concrete and personal benefits from the fraud, including massive cash bonuses and sales of Nevsun stock at inflated prices." (Cmplt. ¶ 176) The Complaint further alleges that these Defendants were motivated to overstate the gold reserves at Bisha in order to extract a high price from ENAMCO for the 30% stake it was purchasing in the mine. (Id. ¶ 177) With respect to bonuses and sales of stock, the Complaint alleges that in September 2011 -- when Nevsun stock was trading at record highs -- Davis sold 224,600 common shares of Nevsun stock for $1.5 million. Davis also received $1.14 million in 2011 compensation, including a $600,000 cash bonus. (Id. ¶ 29) In early September, Hardie likewise sold 180,000 shares -- his entire Nevsun stock holdings -- for $1.3 million. His 2011 compensation was $889,816 including a cash bonus of $125,000. (Id. ¶ 33) Trebilcock earned $556,939 in 2011, including a cash bonus of $150,000.6 (Id. ¶ 35) 6 Rogers -- a "Named Executive Officer" in Nevsun's May 2012 Form 6-K -- also sold 100% of his Nevsun stock in November and December 2011. (Cmplt. ¶ 12) Defendants [*41] argue that Rogers' sale was not suspicious because "it is commonplace, not 'suspicious' or 'unusual' for individuals who depart a company to sell their stock in that company." (Def. Br. 21) While that may be true in some cases -- see In re Health Mgmt. Sys., Inc. Sec. Litig., No. 97 Civ. 1865 Page 12 2013 U.S. Dist. LEXIS 162048, *37 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 72 of 139 PageID: 1012 (HB), 1998 U.S. Dist. LEXIS 8061, 1998 WL 283286, at *6 n.4 (S.D.N.Y. June 1, 1998) ("While defendant McIntyre's sales were quite high during the Class Period, this was most likely on account of the fact that he resigned as an HMS director prior to January 1997 and was divesting himself of his shares.") -- the Court cannot speculate about Rogers' reasons for selling his shares at this stage of the proceedings. Nevsun's board approved bonuses for the Individual Defendants in December 2011. (Levin Decl., Ex. Y (May 2012 Form 6-K), at 7-8 n.4) Their compensation and bonuses were linked to the success of the Bisha Mine, and to the transaction with ENAMCO. (Id. at 5 (the "compensation program" for these Defendants "is designed to reward contributions to" inter alia, Bisha's "successful operations [and] expansion of existing assets")) Furthermore, Davis's compensation was based, in part, on "managing Eritrea Government relations [*42] and strategic arrangements" and "achieving successful negotiations in Company transactions." (Id.) Plaintiffs plausibly allege that the timing and magnitude of Defendants' stock sales support a strong inference of scienter. Defendants' stock sales took place shortly after the transaction with ENAMCO and shortly before (1) Defendants' retention of two engineering firms to re-build their reserve model, and (2) the departure of Bisha Mine's three top on-site executives.7 See Stevelman v. Alias Research Inc., 174 F.3d 79, 85 (2d Cir. 1999) (holding that plaintiff had adequately alleged motive where "during the period of the misrepresentations . . . insiders unloaded large positions in Alias"); In re SLM Corp. Sec. Litig., 740 F. Supp. 2d 542, 558 (S.D.N.Y. 2010) (finding motive sufficiently alleged against one defendant "who dumped nearly all of his shares during the Class Period"). 7 Defendants argue that Davis also purchased Nevsun shares during the Class Period. (Def. Br. 18; see Levin Decl., Ex. BB, at 6, 9) However, the shares Davis purchased were acquired through the exercise of stock appreciation rights and options that were granted to Davis as part of his compensation. He did not [*43] buy any shares on the open market. Moreover, Plaintiffs' allegation that Defendants were motivated to overstate the gold reserves in order to increase the price paid by ENAMCO for its 30% stake in the mine is sufficient to survive a motion to dismiss. See Rothman v. Gregor, 220 F.3d 81, 93 (2d Cir. 2000) ("[T]he artificial inflation of stock price in the acquisition context may be sufficient for securities fraud scienter."); Glidepath Holding B.V. v. Spherion Corp., 590 F. Supp. 2d 435, 455 (S.D.N.Y. 2007) ("[A] business seeking to . . . induce a beneficial sale has sufficient motive to commit fraud to raise the requisite 'strong inference' of fraud under Rule 9(b)."); In re Complete Mgmt. Inc. Sec. Litig., 153 F. Supp. 2d 314, 328 (S.D.N.Y. 2001) (allegation that defendants "sought to maintain the artificially high stock price so that [the company] might use that stock as currency for acquisitions . . . is a sufficiently concrete motive to support a strong inference of scienter"). b. The Complaint Adequately Alleges Conscious Misbehavior or Recklessness Rule 9(b)'s scienter requirement is also satisfied where a complaint contains factual allegations "'that constitute strong circumstantial [*44] evidence of conscious misbehavior or recklessness.'" Kalnit, 264 F.3d at 138 (quoting Acito v. Imcera Group, Inc., 47 F.3d 47, 52 (2d Cir. 1995)). Plaintiffs proceeding under the "conscious misbehavior or recklessness" theory must allege reckless conduct that is "at the least . . . highly unreasonable and which represents an extreme departure from the standards of ordinary care to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it." Kalnit, 264 F.3d at 142 (quoting Honeyman v. Hoyt, 220 F.3d 36, 39 (2d Cir. 2000)). While this is a "highly fact-based inquiry," securities fraud claims "typically" survive motions to dismiss where a plaintiff has "'specifically alleged defendants' knowledge of facts or access to information contradicting their public statements.'" Kalnit, 264 F.3d at 142 (quoting Novak, 216 F.3d at 308). A failure "to check information [defendants'] had a duty to monitor" may also give rise to a strong inference of recklessness. Novak, 216 F.3d at 311; see also Nathel v. Siegal, 592 F. Supp. 2d 452, 464 (S.D.N.Y. 2008). Under such circumstances, "defendants knew or, more importantly, should have known [*45] that they were misrepresenting material facts related to the corporation." Kalnit, 264 F.3d at 142. Where, as here, "information contrary to the alleged misrepresentations is alleged to have been known by defendants at the time the misrepresentations were made, the falsity and scienter requirements are essentially Page 13 2013 U.S. Dist. LEXIS 162048, *41 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 73 of 139 PageID: 1013 combined." In re Revlon, Inc. Sec. Litig., No. 99 Civ. 10192 (SHS), 2001 U.S. Dist. LEXIS 3265, 2001 WL 293820, at *7 (S.D.N.Y. March 27, 2001) (citing Rothman, 220 F.3d at 89-90). As discussed above, Plaintiffs have adequately pled that Defendants "knew or, more importantly, should have known that they were misrepresenting material facts" concerning Bisha Mine's strip ratio, gold reserves, and life of mine. See Kalnit, 264 F.3d at 142 (citations omitted). Accordingly, Plaintiffs have alleged "strong circumstantial evidence of conscious misbehavior or recklessness." Id. at 138 (citations omitted). Defendants' motion to dismiss Plaintiffs' Section 10(b) claim will be denied. II. THE COMPLAINT ADEQUATELY ALLEGES CLAIMS UNDER SECTION 20(A) OF THE EXCHANGE ACT Under Section 20(a) of the Exchange Act, a person exercising "control" over a person liable under § 10(b) is also liable, subject only to the defense [*46] of "good faith." 15 U.S.C. § 78t(a). "'In order to establish a prima facie case of liability under § 20(a), a plaintiff must show: (1) a primary violation by a controlled person; (2) control of the primary violator by the defendant; and (3) that the controlling person was in some meaningful sense a culpable participant in the primary violation.'" In re Am. Int'l Grp., Inc. 2008 Sec. Litig., 741 F. Supp. 2d 511, 535 (S.D.N.Y. 2010) (quoting Boguslavsky v. Kaplan, 159 F.3d 715, 720 (2d Cir. 1998)). Defendants' sole argument for dismissal of this claim is that "Plaintiffs have not properly alleged an underlying primary violation by Nevsun." (Def. Br. 25) Given that this Court has concluded that Plaintiffs have adequately alleged a primary violation of Section 10(b), Defendants' motion to dismiss Plaintiffs' Section 20(a) claim will be denied. CONCLUSION Defendants' motion to dismiss is DENIED. The Clerk of the Court is directed to terminate the motion (Dkt. No. 19). Dated: New York, New York September 27, 2013 SO ORDERED. /s/ Paul G. Gardephe Paul G. Gardephe United States District Judge Page 14 2013 U.S. Dist. LEXIS 162048, *45 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 74 of 139 PageID: 1014 Tab 9 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 75 of 139 PageID: 1015 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 1 2006 WL 3350461 Only the Westlaw citation is currently available. United States District Court, D. New Jersey. In re PDI SECURITIES LITIGATION. No. Civ.A. 02-211(GEB). | Nov. 16, 2006. Attorneys and Law Firms Allyn Zissel Lite, Joseph J. Depalma, Susan D. Pontoriero, Lite, Depalma, Greenberg & Rivas, LCC, Newark, New Jersey and Lee A. Weiss, Sharon M. Lee, Milberg Weiss Bershad & Schulman LLP, New York, New York and Sherrie R. Savett, Carole A. Broderick, Gary E. Cantor, Berger & Montague, P.C., Philadelphia, Pennsylvania, for Plaintiffs Gary Kessel, Rita Lesser, Lewis Lesser and the class of all others similarly situated, as well as Consolidated Plaintiffs Benjamin Vincent and Mary Kay Richardson. Alan S. Naar, Gina Marie Pontoriero, Greenbaum, Rowe, Smith & Davis LLP, Woodbridge, New Jersey and Douglas H. Flaum, Israel David, Fried, Frank, Harris, Shriver & Jacobson LLP, New York, New York, for Defendants PDI, Inc., Charles T. Saldarini and Bernard C. Boyle. 1 1 This Opinion is amended, in accordance with the Order filed herewith, to reflect representation of Defendants by Douglas H. Flaum, Esq. and Israel David, Esq. of Fried, Frank, Harris, Shriver & Jacobson LLP (in addition to Alan S. Naar, Esq. and Gina Marie Pontoriero, Esq. of Greenbaum, Rowe, Smith & Davis). AMENDED OPINION GARRETT E. BROWN, Jr., Chief Judge *1 This matter is before the Court on Defendants' motions to dismiss the Plaintiffs' Third Consolidated and Amended Class Action Complaint (“Motion”) pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6), and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. §§ 78u-4, et seq. 2 2 Plaintiffs' Complaint consists of fifty pages and 127 paragraphs, and is, effectively, a narrative listing (1) the events that Plaintiffs deem pertinent, (2) various Defendants' statements (those challenged, as well as those apparently frowned at but not actually challenged by Plaintiffs), and (3) Plaintiffs' twenty- five allegations, scattered between (1) and (2), above. Moreover, Plaintiffs' discussions of factual predicate for Plaintiffs' allegations are frequently removed from Plaintiffs' discussion of allegedly fraudulent Defendants' statements by thirty to fifty paragraphs. For the reasons discussed below, Defendants' Motion will be GRANTED, and Plaintiffs' Third Consolidated and Amended Class Action Complaint will be DISMISSED WITH PREJUDICE. PROCEDURAL HISTORY Plaintiffs, purchasers of the common stock of Defendant PDI, Inc. (“PDI” or “Company”) between May 22, 2001, and August 12, 2002 (“Class Period”), brought this securities fraud class action alleging that Defendants defrauded investors by artificially inflating the value of the common stock through false and misleading statements disseminated into the investing community. The litigation was initiated on January 16, 2002. 3 See Docket Entry No. 1. On November 19, 2002, Plaintiffs' motion to file an Amended Complaint was granted, see Docket Entry No. 29, and the Second Amended Complaint (“Second Amended Complaint”) was subsequently filed on December 13, 2002. See Docket Entry No. 32. On February 14, 2003, Defendants filed a motion (“Preceding Motion”) to dismiss the Second Amended Complaint under Federal Rules of Civil Procedure 9(b) and 12(b)(6), and the Private Securities Litigation Reform Act of 1995 (“Reform Act” or “PSLRA”), 15 U.S.C. §§ 78u-4, et seq. See Docket Entry No. 35. On August 17, 2005, the Court issued an opinion (“August Opinion”) examining Defendants' Preceding Motion and order granting Plaintiffs leave to replead. See id. at 48. On October 21, 2005, Plaintiffs filed the Third Amended Complaint (“Complaint”). See Docket Entry No. 50. Defendants filed the instant Motion on December 21, 2005. See Docket Entry No. 51. Plaintiffs filed two Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 76 of 139 PageID: 1016 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 2 briefs in opposition to the Motion, one on April 18, 2006 (“Opposition”), see Docket Entry No. 53, and another on April 18, 2006 (“Opposition Two”). See Docket Entry No. 55. Defendants filed their reply (“Reply”) on June 2, 2006. See Docket Entry No. 60. 3 On May 23, 2002, Honorable Ronald J. Hedges, Magistrate Judge, granted Plaintiff Kessel's motion to consolidate Civil Case 02-211 with 02-367 and 02-699. See Docket Entry No. 15. This matter was transferred to the undersigned on August 7, 2006. See Docket Entry No. 66. Except for the instant Motion, no other applications are currently pending in this action. DISCUSSION I. APPLICABLE LEGAL STANDARDS A. PLEADING REQUIREMENTS UNDER RULES 12(b)(6) AND 9(b), AND PSLRA, AS READ JOINTLY The standard of review under Rule 12(b)(6) is well-settled: the courts must accept all well-pleaded allegations in the complaint as true and draw all reasonable inferences in favor of the non-moving party. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974), overruled on other grounds, Harlow v. Fitzgerald, 457 U.S. 800 (1982); Allegheny Gen. Hosp. v. Philip Morris, Inc., 228 F.3d 429, 434-35 (3d Cir.2000). At this stage, the question is whether the plaintiff should be given an opportunity to offer evidence in support of plaintiff's claims, not whether the plaintiff will ultimately prevail in a trial on the merits. See Scheuer, 416 U.S. at 236. Therefore, dismissal under Rule 12(b) (6) is not appropriate unless it appears beyond doubt that the plaintiff can prove no set of facts in support of plaintiff's claim which would entitle him to relief. See Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 346 (citing Conley v. Gibson, 355 U.S. 41, 45-46 (1957)). Nonetheless, the Third Circuit has noted that courts are not required to credit bald assertions or legal conclusions improperly alleged in the complaint. See Burlington Coat Fact. Sec. Litig ., 114 F.3d 1410, 1429 (3d Cir.1997). Therefore, legal conclusions draped in the guise of factual allegations may not benefit from the presumption of truthfulness. See Nice Sys., Ltd. Sec. Litig., 135 F.Supp.2d 551, 565 (D.N.J.2001). *2 The Rule 12(b)(6) standard of review is, however, altered by Rule 9(b), which imposes a heightened pleading requirement of factual particularity with respect to allegations of fraud. Rule 9(b) states: “In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.” Fed.R.Civ.P. 9(b). “This particularity requirement has been rigorously applied in securities fraud cases.” Burlington, 114 F.3d at 1417 (citations omitted). A Plaintiff averring securities fraud claims must specify “ ‘the who, what, when, where, and how: the first paragraph of any newspaper story.” ’ Advanta Corp. Sec. Litig., 180 F.3d 525, 534 (3d Cir.1999) (quoting DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.1990)). The Third Circuit clarified: [a]lthough Rule 9(b) falls short of requiring every material detail of the fraud such as date, location, and time, plaintiffs must use “alternative means of injecting precision and some measure of substantiation into their allegations of fraud.” Rockefeller Ctr. Props. Sec. Litig., 311 F.3d 198, 216 (3d Cir.2002) (quoting Nice Sys., 135 F.Supp.2d at 577). In addition to the Rule 9(b) requirements, a plaintiff alleging securities fraud must comply with the heightened pleading requirements of the Reform Act. See 15 U.S.C. § 78u-4(b)(1) and (b)(2). Specifically, § 78u-4(b)(1) of the Reform Act requires the plaintiff to specify the facts indicating the falsity of the challenged statement. The Plaintiff must “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). Similarly, the Reform Act requires that “the complaint shall, with respect to each act or omission ..., state with particularity [all] facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). These requirements of the Reform Act modified the traditional Rule 12(b)(6) analysis. “ ‘[W]hereas under Rule 12(b)(6), we must assume all factual allegations in the complaint are true ... under the Reform Act, we disregard ‘catch-all’ or ‘blanket’ assertions that do not live up to the particularity requirements of the statute .” ' Rockefeller Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 77 of 139 PageID: 1017 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 3 Center, 311 F.3d at 224 (quoting Florida State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 345, 660 (8th Cir.2001)). “The Reform Act requires a ‘strong inference’ of scienter, and accordingly, alters the normal operation of inferences under Rule 12(b)(6).” Digital Island Sec. Litig., 357 F.3d 322, 328 (3d Cir.2004) (citing Rockefeller Ctr., 311 F.3d at 224, stating that, “unless plaintiffs in securities fraud actions allege facts ... with the requisite particularity ... they may not benefit from inferences flowing from vague or unspecific allegations-inferences that may arguably have been justified under a traditional Rule 12(b)(6) analysis”); see also Greebel v. FTP Software, Inc., 194 F.3d 185, 196 (1st Cir.1999) (“A mere reasonable inference is insufficient to survive a motion to dismiss”). A plaintiff's failure to meet these heightened pleading requirements results in dismissal of the complaint. See Advanta, 180 F.3d at 531. B. SECTION 10(b), RULE 10B-5 AND RELATED PROVISIONS *3 Section 10(b) proscribes the “use or employ[ment], in connection with the purchase or sale of any security, ... [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe.” 15 U.S.C. § 78j(b). The ensuing Rule 10b-5, 17 C.F.R. § 240.10b-5, makes it illegal “[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made in the light of the circumstances under which they were made, not misleading ... in connection with the purchase or sale of any security.” 17 C.F.R. § 240.10b-5(b). While “[t]he private right of action under Section 10(b) and Rule 10b-5 reaches beyond statements and omissions made in a registration statement or prospectus or in connection with an initial distribution of securities and creates liability for false or misleading statements or omissions of material fact that affect trading on the secondary market,” Burlington, 114 F.3d at 1417 (citing Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994)); see also Eckstein v. Balcor Film Investors, 8 F.3d 1121, 1123-24 (7th Cir.1993), cert. denied, 510 U.S. 1073 (1994), a Rule 10b-5 plaintiff must still (1) establish that the defendant made a materially false or misleading statement, see Burlington, 114 F.3d at 1417 (citing Phillips Petroleum Sec. Litig., 881 F.2d 1236, 1243 (3d Cir.1989)), (2) demonstrate that the defendant acted with scienter, and (3) show that plaintiff's reliance on defendant's misstatement caused injury to the plaintiff. See id. (citing Phillips, 881 F.2d at 1244); San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., Inc., 75 F.3d 801, 808 (2d Cir.1996). 1. False and Misleading Forward-Looking Statements When the plaintiff challenges a forward-looking statement 4 made by the defendant, plaintiff's mere usage of catchwords or bold assertions that defendant's statement was false or misleading because the defendant knew it to be false or misleading cannot lend support to plaintiff's claim. See GSC Partners CDO Fund v. Washington, 368 F.3d 228, 239 (3d Cir.2004) (“[I]t is not enough for plaintiffs to merely allege that defendants ‘knew’ their statements were fraudulent or that defendants ‘must have known’ their statements were false”); Read- Rite Corp. Sec. Litig., 115 F.Supp.2d 1181 (N.D.Cal.2000) (conclusory allegations that the corporate officers must have known the falsity were insufficient). Consequently, plaintiff's failure to plead with specificity the facts showing that defendant's forward-looking statements were made by the defendant with defendant's actual knowledge that these statements were false precludes plaintiff's claim, and plaintiff's allegation that the defendant was reckless in defendant's projections is insufficient. See 15 U.S.C. § 78u-5(c)(1)(B). 4 “The term ‘forward-looking statement’ means [inter alia,] a statement containing a projection of revenues, income (including ... loss), earnings (including ... loss) per share, capital expenditures, dividends, capital structure, or other financial items; [or] a statement of the plans and objectives of management for future operations, including [those] relating to the products or services of the issuer; [or] a statement of future economic performance [or] results of operations; [or] any statement of the assumptions underlying or relating to any statement described [above .]” 15 U.S.C. § 78u-5(i)(1). *4 However, the provision contains no definition of “actual knowledge” for the purposes of forward-looking statements. Since it is apparent that actual knowledge can exist only in the present or past, and one cannot have actual knowledge of the future, courts have held that a forward-looking statement could be regarded as a representation that the speaker has a present belief as to the future. See NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1330 (3d Cir.2002) (“To be actionable, a statement ... Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 78 of 139 PageID: 1018 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 4 must have been misleading at the time it was made”) (citing Nice Sys., Ltd. Sec. Litig., 135 F.Supp.2d at 586). “[Plaintiff's] mere second-guessing of [defendant's] calculations will not suffice; [the plaintiff] must show that [the defendant's] judgment-at the moment exercised- was sufficiently egregious such that a reasonable [person] reviewing the facts and figures should have concluded that [these facts or figures] were misstated and [in addition,] that ... the public was likely to be misled. [Securities] ‘law does not expect clairvoyance.” ’ IKON Office Solutions, Inc., 277 F.3d 658, 673 (3d Cir.2002) (quoting Denny v. Barber, 576 F.2d 465, 470 (2d Cir.1978)); see also DiLeo, 901 F.2d at 627) (“[P]roffer[ing a] different financial statement [is not sufficient .] Investors must point to some facts suggesting that the difference is attributable to fraud”); Harris v. IVAX Corp., 998 F.Supp. 1449, 1455 (S.D.Fla.1998) (“Plaintiff[']s attempt simply to hold up the Defendants' predictions against the backdrop of what actually happened” is insufficient to establish scienter), aff'd, 182 F.3d 799 (11th Cir.1999), reh'g denied en banc, 209 F.3d 1275 (2000). Thus, the plaintiff cannot assert defendant's lack of sincere belief by pointing to the difference between the defendant's projections and the actual outcome. See Cal. Public Employees' Retirement Sys. v. Chubb Corp. (“Chubb”), 394 F.3d 126, 158 (3d Cir.2004) (the Third Circuit has “long rejected attempts to plead fraud by hindsight”); Wielgos v. Commonwealth Edison Co., 892 F .2d 509, 514 (7th Cir.1989) (“If all estimates are made carefully and honestly, half will turn out too favorable to the firm and the other half too pessimistic. In either case, the difference may disappoint investors, who can say later that they bought for too much [if the projection was too optimistic,] or sold for too little, [if the projection was too pessimistic].... [T]he firm is not liable despite error”); Grossman v. Novell, Inc., 120 F.3d 1112, 1124 (10th Cir.1997) (“[I]t is clearly insufficient for plaintiffs to say that the later, sobering revelations make the earlier, cheerier statement a falsehood”) (quoting GlenFed Sec. Litig., 42 F.3d 1541, 1548-49 (9th Cir.1994)); Suprema Specialities, Inc. Sec. Litig., 334 F.Supp.2d 637, 647 (D.N.J.2004) (“Allegations that a company's later financial difficulties imply that earlier financial statements were untrue or misleading are ‘fraud by hindsight’ and do not state a claim”) (citations omitted); Boston Tech. Sec. Litig., 8 F.Supp.2d 43, 53 (D.Mass.1998) (“A general averment that defendants made a statement knowing at the time what later ‘turned out badly’ does not suffice”) (citation omitted). *5 Even though all allegations relating to falsity of defendant's statement must be pled with particularity, see 15 U.S.C. § 78u-4(b)(1) and (2), a plaintiff in securities fraud actions can support a complaint by reliance on information attributed to confidential sources. See Novak, 216 F.3d at 313-14 (holding that, while the PSLRA “may compel revelation of confidential sources under certain circumstances,” there was no per se requirement of disclosure if the plaintiff states sufficient facts to support plaintiff's allegations). However, statements from undisclosed confidential sources can be used in two situations: (1) if the complaint sets forth other factual allegations, such as documentary evidence, which are sufficient alone to support a fraud allegation, see id. at 314; Royal Dutch/Shell Transp. Sec. Litig., 380 F.Supp.2d 509 (D.N.J.2005) (finding sufficient corroboration in specific notes, memoranda, emails and presentation materials); Barnum v. Millbrook Care Ltd. Partnership, 850 F.Supp. 1227, 1232-33 (S.D.N.Y.1994) (if the allegations are contradicted by the documents, the documents control), aff'd, 43 F.3d 1458 (2d Cir.1994); or (2) when the confidential sources are described in the complaint with sufficient particularity to support the probability that a person in the position occupied by the [confidential] source would possess the information alleged. See Royal Dutch/Shell Transp. Sec. Litig., 380 F.Supp.2d 509. Elaborating on the latter scenario, the Third Circuit explained that the complaint must disclose: (1) the time period that the confidential source worked at the defendant-company, (2) the dates on which the relevant information was acquired, and (3) the facts detailing how the source obtained access to the information. See Chubb, 394 F.3d at 146; Freed v. Universal Health Servs., 2005 U.S. Dist. LEXIS 7789 (E.D.Pa. May 3, 2005); Portal Software, Inc. Secs. Litig., 2005 U.S. Dist. LEXIS 20214, at *28 (N.D.Cal. Aug. 10, 2005) (“[P]laintiffs must describe the job title, job description, duties, and dates of employment for the controller's sources before this information can be deemed reliable”). Moreover, in Chubb, the Third Circuit held that allegations attributed to the information obtained from a confidential source must contain specific details regarding the basis for the source's personal knowledge and describe supporting events in detail. See id.; see also Northpoint Commc'ns Group, Inc., Sec. Litig., 184 F.Supp.2d 991, 999-1000 (N.D.Cal.2001); U.S. Aggregates, Inc. Sec. Litig., 235 F.Supp.2d 1063, 1074 (N.D.Cal.2002); Ramp Networks, Inc., 201 F.Supp.2d 1051, 1067 (N.D.Cal.2002). Failure Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 79 of 139 PageID: 1019 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 5 to meet these requirements with respect to each and every confidential source the plaintiff relies upon, renders that source irrelevant for the purposes of plaintiff's allegations. See Chubb, 394 F.3d at 146. “The sheer volume of confidential sources cited cannot compensate for these inadequacies.... Cobbling together a litany of inadequate allegations does not render those allegations particularized in accordance with Rule 9(b) or the PSLRA.” Id. at 155; see also Am. Bus. Fin. Servs., Inc. Sec. Litig., 413 F.Supp.2d 378, 391-92 (E.D.Pa.2005) (finding statements from five insufficiently identified confidential sources insufficient). *6 Finally, it shall be noted that a company's management is not responsible for opinions, projections and estimates of security analysts, even if the management may have supplied the analysts with some of the information they used to formulate their estimates, 5 unless the plaintiff sets forth facts indicating that the management passed misinformation to analysts with intention that the analysts communicate the misinformation to the market. See V-Mark Software, Sec. Litig., 928 F.Supp. 122 (D.Mass.1996). Under these circumstances, the complaint must allege “facts showing that a particular defendant both made the statement to the analyst and controlled the content of the [analyst's] report.” U.S. Interactive, Inc. Sec. Litig., 2002 U.S. Dist. LEXIS 16009, *48 (E .D. Pa. Aug. 23, 2002) (citing Klein v. Gen. Nutrition Cos., 186 F.3d 338, 345 (3d Cir.1999)). “The complaint must rise or fall on allegations about defendant['s] conduct and not on wide-eyed citation to the gratuitous commentary of outsiders.” Hershfang v. Citicorp, 767 F.Supp. 1251, 1255 (S.D.N.Y.1991). 5 “[S]ecurities laws require [the company] to speak truthfully to investors; they do not require the company to police statements made by third parties for inaccuracies, even if the third party attributes the statement to [the company.]” Raab v. General Physics Corp., 4 F.3d 286, 288 (4th Cir.1993). 2. Scienter Rule 10b-5 describes the type of conduct proscribed but it does not set out the appropriate standard of culpability. The Supreme Court held in Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976), that, in order to establish a valid claim under Rule 10b-5, the plaintiff must prove that the defendant acted with scienter. The scienter requirement is satisfied by a showing of intentional misrepresentation made with intent to deceive. 6 6 In addition, the Third Circuit has found that recklessness is sufficient to state a claim under 10b-5 with respect to past and present events that were falsely presented to the investing community. See, e.g., Sharp v. Coopers & Lybrand, 649 F.2d 175 (3d Cir.1981), cert. denied, 455 U.S. 938 (1982); Coleco Indus., Inc. v. Berman, 567 F.2d 569 (3d Cir.1977), cert. denied, 439 U.S. 830, reh'g denied, 439 U.S. 998 (1978). As the Ninth Circuit explained, [R]ecklessness is a lesser form of intent rather than a greater degree of negligence.... Reckless conduct may be defined as a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it. Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569 (1990), cert. denied, 499 U.S. 976 (1991) (quoting Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1044-45 (7th Cir.), cert. denied, 434 U.S. 875 (1977)). To satisfy the recklessness standard in a case alleging non-disclosure, a plaintiff must demonstrate: “(1) the defendant knew of the potentially material fact, and (2) the defendant knew that failure to reveal the potentially material fact would likely mislead investors.” Wilson, 195 F.Supp.2d at 639. Since scienter is based on the defendant's state of mind and, as such, may be difficult to prove with direct evidence, courts are willing to permit an inference that the defendant acted with the requisite scienter. See, e.g., Fine v. American Solar King Corp., 919 F.2d 290 (5th Cir.1990), cert. dismissed, 502 U.S. 976 (1991). However, such inferences are not to be made lightly. See, e.g., Rothman v. Gregor, 220 F.3d 81 (2d Cir.2000) ($1.6 million dollar profit from inside trading was not sufficiently unusual to provide an inference of scienter). The inference may be made only when the fact pattern unambiguously indicates that the defendant must have been acting with the requisite state of mind. See, e.g., Phillips Petroleum Sec. Litig., 881 F.2d 1236 (defendant's good faith statement of present intent does not become actionable simply because of defendant's change of intent at a later point). Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 80 of 139 PageID: 1020 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 6 Thus, to withstand the scrutiny imposed by the Reform Act, the inference of scienter must be (1) reasonable, (2) strong and (3) based on pleadings stating the pertinent facts with particularity. See 15 U.S.C. § 78u-4(b)(1) and (2) (the plaintiff shall state “the reason ... why the [challenged] statement [was] misleading, and ... all facts on which [plaintiff's] belief is formed,” as well as “particular[ ] facts giving rise to a strong inference that the defendant acted with the required state of mind”); Alpharma Sec. Litig., 372 F.3d 137, 150 (3d Cir.2004); The End of the Unbearable Lightness of Pleading: Scienter After Silicon Graphics, 48 UCLA L.Rev. 973 (2001) (detailing the development of both elements). *7 A plaintiff may establish the requisite strong inference of fraudulent intent in one of two ways: (1) by alleging facts “establishing a motive and an opportunity to commit fraud”; or (2) “by setting forth facts that constitute circumstantial evidence of either recklessness or conscious behavior.” Advanta, 180 F.3d at 534; see also Burlington, 114 F.3d at 1418. If the plaintiff desires to employ the “motive and opportunity” method, the plaintiff should demonstrate a logical connection between the alleged fraud and motive in order to establish a reasonable inference of fraud. See Glickman v. Alexander & Alexander Servs., 1996 U.S. Dist. LEXIS 2325, at *36 (S.D.N.Y. Feb. 27, 1996) (“[There should be] coherent nexus between the alleged fraudulent conduct and its alleged purpose”). Furthermore, there must be more than conclusory allegations of motive and opportunity; stating that “the defendant must have known” is not legally sufficient. See, e.g., Mortensen v. AmeriCredit Corp., 123 F.Supp.2d 1018 (N.D.Tex.2000); Livent, Inc. Sec. Litig., 78 F.Supp.2d 194 (S.D.N.Y.1999). A “strong inference” may arise only if the complaint sufficiently alleges that the defendants: (1) “benefitted in a concrete and personal way from the purported fraud”; (2) “engaged in deliberately illegal behavior”; (3) “knew facts or had access to information suggesting that their public statements were not accurate”; or (4) “failed to check information they had a duty to monitor.” Novak v. Kasaks, 216 F .3d 300, 311 (2d Cir.2000); see Wilson v. Bernstock, 195 F.Supp.2d 619, 633 (D.N.J.2002) (“Motive entails allegations that the individual corporate defendants stood to gain in a concrete and personal way from one or more of the allegedly false or misleading statements and wrongful nondisclosures.... [M]otive and opportunity ‘like all other allegations of scienter must now be supported by facts stated with particularity and must give rise to a strong inference of scienter” ’) (quoting Advanta, 180 F.3d at 535); Cybershop.com Sec. Litig., 189 F.Supp.2d 214 (D.N.J.2002). Under this pleading standard, a plaintiff may not rely on facts indicating that the defendant had certain goals or aspirations (or sought to engage in the industry practices) common to the law-abiding business community, since such goals or practices cannot amount to a valid motive for the purposes of showing scienter. See GSC Partners CDO Fund, 368 F.3d at 237 (“ “Motives that are generally possessed by most corporate directors and officers do not suffice”) (quoting Kalnit v. Eichler, 264 F.3d 131, 139 (2d Cir.2001) (capitalization restored); San Leandro, 75 F.3d at 814 (“[A] company's desire to maintain a high bond or credit rating” is an insufficient motive for fraud because such motive could be imputed to any company. If scienter could be pleaded on that basis alone, virtually every company in the United States that experiences a downturn in stock price could be forced to defend securities fraud actions”); Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1068 (5th Cir.1994) ( “[I]ncentive compensation can hardly be the basis on which an allegation of fraud is predicated”) (citation omitted); Nice Sys., Ltd. Secs. Litig., 135 F.Supp.2d at 584) (“[T]he allegation that [d]efendants made false and misleading statements to secure market share is ... insufficient to demonstrate that [d]efendants had a motive to commit fraud”); Boeing Sec. Litig., 40 F.Supp.2d 1160, 1175 (W.D.Wash.1998) (“[T]he desire to remain profitabl[e] is a generic motive that fails to satisfy the heightened pleading standards for scienter under the PSLRA”). *8 With respect to the other method of establishing scienter, that is, by circumstantial evidence of intent, “the strength of the circumstantial allegations must be [even] greater.” Kalnit, 264 F.3d at 142; see Oran v. Stafford, 226 F.3d 275, 288-89 (3d Cir.2000). In that situation, the plaintiff must support his allegations by detailing, with particularity, “the who, what, when, where and how” of the events at issue and present clear facts verifying plaintiff's deductions with respect to defendant's state of mind. Burlington, 114 F.3d at 1422 (citing DiLeo, 901 F.2d at 627); see also Ronconi v. Larkin, 253 F.3d 423, 437 (9th Cir.2001) (finding that a temporal proximity of events is insufficient circumstantial evidence). Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 81 of 139 PageID: 1021 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 7 The above-discussed requirement to prove scienter is reflected in Section 21E of the 1934 Act, 15 U.S.C. § 78u-5(c), which provides guidance to corporate managers wishing to issue forward-looking projections without risking legal liability. To be protected by 15 U .S.C. § 78u-5(c), an issuer (or the issuer's agents) must: (1) identify all written or oral forward-looking statements as forward- looking, or couch these statements in such terms that the forward-looking nature of these statements would be self- evident to a reasonable investor. See Clorox Co. Secs. Litig., 238 F.Supp.2d 1139, at *16 (N.D.Cal.2002) (“[A] prediction about future events is self-evidently a forward- looking statement”), and (2) make these projections without actual knowledge that the projections are false or misleading; see also 15 U.S.C. §§ 78u-5(c)(1)(B)(i) and 78u-5(c)(1)(B)(ii)(II). 7 7 The rationale of this rule is self-evident: an issuer (or the issuer's agent) made a statement without actual knowledge that the statement was false or misleading, the issuer (or its agent) cannot intend to defraud the market and, thus, lacks the requisite scienter. Alternatively, if the issuer (or issuer's agent) has actual knowledge that the issuer's forward-looking statements are false of misleading, but accompanies these forward-looking statements with a meaningful and directly-related cautionary language, the issuer is not liable for the injuries that might ensue from investors' reliance on the false forward-looking statements. See 15 U.S.C. § 78u-5(c)(1)(A)(I). The Court, however, determined in its August Opinion that 15 U.S.C. § 78u-5(c)(1)(A)(I) is inapplicable to the case at bar. See August Opinion at 17-27. 3. Materiality The test of materiality depends not upon the literal truth of statements but upon the ability of reasonable investors to become accurately informed, see McMahan & Co. v. Warehouse Entertainment, Inc., 900 F.2d 576, 579 (2d Cir.1990), cert. denied, 501 U.S. 1249 (1991); this is sometimes referred to as the mosaic representation thesis. See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); Genentech, Inc. Sec. Litig., 1989 WL 137189 (C.D.Cal.1989). Thus, a finding of materiality is based on the total mix of information available, see Ieradi v. Mylan Labs., Inc., 230 F.3d 594 (3d Cir.2000), and the concept of materiality cannot be distilled into a bright-line test, see Basic Inc. V. Levinson, 485 U.S. 224 (1988), see also Shapiro v. UJB Fin. Corp., 964 F.2d 272, 281 (3d Cir.1992); Ganino v. Citizens Utilities Co., 228 F .3d 154 (2d Cir.2000), short of stating that an alleged misrepresentation cannot be deemed material to an investor if the general public has access to correct information. See Basic, 485 U.S. at 231-32; Wallace v. Systems & Computer Tech. Corp., 1997 U.S. Dist. LEXIS 14677, at *42-44 (E.D.Pa. Sept. 22, 1997). The fact that materiality is determined in context means that a purchaser or seller of securities is not necessarily entitled to all information relating to each of the circumstances surrounding the transaction. See Acito v. IMCERA Group, 47 F.3d 47 (2d Cir.1995) (deficiencies found by FDA inspectors at one of many business locations were not material); Wilensky v. Digital Equip. Corp., 903 F.Supp. 173 (D.Mass.1995), aff'd in part, rev'd in part on other grounds, 82 F.3d 1194 (1st Cir.1996) (failure to disclose details of new marketing strategy was immaterial); accord Press v. Quick & Reilly, Inc., 218 F.3d 121 (2d Cir.2000) (intermediary's conflict of interest is immaterial); Carter-Wallace, Inc. v. Hoyt, 150 F.3d 153 (2d Cir.1998) (departure from the generally accepted accounting principles cannot qualify as a material element for the purposes of securities fraud action). It is not sufficient to show that a shareholder might have found the information to be of interest: the plaintiff has to establish importance of the particular piece of information to a reasonable investor. See Burlington, 114 F.3d at 1432 (“ ‘[A] corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact .’ [Management's] possession of material nonpublic information alone does not create a duty to disclose it”) (quoting Time Warner Sec. Litig., 9 F.3d 259, 267 (2d Cir.1993), and citing Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1202 (1st Cir.1996), and Roeder v. Alpha Indus., Inc., 814 F.2d 22, 26 (1st Cir.1987)); Milton v. Van Dorn Co., 961 F.2d 965 (1st Cir.1992) (where plaintiffs bought the stock of a subsidiary company of the parent corporation and, after the sale was completed, another of the parent corporation's subsidiaries announced plans to begin producing a product that would compete with plaintiffs' product, the court found that nondisclosure of the other subsidiary's production plans was immaterial). *9 “When an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak [since a] duty to disclose under § 10(b) does not arise from the mere possession of nonpublic market information.” Chiarella v. United States, 445 U.S. 222, 235 (1980). As the Third Circuit explained, Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 82 of 139 PageID: 1022 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 8 “Silence, absent a duty to disclose, is not misleading under Rule 10b-5.” Basic, Inc. v. Levinson, 485 U.S. 224, 239 n. 17 (1988); see also Burlington, 114 F.3d at 1432 (“Except for specific periodic reporting requirements ... there is no general duty on the part of a company to provide the public with all material information”). Such a duty to disclose may arise when there is [an incident of] insider trading, [or presence of] a statute requiring disclosure, or [there was] an inaccurate, incomplete or misleading prior disclosure [requiring a corrective statement]. See Glazer v. Formica Corp., 964 F.2d 149, 157 (2d Cir.1992); Backman v. Polaroid Corp., 910 F.2d 10, 12 (1st Cir.1990) (en banc); General Motors Class E Stock Buyout Sec. Litig., 694 F.Supp. 1119, 1129 (D.Del.1988). Oran, 226 F.3d at 286-87. Moreover, “vague and general statements of optimism ‘constitute no more than puffery, and [being] understood by reasonable investors as such,” ’ cannot amount to materially fraudulent information. Advanta, 180 F.3d at 538 (quoting Burlington, 114 F.3d at 1428 n. 14); see also ATI Techs., Inc. Sec. Litig., 216 F.Supp.2d 418, 433 (E.D.Pa.2002) (holding that “[a] spin on its historical performance, as setting a ‘record in revenue,’ conferring a ‘strong start,’ and giving ... ‘market leadership,’ is puffery”); cf. San Leandro, 75 F.3d at 811. In Burlington, the Third Circuit clarified that “[c]laims that ... vague expressions of hope by corporate managers could dupe the market have been ... uniformly rejected by the courts.” 114 F.3d at 1427; see also Parnes v. Gateway 2000, Inc., 122 F.3d 539, 547 (8th Cir.1997) (“[S]ome statements are so vague and such obvious hyperbole that no reasonable investor would rely upon them”). For instance, statements by the defendant that merely express defendant's confidence with respect to future results on the basis of previous successes are not actionable. See Advanta, 180 F .3d at 538. 4. Reliance The reliance requirement is a corollary of materiality. See Semerenko v. Cendant Corp., 233 F.3d 165, 180 (3d Cir.2000). As under common law, the reliance requirement applies in securities fraud cases, and reliance is an element of a private claim under Rule 10b-5. See List v. Fashion Park, Inc., 340 F.2d 457, 452 (2d Cir.1965), cert. denied, 382 U.S. 811, reh'g denied, 382 U.S. 933 (1965). Since proving reliance could be hard in view of the nature of modern securities markets, federal courts fashioned a “fraud-on-the-market” presumption for proving reliance based on the Efficient Capital Market Hypothesis, i.e., the premise that, if the market is efficient, the information disclosed by issuers, issuers' agents and analysts is both available to and swiftly absorbed by the investors. See Basic, 485 U.S. 224; Hayes v. Gross, 982 F.2d 104 (3d Cir.1992). *10 In Cammer v. Bloom, 711 F.Supp. 1264, 1276 n. 17 (D.N.J.1989), appeal dismissed, 993 F.2d 875 (3d Cir.1993), the Court set out the following key terms for an efficient market that enables plaintiff's usage of the fraud on the market theory: (1) an open market is one in which anyone, or at least a large number of persons, can buy or sell; (2) a developed market is one which has a relatively high level of activity and frequency, and for which trading information (e.g., price and volume) is widely available, e.g., a secondary market in outstanding securities which usually has continuity, liquidity and the ability to absorb a reasonable amount of trading with relatively small price changes; (3) an efficient market is one which rapidly reflects new information in price; and (4) these terms are cumulative in the sense that a developed market will almost always be an open one, and an efficient market will almost invariably be a developed one. See Enron Corp. Sec. Derivative & “ERISA” Litig., 2006 U.S. Dist. LEXIS 43146, at *95 (S.D. Tex. June 5, 2006) (relying on Cammer ). Since the New York and American Stock Exchanges are examples of open and developed securities markets, see id., and PDI's common stock is registered with the United States Securities and Exchange Commission and traded on the NASDAQ, 8 the case at bar is subject to both the Efficient Capital Market Hypothesis and the fraud on the market presumption. 8 PDI's NASDAQ symbol is PDII. See <>. C. LIABILITY OF CONTROLLING PERSON Section 20(a) of the 1934 Act, 15 U.S.C. § 78(a), states that “[e]very person who, directly or indirectly, controls any person liable [for securities fraud] shall also be liable jointly and severally with and to same extent as such controlled person.” 15 U.S.C. § 78t(a). Thus, for a controlling person to be liable, the person over whom control was exercised must have committed a primary violation of the securities laws. See Merck & Co. Sec. Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 83 of 139 PageID: 1023 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 9 Litig., 432 F.3d 261 (3d Cir.2005); Digital Island Sec. Litig., 357 F.3d at 337; Shapiro, 964 F.2d at 279. To establish a prima facie case that the defendant was a controlling person within the meaning of Section 20(a), the plaintiff must show that: (1) the defendant had actual power or influence over the controlled person; and (2) the defendant actually participated in the alleged illegal activity. 9 See Kersh v. General Council of the Assemblies of God, 804 F.2d 546, 548 (9th Cir.1986); Rochez Bros., Inc. v. Rhoades, 527 F.2d 880, 885 (3d Cir.1975); MobileMedia Secs. Litig., 28 F.Supp.2d 901, 940 (D.N.J.1998); Klein v. Boyd, 949 F.Supp. 280 (E.D.Pa.1996), aff'd in part, rev's on other grounds, 1998 U.S.App. LEXIS 2004 (3d Cir. Feb. 12, 1998); Gordon v. Diagnostek, Inc., 812 F.Supp. 57 (E.D.Pa.1993). 9 The group pleading doctrine allows plaintiffs in securities fraud cases to attribute corporate statements to “one or more individual defendants based solely on their corporate titles.” Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 363 (5th Cir.2004). The doctrine (alternatively referred to as the “group published” doctrine and the “group published information presumption,” see id.; William O. Fisher, Don't Call Me a Securities Law Groupie: The Rise and Demise of the “Group Pleading” Protocol in 10b-5 Cases, 56 Bus. Law. 991, 995 n. 12 (2001)) favors plaintiffs by making it easier to satisfy Rule 9(b)'s particularity requirement since, under the doctrine, the plaintiffs can name corporate officers as defendants even though the plaintiffs did not know the roles such officers played in an alleged fraud. The Third, Seventh and Fifth Circuits have held that the PSLRA forecloses the practice of group pleading in securities fraud cases. See, e.g., Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588, 603 (7th Cir.2006); Tyson Foods, Inc. Sec. Litig., 155 Fed. Appx. 53, 57 (3d Cir.2005); Southland, 365 F .3d at 359-64; Sonus Networks Secs. Litig., 2006 U.S. Dist. LEXIS 28272 (D.Mass. May 10, 2006); AIG Global Secs. Lending Corp. v. Bane of Am. Sec. LLC, 2006 U.S. Dist. LEXIS 25883 (S.D.N.Y. Apr. 25, 2006); see also Steiner v. MedQuist Inc., 2006 U.S. Dist. LEXIS 71952 (D.N.J. Sept. 29, 2006); Cambrex Corp. Secs. Litig., 2005 U.S. Dist. LEXIS 25339 (D.N.J. Oct. 27, 2005); Bio-Technology Gen. Corp. Sec. Litig., 380 F.Supp.2d 574 (D.N.J.2005). II. ANALYSIS Having provided a brief overview of the pertinent legal standards, this Court now turns to the facts of the case at bar. PDI (“Professional Detailing, Inc.”), a publicly-held Delaware corporation having its principal executive offices in Upper Saddle River, New Jersey, see Compl. ¶¶ 7, 11, is a provider of sales and marketing services to the bio-pharmaceutical industry. 10 See id. ¶ 21; Mot., Mem. at 2; <>. PDI built its business on “contract sales,” that is, on providing customized marketing services to pharmaceutical manufacturers who wished to outsource marketing and selling activities for particular drugs. See Compl. ¶¶ 7, 21, 32. This type of business is referred to as “fee-for-service” since the revenue is principally derived from the fees received for sales and marketing services. See id. ¶ 21. In the years up to and including 2000, PDI's contract sales business enjoyed substantial growth in revenues and earnings. See id. ¶ 22. In October 2000, PDI announced that, in addition to its fee-for-service business, PDI had entered into another line of business. See id. ¶ 24. This new line of business was based on “performance-based” contracts, that is, agreements to market, distribute and sell particular drugs for pharmaceutical manufacturers. This new type of agreement envisioned profit to PDI only if PDI could achieve the level of sales above the baseline set in the agreement. See id. ¶¶ 24-25, 40-43, 56. In view of the difference between PDI's traditional contract sales and these new performance-based contracts, PDI notified the investing public that PDI had “no prior experience [with performance-based contracts] and, therefore, [PDI's] prospects for success [with this new line of business were] uncertain.” Mot., Ex. 18. 10 During the Class Period, Saldarini and Boyle served as the Chief Executive Officer and Vice Chairman of the Board of Directors of PDI, and PDI's Chief Financial Officer and Executive Vice President, respectively. See Compl. ¶¶ 8, 9, Mot., Mem. at 3. Saldarini, Boyle and other directors of PDI jointly held 40% of PDI's stock. See Mot. at 1. *11 Certain Defendants' statements or actions that took place during 2001 and 2002 and were related to three of such performance-based contracts gave rise to this litigation. Referring to these statements and actions by Defendants, Plaintiffs' Complaint, Count I, alleges that Defendants violated Section 10(b) of the Securities Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 84 of 139 PageID: 1024 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 10 Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Count II alleges violations of Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), by Saldarini and Boyle as controlling persons of PDI. Plaintiffs' Complaint, however, does not challenge the accuracy of any PDI's financial reports and does not assert that either Saldarini, Boyle, or any other director of PDI sold even one share of PDI's stock during the Class Period or profited in any other way from the alleged violations. A. CEFTIN CONTRACT In October 2000, PDI entered into its first performance- based contract with GlaxoSmithKline (“GSK”). 11 The contract provided PDI with the right to exclusive marketing, distribution and sale of two forms, i.e., tablets and suspension, of Ceftin (“Ceftin Contract”), a cephalosporin antibiotic patented by GSK. See Compl. ¶ 24; Mot., Exs. 18-19. 11 Prior to entering the Ceftin Contact, PDI had already established a business relationship with GSK, holding a fee-for-services contract (“GSK Contract”) that was active at the time the Ceftin Contract was initiated. The GSK Contract was terminated in February of 2001, prior to beginning of the Class Period. See Compl. ¶ 34. The Ceftin Contract had a five-year term and required PDI to purchase from GSK a minimum amount of Ceftin during each calendar quarter. 12 See Compl.¶ 24; Mot., Exs. 17-19, 21. After the first quarter of the Ceftin Contract (the fourth calendar quarter of 2000), PDI reported an operating profit from Ceftin in the amount of $1.9 million; PDI's operating profit from Ceftin during the second and third quarter of the Ceftin Contract (the first and second calendar quarter of 2001) reached $8.5 million each quarter. See Compl.¶ 25; Mot., Exs. 19-21, 23-24. In the first quarter of 2001, PDI began promoting Ceftin through marketing materials asserting that Ceftin was “[f]irst-line in an era of bacterial resistance.” Compl.¶ 26. In mid-March of 2001, after the U.S. Food and Drug Administration (“FDA”) ordered PDI to “cease distribution of [such] promotional materials,” PDI stopped this line of advertisement. Id. 12 For the purposes of either financial or managerial accounting, the period used is either “fiscal year” or a quarter of such year. A new company or business must select the date on which its fiscal year begins. See, e.g., Craig A. Peterson and Norman W. Hawker, Does Corporate Law Matter? Legal Capital Restrictions on Stock Distributions, 31 Akron L.Rev. 175 (1997). However, since Plaintiffs' Complaint often uses the terms “fiscal year” or “fiscal quarter” without specifying whether PDI's fiscal year coincided with calendar year, see, e.g., Compl. ¶¶ 42, 51-52, 79, 82, the Court limits its terminology to calendar yearly and quarterly periods. Shortly prior to PDI entering the Ceftin Contract, GSK's competitor, Ranbaxy Pharmaceuticals, Inc. (“Ranbaxy”) sought to introduce a generic equivalent of Ceftin tablets to the market. See id. ¶ 29. Although GSK obtained an injunction from a district court against Ranbaxy on December 19, 2000, preventing sale of the generic equivalent, the circuit court reversed this decision in August of 2001, finding that Ranbaxy's generic version did not infringe the Ceftin patent, and enabling immediate sale of the generic equivalent (subject to FDA approval), see Mot., Ex. 7, starting from the fourth quarter of the Ceftin Contract (the third calendar quarter of 2001). See Compl. ¶ 30; Mot., Exs. 5, 19. PDI promptly informed investors of that unfavorable to PDI development and enumerated six options that PDI was considering as a response, with one of these options being termination of the Ceftin Contract. See Compl.¶ 30, 65-66; Mot., Exs. 5-6. In November of 2002, the Ceftin Contract was terminated by mutual agreement between PDI and GSK, and PDI notified investors that PDI was taking a $24 million charge as a reserve for potential losses related to the Ceftin Contract. See Mot., Ex. 8. *12 Plaintiffs set forth seven claims related to the Ceftin Contract and asserting that Defendants' statements or action were fraudulent or false and misleading. Three of these claims relate to Defendants' past or contemporaneous actions and read as follows: (A) [T]he Company publicly stated at the time that the Ceftin contract had a five year term, [and concealed the fact that] the patent for Ceftin tablets was due to expire in 2003. (B) Upon execution of the [Ceftin C]ontract, PDI ... took steps to pump up Ceftin sales and profits in the fourth quarter of 2000, by inducing drug distributors to stock up on Ceftin, [causing] Company's reported Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 85 of 139 PageID: 1025 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 11 earnings [to rise during] the fourth quarter of 2000[by] $0.77 per share. (C) [Then] PDI attempted to increase ... Ceftin's market share ... in the first quarter of 2001 by promoting the drug [in the fashion later disapproved] by ... FDA, even though there was no substantial evidence that the drug was effective [in the fashion advertized by PDI]. Compl. ¶¶ 24-26. None of these allegations, however, presents a claim cognizable under the securities laws. Plaintiffs' claim (A) is based on facts contradicted by the documents upon which Plaintiffs rely for their information, and which indicate that, in November of 2000 (before the beginning of the Class Period), Defendants disclosed that GSK's patent of Ceflin tablets was expiring in 2003, while GSK's patent of Ceflin suspension was expiring in 2008. Defendants repeated this disclosure in March of 2001. See Mot., Exs 18-19. Since, contrary to Plaintiffs' allegations, Defendants did not conceal true information, Plaintiffs' claim (A) will be dismissed for failure to plead fraud. Plaintiffs' claims (B) and (C) are similarly insufficiently pled since Plaintiffs failed to set forth any nexus between PDI's sales aggressive techniques aimed at the distributors who were purchasing Ceftin from PDI and the alleged injuries suffered by investors. 13 See Glickman, 1996 U.S. Dist. LEXIS 2325, at *36. Thus, Plaintiffs' claims (B) and (C) related to the Ceftin Contract and based on Defendants' contemporaneous or previous actions will also be dismissed. 13 Moreover, any PDI's “inducing,” “pumping” or “promoting” marketing techniques called into question by Plaintiffs took place before the beginning of the Class Period and, under the Efficient Capital Market Hypothesis, could not have caused any injury to the investors because the information was long available to and absorbed by the market as of the first day of the Class Period. See Basic, 485 U.S. 224; Hayes, 982 F.2d 104. Plaintiffs' remaining four claims related are based on Defendants' forward-looking projections. 14 These claims are likewise insufficiently pled. First, Plaintiffs assert that, 14 In addition to being expressly qualified by Defendants as “forward-looking,” see, e.g., Mot., Ex. 7, all Defendants' projections challenged by Plaintiffs with respect to the Ceftin Contract were paraphrased in language unambiguously indicating that these statements were forward-looking and, therefore, will be examined by this Court as such. See Clorox Co. Secs. Litig., 238 F.Supp.2d 1139, at *16. [f]ollowing the FDA [order] to stop distributing [the promotional] materials, Ceftin's share of [the antibiotic] market declines. [However,] in the second quarter of 2001, the Company [increased] Ceftin's sales by announcing [that] a price increase [would] take effect in the beginning of July, which induced distributors to increase their Ceftin inventories in advance [and] added $0.13-$0.20 per share to the Company's reported earnings. Compl. ¶ 28. Plaintiffs maintain that Defendants' announcement was made with intent to deceive the investors. See id. This claim is not sufficiently pled in that it fails to show a nexus between PDI's pricing policies disseminated among the distributors purchasing Ceftin from PDI and PDI's alleged fraud on the market. See Glickman, 1996 U.S. Dist. LEXIS 2325, at *36. Indeed, Plaintiffs-being investors in PDI stock-could not have been defrauded by or relied upon PDI's announcement that PDI would increase Ceftin's prices in July of 2001. Plaintiffs' pleading (based on the alleged “ripple-effect” of Defendants' marketing techniques, which, allegedly, affected Ceftin distributors' purchasing behavior, which, in turn, impacted the level of demand for Ceftin during the second quarter of 2001, which, in turn, raised PDI's revenue which, in turn, affected PDI's stock prices, which, in turn, created an incentive for Plaintiffs to purchase PDI's stock) is unduly speculative and fails to provide this Court with the nexus required by the securities laws. See Digital Island Sec. Litig ., 357 F.3d at 328 (citing Rockefeller Ctr., 311 F.3d at 224) (“The Reform Act requires a ‘strong inference’ of scienter, and accordingly, alters the normal operation of inferences under Rule 12(b)(6).... [P]laintiffs in securities fraud actions ... may not benefit from inferences flowing from vague or unspecific allegations....”). *13 Next, Plaintiffs assert the following: “In August 2001, [after] the Federal Circuit decision [allowed marketing of] generic version of Ceftin ..., [D]efendants conceded ... that this decision would reduce the Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 86 of 139 PageID: 1026 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 12 profitability of the Ceftin contract. However, [Defendants] assured investors that reduced profits were the “worst-case scenario” for the Ceftin contract, ... and the Company could avoid losses by terminating the contract.... [T]he representation concerning contract termination was false, as [D]efendants knew that termination of the Ceftin contract would cost the Company millions of dollars in write-offs of capitalized contract acquisition costs, continued liability for sales returns and the costs of administering Medicaid rebates, and significant costs related to the retention of hundreds of sales and marketing personnel whose assignment ended with the termination of the Ceftin contract.... Defendants did not publicly disclose the fact that PDI would incur these costs if the Company terminated the Ceftin contract until November 13, 2001. Compl. ¶¶ 25-28, 30, 32. This lengthy and ambiguous chain of allegations appears to combine three separate claims, since Plaintiffs' Complaint also asserts as follows: (A) On August 14, 2001, ... Defendants participated in a conference call regarding the Company's results for the second quarter of 2001 ... [D]efendants explained that the Company would likely earn $0.20 per share less than previously forecasted for the third quarter due to a Ceftin inventory glut at distributors.... Defendants' statements ... were materially false and misleading when made because ... Ceftin sales were unlikely to increase given the glut of inventory at the distributor level. (B) [Contacting the investors through] August 23, 2001 ... press release [and] August 24, 2001 conference call, Saldarini stated that (1) the Company was expecting Ceftin to contribute $0.30-$0.40 earnings per share in the fourth quarter of 2001[and] $0.30 ... in 2002. [This prediction was false because of the decline of Ceftin's market share from 10.8% to 10.7% during the first and second quarters of 2001, and also because] PDI had never increased Ceftin's market share, except when [PDI] had unlawfully promoted the drug, or artificially inflated [the] sales [by announcing the price increase; and] (2) the earnings reductions were the “ugliest scenario” [that could occur if the Ceftin Contract was terminated. This prediction was false and misleading because the usage of term “ugliest scenario” indicated that PDI intentionally] failed to disclose that the termination of the Ceftin contract ... would cause PDI [substantial] expenses. Compl. ¶¶ 62-63, 65, 68-69 (referring to ¶¶ 24, 26-28, 30, 40-41, 61). While Plaintiffs maintain that their claim (A) indicates that Defendants made a fraudulent projection, Plaintiffs' claim fails to allege any falsity on the part of Defendants. Defendants' projection that “the Company would likely earn ... less than previously forecasted ... due to a Ceftin inventory glut at distributors,” id. ¶ 62, the projection is entirely coherent with Plaintiffs' claim that “Ceftin sales were unlikely to increase given the glut of inventory at the distributor level.” Id. ¶ 63. Since Plaintiffs' claim (A) fails to allege any fraud on the part of Defendants, the claim will be dismissed. See Chiarella, 445 U.S. at 234-35. *14 Plaintiffs claim in (B)(1) similarly fails to plead fraud adequately. According to Plaintiffs, Defendants' projections of an increase in earnings per share had to be false because the Ceftin's market share had been declining prior to Defendants' projections. The decline of the Ceftin's market share, however, does not render Defendants' projections necessarily false. The amount of a good demanded is presumed to be steadily increasing (except for goods that become obsolete) since market economies like the United States are presumed to increase their “economic pie.” 15 See A. Michell Polinsky, An Introduction to Law and Economics (“Introduction Economics” ) 7 (2d ed.1989). The concept is referred to as Pareto efficiency, which implies that the societal purchasing power, as a whole, increases, since the society can increase at least one individual's slice of the pie, without making any other individual worse off. See Emilio Barucci, F. Barucci, and E. Barucci, Financial Markets Theory: Equilibrium, Efficiency and Information 8 (2002); George Cohen, Posnerian Jurisprudence and Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 87 of 139 PageID: 1027 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 13 Economic Analysis of Law: The View from the Bench, 133 U. Pa. L.Rev. 1117, 1120 (1985). The concept implies an increase of the societal buying power instead of keeping this buying power at the zero-sum gain, meaning that the economic pie is continuously and infinitely increasing, that is, factoring out temporary fluctuations caused by unfavorable periods in the business cycle. 16 See Introduction Economics 7. 15 The concept of “economic pie,” the term roughly equated with the “accumulated wealth of a nation,” is derived from Adam Smith's “Inquiry into the Nature and Causes of the Wealth of Nations,” the famous study that gave birth to the discipline of economics. See, e.g., Ellen Byers, Corporations, Contracts, and the Misguiding Contradictions of Conservatism, 34 Seton Hall L.Rev. 921 (2004). 16 The term “business cycle” (or “economic cycle”) refers to the periodic fluctuations of economic activity about its long term growth trend. The cycle involves shifts over time between periods of relatively rapid growth of output (“recovery” and “prosperity”), alternating with periods of relative stagnation or decline (“contraction” or “recession”). See Michael Baye, Managerial Economics and Business Strategy (“Economics” ) 130 (4th ed.2002). To illustrate, if the total market for prescription drugs during the fiscal period One equals 1 billion dollars, and cephalosporin antibiotics constitute, for example, 0.1% of the total market, with Ceftin holding, for example, 1% market share of all cephalosporin antibiotics (i.e., 0.001% of the total market, or 1 million in dollar value) but, during the fiscal period Two, the total market increases 1%, while the market share of Ceftin drops 1% (thus, becoming 0.00099% of the total market), the dollar value of such reduced Ceftin's market share during the fiscal quarter Two becomes $1,009,800, meaning that the revenue increases by $9,800 (allowing for an increase in earnings per share), even though Ceftin's market share declined. Since the prescription drug market in the United States has been continuously increasing, see, e.g., Pharmaceuticals-North America, Factiva, a Dow Jones and Reuters Company (May 1, 2006) (stating that, in 2005, “the U.S. continued [its] record solid growth in prescription drug sales [being] the world's largest market, [and the sales grew] to $251.8 billion ... from $239.8 billion in 2004,” i.e., 5%), Ceftin's one-tenth of one percent decline in its market share could not possibly constitute a fact that, in August of 2001, Defendants knew that Ceftin's earnings per share would not grow by the fourth quarter of 2001. Since Plaintiffs' claim ignores the possibility that a decline in market share could still result in an increase in earnings per share, and that Defendants could legitimately factor such increase in Defendants' projections (or sincerely believe that PDI could “turn the tide” and increase Ceftin market share through a skillful marketing), Plaintiffs plead not a fact but a speculation insufficient to meet the requirements set forth by the Reform Act. 17 See GSC Partners CDO Fund, 368 F.3d at 239; Read-Rite Corp. Sec. Litig., 115 F.Supp.2d 1181. Therefore, Plaintiffs' claim in (B)(1) will be dismissed. 17 Moreover, Plaintiffs' claim in (B)(1) fails to plead fraud adequately because Plaintiffs make an assertion contradicting the events set forth elsewhere in Plaintiffs' Complaint. Specifically, Plaintiffs claim that PDI never increased Ceftin sales “lawfully” and, therefore, was not likely to increase it in the future. This claim directly contradicts Plaintiffs' other statement that Ceftin's sales were indeed increased during the fourth quarter of 2000 (due to the rise in demand attributed to the fall-winter “flu season”) without any marketing tactics that Plaintiffs could qualify as “unlawful.” See Compl. ¶ 26. Hence, it appears to this Court that Plaintiffs accuse Defendants of committing fraud because Defendants did not describe some of Defendants' more aggressive marketing techniques as “unlawful.” See id. ¶¶ 26-28, 69. The Court, however, is aware of no securities law (and Plaintiffs enlighten this Court about none) requiring Defendants to use any self-degrading or self-demeaning adjectives when Defendants disclose their marketing tactics to the investing public. See Ash v. LFE Corp., 525 F.2d 215, 220 (3d Cir.1975) (“[What matters] is the objective sufficiency of the disclosure”). *15 Plaintiffs' claim in (B)(2) is also insufficiently pled. Plaintiffs asserts that Defendants' prediction about the “ugliest scenario” was false because the prediction necessarily meant that PDI could avoid any losses if the Ceftin Contract was terminated. Compl. ¶ 32, 69. However, neither Defendants' August 23 nor August 24 statements included such a prediction. 18 The August 23 press release merely listed six of PDI's business options, briefly summarizing them as follows: 18 Defendants' August 23 and August 24 statements contained neither the phrase “avoid losses” nor any other phrase that the Court could perceive as Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 88 of 139 PageID: 1028 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 14 interchangeable, in its meaning, with avoidance of losses. See Mot., Exs. 6, 7. PDI has had preliminary discussions with GSK [and GSK is still] exploring ... all ... measures to [prevent introduction of generic competition to the market]. Given the uncertainties surrounding the entry of a generic [equivalent to] tablets ... and the uncertainty of the impact ... PDI is ... evaluating its current options. These options include [ (a) ] termination [of the Ceftin Contract]; [ (b) ] assessing [the marketing] strategies [for each form of Ceftin] individually; [ (c) ] evaluating Ceftin pricing scenarios; [ (d) ] assessing demand creation opportunit[ies] ...; [e) ] assessing cost reduction measures; and [ (f) ] evaluating the impact of the purchase minimum reset provisions.... Mot., Ex. 6. On August 24, referring to financial implications of any one of these options, PDI told investors that “PDI expect[ed] a severe impact on net revenues and profitability,” id ., but refused to detail any other negative aspect of these options. Saldarini expressly stated that: [t]he Company's ... future business decisions [would be] difficult or impossible to predict, and many of which [would be] beyond the Company's control. [As of August 24, 2001, PDI was] prepared [to continue the Ceftin Contract and] accept a reduced profit ... in exchange for sustaining [the market] platform that [PDI had] created [since] it's important in terms of the [business] model that [PDI has been] building.... [Hence,] while [PDI] own[s] the right to terminate, [PDI would be still] examining that right ... and ha[d not] made any firm [decisions] yet.... [Any] conclusions regarding [the above-listed] options [would be provided] later in the year [when PDI would be] able to give additional updates [about] those options.... [When PDI] finalize[s] and put[s] together [its] full ... picture [PDI would] obviously get back to [the investors] with additional guidance. [Depending whether the generic equivalent is introduced only as tablets or as tablets and suspension, PDI would] reexamine [the above- listed options] again.... If [PDI decides] to deal exclusively with suspension, [PDI] would need to renegotiate ... with GSK in that regard, and [PDI had not yet] approached GSK on that issue.... [PDI] would get back to [the investors] with more guidance if [PDI thinks one particular option would] materialize. Mot. Ex. 7. In addition, Saldarini indicated that, under any one of the above-listed six options, PDI anticipated a negative financial impact. Saldarini stated that *16 [PDI's Ceftin] inventory levels [were] high in anticipation of flu season [and, due to introduction of the generic equivalent, PDI was] not expecting any ... sales [except for those pre-arranged] during the third quarter [of 2001. Moreover, PDI would not be] making[,] in the third quarter [,] any changes in sales force deployment.... [PDI's Ceftin team] ranges between 125 and 175 full-time [employees and] the ... team [of] 100 to 125. Id. Thus, Defendants' August 23 and 24 statements were not incompatible with the possibility of PDI's future losses since these statements, while unambiguously predicting that (1) revenues were to drop, (2) inventories would substantially exceed the demand, and (3) workforce might be idled, did not address either the issue of “losses” or the extent of such losses with respect to any one of these six options. See id. Defendants expressly stated that such disclosure would be proper only when the election is made. See id. Since Plaintiffs' claim (B)(2) fails to plead fraud sufficiently, this claim will be dismissed. See Rockefeller Center, 311 F.3d at 224 (“ ‘[The Court will] disregard ‘catch-all’ or ‘blanket’ assertions that do not live up to the Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 89 of 139 PageID: 1029 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 15 particularity requirements of the statute” ') (quoting Green Tree Fin. Corp., 270 F.3d at 660). In their final set of claims related to the Ceftin Contract, Plaintiffs assert that Defendants were motivated by Defendants' desire to prevent “the negative effect [which the disclosure of losses associated with the termination of the Ceftin Contract] would have on the Company's stock” and, therefore, Defendants must have fraudulently concealed such losses in order to deceive the investors. Compl. ¶ 64. Plaintiffs' allegations, however, consist of nothing but Plaintiffs' bold assertions and, therefore, are insufficient to meet the stringent pleading requirements of the Reform Act. Moreover, the fact that Defendants did not sell a single share of their own stock during the Class Period effaces Plaintiffs' assertions about Defendants' motives. This Court fails to perceive what possible concrete and personal benefits Defendants were trying to obtain by fraudulently inflating PDI's stock price if Defendants were not selling their shares. See Novak, 216 F.3d at 311; see Wilson, 195 F.Supp.2d at 633 (“Motive entails allegations that the individual corporate defendants stood to gain in a concrete and personal way from one or more of the allegedly false or misleading statements and wrongful nondisclosures”). “If [this Court] were to conclude that [Defendants] meant to defraud investors, [the Court] would have to believe that they did so for the sheer joy of it rather than for profit.” SEC v. Steadman, 967 F.2d 636, 642 (D.C.Cir.1992). In sum, the Court finds that Plaintiffs failed to allege any factual predicate indicating that Defendants's contemporaneous acts caused Plaintiffs' injuries or that Defendants knew their projections related to the Ceftin Contract were false and misleading and/or intended to defraud investors. Consequently, all Plaintiffs' claims related to the Ceftin Contract will be dismissed. B. LOTENSIN CONTRACT 1. Context *17 On May 22, 2001, the first day of the Class Period, PDI announced that it had entered into its second performance-based contract. This contract was with Novartis Pharmaceutical Corporation (“Novartis”) and provided for PDI's exclusive rights to marketing, promotion and sale of Lotensin, a drug used for treatment of hypertension (“Lotensin Contract”). See Compl. ¶¶ 37, 39, 59; Mot., Ex. 22. The Lotensin Contract had a two-and-half-year term and, under the contract, PDI stood to receive “a split of incremental net sales above specified baselines.” See Compl. ¶ 39; Mot., Ex. 22. Upon entering the Lotensin Contract, PDI advised the investing community that, “[i]n the event [PDI's] estimates of the demand for Lotensin [were] not accurate[,] or more sales and marketing resources than anticipated are required, the [Lotensin Contract] could have a material adverse impact on [PDI's financial] results.” Mot., Exs. 12, 14, 23. 2. Plaintiffs' Challenges Plaintiffs challenge thirteen forward-looking and contemporaneous statements that Defendants made in connection with the Lotensin Contract. These statements were made on the following six dates: May 22, 2001, August 14, 2001, November 12, 2001, November 13, 2001, February 20, 2002 and May 14, 2002, see ¶ ¶ 59, 62, 71, 77, 79, 81, 85, 87, and will be examined by this Court chronologically. a. May 22, 2001 According to Plaintiffs, Defendants made false and misleading statements when, [o]n May 22, 2001, [PDI] held a conference call with securities analysts to discuss and answer questions regarding the contract with Novartis for distribution of Lotensin. During the conference ..., Saldarini represented that[,] although startup costs related to the Lotensin [C]ontract, such as training and promotional costs, would likely depress earnings for the second and third quarters [of 2001, i.e., the first and second quarters of the Lotensin Contract], the [C]ontract would generate (a) substantial earnings of $0.25 per share to its fourth quarter of 2001 [i.e., the third quarter of the Lotensin Contract]; (b) revenues of $225 to $250 million from 2001-2003 [i.e., through the life of the Lotensin Contract]; and (c) operating income of $45 to $62.5 million over the same Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 90 of 139 PageID: 1030 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 16 period[,] with an operating profit margin of 20 to 25%. Compl. ¶ 59. It appears from this statement that Plaintiffs challenge two groups of Defendants' projections as materially false and misleading: 19 (1) those related to earnings per share expected during the last quarter of 2001; and (2) those related to revenues, operating income and operating profit margin expected during the remainder of the Lotensin Contract. Plaintiffs assert that the nine facts discussed below verify that Defendants knew their projections were materially false and misleading. Id. ¶¶ 40-41, 43, 45, 59-60, 73, Opposition at 23-27. 19 All Defendants' statements challenged by Plaintiffs with respect to the Lotensin Contract were either expressly identified as-or paraphrased in the language unambiguously indicating that these statements were- forward-looking. See Clorox Co. Secs. Litig., 238 F.Supp.2d 1139, at *16. As a key factual predicate for Plaintiffs' claim that Defendants' projections were false and misleading Plaintiffs offer the fact that Defendants did not disclose the Lotensin baseline. According to Plaintiffs, the fact of such nondisclosure indicated that “Defendants did not expect the Lotensin [C]ontract to produce any profit” but wished to conceal this fact from investors. Opposition at 23 (emphasis in original). The claim, as pled, fails to assert a violation of the securities laws since Defendants did not have any obligation to disclose the baseline. 20 See Oran, 226 F.3d at 286-87 (quoting Basic, 485 U.S. at 239 n. 17, and citing Burlington, 114 F.3d at 1432). Therefore, Defendants' silence cannot serve as an indication of what Defendants knew or did not know, including whether the Lotensin Contract would or would not be profitable. 21 See Chiarella, 445 U.S. at 235. Indeed, if this Court were to find otherwise, any corporation not detailing every aspect of the corporation's agreements with its clients would be presumed to know that these agreements are unprofitable, and such presumption would render most of United States businesses permanently involved in unprofitable contracts. 20 Plaintiffs assert that Defendants had the duty to disclose the baseline because Defendants “chose[ ] to speak about the Lotensin contract, including representations that PDI would earn ‘substantial’ revenues and profits,” and that reference to “revenues and profits” created a duty to disclose the baseline. Opposition at 28. Plaintiffs err. Defendants' belief that PDI would exceed the baseline did not require Defendants to execute such disclosure. The duty to disclose a piece of information is created by either incidents of insider trading or by a statute, or by a previous statements containing an incorrect piece of information (e.g., containing a wrong baseline or qualifying it as “low”) and, thus, requiring a correction. See Oran, 226 F.3d at 286-87. Neither one of these three scenarios is applicable to the case at bar. The mere fact that Defendants disclosed their expectation with respect to PDI's revenues and profits cannot qualify as a “false” previous information requiring a corrective disclosure. 21 Plaintiffs' Complaint does not allege that PDI had the practice of disclosing any specific details of PDI's contracts with any client to the investing community. See generally, Compl. *18 Plaintiffs then allege that PDI knew about the falsity of PDI's predictions with respect to the fourth quarter of 2001 because (A) [a]t the inception of the Lotensin [C]ontract, ... PDI encountered significant difficulties in training sales representatives and obtaining training and marketing materials, [and] Defendants [had to be] aware that these initial problems would ... adversely impact PDI's short-term ability to increase Lotensin sales. (B) On November 13, 2001, [when D]efendants disclosed that ... the Lotensin [C]ontract ... produce[d] a loss ..., [D]efendants blamed th[e] ... disparity on delay in completing market research and the preparation of marketing materials. Compl. ¶¶ 41-42, 61. Plaintiffs assert that these post- May 22 facts indicate that Defendants knew on May 22 that their predictions with respect to any profit from the Lotensin Contract were false. Plaintiffs, however, fail to plead any facts indicating that, as of May 22, Defendants knew about the upcoming problems and how these problems would affect PDI's profit. Since Defendants' May 22 statements were made a few days after the Lotensin Contract was executed and long before PDI could become aware of the training and marketing difficulties that lay ahead, Plaintiffs offer nothing but their conjecture in support of Plaintiffs' claim with respect to Defendants' May 22 state of mind. 22 Such pleadings Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 91 of 139 PageID: 1031 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 17 are, however, insufficient. See NAHC, Inc. Sec. Litig., 306 F.3d at 1330 (“To be actionable, a statement ... must have been misleading at the time it was made”) (citing Nice Sys., Ltd. Sec. Litig., 135 F.Supp.2d at 586). The fact that in November of 2001, six months after the May 22 conference, Defendants acknowledged the problems, which arose during the first few months of the Lotensin Contract, does not show that Defendants falsified their vision of the future in May of 2001. See Suprema Specialities, Inc. Sec. Litig., 334 F.Supp.2d at 647 (“Allegations that a company's later financial difficulties imply that earlier financial statements were untrue or misleading are ‘fraud by hindsight’ and do not state a claim”); Harris, 998 F.Supp. at 1455 (“hold[ing] up Defendants' predictions against the backdrop of what actually happened” is insufficient to establish scienter), aff'd, 182 F.3d 799, reh'g, en banc, denied, 209 F.3d 1275. 22 Moreover, Plaintiffs' allegations contradict Plaintiffs' own statement that “PDI deemed the retention of qualified salespersons ... critical” to PDI's success and, therefore, always kept an ample pool of trained sales professionals. Compl. ¶ 61. The presence of such ample pool of sales professionals on May 22, 2001, at the outset of the Lotensin Contract, suggests that PDI could not anticipate the upcoming problems related to training of the sales force. In the alternative, Plaintiffs' allege that PDI's projections with respect to the fourth quarter of 2001 were known to be false and misleading since, in Plaintiffs' opinion, Defendants knew that the Lotensin [C]ontract would ultimately be unprofitable because ... PDI's sole compensation for its marketing efforts was a split of net Lotensin sales over a baseline amount ... set at a level that would cause PDI to lose money ... throughout 2001 [unless] PDI would [be able] to increase Lotensin sales by another $10 million in the quarter ... boost [ing] sales by an additional 13% [and the increase in Lotensin sales actually achieved during the fourth quarter of 2001 was not that high]. *19 Id. ¶ 41. However, the sole fact that, six-to-nine months prior to the fourth quarter, Defendants failed to foresee that the sales would not climb above 13% (an increase certainly not unthinkable) cannot qualify as a fact indicating that, as of May 22, 2001, “Defendants knew that the Lotensin [C]ontract would ultimately be unprofitable.” See Grossman, 120 F.3d at 1124 (“[I]t is clearly insufficient for plaintiffs to say that the later, sobering revelations make the earlier, cheerier statement a falsehood”) (quoting GlenFed Sec. Litig., 42 F.3d at 1548-49); Boston Tech. Sec. Litig., 8 F.Supp.2d at 53 (“A general averment that defendants made a statement knowing at the time what later ‘turned out badly’ does not suffice”). The fifth fact that Plaintiffs offer in support of their claim is part calculation and part Plaintiffs' opinion. Plaintiffs state that, although Saldarini projected earnings of $0.25 per share to the fourth quarter of 2001, i.e., during the third quarter of the Lotensin Contract, on May 22, 2001, Defendants falsified their projections because, [t]o achieve the $0.25 earnings per share forecasted by [D]efendants, PDI needed to increase Lotensin sales by over 30%, which [Plaintiffs believe] was not reasonably possible after only a few months of promotional activity ... in a crowded highly competitive market. Id. ¶ 41-42. However, PDI never promised these $0.25 earnings. As the very document upon which Plaintiffs rely reveals, Saldarini announced the anticipated earnings from Lotensin of merely $0.10 per share for the fourth quarter, see Mot., Ex. 3, a moderate figure indeed. Moreover, Plaintiffs concede that “Lotensin's share of the ... market had increased by the fourth quarter of 2001,” Compl. ¶ 41, although Defendants' efforts did not generate the earning per share which Defendants anticipated in May of 2001. The difference between Defendants' projections and the actual outcome cannot amount to a fact verifying Defendants' May 22 knowledge that their projections were false and misleading. See Wielgos, 892 F.2d at 514 (“If all estimates are made carefully and honestly, half will turn out too favorable to the firm and the other half too pessimistic ..... [T]he firm is not liable despite error”). Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 92 of 139 PageID: 1032 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 18 Finally, Plaintiffs proffer the following four facts with respect to PDI's Lotensin projections for 2002-2003 as indicators that Defendants knew their 2002-2003 projections were false: (A) [At the time of the May 22, 2001, conference call,] there were at least five [substitute goods on the market] with larger market shares than Lotensin, and Lotensin's share of that market was declining. (B) [At the time of the May 22, 2001, conference call, t]here was no new data or other information demonstrating any previously unknown advantage of Lotensin over competing [substitute goods]. (C) [O]n May 23, 2001, WR Hambrecht & Co. published an analyst report based on [D]efendants' announcement during a conference call on May 22, 2001.... In the report, analyst[s] Josh Fisher and Rosemary Wang [entered their opinion that] PDI's main goal with Lotensin [would] be to try and slow- down its market share deterioration. *20 (D) Plaintiffs' own opinion that Defendants' knew their predictions were false. 23 23 Plaintiffs' opinion is termed as an assertion that Defendants knew about PDI's inability to achieve “revenues of $225 to $250 million from 2001-2003; and ... operating income of $45 to $62.5 million over the same period with an operating profit margin of 20 to 25%.” Compl. ¶ 60. It shall be noted that Plaintiffs' reading of Defendants' statement is incorrect. Defendants' statement was silent as to PDI's operating profit margin. See Mot., Ex. 3. Rather, Defendants stated that PDI's operating profit, a concept different from that of operating profit margin, would be 20 to 25% of revenue. See Mot., Ex. 3. The term “operating profit margin” means revenue after subtracting such items as cost of sales, general and administrative expenses, sales and marketing expenses, research and development expenses, depreciation of property, plant and equipment and any other recurring non-financing expense associated with a company's ongoing operations. See Introduction at 153; Charles Horngren, Gary Sundem, John Elliott, Introduction to Financial Accounting (“Introduction” ) 757 (8th ed.2002); see also Economics at 554. “Profit margin” is an the entirely different term, and it means “a measure of profitability” calculated as net income divided by revenue. See Jamie Pratt, Financial Accounting in an Economic Context (“Financial Accounting” ) 761 (6th ed.2005). Plaintiffs, however, do not explain how the revenue and operating profit figures indicate that Defendants knew these figures were unattainable, especially in view of the fact that Defendants, having no previous negative experience with Lotensin, were making a prediction of financial performance for the next two and a half years. Conversely, Saldarini's projection of $225 to 250 million for the remainder of the Lotensin Contract appears to be an expression of Defendants' sincere belief in view of Saldarini's other statement, namely, that PDI anticipated about $30 million in revenue for the last quarter of 2001. See Mot., Ex. 3. This Court's quick assessment suggests that these statements are coherent. Since the Lotensin Contract was to run until December 31, 2003, see Mot., Ex. 22, and the years 2002 and 2003 presented eight fiscal quarters, $30 million by 8 gives $240 million, suggesting that Saldarini factored in $15 million downward and $10 million upward variance to account for possible fluctuations of the expected Lotensin market. Compl. ¶¶ 40, 43, 60. None of these assertions provides Plaintiffs with a properly pled factual support. The fact that there were five substitute goods rivaling Lotensin does not show that Defendants knew their projections were false and misleading. 24 Most goods in the United States market have rival substitutes, but it does not prevent these goods from staying in and even winning the competition. Similarly, the fact that Lotensin market share was declining prior to the Lotensin Contract does not show that Defendants knew their projections were false and misleading since the declining market share does not necessarily indicate decline in revenue. 25 See supra this Opinion at pp. 28-29. Therefore, the state of the competition in the market of hypertension drugs existing as of-or prior to-May of 2001 cannot serve as a sufficiently pled fact indicating that Defendants knew their predictions for the next two years were false. See Digital Island Sec. Litig., 357 F.3d at 328. 24 One kind of good is said to be a substitute good for another kind insofar as the two kinds of goods can be consumed or used in place of one another in at least some of their possible uses, e.g., margarine and Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 93 of 139 PageID: 1033 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 19 butter, or petroleum and natural gas. See Economics 125. (One good is a perfect substitute for another only if it can be used in exactly the same way, at exactly the same cost, and with exactly the same quality of outcome; that is, when there is no particular incentive for a customer to prefer one over the other. See id.) The concept of “substitute goods” is related to the concept of “demand.” The latter stands for economic want backed up by purchasing power, i.e., it is an estimated amounts of a certain good buyers are willing and able to buy at all possible prices, assuming all other non-price factors remain the same. See Economics 34-35, 238-40. When more people want a good because of a change in buyers' tastes or needs, the quantity of the good demanded at all prices and in all substitutable forms will tend to increase. For instance, during cold weather, when more people suffer from colds, demand for all types of cold medicines increases. See id. at 35-39, 87-92. 25 Moreover, the declining market share of Lotensin prior to PDI's agreement with Novartis is of little relevance to the inquiry at bar since PDI could believe that it could “turn the tide” and increase Lotensin market share through skillful marketing campaigns, creation of original custom services, introduction of various incentives and a whole panoply of other marketing techniques. Plaintiffs' reliance on WR Hambrecht's analyst report is even more inexplicable. According to Plaintiffs, the “analyst[s'] report [was] based on [D]efendants' announcement during a conference call on May 22, 2001.” Id. ¶ 43 (emphasis supplied). However, using the very same information from PDI that Plaintiffs had, the analysts predicted a much more somber picture than that referred to by Plaintiffs. Plaintiffs' subjective interpretations of that information does not show that the picture painted by Saldarini was false. See Basic, 485 U.S. 224. Moreover, it is not immediately obvious to this Court how Plaintiffs can simultaneously assert that Defendants' statements: (1) were unduly optimistic, (2) served as a basis for the somber findings made by the analysts, (3) contradicted these very findings, and (4) misled Plaintiffs who were availed to the entire mosaic of representations, including both the analysts' report and PDI's statements, all existing on the market simultaneously under the Efficient Capital Market Hypothesis. Finally, in addition to their reliance on the nine facts discussed above, Plaintiffs maintain that Defendants' knowledge of the falsity of their May 22 statements is evident from three facts which indicate that Defendants had a motive to defraud the investing community. First, Plaintiffs allege that PDI entered into the Lotensin Contract so it could preserve the employ of 500 to 600 sales representatives (who became idle when the GSK Contract was terminated) and-after PDI did so without regard to the losses that Defendants knew would ensue from the Lotensin Contract-PDI kept falsifying its financial projections in order to conceal PDI's true motive from investors. Id. ¶ 34. Plaintiffs' allegations defy logic since it would have been anomalous for Defendants, PDI's top executives and holders of 40% of the Company, to enter a “losing” contract in order to temporarily preserve the jobs of 500-600 employees because doing so would create a grave risk to Defendants' own investment and employ and still leave these 500-600 employees unemployed as soon as the Lotensin Contract proved unprofitable. Moreover, Plaintiffs offer no facts indicating that the very employees idled by termination of the GSK Contract were the ones actually assigned to the Lotensin Contract. Conversely, it appears that the workforce assigned to the Lotensin Contract was different from the GSK one since GSK employees were trained as a result of the GSK Contract, see Compl. ¶ 34, while the training of Lotensin sales force required, according to Plaintiffs, four months. Moreover, Plaintiffs' assertions that PDI's desire to retain its trained employees must mean that the Lotensin Contract was a “losing” one is nothing but Plaintiffs' conjecture since the facts are merely that: (A) the ex-GSK employees 26 were not laid off; and (B) PDI invariably adhered to the industry practice of keeping qualified employees during the periods of slowdown. See Compl. ¶¶ 30, 34; Mot., Ex. 3. Plaintiffs fail to provide any nexus between PDI's retention of qualified employees and the alleged fraudulent concealment of the fact that the Lotensin Contract was meant to be a “losing” one. See Glickman, 1996 U.S. Dist. LEXIS 2325, at *36; cf. Rockefeller Ctr., 311 F.3d at 224; Mortensen, 123 F.Supp.2d 1018; Livent, Inc. Sec. Litig., 78 F.Supp.2d 194. Plaintiffs' assertion that PDI's adherence to a common business practice indicates that Defendants wished to defraud investors similarly fails to plead a fact meeting the requirements of the Reform Act. 27 See GSC Partners CDO Fund, 368 F.3d at 237; San Leandro, 75 F.3d at 814; Tuchman, 14 F.3d at 1068; Nice Sys., Ltd. Secs. Litig., 135 F.Supp.2d at 584; Boeing Sec. Litig., 40 F.Supp.2d at 1175. Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 94 of 139 PageID: 1034 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 20 26 Although PDI's sales force was contracted rather than permanently employed, this distinction, however, is irrelevant to the analysis conducted by this Court, and the Court refers to these sales representatives as “employees.” 27 Corporate executives are frequently asked to manage and monitor economic business cycles to gain a competitive advantage. See Economics 51, 466-92. In modern business, effective business-cycle management often involves programs aiming to prevent layoffs during the period of recession (be it that of the nation or of the industry), since the firms know that, as soon as the economy starts to recover or the industry's business picks up, any apparent labor savings obtained from layoffs would be obliterated by the process of hiring and retraining new employees. See, e.g., Peter Navarro, How To Avoid A Business- Cycle Wipeout; CIOs Play an Integral Role in Helping Their Companies ride the Economic Cycles, Fin. Mgt. at 59 (June 1, 2006). *21 Plaintiffs also assert that PDI had a motive to deceive the investors because PDI “apparently intended [to be] a loss leader in the hope of obtaining future profitable business from Novartis.” See Compl. ¶¶ 44-45, 61. This claim is also insufficiently pled. In support of this claim, Plaintiffs rely on Saldarini's later statement (made during November 13, 2001) that “the Lotensin [C]ontract was a ‘long-term strategic opportunity” ’ for PDI, id. ¶ 45, and offer Plaintiffs' opinion that the usage of the phrase “long-term strategic opportunity” must mean that PDI always knew that the Lotensin Contract would be “unprofitable.” See Opposition at 28-29 (citing to Compl. ¶¶ 46, 87, 89). However, Plaintiffs' reading of ulterior motives into Defendants' garden variety phrase “long- term strategic opportunity” is pure speculation rather than a fact cognizable under the Reform Act. 28 See Digital Island Sec. Litig., 357 F.3d at 328. 28 Moreover, Plaintiffs' claim that PDI, by entering into the Lotensin Contract, was hoping to impress Novartis with PDI's selling abilities, see Compl. ¶ 87, contradicts Plaintiffs' claim that the Lotensin Contract was a losing one since it would be anomalous for PDI to hope that Novartis could be impressed by-or consider for a long-term future partnership-a marketing company consistently operating at loss. Plaintiffs' last allegation, namely, that PDI had a motive to deceive the investing public because PDI “was attempting to procure contracts for its services with other pharmaceutical companies[, and] disclosing that the terms of the Lotensin Contract were unprofitable for PDI would likely cause the companies with whom PDI was negotiating to demand similarly unfavorable contractual terms,” id. ¶ 44, is even more puzzling than the preceding ones. 29 See Burlington, 114 F.3d at 1417 (plaintiff must allege actual facts that defendant acted with scienter); San Leandro, 75 F.3d at 808. Plaintiffs' interpretation of the fact that PDI did not intimate the terms of PDI's agreement with Novartis to other pharmaceutical manufacturers cannot transform PDI's practices into a piece of evidence verifying that PDI had a motive to deceive the investors, especially in view of Plaintiffs' failure to establish any nexus between PDI's nondisclosure of the terms of the Lotensin Contract to the pharmaceutical manufacturers seeking PDI's future marketing services and PDI's alleged fraud on the investors . 30 See Glickman, 1996 U.S. Dist. LEXIS 2325, at *36. Therefore, the Court finds that all Plaintiffs' allegations based on Defendants' May 22, 2001, statements related to the Lotensin Contract are not sufficiently pled and will be dismissed. 29 The business logic of this claim directly contradicts the asserted business logic of Plaintiffs' “loss leader” allegations. If, according to Plaintiffs, PDI was hoping to eventually win future lucrative contracts from Novartis by being a “loss leader” for Novartis, why would PDI avoid advertising PDI's willingness to be such “loss leader” in a similar hope to eventually win future lucrative contracts from other influential clients? 30 Plaintiffs' Complaint does not allege that PDI had a practice of advertising any terms of PDI's agreement with one client to any other client. b. August 14, 2001 With respect to Defendants' August 14, 2001, conference call, Plaintiffs challenge Defendants' prediction that PDI would meet its previous full-year 2001 projection to earn $2.30 per share. Specifically, Plaintiffs allege that, since these $2.30 projections “included [the] earnings of $0.25 related to the Lotensin [C]ontract, [which] Defendants could not have reasonably expected to achieve” for the reasons set forth in Plaintiffs' challenges associated with Defendants' May 22, 2001, conference, Defendants knew that their $2.30 projections were false and misleading. Compl. ¶¶ 62-63 (referring to ¶¶ 40-45). Following Defendants' pointing out that Saldarini projected $0.10 Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 95 of 139 PageID: 1035 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 21 rather than $0.25 earnings per share and that Plaintiffs' claim distorted the number by exaggerating it 250%, see Mot. at 12-14; Reply at 3, Plaintiffs paraphrased their original allegation into a claim that Defendants falsely projected “[t]hat the Company would meet previously announced expected earnings for the year 2001 of $2.30 per share, due to the expected strength of the fourth quarter.” Opposition at 23-24. Plaintiffs' allegations, either as originally stated or as paraphrased, fail to allege any misrepresentation on part of Defendants. *22 As originally stated, Plaintiffs' claim that $2.30 projections were unreasonable because these projections included $0.25 earning per share has not been properly pled since the claim is (1) based on the incorrect $0.25 figure, see Compl. ¶¶ 40-45, 62-63; (2) employs an incorrect legal test of “reasonableness” instead of that of intentional misrepresentation, see 15 U.S.C. § 78u-5(c) (1)(B); and (3) presents nothing but Plaintiffs' conjecture not cognizable under the securities laws. See Rockefeller Center, 311 F.3d at 224. As paraphrased, Plaintiffs' claim fails to allege any fraud since the claim is factually divorced from the context of the Lotensin Contract. Saldarini's statement that PDI would meet the previously announced expected earnings due to expected strength in the fourth quarter were related to the Ceflin rather than Lotensin Contract. See Compl. ¶ 62. Therefore, Plaintiffs' allegations based on Defendants' August 14, 2001, statements related to the Lotensin Contract are insufficiently pled and will be dismissed. c. November 12, 2001 Plaintiffs assert that Defendants' November 12, 2001, press release was false because Defendants stated that Defendants were “continu[ing] to feel confident about Lotensin's ability to contribute positively to 2002 financial results.” Compl. ¶ 71. Plaintiffs' claim is insufficiently pled. Defendants' statement of confidence constitutes nothing but a permitted immaterial puffery. See Advanta, 180 F.3d at 538 (quoting Burlington, 114 F.3d at 1428 n. 14); see also ATI Techs., Inc. Sec. Litig., 216 F.Supp.2d at 433. Consequently, Plaintiffs' claim based on Defendants' November 12, 2001, statement with respect to the Lotensin Contract will be dismissed. d. November 13, 2001 During the November 13, 2001, conference call, PDI revised downward PDI's projection with respect to Lotensin. Specifically, Saldarini stated that PDI was projecting $50-60 million in revenue from Lotensin during the entire 2002. See Mot., Ex. 9. According to Plaintiffs, Defendants knew that these revised projections were false and misleading, see Compl. ¶¶ 77-78 (referring to ¶¶ 30, 40-45, 89, 93); Opposition at 24 (referring to Compl. ¶ 85), because of two facts: (1) in its 10-Q form filed with the SEC on May 15, 2002 (that is, six months after November 13, 2001, conference), PDI stated that the Lotensin Contract lost money during the first quarter of 2002, see Compl. ¶ 89; and (2) during August 13, 2002, conference (that is, nine months after November 13, 2001, conference), Defendants stated that the Lotensin Contract lost money during the second quarter of 2002. See id. ¶ 93. However, the fact that six or nine months after the November 13, 2001, conference, Defendants reported the outcome different from Defendants' earlier projections cannot amount to a fact indicating that, on November 13, 2001, Defendants knew their revenue projections were false and misleading. Plaintiffs are simply “pleading false by hindsight” in violation of the rigid standards set forth by the Reform Act. 31 See Chubb, 394 F.3d at 158 (the Third Circuit has “long rejected attempts to plead fraud by hindsight”). Consequently, Plaintiffs' claims, supported by nothing but hindsight and conjecture, are insufficiently pled and will be dismissed. 32 31 This Court agrees with Defendants that Plaintiffs' claim that Defendants November 13, 2001, revenue projections must have been false and misleading since the Lotensin Contract did not show profit during the first and second quarter of 2002 is a non sequitur. See Opposition at 24; Mot. at 3. “Revenue” is the amount of money that a company earns from its activities (during a given period) from sales of goods and/or services to customers. See Introduction 134. In very basic terms, revenue is defined as the price of a good multiplied by the number of goods sold, though it is rarely this simple in actuality. See Economics 73-76, 457-59. Various concepts employing the word “profit” are related to that of revenue. For instance, “net profit” is the revenue less such costs as wages of rank-and-file employees, salaries of administrative personnel, managerial expenses, rent, utilities, fuel, raw materials, research and development, interest on loans, depreciation and corporate taxes (collectively “Total Costs”). See Introduction at 149; see also Financial Accounting 558-64, 756. By contrast, “operating profit,” which Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 96 of 139 PageID: 1036 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 22 is a measure of a company's earning power from ongoing operations, is equal to earnings before the deduction of interest payments and income taxes. See Introduction at 150; Financial Accounting at 757. Therefore, if the company's Total Costs exceed revenue, the revenue projections may be entirely correct but the company's operations may still result in a loss. 32 Plaintiffs also maintain that Defendants made the November 13, 2001, projections with intent to deceive the investors since Defendants still had the same motives that Plaintiffs alleged with respect to Defendants' May 22, 2001, conference. These “motives,” however, have been already found insufficient by this Court. See supra this Opinion at pp. 41-44. e. February 20, 2002 *23 According to Plaintiffs, Defendants knew that they issued a materially false and misleading statement during the February 20, 2002, conference call when Saldarini made a forward-looking projection that PDI was still expecting $50 to $60 million in revenue from the Lotensin contract in 2002. Just as with respect to their claim based on Defendants' November 13, 2001 predictions discussed right above, Plaintiffs assert that Defendants' February 20, 2002, forward-looking statement was false and misleading because of PDI's filing of May 15, 2002 10- Q form, see Compl. ¶ 78 (referring to ¶ 89); and because of Defendants' August 13, 2002, disclosure that the Lotensin Contract lost money during the second quarter of 2002. See id. (referring to ¶ 93). However, the fact that six weeks into the first quarter of 2002 Defendants stated that they still expected to meet their previous revenue prediction for the entire year, i.e., for the next ten and a half months, cannot be rendered false and misleading simply because the Lotensin Contract eventually showed loss for the first or the second quarter. 33 See Grossman, 120 F.3d at 1124 (“[I]t is clearly insufficient for plaintiffs to say that the later, sobering revelations make the earlier, cheerier statement a falsehood”) (quoting GlenFed Sec. Litig., 42 F.3d at 1548-49); Suprema Specialities, Inc. Sec. Litig., 334 F.Supp.2d at 647. 33 In their claims related to Defendants' February 20, 2002, statements, Plaintiffs again conflate the concepts of revenue and profit by claiming that lack of the latter must necessarily mean lack of the former. However, as this Court has pointed out, this proposition is incorrect. See supra this Opinion, note 31. In addition, Plaintiffs maintain that, during the February 20, 2002, conference call, Defendants made five materially false and misleading contemporaneous observations when Saldarini stated that: (A) Lotensin was “trending in the right direction for [PDI's] 2002 expectations”; (B) Lotensin was “currently ahead of [PDI's] revised expectations”; (C) PDI was “creating a substantive delta over [the] baseline”; (D) “[PDI] made progress against both [the] baseline as well as [PDI's] growth target”; and (E) “[b]ecause [PDI] control[led] the spending on the [Lotensin] product, [PDI] can manage the income statement effect of Lotensin very successfully.” Opposition at 24 (referring to Compl. ¶¶ 77, 79, 81, 85, referring, in turn, to ¶¶ 78, 89, 93). Plaintiffs, however, do not plead a single fact indicating that, in February of 2002, Lotensin sales were either trending “in the wrong direction” or otherwise falling below PDI's revised expectations, or “ma[king no] progress against the baseline.” Moreover, Plaintiffs' Complaint does not suggest that any entity other than PDI was controlling PDI's spending on the Lotensin brand. 34 See generally, Compl. All Plaintiffs' claims with respect to Defendants' February 20, 2002, contemporaneous statements are based solely on Plaintiffs' allegation that Defendants knew that Defendants' contemporaneous statements were false since Defendants had the very same “motives” that were proffered by Plaintiffs with respect to Defendants' May 22, 2001, conference. See id. ¶ 80 (referring to ¶ 78, referring, in turn, to ¶¶ 40-45). These “motives,” however, were already found insufficient by this Court. See supra this Opinion at pp. 41-44. In view of these shortcomings, Plaintiffs' allegations based on Defendants' February 20, 2002, forward-looking and contemporaneous statements related to the Lotensin Contract will be dismissed as insufficiently pled. 34 The vagueness of Defendants' opinion suggests that some of these observations, e.g., the one that Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 97 of 139 PageID: 1037 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 23 Lotensin was “trending in the right direction,” was nothing but harmless puffery. See Advanta, 180 F.3d at 538 (“[V]ague and general statements of optimism ‘constitute no more than puffery and [being] understood by reasonable investors as such” ’ and cannot amount to materially fraudulent information) (quoting Burlington, 114 F.3d at 1428 n. 14). f. May 14, 2002 *24 Finally, Plaintiffs maintain that Defendants falsified the truth known to them when, during May 14, 2002 conference call, [PDI] announced that it had reduced the number of representatives selling Lotensin from 500 to 150 [in order] to decrease [PDI's] losses from the Lotensin Contract. [According to Plaintiffs, Defendants knew that this] statement was false [since Defendants were aware that, due to] the baseline in the [Lotensin C]ontract, PDI would continue to suffer significant losses. Compl. ¶ 87. Plaintiffs' claim, however, lacks logic since PDI announced that it took a measure intended to reduce- rather than to eliminate-the losses. See id. Contrary to Plaintiffs' falsity inference, the fact that PDI continued to suffer some losses after the measure was implemented suggests that Defendants' expectations were both honest and correct. 35 Consequently, Plaintiffs' claim based on Defendants' May 14, 2002 statement will be dismissed. See Chiarella, 445 U.S. at 234-35. 35 It appears that Plaintiffs' claim is based on Plaintiffs' disappointment that Defendants did not use a qualifying adjective before the word “reduced,” i.e., that Defendants did not state “PDI had insufficiently reduced the number of its sales representatives.” See Compl. ¶ 87. However, the securities laws do not obligate Defendants to qualify the disclosed numbers by any adjectives. See Ash, 525 F.2d at 220 (“[What matters] is the objective sufficiency of the disclosure”). Having examined all Plaintiffs' claims based on Defendants' statement related to the Lotensin Contract, this Court finds that (1) with respect to Defendants' forward-looking statements, Plaintiffs failed to plead any facts indicating either that Defendants knew these statements were false and misleading or that these statements were made with intent to defraud the investors, and (2) with respect to Defendants' contemporaneous statements, Plaintiffs failed to plead any fact indicating that Defendants' statements were factually false. C. EVISTA CONTRACT 1. Context In October of 2001, PDI announced that it had entered another performance-based contract. The contract was with Eli Lilly and Company (“Eli Lilly”), and its purpose was PDI and Eli Lilly's co-promotion of Evista, a non-hormonal drug used for prevention and treatment of osteoporosis (“Evista Contract”). 36 See Compl. ¶ 47; Mot., Ex. 25. The Evista Contract provided that PDI would “be compensated on net sales above a predetermined level,” i.e., a baseline. See id., ¶¶ 25, 47, 49; Mot., Ex. 25. Upon entering the Evista Contract, PDI advised the investing community that, in the event the baseline levels of sale were not achieved, PDI “will not receive any revenue to offset the expenses incurred.” Mot., Exs. 12, 14. Thirteen months later, in November of 2002, PDI notified the investors that it was terminating the Evista Contract and taking a $9.1 million charge as a reserve for potential losses associated with the termination. See Compl. ¶ 56. Plaintiffs' Complaint challenges three of Defendants' forward-looking projections 37 and two contemporaneous statements. 36 At the time of execution of the Evista Contract, Eli Lilly's sales force was already promoting Evista. See Compl. ¶ 49. 37 In addition to being expressly qualified by Defendants as “forward-looking,” see, e.g., Mot., Exs. 9, 11, these projections were paraphrased in the language unambiguously indicating that these statements were forward-looking. See Clorox Co. Secs. Litig., 238 F.Supp.2d 1139, at *16. 2. Forward-Looking Statements Plaintiffs assert that Defendants knew their projections were false when Saldarini made the following three forward-looking statements: (1) during the November 13, 2001, conference call, Saldarini said that PDI was expecting the Evista Contract to contribute approximately $50 to $60 million in revenue during the entire 2002, Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 98 of 139 PageID: 1038 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 24 see Compl. ¶¶ 75, Mot., Ex. 9; (2) during the February 20, 2002, conference call, Saldarini reaffirmed these $50 to $60 million expectations, see Compl. ¶¶ 85-86, Mot., Ex. 11; and (3) during the February 20, 2002, conference call, Saldarini opined that PDI was “expect[ing] that [the] increase in share of Evista should produce ... sales growth of 25-30% on a year-to-year basis.” Compl. ¶ 83; Mot., Ex. 11. *25 According to Plaintiffs, Defendants knew all these statements were false because the Evista “baselines were set at levels that guaranteed PDI would not earn revenue, even in the event [PDI] materially increased Evista's rate of growth [and, therefore, D]efendants ... did not expect the contract to be profitable.” See Compl. ¶ 84 (referring to ¶ 76, referring, in turn, to ¶¶ 49-51). a. Projections Related to Revenue In support of Plaintiffs' claim that the Evista Contract was “guaranteed ... not to earn revenue” Plaintiffs offer (1) one calculation, (2) two facts, and (3) information allegedly obtained from Plaintiffs' confidential source. Plaintiffs' calculation reads as follows: [Since] PDI expected $50-$60 million in revenue from the Lotensin contract in 2002 [and PDI's sales- related] expenses for the contract were approximately $5 million in the fourth quarter of 2001, [the $50- $60 million in revenue] would have produced operating profits of $20 to $30 million, or a profit margin of 20-25%. Compl. ¶ 77. However, Plaintiffs: (1) incorrectly define the term “operating profit”; (2) erroneously equate such incorrect definition with the term “net profit”; and (3) use this incorrect definition to arrive at Evista's profit margin and render on the issue of profitability of the Evista Contract. 38 Since Plaintiffs' calculation is based upon the above-discussed errors and Plaintiffs' conjecture about Defendants' state of mind, Plaintiffs' argument based on this calculation does not satisfy the pleading requirements. Cf. See IKON Office Solutions, Inc., 277 F.3d at 673 (“[plaintiff's] mere second-guessing of [defendant's] calculations will not suffice; [the plaintiff] must show that [defendant's] facts and figures ... were misstated and [in addition,] that ... the public was likely to be misled. [Securities] law does not expect clairvoyance” ') (quoting Denny, 576 F.2d at 470). 38 See supra this Opinion, note 31, for definitions of revenue, net profit and operating profit. While Plaintiffs' definition equates “net profit” with the difference between revenue and sales-related costs, the actual “net profit” is revenue reduced by such costs as pro-rated administrative and managerial expenses, rents and utilities, interests on loans, depreciation and corporate taxes. See id. If a firm's Total Costs exceed the amount of the firm's revenue, the firm's net profit would be a negative (meaning that the firm would bear a loss) regardless of the increase in the firm's revenue. Next, Plaintiffs' offer the following two facts in support of Plaintiffs' claim that Defendants knew PDI was “guaranteed ... not to earn revenue” from the Evista Contract: (A) In May of 2002, PDI revealed that PDI had lost money in the first quarter of 2002 in connection with the Evista Contract. See Compl. ¶ 88; (B) At the end of the Class Period, PDI finally “admitted for the first time” that the Evista Contract was always meant to be profitable only at the “back- end” of 2002, and the loss from the Evista Contract during the first two quarters of 2002 was “consistent with [PDI's] actual expectations.” 39 39 Plaintiffs' facts, however, are incorrect. Contrary to Plaintiffs' assertion, as the documents relied upon by Plaintiffs reveal, Defendants stated their opinion that the Evista Contract was expected to be profitable at the “back-end” of 2002 during Defendants' February 20, 2002, conference by expressly pointing out that, “if [PDI is] successful with [its marketing] strategy, [PDI is expecting a positive] effect on the back half of the year.” Mot., Ex. 11. This Plaintiffs error, however, is not a decisive point for the purposes of this Court's analysis. Compl. ¶¶ 53, 55, 94. As with Plaintiffs' calculation discussed immediately above, these facts lend no support to Plaintiffs' claim. Plaintiffs do not acknowledge that Defendants' November 13, 2001, and February 20, 2002, projections with respect to revenue explored a subject conceptually different from those related to profit (which Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 99 of 139 PageID: 1039 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 25 was the subject of Defendants' May 2002 statements). 40 See supra this Opinion, note 31. PDI's projections of the total yearly revenue for 2002 are harmonizable with both PDI's report revealing losses half a year later, as well as with Defendants' statement that PDI had been expecting a positive effect from Evista only at the “back-end” of 2002. Conversely, Plaintiffs' reading of these statements as inherently contradictory is incorrect, and Plaintiffs' reading of (A) and (B) above as an indication that Defendants knew PDI would not produce the projected revenue is pure conjecture that cannot support Plaintiffs' claim of falsity. See Grossman, 120 F.3d at 1124; Suprema Specialities, Inc. Sec. Litig., 334 F.Supp.2d at 647. 40 The fact that Plaintiffs did not note the difference between the concept of revenue and that of profit did not rendered Defendants' projections false. *26 Finally, Plaintiffs rely on an unspecified number of confidential sources to support Plaintiffs' claim that PDI's revenue predictions were false and misleading. According to Plaintiffs, these confidential sources heard certain statements to the effect that the Evista Contract would be unprofitable for a substantial period of time. See Compl. ¶¶ 51, 76, 78, 107. Even if this Court were to accept the statements of these sources as valid facts, such facts would be just as irrelevant as Plaintiffs' calculation and (A) and (B) discussed right above since lack of profitability does not necessarily mean lack of revenue. See supra this Opinion, notes 31, 38. Therefore, the Court does not have to reach the issue of credibility of Plaintiffs' confidential sources in order to dismiss Plaintiffs' claims based on Defendants' Evista projections made during November 13, 2001, and February 20, 2002, conference calls. However, if this Court were to hypothesize that the statements made by Plaintiffs' sources are somehow relevant, Plaintiffs' pleading with respect to these confidential sources is clearly insufficient. In order to make a statement of a confidential source a properly pled fact, Plaintiffs need to expressly specify: (1) the time period when the source worked at the company, (2) the dates when the information was acquired, (3) how the sources had access to the information; and (4) specific details setting forth the basis for the source's personal knowledge. See Chubb, 394 F.3d at 146; Portal Software, 2005 U.S. Dist. LEXIS 20214, at *28. Plaintiffs fail to meet these requirements with respect to each and every source Plaintiffs cited. For instance, Plaintiffs' reference to a statement made by Saldarini in the presence of a “former PDI employee who managed [PDI's] campaign to compete for the corporate award,” Compl. ¶ 51, fails to state the employee's period of employ with PDI, or the date of the alleged Saldarini's statement, or any detail specifying the basis for the employee's personal knowledge. 41 41 Presumably, the employee's claim that Saldarini stated something in the employee's presence could satisfy the “access” requirement. Plaintiffs' reference to “[s]everal [unspecified and unnumbered] PDI managers [who] were aware that the Evista [C]ontract would not be profitable” fairs even worse, since such en masse description neither meets a single requirement of Chubb nor explains what fact exactly this “awareness” stands for or how it arose. Finally, we address Plaintiffs' reference to a confidential source who is a “former regional manager” of PDI. Plaintiffs maintain that, according to this former regional manager, the fact that PDI was planning, ab initio, to lose money on Evista was: (A) confirmed by PDI's executives (without detailing when and to whom this fact was confirmed, and without specifying, naming or even numbered these PDI's executives); (B) common knowledge at PDI (without providing the Court with either the origin of such “common knowledge” or with Plaintiffs' definition of the term); (C) stated by a PDI's National Vice President (without specifying which PDI's National Vice President Plaintiffs have in mind, and without detailing when, where and to whom this Vice President made this statement); and (D) confirmed, in October of 2001, when a PDI's Executive Vice President stated in that former regional manager's presence that the Company believed it could not make any money off Eli Lilly (without specifying which PDI's Executive Vice President Plaintiffs have in mind or the date of this communication). See Compl. ¶ 51. *27 Allegations (A) to (C) fail to meet any requirement of Chubb, while allegation (D) meets only the “access” requirement. Moreover, all these allegations present third- hand information (since second-hand information is the opinions of these unspecified National Vice President, Executive Vice President and PDI executives, the parties who, allegedly, formed their opinions on the basis of certain Defendants' statements or PDI's internal data or memoranda). Under the rigid specificity test set forth by the Third Circuit in Chubb and the emphasis placed by the Third Circuit on the source's personal knowledge, it would Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 100 of 139 PageID: 1040 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 26 be anomalous for this Court to recognize any allegations styled as a round of the “broken telephone” game and accept Plaintiff's “she-said-that-he-said-that-she-said” as a fact indicating that Defendants actually knew their projections were false. While a source might have a reason to remain confidential, the narrow rule on admissibility of confidential sources' statements is not meant to open the Court's floodgate to exponential layers of hearsay. See Chubb, 394 F.3d at 146; Freed, 2005 U.S. Dist. LEXIS 7789; Portal Software, Inc. Secs. Litig., 2005 U.S. Dist. LEXIS 20214, at *28; U.S. Aggregates, Inc. Sec. Litig., 235 F.Supp.2d at 1074; Ramp Networks, Inc., 201 F.Supp.2d at 1067; Northpoint Commc'ns Group, Inc., Sec. Litig., 184 F.Supp.2d at 999-1000. b. Projections Related to Sales Growth Plaintiffs also challenge Defendants' February 20, 2002, projection that PDI was “expect[ing] that [the] increase in share of Evista should produce ... growth of [Evista sales by] 25-30% on a year-to-year basis.” Compl. ¶ 83 (referring to ¶ 76); Mot., Ex. 11. Plaintiffs assert that Defendants knew their projections were false because: (1) such growth was not achievable unless Evista sales growth tripled, and Plaintiffs are of opinion that Defendants knew such tripling of sales would not occur, 42 see Compl. ¶¶ 44, 48, 51, 55, 58, 76; Opposition at 13; Opposition 2 at 21, 32-33; and (2) Defendants unduly delayed disclosure of the fact that the sales growth had to triple until the end of the Class Period. See id.; see also Compl. ¶ 54. 42 In the alternative, Plaintiffs suggest that the growth rate of Evista was unattainable because there was a substitute competing product on the market, and Evista's market share was slightly declining at the beginning of 2001. See Compl. ¶ 48-50. These types of arguments were already found invalid by the Court with respect to the Ceftin and Lotensin Contracts and need not be revisited. See supra this Opinion at pp. 28-29, 39-40. Plaintiffs' claim, however, does not satisfy the pleading requirements. First of all, contrary to Plaintiffs' assertion that Defendants unduly concealed the information about the required sales growth, the documents relied upon by Plaintiffs reveal that Defendants expressly disclosed, during the February 20, 2002, conference, that PDI has an “aggressive goal [to increase Evista sales by] 25-30 percent on a year over year basis.” 43 Mot., Ex. 11. Moreover, Plaintiffs' opinion as to what sales growth was or was not achievable, as well as to what Defendants did or did not know, does not qualify as a fact sufficiently pled to show that Defendants knew their projections were false. 44 See GSC Partners CDO Fund, 368 F.3d at 239 (“[I]t is not enough for plaintiffs to merely allege that defendants ‘knew’ their statements were fraudulent or that defendants ‘must have known’ their statements were false”); Read- Rite Corp. Sec. Litig., 115 F.Supp.2d 1181 (conclusory allegations that the corporate officers must have known the falsity were insufficient). 43 Plaintiffs' claim is puzzling in view of the fact that Plaintiffs themselves state that the growth rate of Evista sales in the United States at the inception of the Evista Contract was 8%. See Opposition at 13. Tripling such 8% growth rate cumulatively would yield growth rate of 26% (100% x 1.08 x 1.08 x 1.08 = 125.97%. 125.97% signifies approximately 26% of cumulative increase from the original 100%), that is, the very percentage projected by Defendants. 44 While Defendants did not achieve 25-30% sales growth, “PDI was able to successfully increase Evista's market share by 15% in the first quarter of ... 2002.” Compl. ¶ 21. *28 Finally, Plaintiffs allege that Defendants intended to deceive the investors about the realities of the Evista Contract because Defendants had the “motives” similar to those Defendants had with respect to the Lotensin Contract, namely: (1) PDI's desire to preserve the jobs of PDI employees who were about to become idled, this time, by PDI's upcoming cancellation of the Ceftin Contract; (2) PDI's desire to become the “loss leader,” this time, for Eli Lilly, in order to impress Eli Lilly with both PDI's marketing skills and ability to lose money, and eventually obtain a profitable contract with Eli Lilly; and (3) PDI's desire to conceal from PDI's potential clients the unfavorable contractual terms, this time, related to the Evista Contract, in order to prevent potential clients from demanding terms unfavorable to PDI. See Compl. ¶¶ 49, 52-54. In support of these allegations, Plaintiffs rely, again, on (1) Defendants' usage of the phrase “long- term strategic opportunity,” this time, with respect to the Evista Contract, id. ¶ 53; and (2) Defendants' November 2002 statements informing the investors that PDI's earlier projections eventually did not materialize. Id. ¶ 54. However, neither Defendants' usage of a common business phrase “long-term strategic opportunity” nor Plaintiffs' hindsight comparison of Defendants' Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 101 of 139 PageID: 1041 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 27 projections to the actual results achieved nine-months-to- a-year later, or the fact that PDI, adhering to a common business practice, was reluctant to lay off qualified employees provides a properly pled factual predicate supporting Plaintiffs' claim that Defendants intended to defraud the investors. 45 See supra this Opinion at pp. 41-44. Therefore, Plaintiffs' argument that Defendants knew their February 20, 2002, projections with respect to potential growth rate of Evista sales were false and misleading is not supported by facts and will be dismissed. 45 Plaintiffs also assert that Defendants' intent to defraud the investing public is verified by Plaintiffs' confidential sources who allegedly stated that Defendants knew that the Evista Contract would not be profitable. See Compl. ¶ 76 (referring to ¶ 51). These sources are, however, not reliable for failure to meet the requirements set forth in Chubb. See supra this Opinion at pp. 53-56. Moreover, Plaintiffs' confidential sources add nothing to Plaintiffs' scienter claim. Plaintiffs' claim that Defendants' projections were false and misleading (based on the sources' allegations that Defendants were not expecting to make any profit on Evista) cannot indicate that Defendants were planning to become a “loss leader” since lack of profit does not necessarily mean a loss. See Rockefeller Ctr., 311 F.3d at 224; Greebel, 194 F.3d at 196. c. Contemporaneous Statements Finally, Plaintiffs challenge two of Defendants' contemporaneous statements. One statement was made on May 14, 2002 as part of PDI's press release and the statement made by Defendants on the same day. According to Plaintiffs, [D]efendants revealed that PDI had lost $8.5 million in the first quarter of 2002 in connection with the Evista contract. However, these statements were materially false and misleading, as defendants failed to disclose that the losses would have been much higher absent significant distributor overstocking during the quarter. Due to this overstocking, the growth of Evista sales dropped sharply from 16% to 5% in the first two quarters of fiscal 2002. 46 46 We note that Plaintiffs' first two sentences appear to suggest that, had the distributors not been “overstocking” during the first quarter of 2002, PDI would suffer even greater loss, hence prompting this Court to conclude that PDI faired better during the first quarter of 2002 because of the “overstocking.” Yet Plaintiffs' third sentence appears to suggest that PDI faired worse during the very same first quarter of 2002 because the “overstocking” caused PDI loss of business in the amount of 70%. Compl. ¶ 88. Plaintiffs' claim fails to plead any falsity on part of Defendants, since Plaintiffs do not challenge the $8.5 million figure. What Plaintiffs appear to challenge is Defendants' unwillingness to engage into speculations as to why the Evista sales were not higher or lower than those actually achieved. However, the securities laws do not obligate corporate managers to speculate about buyers' behavioral patterns. Cf. Ash v. LFE Corp., 525 F.2d at 220. Consequently, Plaintiffs' claim based on Defendants' May 14, 2002, contemporaneous statement related to the Evista Contract will be dismissed. *29 The other challenged statement was made by Defendants on February 20, 2002, when Saldarini stated that PDI was “providing a major increase in the brand share of Evista [and PDI] believe[d] that [was] approximately a 50% increase.” Compl. ¶ 83. Plaintiffs allege that this statement was “materially false and misleading when made for the reasons stated in ¶ 76,” Compl. ¶ 84, i.e., because (1) the Evista baseline was, in Plaintiffs' opinion, unduly high, and (2) Plaintiffs believe that Defendants purposely entered into a losing contract with Eli Lilly to retain PDI's employees and to eventually lend a profitable contract with Eli Lilly after being a “loss leader” for a prolonged period of time. Id. ¶ 76. Plaintiffs' alleged “facts,” however, are nothing but pure conjecture. 47 Therefore, Plaintiffs' claim based on Defendants' February 20, 2002, contemporaneous statements related to the Evista Contract will be dismissed as insufficiently pled. See GSC Partners CDO Fund, 368 F.3d at 239; Read-Rite Corp. Sec. Litig., 115 F.Supp.2d 1181. 47 Moreover, Plaintiffs' own data appears to be entirely coherent with Saldarini's assessment since (1) Plaintiffs acknowledge that PDI indeed did raise Evista's growth rate by 7% (from original 8% existing Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 102 of 139 PageID: 1042 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 28 before PDI started marketing Evista to 15%) by the end of the first quarter of 2002, see Opposition at 13; (2) 7% increase in growth rate during that quarter is completely coherent with 4% increase in growth rate half way into this period; (3) 8% original growth rate, together with such 4% increase, yields 12% growth rate as of the middle of the first quarter of 2002; and (5) in comparison to the original growth rate of 8%, such 12% growth rate constitutes the very 50% increase stated by Saldarini. D. CONTROLLING PERSON CLAIMS Plaintiffs assert that both Saldarini and Boyle “violated § 10(b) ... and Rule 10b-5 by their acts and omissions as alleged in th[e] Complaint. By virtue of their positions as controlling persons of PDI, the Individual Defendants also are liable pursuant to § 20(a).” 48 Compl. ¶ 49-50. However, for a controlling person to be liable, the person over whom control was exercised must have committed a primary violation of the securities laws. See Merck, 432 F.3d 261, at *41-42; Digital Island., 357 F.3d at 337; Shapiro, 964 F.2d at 279. Having found that none of PDI's statements qualified as a violation of the securities law, this Court has no reason to presume that Plaintiffs would be able to prove Saldarini or Boyle's derivative liability. Consequently, Plaintiffs' claims against Saldarini and Boyle in their capacity as controlling persons of PDI will be dismissed. 48 Plaintiffs employ the group pleading technique with respect to Boyle, even though the technique is found invalid under the Reform Act. See Tyson Foods, Inc. Sec. Litig., 155 Fed. Appx. at 57. The Court, however, does not need to reach the issue of Plaintiffs' pleading with respect to Plaintiffs' claims against Boyle since these claims are derivative from Plaintiffs' claims against PDI. See Merck, 432 F.3d 261, at *41-42. E. LEAVE TO AMEND Having thoroughly examined all Plaintiffs' twenty five claims and finding that each of these challenges is not supported by properly pled facts indicating that Defendants knew that their statements were false when made or that Defendants made these statement with the requisite scienter, this Court now turns to the question of whether Plaintiffs shall be allowed to replead their claims for the fourth time. The Court recognizes that, ordinarily, dismissal based on failure to plead fraud with particularity under Fed.R.Civ.P. 9(b) is without prejudice to a plaintiff's filing an amended complaint to cure the deficient pleading and, under Federal Rule of Civil Procedure 15(a), the plaintiff may be granted “leave [to amend,] ... when justice so requires.” See Foman v. Davis, 371 U.S. 178, 182 (1962); Lorenz v. CSX Corp., 1 F.3d 1406, 1414 (3d Cir.1993). However, “[a]llowing leave to amend where ‘there is a stark absence of any suggestion by the plaintiffs that they have developed any facts since the action was commenced, which would, if true, cure the defects in the pleadings under the heightened requirements of the PSLRA,’ would frustrate Congress's objective in enacting this statute of ‘provid[ing] a filter at the earliest stage (the pleading stage) to screen out lawsuits that have no factual basis.” ’ Chubb, 394 F.3d at 164 (quoting GSC Partners CDO Fund, 368 F .3d at 246); see Cybershop.com Sec. Litig., 189 F.Supp.2d at 237 (“[T]he Reform Act would be ‘meaningless' if judges liberally granted leave to amend on a limitless basis”) (citing Champion Enter., Inc., Sec. Litig., 145 F.Supp.2d 871, 872 (E.D.Mich.2001)). For instance, where the plaintiff had already amended plaintiff's complaint and yet failed to allege sufficient facts, the courts hold that “[t]hree bites at the apple is enough,” and find it proper to deny leave to replead. Salinger v. Projectavision, Inc., 972 F.Supp. 222, 236 (S.D.N.Y.1997) (citing Olkey v. Hyperion 1999 Term Trust. Inc., 98 F.3d 2 (2d Cir.1996); American Express Co. Shareholder Litig., 39 F.3d 395, 402 (2d Cir.1994); and Fisher v. Offerman & Co., Inc., 1996 U.S. Dist. LEXIS 14560 (S.D.N.Y.1996)). *30 Plaintiffs' instant Complaint, as well as its predecessor, Plaintiffs' Second Amended Complaint, sets forth no facts that might serve as a basis for a claim cognizable under the securities laws. While the instant Complaint exceeds in length its predecessor by five pages and eleven paragraphs, it does not improve substantively the claims set forth in the Second Amended Complaint. After three attempts over a period of almost five years, Plaintiffs are still unable to present this Court with anything but Plaintiffs' speculations or bold assertions. Plaintiffs' Complaint does not challenge the accuracy of any of PDI's financial results and does not assert that either Saldarini, Boyle, or any other director of PDI, being the main holders of PDI stock, sold even one share during the Class Period or profited in any other way from the statements that Plaintiffs are trying to qualify as violations of securities laws. “Far from supporting a ‘strong inference’ that [D]efendants had a motive to Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 103 of 139 PageID: 1043 In re PDI Securities, Not Reported in F.Supp.2d (2006) 2006 WL 3350461 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 29 capitalize on artificially inflated stock prices, these facts suggest [Defendants] had every incentive to keep [the Company] profitable.” Advanta, 180 F.3d at 541 (citing Burlington, 114 F.3d at 1422 n. 12). While the Court certainly sympathizes with Plaintiffs' disappointment over a financial investment that turned out sour, the securities laws are not meant to provide a disappointed investor with a consolation prize in the form of a legal trial. “Section 10(b) is aptly described as a catchall provision, but what it catches must be fraud.” Chiarella, 445 U.S. at 234-35. Since (1) Plaintiffs' allegations present nothing but Plaintiffs' conjecture and, hence, are too general to meet pleading requirement of the Reform Act, and (2) under § 78u-5(c)(1)(B), Defendants could not be liable for forward looking statements unless Defendants knew the statements were false and misleading when made, and Plaintiffs, third time around, failed to plead any specific facts indicating that Defendants so knew, the Court finds it contrary to both the letter and spirit of the Reform Act, as well as entirely futile, to grant Plaintiffs another leave to amend. 49 Consequently, Plaintiffs' Complaint will be dismissed with prejudice. 49 The purpose of the [Reform] Act was to restrict abuses in securities class-action litigation, including: (1) the practice of filing lawsuits against issuers of securities in response to any significant change in stock price, regardless of defendants' culpability; (2) the targeting of “deep pocket” defendants; (3) the abuse of the discovery process to coerce settlement; and (4) manipulation of clients by class action attorneys. See H.R. Conf. Rep. No. 104-369, at 28 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 748. Advanta, 180 F.3d at 531. CONCLUSION For the foregoing reasons, Defendants' Motion to Dismiss will be GRANTED. Plaintiffs' Third Consolidated and Amended Class Action Complaint will be DISMISSED WITH PREJUDICE. An appropriate Order accompanies this Opinion. All Citations Not Reported in F.Supp.2d, 2006 WL 3350461 End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works. Case 1:15-cv-08007- BK-KMW Document 20-1 Filed 08/04/16 Page 104 of 139 PageID: 1044 Tab 10 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 105 of 139 PageID: 1045 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 1 2006 WL 2547350 Only the Westlaw citation is currently available. United States District Court, W.D. Pennsylvania. Phillip VAVRO, Plaintiff, v. James W. ALBERS and Stanley Berent, Defendants. No. 2:05CV321. | Aug. 31, 2006. Attorneys and Law Firms George P. Chada, Law Offices of George P. Chada, Natrona Heights, PA, for Plaintiff. James F. Israel, Gaca, Matis, Baum & Rizza, Justin M. Gottwald, Peter T. Stinson, Stephen M. Houghton, Dickie, McCamey & Chilcote, Tyler J. Smith, Jeanette H. Ho, Pietragallo, Bosick & Gordon, Pittsburgh, PA, for Defendants. MEMORANDUM ORDER CERCONE, J. *1 Plaintiff's complaint was received by the Clerk of Court on March 10, 2005, and was referred to United States Magistrate Judge Lisa Pupo Lenihan for pretrial proceedings in accordance with the Magistrates Act, 28 U.S.C. § 636(b)(1), and Rules 72.1.3 and 72.1.4 of the Local Rules for Magistrates. The Magistrate Judge's Report and Recommendation (Document No. 76), filed on August 1, 2006, recommended that Defendants' Joint Motion to Dismiss the Third Amended Complaint (Document No. 66) should be granted and the Third Amended Complaint be dismissed in its entirety with prejudice. Service was made on all counsel of record. The parties were informed that in accordance with Magistrates Act, 28 U.S.C. § 636(b)(1)(B) and (C), and Rule 72.1.4(B) of the Local Rules for Magistrates, that they had ten (10) days to file any objections. On August 3, 2006, Plaintiff filed a combined Motion to Enforce Recusal Order, Motion to Vacate the Report and Recommendation, and Motion to Transfer Case (Document No. 78), which was denied simultaneously by the undersigned District Judge and Magistrate Judge Lenihan on August 9, 2006 (Document Nos. 82 and 83). On August 4, 2006, Plaintiff filed a Motion for Discovery (Document No. 80), which was denied by the Magistrate Judge on August 9, 2006 (Document No. 83). On August 18, 2006, Plaintiff filed two separate Motions for Reconsideration (Document Nos. 84 and 86) for each of the Orders docketed at No. 82 and No. 83. The undersigned District Judge entered an order on August 21, 2006 denying both motions for reconsideration (Document No. 88). Also on August 21, 2006, Plaintiff filed Objections to the Magistrate Judge's Report and Recommendation (Document No. 89). Defendants filed a Response to Plaintiff's Objections (Document No. 90) on August 24, 2006. After review of the pleadings and the documents in the case, together with the report and recommendation, the objections thereto and the response to the objections, the combined motion to enforce recusal order, to vacate the Report and Recommendation and to transfer the case, and motions for reconsideration, the following order is entered: AND NOW, this 29 day of August, 2006; IT IS HEREBY ORDERED that Defendants' Joint Motion to Dismiss the Third Amended Complaint (Document No. 66) is GRANTED WITH PREJUDICE. IT IS FURTHER ORDERED that the Report and Recommendation (Document No. 76) of Magistrate Judge Lenihan, dated August 1, 2006, is adopted as the opinion of the Court. MAGISTRATE JUDGE'S REPORT AND RECOMMENDATION LENIHAN, Magistrate J. I. RECOMMENDATION It is recommended that Defendants' Joint Motion to Dismiss the Third Amended Complaint pursuant to Fed.R.Civ.P. 12(b)(6) be granted and the Third Amended Complaint be dismissed in its entirety with prejudice. II. REPORT Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 106 of 139 PageID: 1046 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 2 Currently pending before the Court is Defendants' Joint Motion to Dismiss the Third Amended Complaint. Plaintiff filed his Third Amended Complaint against Defendants James W. Albers and Stanley Berent (hereinafter “Defendants” or “Doctors”), 1 on December 18, 2005, in response to this Court's Report and Recommendation dated October 27, 2007 (Doc. No. 48), adopted by the District Court on November 16, 2005, and granting Plaintiff leave to file a Third Amended Complaint to plead sufficient facts to establish this Court's subject matter jurisdiction. Plaintiff has now pled sufficient facts to establish this Court's subject matter jurisdiction. This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1332(a). Venue lies in this District pursuant to 28 U.S.C. § 1391(a)(2), as Plaintiff alleges in his Third Amended Complaint that a substantial part of the events giving rise to his claims occurred in this District. 1 Prior to filing his Third Amended Complaint, Plaintiff filed a Motion to Voluntarily Dismiss certain previously named Defendants, i.e., A.K. Steel Co., University of Michigan, University of Michigan School of Medicine, Joint Defense Agreement, John and Mary Does 1-100, and Doe Corporations, Partnerships or other entities 1-100 Doe Defendants, on November 12, 2005 (Doc. No. 50), which was granted on December 13, 2005 (Doc. No. 58). Plaintiff also filed a Notice of Voluntary Dismissal of Defendant Railroad Occupational Intra-Industry Claims Organization (“ROIICO”) on January 4, 2006 (Doc. No. 65); ROIICO was terminated as a party- defendant on January 5, 2006. *2 In his Third Amended Complaint, Plaintiff seeks damages for the following alleged claims: (1) Defendants' negligent failure to protect his Informed Consent Protections codified at 45 C.F.R. § 46.116(d); (2) a civil conspiracy to perpetrate a fraud to convert Plaintiff's personal property in the form of Plaintiff's personal medical information (“PMI”) in violation of 42 U.S.C. § 1320d-6(b), Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), Section 1177; (3) the unlawful conversion of Plaintiff's personal property in the form of his PMI, in violation of HIPAA; (4) a conspiracy to violate Sections 1962 and 1964(c) of the Racketeering Influenced Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. (“RICO”); and, (5) Defendants' continued use of Plaintiff's PMI which constitutes a continuing criminal violation of Section 1177 of HIPAA and RICO, 18 U.S.C. §§ 1961 & 1964(c). In response, Defendants contend that the Third Amended Complaint should be dismissed with prejudice for failure to state a claim upon which relief can be granted under Fed.R.Civ. P. 12(b)(6). For the reasons that follow, the Court recommends that Defendants' Joint Motion to Dismiss the Third Amended Complaint be granted with prejudice. A. Standard of Review-Motion to Dismiss Defendants have moved to dismiss the Third Amended Complaint in its entirety under Rule 12(b)(6). In ruling on a motion to dismiss under Rule 12(b)(6), the Court is required to accept as true all allegations made in the complaint and all reasonable inferences that can be drawn therefrom, and to view them in the light most favorable to the plaintiff. 2 See Blaw Knox Ret. Income Plan v. White Consol. Indus. Inc., 998 F.2d 1185, 1188 (3d Cir.1993); Ditri v. Coldwell Banker Residential Affiliates, Inc., 954 F.2d 869, 871 (3d Cir.1992). The issue is not whether the plaintiff will ultimately prevail, but rather whether “plaintiff can prove any set of facts consistent with the averments of the complaint which would show the plaintiff is entitled to relief.” See Gaines v. Krawczyk, 354 F.Supp.2d 573, 576 (W.D.Pa.2004) (citing Jordan v. Fox, Rothschild, O'Brien & Frankel, 20 F.3d 1250, 1261 (3d Cir.1994)). Dismissal is appropriate “only if it is clear that no relief could be granted under any set of facts that could be proven consistent with the allegations.” See Port Auth. of New York and New Jersey v. Arcadian Corp., 189 F.3d 305, 311 (3d Cir.1999) (quoting Alexander v. Whitman, 114 F.3d 1392, 1397 (3d Cir.1997)); see also Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Langford v. City of Atlantic City, 235 F.3d 845, 847 (3d Cir.2000). Thus, under this standard, a complaint will withstand a motion to dismiss if it gives the defendant adequate notice of the essential elements of a cause of action. Gaines, 354 F.Supp.2d at 576 (citing Nami v. Fauver, 82 F.3d 63, 66 (3d Cir.1996)). 2 Nonetheless, a court is not required to credit bald assertions or legal conclusions in a complaint when deciding a motion to dismiss. Gaines v. Krawczyk, 354 F.Supp.2d 573, 576 (W.D.Pa.2004) (citing Morse v. Lower Merion Sch. Dist., 132 F.3d 902, 906 (3d Cir.1997)). Consistently, the courts have rejected “ ‘legal conclusions,’ ‘unsupported conclusions,’ ‘unwarranted inferences,’ ‘unwarranted deductions,’ ‘footless conclusions of law’ or ‘sweeping legal Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 107 of 139 PageID: 1047 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 3 conclusions cast in the form of factual allegations” ’[,] in deciding a motion to dismiss pursuant to Rule 12(b)(6). Id. (citing Morse, 132 F.3d at 906 n. 8 (citing Charles Allen Wright & Arthur R. Miller, Federal Practice and Procedure, § 1357 (2d ed.1997)); Leeds v. Meltz, 85 F.3d 51, 53 (2d Cir.1996); Fernandez- Montes v. Allied Pilots Ass'n, 987 F.2d 278, 284 (5 th Cir.1993)). Courts generally consider only the allegations of the complaint, attached exhibits, and matters of public record in deciding motions to dismiss. Pension Benefit Guar. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir.1993). Factual allegations within documents described or identified in the complaint may also be considered if the plaintiff's claims are based upon those documents. Id. (citations omitted). A district court may consider these documents without converting a motion to dismiss into a motion for summary judgment. In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir.1997). B. Statement of Facts and Procedural History *3 Plaintiff claims to suffer from toxic solvent encephalopathy (“TSE”) attributable to alleged chronic and uncontrolled exposure to chlorinated solvents while working for A.K. Steel Corporation in Butler, Pennsylvania. (Third Amended Complaint (hereinafter “TAC”), ¶ 49.) Plaintiff contends his TSE caused his total disability from gainful employment. (TAC ¶ 51.) Plaintiff filed a claim for workers' compensation occupational disease (“WCOD”) benefits related to his TSE, which was contested by A.K. Steel, and subsequently denied by a Workers' Compensation Administrative Law Judge (hereinafter “WC-ALJ”). (TAC, ¶¶ 52-53; Ex. 2 to Pl.'s Answer to Defs.' Joint Mot. to Dismiss TAC (Doc. 73-3).) The decision of the WC-ALJ was affirmed by the Workers' Compensation Appeal Board (“WCAB”) and the Commonwealth Court of Pennsylvania. (Ex. 4 and Ex. 5 to Pl.'s Answer to Defs.' Joint Mot. to Dismiss TAC (Doc. 73-5 & 73-6).) Plaintiff also applied for short-term and long-term disability retirement benefits (“disability retirement benefits”), but this claim was also denied. 3 3 There is no indication in the Third Amended Complaint or elsewhere in the record of the basis or nature of Plaintiff's disability retirement claim, when it was made, denied, the outcome and bases therefor, or whether an appeal was taken and/or administrative remedies exhausted. Plaintiff has failed to plead any facts to show that the denial of his statutory right to short-term and long-term disability retirement benefits is properly before this Court. Moreover, in all likelihood, the denial of disability retirement benefits is governed exclusively by ERISA. Therefore, to the extent any of Plaintiff's claims includes an allegation of injury and/or damages predicated on the denial of his “statutory right to short-term and long- term disability retirement benefits,” the Court will disregard such allegations and recommends all such references/allegations be stricken/dismissed from the Third Amended Complaint. The thrust of Plaintiff's complaint before this Court is that Defendants conspired to and did, in fact, conduct fraudulent defense medical examinations (“DMEs”) of Plaintiff for the purpose of obtaining Plaintiff's PMI and converting it for their use without authorization, by publishing his PMI in three biomedical journal articles 4 and using these journal articles to successfully defend the TSE claims of Plaintiff and other railroad workers. 5 Plaintiff thus contends that Defendants' conduct constitutes fraud, conversion of personal property and a civil conspiracy under Pennsylvania law, a conspiracy to violate RICO, and violations of 42 U.S.C. § 1320d-6(b), Section 1177 of HIPAA, which constitutes a violation of RICO. (TAC ¶ 48.) In addition, Plaintiff contends Defendants were negligent in that they had a duty to protect Plaintiff's PMI and they breached that duty in failing to either inform Plaintiff of his informed consent protections (codified at 45 C.F.R. § 46.116(d)(1)-(4)) and/ or obtaining an effective waiver of said protections, or by failing to document the elements of an effective waiver. (TAC ¶¶ 64-68.) 4 The articles to which Plaintiff is referring were published in the JOURNAL OF OCCUPATIONAL & ENVIRONMENTAL MEDICINE (“JOEM”) in June of 1999 and 2000, and were authored by a number of medical doctors and/or PhDs, including the Defendants. (Ex. 10 and Ex. 11 to Pl.'s Mot. for More Definite Statement, and Mot. to Strike (Doc. 27-2, pgs.17-22).) Plaintiff also refers to a third JOEM article, but the Court is unable to determine the title, authors or date of that article from the record. 5 By way of further background, Plaintiff alleges that ROIICO, an ad hoc committee of the Association of American Railroads (“AAR”) which was formed in 1996 allegedly in response to a position statement approved by a majority of the invitees at a workshop hosted by the National Institute of Occupational Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 108 of 139 PageID: 1048 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 4 Safety and Health (“NIOSH”) in November, 1996, conspired with its counsel and the Defendants to set up and conduct fraudulent DMEs. (TAC ¶¶ 10, 23-24, 27, 36, 47.) The NIOSH position statement found, in effect, that TSE is an occupational disease which required human research to measure the incidence of TSE in various occupations and to identify dispositive TSE-diagnostic techniques and treatment. (TAC ¶ 14.) According to Plaintiff, the purpose of the fraudulent DMEs was to examine TSE-claimants, to obtain and distort their PMI, which was protected by 42 U.S.C. § 1320d-6(b), to counter the NIOSH research, to convert said PMI for ROIICO's use by publishing said PMI as “human research” in three biomedical publications, which either denied the existence of TSE or posited that TSE-patients were misdiagnosed psychiatric patients. (TAC ¶ ¶ 37, 47, 56.) Defendants maintain that Plaintiff fails to recognize that the human research that formed the basis of the JOEM articles involved only railroad workers. Indeed, Defendants argue that they had not even met Plaintiff at the time the first JOEM article was published in June of 1999, as the DMEs of Plaintiff did not occur until September 7 and 8, 1999. (Defs.' Reply to Pl.'s Answer to Joint Mot. to Dismiss TAC (Doc. 71) at 3 & n. 3 (citing Mot. to Strike, Ex. 10; Mot. to Dismiss SAC, Ex. 1 at 8 & 9).) Plaintiff further contends that when he became aware of the alleged conspiracy between Defendants and ROIICO, he filed a complaint with the Department of Health and Human Services Office for Human Research Protections (“OHRP”) regarding Defendants' alleged conversion and publication of his PMI. 6 (TAC ¶ 57.) According to Plaintiff, OHRP investigated Plaintiff's complaint and on or about February 12, 2003, issued a determination letter in which it found Defendants' use of Plaintiff's PMI in violation of the informed consent protections codified at 45 C.F.R. § 46.116(d)(1)-(4). 7 (TAC ¶ 59.) However, the February 12, 2003 correspondence from OHRP does not make any such finding, 8 but rather, states that the identified research activity 9 was submitted to the University of Michigan institutional review board (“IRB”) for review and the IRB subsequently approved a waiver of the requirement for informed consent for all research involving retrospective review of medical records for each of the studies. (Ex. 10 to Pl.'s Answer to Defs.' Joint Mot. to Dismiss TAC (Doc. Nos. 70-11 & 73-11).) OHRP then determined that the University of Michigan IRB failed to document the four specific criteria for waiver of informed consent for the identified research activity as required by 45 C.F.R. § 46.116(d). (Id.) OHRP directed the University of Michigan to submit a satisfactory corrective action plan addressing this finding by March 31, 2003. (Id.) It appears that the IRB's failure to document the four criteria for waiver was ultimately resolved to the satisfaction of OHRP as of September 15, 2003. See Wicker v. Consolidated Rail Corp., 371 F.Supp.2d 702, 705-06 (W.D.Pa.2005). 6 Plaintiff's complaint was made in a letter dated March 15, 2001 addressed to OHRP. See Ex. 20 to Pl.'s Mot. for More Definite Statement, and Mot. to Strike Defs.' Mot. to Dismiss (Doc. 27-3, pgs.14-15). 7 Plaintiff contends he learned of OHRP's February 12, 2003 determination on March 16, 2003. (TAC ¶ 61.) By making this allegation, Plaintiff appears to be attempting to establish the date he “discovered” his injuries, thereby establishing that his state common law claims were timely filed. In other words, Plaintiff is attempting to show that the statute of limitations did not begin to run until March 16, 2003, when he learned of OHRP's findings. However, as discussed below, the proper inquiry is when a reasonable person in Plaintiff's position would have known of his injuries, and Plaintiff's letter dated March 15, 2001 to OHRP indicates that he knew all of the facts of his injuries by March 15, 2001. 8 The Court is not required to accept as true allegations of fact that are obviously untrue, or that obviously cannot be proven. See note 2, supra. Moreover, the Court may consider the factual allegations contained in the February 12, 2003 letter from OHRP without converting Defendants' motion to dismiss to a summary judgment motion, because Plaintiff has described or identified this letter in the Third Amended Complaint and some or all of his claims are based on this document. Burlington, 114 F.3d at 1426. 9 OHRP investigated the following research activity of the Defendants: Albers, J.W., et al., Absence of Polyneuropathy Among Workers Previously Diagnosed with Solvent-Induced Toxic Encephalopathy, JOURNAL OF OCCUPATIONAL & ENVIRONMENTAL MEDICINE, 41:500-509 (1999); and Albers, J.W. et al., Neurological Evaluation of Workers Previously Diagnosed with Solvent-Induced Toxic Encephalopathy, JOURNAL OF OCCUPATIONAL & ENVIRONMENTAL MEDICINE, 42:410-423 (2000). (Ex. 10 to Pl.'s Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 109 of 139 PageID: 1049 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 5 Answer to Defs.' Joint Mot. to Dismiss TAC (Doc. Nos. 70-11 & 73-11).) *4 As to damages, Plaintiff avers that as a result of Defendants' negligence, he was denied his statutory right to WCOD and disability retirement benefits. (TAC ¶ 69.) He requests compensatory damages equal to the amount he would have received in WCOD and disability retirement benefits, 10 estimated to be $980,000.00, as well as costs for health care necessary to treat TSE over his lifetime, estimated to be in excess of $ 3 million. (TAC ¶ 70.) In addition, as a result of Defendants' civil conspiracy and fraud, 11 Plaintiff claims he was denied his statutory right to the health care necessary to treat TSE as provided by the Pennsylvania Workers' Compensation Act (“WCA”). (TAC ¶¶ 78, 83.) Plaintiff requests punitive damages in an amount equal to the amount he would have received in WCOD and disability retirement benefits, 12 plus the cost of health care necessary to treat TSE over his lifetime. (TAC ¶¶ 79, 84.) 10 See note 3, supra. 11 With regard to the fraud claim, Plaintiff also contends that by operation of the fraud, Defendants obstructed his statutory right to WCOD and disability retirement benefits. (TAC ¶ 83.) 12 See note 3, supra. Plaintiff also claims actual damages resulting from Defendants' conversion of his PMI in the form of the loss of his statutory right to WCOD and disability retirement benefits, 13 and punitive damages. (TAC ¶¶ 89-90.) He requests punitive damages in an amount equal to what he would have received in WCOD and disability retirement benefits 14 and the cost of continuing health care to treat TSE over his lifetime. (TAC ¶ 92.) 13 Id. 14 Id. As to his claim for conspiracy to violate RICO, Plaintiff requests punitive damages in an amount “treble the quantum meruit penalty value of the railroads and AAR who formed ROIICO,” and treble the equivalent of the amount of WCOD and disability retirement benefits 15 he was entitled to receive, plus the costs of continuing health care over his lifetime. (TAC ¶ 98.) As to his claim against Defendants for violations of RICO, Plaintiff contends as a result of Defendants' actions, he suffered serious personal and financial injuries, including “intentionally inflicted distress, some or all of which may be permanent;” “physical pain and mental distress;” “diminished capacity to enjoy life;” “sustained loss of income, a diminished earning capacity, and other substantial economic losses”. (TAC ¶ 106.) Plaintiff further contends he was wrongfully and intentionally denied treatment and care, and will continue to incur bills for such treatment and care in the future. (Id.) Further, as a “direct result of defendants' fraud, conversion and organized crime conduct [, Plaintiff contends Defendants] committed the independent tort of intentional infliction of emotional distress.” (Id.) Finally, as to all claims, Plaintiff requests pre-judgment interest, his costs of suit, injunctive relief against Defendants, costs, and legal or attorney's fees. (TAC ¶ 107.) 15 Id. In response to Plaintiff's Third Amended Complaint, Defendants have filed a Joint Motion to Dismiss said Complaint in its entirety. In opposition, Plaintiff has filed an Answer to Defendants' Joint Motion to Dismiss the Third Amended Complaint (hereinafter “Answering Brief”), maintaining that he has sufficiently pleaded state law claims of negligence, conversion, fraud and conspiracy, as well as a federal civil RICO violation. Defendants filed a Reply Brief in response to Plaintiff's Answering Brief. Accordingly, Defendants' Joint Motion to Dismiss the Third Amended Complaint is now ripe for determination. C. Analysis *5 At the outset, the Court is compelled to make two observations regarding this litigation. First and foremost, it appears that the present lawsuit is nothing more than an attempt by Plaintiff to relitigate his failed claims for WCOD and disability retirement benefits, albeit under the guise of state common law tort and civil RICO claims. Plaintiff alleges essentially the same injuries, and claims as damages the same amounts he would have received if his claims for WCOD and disability retirement benefits had not been denied. Principles of collateral estoppel, judicial comity and economy, and federal preemption (as to disability retirement benefits only 16 ), among others, counsel against allowing Plaintiff to proceed on his claims in this forum. Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 110 of 139 PageID: 1050 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 6 16 See note 3, supra. In addition, Plaintiff makes several allegations in his Third Amended Complaint and Answering Brief regarding Defendants' wrongful conduct vis a vis railroad workers who brought unsuccessful claims against their railroad-employers under FELA alleging TSE from exposure to chemical solvents while employed with the railroads (hereinafter “TSE claimants”). However, the TSE claimants are not parties to this action; nor is this case a class action. Further, Plaintiff has not alleged any facts to establish that he even has standing to make these arguments on behalf of the TSE claimants. Therefore, the Court finds Plaintiff may not assert injuries and damages on behalf of any of the TSE claimants in the present litigation. 1. Statute of Limitations Bars Plaintiff's State Law Claims of Negligence, Conversion, Fraud, and Conspiracy Defendants raise an argument, in the alternative, which the Court feels should be addressed at the outset, namely, that Plaintiff's state common law tort claims (hereinafter “tort claims”) are barred by the applicable statute of limitations under Pennsylvania law, and therefore, should be dismissed. In particular, Defendants maintain that Plaintiff's tort claims are subject to Pennsylvania's two- year statute of limitations, 17 and that the Court need only look to the decisions of the WC-ALJ, WCAB, and Commonwealth Court in the workers' compensation proceedings to see that Plaintiff was aware of his alleged injuries more than two years prior to the commencement of the instant lawsuit on March 10, 2005. In response, Plaintiff submits that he was not aware of the facts related to his loss of statutory entitlement to WCOD and disability retirement benefits until on or about March 16, 2003, as supported by his Affidavit attached to his Answering Brief (Doc. No. 70-12). In addition, Plaintiff argues in his Answering Brief that the conversion/theft of his PMI and his conspiracy claims are continuing violations and therefore the statute of limitations does not begin to run until after the commission of the last act. The Court agrees with Defendants that as to Plaintiff's tort claims, the statute of limitations expired before Plaintiff instituted the present action. 17 The parties appear to be in agreement that Plaintiff's common law tort claims are subject to Pennsylvania's two year statute of limitations. Where a federal court exercises diversity jurisdiction, it is required to apply the substantive law of the forum state, which includes statutes of limitations. Menchini v. Grant, 995 F.2d 1224, 1228 n. 2 (3d Cir.1993) (citing Ciccarelli v. Carey Canadian Mines, Ltd., 757 F.2d 548, 552 (3d Cir.1985)). The applicable Pennsylvania statutes of limitations for claims arising out of tortious conduct are codified at 42 Pa.C.S.A. § 5524 (West Supp.2005). *6 Generally, a statute of limitations begins to run as soon as the underlying cause of action accrues. Further, “lack of knowledge, mistake or misunderstanding do not toll the running of the statute of limitations.” Pocono Int'l Raceway, Inc. v. Pocono Produce, Inc., 503 Pa. 80, 85, 468 A.2d 468, 471 (1983). An equitable exception to this general rule is the discovery rule. 18 Menichini v. Grant, 995 F.2d 1224, 1229 n. 4 (3d Cir.1993) (citing Bohus v. Beloff, 950 F.2d 919, 924 (3d Cir.1991)). With regard to the discovery rule exception, the Court of Appeals has stated: 18 Equitable tolling, which presumes claim accrual, is invoked to toll or stop the running of the statute of limitations in light of established equitable considerations, Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1390 (3d Cir.1994), such as where a defendant actively conceals or misleads the plaintiff from discovering the facts of his or her injury. If raised, equitable tolling will preclude the granting of a motion to dismiss because it raises questions of fact which cannot be determined on a motion to dismiss. Id. at 1391 n. 1. The Court of Appeals in Osihver cautioned against confusing equitable tolling with the discovery rule in applying statutes of limitations, opining: “The purpose of the discovery rule is to determine the accrual date of a claim, for ultimate purposes of determining, as a legal matter, when the statute of limitations begins to run. Equitable tolling ... presumes claim accrual.” Id. Plaintiff has not advanced an equitable tolling argument in this case, nor has he pled any facts in support of equitable tolling, to stop the running of the statute of limitations. Rather, Plaintiff argues that the discovery rule applies to extend the date of accrual. Determining the date of accrual of a cause of action is a legal matter that can be determined in a motion to dismiss. Kingston Coal Co. v. Felton Min. Co., Inc., 456 Pa.Super. 270, 279, 690 A.2d 284, 289 (1997) (citing E.J.M. v. Archdiocese of Philadelphia, 424 Pa.Super. 449, 455, 622 A.2d 1388, 1391) (1993) (“where the facts are so clear that reasonable minds cannot differ as to whether the plaintiff should reasonably be aware that he has Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 111 of 139 PageID: 1051 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 7 suffered an injury, the determination as to when the limitations period commences may be made as a matter of law.”)). Therefore, the Court is not precluded from determining whether the statute of limitations bars Plaintiff's tort claims. The discovery rule, which “arises from the inability of the injured, despite the exercise of due diligence, to know of the injury or its cause,” [Pocono Int'l Raceway, 503 Pa. at 85, 468 A.2d at 471], provides that “the statute of limitations begins to run as soon as ‘the plaintiff knows, or reasonably should know, (1) that he has been injured, and (2) that his injury has been caused by another party's conduct.” ’ Bohus, 950 F.2d at 924 (citing Cathcart v. Keene Indus. Insulation, 324 Pa.Super. 123, 136-37, 471 A.2d 493, 500 (1984) (en banc)) (footnote omitted). Id. The Third Amended Complaint and documents identified therein, as well as the decisions of the Pennsylvania WC- ALJ and appellate tribunals, show unequivocally that as of March 15, 2001, Plaintiff was aware of Defendants' alleged misuse of his PMI by Defendants, as evidenced by his correspondence to the OHRP on that date. (Ex. 20 to Pl.'s Mot. To Strike (Doc. No. 27-3).) 19 Moreover, in his March 15, 2001 correspondence to OHRP, Plaintiff states that he “learned” that Defendants used the articles that they published in the JOEM as the basis for their opinion that he did not suffer from TSE, and that said opinion caused the WC-ALJ to deny him benefits. (Id.) It is also clear from the decisions of the WCAB and Commonwealth Court dated January 22, 2002 and August 2, 2002, respectively, that Plaintiff was aware of his injuries from Defendants' alleged fraud, deceit, and theft/conversion of his PMI, as he raised these issues before these appellate tribunals. Thus, even under the discovery rule exception, Plaintiff's fraud and theft/ conversion claims are untimely. 19 The Court may consider factual allegations contained in the March 15, 2001 correspondence to the OHRP because Plaintiff identified this correspondence in his Third Amended Complaint, and his negligence and conversion claims are based on this letter as well as OHRP's letter dated February 12, 2003. Pension Benefit Guar., 998 F.2d at 1196. However, the Court declines to consider Plaintiff's Affidavit (Doc. No. 70-12) proffered in support of his “discovery” of Defendants' conduct which he claims gave rise to the instant action, because for purposes of deciding a statute of limitations argument in a motion to dismiss, the Court may only look to the allegations in the complaint or documents identified in the complaint. Bethel v. Jendoco Constr. Corp., 570 F.2d 1168, 1174 (3d Cir.1978) (if it is not apparent on the face of the complaint that the action is barred by a statute of limitations, than that defense may not provide the basis for dismissal of the claim under Rule 12(b)(6)). Plaintiff's negligence claim is likewise untimely because he bases his claim for damages from Defendants' alleged negligence on the same wrongful conduct underlying his other tort claims-misuse of his PMI resulting in the denial of his claim for WCOD benefits. Thus, Plaintiff was aware of his injury and Defendants' alleged role therein as of March 15, 2001. Plaintiff's argument to the contrary is of no avail. Plaintiff submits that until he learned of the OHRP's findings as stated in the February 12, 2003 correspondence, he possessed only a “suspicion” that Defendants' failed to obtain his informed consent to use his PMI in their articles regarding solvent-induced encephalopathy. The fact that OHRP investigated the University of Michigan IRB informed consent procedure as a result of Plaintiff's March 15, 2001 correspondence and notified the University of Michigan of its findings on February 12, 2003, does not impact this Court's determination of when Plaintiff's cause of action for negligence began to accrue. First, nowhere in OHRP's February 12, 2003 correspondence does OHRP state that Defendants failed to obtain Plaintiff's informed consent to use his PMI in their research studies. Rather, OHRP merely found that the University of Michigan IRB approved a waiver of the requirement for informed consent for all research involving retrospective review of medical records for each of the studies, and that the IRB failed to document the specific criteria for waiver of informed consent for these research studies, as required by 45 C.F.R. § 46.116(d). These findings do not provide Plaintiff with any more information than he already possessed prior to the issuance of the letter. Accordingly, Plaintiff's reliance on the February 12, 2003 OHRP letter to support his “suspicion” argument is misplaced. *7 Nor can Plaintiff avoid Defendants' statute of limitations defense by artful pleading, i.e., choosing to refer to his knowledge of Defendants' failure to obtain his informed consent to use his PMI as merely a “suspicion” prior to learning of OHRP's findings in its February 12, 2003 correspondence. The standard applied in determining when a cause of action begins to accrue does not speak in terms of “suspicions.” Instead, the Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 112 of 139 PageID: 1052 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 8 standard requires only that Plaintiff be aware of his actual injury; it is not necessary that he be aware of the legal cause of his injury. Bohus, 950 F.2d at 924-25 (construing Pennsylvania law) (it is not necessary for Plaintiff to know the exact cause of his injury, or that the injury resulted from another's negligent conduct, or that he has a cause of action, before the statute of limitations will begin to run). Here it is clear from Plaintiff's March 15, 2001 correspondence to OHRP that he possessed an awareness of his actual injury, which is all that is required to start the running of the statute of limitations. Therefore, the Court finds the Third Amended Complaint and documents referenced therein do not support Plaintiff's argument that he was not aware of his injury or Defendants' role in allegedly causing that injury until March 16, 2003. Thus, Plaintiff's negligence claim is barred by the statute of limitations. As to the timeliness of Plaintiff's state common law conspiracy claim, Plaintiff contends that the statute of limitations does not begin to run until after the commission of the last act in the conspiracy. In the Third Amended Complaint, Plaintiff avers that the Defendants committed the following acts in furtherance of their civil conspiracy: (1) accepting payment from the ROICO to obtain and to convert by criminal means and methods Plaintiff's PMI; (2) by inducing by fraud Plaintiff to under go a fraudulent DME conducted by Defendants ...; (3) by obtaining and distorting the results of said DME which was Plaintiff's personal property in the form of his PMI at the conclusion of said DME; (4) by converting said PMI for publication in biomedical articles which countered NIOSH's TSE- Position; (5) by publishing said PMI in their JOEM articles for use by the railroads in defense of TSE-claims and (6) by testifying against Plaintiff during Plaintiff's Workers Compensation proceeding and Short-and Long-Term Disability Retirement Arbitrations. Pl.'s TAC, ¶ 76. In addition, Plaintiff avers that the “actual legal damages which arose consequent to the civil conspiracy ... is [sic] the denial of [his] statutory right to Workers Compensation benefits and Short- and Long- term Disability Retirement benefits.” Pl.'s TAC, ¶ 77. It is clear from the allegations in paragraphs 76 and 77 of the Third Amended Complaint, and the decisions of the WC- ALJ, WCAB and Commonwealth Court, that the acts allegedly committed in furtherance of the civil conspiracy occurred, at the latest, by the date of the WC-ALJ issued his decision denying Plaintiff's claim for WCOD benefits, i.e., December 7, 2000. Therefore, since Plaintiff did not file his civil conspiracy claim until March 10, 2005, more than four years after the last act in furtherance of the conspiracy, his claim for civil conspiracy is also untimely. *8 As to the continuing violation doctrine, Plaintiff raises this argument in his Answering Brief only with respect to his conversion/theft claim and his federal RICO claim. However, the Third Amended Complaint does not contain any allegations of a continuing violation as to Plaintiff's negligence, fraud, conversion or civil conspiracy claims. 20 Therefore, because Plaintiff has failed to allege a continuing violation as to any of his claims, the Court finds that Plaintiff's tort claims are untimely and therefore Defendants' Motion to Dismiss should be granted as to these claims. 20 A close reading of Plaintiff's Third Amended Complaint reveals that he has pled a continuing violation only as to the criminal conduct that he alleges supports his claim for violation of Sections 1962 and 1964 of RICO. (TAC ¶ 104, subsections a, h, & i.) Arguably, even if Plaintiff's allegations of a continuing violation as to his RICO claim could be construed to extend to his state tort claims for conversion and civil conspiracy, which the Court declines to find, the facts alleged in the Third Amended Complaint do not establish a continuing conversion/theft of his PMI or a continuing conspiracy to steal/convert his PMI. To the contrary, the factual allegations in the Third Amended Complaint show that the sole basis for Plaintiff's claim for damages as to his conversion claim (TAC ¶¶ 89-92) and civil conspiracy claim (¶¶ 76-79) is a single act-the denial of his claim for WCOD, the facts of which were known at the latest on March 15, 2001. Accordingly, the Court finds no basis for invoking the continuing violation doctrine to any of Plaintiff's state tort claims. 2. Proximate Causation and Collateral Estoppel Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 113 of 139 PageID: 1053 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 9 Defendants argue that proximate cause is a requisite element of Plaintiff's claims for negligence, fraud and violations of RICO, and that the allegations in the Third Amended Complaint are insufficient to establish proximate cause. Indeed, Defendants argue Plaintiff's allegation, that Defendants' wrongful conduct resulted in the denial of his WCOD and disability retirement benefits, amounts to sheer speculation. Defendants thus submit that since Plaintiff cannot prove that their alleged wrongful conduct resulted in a denial of his WCOD and disability retirement benefits, Plaintiff has failed to state a claim upon which relief can be granted as to his negligence, fraud and RICO violation claims. Defendants further submit that Plaintiff is collaterally estopped from litigating the issue of whether Defendants' alleged wrongful conduct resulted in the denial of his WCOD and disability retirement benefits. The Court finds some merit in Defendants' arguments. Neither the WC-ALJ nor any state appellate tribunal indicated that the JOEM articles or the underlying research studies on which Plaintiff hangs his hat, played any role in the decision to deny benefits. 21 Rather, the decision to deny benefits was based on the totality of the evidence and credibility determinations of the WC- ALJ, which included Plaintiff's testimony, as well as the testimony of a certified industrial hygienist, Lawrence Keller; a manager/maintenance engineer for A.K. Steel, Robert E. Cockroff; a maintenance supervisor/repairman for A.K. Steel, Thomas P. Kennedy, expert testimony of Defendant James W. Albers, M.D., Ph.D. (Defendant herein), board certified in neurology and electrodiagnostic medicine; expert testimony of Stanley Berent, Ph.D. (Defendant herein), board-certified in clinical psychology and clinical neuropsychology; expert testimony of Lisa Ann Morrow, Ph.D., a licensed psychologist; and the expert testimony of Aileen Scott, M.D., board-certified in occupational medicine. (Decision of WC-ALJ dated 12/7/00 at 10-11 (Ex. 2 to Pl.'s Answer to Defs.' Joint Mot. to Dismiss TAC (Doc. Nos. 70-3 and 73-3).) In particular, the WC-ALJ accepted as credible the testimonies of Kennedy, Cockroft, Keller, and Doctors Albers and Berent (Defendants herein), and specifically rejected any testimony of the Plaintiff and/or Doctors Morrow or Scott that contradicted the accepted testimonies, and explained the bases for accepting the evidence. 22 (Id. at 10 .) 21 The only reference to any “studies” in the WC-ALJ's decision appears as part of the background information provided regarding Dr. Albers credentials: The WC-ALJ noted that Dr. Albers participated in a study that was funded by NIOSH in the early 1980's involving the neurological effects of solvent exposures, and that he participated in subsequent investigations and studies involving the effects of solvent exposure on an individual's neurological well-being. (Id. at 8.) Nowhere in the WC-ALJ's decision does he find that his credibility determinations of Defendants were based on the JOEM articles or the underlying studies. Likewise, the WCAB and Commonwealth Court affirmances of the WC-ALJ's decision do not turn on any findings in the “studies” or JOEM articles. 22 Based on the testimony of Mr. Keller, the WC- ALJ found that although Plaintiff may have had some short periods of peak exposure to solvents in excess of the permissible levels, this exposure was minimal and occurred in areas where a large volume of air was present thus allowing for evaporation and prevention of concentration, and therefore, could not be expected to cause an occupational disease. (Decision of WC-ALJ dated 12/7/00 at 11 (Ex. 2 to Pl.'s Answer to Defs.' Joint Mot. to Dismiss TAC (Doc. Nos. 70-3 and 73-3).) The WC-ALJ also accepted as credible the testimony of Kennedy and Cockroft as to Plaintiff's occupational exposure. (Id.) The WC-ALJ further found significant the fact that Dr. Albers' examination of Plaintiff yielded no neurological symptoms, complaints or neurological signs attributable to exposure to organic solvents, and that the neurological exam of Plaintiff was completely normal, while the majority of problems reported by Plaintiff had a psychological basis. (Id.) In this regard, Dr. Albers found significant Plaintiff's complaint that his depression was most severe at a time after his exposure to the occupational solvents terminated, because there is no evidence of a delayed symptom with exposure to solvents followed by delayed period of time of onset of a problem; rather, according to Dr. Albers, the studies showed improvement after removal from exposure. (Id. at 9.) (Emphasis added.) In addition, during Dr. Albers' examination, Plaintiff complained of depression and anxiety of a duration of approximately seven to 10 years; however, Dr. Albers found Plaintiff's statements to be contradicted by his medical records which showed the onset of obsessive-compulsive disorder symptoms to the mid-1970's or mid-1980's, as well as by Plaintiff's previous statements to physicians that he has been depressed his entire life. (Id. at 8.) The WC-ALJ also found credible Dr. Berent's opinion that although Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 114 of 139 PageID: 1054 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 10 he found Plaintiff had a relatively severe emotional disturbance, he had a long history of psychiatric disturbance dating back many years. Moreover, Dr. Berent noted that Plaintiff's scores on several cognitive tests were so low that there should have been some demonstrable neurological impairment accompanying the poor performance which did not exist. (Id. at 9-10.) Also, Dr. Berent's examination revealed that Plaintiff's scores on tests that required memory were inconsistent. (Id. at 10.) Thus, the WC- ALJ found the opinion testimony of Dr. Berent, that although Plaintiff has a severe emotional disturbance, there is no evidence that toxins played any role and that Plaintiff does not have a solvent-induced disorder, to be credible. (Id. at 11.) *9 On appeal, the WCAB and Commonwealth Court rejected Plaintiff's argument that his employer used the “Dow Defense” to obtain a judgment in its favor from the WC-ALJ by fraud and deceit. (WCAB Op. at 7; Commw. Ct. Op. at 8 & n. 15, 10.) The WCAB dismissed Plaintiff's argument as “an attempt to usurp the [Workers' Compensation Judge's] sole authority to make credibility determinations.” (WCAB Op. at 7.) The Commonwealth Court affirmed the decision of the WCAB denying Plaintiff's request for remand to the WC- ALJ for rehearing. In so doing, the Commonwealth Court found that the decision of the WCAB did not violate Section 425 of the WCA, which provides, in pertinent part: “If on appeal it appears that the [WC-ALJ's] award or disallowance of compensation was capricious or caused by fraud, coercion, or other improper conduct by any party in interest, the [WCAB] may, grant a de novo hearing before the board, or one or more of its members or remand the case for rehearing to any [WC-ALJ].” (Commw. Ct. Op. at 9 (citing 77 P.S. § 856).) Noting unequivocally that the WCAB is vested with sole discretion to grant or deny a rehearing, and such discretion is usually exercised to grant rehearing only to allow a party to present newly discovered, non-cumulative evidence, and not to permit a party to strengthen weak proofs already presented, the Commonwealth Court determined that the evidence on which Plaintiff sought rehearing-Defendants' participation in the CSX study-could not constitute newly discovered evidence. The Commonwealth Court reasoned that Plaintiff's original counsel was aware of the prior and ongoing studies during the proceedings before the WC- ALJ, and extensive voir dire examination was conducted by counsel concerning such studies at the Defendants' depositions in the workers' compensation case. Thus, the Commonwealth Court found that Plaintiff “was merely seeking the proverbial second bit at the apple or, as the [WCAB] so characterized, merely making another ‘attempt to usurp the WCJ's authority to make credibility determinations,’ which were in [the] Employer's favor.” (Commw. Ct. Op. at 10 (quoting WCAB Op. at 7.) 23 23 The Court also takes judicial notice of the decision of Judge Shaffer in Butler County Court of Common Pleas in which he found Plaintiff was collaterally estopped from proving causation in products liability action against the manufacturers of the chemical solvents which allegedly caused his TSE. See Vavro v. E+E(US) Inc., t/d/b/a Chemply, A.D. No. 99-10526, slip op. at 3 (Butler Co. Ct. Com. Pl. Jan. 18, 2002) (Doc. No. 26-2). Now, in this federal action, Plaintiff is, in effect, seeking yet another bite at the proverbial apple. As this Court views it, the gist of Plaintiff's claims is that but for the JOEM articles and the underlying studies of Doctors Albers and Berent (which are allegedly based on Plaintiff's converted and/or fraudulently obtained PMI), the WC- ALJ would have awarded benefits to him. As explained above, however, the issue of whether Defendants' alleged fraudulent and/or deceitful conduct caused the WC-ALJ to issue an unfavorable decision, has already been determined by the WC-ALJ and appellate tribunals to Plaintiff's detriment. Unhappy with this decision and because he has exhausted all of his workers' compensation appeals, Plaintiff now attempts an end run around the final decision of the state tribunals denying WCOD benefits by instituting the instant lawsuit. This he cannot do. *10 In order to invoke collateral estoppel, four factors must be demonstrated: (1) identical issues; (2) a final judgment on the merits; (3) party against whom collateral estoppel is invoked was a party or in privity with the party to the prior adjudication; and (4) a full and fair opportunity to litigate the issue in question in the prior action. Greenleaf v. Garlock, Inc., 174 F.3d 352, 357-58 (3d Cir.1999) (citations omitted); Tucker v. Philadelphia Daily News, 577 Pa. 598, 848 A.2d 113 (2004). There is no question here that all four requirements have been met. The issues are identical, as illustrated by the Court's discussion above. In addition, the WC-ALJ's denial of WCOD benefits was affirmed by both the WCAB and the Commonwealth Court of Pennsylvania, Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 115 of 139 PageID: 1055 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 11 and the Pennsylvania Supreme Court denied allocatur, and therefore, the WC-ALJ's decision constitutes a final judgment on the merits. Also, Plaintiff was clearly a party in the workers' compensation proceedings as the claimant. Finally, counsel for Plaintiff in the workers' compensation proceedings was aware of the JOEM articles and underlying research studies and Defendants' alleged wrongful conduct with regard thereto, and therefore had a full and fair opportunity to litigate the issue of whether Defendants' alleged fraudulent and/or deceitful conduct played any role in the denial of his claim for WCOD benefits. Accordingly, Plaintiff is collaterally estopped from litigating in this Court the cause of or basis for the denial of WCOD benefits. 24 24 Defendants also argue that Plaintiff's conversion/ theft claim is collaterally estopped. However, both the WCAP and Commonwealth Court found they did not have jurisdiction over Plaintiff's conversion claim because he raised it for the first time on appeal. Nonetheless, the WCAB and Commonwealth Court proceeded to render an advisory opinion as to the merits of Plaintiff's conversion/theft claim. This is dicta as best and does not meet the first requirement for collateral estoppel. As the Supreme Court noted in Thomas v. Gas Light Co., 448 U.S. 261, 282, 100 S.Ct. 2647, 65 L.Ed.2d 757 (1980), res judicata principles may only be applied where the court had jurisdiction to decide the issue in the first instance. Since the Pennsylvania workers' compensation tribunals found they did not have jurisdiction over Plaintiff's conversion/theft claim, the opinions of the WCAB and Commonwealth Court as to that claim are not entitled to collateral estoppel effect. To the extent that any of Plaintiff's claims includes an allegation as to the cause of or basis for denial of his WCOD benefits, Plaintiff is collaterally estopped from litigating that issue in this action. In addition, to the extent Plaintiff's damages are based on the amount of WCOD and disability retirement benefits he would have otherwise received, said damages are likewise foreclosed. 3. Plaintiff Fails to State a Claim for Negligence, Conversion, Fraud or Conspiracy Under Pennsylvania Law Even if the two-year statute of limitations does not apply to bar Plaintiff's tort claims, or the collateral estoppel doctrine does not apply to foreclose litigating the issue of the cause of Plaintiff's injury/damages, as explained below the Court finds Plaintiff has nonetheless failed to allege sufficient facts to state claims for negligence, conversion/ theft, fraud and civil conspiracy under Pennsylvania law. Therefore, the Court recommends dismissal of the tort claims pursuant to Fed.R.Civ.P. 12(b)(6). a. Negligence In order to establish a cause of action for negligence in Pennsylvania, a plaintiff must prove four elements: (1) “the existence of a duty or obligation recognized by law;” (2) a breach of that duty; (3) “a causal connection between the ... breach and the resulting injury; and [ (4) ] actual loss or damage suffered....” Orner v. Mallick, 515 Pa. 132, 135, 527 A.2d 521, 523 (1987) (citing Morena v. South Hills Health Sys., 501 Pa. 634, 642 n. 5, 462 A.2d 680, 864 n. 5 (1983)). In support of his negligence claim, Plaintiff avers that Defendants' owed him a duty to “protect [his] Informed Consent protections codified at 45 C.F.R. § 46.116(d) (1)-(4)”, as imposed pursuant to the Multiple Project Assurance Agreement of the University of Michigan and its Medical School, and/or IRB Review Informed Consent Submittal Agreement Assurance of Compliance, and/or the respective Individual Investigator Agreement (collectively referred to by Plaintiff as “MPAA”). (TAC ¶¶ 64-65.) Plaintiff further avers that Defendants breached this duty by failing to either inform him of his informed consent protections, obtain an effective waiver of said protections, and/or document the elements of effective waiver of said protections. (TAC ¶ 68.) As a result of this breach of duty, Plaintiff alleges he was denied his statutory right to WCOD and disability retirement benefits. (TAC ¶ 69.) *11 Defendants respond that Plaintiff cannot establish any facts to support these assertions. In particular, Defendants first argue that neither Section 46.116(d) nor any other authority cited by Plaintiff imposes a blanket prohibition against publishing DME results. Defendants further argue that DMEs are authorized as part of the litigation process, and release of a plaintiff's medical information obtained through a DME is authorized where the plaintiff has instituted litigation seeking recovery for personal injuries. In support of this argument, Defendants cite Dennie v. Univ. of Pittsburgh School of Med., 638 F.Supp. 1005, 1008 (W.D.Pa.1986), and Doe v. WCAB (U.S.Air, Inc.), 653 A.2d 715, 717 (Pa.Commw.1995). Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 116 of 139 PageID: 1056 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 12 The Court agrees with Defendants. Assuming without deciding that Defendants had a duty under 45 C.F.R. § 46.116 and/or the MPAA to obtain the informed consent of their subjects or document criteria for waiver of the informed consent requirements, Plaintiff has failed to allege facts which support a finding that Defendants breached that duty as to him. By filing a claim for WCOD benefits, which clearly seeks an award of benefits for physical injuries, Plaintiff waived any claim of privilege as to all medical treatment and examinations as to the physical/psychological injuries of which he complains. Dennie, 638 F.Supp. at 1008 (citing In re Agent Orange Product Liability Lit., 91 F.R.D. 616 (E.D.N.Y.1981); 42 Pa.C.S.A. § 5929 (Purdon's 1986)). Plaintiff cannot claim an expectation of privacy as to the results of his medical examination and tests conducted by Defendants as part of the DMEs in the workers' compensation proceeding. Defendants also correctly argue that even if the alleged violation of section 46.116(d) did constitute a breach of an owed duty, the Third Amended Complaint, documents identified therein, and documents of public record show that any violation was not attributed to Defendants. In the Court's view, by alleging that the fraudulent DMEs of Plaintiff conducted by Defendants are research procedures subject to the informed consent protections of 45 C.F.R. § 46.116 (TAC ¶¶ 66-67), Plaintiff is attempting to conflate two entirely separate matters in a desperate attempt to create a breach of duty on the part of Defendants. Plaintiff underwent medical examinations and tests by Defendants as part of DMEs at the request of his employer in the workers' compensation proceeding. These examinations and tests occurred on September 7 and 8, 1999. Entirely separate from the DMEs of Plaintiff in September 1999, Defendants conducted several human research studies at the University of Michigan School of Medicine (“UMSM”), the results of which were published in articles appearing in the JOEM in June, 1999 and 2000. Obviously, the human research studies upon which the June 1999 JOEM article was based had to have been conducted prior to publication of the article in June 1999. Plaintiff was not even examined by Defendants for the DMEs until September 1999. Moreover, it is clear from both the June 1999 and 2000 JOEM articles that the human subjects studied in Defendants' research were all railroad workers. Plaintiff has not alleged any facts to show otherwise, his conclusory allegations notwithstanding. Therefore, there was no need for Defendants to obtain Plaintiff's informed consent in the first instance because he was not part of the human research studies. *12 Further, the UM IRB waived the requirement to obtain informed consent for these studies. Therefore, Defendants were not obligated to obtain their subjects' informed consent for the studies. Rather, the IRB was obligated to set forth and document its findings as to the four criteria for waiver. Although there was an issue as to the IRB's failure to document the four criteria for waiver, this was eventually resolved to the satisfaction of OHRP. Accordingly, the Court finds Plaintiff has not alleged facts to establish that Defendants breached their duty under 45 C.F.R. § 46.116 to “protect Plaintiff's informed consent protections.” Finally, Plaintiff requests compensatory damages in an amount equal to his WCOD and disability retirement benefits ($980,000.00) plus the costs for health care necessary to treat his TSE as provided by the Pennsylvania WCA which he expects to exceed $ 3 million over his lifetime. (TAC ¶ 70.) These damages are the same damages Plaintiff sought and was denied in his workers' compensation proceeding. Since he has failed to allege any injuries separate and apart from those raised in his workers' compensation case, Plaintiff has failed to satisfy the fourth element required to establish a claim for negligence-an actual injury suffered. Even if the Plaintiff had met his burden as to the second and fourth elements of a negligence claim, it strains credibility to suggest that the use of Plaintiff's PMI in research studies which formed the basis for JOEM articles caused the WC-ALJ to denial his claim for workers' compensation benefits. Moreover, as explained above, the issue of proximate cause is foreclosed by the doctrine of collateral estoppel. Therefore, Plaintiff cannot allege or prove any set of facts to show that he has satisfied the third element of a cause of action for negligence. Accordingly, the Court recommends that Plaintiff's claim for negligence be dismissed. b. Conversion The thrust of Plaintiff's conversion claim is that Defendants obtained his PMI through fraudulent DMEs, distorted the results of the DMEs, and used and published this distorted PMI, without justification or his consent, in JOEM articles which were used to successfully defend Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 117 of 139 PageID: 1057 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 13 the TSE claims of Plaintiff and railroad workers, resulting in actual damages consisting of the loss of his statutory right to WCOD and disability retirement benefits, and punitive damages. (TAC ¶¶ 86-90.) In addition, Plaintiff contends Defendants' conversion of his PMI defrauded him of his personal property interest in his PMI. (TAC ¶ 91.) In their motion to dismiss, Defendants submit that Plaintiff's conversion claim fails for several reasons. First, Defendants argue that they did not steal Plaintiff's PMI, as that PMI was gathered as part of authorized independent medical examinations conducted during his workers' compensation case, nor did they deprive him of any “rights” to his PMI or interfere with his use or possession of it. In support of this argument, Defendants cite to the Commonwealth Court's conclusion in the workers' compensation appeal, which states in pertinent part that an IME in the context of a workers' compensation case “require[s] the release and analysis of such personal medical information.” Commw. Ct. Op. at 10 n. 18. Defendants also cite Plaintiff's acknowledgment at oral argument on the motion to dismiss Plaintiff's second amended complaint that Doctors Albers and Berent “did everything exactly right until they published his personal medical information without his consent.” (Tr. Oral Arg. 9/7/05 at 41.) Thus, Defendants argue that they did not act without consent or legal justification. Next, Defendants argue that despite Plaintiff's claims to the contrary, his PMI played no part in the cited studies. According to Defendants, a cursory review of the cited studies, which are the centerpiece of Plaintiff's theft/conversion and fraud charges, demonstrates that the studies had nothing to do with Plaintiff's PMI. Third, Defendants submit that Plaintiff has failed to identify the market value of his PMI, or the time or place of conversion. Defendants further submit Plaintiff has failed to allege the market value of the other injured workers' allegedly converted personal medical information or their identities. According to Defendants, these deficiencies also doom Plaintiff's conversion claim, citing Northcraft v. Edward C. Michener Assoc., 319 Pa.Super. 432, 447, 466 A.2d 620, 628 (1983). Finally, Defendants argue that an individual's personal medical information cannot be the subject of a conversion claim in Pennsylvania. *13 In response, Plaintiff submits several arguments. First, Plaintiff counters that the tort of conversion refers to “chattel” which is defined as “an article of personal property; any species of property not amounting to a freehold or fee in land.” (Pl.'s Answering Br. at 19 (citing two Pennsylvania cases quoting Black's Law Dictionary, 3d ed., at 316.) Because his PMI is not a freehold or fee in land, Plaintiff argues his PMI constitutes chattel and therefore may properly be the subject of a conversion action. Moreover, Plaintiff submits that it is not relevant that there has never been a conversion action involving PMI in Pennsylvania; rather, what is relevant is that there is no Pennsylvania authority which excludes PMI as a subject of conversion. Therefore, according to Plaintiff, based on Pioneer Commercial Funding Corp. v. Am. Fin. Mortgage Corp., 579 Pa. 275, 855 A.2d 818 (2004), it appears PMI is subject to conversion in Pennsylvania. Next, Plaintiff responds that OHRP, in its February 12, 2003 correspondence, found as a fact that Defendants unlawfully interfered with his possession and use of his PMI and that these findings, together with Pennsylvania law suggesting that any “specie of property other than freehold in land” is subject to conversion, mandate the conclusion that Plaintiff is entitled to judgment on the pleadings on his conversion claim. Finally, in response to Defendants' argument that Plaintiff failed to plead the market value of his PMI, Plaintiff submits that conversion is an intentional tort which carries punitive damages and he has included a request for punitive damages in his Third Amended Complaint. Therefore, it is for a jury to decide the amount of punitive damages to which he is entitled, citing Pioneer, supra. Plaintiff also attempts to quantify the value of his PMI in his Answering Brief. In their Reply Brief, Defendants challenge Plaintiff's argument that he may recover punitive damages, because he has failed to identify any compensable damages, which are a prerequisite to recovering punitive damages, citing Martin v. Johns-Manville Corp., 508 Pa. 154, 173, 494 A.2d 1088, 1098 (1985); Pioneer, 579 Pa. at 299 n. 33, 855 A.2d at 833. Defendants also contend Plaintiff's valuation of the converted PMI in the “tens of millions” based on avoided litigation payouts is absurd. Defendants argue Plaintiff has failed to explain how the settlements of 44 TSE claims resulted in any “value” to them, who were expert witnesses, not parties, in some but not all of those cases. Even if Plaintiff's PMI were included in the JOEM articles which they maintain it was not, Defendants argue he could not possibly demonstrate that the articles dictated an unsuccessful outcome in any particular case Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 118 of 139 PageID: 1058 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 14 The required elements of a conversion claim in Pennsylvania are: [ (1) ] “the deprivation of another's right of property in, or use or possession of, a chattel, or other interference therewith, *14 [ (2) ] without the owner's consent, and (3) without lawful justification.” McKeeman v. Corestates Bank, N.A., 751 A.2d 655, 659 n. 3 (Pa.Super.Ct.2000) (quoting Stevenson v. Economy Bank of Ambridge, 412 Pa. 442, 451, 197 A.2d 721, 726 (1964)) (other citation omitted). Although the exercise of control over the property must be intentional, one does not have to prove specific intent to commit a wrong in order to recover for conversion. Id. (citing Norriton East Realty Corp. v. Central-Penn Nat'l Bank, 435 Pa. 57, 254 A.2d 637 (1969)). As to the type of property that may be the subject of conversion, it is clear in Pennsylvania that a cause of action for conversion may be maintained for almost all kinds of personal property, including money, notes, bonds, certificates of stock, title deeds. Mackay v. Benjamin Franklin Realty & Holding Co., 288 Pa. 207, 210, 135 A. 613, 614 (1927); see also Northcraft v. Edward C. Michener Assoc., 319 Pa.Super. 432, 441, 466 A.2d 620, 625 (1983) (citing cases involving intangible property rights). However, the Pennsylvania courts have refused to recognize an action for conversion where the property at issue involves a property right so entirely intangible that it is not connected with physical property, such as ordinary debt, business good will, or ideas. Mackay, 288 Pa. at 210, 135 A. at 614; Northcraft, 319 Pa.Super. at 441, 466 A.2d at 625. Thus, in Pennsylvania, an interest in intangible property cannot be the subject of a conversion action unless that interest is of a type that is customarily merged in, or identified with some document. Northcraft, 319 Pa.Super. at 441, 466 A.2d at 625; see also DirecTV v. Frick, No. Civ. A. 03-6045, 2004 WL 438663, *2-3 (E.D.Pa. Mar.2, 2004) (holding under Pennsylvania law, a satellite signal is intangible property that cannot be converted) (citing Northcraft, supra; Famology.com, Inc. v. Perot Sys. Corp., 158 F.Supp.2d 589, 591 (E.D.Pa.2001) (holding internet domain names do not constitute tangible property)). Although the Court has been unable to find any Pennsylvania cases addressing whether a property interest in PMI can be the subject of a conversion claim, the Court has found two New York state appellate division cases and a federal district court case in the Northern District of Iowa which have addressed conversions claims involving property/privacy interests in medical information. See, e.g., Rao v. Verde, 222 A.D.2d 569, 635 N.Y.S.2d 660, 661 (N.Y.App.Div.1995) (holding that information obtained from medical records was intangible and therefore could not be the subject of a conversion claim); Waldron v. Ball Corp., 210 A.D.2d 611, 619 N.Y.S.2d 841, 843 (N.Y.App.Div.1994) (holding that “possessory interest” in a patient's medical records did not constitute an intangible property right merged in, or identified with the medical records, and therefore, the court held an action for conversion was not cognizable 25 ); Hanson v. Hancock County Mem'l Hosp., 938 F.Supp. 1419, 1438 (N.D.Iowa 1996) (court rejected plaintiff's argument that privacy interest in hospital patient information constituted protected intangible personal property finding there was no authority for finding that plaintiff's privacy interest was in fact a property right, and in any event, it was not a property right that is “customarily merged in, or identified with, some document”) (quoting Hurst v. Dezer/Reyes Corp., 82 F.3d 232, 235-36 (8 th Cir.1996)) (other citations omitted). None of these cases found that a privacy or possessory interest in medical information/ records constituted a cognizable property right; and even if it was a property right, the cited authority held it was not one of the narrowly defined intangible property interests to which a conversion claim should apply. 25 The New York Supreme Court in Waldron also found that although patients have a right to access their records regarding medical treatment, it is well established under New York law that these records become property belonging to the treating doctors. 619 N.Y.S.2d at 843 (citations omitted). *15 Turning to the merits of Defendants' arguments, the Court concludes that Plaintiff's interest in his PMI does not appear to be the type of property interest that Pennsylvania would recognize as the subject of a conversion claim. Since neither the Pennsylvania Supreme Court, nor any intermediate appellate court in Pennsylvania, has addressed this issue, this Court must predict how the Pennsylvania Supreme Court would rule on this issue. Based on the authority cited above, the Court concludes that a property interest in medical information Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 119 of 139 PageID: 1059 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 15 is an intangible right that is not customarily merged in or identified with some document, and therefore, cannot be the subject of a conversion claim in Pennsylvania Plaintiff's reliance on Pioneer in support of his argument that PMI may be the subject of a conversion action in Pennsylvania is misplaced. Pioneer involved a commercial priority dispute between a banking institution exercising a set off against a general deposit account and a company asserting a third party interest in account proceeds. In that case, there was no question that the property at issue, identifiable account funds, were chattel for purposes of the conversion action. 579 Pa. at 289 n. 21, 855 A.2d at 827 n. 21. Rather, the issue in Pioneer was whether a lawful justification existed under principles of commercial law for the bank's action in mistakenly seizing wired funds. Thus, Pioneer is factually distinguishable from the case at bar and provides no support for Plaintiff's contention that his PMI may be the subject of a conversion action. It also appears that Defendants' independent medical examinations of Plaintiff, including medical tests, were conducted pursuant to an authorized consent in the workers' compensation case and indeed, Plaintiff concedes as much. Therefore, Defendants had lawful justification for using Plaintiff's PMI in his workers' compensation case. Moreover, the Court is not required to accept as true Plaintiff's unsupported conclusion that Defendants used his PMI in the research studies without his consent or lawful justification. In deciding a motion to dismiss, a court “need not accept as true ‘unsupported conclusions and unwarranted inferences.” ’ City of Pittsburgh, v. West Penn Power Co., 147 F.3d 256, 263 (3d Cir.1998) (quoting Schuylkill Energy Resources, Inc. v. Pa. Power & Light Co., 113 F.3d 405, 417 (3d Cir.1997)). In deciding a motion to dismiss, a court is not required to take the allegations of the complaint at face value. Id. As the Court of Appeals opined in City of Pittsburgh, courts must “view the complaint as a whole and ... base rulings not upon the presence of mere words, but rather, upon the presence of a factual situation which is or is not justiciable. We do draw on the allegations of the complaint, but in a realistic, rather than a slavish, manner.” Id. (footnote omitted). In analyzing Plaintiff's conversion claim in this manner, it is clear from the published JOEM articles that Plaintiff could not have been one of the subjects of the research studies upon which the JOEM articles are based. 26 In addition, it is physically impossible for Plaintiff to have been included in the research study upon which the June 1999 article is based since that article was published three months prior to Defendants' examinations of Plaintiff. Moreover, as Plaintiff alleges, the studies were funded partially by the railroad industry to address an onslaught of FELA claims by railroad workers claiming occupational disease due to TSE. (TAC ¶¶ 16-17.) Plaintiff, however, worked as a maintenance repairman and eventually progressed to maintenance leader/foreman in a steel processing/finishing plant. (WC- ALJ Decision dated 12/7/00 at 2.) Further, it defies logic to suggest that the railroad industry and/or the researchers would be interested in the medical history/ records of a non-railroad worker in the research studies on railroad workers. Therefore, viewing the complaint and documents identified therein in a realistic manner, the Court concludes that the allegations in the Third Amended Complaint do not establish that Defendants used Plaintiff's PMI in their research studies, let alone without his consent or lawful justification. 27 26 Both of the JOEM articles describe the subjects of the research studies: The June 1999 article indicates that the human research subjects consisted of “thirty railroad workers previously diagnosed with toxic encephalopathy”; the 2000 JOEM article indicates that the subject of the research study consisted of “52 railroad workers with long-term occupational solvent exposures ... previously diagnosed ... as having solvent-induced toxic encephalopathy.” 27 The Court finds no merit in Plaintiff's argument that OHRP's February 12, 2003 letter conclusively determined Defendants unlawfully interfered with Plaintiff's possession and use of his PMI. Plaintiff seriously misstates the contents of this letter and it is disingenuous to represent to the Court that OHRP found anything other than the UM-IRB failed to document the criteria for waiver of the informed consent requirements. Plaintiff's conclusion is simply not warranted by the actual contents of the letter. Moreover, because the Court has found that Plaintiff's property interest in his PMI cannot be the subject of a conversion action in Pennsylvania, and that Defendants' used Plaintiff's PMI with consent and lawful justification, the Court finds it is not necessary to address Defendants' remaining argument. *16 Accordingly, Plaintiff has failed to plead a claim for conversion under Pennsylvania law. Therefore, the Court Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 120 of 139 PageID: 1060 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 16 recommends that Plaintiff's conversion claim be dismissed with prejudice. c. Fraud In order to state a claim for fraud in Pennsylvania, Plaintiff must prove by clear and convincing evidence the following six elements: “(1) a representation; (2) which is material to the transaction at hand; (3) made falsely, with knowledge of its falsity or recklessness as to whether it is true or false; (4) with the intent of misleading another into relying on it; (5) justifiable reliance on the misrepresentation; and (6) the resulting injury was proximately caused by the reliance. Gibbs v. Ernst, 538 Pa. 193, 207-08, 647 A.2d 882, 889 (1994) (footnote and citations omitted); Goldstein v. Phillip Morris, Inc., 854 A.2d 585, 590-91 (Pa.Super.Ct.2004) (citation omitted). In addition, Federal Rule of Civil Procedure 9(b) requires the plaintiff to state with particularity the circumstances constituting the fraud. See also, Lum v. Bank of America, 361 F.3d 217, 223-24 (3d Cir.2004). Allegations of fraud which are general or conclusory will not satisfy the specificity requirement of Rule 9(b). Id. at 224. A plaintiff may satisfy the requirements of Rule 9(b) “by pleading the ‘date, place or time’ of the fraud, or through ‘alternative means of injecting precision and some measure of substantiation into [his] allegations of fraud.” ’ Id. (citation omitted). In addition, the plaintiff must allege the identity of the person or persons who made a misrepresentation, to whom the misrepresentation was made, and the general content of the misrepresentation. Id. (citations omitted). In support of his fraud claim, Plaintiff alleges in the Third Amended Complaint that Defendants' fraudulent actions consisted of arranging for Plaintiff to undergo the DMEs, which served as a fraudulent device to obtain, distort, and convert Plaintiff's PMI for publication in the JOEM and use by the railroads in defense of TSE claims of railroad workers. (TAC ¶¶ 81 a-b.) Plaintiff further alleges: (1) Defendants and designated counsel actively concealed their fraudulent purpose from Plaintiff (TAC ¶ 81c); (2) Defendants and designated counsel conspired to and intentionally obtained and converted Plaintiff's PMI, thereby violating the informed consent requirements of 45 C.F.R. § 46.116(d)(1)-(4) and the protections of HIPAA, 42 U.S.C. § 1320d-6(b) (TAC ¶¶ 81 d & e); (3) Defendants induced Plaintiff through active concealment to rely on their respective misrepresentations that the DMEs were limited in nature and not intended to be used in railroads' defense of TSE claims (TAC ¶¶ 81f); (4) Defendants negotiated and received payment for fraudulent conversion of Plaintiff's PMI from ROICO and deliberately deceived Plaintiff and the UM-IRB (TAC ¶ 81 g); and (5) ROICO paid Defendants to find that the results of Plaintiff's DMEs were negative for signs and symptoms of TSE, to publish the results in JOEM, and to testify in legal proceedings that Plaintiff did not suffer from TSE (TAC ¶¶ 81 h-j). In addition, Plaintiff alleges he “reasonabl[y] relied upon the material misrepresentations which operated to actively conceal the fraud which dispossessed Plaintiff from his TSE by Defendants ... and designated counsel.” (TAC ¶ 82.) Finally, Plaintiff avers Defendants' fraudulent conduct proximately caused an “illegal [ ] obstruct[ion]” of his statutory right to WCOD and disability retirement benefits, and denied him his statutory right to health care necessary to treat his TSE as provided by the WCA. (TAC ¶ 83.) *17 Defendants argue that Plaintiff's fraud claim should be dismissed because these allegations of fraud fail to meet the specificity requirements of Fed.R.Civ.P. 9(b). Defendants further argue that Plaintiff has failed to set forth the requisite elements of liability for fraud. In support of their argument, Defendants submit that Plaintiff fails to: (1) identify specific misrepresentations made by Defendants; (2) specify when, how or where such misrepresentations were made; or (3) explain how he was induced to rely on any such misrepresentation. Defendants posit that this lack of detail is attributed to the nature of an independent medical examination- a party submits to an IME because he is required to do so under the rules of procedure if he wishes to proceed with his lawsuit, not because the examining physician promises or represents something in return. In any event, Defendants submit that Plaintiff has failed to establish that the denial of his statutory rights to WCOD and disability retirement benefits were the immediate and proximate consequence of Plaintiff's reliance on Defendants' alleged misrepresentations, citing Crawford v. Pituch, 368 Pa. 489, 495, 84 A.2d 204, 207 (1951) (holding that the only damages recoverable were those damages which were the immediate and proximate consequence of defendant's deceit, and disallowing recovery for consequential, speculative and conjectural damages). In response, Plaintiff submits that the allegations of fraud in the Third Amended Complaint are sufficient to survive a motion to dismiss under Rule 12(b)(6). Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 121 of 139 PageID: 1061 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 17 In support of his argument, Plaintiff submits that the pleading requirements of Pennsylvania Rule of Civil Procedure 1019(b) apply and under that standard, he has pled sufficient facts to support his fraud claim. However, Plaintiff's argument misses the mark. Although state law governs the burden of proving fraud at trial, the federal rules govern the procedure for pleading fraud in diversity cases filed in federal court. Capitol Life Ins. Co. v. Rosen, 69 F.R.D. 83, 89 (E.D.Pa.1975) (citation omitted); Hayduk v. Lanna, 775 F.2d 441, 443 (1 st Cir.1985) (citing 5 C. Wright and A. Miller, Federal Practice & Procedure, §§ 1204, 1296 (1969)) (other citation omitted); Thresher v. Gulf States Paper Corp., 244 F.Supp.2d 175, 178 (W.D.N.Y.2003) (citing 2 Moore's Federal Practice (2002) § 9.03[e] ). Therefore, the special pleading requirements of Federal Rule of Civil Procedure 9(b) govern Defendants' challenge to the sufficiency of Plaintiff's fraud claim. Turning to the allegations of fraud in the Third Amended Complaint, the Court finds the allegations contained in paragraphs 81 through 83 are either conclusory or contrary to established facts and therefore incapable of being proven at trial. Moreover, none of the allegations in paragraphs 81 through 83 states with specificity the date, place or time of the allegedly fraudulent actions, or the content of the misrepresentations and identities of the persons making and receiving the misrepresentations. Nor does Plaintiff indicate how he was induced to rely on the alleged misrepresentations. Accordingly, the Court finds Plaintiff's allegations of fraud to be woefully deficient of the pleading standard required by Rule 9(b) and therefore recommends Plaintiff's fraud claim be dismissed with prejudice. 28 28 This is not a situation where Plaintiff's fraud claim should be dismissed without prejudice with leave to file yet another amended complaint. Plaintiff is not entitled to an unlimited number of bites from the proverbial apple. See Rolo v. City Investing Co. Liquidating Trust, 155 F.3d 644, 659 (3d Cir.1998) (citing Gasoline Sales, Inc. v. Aero Oil Co., 39 F.3d 70, 74 (3d Cir.1994)). He has already had four opportunities to adequately plead his claim and has failed to cure the deficiencies. Moreover, the Court cannot envision any set of facts that would establish a prima facie claim of fraud. Therefore, allowing Plaintiff to file yet another amended complaint would be futile. Under these circumstances, the Court recommends Plaintiff's fraud claim be dismissed with prejudice. Gasoline Sales, 39 F.3d at 74. d. Conspiracy *18 As to Plaintiff's conspiracy claim, Defendants correctly argue that since Plaintiff has failed to state a common law claim of fraud or conversion, Plaintiff's civil conspiracy claim likewise fails. In Pennsylvania, to state a claim for conspiracy, a plaintiff must allege: 1) A combination of two or more persons acting with a common purpose to do an unlawful act or to do a lawful act by unlawful means or for an unlawful purpose; 2) an overt act done in pursuance of the common purpose; and 3) actual legal damage. Goldstein v. Phillip Morris, Inc., 854 A.2d at 590 (citation omitted). Moreover, “ ‘absent a civil cause of action for a particular act, there can be no cause of action for civil conspiracy .” ’ Id. (quoting McKeeman v. Corestates Band, N.A., 751 A.2d 655, 660 (Pa.Super.Ct.2000)). Also essential to maintaining a claim for conspiracy is proof of malice. Id. (citation omitted). Given that Plaintiff has failed to state a claim for conversion and fraud, his civil conspiracy claim fails as a matter of law. Therefore, the Court recommends Plaintiff's cause of action for civil conspiracy be dismissed with prejudice. 4. Plaintiff Fails to State a Claim for Violations of RICO and Conspiracy to Violate RICO a. Violation of Sections 1962 & 1964(c) of RICO (Count VI) The essence of Plaintiff's claim in Count VI of the Third Amended Complaint is that Defendants violated Sections 1962 and 1964(c) of RICO, by conspiring with and acting in furtherance of the ROIICO enterprise whose goal was to distort, convert, and publish distorted PMI of 100 or more TSE claimants in articles used by ROIICO to defend TSE claims, and that each of these 100 plus acts violated HIPAA's criminal provisions 29 and, as such, are predicate acts which establish a pattern of criminal conduct necessary to establish a RICO violation. (TAC ¶¶ 103-04; Pl.'s Answering Br. at 12-13.) Plaintiff further Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 122 of 139 PageID: 1062 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 18 avers that his “property interest in his PMI was damaged consequent to the ... [D]efendants' violations of 42 U.S.C. § 1320d-6(b) (HIPAA Section 1177).” (TAC ¶ 105.) As a result of Defendants' alleged conduct, Plaintiff submits he sustained serious personal injuries including, among other things, intentionally inflicted emotional distress, 30 physical pain and mental distress, a diminished capacity for enjoyment of life, and denial of medical care and treatment; he also contends he sustained serious financial injuries, including sustained loss of income, diminished earning capacity, costs for past and future medical treatment and care, and other “substantial economic losses.” (TAC ¶ 106.) 29 Plaintiff contends that Defendants' unauthorized use of Plaintiff's PMI violates the criminal provisions of HIPAA. (Pl.'s Answering Br. at 13.) 30 Plaintiff has failed to plead any facts in support of his claim that Defendants' conduct has resulted in intentional infliction of emotional distress. Therefore, the Court does not construe the Third Amended Complaint as setting forth a cognizable claim for intentional infliction of emotional distress. Under 18 U.S.C. § 1964(c), Congress authorized civil suits by “[a]ny person injured in his business or property by reason of a violation of [18 U.S.C. § 1962].” Section 1962 contains four separate subsections, each prohibiting a different type of conduct: Section 1962(a) prohibits “any person who has received any income derived ... from a pattern of racketeering activity” from using that money to acquire, establish or operate any enterprise that affects interstate commerce. Section 1962(b) prohibits any person from acquiring or maintaining an interest in, or controlling any such enterprise “through a pattern of racketeering activity.” Section 1962(c) prohibits any person employed by or associated with an enterprise affecting interstate commerce from “conduct[ing] or participat[ing] ... in the conduct of such enterprise's affairs through a pattern of racketeering activity.” Finally, section 1962(d) prohibits any person from “conspir[ing] to violate any of the provisions of subsections (a), (b), or (c).” *19 Kehr Packages, Inc. v. Fidelcor, Inc., 926 F.2d 1406, 1411 (3d Cir.1991) (quoting 18 U.S.C. § 1962(a)-(d)). A “pattern of racketeering activity” requires the commission of at least two predicate offenses from the list delineated in 18 U.S.C. § 1961(1). See 18 U.S.C. § 1961(5) (West 2000). This entails a showing by the plaintiff “ ‘that the racketeering acts are related, and that they amount to or pose a threat of continued criminal activity.” ’ Kehr Packages, 926 F.2d at 1412 (quoting H.J. Inc. v. Northwestern Bell Tele. Co., 492 U.S. 229, 239, 109 S.Ct. 2893, 106 L.Ed.2d 195 (1989)). A “racketeering activity” is defined under RICO as “any act or threat involving murder, kidnapping, gambling, arson, robbery, bribery, extortion, dealing in obscene matter, or dealing in a controlled substance or listed chemical ..., which is chargeable under State law and punishable by imprisonment for more than one year;” or any act which is indictable under specifically enumerated federal criminal statutes. 18 U.S.C.A. § 1961(1) (West 2000). An “enterprise” is defined as “any individual, partnership, corporation, association, or other leal entity, and any union or group of individuals associated in fact although not a legal entity.” 18 U.S.C.A. § 1961(4) (West 2000). If a violation of section 1962(c) is alleged, an entity cannot be both an enterprise and a defendant. 31 Id. (citation omitted). Moreover, to the extent the alleged violations of RICO are based on fraud, the heightened pleading requirements of Fed.R.Civ.P. 9(b) apply. Lum v. Bank of America, 361 F.3d 217, 223 (3d Cir.2004) (citing Saporito v. Combustion Eng'g, Inc., 843 F.2d 666, 673 (3d Cir.1988), vacated on other grounds 489 U.S. 1049, 109 S.Ct. 1306, 103 L.Ed.2d 576 (1989)). 31 In Count VI of the Third Amended Complaint, Plaintiff appears to be alleging a violation of subsection (c) of Section 1962. (TAC ¶ 100.) Plaintiff's allegations of a RICO conspiracy under Section 1962(d) are set forth in Count V and are discussed infra in Part 4.b. In support of their motion to dismiss Plaintiff's RICO claim, Defendants advance several arguments for the Court's consideration. First, Defendants argue that the Third Amended Complaint fails to allege a “racketeering activity” as that term is defined under RICO. Defendants submit that the only predicate acts purportedly identified in the Third Amended Complaint consist of the 100 plus alleged instances of theft and conversion of Plaintiff's and the other TSE claimants' PMI. Even assuming for argument's sake they stole and converted the PMI as alleged, Defendants submit that none of this conduct, including the alleged criminal violations of HIPAA, falls within the racketeering activities delineated under Section 1961(1). Thus, according to Defendants, Plaintiff has Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 123 of 139 PageID: 1063 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 19 not and cannot allege a pattern of racketeering activity, let alone a single racketeering activity, and therefore, Plaintiff's RICO claim must fail. In further support of dismissal of Plaintiff's RICO claim, Defendants argue that Plaintiff has failed to allege in his Third Amended Complaint and prove that he has been injured in his business or property, as required by Section 1964(c). 32 Defendants submit that for purposes of Section 1964(c), allegations of injury to a plaintiff's business or property do not include personal injuries, citing Gentry v. Resolution Trust Corp., 937 F.2d 899, 918-19 (3d Cir.1991); Zimmeran v. HBO Affiliate Group, 834 F.2d 1163, 1169 (3d Cir.1987); Murphy v. Bancroft Constr. Co., No. 04-2929, 2005 U.S.App. LEXIS 7888, *7-8 (3d Cir. May 5, 2005); Fried v. Sungard Recovery Serv., Inc., 900 F.Supp. 758, 762 (E.D.Pa.1995). Thus, Defendants maintain that because Plaintiff's core injuries are medical in nature or pecuniary losses arising therefrom, said injuries are not recoverable under RICO. 32 With regard to their argument that Plaintiff is required to allege and prove an injury to his business or property, Defendants refer continuously to Section 1962(c). However, Court believes Defendants meant to cite to Section 1964(c). *20 Defendants further argue that to the extent Plaintiff seeks to evade this problem by asserting that his PMI constitutes RICO “property,” no authority exists supporting such a contention, and even if authority did exist, Plaintiff has not articulated a compensable “injury” under Section 1964(c). In support of this argument, Defendants cite Anderson v. Ayling, 396 F.3d 265, 271 (3d Cir.2005), for the proposition that “ ‘a showing of injury requires proof of a concrete financial loss and not mere injury to a valuable intangible property interest.” ’ Id. (citing Maio v. Aetna, Inc., 221 F.3d 472, 483 (3d Cir.2000) (quoting Steele v. Hosp. Corp. of Am., 36 F.3d 69, 70 (9 th Cir.1994)). Defendants further submit that Plaintiff has failed to explain how he could have property interests in the PMI of the other 100 plus TSE claimants and/or how a RICO violation of those interests resulted in a cognizable injury to Plaintiff. Because Plaintiff lacks a concrete financial loss to his business or property, Defendants maintain Plaintiff's RICO claim should be dismissed. Finally, Defendants argue that even if Plaintiff had properly identified a racketeering activity and a cognizable injury to his business or property, he has failed to allege how such violations proximately caused any injuries. Therefore, based on Allegheny Gen. Hosp. v. Philip Morris, Inc., 228 F.3d 429, 443-46 (3d Cir.2000) (“AGH” ), Plaintiff's RICO claim likewise fails. 33 33 Defendants advance an additional argument in support of their motion to dismiss. Defendants submit that RICO claims must be pleaded with specificity where the underlying acts involve allegations sounding in fraud and the Third Amended Complaint is woefully deficient in this regard. Because the Court finds Plaintiff's civil RICO claim deficient on other grounds, it need not address this argument. In response, Plaintiff reiterates the allegations contained in the Third Amended Complaint and argues that the alleged conduct is sufficient to state a claim for violations of Sections 1962 and 1964(c) of RICO. He does not attempt to address Defendants' arguments that the allegations do not set forth a “racketeering activity” as defined under Section 1961(1), other than to argue merely that the predicate acts for RICO purposes are Defendants' violation of HIPAA's criminal provisions which resulted from Defendants' violation of the informed consent protections which is an unauthorized use of his PMI. Defendants' arguments are convincing. Plaintiff's RICO claim is fatally flawed due to the absence of any allegations of a recognized racketeering activity. Nor can the Court envision any set of facts that would establish a racketeering activity under RICO. 34 However, even if Plaintiff had alleged a cognizable racketeering activity, which he has not, his RICO claim is barred for a more primal reason in that he lacks standing under Section 1964(c) to bring a civil RICO claim. 34 See note 28, supra. In order to assert a civil RICO claim, a plaintiff must first satisfy the requirements of Section 1964(c), which has been referred to as the “standing” provision of RICO. Maio, 221 F.3d at 482 n. 7 (citing Brokerage Concepts, Inc. v. U.S. Healthcare, Inc., 140 F.3d 494, 520-21 (3d Cir.1998)). The requirements for standing are two-fold: (1) injury to the plaintiff's business or property; and (2) the Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 124 of 139 PageID: 1064 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 20 alleged RICO violations must have proximately caused said injury. Id. For the reasons set forth below, the Court finds Plaintiff has failed to meet both requirements. *21 With regard to the “injury” prong of the standing test, Plaintiff alleges that his “property interest in his PMI was damaged [as a result of] defendants' violations of 42 U.S.C. § 1320d-6(b) (HIPAA Section 1177).” (TAC ¶ 105.) However, all of the injuries Plaintiff claims to have suffered constitute either personal injuries (intentionally inflicted distress, physical pain and mental distress, a diminished capacity to enjoy life, intentional infliction of emotional distress, denial of medical treatment and care), or financial injuries that derive from the alleged personal injuries (i.e., incurred medical bills for treatment and care, loss of income, diminished earning capacity, and other substantial economic losses), none of which are deemed compensable under RICO. As the Court of Appeals noted in Genty v. Resolution Trust Corp., “[i]n ordinary usage, ‘injury to business or property’ does not denote physical or emotional harm to a person. Indeed, the Supreme Court has declared that Congress's limitation of recovery to business or property injury ‘retains restrictive significance. It would for example exclude personal injuries suffered.” ’ 937 F.2d at 918 (quoting Reiter v. Sonotone Corp., 442 U.S. 330, 339, 99 S.Ct. 2326, 60 L.Ed.2d 931 (1979)); see also Zimmerman, 834 F.2d at 1169 (alleged injury of mental distress did not constitute an injury in business or property for RICO standing); Fried, 900 F.Supp. at 762-63 (declining to find plaintiff's claim for hazard pay constituted an “injury” for RICO standing where hazard pay would have allegedly been paid to induce workers to work in an environment contaminated by dangerous asbestos fibers; in reality hazard pay constituted compensation for fear of catching a disease which is a type of emotional distress not covered by RICO). Moreover, to the extent a RICO plaintiff attempts to claim financial losses that derive from the personal injuries, the courts have refused to find a cognizable injury to property for RICO standing purposes. See Thomas, 2005 U.S.App. LEXIS 7888, at *7-8 (affirming district court's rejection of civil RICO claim where alleged injury from RICO violations consisted of lost earning capacity due to depression which was found to be a non-cognizable injury under RICO); Fried, 900 F.Supp. at 762 (quoting Grogan v. Platt, 835 F.2d 844, 847 (11 th Cir.1988) (recognizing that although “ ‘recovery for personal injury has pecuniary aspects' ... it is important to distinguish between the pecuniary harm that arises from personal injuries and the pecuniary harm that arises from injury to business or property.”) Also problematic is Plaintiff's allegation that Defendants' RICO violations caused him to sustain injury to his property interest in his PMI. First, Plaintiff's property interest in his PMI is, at best, “valuable intangible property” which the Court of Appeals has indicated is normally not the type of property which, when injured, is capable of incurring a concrete financial loss, and therefore, is insufficient to create RICO standing. Anderson, 396 F.3d at 271 (quoting Steele, 36 F.3d at 70) (to prove an “injury” for RICO standing, plaintiff must show “ ‘a concrete financial loss and not merely injury to a valuable intangible property interest” ’). In Anderson, plaintiffs' claim of injury as a result of defendants' alleged RICO violations (mail fraud) was two- fold: (1) termination from employment; 35 and (2) “injury from the corruption of their local [union.]” Id. As to the second alleged injury, the Court of Appeals found that plaintiffs failed to demonstrate any concrete losses, financial or otherwise, from the alleged corruption of their local union, and therefore, concluded that plaintiffs failed to state a cognizable injury for RICO standing. Id. at 271 (citing Maio, 221 F.3d at 483). 35 As to the first alleged injury, the Court of Appeals in Anderson concluded that although job loss is not speculative in that plaintiffs' claims were for lost wages, this was not the kind of injury that normally creates RICO standing because plaintiffs failed to allege sufficient facts to show that the alleged RICO violations proximately caused them to lose their jobs. 396 F.3d at 270-71. The court's conclusion in this regard turned on its proximate cause analysis which is discussed more fully infra at 48-50. *22 Like the plaintiffs in Anderson, Plaintiff's alleged injury to his property interest in his PMI is, at best, merely an injury to a valuable intangible property interest, the damage to which is speculative and incapable of quantification. Further, Plaintiff's claimed injuries of out of pocket medical expenses, lost income, diminished earning capacity, although capable of valuation, all derive from his alleged TSE and the denial of his workers' compensation claim, not an alleged injury to his intangible property interest in his PMI. Therefore, Plaintiff's alleged injuries are not the type of “injury” that creates RICO standing. Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 125 of 139 PageID: 1065 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 21 As to the second standing requirement, Plaintiff has failed to show that the alleged injuries were proximately caused by Defendants' alleged RICO violations. In Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258, 268, 112 S.Ct. 1311, 117 L.Ed.2d 532 (1992), the Supreme Court held that in order to bring a civil RICO cause of action, the plaintiff must show that the alleged RICO violation “not only was a ‘but for’ cause of his injury, but was the proximate cause as well.” The Supreme Court further opined: [W]e use “proximate cause” to label generically the judicial tools used to limit a person's responsibility for the consequences of that person's own acts. At bottom, the notion of proximate cause reflects “ideas of what justice demands, or of what is administratively possible and convenient.” Accordingly, among the many shapes this concept took at common law was a demand for some direct relation between the injury asserted and the injurious conduct alleged. Thus, a plaintiff who complained of harm flowing merely from the misfortunes visited upon a third person by the defendant's acts was generally said to stand at too remote a distance to recover. Id. at 268-69 (internal citations omitted). Thus, in determining whether proximate cause exists for RICO standing, the Court took into account the following three factors: First, the less direct an injury is, the more difficult it becomes to ascertain the amount of a plaintiff's damages attributable to the violation, as distinct from other, independent, factors. Second, ... claims of the indirectly injured would force courts to adopt complicated rules apportioning damages among plaintiffs removed at different levels of injury from the violative acts, to obviate the risk of multiple recoveries. And, finally, the need to grapple with these problems is simply unjustified by the general interest in determining injurious conduct, since directly injured victims can generally be counted on to vindicate the law as private attorneys general, without any of the problems attendant upon suits by plaintiffs injured more remotely. Id. at 269-70 (citing Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 541-44, 103 S.Ct. 897, 74 L.Ed.2d 723 (1983)) (other internal citations omitted) (“AGC” ); 36 see also Steamfitters Local Union No. 420 Welfare Fund v. Philip Morris, Inc., 171 F.3d 912, 932 (3d Cir.1999) (“Steamfitters” ) (citing Holmes, supra ); AGH, 228 F.3d at 443 (citing Holmes and Steamfitters, supra ). Commenting on the public policy arguments of the parties, the Supreme Court opined that “[a]llowing suits by those injured only indirectly would open the door to ‘massive and complex damages litigation[, which would] not only burde [n] the courts, but [would] also undermin[e] the effectiveness of treble-damages suits.” ’ 503 U .S. at 274 (quoting AGC, 459 U.S. at 545). Therefore, in “evaluat[ing] a RICO claim for proximate causation, the central question [a court] must ask is whether the alleged violation led directly to the plaintiff's injuries.” Anza v. Ideal Steel Supply Corp., 547U.S. 451, ----, 126 S.Ct. 1991, 1998, 164 L.Ed.2d 720 (2006). 36 Although the proximate cause analysis in AGC involved violations of antitrust law, the Supreme Court and U.S. Court of Appeals for the Third Circuit have noted that such analysis applies equally to civil RICO claims brought under § 1964(c). Holmes, 503 U.S. at 268; Steamfitters Local Union No. 420 Welfare Fund v. Philip Morris, Inc., 171 F.3d 912, 932 (3d Cir.1999) (citing Holmes, supra, and McCarthy v. Recordex Serv., Inc., 80 F.3d 842, 855 (3d Cir.1996)). *23 Here the Court starts its proximate cause analysis with a review of the Supreme Court's decision in Holmes. In that case, the Securities Investor Protection Corporation (“SIPC”) brought a civil RICO claim against defendants who were alleged to have conspired to manipulate stock prices, which led to losses for two broker-dealers, which in turn prevented those broker- dealers from meeting obligations to customers who had not purchased the manipulated stock (“non-investing customers”), thereby triggering SPIC's duty to advance funds to reimburse the non-investing customers. 503 U.S. at 261. SPIC claimed it had met the requirements for RICO standing because it was subrogated to the rights of the non-investing customers. The Supreme Court found that even if SIPC did have subrogation rights, which the Court assumed without deciding, the link Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 126 of 139 PageID: 1066 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 22 between the alleged stock manipulation and the non- investing customers' harm was solely contingent on the harm suffered by the broker-dealers, and therefore, was too remote to establish an injury to SIPC's business or property for RICO standing. Id. at 271. Very recently, the Supreme Court again considered whether proximate cause was lacking in a civil RICO claim brought pursuant to Section 1962(c), involving the directness of an injury to a corporation's business, in the form of lost sales, allegedly caused by a competitor's acts of tax fraud, and mail and wire fraud, which were directed at the state taxing authority. Anza v. Ideal Steel Supply Corp., supra. Specifically, the plaintiff claimed it lost sales as a result of defendant's decreased prices (from failing to assess state sales tax) for cash-paying customers. Applying the principles of Holmes to the facts of that case, the Supreme Court concluded that proximate cause was lacking, finding that the state taxing authority was the direct victim of defendant's wrongful acts as it had been defrauded by, and lost tax revenue as a direct result of, defendant's acts. 126 S.Ct. at 1996-97. The Court opined that the “attenuated connection between [plaintiff's] injury and the [defendant's] injurious conduct ... implicate[d] fundamental concerns expressed in Holmes.” Id. at 1997. The Court reasoned that several independent bases may have existed to have caused the defendant to lower its prices, such as receipt of an inflow of cash from another source, or a business decision to accept a smaller profit margin in exchange for increased sales. Moreover, the Court opined that just because a company may commit tax fraud does not mean it will lower its prices with the excess cash. The Court further noted that plaintiff's lost sales could have resulted from factors other than defendant's alleged fraud. Id. at 1997. These concerns, along with the speculative nature of the proceedings that would ensue if plaintiff were permitted to maintain its Section 1962(c) claim, and the fact that the state, as the immediate victim of the alleged RICO violation could be expected to vindicate the laws by filing its own claim, provided additional support for the Court's conclusion that plaintiff's alleged injury was not the direct result of a RICO violation, and therefore, proximate cause was lacking. Id. at 1997-98. *24 A seminal case on the proximate cause requirement for RICO standing in this Circuit is Steamfitters, supra. In that case, plaintiffs, union and health and welfare funds (“funds”), brought claims for violations of antitrust and civil RICO statutes against tobacco companies. 171 F.3d at 916. The gravamen of the funds' complaint was that the “tobacco companies conspired to suppress research on safer tobacco products, defrauded health care providers and payers by informing them that [their] tobacco products were safe, and caused smokers to become ill by preventing the dissemination of smoking- reduction and smoking-cessation information .” Id. at 918. As a consequence of the intentional and fraudulent acts of the tobacco companies, directed at both smokers and the funds, it was alleged that the costs of smoking- related illnesses were improperly shifted from the tobacco companies to the funds. Id. at 918-19. The funds sought to recover payment of millions of dollars for the smoking- related medical expenses of the funds' participants who were allegedly victimized by the tobacco companies' conspiracy and fraud. Id. at 919. The Court of Appeals found that the funds' claims “necessarily fail[ed] for being too remotely connected in the causal chain from any wrongdoing on defendants' part.” Id. at 928. Indeed, the Steamfitters Court observed: The sheer number of links in the chain of causation that connect defendants' suppression of information on the dangers of their products and withholding of safer tobacco products from the market to the funds' increased expenditures are greater than in any [jurisprudence] in which this court or the Supreme Court has found antitrust standing .... the tortured path that one must follow from the tobacco companies' alleged wrongdoing to the funds' increased expenditures demonstrates that the plaintiffs' claims are precisely the type of indirect claims that the proximate cause requirement is intended to weed out. 171 F.3d at 930 (citation omitted). 37 37 The Court of Appeals in Steamfitters identified five alleged links in the causal chain: “(1) the tobacco companies engaged in a conspiracy to suppress information and withhold products from the market; (2) the Funds were prevented from informing their members about the dangers of smoking and the Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 127 of 139 PageID: 1067 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 23 availability of less dangerous products; (3) smokers continued to smoke dangerous tobacco products that they would not have otherwise used (or would have used less); (4) smokers contracted more smoking- related illnesses; and, finally, (5) the Funds suffered increased expenses due to their reimbursement of smokers' health care costs.” 171 F.3d at 930. Moreover, the Court of Appeals in Steamfitters based its conclusion as to the lack of RICO standing on the speculative and attenuated nature of the funds' claims. Id. at 933. In this regard, the Court of Appeals found if it allowed the funds to proceed with their RICO and antitrust claims, it would be required to determine the extent to which their increased costs for smoking- related illnesses resulted from tobacco companies' alleged conspiracy as opposed to independent causes, such as the participants' other health problems, decisions to smoke, and disregard of health and safety warnings. 38 Id. at 933. 38 The Court of Appeals further noted the funds' claims raised concerns about apportioning damages which weighed against RICO standing, while the third prong of the proximate cause analysis-whether another party could better vindicate the RICO claims- was not fully applicable. However, the Court of Appeals held its finding as to the third factor did not outweigh its concerns regarding the remoteness of injury and apportionment of damages. 171 F.3d at 933-34. In a subsequent decision of the Court of Appeals, sixteen hospitals brought an action against tobacco companies for violations of antitrust and civil RICO statutes, seeking to recover unreimbursed health costs provided to non- paying patients suffering from tobacco-related illnesses. AGH v. Philip Morris Inc., 228 F.3d at 432. The hospitals alleged the tobacco companies conspired to deceive and mislead the public about the addictive properties of nicotine and the health risks of smoking. Consequently, it was alleged that many persons used tobacco and developed lung cancer and other tobacco-related illnesses. 228 F.3d at 432-33. Some of the persons who became inflicted with the tobacco-related illnesses were medically indigent and could not afford health care, i.e., “the non-paying patients,” and the burden of treating these patients fell on the hospitals. Id. at 433-34. The hospitals further contended that the tobacco companies intended to shift the costs of diagnosing and treating tobacco-related illnesses of the non-paying patients to them and therefore advanced two theories of injury: one direct-the tobacco companies' wrongful acts increased the unreimbursed costs the hospital incurred; and one indirect-the tobacco companies' wrongful acts hampered the hospitals' efforts to reduce tobacco consumption among the non-paying patients through effective counseling, thereby preventing the hospitals from reducing health care costs of treating tobacco-related illnesses. Id. at 434. Based on its reasoning in Steamfitters, the Court of Appeals in AGH concluded that the hospitals' claimed injuries were remote and indirect, and much uncertainty and speculation existed as to what would have happened to the hospitals had the tobacco companies not conspired. Id. at 443-44 (citing Steamfitters, 171 F.3d at 933) (other citation omitted). The fact that the hospitals had a duty to provide medical care and did in fact provide direct or free medical care had no effect on the Court of Appeals' conclusion as to the lack of proximate cause. *25 With regard to the other two factors of the proximate cause analysis, even though the Court of Appeals found the problems of apportionment were not significant and the hospitals may be the best parties to vindicate the RICO claims, the Court of Appeals in AGH nonetheless held that the remoteness of the hospitals' alleged injuries from any wrongful conduct by the tobacco companies outweighed the other factors and therefore led it to conclude that proximate cause did not exist. Accordingly, the Court of Appeals held the hospitals lacked standing to maintain a civil RICO claim. Id. at 444 (citing Steamfitters, 171 F.3d at 933-34). Finally, in Anderson, supra, plaintiffs were loyalist members of the local teamsters union (“local”) whose opposition to the president of the International Brotherhood of Teamsters (“IBT”) allegedly cost them their jobs at a company who employed union workers. Some of the defendants, consisting of other members of the local, were alleged to have committed wire fraud by making false accusations against plaintiffs during telephone conferences with an IBT investigator which accusations were included in a report to the IBT. This report was in turn relied upon by the president of the IBT (also a defendant) in imposing an emergency trusteeship of the local, which in turn was relied on by plaintiffs' employer in terminating their employment. 396 F.3d at 267-68. The Court of Appeals found the Supreme Court's decision in Beck v. Prupis, 529 U.S. 494, 120 S.Ct. 1608, 146 L.Ed.2d 561 (2000), as well as its decision in Steamfitters, provided factually analogous precedent Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 128 of 139 PageID: 1068 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 24 on the issue of whether the alleged complex pattern of racketeering activities proximately caused plaintiffs' termination. Id. at 270. The Court of Appeals in Anderson noted that Beck involved a less attenuated chain of causation than the one alleged there and yet the Supreme Court found proximate cause to be lacking. 39 Id. The Anderson Court was therefore satisfied that the district court was justified in relying on Beck to dismiss plaintiff's civil RICO claim. Id . The Court of Appeals in Anderson found support for its decision in its proximate cause analysis in Steamfitters, 171 F.3d at 924. Applying the six factors in Steamfitters to the facts of that case, the Court of Appeals found the causal connection between the alleged wrongful conduct (wire fraud) and the harm to plaintiffs (termination of employment) was attenuated because several independent causes, i.e., the report to the IBT, the imposition of the trusteeship, employer's own decision to terminate plaintiffs, intervened between the two. Id. at 270-71. The Court of Appeals further found that the alleged wire fraud was intended to attack someone other than plaintiffs and therefore specific intent to harm plaintiffs was minimally indicated; the nature of plaintiffs' injury-job termination-was not the type of injury that normally creates RICO standing; the injury was “extremely indirect”; the extent to which plaintiffs' termination was due to intervening factors as opposed to the alleged RICO acts would be difficult to ascertain; and although little danger of duplicate recovery existed, a significant danger of duplicate litigation was present as the RICO lawsuit appeared to be an attempt to relitigate the trusteeship dispute previously ruled upon in an earlier lawsuit. Id. (citations omitted). 39 In Beck, plaintiff was the president of an insurance company who discovered some of the company's officers and directors were engaged in a financial fraud and reported it to the insurance regulators. In response, the conspiring officers and directors hired a consultant to write a false report suggesting the president failed to adequately perform his duties, and the board of directors terminated the president based on the fabricated report. 529 U.S. 494, 498, 120 S.Ct. 1608, 146 L.Ed.2d 561 (2000). The plaintiff in Beck, like the plaintiffs in Anderson, alleged only one overt act that directly harmed him-his termination. Despite the fact that the defendants in Beck controlled the board of directors that terminated the plaintiff-president, and their falsified report was directly relied upon by the board of directors in terminating plaintiff, the Supreme Court nonetheless concluded that proximate cause was lacking because the alleged overt act-his termination-was not a direct act of racketeering under Section 1962(a)-(c), which is required for RICO standing. 529 U.S. at 507. Beck is also discussed in Part 4 .b, infra, in conjunction with the Court's analysis of Plaintiff's RICO conspiracy claim. *26 Applying the above Supreme Court and Third Circuit precedent on proximate cause to the facts of this case, the Court concludes that Plaintiff's alleged injuries are too remote from the alleged wrongdoing by Defendants to establish the requisite proximate cause for RICO standing. While not quite as attenuated as the chain of causation in Steamfitters and Anderson, the present case presents a chain of causation that is at least as indirect as, if not greater than, that found in Holmes, Anza, and Beck, in which the Supreme Court held the injury was too remote to establish proximate cause. Here the alleged racketeering conduct consisted of conducting fraudulent DMEs, distorting the results of the DMEs, and conversion of Plaintiff's PMI, and the alleged harm or injury to Plaintiff was denial of his statutory right to WCOD and disability retirement benefits. In between these two ends of the causation chain, are the following links: (1) Defendants conducted research studies at the University of Michigan on the effects of exposure to chemical solvents in the workplace and allegedly incorporated Plaintiff's distorted PMI in these studies; (2) Defendants then published two articles in the JOEM incorporating the data from the research studies; (3) Defendants testified at the workers' compensation proceedings regarding the JOEM articles they published (as well as regarding their examinations of Plaintiff and clinical findings); (4) the WC-ALJ issued his decision denying Plaintiff's claim for benefits and allegedly relied solely on Defendants' testimony in that proceeding regarding the JOEM articles; and (5) the Pennsylvania Commonwealth Court affirmed the WC-ALJ's decision, and the Pennsylvania Supreme Court denied his petition for allocatur. Thus, Plaintiff has alleged at least five intervening links between the alleged racketeering acts and alleged harm, which clearly demonstrates that Plaintiff's claimed injury is indirect and remote. 40 40 Plaintiff alleges the following overt acts by Defendants: (1) conducting fraudulent DMEs; (2) distorting the results of the DMEs; (3) conversion of and interference with Plaintiff's and TSE-Claimants' PMI which allegedly constitutes a violation of Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 129 of 139 PageID: 1069 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 25 HIPAA; (4) publication of studies in JOEM which included Plaintiff's PMI; and (5) testifying at workers' compensation proceedings. None of these acts, however, directly harmed Plaintiff. Arguably, the only act that directly harmed Plaintiff was the denial of his claims for WCOD and disability retirement benefits. However, this harm was not directly caused by Defendants, but rather, caused by the WC-ALJ and appellate courts. Moreover, the denial of WCOD benefits is not a direct act of racketeering activity under Sections 1961 and 1962. Thus, Plaintiff cannot establish the direct causal connection required for proximate cause. Moreover, Plaintiff's argument that the WC-ALJ would not have denied his claim for WCOD benefits if Defendants had not published the JOEM articles which incorporated data from the research studies, which allegedly included his distorted DME results, is simply too speculative given the existence of several independent causes for the denial of WCOD benefits, to wit: (1) Plaintiff's history of depression predating his exposure to chemical solvents; (2) WC-ALJ relied on other evidence in the record besides the JOEM articles; 41 and (3) Plaintiff's PMI was not included in the research studies or JOEM articles. If Plaintiff was allowed to proceed with his civil RICO claim, the Court would be required to determine the extent to which Plaintiff's injury was due to Defendants' alleged racketeering activities as opposed to these independent causes. Thus, as in Steamfitters, the Court finds the “tortured path” Plaintiff asks it to follow from Defendants' alleged wrongdoing to the denial of his statutory right to benefits, demonstrates that Plaintiff's claims “are precisely the type of indirect claims that the proximate cause requirement is intended to weed out.” 171 F.3d at 930. 41 See note 22, supra. *27 In addition, although duplicate recovery is not implicated here (due to the denial of Plaintiff's claims for WCOD and disability retirement benefits), a significant risk of duplicate litigation does exist, as Plaintiff's civil RICO claim appears to be an attempt to relitigate his claim for WCOD benefits which was denied by WC- ALJ and affirmed by the appellate courts. As to whether another party could better vindicate the RICO claim, there does not appear to be any person who could bring a viable civil RICO claim on these facts, and therefore, there is no civil RICO claim left to vindicate. Although Plaintiff may have been the best party to bring suit to vindicate his personal injury claims asserted here, he has already had an opportunity to litigate those claims in other litigation. Therefore, it appears that all three factors of the proximate cause analysis weigh heavily against finding proximate cause in this case. Accordingly, Plaintiff lacks standing to bring a civil RICO claim. Morever, the issue of proximate cause was already litigated in the workers' compensation proceedings and therefore, arguably, Plaintiff is collaterally estopped from relitigating that issue here. There is no doubt in this Court's mind that Plaintiff's civil RICO claim is yet another attempt to circumvent the decisions of the WC- ALJ and appellate tribunals. Therefore, for all of the reasons delineated above, the Court recommends that Plaintiff's RICO claim (Count VI) be dismissed with prejudice. b. Conspiracy to Violate Sections 1962 & 1964(c) of RICO (Count V) Section 1962(d) provides that “[i]t shall be unlawful for any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this section.” The combined effect of Section 1964(c) and Section 1962(d) requires a plaintiff to allege and prove that he has been injured by reason of a conspiracy to violate any of the provisions of Section 1962(a)-(c). Beck v. Prupis, 529 U.S. 494, 500, 120 S.Ct. 1608, 146 L.Ed.2d 561 (2000). In other words, to state a cause of action for a RICO conspiracy, the alleged overt act that caused the plaintiff's injury must be an act of racketeering or otherwise wrongful under Section 1962. Id. at 505. In Beck, the Supreme Court held that “an injury caused by an overt act that is not an act of racketeering or otherwise wrongful under RICO [ (sections 1962(a)-(c)) ] is not sufficient to give rise to a cause of action under § 1964(c) for a violation of § 1962(d).” Id. at 507. In reaching this conclusion, the Supreme Court determined that Congress intended to adopt common law civil conspiracy principles when it established a civil cause of action in RICO for a person injured by reason of a conspiracy. Id. at 504. Just as a plaintiff alleging a common law civil conspiracy claim must allege injury from a tortious act, so too, the Supreme Court concluded, must a RICO conspiracy plaintiff allege an act that is independently wrongful under RICO. Id. at 505-06. In Beck, the overt act that allegedly caused injury to the plaintiff, who was the former president, Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 130 of 139 PageID: 1070 Vavro v. Albers, Not Reported in F.Supp.2d (2006) 2006 WL 2547350 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 26 director and shareholder of the insurance company, was his termination by the board of directors for a “substantial failure to perform his material duties,” which failure was fabricated by certain directors and officers of the insurance company. Id. at 498. Because his termination by the board of directors was not independently wrongful under RICO, the Supreme Court found plaintiff could not establish that he was injured by reason of a conspiracy. Accordingly, the Supreme Court affirmed dismissal of plaintiff's RICO claim for violation of Section 1962(d). *28 In the case at bar, Plaintiff does not allege any injuries by reason of the conspiracy, let alone injuries caused by an act of racketeering. (TAC ¶¶ 94-98.) Rather, Plaintiff alleges merely that Defendants conspired to violate Sections 1962 and 1964(c) by “agree[ing] with ROICO to conduct fraudulent DMEs for the criminal conversion of TSE-claimants' and Plaintiff's PMI in violation of 42 U.S.C. § 1320d-6(a) (HIPAA Section 1177),” and that said agreement “comprehended more than two incidents of criminal conversion” and “was their direct participation in the ROICO-enterprise's conduct of a systematic, interstate, criminal racketeering activity.” (TAC ¶¶ 94-97.) Thus, Count V of the Third Amended Complaint, which fails to state any injuries caused by the conspiracy or a recognized act of racketeering to which said injury may be attributed, is fatally deficient. Therefore, Plaintiff lacks standing under Section 1964(c) to bring a claim for RICO conspiracy under Section 1962(d). Plaintiff's conspiracy claim fails for another reason. As explained above, Plaintiff has failed to state a claim for violations of RICO Section 1962(c), and therefore, so too must his claim for conspiracy to violate RICO fail. See Baglio v. Baska, 940 F.Supp. 819, 836 (W.D.Pa.1996), aff'd 116 F.3d 467 (3d Cir.1997) (quoting Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153, 1191 (3d Cir.1993)) (“ ‘Any claim under section 1962(d) based on a conspiracy to violate the other subsections of section 1962 necessarily must fail if the substantive claims are themselves deficient.” ’) (other citation omitted). Accordingly, the Court recommends that Plaintiff's RICO conspiracy claim, Count V, be dismissed with prejudice. III. CONCLUSION For the reasons set forth above, it is recommended that Defendants' Joint Motion to Dismiss Plaintiff's Third Amended Complaint be granted with prejudice. In accordance with the Magistrate Judges Act, 28 U.S.C. § 636(b)(1)(B) and (C), and Rule 72.1.4(B) of the Local Rules for Magistrate Judges, the parties are allowed ten (10) days from the date of service of a copy of this Report and Recommendation to file objections to this Report and Recommendation. Any party opposing the objections shall have seven (7) days from the date of service of objections to respond thereto. Failure to file timely objections may constitute a waiver of any appellate rights. All Citations Not Reported in F.Supp.2d, 2006 WL 2547350 End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works. Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 131 of 139 PageID: 1071 Tab 11 Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 132 of 139 PageID: 1072 Witriol v. Conexant Systems, Inc., Not Reported in F.Supp.2d (2006) 2006 WL 3511155 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 1 2006 WL 3511155 Only the Westlaw citation is currently available. NOT FOR PUBLICATION United States District Court, D. New Jersey. Joseph WITRIOL, individually and on behalf of all others similarly situated, Plaintiffs, v. CONEXANT SYSTEMS, INC., Dwight W. Decker, Armando Geday, Robert McMullan, and Scott J. Blouin, Defendants. Civil Action No. 04-6219 (SRC). | Dec. 4, 2006. Attorneys and Law Firms Janet Rita Bosi, Lite Depalma Greenberg & Rivas LLC, Joseph J. DePalma, Lite DePalma Greenberg & Rivas LLC, Newark, NJ, Peter S. Pearlman, Cohn Lifland Pearlman Herrmann & Knopf LLP, Saddle Brook, NJ, Patrick Louis Rocco, Gary S. Graifman Esq., Kantrowitz, Goldhamer & Graifman, P.C., Chestnut Ridge, NY, James C. Shah, Shepherd, Finkelman, Miller & Shah, LLC, Collingswood, NJ, Andrew Robert Jacobs, Epstein, Fitzsimmons, Brown, Gioia, Jacobs & Sprouls, PC, Chatham Township, NJ, for Plaintiffs. David M. Simon, pro se. Gregory B. Reilly, Deborah A. Silodor, Lowenstein Sandler PC, Roseland, NJ, for Defendants. OPINION CHESLER, District Judge. *1 This matter comes before this Court on the motion to dismiss the Second Amended Class Action Complaint for failure to state a claim upon which relief can be granted, pursuant to FED.R.CIV.P. 12(b)(6), by Defendants Conexant Systems, Inc., Dwight W. Decker, Armando Geday, Robert McMullan, and Scott J. Blouin (collectively, “Defendants”). For the reasons set forth below, Defendants' motion to dismiss is GRANTED. BACKGROUND This case stems from a dispute over alleged violations of federal securities laws. Defendant Conexant Systems, Inc. (“Conexant”) is a corporation organized under the laws of Delaware; it produces electronics. Defendants Dwight W. Decker, Armando Geday, Robert McMullan, and Scott J. Blouin are present or former officers and directors of Conexant. Plaintiffs are a class of purchasers of the publicly traded stock of Conexant, purchased during the Class Period (March 1, 2004 through November 4, 2004); on April 6, 2005, this Court appointed Phillips Group as lead Plaintiff. In brief, Plaintiffs' Second Amended Class Action Complaint (the “SAC”), filed December 5, 2005, makes the following factual allegations. Conexant acquired Globespan Virata, Inc. on February 27, 2004 (the “Globespan Acquisition”). During the Class Period, Defendants made false and misleading statements that the integration of Conexant and Globespan was proceeding successfully; Plaintiffs contend that the integration of the two companies was very troubled. Also, “[t]he Company failed to regularly assess[ ] its inventory levels to ensure that the Company's inventories would not exceed the foreseeable demand and continued to stuff its distribution channels, which caused its revenues to be artificially inflated ... to conceal the integration problems afflicting Conexant.” (SAC ¶ 81(f).) Plaintiffs refer to this as the “channel-stuffing.” (See, e.g., SAC ¶ 81(h).) Plaintiffs allege that Defendants engaged in a fraudulent scheme to conceal these problems, artificially inflating the stock price. When the truth came out, the stock price dropped. The Second Amended Class Action Complaint alleges three causes of action: 1) Defendants engaged in securities fraud in violation of § 10(b) of the Exchange Act and Rule 10b5; 2) the individual Defendants are subject to control person liability under § 20(a) of the Exchange Act; and 3) Defendants McMullan and Blouin violated § 18(a) of the Exchange Act through their involvement in Conexant's SEC filings. On February 6, 2006, Defendants filed the instant motion to dismiss the SAC. Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 133 of 139 PageID: 1073 Witriol v. Conexant Systems, Inc., Not Reported in F.Supp.2d (2006) 2006 WL 3511155 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 2 ANALYSIS I. Governing Legal Standards A. Standard for a Rule 12(b)(6) Motion to Dismiss On a motion to dismiss for failure to state a claim, pursuant to FED.R.CIV.P. 12(b)(6), the court must accept as true all allegations in the complaint and all reasonable inferences that can be drawn therefrom, and view them in the light most favorable to the non-moving party. See Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384-85 (3d Cir.1994). A complaint should be dismissed only if the alleged facts, taken as true, fail to state a claim. See In re Warfarin Sodium, 214 F.3d 395, 397-98 (3d Cir.2000). The question is whether the claimant can prove any set of facts consistent with his or her allegations that will entitle him or her to relief, not whether that person will ultimately prevail. See Hishon v. King & Spalding, 467 U.S. 69, 73 (1984). “[A] complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45-46 (1957). *2 While a court will accept well-pled allegations as true for the purposes of the motion, it will not accept unsupported conclusions, unwarranted inferences, or sweeping legal conclusions cast in the form of factual allegations. See Morse v. Lower Merion School District, 132 F.3d 902, 906 n. 8 (3d Cir.1997). All reasonable inferences, however, must be drawn in the plaintiff's favor. See Sturm v. Clark, 835 F.2d 1009, 1011 (3d Cir.1987). Moreover, the claimant must set forth sufficient information to outline the elements of his or her claims or to permit inferences to be drawn that the elements exist. See FED.R.CIV.P. 8(a)(2); Conley, 355 U.S. at 45-46. “The defendant bears the burden of showing that no claim has been presented.” Hedges v. United States, 404 F.3d 744, 750 (3d Cir.2005). The Supreme Court has characterized dismissal with prejudice as a “harsh remedy.” New York v. Hill, 528 U.S. 110, 118 (2000). Dismissal of a count in a complaint with prejudice is appropriate if amendment would be inequitable or futile. “When a plaintiff does not seek leave to amend a deficient complaint after a defendant moves to dismiss it, the court must inform the plaintiff that he has leave to amend within a set period of time, unless amendment would be inequitable or futile.” Grayson v. Mayview State Hosp., 293 F.3d 103, 108 (3d Cir.2002). II. Defendants' 12(b)(6) Motion to Dismiss A. The First Claim: Violation of § 10(b) and Rule 10b-5 Defendants move to dismiss Plaintiffs' First Claim, for violation of § 10(b) of the Exchange Act and Rule 10b-5, on several grounds, including failure to adequately allege loss causation, and failure to plead fraud with particularity. Because this Court finds that Plaintiffs have failed to adequately plead scienter, it need not reach the remaining arguments for dismissal. 1 1 This Court also has concerns that the fraud claims come perilously close to invalidity under the rule of Craftmatic Sec. Litigation v. Kraftsow, 890 F.2d 628, 639 (3d Cir.1989) (“allegations of failure to disclose mismanagement alone do not state a claim under federal securities law”). As noted, this Court need not reach this issue to rule on the motion to dismiss. There are six basic elements that must be pled to state a claim of securities fraud in violation of § 10(b): (1) a material misrepresentation (or omission); (2) scienter, i.e., a wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-342 (2005). The Third Circuit restated the requirements for pleading the element of scienter in a § 10(b) claim in In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 276 (3d Cir.2006). The Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u-4, requires that a plaintiff “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 2 15 U.S.C. § 78u-4(b)(2). “The requisite ‘strong inference’ of fraud may be established either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness.” Suprema, 438 F.3d at 276. Defendants contend that the allegations of scienter in the First Claim are insufficient under both of these two prongs. Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 134 of 139 PageID: 1074 Witriol v. Conexant Systems, Inc., Not Reported in F.Supp.2d (2006) 2006 WL 3511155 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 3 2 The particularity requirement also derives support from FED.R.CIV.P. 9(b). See In re Advanta Corp. Sec. Litig., 180 F.3d 525, 539 (3d Cir.1999). *3 The Second Amended Complaint claims to address scienter in four sections. First, the SAC purports to address the scienter of the individual Defendants in ¶¶ 61-67. Despite the heading, “The Individual Defendants' Scienter,” this section makes no particularized allegations about the mental state of the individual Defendants in regard to the false statements. Rather, the section only alleges with particularity some aspects of the compensation arrangements of the individual Defendants, asserting generally that they were motivated by financial gain to accomplish the merger and conceal its problems. The SAC next details the false and misleading statements made during the class period, addressing scienter in two places, ¶¶ 81 and 90. In ¶ 8 1, Plaintiffs make broad, general allegations about the mental state of Defendants in reference to statements in the March 1, 2004 press release (¶¶ 74-75), the second quarter 2004 earnings release (¶¶ 76-77), the April 26, 2004 conference call (¶ 78), and the second quarter 2004 10-Q (¶¶ 79-80). 3 These allegations suffer from several defects. First, and most importantly, they do not state facts with particularity. Within ¶ 81, there are eight assertions. Not one of them makes a statement about a particular person or a particular event. Rather, they are all general and conclusory. They make general assertions covering four different events, without identifying specific statements made by specific people, or the particular circumstances associated with a particular statement. They provide only conclusions about the mental states of Defendants (e.g., “Defendants knew or recklessly disregarded the fact that there was too much overlap between Conexant's and Globespan's products ...”, ¶ 81(e)). These vague and conclusory assertions do not meet the particularity requirement of the PSLRA. 3 The first sentence of ¶ 81 foreshadows the problem that follows: “The statements in paragraphs 74 through 80 were each false and misleading when made because they misrepresented and omitted material adverse facts ...” Although the use of “they” suggests an assertion about the people who made the misrepresentations, the antecedent for “they” appears to be the statements themselves, not the people who made them; ¶ 81 contains no allegations which address the mental state of any particular person making any particular statement. Similarly, in ¶ 90, Plaintiffs make allegations about the mental state of Defendants in reference to statements in the July 6, 2004 earnings warning (¶¶ 82-83), the July 6, 2004 conference call (¶ 84), the third quarter 2004 earnings release (¶¶ 85-86), the July 29, 2004 conference call (¶ 87), the third quarter 2004 10-Q (¶ 88), and the September 30, 2004 press release (¶ 89). The seven assertions which follow are, again, general and conclusory; every statement made above about ¶ 81 applies equally here. These vague and conclusory allegations do not meet the particularity requirement of the PSLRA. The fourth section of the SAC which purports to address scienter is comprised by ¶¶ 109-127. This section begins with general and conclusory allegations of scienter (¶¶ 109-111). Next (¶¶ 112-119), Plaintiffs again make detailed allegations about the individual Defendants' compensation arrangements. The next part (¶¶ 120-124) purports to allege that the individual Defendants had actual knowledge of the fraud, based on the statements of confidential witnesses (referred to as “CW”), but nothing is alleged with the necessary particularity. In ¶ 120, Plaintiffs allege that “CW-1 stated that because of the integration problems, ‘We weren't able to meet the commitment to our customers, which led to the loss of business.’ “ This does not state with particularity facts giving rise to a strong inference that a Defendant acted with the required state of mind; it does not speak to what a particular Defendant knew, or when. *4 In ¶ 121, Plaintiffs allege that CW-2, CW-5, 4 and CW-6 described problems with the integration of the companies. Again, this does not state with particularity facts giving rise to a strong inference that a defendant acted with the necessary state of mind. Similarly, in ¶ 122, Plaintiffs allege that CW-3, CW-4, and CW-7 described channel-stuffing. Again, this does not state with particularity facts giving rise to a strong inference that a defendant acted with the necessary state of mind. To plead scienter, it is not sufficient to allege that the integration was problematic or that channel-stuffing occurred. The key issue is what the individual Defendants knew about the integration problems and the channel-stuffing, or whether these were so obvious that the Defendants must have been aware of them. None of the allegations of statements by the confidential witnesses, separately or as a whole, gives Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 135 of 139 PageID: 1075 Witriol v. Conexant Systems, Inc., Not Reported in F.Supp.2d (2006) 2006 WL 3511155 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 4 rise to a strong inference that any particular individual Defendant knew about the integration problems or the channel-stuffing, or that these were so obvious that Defendants must have been aware of them. 4 In ¶ 58, Plaintiffs state that CW-5 “said that there were obvious integration problems that far exceeded what one would expect from a merger of this sort.” This conclusory assertion of obviousness does not satisfy the PSLRA's requirement that Plaintiffs state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. Moreover, CW-5 is not even alleged to have stated that it was so generally obvious it must have been obvious to the individual Defendants. The statement alleges no more than that CW-5 found it obvious to himself or herself. In ¶ 124, Plaintiffs make the conclusory assertion that the resignations of McMullan and Geday establish scienter. Geday's resignation on November 9, following the close of the class period, does not lead to a strong inference about his state of mind during the class period. Plaintiffs offer no explanation of how McMullan's resignation gives rise to an inference about his state of mind, nor does this Court find a connection apparent. The following part of this section (¶¶ 125-127) asserts generally that the Globespan Acquisition was a “key business transaction” for Conexant, and that the individual Defendants were involved in making the company's public disclosures. Again, this does not state with particularity facts giving rise to a strong inference that a defendant acted with the necessary state of mind. In their opposition, Plaintiffs contend that, viewed in its entirety, the SAC adequately alleges scienter. Examination of the Second Amended Complaint as a whole, however, does not lead to any conclusions that differ from those stated above in regard to the parts. Overall, Plaintiffs allege that the individual Defendants had a strong financial interest in completing the Globespan Acquisition and then in covering up the merger's problems. Confidential witnesses knew that there were integration problems and channel-stuffing. Distilled to its essence, Plaintiffs' position on scienter is that the individual Defendants must have known about the integration problems because the merger was so important to the company, and they were high-level management, involved in making particular public statements. As to the channel-stuffing, examining the SAC as a whole, there is no clear theory of scienter. 5 5 Indeed, the channel-stuffing claim also appears to be inadequate under FED.R.CIV.P. 9(b). Rather than describing a fraud, the SAC simply alleges that managers instructed employees to “prematurely ship” product at the end of each quarter. (SAC ¶ 57.) According to CW-4, excess inventory was sometimes sold to third-world countries. (Id.) According to CW-7, “Conexant would offer discounts to customers who agreed to accept products early.” (SAC ¶ 60.) Exactly what is fraudulent about this conduct is nowhere described. Plaintiffs do not explain, nor does this Court perceive, how selling products to third- world countries and selling discounted products to customers who agree to accept them early constitute fraudulent or illicit conduct. As to the integration problems, Plaintiffs' allegations of scienter do not go farther than to say “they must have known” because of their positions in the company. The Third Circuit rejected the “they must have known” theory in Advanta: “It is well established that a pleading of scienter may not rest on a bare inference that a defendant must have had knowledge of the facts ... Likewise, allegations that a securities-fraud defendant, because of his position within the company, ‘must have known’ a statement was false or misleading are precisely the types of inferences which [courts], on numerous occasions, have determined to be inadequate to withstand Rule 9(b) scrutiny.” 180 F.3d at 539 (citations omitted). This precisely characterizes Plaintiffs' allegations of scienter as a whole, and they are insufficient. *5 Furthermore, Plaintiffs attempt to bolster this inadequate theory of scienter with theories of financial motivation which the Third Circuit has also rejected as insufficient. Plaintiffs allege that the individual Defendants were motivated to commit fraud so that they could “take advantage” of their new employment agreements with Conexant. (See SAC ¶¶ 113, 114, 119.) In In re Digital Island Sec. Litig., 357 F.3d 322, 331 (3d Cir.2004), the Third Circuit found inadequate a similar theory about an employment agreement alleged to have induced fraud in the context of a merger: “Because Plaintiffs' allegations regarding the [defendant's] employment agreement do nothing to distinguish her motivations from those surrounding countless other mergers and acquisitions, the proposed Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 136 of 139 PageID: 1076 Witriol v. Conexant Systems, Inc., Not Reported in F.Supp.2d (2006) 2006 WL 3511155 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 5 amended Complaint fails to create a strong inference of scienter as required by the PSLRA.” Moreover, the Third Circuit noted that it was in accord with the Second Circuit's holding in Kalnit v. Eichler, 264 F.3d 131, 140 (2d Cir.2001): “an allegation that defendants were motivated by a desire to maintain or increase executive compensation is insufficient because such a desire can be imputed to all corporate officers.” Plaintiffs' allegations about the individual Defendants' employment agreements and compensation arrangements similarly fail to distinguish their motivations from those typical of corporate officers in the context of mergers and acquisitions. The conclusion that Plaintiffs have failed to meet the requirements of the PSLRA for pleading scienter is supported by examination of the SAC under the two prongs of the Third Circuit's “strong inference” formulation in Suprema. Plaintiffs contend that they have satisfied both prongs. 1. The recklessness/conscious misbehavior prong Defendants argue that Plaintiffs have not adequately alleged facts that constitute strong circumstantial evidence that Defendants engaged in recklessness or conscious misbehavior. In response, Plaintiffs contend that they have done so. The SAC does not contain strong circumstantial evidence that the individual Defendants engaged in conscious misbehavior when they prepared or made the public statements. As discussed above, Plaintiffs do not allege more than that the individual Defendants must have known by virtue of their positions. This cannot suffice as strong evidence of conscious misbehavior. Nor have Plaintiffs presented strong circumstantial evidence of recklessness. “A reckless statement is a material misrepresentation or omission ‘involving not merely simple, or even excusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.’ “ GSC Partners CDO Fund v.. Washington, 368 F.3d 228, 239 (3d Cir.2004) (quoting Advanta, 180 F.3d at 535). This formulation presents a test with two parts, both of which must be met: 1) the statement involves an extreme departure from the standards of ordinary care; and 2) the statement presents a danger of misleading buyers or sellers that is either known or obvious. *6 Breaking down the GSC standard in this way, it is apparent that the SAC is insufficient. As to the first element, there is nothing in the SAC which alleges or even refers to a standard of ordinary care for management in preparing or making public statements, nor any allegations about the care the individual Defendants took, or failed to take, in the preparation and making of the statements. Aside from conclusory assertions of Defendants' recklessness, the SAC says nothing whatever about how the Defendants prepared the statements. The allegations of Defendants' reckless scienter have no particularity at all. Similarly, the SAC does not address the second element, the danger of misleading buyers. As stated, the second requirement may be satisfied by alleging either that the defendant knew of the danger of misleading, or that the danger was so obvious that the defendant must have known about it. There are no allegations in the SAC on which this Court could base an inference about what any Defendant thought about the danger of misleading investors. 2. The motive and opportunity prong Defendants argue that Plaintiffs have not adequately alleged facts that show that Defendants had both motive and opportunity to commit fraud. In response, Plaintiffs contend that they have done so. As discussed above, while the SAC makes implications about Defendants' motives, it does not articulate a theory of motive and opportunity with any particularity. Plaintiffs' opposition brief does not help. In the brief, Plaintiffs rest their argument on the allegations that “Defendants used the Globespan Acquisition to renegotiate their respective employment agreements and reap substantial personal gains.” (Pls.' Opp. Br. 42.) This appears to be the theory of motive and opportunity in its entirety, and it says nothing about fraud scienter. Moreover, as discussed above, the Third Circuit's observation in Digital Island applies here as well: company managers commonly reap substantial personal gains from Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 137 of 139 PageID: 1077 Witriol v. Conexant Systems, Inc., Not Reported in F.Supp.2d (2006) 2006 WL 3511155 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 6 mergers, and this says nothing about scienter for fraud. 357 F.3d at 331. The SAC does not plead particular facts which give rise to a strong inference of fraud scienter, under either the Suprema recklessness/conscious misbehavior prong or the motive and opportunity prong. The First Claim fails to meet the requirements of the PSLRA for pleading the element of scienter. Plaintiffs' First Claim fails to state a valid claim for relief. Plaintiffs have now been given two opportunities to amend the Complaint. Plaintiffs' opposition brief does not indicate that there is a possibility that Plaintiffs could augment their pleading of scienter so that the First Claim could withstand a motion to dismiss. Nor does this Court perceive any potential for Plaintiffs to further amend the First Claim so as to satisfy the PSLRA's requirements for pleading scienter. Because amendment is futile, Defendants' motion to dismiss the First Claim will be granted, and the First Claim will be dismissed with prejudice. B. The Second Claim: Violation of § 20(a) *7 Defendants move to dismiss Plaintiffs' Second Claim, for violation of § 20(a) of the Exchange Act, because there can be no violation of § 20(a) without an independent violation of the securities laws. See In re Advanta Corp. Sec. Litig., 180 F.3d 525, 541 (3d Cir.1999) (“claims under section 20(A) are derivative, requiring proof of a separate underlying violation of the Exchange Act”). Because the Second Claim is derivative of the First Claim, and this Court has found that the First Claim fails to state a valid claim for relief, Defendants' motion to dismiss the Second Claim will be granted, and the Second Claim will be dismissed with prejudice. C. The Third Claim: Violation of § 18(a) Defendants move to dismiss Plaintiffs' Third Claim, for violation of § 18(a) of the Exchange Act, for failure to plead fraud with particularity and failure to allege actual reliance. Defendants' argument is persuasive. In Suprema, the Third Circuit examined the pleading adequacy of a § 18(a) claim in the context of a Rule 12(b) (6) motion to dismiss, holding that cursory allegations of reliance and general allegations of reliance are not sufficient: SSF Plaintiffs alleged cursorily that they “received, reviewed, actually read, and relied upon” various Form 10-Q filings and the 2000 and 2001 Form 10-K filings. For example, regarding the September 28, 2001, Form 10-K, they allege that they “obtained this document at or about the it [sic] was publicly filed with the SEC, and actually read and relied upon it in making their decisions to invest in Suprema common stock.” App. at 367. SSF Plaintiffs failed, however, to plead facts probative of their actual reliance on any specific false statements contained in those filings. Given the lack of allegations to show the requisite causal nexus between their purchase of securities and specific statements contained in the SEC filings, we will affirm the District Court's dismissal of SSF Plaintiffs' Section 18 claims. Suprema, 438 F.3d at 284. Plaintiffs' Third Claim is insufficient in light of Suprema: the allegations of reliance are cursory and general, lacking the specificity that the Third Circuit requires to state a claim. The allegations of reliance in the Third Claim of the Second Amended Complaint are brief: 155. Plaintiff Sam Phillips and other members of the Class read and relied upon each of the Company's Class Period SEC filings, not knowing that they were false and misleading. ... 157. In connection with his purchases of Conexant stock, Plaintiff Sam Phillips and other class members specifically read and relied on the false and misleading statements regarding: [list of three subject areas of statements]. Plaintiff Sam Phillips' and the Class' reliance was reasonable. These allegations fail to plead facts probative of actual reliance on specific false statements. In their briefs, the parties debate whether an omission may constitute a false statement. This misses the point. In ¶ 157, Plaintiffs allege reliance on false statements, but state only generalizations about the subject matter of the statements. No specific false statements are identified. Plaintiffs have pled no facts probative of their actual reliance on specific false statements contained in the filings. This is the kind of cursory pleading that the Third Circuit found insufficient in Suprema. Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 138 of 139 PageID: 1078 Witriol v. Conexant Systems, Inc., Not Reported in F.Supp.2d (2006) 2006 WL 3511155 © 2016 Thomson Reuters. No claim to original U.S. Government Works. 7 *8 Plaintiffs' Third Claim fails to state a valid claim for relief under § 18(a) of the Exchange Act, 15 U.S.C. § 78r(a). Defendants' motion to dismiss the Third Claim will be granted, and the Third Claim will be dismissed without prejudice. CONCLUSION For the reasons stated above, this Court GRANTS Defendants' motion to dismiss the Second Amended Class Action Complaint for failure to state a claim upon which relief can be granted, pursuant to FED.R.CIV.P. 12(b) (6). The First Claim and the Second Claim of the Second Amended Class Action Complaint are DISMISSED with prejudice. The Third Claim of the Second Amended Class Action Complaint is DISMISSED without prejudice. As to the Third Claim only, Plaintiffs are granted leave to amend the Second Amended Class Action Complaint within 45 days of the filing of this Opinion. All Citations Not Reported in F.Supp.2d, 2006 WL 3511155 End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works. Case 1:15-cv-08007-RBK-KMW Document 20-1 Filed 08/04/16 Page 139 of 139 PageID: 1079 LATHAM & WATKINS LLP Kegan A. Brown 885 Third Avenue New York, NY 10022 Tel: (212) 906-1200 kegan.brown@lw.com Kevin H. Metz (vro hac vice) Sarah A. Greenfield (vro hac vice) 555 Eleventh Street NW Washington, DC 20004 Tel: (202) 637-2200 kevin.metz@lw.com sarah.greenfield@lw.com Attorneys for Defendants Checkpoint Systems, Inc., George Babich, Jr., Jeffery 0. Richard, and James M. Lucania UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY · STEPHEN MEIER, Individually and On Behalf of All Others Similarly Situated, Plaintiff, v. CHECKPOINT SYSTEMS, INC., GEORGE BABICH, JR., JEFFERY 0. RICHARD AND JAMES M. LUCANIA, Defendants. No. 1: 15-cv-08007 (RBK)(KMW) SUPPLEMENTAL DECLARATION OF SARAH A. GREENFIELD IN FURTHER SUPPORT OF DEFENDANTS' MOTION TO DISMISS PLAINTIFF'S AMENDED COMPLAINT I, Sarah A. Greenfield, am a partner at the law firm of Latham & Watkins LLP, 555 Eleventh Street, NW, Suite 1000, Washington, D.C., 20004, counsel to Checkpoint Systems, Inc. ("Checkpoint"), George Babich, Jr., Jeffrey 0. Richard, and James M. Lucania (collectively with Checkpoint, "Defendants"). I am admitted to the Bars of the State of Illinois and District of Columbia and am Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 1 of 139 PageID: 1080 admitted pro hac vice in the above-captioned matter. I am submitting this Supplemental Declaration in further support of Defendants' Motion to Dismiss Plaintiff's Amended Complaint, filed on May 19, 2016. 1. Attached hereto as Exhibit X is a true and correct copy of Checkpoint's Form 10-Q for the quarterly period ended March 29, 2015, filed with the U.S. Securities and Exchange Commission ("SEC") on May 6, 2015. 2. Attached hereto as Exhibit Y is a true and correct copy of Checkpoint's Form 10-Q for the quarterly period ended June 28, 2015, filed with the SEC on August 4, 2015. 3. Attached hereto as Exhibit Z is a true and correct copy of a transcript of Checkpoint's First Quarter 2015 Earnings Call, dated May 6, 2015. 4. Attached hereto as Exhibit AA is a true and correct copy of a transcript of Checkpoint's Second Quarter 2015 Earnings Call, dated August 4, 2015. 5. Attached hereto as Exhibit BB is a true and correct copy of Checkpoint's Form 8-K, filed with the SEC on February 8, 2013. 6. Attached hereto as Exhibit CC is a true and correct copy of an excerpt of Checkpoint's Schedule 14A, filed with the SEC on April 8, 2016. 2 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 2 of 139 PageID: 1081 I declare under penalty of perjury that to the best of my knowledge the foregoing is true and correct, pursuant to 28 U.S.C. § 1746. Executed this 4th day of August, 2016 in Washington, D.C. 3 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 3 of 139 PageID: 1082 Exhibit X Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 4 of 139 PageID: 1083 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 For the quarterly period ended March 29, 2015 OR For the transition period from ___________________ to Commission File No. 1-11257 CHECKPOINT SYSTEMS, INC. (Exact name of Registrant as specified in its charter) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.05 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ APPLICABLE ONLY TO CORPORATE ISSUERS: As of May 1, 2015, there were 42,068,671 shares of the Company’s Common Stock outstanding. þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Pennsylvania 22-1895850 (State of Incorporation) (IRS Employer Identification No.) 101 Wolf Drive, PO Box 188, Thorofare, New Jersey 08086 (Address of principal executive offices) (Zip Code) 856-848-1800 (Registrant’s telephone number, including area code) Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o (Do not check if a smaller reporting company) Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 5 of 139 PageID: 1084 Table of Contents CHECKPOINT SYSTEMS, INC. FORM 10-Q Table of Contents 2 Page PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statements of Comprehensive Income (Loss) 5 Consolidated Statements of Equity 6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 26 Item 3. Quantitative and Qualitative Disclosures About Market Risk 34 Item 4. Controls and Procedures 35 PART II. OTHER INFORMATION 36 Item 1. Legal Proceedings 36 Item 1A. Risk Factors 37 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37 Item 3. Defaults Upon Senior Securities 37 Item 4. Mine Safety Disclosures 37 Item 5. Other Information 37 Item 6. Exhibits 38 SIGNATURES 39 INDEX TO EXHIBITS 40 Rule 13a-14(a)/15d-14(a) Certification of George Babich, Jr., President and Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification of James M. Lucania, Acting Chief Financial Officer and Treasurer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 XBRL Instance Document XBRL Taxonomy Extension Schema Document XBRL Taxonomy Extension Calculation Linkbase Document XBRL Taxonomy Extension Definition Linkbase Document XBRL Taxonomy Extension Label Linkbase Document XBRL Taxonomy Extension Presentation Linkbase Document Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 6 of 139 PageID: 1085 Table of Contents CHECKPOINT SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) See Notes to Consolidated Financial Statements. (amounts in thousands) March 29, 2015 December 28, 2014 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 124,205 $ 135,537 Accounts receivable, net of allowance of $7,917 and $8,526 100,696 131,720 Inventories 95,579 91,860 Other current assets 21,245 25,928 Deferred income taxes 5,310 5,557 Total Current Assets 347,035 390,602 REVENUE EQUIPMENT ON OPERATING LEASE, net 1,021 1,057 PROPERTY, PLANT, AND EQUIPMENT, net 77,022 76,332 GOODWILL 164,027 173,569 OTHER INTANGIBLES, net 60,980 64,940 DEFERRED INCOME TAXES 23,088 25,284 OTHER ASSETS 6,264 6,882 TOTAL ASSETS $ 679,437 $ 738,666 LIABILITIES AND EQUITY CURRENT LIABILITIES: Short-term borrowings and current portion of long-term debt $ 224 $ 236 Accounts payable 36,523 48,928 Dividend payable 21,384 - Accrued compensation and related taxes 20,205 27,511 Other accrued expenses 37,208 44,204 Income taxes - 1,278 Unearned revenues 7,208 7,663 Restructuring reserve 4,324 6,255 Accrued pensions - current 3,999 4,472 Other current liabilities 16,058 17,504 Total Current Liabilities 147,133 158,051 LONG-TERM DEBT, LESS CURRENT MATURITIES 65,138 65,161 FINANCING LIABILITY 31,187 33,094 ACCRUED PENSIONS 96,948 108,920 OTHER LONG-TERM LIABILITIES 28,104 30,140 DEFERRED INCOME TAXES 15,120 15,369 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS’ EQUITY: Preferred stock, no par value, 500,000 shares authorized, none issued - - Common stock, par value $.10 per share, 100,000,000 shares authorized, 45,996,605 and 45,840,171 shares issued, 41,960,693 and 41,804,259 shares outstanding 4,600 4,584 Additional capital 420,955 441,882 Accumulated deficit (13,076) (12,331) Common stock in treasury, at cost, 4,035,912 and 4,035,912 shares (71,520) (71,520) Accumulated other comprehensive income, net of tax (45,152) (34,684) TOTAL STOCKHOLDERS' EQUITY 295,807 327,931 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 679,437 $ 738,666 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 7 of 139 PageID: 1086 3 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 8 of 139 PageID: 1087 Table of Contents CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) See Notes to Consolidated Financial Statements. 4 Quarter (13 weeks) Ended (amounts in thousands, except per share data) March 29, 2015 March 30, 2014 Net revenues $ 128,542 $ 147,406 Cost of revenues 72,005 85,120 Gross profit 56,537 62,286 Selling, general, and administrative expenses 51,306 54,346 Research and development 4,543 3,882 Restructuring expenses 1,304 1,892 Acquisition costs 79 - Other operating income (361) - Operating (loss) income (334) 2,166 Interest income 227 267 Interest expense 938 1,256 Other gain (loss), net 371 (86) (Loss) earnings before income taxes (674) 1,091 Income tax expense 71 1,220 Net loss $ (745) $ (129) Net loss per common share: Basic loss per share $ (0.02) $ - Diluted loss per share $ (0.02) $ - Dividend declared per share $ 0.50 $ - Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 9 of 139 PageID: 1088 Table of Contents CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) See Notes to Consolidated Financial Statements. 5 Quarter (13 weeks) Ended (amounts in thousands) March 29, 2015 March 30, 2014 Net loss $ (745) $ (129) Other comprehensive (loss) income, net of tax: Pension liability adjustments, net of tax benefit of $3 and $110 4,431 328 Foreign currency translation adjustment (14,899) 355 Total other comprehensive (loss) income, net of tax (10,468) 683 Comprehensive (loss) income $ (11,213) $ 554 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 10 of 139 PageID: 1089 Table of Contents CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF EQUITY (Unaudited) See Notes to Consolidated Financial Statements. 6 (amounts in thousands) Checkpoint Systems, Inc. Stockholders Common Stock Additional Capital Accumulated Deficit Treasury Stock Accumulated Other Comprehensive Income (Loss) Total Equity Shares Amount Shares Amount Balance, December 29, 2013 45,484 $ 4,548 $ 434,336 $ (23,284) 4,036 $ (71,520) $ 2,245 $ 346,325 Net earnings 10,953 10,953 Exercise of stock-based compensation and awards released 356 36 907 943 Tax benefit on stock-based compensation (14) (14) Stock-based compensation expense 5,781 5,781 Deferred compensation plan 872 872 Pension liability adjustments (17,263) (17,263) Foreign currency translation adjustment (19,666) (19,666) Balance, December 28, 2014 45,840 $ 4,584 $ 441,882 $ (12,331) 4,036 $ (71,520) $ (34,684) $ 327,931 Net loss (745) (745) Exercise of stock-based compensation and awards released 156 16 (1,084) (1,068) Tax benefit on stock-based compensation (1) (1) Stock-based compensation expense 1,459 1,459 Deferred compensation plan 83 83 Dividend declared ($0.50 per share) (21,384) (21,384) Pension liability adjustments 4,431 4,431 Foreign currency translation adjustment (14,899) (14,899) Balance, March 29, 2015 45,996 $ 4,600 $ 420,955 $ (13,076) 4,036 $ (71,520) $ (45,152) $ 295,807 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 11 of 139 PageID: 1090 Table of Contents CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) See Notes to Consolidated Financial Statements. 7 (amounts in thousands) Quarter (13 weeks) ended March 29, 2015 March 30, 2014 Cash flows from operating activities: Net loss $ (745) $ (129) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 6,690 6,164 Amortization of debt issuance costs 108 108 Interest on financing liability 492 559 Deferred taxes (41) (93) Stock-based compensation 1,459 1,501 Provision for losses on accounts receivable 258 676 Excess tax benefit on stock-based compensation (101) (186) (Gain) loss on disposal of fixed assets (97) 29 Restructuring related asset impairment - 172 Decrease (increase) in operating assets: Accounts receivable 24,578 24,279 Inventories (8,312) (11,111) Other assets 3,856 3,995 (Decrease) increase in operating liabilities: Accounts payable (10,803) (13,209) Income taxes (1,084) (2,376) Unearned revenues - current 110 594 Restructuring reserve (1,414) (517) Other liabilities (15,381) (1,893) Net cash (used in) provided by operating activities (427) 8,563 Cash flows from investing activities: Acquisition of property, plant, and equipment and intangibles (5,800) (3,318) Cash receipts on note receivable from sale of discontinued operations 71 71 Other investing activities 97 36 Net cash used in investing activities (5,632) (3,211) Cash flows from financing activities: Proceeds from stock issuances 104 59 Excess tax benefit on stock-based compensation 101 186 Net change in factoring and bank overdrafts 5 (55) Proceeds from long-term debt - 1,000 Payment of long-term debt (28) (7,179) Proceeds from financing liability 1,121 - Net cash provided by (used in) financing activities 1,303 (5,989) Effect of foreign currency rate fluctuations on cash and cash equivalents (6,576) 227 Net decrease in cash and cash equivalents (11,332) (410) Cash and cash equivalents: Beginning of period 135,537 121,573 End of period $ 124,205 $ 121,163 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 12 of 139 PageID: 1091 Table of Contents CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES The Consolidated Financial Statements include the accounts of Checkpoint Systems, Inc. and its majority-owned subsidiaries (collectively, the “Company”). All inter-company transactions are eliminated in consolidation. The Consolidated Financial Statements and related notes are unaudited and do not contain all disclosures required by generally accepted accounting principles in annual financial statements. The Consolidated Balance Sheet as of December 28, 2014 is derived from the Company's audited Consolidated Financial Statements at December 28, 2014. Refer to our Annual Report on Form 10-K for the fiscal year ended December 28, 2014 for the most recent disclosure of our accounting policies. The Consolidated Financial Statements include all adjustments, consisting of normal recurring adjustments, necessary to state fairly our financial position at March 29, 2015 and December 28, 2014 and our results of operations for the thirteen weeks ended March 29, 2015 and March 30, 2014 and changes in cash flows for the thirteen weeks ended March 29, 2015 and March 30, 2014. The results of operations for the interim period should not be considered indicative of results to be expected for the full year. Reclassifications Certain reclassifications have been made to prior period information to conform to the current period presentation. Customer Rebates We record estimated reductions to revenue for customer incentive offerings, including volume-based incentives and rebates. The accrual for these incentives and rebates, which is included in the Other Accrued Expenses section of our Consolidated Balance Sheets, was $10.5 million and $12.5 million as of March 29, 2015 and December 28, 2014, respectively. We record revenues net of an allowance for estimated return activities. Return activity was immaterial to revenue and results of operations for all periods presented. Warranty Reserves We provide product warranties for our various products. These warranties vary in length depending on product and geographical region. We establish our warranty reserves based on historical data of warranty transactions. The following table sets forth the movement in the warranty reserve which is located in the Other Accrued Expenses section of our Consolidated Balance Sheets: 8 (amounts in thousands) Three months ended March 29, 2015 March 30, 2014 Balance at beginning of year $ 4,379 $ 4,521 Accruals for warranties issued, net 597 810 Settlements made (887) (962) Foreign currency translation adjustment (200) 13 Balance at end of period $ 3,889 $ 4,382 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 13 of 139 PageID: 1092 Table of Contents Accumulated Other Comprehensive Income (Loss) The components of Accumulated Other Comprehensive Income (Loss), net of tax, for the three months ended March 29, 2015 were as follows: The significant items reclassified from each component of other comprehensive income (loss) for the three months ended March 29, 2015 and March 30, 2014 were as follows: Dividend On March 5, 2015, we declared a special dividend (the Dividend) of $0.50 per outstanding common share for all shareholders of record as of March 20, 2015. This Dividend reflects our commitment to building shareholder value through the execution of our strategic plan and a disciplined approach to capital allocation. After the Dividend, we believe we have the appropriate level of liquidity both to fund our internal initiatives and act quickly on any strategic opportunities. The dividend was payable on April 10, 2015. Dividend distributions to shareholders are recognized as a liability in the period in which the dividend is formally approved by our Board of Directors and communicated to shareholders. As of March 29, 2015, we have a liability of $21.4 million recorded as Dividend Payable on the Consolidated Balance Sheets. The dividend was recorded as a reduction of Additional Capital in Stockholders' Equity. The dividend does not provide any cash payment or benefit to stock options, restricted stock units, or performance shares, and instead only applies to the outstanding common stock and as outlined in the executive and director deferred compensation plans. We have recorded a non- cash liability of $0.4 million included in Dividend Payable on the Consolidated Balance Sheets for the amounts credited to the executive and director deferred compensation plan accounts on April 10, 2015. Subsequent Events We perform a review of subsequent events in connection with the preparation of our financial statements. The accounting for and disclosure of events that occur after the balance sheet date, but before our financial statements are issued, are reflected where appropriate or required in our financial statements. Refer to Note 14 of the Consolidated Financial Statements. 9 (amounts in thousands) Pension plan Foreign currency translation adjustment Total accumulated other comprehensive income Balance, December 28, 2014 $ (35,036) $ 352 $ (34,684) Foreign currency translation adjustment 3,678 (14,899) (11,221) Amounts reclassified from other comprehensive income 753 - 753 Net other comprehensive income 4,431 (14,899) (10,468) Balance, March 29, 2015 $ (30,605) $ (14,547) $ (45,152) (amounts in thousands) March 29, 2015 March 30, 2014 Details about accumulated other comprehensive income (loss) components Amount reclassified from accumulated other comprehensive income (loss) Affected line item in the statement where net loss is presented Amount reclassified from accumulated other comprehensive income (loss) Affected line item in the statement where net loss is presented Amortization of pension plan items Actuarial loss (1) $ (750) $ (385) Prior service cost (1) (6) (3) (756) Total before tax (388) Total before tax 3 Tax benefit 110 Tax benefit Total reclassifications for the period $ (753) Net of tax $ (278) Net of tax (1) These accumulated other comprehensive income components are included in the computation of net periodic pension costs. Refer to Note 9 of the Consolidated Financial Statements. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 14 of 139 PageID: 1093 Table of Contents Recently Adopted Accounting Standards In April 2014, the FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," (ASU 2014-08). Under ASU 2014-08, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Additionally, ASU 2014-08 requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations, including disclosure of pretax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. ASU 2014-08 was effective for fiscal and interim periods beginning on or after December 15, 2014, which for us was December 29, 2014, the first day of our 2015 fiscal year. The adoption of this standard has not had a material effect on our consolidated results of operations and financial condition. New Accounting Pronouncements and Other Standards In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” (ASU 2014-09), which creates a new Topic, Accounting Standards Codification Topic 606. The standard is principle-based and provides a five-step model to determine when and how revenue is recognized. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The accounting standard is effective for annual and interim periods beginning after December 15, 2016, which for us is December 26, 2016, the first day of our 2017 fiscal year. Early adoption is not permitted. We are currently evaluating the impact of adopting this guidance. On April 1, 2015, the FASB board voted to propose having ASU 2014-09 take effect for reporting periods beginning after December 15, 2017. Under the proposal, early adoption would be allowed as of the original effective date for public companies. The public will have 30 days to comment, after which the FASB board will decide whether formally enact this proposal. In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period,” (ASU 2014-12). ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in ASU 2014-12 are effective for annual periods and interim periods beginning after December 15, 2015, which for us is December 28, 2015, the first day of our 2016 fiscal year. Early adoption is permitted. We have not early adopted ASU 2014-12. Entities may apply the amendments in ASU 2014-12 either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of this standard is not expected to have a material effect on our consolidated results of operations and financial condition. In August 2014, the FASB issued ASU 2014-15, "Preparation of Financial Statements - Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern," (ASU 2014-15). Continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, "Presentation of Financial Statements-Liquidation Basis of Accounting". Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the new criteria in ASU 2014-15 should be followed to determine whether to disclose information about the relevant conditions and events. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. We have not early adopted ASU 2014-15. We are in the process of evaluating the adoption of this ASU, and currently do not expect this to have a material effect on our consolidated results of operations and financial condition. In January 2015, the FASB issued ASU 2015-01, "Income Statement-Extraordinary and Unusual Items (Subtopic 225-20)," (ASU 2015-01). The amendments in ASU 2015-01 eliminate from GAAP the concept of extraordinary items. Although the amendments will eliminate the requirements in Subtopic 225-20 for reporting entities to consider whether an underlying event or transaction is extraordinary, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. ASU 2015-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 10 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 15 of 139 PageID: 1094 Table of Contents 2015, which for us is December 28, 2015, the first day of our 2016 fiscal year. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We have not early adopted ASU 2015-01. The adoption of this standard is not expected to have a material effect on our consolidated results of operations and financial condition. In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810) - Amendments to the Consolidation Analysis,” (ASU 2015-02). ASU 2015-02 modifies existing consolidation guidance related to (i) limited partnerships and similar legal entities, (ii) the evaluation of variable interests for fees paid to decision makers or service providers, (iii) the effect of fee arrangements and related parties on the primary beneficiary determination, and (iv) certain investment funds. These changes reduce the number of consolidation models from four to two and place more emphasis on the risk of loss when determining a controlling financial interest. This guidance is effective for public companies for fiscal years beginning after December 15, 2015, which for us is December 28, 2015, the first day of our 2016 fiscal year. The adoption of this standard is not expected to have a material effect on our consolidated results of operations and financial condition. In April 2015, the FASB issued ASU 2015-03, “Interest-Imputation of Interest (Subtopic 835-30),” (ASU 2015-03). The amendments in ASU 2015- 03 change the presentation of debt issuance costs in financial statements requiring an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2016, which for us is December 26, 2016, the first day of our 2017 fiscal year. Early adoption is permitted. We have not early adopted ASU 2015-03. The new guidance will be applied retrospectively to each prior period presented. The adoption of this standard is not expected to have a material effect on our consolidated results of operations and financial condition. In April 2015, the FASB issued ASU 2015-04, “Compensation-Retirement Benefits (Topic 715),” (ASU 2015-04). The amendments in ASU 2015-04 provide a practical expedient for employers with fiscal year-ends that do not fall on a month-end by permitting those employers to measure defined benefit plan assets and obligations as of the month-end that is closest to the entity's fiscal year-end. ASU 2015-04 is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2015, which for us is December 28, 2015, the first day of our 2016 fiscal year. Early adoption is permitted. We have not early adopted ASU 2015-04. The adoption of this standard is not expected to have a material effect on our consolidated results of operations and financial condition. In April 2015, the FASB issued ASU 2015-05, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40),” (ASU 2015-05). The amendments in ASU 2015-05 help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance as to whether an arrangement includes the sale or license of software. ASU 2015-05 is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2015, which for us is December 28, 2015, the first day of our 2016 fiscal year. Early adoption is permitted. We have not early adopted ASU 2015-05. The adoption of this standard is not expected to have a material effect on our consolidated results of operations and financial condition. Note 2. INVENTORIES Inventories consist of the following: Note 3. GOODWILL AND OTHER INTANGIBLE ASSETS We had intangible assets with a net book value of $61.0 million and $64.9 million as of March 29, 2015 and December 28, 2014, respectively. 11 (amounts in thousands) March 29, 2015 December 28, 2014 Raw materials $ 18,210 $ 21,085 Work-in-process 3,739 3,264 Finished goods 73,630 67,511 Total $ 95,579 $ 91,860 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 16 of 139 PageID: 1095 Table of Contents The following table reflects the components of intangible assets as of March 29, 2015 and December 28, 2014: Amortization expense for the three months ended March 29, 2015 and March 30, 2014 was $2.7 million and $2.9 million, respectively. Estimated amortization expense for each of the five succeeding years is anticipated to be: The changes in the carrying amount of goodwill are as follows: The following table reflects the components of goodwill as of March 29, 2015 and December 28, 2014: 12 March 29, 2015 December 28, 2014 (amounts in thousands) Amortizable Life (years) Gross Amount Gross Accumulated Amortization Gross Amount Gross Accumulated Amortization Finite-lived intangible assets: Customer lists 6 to 20 $ 75,931 $ 57,396 $ 79,110 $ 58,873 Trade name 1 to 30 24,639 16,530 27,172 18,031 Patents, license agreements 3 to 14 54,993 49,876 58,060 52,448 Internal-use software 3 to 7 23,688 15,104 24,034 14,758 Other 2 to 6 6,976 6,853 7,029 6,867 Total amortized finite-lived intangible assets 186,227 145,759 195,405 150,977 Indefinite-lived intangible assets: Trade name 20,512 - 20,512 - Total identifiable intangible assets $ 206,739 $ 145,759 $ 215,917 $ 150,977 (amounts in thousands) 2015 (1) $ 10,794 2016 $ 10,405 2017 $ 9,332 2018 $ 3,447 2019 $ 2,451 (1) The estimated amortization expense for the remainder of 2015 is anticipated to be $8.1 million. (amounts in thousands) Merchandise Availability Solutions Apparel Labeling Solutions Retail Merchandising Solutions Total Balance as of December 29, 2013 $ 159,157 $ 2,116 $ 24,591 $ 185,864 Translation adjustments (9,511) - (2,784) (12,295) Balance as of December 28, 2014 $ 149,646 $ 2,116 $ 21,807 $ 173,569 Translation adjustments (7,256) - (2,286) (9,542) Balance as of March 29, 2015 $ 142,390 $ 2,116 $ 19,521 $ 164,027 March 29, 2015 December 28, 2014 (amounts in thousands) Gross Amount Accumulated Impairment Losses Goodwill, Net Gross Amount Accumulated Impairment Losses Goodwill, Net Merchandise Availability Solutions $ 176,091 $ 33,701 $ 142,390 $ 192,303 $ 42,657 $ 149,646 Apparel Labeling Solutions 83,291 81,175 2,116 84,407 82,291 2,116 Retail Merchandising Solutions 112,162 92,641 19,521 124,127 102,320 21,807 Total goodwill $ 371,544 $ 207,517 $ 164,027 $ 400,837 $ 227,268 $ 173,569 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 17 of 139 PageID: 1096 Table of Contents We perform an assessment of goodwill by comparing each individual reporting unit’s carrying amount of net assets, including goodwill, to their fair value at least annually during the October month-end close and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The May 2011 acquisition of the Shore to Shore businesses included a purchase price payment to escrow of $17.5 million related to the 2010 performance of the acquired business. This amount is subject to adjustment pending final determination of the 2010 performance and could result in an additional purchase price payment of up to $6.3 million. We are currently involved in an arbitration process in order to require the seller to provide audited financial information related to the 2010 performance. Once the final information is received and the calculation of the final purchase price is agreed to by both parties, the final adjustment to the purchase price will be recognized through earnings. Acquisition related costs incurred in connection with the transaction, including legal and other arbitration-related costs, are recognized within Acquisition Costs in the Consolidated Statement of Operations and approximate $0.1 million for the three months ended March 29, 2015 without a comparable expense for the three months ended March 30, 2014. Note 4. DEBT Debt as of March 29, 2015 and December 28, 2014 consisted of the following: 2013 Senior Secured Credit Facility On December 11, 2013, we entered into a new $200.0 million five-year senior secured multi-currency revolving credit facility (2013 Senior Secured Credit Facility) agreement (2013 Credit Agreement) with a syndicate of lenders. All obligations under the 2013 Senior Secured Credit Facility are irrevocably and unconditionally guaranteed on a joint and several basis by certain domestic subsidiaries. Collateral under the 2013 Senior Secured Credit Facility includes a 100% stock pledge of domestic subsidiaries and a 65% stock pledge of all first-tier foreign subsidiaries, excluding our Japanese subsidiary. All domestic tangible and intangible personal property, excluding any real property with a value of less than $5 million, are also pledged as collateral. Borrowings under the 2013 Senior Secured Credit Facility, other than swingline loans, bear interest at our option of either (i) a spread ranging from 0.25% to 1.25% over the Base Rate (as described below), or (ii) a spread ranging from 1.25% to 2.25% over the LIBOR rate, and in each case fluctuating in accordance with changes in our leverage ratio, as defined in the 2013 Credit Agreement. The "Base Rate" is the highest of (i) the Federal Funds Rate, plus 0.50%, (ii) the Administrative Agent’s prime rate, and (iii) a daily rate equal to the one-month LIBOR rate, plus 1.00%. Swingline loans bear interest of a spread ranging from 0.25% to 1.25% over the Base Rate. We pay an unused line fee ranging from 0.20% to 0.40% per annum on the unused portion of the 2013 Senior Secured Credit Facility. Pursuant to the terms of the 2013 Senior Secured Credit Facility, we are subject to various requirements, including covenants requiring the maintenance of (i) a maximum total leverage ratio of 3.00 and (ii) a minimum interest coverage ratio of 3.00. We are in compliance with the maximum total leverage ratio and minimum interest coverage ratio as of March 29, 2015. The 2013 Senior Secured Credit Facility also contains customary representations and warranties, affirmative and negative covenants, notice provisions and events of default, including change of control, cross- defaults to other debt, and judgment defaults. Upon a default under the 2013 Senior Secured Credit Facility, including the non-payment of principal or interest, our obligations under the 2013 Credit Agreement may be accelerated and the assets securing such obligations may be sold. As of March 29, 2015, $1.4 million issued in letters of credit, were outstanding under the 2013 Senior Secured Credit Facility. 13 (amounts in thousands) March 29, 2015 December 28, 2014 2013 Senior Secured Credit Facility: $200 million variable interest rate revolving credit facility maturing in 2018 $ 65,000 $ 65,000 Full-recourse factoring liabilities 51 83 Bank overdraft credit facility 95 65 Capital leases with maturities through 2020 216 249 Total 65,362 65,397 Less current portion 224 236 Total long-term portion $ 65,138 $ 65,161 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 18 of 139 PageID: 1097 Table of Contents Financing Liability In June 2011, we sold, to a financial institution in Spain, rights to future customer receivables resulting from the negotiated extension of previously executed sales-type lease arrangements, whose receivables were previously sold. The 2011 transaction qualified as a legal sale without recourse. However, until the receivables are recognized, the proceeds from the fiscal 2011 legal sale are accounted for as a financing arrangement and reflected as Financing Liability in our Consolidated Balance Sheets. The balance of the financing liability is $30.1 million and $33.1 million as of March 29, 2015 and December 28, 2014, respectively. We impute a non-cash interest charge on the financing liability using a rate of 6.365%, which we recognize as interest expense, until our right to recognize the legal sales permits us to de-recognize the liability and record operating income on the sale. We recognized interest expense related to the financing liability of $0.5 million and $0.6 million for the three months ended March 29, 2015 and March 30, 2014, respectively. During fiscal 2016 through 2018, when we are permitted to recognize the lease receivables upon the commencement of the lease extensions, we expect to de-recognize both the associated receivables and the related financing liability and record other operating income on the sale. At this point, our obligation under the financing liability will have been extinguished. In March 2015, we again sold rights to future customer receivables to a financial institution in Spain resulting from the negotiated extension of previously executed sales-type lease arrangements. The 2015 transaction qualified as a legal sale without recourse. We recognized $0.4 million of income on the sale recorded as Other Operating Income on our Consolidated Statement of Operations. A portion of the receivables were previously sold to another financial institution and we did not complete the reacquisition of these receivables until after the end of the first quarter. Therefore, a portion of the proceeds from the fiscal 2015 legal sale are accounted for as a financing arrangement and reflected as Financing Liability in our Consolidated Balance Sheets until the reacquisition of the receivables is completed in the second quarter. The balance of the financing liability is $1.1 million as of March 29, 2015. Note 5. STOCK-BASED COMPENSATION Stock-based compensation cost recognized in operating results (included in selling, general, and administrative expenses) for the three months ended March 29, 2015 and March 30, 2014 was $1.5 million and $1.5 million ($1.4 million and $1.4 million, net of tax), respectively. The associated actual tax benefit realized for the tax deduction from option exercises of share-based payment units and awards released equaled $0.2 million and $0.1 million for the quarter ended March 29, 2015 and March 30, 2014, respectively. Stock Options Option activity under the principal option plans as of March 29, 2015 and changes during the quarter ended March 29, 2015 were as follows: The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between our closing stock price on the last trading day of the first quarter of fiscal 2015 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 29, 2015. This amount changes based on the fair market value of our stock. The total intrinsic value of options exercised for the quarter ended March 29, 2015 and March 30, 2014 was $40 thousand and $18 thousand, respectively. 14 Number of Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Outstanding at December 28, 2014 2,349,447 $ 17.77 3.98 $ 2,716 Granted 252,260 13.56 Exercised (11,005) 9.46 Forfeited or expired (85,803) 17.03 Outstanding at March 29, 2015 2,504,899 $ 17.41 4.47 $ 936 Vested and expected to vest at March 29, 2015 2,380,156 $ 17.61 4.21 $ 922 Exercisable at March 29, 2015 1,992,965 $ 18.57 3.28 $ 692 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 19 of 139 PageID: 1098 Table of Contents As of March 29, 2015, $1.6 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted- average period of 2.3 years. The fair value of share-based payment units was estimated using the Black-Scholes option pricing model. The table below presents the weighted- average expected life in years. The expected life computation is based on historical exercise patterns and post-vesting termination behavior. The expected dividend yield is based on the estimate of annual dividends expected to be paid at the time of the grant. Volatility is determined using changes in historical stock prices. The interest rate for periods within the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. The weighted-average fair values and assumptions were as follows: Restricted Stock Units Nonvested restricted stock units as of March 29, 2015 and changes during the quarter ended March 29, 2015 were as follows: The total fair value of restricted stock awards vested during the first quarter of 2015 was $3.2 million as compared to $2.8 million in the first quarter of 2014. As of March 29, 2015, there was $4.8 million of unrecognized stock-based compensation expense related to nonvested restricted stock units (RSUs), including amounts related to performance-based RSUs detailed below. That cost is expected to be recognized over a weighted- average period of 1.9 years. The following performance-based awards of restricted stock units (RSUs) are included in the balance of nonvested RSUs at March 29, 2015 in the table above. There were no new awards of performance-based RSUs in the first quarter of 2015. On February 27, 2014, RSUs were awarded to certain key employees as part of the LTIP 2014 plan. The number of shares for these units varies based on the growth of our earnings before interest, taxes, depreciation, and amortization (EBITDA) during the January 2014 to December 2016 performance period. The final value of these units will be determined by the number of shares earned. The value of these units is charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated award amounts and estimated forfeitures rates. The weighted average price for these RSUs was $14.90 per share. Compensation expense of $50 thousand and $32 thousand was recognized in connection with these RSUs for the quarter ended March 29, 2015 and March 30, 2014, respectively. As of March 29, 2015, total unamortized compensation expense for this grant was $0.6 million. As of March 29, 2015, the maximum achievable RSUs outstanding under this plan are 137,820 units. These RSUs reduce the shares available to grant under the Checkpoint Systems, Inc. Amended and Restated 2004 Omnibus Incentive Compensation Plan (the 2004 Plan). 15 Three months ended March 29, 2015 March 30, 2014 Weighted-average fair value of grants $ 5.54 $ 6.44 Valuation assumptions: Expected life (in years) 5.53 5.11 Expected dividend yield 0.00% 0.00% Expected volatility 46.05% 48.16% Risk-free interest rate 1.540% 1.461% Number of Shares Weighted- Average Vest Date (in years) Weighted- Average Grant Date Fair Value Nonvested at December 28, 2014 940,857 0.56 $ 17.11 Granted 263,810 $ 13.25 Vested (230,334) $ 13.69 Forfeited (4,590) $ 14.21 Nonvested at March 29, 2015 969,743 1.31 $ 16.89 Vested and expected to vest at March 29, 2015 856,572 1.19 Vested and deferred at March 29, 2015 411,250 - Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 20 of 139 PageID: 1099 Table of Contents On February 27, 2013, RSUs were awarded to certain key employees as part of the LTIP 2013 plan. These awards have a market condition. The number of shares for these units varies based on the relative ranking of our total shareholder return (TSR) against the TSRs of the constituents of the Russell 2000 Index during the January 2013 to December 2015 performance period. The final value of these units will be determined by the number of shares earned. The value of these units is charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated award amounts and estimated forfeitures rates. The grant date fair value for these RSUs was $11.91 per share. Additional RSUs related to the LTIP 2013 plan were awarded on May 28, 2013, with a grant date fair value of $11.56 per share. Compensation expense of $2 thousand was reversed in the quarter ended March 29, 2015 and $29 thousand of expense was recognized in the quarter ended March 30, 2014. As of March 29, 2015, total unamortized compensation expense for these grants was $47 thousand. As of March 29, 2015, the maximum achievable RSUs outstanding under this plan are 22,500 units. These RSUs reduce the shares available to grant under the 2004 Plan. Other Compensation Arrangements On March 15, 2010, we initiated a plan in which time-vested cash unit awards were granted to eligible employees. The time-vested cash unit awards under this plan vest evenly over two or three years from the date of grant. The total amount accrued related to the plan equaled $0.3 million as of March 29, 2015, of which $0.2 million was expensed for the three months ended March 29, 2015. The total amount accrued related to the plan equaled $0.3 million as of March 30, 2014, of which $0.3 million was expensed for the three months ended March 30, 2014. The associated liability is included in Accrued Compensation and Related Taxes in the accompanying Consolidated Balance Sheets. On May 2, 2013 a cash-based performance award was awarded to our CEO under the terms of our LTIP 2013 plan. Our relative TSR performance determines the payout as a percentage of an established target cash amount of $0.4 million. Because the final payout of the award is made in cash, the award is classified as a liability and the fair value is marked-to-market each reporting period. As of March 29, 2015, the fair value of the award is $0.12 per dollar of the target cash amount awarded. The value of this award is charged to compensation expense on a straight-line basis over the vesting period. Compensation expense of $83 thousand was reversed in the first quarter of 2015. For the first quarter of 2014, less than $1 thousand was charged to compensation expense. The associated liability is included in Accrued Compensation and Related Taxes in the accompanying Consolidated Balance Sheets. To determine the fair value of the cash-based performance award as of March 29, 2015, we used a Monte Carlo simulation using the following assumptions: (i) expected volatility of 34.94%, (ii) risk-free rate of 0.20%, and (iii) an expected dividend yield of zero. Note 6. SUPPLEMENTAL CASH FLOW INFORMATION Cash payments for interest and income taxes for the quarter ended March 29, 2015 and March 30, 2014 were as follows: As of March 29, 2015 and March 30, 2014, we accrued $1.6 million and $0.6 million of capital expenditures, respectively. These amounts were excluded from the Consolidated Statements of Cash Flows at March 29, 2015 and March 30, 2014 since they represent non-cash investing activities. Accrued capital expenditures at March 29, 2015 and March 30, 2014 are included in Accounts Payable and Other Accrued Expenses on the Consolidated Balance Sheets. A special dividend of $21.4 million was declared on March 5, 2015 and is recorded as Dividend Payable on the Consolidated Balance Sheets. This amount represents a non-cash financing activity as of March 29, 2015 as the dividend is payable to shareholders on April 10, 2015. Included in Dividend Payable on the Consolidated Balance Sheets is a non-cash liability of $0.4 million for the dividend amounts to be credited to the executive and director deferred compensation plan accounts on April 10, 2015. 16 (amounts in thousands) Three months ended March 29, 2015 March 30, 2014 Interest $ 380 $ 541 Income tax payments $ 1,358 $ 2,287 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 21 of 139 PageID: 1100 Table of Contents Note 7. EARNINGS PER SHARE The following data shows the amounts used in computing earnings per share and the effect on net earnings and the weighted-average number of shares of dilutive potential common stock: Anti-dilutive potential common shares are not included in our earnings per share calculation. The Long-term Incentive Plan restricted stock units were excluded from our calculation due to performance vesting criteria not being met. The number of anti-dilutive common share equivalents for the three months ended March 29, 2015 and March 30, 2014 were as follows: Note 8. INCOME TAXES The effective tax rate for the quarter ended March 29, 2015 was negative 10.5% as compared to 111.8% for the quarter ended March 30, 2014. The change in the effective tax rate for the quarter ended March 29, 2015 was due to the mix of income between subsidiaries and decreased losses for entities with valuation allowances for which no tax benefit is received. We evaluate our deferred income taxes quarterly to determine if valuation allowances are required or should be adjusted. We are required to assess whether valuation allowances should be established against their deferred tax assets based on all available evidence, both positive and negative, using a “more likely than not” standard. In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with loss carryforwards not expiring, and tax planning alternatives. We operate and derive income across multiple jurisdictions. As each of the respective lines of business experiences changes in operating results across their geographic footprint, we may encounter losses in jurisdictions that have been historically profitable, and as a result might require additional valuation allowances to be recorded against certain deferred 17 Quarter (13 weeks) Ended (amounts in thousands, except per share data) March 29, 2015 March 30, 2014 Net loss available to common stockholders $ (745) $ (129) Shares: Weighted-average number of common shares outstanding 41,852 41,541 Shares issuable under deferred compensation agreements 805 345 Basic weighted-average number of common shares outstanding 42,657 41,886 Common shares assumed upon exercise of stock options and awards - - Unvested shares issuable under deferred compensation arrangements - - Dilutive weighted-average number of common shares outstanding 42,657 41,886 Basic loss per share $ (0.02) $ - Diluted loss per share $ (0.02) $ - Quarter (13 weeks) Ended (amounts in thousands) March 29, 2015 March 30, 2014 Weighted-average common share equivalents associated with anti-dilutive stock options and restricted stock units excluded from the computation of diluted EPS(1) 2,210 2,260 (1) Stock options and awards of 292 thousand shares and deferred compensation arrangements of 27 thousand shares were anti-dilutive in the first three months of 2015 and were therefore excluded from the earnings per share calculation due to our net loss for the period. Stock options and awards of 345 thousand shares and deferred compensation arrangements of 17 thousand shares were anti-dilutive in the first three months of 2014 and were therefore excluded from the earnings per share calculation due to our loss from continuing operations for the period. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 22 of 139 PageID: 1101 Table of Contents tax asset balances. As of March 29, 2015 and December 28, 2014, we had net deferred tax assets of $10.7 million and $12.8 million, respectively. At December 28, 2014, the U.S. had a valuation allowance of $108.3 million recorded against its net deferred tax assets of $96.1 million. The amount of valuation allowance recorded was greater than the net domestic deferred tax asset after consideration of deferred tax liabilities associated with non amortizable assets such as goodwill and indefinite lived intangibles. The valuation allowance is reviewed quarterly and will be maintained until there is sufficient positive evidence to support a release. At each reporting date, we consider new evidence, both positive and negative, that could impact the future realization of deferred tax assets. We will consider a release of the valuation allowance once there is sufficient positive evidence that it is more likely than not that the deferred tax assets will be realized. Due to improvements in the U.S. operating results over the past three years, management believes a reasonable possibility exists that, in the near future, sufficient positive evidence may become available to reach a conclusion that all or some portion of the U.S. valuation allowance will no longer be needed. Any release of the valuation allowance will be recorded as a tax benefit increasing net income. Included in Other Current Assets as of March 29, 2015, is a current income tax receivable of $3.4 million. This amount represents a net receivable of $2.4 million as of December 28, 2014, year to date estimated tax payments made in excess of refunds received in the amount of $1.1 million, and current tax expense recorded on our year to date pretax income of $0.1 million. Included in Other Current Liabilities is our current deferred tax liability of $2.6 million. The total amount of gross unrecognized tax benefits that, if recognized, would affect the effective tax rate was $16.3 million and $16.4 million at March 29, 2015 and December 28, 2014, respectively. Penalties and tax-related interest expense are reported as a component of Income Tax Expense on our Consolidated Statement of Operations. During the quarter ended March 29, 2015 we recognized an interest and penalties expense of $0.2 million compared to an interest and penalties expense of $0.2 million during the quarter ended March 30, 2014. As of March 29, 2015 and December 28, 2014, we had accrued interest and penalties related to unrecognized tax benefits of $4.5 million and $4.3 million, respectively. As of March 29, 2015 and December 28, 2014, $16.1 million and $16.1 million, respectively, of our unrecognized tax benefits, penalties, and interest were recorded as a component of Other Long-Term Liabilities on the Consolidated Balance Sheets. We file income tax returns in the U.S. and in various states, local and foreign jurisdictions. We are routinely examined by tax authorities in these jurisdictions. It is possible that these examinations may be resolved within twelve months. Due to the expiration of various statutes of limitation and the potential resolution of federal, state, and foreign examinations, it is reasonably possible that the gross unrecognized tax benefits balance may decrease within the next twelve months by a range of $4.2 million to $12.0 million. We are currently under audit in the following major jurisdictions: Germany - 2006 to 2009, Finland - 2005 to 2009, India - 2012 to 2013, and Canada - 2011 to 2014. The following major jurisdictions have tax years that remain subject to examination: Germany - 2006 to 2014, United States - 2011 to 2014, China - 2011 to 2014 and Hong Kong - 2008 to 2014. Our tax returns for open years in all jurisdictions are subject to changes upon examination. We operate under tax holidays in certain countries, which are effective through dates ranging from 2015 to 2017, and may be extended if certain additional requirements are satisfied. The tax holidays are conditional upon our meeting certain employment and investment thresholds. Note 9. PENSION BENEFITS The components of net periodic benefit cost for the three months ended March 29, 2015 and March 30, 2014 were as follows: 18 Quarter (13 weeks) Ended (amounts in thousands) March 29, 2015 March 30, 2014 Service cost $ 304 $ 282 Interest cost 535 916 Expected return on plan assets (34) - Amortization of actuarial loss 750 385 Amortization of prior service costs 6 3 Net periodic pension cost $ 1,561 $ 1,586 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 23 of 139 PageID: 1102 Table of Contents We expect the cash requirements for funding the pension benefits to be approximately $4.2 million during fiscal 2015, including $1.2 million which was funded during the quarter ended March 29, 2015. Note 10. FAIR VALUE MEASUREMENT, FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Fair Value Measurement We utilize the market approach to measure fair value for our financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The fair value hierarchy is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels: Because our derivatives are not listed on an exchange, we value these instruments using a valuation model with pricing inputs that are observable in the market or that can be derived principally from or corroborated by observable market data. Our methodology also incorporates the impact of both ours and the counterparty’s credit standing. The following tables represent our assets and liabilities measured at fair value on a recurring basis as of March 29, 2015 and December 28, 2014 and the basis for that measurement: 19 Level 1 Inputs are quoted prices in active markets for identical assets or liabilities. Level 2 Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data. Level 3 Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. (amounts in thousands) Total Fair Value Measurement March 29, 2015 Quoted Prices In Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Foreign currency forward exchange contracts $ 322 $ - $ 322 $ - Total assets $ 322 $ - $ 322 $ - Foreign currency forward exchange contracts $ - $ - $ - $ - Total liabilities $ - $ - $ - $ - (amounts in thousands) Total Fair Value Measurement December 28, 2014 Quoted Prices In Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Foreign currency forward exchange contracts $ 55 $ - $ 55 $ - Total assets $ 55 $ - $ 55 $ - Foreign currency forward exchange contracts $ 23 $ - $ 23 $ - Total liabilities $ 23 $ - $ 23 $ - Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 24 of 139 PageID: 1103 Table of Contents We believe that the fair values of our current assets and current liabilities (cash, accounts receivable, accounts payable, and other current liabilities) approximate their reported carrying amounts. The carrying values and the estimated fair values of non-current financial assets and liabilities that qualify as financial instruments and are not measured at fair value on a recurring basis at March 29, 2015 and December 28, 2014 are summarized in the following table: Long-term debt is carried at the original offering price, less any payments of principal. The carrying amount of the Senior Secured Credit Facility approximates fair value due to the variable rate nature of its interest at current market rates. The related fair value measurement has generally been classified as Level 2 in the fair value hierarchy. March 29, 2015 December 28, 2014 (amounts in thousands) Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Long-term debt (including current maturities and excluding capital leases and factoring)(1) 2013 Senior secured credit facility $ 65,000 $ 65,000 $ 65,000 $ 65,000 (1) The carrying amounts are reported on the Consolidated Balance Sheets under the indicated captions. Nonrecurring Fair Value Measurements Severance costs included in our restructuring charges are calculated using internal estimates and are therefore classified as Level 3 in the fair value hierarchy. Refer to Note 11 of the Consolidated Financial Statements. In connection with our restructuring plans, we recorded impairment losses in restructuring expense during the quarter ended March 30, 2014 of $0.2 million due to the impairment of certain long-lived assets for which the carrying value of those assets may not be recoverable based upon our estimated cash flows. Assets with carrying amounts of $0.2 million were written down to their fair values of $21 thousand. Given that the impairment losses were determined using internal estimates of future cash flows or upon non-identical assets using significant unobservable inputs, we have classified the remaining fair value of long-lived assets as Level 3 in the fair value hierarchy. Refer to Note 11 of the Consolidated Financial Statements. Financial Instruments and Risk Management We manufacture products in the U.S., Europe, and the Asia Pacific region for both the local marketplace and for export to our foreign subsidiaries. The foreign subsidiaries, in turn, sell these products to customers in their respective geographic areas of operation, generally in local currencies. This method of sale and resale gives rise to the risk of gains or losses as a result of currency exchange rate fluctuations on inter-company receivables and payables. Additionally, the sourcing of product in one currency and the sales of product in a different currency can cause gross margin fluctuations due to changes in currency exchange rates. Our major market risk exposures are movements in foreign currency and interest rates. We have historically not used financial instruments to minimize our exposure to currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries. We have used third-party borrowings in foreign currencies to hedge a portion of our net investments in and cash flows derived from our foreign subsidiaries. A reduction in our third-party foreign currency borrowings will result in an increase of foreign currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries. We enter into forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts are entered into with major financial institutions, thereby minimizing the risk of credit loss. We will consider using interest rate derivatives to manage interest rate risks when there is a disproportionate ratio of floating and fixed-rate debt. We do not hold or issue derivative financial instruments for speculative or trading purposes. We are subject to other foreign exchange market risk exposure resulting from anticipated non-financial instrument foreign currency cash flows which are difficult to reasonably predict, and have therefore not been included in the table of fair values. All listed items described are non-trading. 20 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 25 of 139 PageID: 1104 Table of Contents The following table presents the fair values of derivative instruments included within the Consolidated Balance Sheets as of March 29, 2015 and December 28, 2014: The following table represents the amounts affecting the Consolidated Statements of Operations for the three months ended March 29, 2015 and March 30, 2014: We selectively purchase currency forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts guarantee a predetermined exchange rate at the time the contract is purchased. This allows us to shift the effect of positive or negative currency fluctuations to a third-party. Transaction gains or losses resulting from these contracts are recognized at the end of each reporting period. We use the fair value method of accounting, recording realized and unrealized gains and losses on these contracts. These gains and losses are included in Other Gain (Loss), net on our Consolidated Statements of Operations. As of March 29, 2015, we had currency forward exchange contracts with notional amounts totaling approximately $8.6 million. The fair values of the forward exchange contracts were reflected as a $0.3 million asset included in Other Current Assets in the accompanying Consolidated Balance Sheets. The contracts are in the various local currencies covering primarily our operations in the U.S. and Western Europe. Historically, we have not purchased currency forward exchange contracts where it is not economically efficient, specifically for our operations in South America and Asia, with the exception of Japan. Note 11. PROVISION FOR RESTRUCTURING Profit Enhancement Plan During September 2014, we initiated the Profit Enhancement Plan focused on increasing profitability through strategic headcount reductions and the streamlining of manufacturing processes. The projects included in this plan are currently underway, with final headcount reductions expected to be recognized by the fourth quarter of 2015. For the quarter ended March 29, 2015, the net charge to earnings of $1.4 million represents the current year activity related to the Profit Enhancement Plan. Total costs of the plan are $6.7 million through the end of the first quarter of 2015. Termination benefits are planned to be paid 1 month to 24 months after termination. Global Restructuring Plan (including LEAN) During September 2011, we initiated the Global Restructuring Plan focused on further reducing our overall operating expenses by including manufacturing and other cost reduction initiatives, such as consolidating certain manufacturing facilities and administrative functions to improve efficiencies. This plan was further expanded in the first quarter of 2012 and again during 21 March 29, 2015 December 28, 2014 Asset Derivatives Liability Derivatives Asset Derivatives Liability Derivatives (amounts in thousands) Balance Sheet Location Fair Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives not designated as hedging instruments Foreign currency forward exchange contracts Other current assets $ 322 Other current liabilities $ - Other current assets $ 55 Other current liabilities $ 23 Total derivatives not designated as hedging instruments 322 - 55 23 Total derivatives $ 322 $ - $ 55 $ 23 Quarter (13 weeks) Ended March 29, 2015 March 30, 2014 (amounts in thousands) Amount of Gain (Loss) Recognized in Income on Derivatives Location of Gain (Loss) Recognized in Income on Derivatives Amount of Gain (Loss) Recognized in Income on Derivatives Location of Gain (Loss) Recognized in Income on Derivatives Derivatives not designated as hedging instruments: Foreign exchange forwards and options $ 545 Other gain (loss), net $ (30) Other gain (loss), net Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 26 of 139 PageID: 1105 Table of Contents the second quarter of 2012 to include Project LEAN. All projects in our Global Restructuring Plan including Project LEAN have been substantially completed. For the quarter ended March 29, 2015, the net release to earnings of $0.1 million represents the current year activity related to the Global Restructuring Plan including Project LEAN. Total costs related to the plan of $60 million have been incurred through March 29, 2015. All terminations for the plan have been substantially completed as of March 29, 2015. Termination benefits are planned to be paid 1 month to 24 months after termination. Restructuring expense for the three months ended March 29, 2015 and March 30, 2014 was as follows: Restructuring accrual activity for the quarter ended March 29, 2015 was as follows: Note 12. CONTINGENCIES We are involved in certain legal and regulatory actions, all of which have arisen in the ordinary course of business, except for the matters described in the following paragraphs. Additionally, management believes that the ultimate resolution of such matters is unlikely to have a material adverse effect on our consolidated results of operations and/or financial condition, except as described below. Matters related to All-Tag Security S.A. and All-Tag Security Americas, Inc. We originally filed suit on May 1, 2001, alleging that the disposable, deactivatable radio frequency security tag manufactured by All-Tag Security S.A. and All-Tag Security Americas, Inc.'s (jointly All-Tag) and sold by Sensormatic Electronics Corporation (Sensormatic) infringed on a U.S. Patent No. 4,876,555 (the 555 Patent) owned by us. On April 22, 2004, the 22 Quarter (13 weeks) Ended (amounts in thousands) March 29, 2015 March 30, 2014 Profit Enhancement Plan Severance and other employee-related charges $ 1,346 $ - Other exit costs 47 - Global Restructuring Plan (including LEAN) Severance and other employee-related charges (89) 1,572 Asset impairments - 172 Other exit costs - 143 SG&A Restructuring Plan Severance and other employee-related charges - 5 Total $ 1,304 $ 1,892 (amounts in thousands) Accrual at Beginning of Year Charged to Earnings Charge Reversed to Earnings Cash Payments Exchange Rate Changes Accrual at March 29, 2015 Profit Enhancement Plan Severance and other employee-related charges $ 4,082 $ 1,426 $ (80) $ (1,763) $ (347) $ 3,318 Other exit costs(1) - 47 - (47) - - Global Restructuring Plan (including LEAN) Severance and other employee-related charges 2,050 6 (95) (892) (166) 903 Other exit costs 15 - - - - 15 SG&A Restructuring Plan Severance and other employee-related charges 108 - - (10) (10) 88 Total $ 6,255 $ 1,479 $ (175) $ (2,712) $ (523) $ 4,324 (1) During the first quarter of 2015, there was a net charge to earnings of $47 thousand primarily due to restructuring agent costs and legal costs in connection with the restructuring plan. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 27 of 139 PageID: 1106 Table of Contents United States District Court for the Eastern District of Pennsylvania (the Pennsylvania Court) granted summary judgment to defendants All-Tag and Sensormatic on the ground that the 555 Patent was invalid for incorrect inventorship. We appealed this decision. On June 20, 2005, we won an appeal when the United States Court of Appeals for the Federal Circuit (the Appellate Court) reversed the grant of summary judgment and remanded the case to the Pennsylvania Court for further proceedings. On January 29, 2007 the case went to trial, and on February 13, 2007, a jury found in favor of the defendants on infringement, the validity of the 555 Patent and the enforceability of the 555 Patent. On June 20, 2008, the Pennsylvania Court entered judgment in favor of defendants based on the jury's infringement and enforceability findings. On February 10, 2009, the Pennsylvania Court granted defendants' motions for attorneys' fees designating the case as an exceptional case and awarding an unspecified portion of defendants' attorneys' fees under 35 U.S.C. § 285. Defendants sought approximately $5.7 million plus interest. We recognized this amount during the fourth fiscal quarter ended December 28, 2008 in Litigation Settlements on the Consolidated Statement of Operations. On March 6, 2009, we filed objections to the defendants' bill of attorneys' fees. On November 2, 2011, the Pennsylvania Court finalized the decision to order us to pay the attorneys' fees and costs of the defendants in the amount of $6.6 million. The additional amount of $0.9 million was recorded in the fourth quarter ended December 25, 2011 in the Consolidated Statement of Operations. On November 15, 2011, we filed objections to and appealed the Pennsylvania Court's award of attorneys' fees to the defendants. Following the filing of briefs and the completion of oral arguments, the Appellate Court reversed the decision of the Pennsylvania Court on March 25, 2013. As a result of the final decision, we reversed the All-Tag reserve of $6.6 million in the first quarter ended March 31, 2013. The Appellate Court decision was appealed by All-Tag and Sensormatic to the U.S. Supreme Court. While the appeal was still pending, the U.S. Supreme Court agreed to hear two cases (Octane Fitness, LLC v. ICON Health & Fitness, Inc. and Highmark, Inc. v. Allcare Health Management Systems) arguing that the governing standard for finding a case exceptional under 35 U.S.C. § 285 was too rigid. On December 30, 2013, based on the Supreme Court’s willingness to re-evaluate the exceptional case standard, defendants requested that the Supreme Court also hear our case. On April 29, 2014, the Supreme Court issued its rulings in Octane Fitness and Highmark and relaxed the standard for determining when a case is exceptional. As a result, on May 5, 2014, the Supreme Court vacated the judgment of the Appellate Court in our case (reinstating the Pennsylvania Court’s exceptional case finding) and sent the case back to the Appellate Court for further consideration in light of the new standards set forth in Octane Fitness and Highmark. On June 10, 2014, defendants filed a motion in the Appellate Court asking that the Appellate Court either affirm the Pennsylvania Court’s exceptional case finding outright or send the case back to the Pennsylvania Court so that it could consider the case again under the new exceptional case standard. On June 23, 2014, we filed our opposition to the motion to remand and moved the Appellate Court to once again reverse the Pennsylvania Court’s exceptional case finding. On October 14, 2014, the Appellate Court remanded the case to the Pennsylvania Court for further proceedings. We do not believe it is probable that the case will ultimately be decided against us and therefore there is no amount reserved for this matter as of March 29, 2015. Matter related to Universal Surveillance Corporation EAS RF Anti-trust Litigation Universal Surveillance Corporation (USS) filed a complaint against us in the United States Federal District Court of the Northern District of Ohio (the Ohio Court) on August 19, 2011. USS claims that, in connection with our competition in the electronic article surveillance market, we violated the federal antitrust laws (Sherman Act and Clayton Act) and state antitrust laws (Ohio Valentine Act). USS also claims that we violated the federal Lanham Act, the Ohio Deceptive Trade Practices Act, and the Ohio Trade Secrets Act, and engaged in conduct that allegedly disparaged USS and tortiously interfered with USS's business relationships and contracts. USS is seeking injunctive relief as well as approximately $65 million in claimed damages for alleged lost profits, plus treble damages and attorney's fees under the Sherman Act. We have neither recorded a reserve for this matter nor do we believe that there is a reasonable possibility that a loss has been incurred. Our legal fees related to the USS matter are being paid pursuant to our coverage under insurance policies with American Home Assurance Company and National Union Fire Insurance Company of Pittsburgh, Pa. (AIG). On July 9, 2014, AIG filed a complaint against us in the Superior Court of New Jersey (the New Jersey Court) claiming that AIG has no duty to defend or indemnify us under the insurance policies as they relate to the USS matter. AIG also claims reimbursement of legal fees, costs, and expenses previously paid by AIG on our behalf that are not covered by insurance as well as our reimbursement of AIG’s legal costs related to this matter. AIG has continued to pay on our behalf most of our legal fees, costs, and expenses related to this matter and we expect AIG to continue to pay on our behalf most of our legal fees, costs, and expenses until such time as the matter is resolved. We believe the claims in this case lack merit. Although it is too early to determine the outcome of this matter or a range of possible losses, an unfavorable outcome could have a material impact on our financial results and cash flows. 23 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 28 of 139 PageID: 1107 Table of Contents Matter related to Zucker Derivative Suit On June 24, 2014, a complaint was filed by Lawrence Zucker in a shareholder derivative suit on behalf of himself, others who are similarly situated and derivatively on behalf of us, of which we are also a nominal defendant, against our Board of Directors (the Board of Directors) in the Court of Common Pleas of Allegheny County, Pennsylvania, under the caption Zucker v. Checkpoint Systems, Inc., et al., No. GD-14-11035. The plaintiff generally asserts claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment against our Board of Directors for allegedly exceeding its authority under our Amended and Restated 2004 Omnibus Incentive Compensation Plan (the Plan). The plaintiff seeks, in addition to other relief, (i) a declaration that certain of the awards granted under the Plan in 2013 were ultra vires; (ii) rescission of awards allegedly granted in violation of the Plan; (iii) monetary damages; (iv) equitable or injunctive relief; (v) direction by the court that we reform our corporate governance and internal procedures and (vi) an award of attorneys’ fees and other fees and costs. The outcome of this matter cannot be predicted with any certainty. We intend to defend vigorously our interests in this matter. Note 13. BUSINESS SEGMENTS We report our financial results in three segments: Merchandise Availability Solutions (MAS), Apparel Labeling Solutions (ALS), and Retail Merchandising Solutions (RMS). Our MAS segment, which is focused on loss prevention and Merchandise Visibility™ (RFID), includes EAS systems, EAS consumables, Alpha® high-theft solutions, RFID systems and software and non-U.S. and Canada-based CheckView®. ALS includes the results of our radio frequency identification (RFID) labels business, coupled with our data management platform and network of service bureaus that manage the printing of variable information on apparel labels and tags. Our RMS segment includes hand-held labeling applicators and tags, promotional displays, and customer queuing systems. 24 Quarter (13 weeks) Ended (amounts in thousands) March 29, 2015 March 30, 2014 Business segment net revenue: Merchandise Availability Solutions $ 81,526 (1) $ 93,464 (2) Apparel Labeling Solutions 37,185 42,081 Retail Merchandising Solutions 9,831 11,861 Total revenues $ 128,542 $ 147,406 Business segment gross profit: Merchandise Availability Solutions $ 41,285 $ 43,942 Apparel Labeling Solutions 11,548 14,085 Retail Merchandising Solutions 3,704 4,259 Total gross profit 56,537 62,286 Operating expenses 56,871 (3) 60,120 (4) Interest expense, net (711) (989) Other gain (loss), net 371 (86) (Loss) earnings before income taxes $ (674) $ 1,091 (1) Includes net revenue from EAS systems, EAS consumables, and Alpha® of $31.2 million, $22.1 million, and $21.2 million, respectively, representing more than 10% of total revenue. (2) Includes net revenue from EAS systems, Alpha® and EAS consumables of $40.1 million, $24.8 million and $24.3 million, respectively, representing more than 10% of total revenue. (3) Includes a $1.3 million restructuring charge, a $0.8 million management transition charge, and a $0.1 million acquisition charge. (4) Includes a $1.9 million restructuring charge. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 29 of 139 PageID: 1108 Table of Contents Note 14. SUBSEQUENT EVENTS 2015 Incentive Award Plan In April 2015, the Board of Directors adopted the Checkpoint Systems, Inc. 2015 Incentive Award Plan (the 2015 Plan), subject to shareholder approval at the annual meeting of shareholders to be held on June 3, 2015. If the 2015 Plan is approved by shareholders at the annual meeting, no additional awards are to be made under the Checkpoint Systems, Inc. Amended and Restated 2004 Omnibus Incentive Compensation Plan (the 2004 Plan). All awards previously granted under the 2004 Plan will remain subject to the terms of the 2004 Plan. The 2015 Plan authorizes the issuance of a total of 3,877,777 shares of common stock, which will be reduced by any shares issued pursuant to awards granted under the 2004 Plan after December 28, 2014. This represents an increase of 1,252,766 shares over the current reserve in the 2004 Plan. In addition, subject to certain limitations, shares covered by an award granted under the 2015 Plan or shares covered by an award previously granted under the 2004 Plan which expire or are canceled without having been exercised in full or that are forfeited or repurchased shall be added to the shares of Common Stock authorized for issuance under the 2015 Plan. 2015 Employee Stock Purchase Plan In April 2015, the Board of Directors adopted the 2015 Employee Stock Purchase Plan (the 2015 ESPP), subject to shareholder approval at the annual meeting of shareholders to be held on June 3, 2015. The 2015 ESPP is designed to replace the Checkpoint Systems, Inc. 423 Employee Stock Purchase Plan (the Prior ESPP). We exhausted the number of shares available for issuance under the Prior ESPP at the end of March 2015. In connection with the adoption of the 2015 ESPP, we registered an additional 600,000 shares of common stock in a Registration Statement on Form S- 8 under the Securities Act of 1933, as amended, on March 31, 2015. 25 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 30 of 139 PageID: 1109 Table of Contents Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information Relating to Forward-Looking Statements This report includes information that constitutes forward-looking statements. Forward-looking statements often address our expected future business and financial performance, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” or “will.” By their nature, forward-looking statements address matters that are subject to risks and uncertainties. Any such forward-looking statements may involve risk and uncertainties that could cause actual results to differ materially from any future results encompassed within the forward- looking statements. Factors that could cause or contribute to such differences include: the impact upon operations of accounting policies review and improvement; the impact upon operations of legal and compliance matters or internal controls review, improvement and remediation, including the detection of wrongdoing, improper activities, or circumvention of internal controls; our ability to successfully implement our strategic plan; our ability to manage growth effectively including our ability to integrate acquisitions and to achieve our financial and operational goals for our acquisitions; changes in economic or international business conditions; foreign currency exchange rate and interest rate fluctuations; lower than anticipated demand by retailers and other customers for our products; slower commitments of retail customers to chain-wide installations and/or source tagging adoption or expansion; possible increases in per unit product manufacturing costs due to less than full utilization of manufacturing capacity as a result of slowing economic conditions or other factors; our ability to provide and market innovative and cost-effective products; the development of new competitive technologies; our ability to maintain our intellectual property; competitive pricing pressures causing profit erosion; the availability and pricing of component parts and raw materials; possible increases in the payment time for receivables as a result of economic conditions or other market factors; our ability to comply with covenants and other requirements of our debt agreements; changes in regulations or standards applicable to our products; our ability to successfully implement global cost reductions in operating expenses including, field service, sales, and general and administrative expense, and our manufacturing and supply chain operations without significantly impacting revenue and profits; our ability to maintain effective internal control over financial reporting; risks generally associated with information systems upgrades and our company-wide implementation of an enterprise resource planning (ERP) system and additional matters disclosed in our Securities and Exchange Commission filings. We believe that the most significant risk factors that could affect our financial performance in the near-term include: (1) changes in economic or international business conditions including foreign currency exchange rate and interest rate fluctuations; (2) our ability to successfully implement our strategic plan; (3) our ability to manage growth effectively including our ability to integrate acquisitions and to achieve our financial and operational goals for our acquisitions, and (4) lower than anticipated demand by retailers and other customers for our products including slower commitments of retail customers to chain-wide installations and/or source tagging adoption or expansion. For a more detailed discussion of these and other factors, see “Risk Factors” and “Management’s Discussion and Analysis of Results of Operations and Financial Condition” in our 2014 Form 10-K, filed on March 5, 2015 with the Securities and Exchange Commission. The forward-looking statements included in this document are made only as of the date of this document, and we undertake no obligation to update these statements to reflect subsequent events or circumstances, other than as may be required by law. Overview We are a leading global manufacturer and provider of technology-driven, loss prevention, inventory management and labeling solutions to the retail and apparel industry. We provide integrated inventory management solutions to brand, track, and secure goods for retailers and consumer product manufacturers worldwide. We are a leading provider of, and earn revenues primarily from the sale of Merchandise Availability Solutions, Apparel Labeling Solutions, and Retail Merchandising Solutions. Merchandise Availability Solutions consists of electronic article surveillance (EAS) systems, EAS consumables, Alpha® solutions, and radio frequency identification (RFID) systems, software and services. Apparel Labeling Solutions includes our web-based data management service and network of service bureaus to manage the printing of variable information on price and promotional tickets, graphic tags and labels, adhesive labels, fabric and woven tags and labels, apparel branding tags, fully integrated tags and labels and RFID tags and labels. Retail Merchandising Solutions consists of hand-held labeling systems (HLS) and retail display systems (RDS). Applications of these products include primarily retail security, asset and merchandise visibility, automatic identification, and pricing and promotional labels and signage. Operating directly in 27 countries, we have a global network of subsidiaries and distributors, and provide customer service and technical support around the world. 26 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 31 of 139 PageID: 1110 Table of Contents Our results are heavily dependent upon sales to the retail market. Our customers are dependent upon retail sales, which are susceptible to economic cycles and seasonal fluctuations. Furthermore, as approximately two-thirds of our revenues and operations are located outside the U.S., fluctuations in foreign currency exchange rates have a significant impact on reported results. We report our financial results in three segments: Merchandise Availability Solutions (MAS), Apparel Labeling Solutions (ALS), and Retail Merchandising Solutions (RMS). Our MAS segment, which is focused on loss prevention and Merchandise Visibility™ (RFID), includes EAS systems, EAS consumables, Alpha® high-theft solutions, RFID systems and software and non-U.S. and Canada-based CheckView®. ALS includes our RFID labels business, coupled with our data management platform and network of service bureaus that manage the printing of variable information on apparel labels and tags. Our RMS segment includes hand-held labeling applicators and tags, promotional displays, and customer queuing systems. The revenues, gross profit, and total assets for each of the segments are included in Note 13 of the Consolidated Financial Statements. Our business strategy is to be a provider of inventory management solutions that give retailers ready insight into the on-shelf availability of merchandise in their stores. Additionally, our business strategy is focusing on improving revenues and profitability, reducing costs, and improving working capital management. In support of this strategy, we provide to retailers, manufacturers and distributors our EAS systems and consumables, Alpha® high-theft solutions, Merchandise Visibility™ (RFID) products and services, and METO® hand-held labeling products. In apparel labeling, we are focusing on those products that support our strategy and leveraging our competitive advantage in the transfer and printing of variable data onto apparel labels. We will also consider acquisitions that are aligned with our strategic plan. Our solutions help customers identify, track, and protect their assets. We believe that innovative new products and expanded product offerings will provide opportunities to enhance the value of legacy products while expanding the product base in existing customer accounts. We intend to maintain our leadership position in key hard goods markets (supermarkets, drug stores, mass merchandisers, and music and electronics retailers), expand our market share in soft goods markets (specifically apparel), and maximize our position in under-penetrated markets. We also intend to continue to capitalize on our installed base with large global retailers to promote source tagging. Furthermore, we plan to leverage our knowledge of radio-frequency (RF) and identification technologies to assist retailers and manufacturers in realizing the benefits of RFID. To achieve these objectives, we expect to continuously enhance and expand our technologies and products, and provide superior service to our customers. We intend to offer customers a wide variety of integrated shrink management solutions, apparel labeling, and retail merchandising solutions characterized by superior quality, ease-of-use, and good value, with enhanced merchandising opportunities. In 2014, we reiterated our commitment to this strategy and our focus on innovation and internally-developed technologies with the appointment of a Senior Vice President of Innovation. We are building a corporate development and mergers and acquisitions (M&A) team to complement our internally-developed innovation with targeted strategic acquisitions. Our Apparel Labeling business was assembled over the past few years through numerous acquisitions to support our penetration into the apparel industry and to support the growth of our RFID strategy. We have made changes to right-size the Apparel Labeling footprint in order to profitably provide on-time, high quality products to our apparel customers so that retailers can effectively merchandise their products. Simultaneously, we reduced our Apparel Labeling product offerings to only those that are also necessary to support our RFID strategy. During September 2014, we initiated the Profit Enhancement Plan focused on increasing profitability through strategic headcount reductions and the streamlining of manufacturing processes. Total costs of the plan through March 29, 2015 are $6.7 million. Total annual savings of the Profit Enhancement Plan are expected to approximate $8 million, with an expected $7 million in savings to be realized in 2015. Future financial results will be dependent upon our ability to successfully implement our strategic focus, expand the functionality of our existing product lines, develop or acquire new products for sale through our global distribution channels, convert new large chain retailers to our solutions for shrink management, merchandise visibility and apparel labeling, and reduce the cost of our products and infrastructure to respond to competitive pricing pressures. We believe that our base of recurring revenue (revenues from the sale of consumables into the installed base of security systems, apparel tags and labels, hand-held labeling tools and services from maintenance), repeat customer business, the anticipated effect of our restructuring activities, our existing cash balances, and our borrowing capacity should provide us with adequate cash flow and liquidity to execute our strategic plan. 27 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 32 of 139 PageID: 1111 Table of Contents Critical Accounting Policies and Estimates We have presented our Critical Accounting Policies and Estimates in Part II - Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 28, 2014 (the "2014 Annual Report"). There have been no material changes to our Critical Accounting Policies and Estimates set forth in our 2014 Annual Report. Thirteen Weeks Ended March 29, 2015 Compared to Thirteen Weeks Ended March 30, 2014 The following table presents for the periods indicated certain items in the Consolidated Statement of Operations as a percentage of total revenues and the percentage change in dollar amounts of such items compared to the indicated prior period: Net Revenues Revenues for the first quarter of 2015 compared to the first quarter of 2014 decreased $18.9 million, or 12.8%, from $147.4 million to $128.5 million. Foreign currency translation had a negative impact on revenues of approximately $11.5 million, or 7.8%, in the first quarter of 2015 as compared to the first quarter of 2014. 28 Percentage of Net Revenues Percentage Change In Dollar Amount Quarter ended March 29, 2015 (Fiscal 2015) March 30, 2014 (Fiscal 2014) Fiscal 2015 vs. Fiscal 2014 Net revenues Merchandise Availability Solutions 63.4 % 63.4 % (12.8)% Apparel Labeling Solutions 29.0 28.6 (11.6) Retail Merchandising Solutions 7.6 8.0 (17.1) Net revenues 100.0 100.0 (12.8) Cost of revenues 56.0 57.7 (15.4) Gross profit 44.0 42.3 (9.2) Selling, general, and administrative expenses 39.9 36.9 (5.6) Research and development 3.5 2.6 17.0 Restructuring expenses 1.0 1.3 (31.1) Acquisition costs 0.1 - N/A Other operating income (0.2) - N/A Operating (loss) income (0.3) 1.5 (115.4) Interest income 0.2 0.2 (15.0) Interest expense 0.7 0.9 (25.3) Other gain (loss), net 0.3 (0.1) 531.4 (Loss) earnings before income taxes (0.5) 0.7 (161.8) Income tax expense 0.1 0.8 (94.2) Net loss (0.6) (0.1) 477.5 (amounts in millions) Dollar Amount Change Percentage Change Quarter ended March 29, 2015 (Fiscal 2015) March 30, 2014 (Fiscal 2014) Fiscal 2015 vs. Fiscal 2014 Fiscal 2015 vs. Fiscal 2014 Net revenues: Merchandise Availability Solutions $ 81.5 $ 93.4 $ (11.9) (12.8)% Apparel Labeling Solutions 37.2 42.1 (4.9) (11.6) Retail Merchandising Solutions 9.8 11.9 (2.1) (17.1) Net revenues $ 128.5 $ 147.4 $ (18.9) (12.8)% Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 33 of 139 PageID: 1112 Table of Contents Merchandise Availability Solutions Merchandise Availability Solutions (MAS) revenues decreased $11.9 million, or 12.8%, during the first quarter of 2015 compared to the first quarter of 2014. After considering the foreign currency translation negative impact of $8.0 million, revenues decreased $3.9 million, or 4.2%, primarily due to decreases in EAS systems and Alpha®. There were also less significant decreases in EAS consumables and CheckView®. These decreases were partially offset by an increase in Merchandise Visibility™ (RFID). EAS systems revenues decreased in the first quarter of 2015 as compared to the first quarter of 2014, primarily due to large roll-outs in the U.S. and Europe that were ongoing in the first quarter of 2014 without comparable projects for 2015. We expect EAS systems growth for the remainder of 2015 to be limited as we do not have a comparable roll-out ongoing for 2015. Merchandise Visibility (RFID) revenues increased in the first quarter of 2015 as compared to the first quarter of 2014 as the business continues to gain traction with installations at several major retailers in the U.S. and Europe. We continue to expand the number of retailers piloting with RFID- based inventory management solutions. We remain confident in our ability to grow this business as our solutions continue to deliver strong return on investment results to our customers. The rate of adoption remains under pressure due to financial challenges at key retail customers. Alpha® revenues decreased in the first quarter of 2015 as compared to the first quarter of 2014, primarily due to strong sales in the U.S. and Asia with key customers in 2014 without comparable levels of demand in 2015. The decrease was partially offset by increases in Europe and International Americas primarily due to larger orders completed in the first quarter of 2015 without comparable orders in 2014. We expect our global Alpha® revenues in 2015 to remain constant despite significant competition entering the market. Growth is expected to be hindered due to lack of new customer build-ups which occurred in previous years and increased competitive pressure. We now only provide CheckView® CCTV services in Asia in connection with EAS systems when our customers require combined security solutions. Due to our decreased focus on this business, our CheckView® Asia revenues decreased in the first quarter of 2015 as compared to the first quarter of 2014. EAS consumables revenues decreased in the first quarter of 2015 as compared to the first quarter of 2014, primarily due to decreased EAS label revenues in the U.S. and Europe. This decrease was partially offset by increases in Hard Tag @ Source™ revenues in the U.S. Apparel Labeling Solutions Apparel Labeling Solutions (ALS) revenues decreased $4.9 million, or 11.6%, in the first quarter of 2015 as compared to the first quarter of 2014. After considering the foreign currency translation negative impact of $1.5 million, the revenues decreased $3.4 million, or 8.0%, driven by declines in sales volumes in Europe due to the impact of some market share loss and lower volumes with some key retailers due to a later start to the peak season, as well as the timing of the Chinese New Year. We expect modest growth during the remainder of 2015 in our Apparel Labeling Solutions business as we continue to build on new business developments in both our core and RFID labels businesses. Retail Merchandising Solutions Retail Merchandising Solutions (RMS) revenues decreased $2.1 million, or 17.1%, in the first quarter of 2015 as compared to the first quarter of 2014. After considering the foreign currency translation negative impact of 2.0 million, the revenues decreased $0.1 million, or 0.9%, due to decreases in Hand-held Labeling Solutions (HLS) revenues reflecting the sunset of a major project in the U.S. partially offset by increases in Retail Display Solutions revenues. We anticipate HLS will continue to face difficult revenue trends due to the on-going shifts in market demand for HLS products. Gross Profit During the first quarter of 2015, gross profit decreased $5.7 million, or 9.2%, to $56.5 million from $62.3 million. Foreign currency translation had a negative impact on gross profit of approximately $3.3 million, or 5.2%, in the first quarter of 2015 as compared to the first quarter of 2014. Gross profit, as a percentage of net revenues, increased to 44.0% in the first quarter of 2015 from 42.3% in the first quarter of 2014. 29 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 34 of 139 PageID: 1113 Table of Contents Merchandise Availability Solutions Merchandise Availability Solutions gross profit as a percentage of Merchandise Availability Solutions revenues increased to 50.6% in the first quarter of 2015 from 47.0% in the first quarter of 2014. The increase in the gross profit percentage of Merchandise Availability Solutions was primarily due to higher margins in Alpha® and Merchandise Visibility. Alpha® margins increased primarily due to manufacturing cost savings, margin enhancement initiatives and favorable mix of sales towards higher margin products, while Merchandise Visibility margins increased as revenue growth drove strong utilization of our professional services team. Apparel Labeling Solutions Apparel Labeling Solutions gross profit as a percentage of Apparel Labeling Solutions revenues decreased to 31.1% in the first quarter of 2015, from 33.5% in the first quarter of 2014. The decrease in the gross profit percentage of Apparel Labeling Solutions is mainly the result of accelerated depreciation for certain inefficient machinery in two key manufacturing locations that will be removed from production, overhead under-absorption in our factories due to lower sales volumes, the impact of a later Chinese New Year pricing pressure, and competition in the market. Retail Merchandising Solutions Retail Merchandising Solutions gross profit as a percentage of Retail Merchandising Solutions revenues increased to 37.7% in the first quarter of 2015 from 35.9% in the first quarter of 2014. The increase in Retail Merchandising Solutions gross profit percentage was primarily due to improvements in manufacturing efficiencies in the first quarter of 2015 and an unfavorable inventory reserve adjustment recorded in the first quarter of 2014 without a comparable adjustment in the first quarter of 2015. Selling, General, and Administrative Expenses Selling, general, and administrative (SG&A) expenses decreased $3.0 million, or 5.6%, during the first quarter of 2015 compared to the first quarter of 2014. Contributing to the decrease was a foreign currency impact on the 2015 expense of $4.0 million. After considering the foreign currency translation impact, SG&A expenses increased $1.0 million primarily due to management transition costs of $0.8 million incurred in the first quarter of 2015 without comparable expense in 2014. The benefits of our cost reduction initiatives were offset by incremental spending related to our strategic initiatives. Research and Development Expenses Research and development (R&D) expenses were $4.5 million, or 3.5% of revenues, in the first quarter of 2015 and $3.9 million, or 2.6% of revenues, in the first quarter of 2014, as we have increased our investment in the development of new products and solutions. Restructuring Expenses Restructuring expenses were $1.3 million, or 1.0% of revenues, in the first quarter of 2015 compared to $1.9 million, or 1.3% of revenues, in the first quarter of 2014. The decrease is a result of the completion of Project LEAN partially offset by additional expense incurred related to the continued execution of our Profit Enhancement Plan. Acquisition Costs Acquisition costs were $0.1 million for the first quarter of 2015 without a comparable expense in 2014. Other Operating Income Other operating income for the first quarter of 2015 increased $0.4 million from the comparable first quarter of 2014. The increase is due to the sale of customer-related receivables associated with the renewal and extension of sales-type lease arrangements in the first quarter of 2015. There were no sales of customer-related receivables in the first quarter of 2014. Interest Income and Interest Expense Interest income was $0.2 million in the first quarter of 2015 compared to $0.3 million in the first quarter of 2014. The decrease in interest income was primarily due to decreased interest income recognized for sales-type leases. 30 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 35 of 139 PageID: 1114 Table of Contents Interest expense for the first quarter of 2015 decreased $0.3 million from the first quarter of 2014. The decrease in interest expense was primarily due to significant reductions in the outstanding balance on our Senior Secured Credit Facility as well as a reduction in non-cash imputed interest expense on our Financing Liability resulting from the weakening of the Euro against the US Dollar. Other Gain (Loss), net Other gain (loss), net was a net gain of $0.4 million in the first quarter of 2015 compared to a net loss of $0.1 million in the first quarter of 2014. The change was primarily due to a $0.4 million foreign exchange gain during the first quarter of 2015 compared to a $0.1 million foreign exchange loss during the first quarter of 2014. The foreign exchange gain is primarily attributed to the U.S. Dollar and Euro fluctuations versus currencies in emerging markets where hedging is either impossible or impractical. Income Taxes The year to date effective tax rate for the first quarter of 2015 was negative 10.5% as compared to the year to date effective rate for the first quarter of 2014 of 111.8%. The change in the effective tax rate was due to the mix of income between subsidiaries and decreased losses in entities with valuation allowances for which no tax benefit is received. Net Earnings (Loss) Net loss was $0.7 million, or $0.02 per diluted share, during the first quarter of 2015 compared to a net loss of $0.1 million, or nil per diluted share, during the first quarter of 2014. The weighted-average number of shares used in the diluted earnings per share computation was 42.7 million and 41.9 million for the first quarter of 2015 and 2014, respectively. Liquidity and Capital Resources We continue to execute our strategic plan in a volatile global economic environment. Our liquidity needs have been, and are expected to continue to be driven by acquisitions, capital investments, product development costs, potential future restructuring related to the rationalization of the business, and working capital requirements. We have met our liquidity needs primarily through cash generated from operations. Based on an analysis of liquidity utilizing conservative assumptions for the next twelve months, we believe that cash on hand from operating activities and funding available under our credit agreement should be adequate to service debt and working capital needs, meet our capital investment requirements, other potential restructuring requirements, product development requirements, and internally developed innovation and targeted strategic acquisitions requirements. We believe that our base of recurring revenue (revenues from the sale of consumables into the installed base of security systems, apparel tags and labels, hand-held labeling tools and services from maintenance), repeat customer business, the anticipated effect of our restructuring activities, and our cash position and borrowing capacity should continue to provide us with adequate cash flow and liquidity to continue with the successful execution of our strategic plan. We have worked to reduce our liquidity risk by implementing working capital improvements while reducing expenses in areas that will not adversely impact the future potential of our business. We evaluate the risk and creditworthiness of all existing and potential counterparties for all debt, investment, and derivative transactions and instruments. Our policy allows us to enter into transactions with nationally recognized financial institutions with a credit rating of “A” or higher as reported by one of the credit rating agencies that is a nationally recognized statistical rating organization by the U.S. Securities and Exchange Commission. The maximum exposure permitted to any single counterparty is $50.0 million. Counterparty credit ratings and credit exposure are monitored monthly and reviewed quarterly by our Treasury Risk Committee. As of March 29, 2015, our cash and cash equivalents were $124.2 million compared to $135.5 million as of December 28, 2014. A significant portion of this cash is held overseas and can be repatriated. We do not expect to incur material costs associated with repatriation. Cash and cash equivalents changed in 2015 primarily due to an unfavorable $6.6 million effect of foreign currency, $5.6 million of cash used in investing activities and $0.4 million of cash used in operating activities, partially offset by $1.3 million of cash provided by financing activities. Cash used in operating activities was $9.0 million higher during the first quarter of 2015 compared to the first quarter of 2014. Our cash from operating activities was negatively impacted by a decrease in other current liabilities, including the timing of performance incentive payments, as well as a decrease in operating income, which was offset by decreased inventory investments and increased income taxes and accounts payable balances. The remainder of the variances can be explained by changes in the restructuring reserve, unearned revenues and accounts receivable balances. 31 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 36 of 139 PageID: 1115 Table of Contents Cash used in investing activities was $2.4 million higher during the first quarter of 2015 compared to the first quarter of 2014. This was primarily due to an increase in the acquisition of property, plant, and equipment during the first quarter of 2015 compared to the first quarter of 2014. Cash provided by financing activities was $7.3 million higher during the first quarter of 2015 compared to the first quarter of 2014. This was due primarily to greater reduction of debt levels in the first quarter of 2014 compared to the first quarter of 2015. Our percentage of total debt to total equity as of March 29, 2015, was 22.1% compared to 19.9% as of December 28, 2014. As of March 29, 2015, our working capital was $199.9 million compared to $232.6 million as of December 28, 2014. We continue to reinvest in the Company through our investment in technology and process improvement. Our investment in R&D amounted to $4.5 million and $3.9 million during the first quarter of 2015 and 2014, respectively. These amounts are reflected in cash used in operations, as we expense our R&D as it is incurred. We anticipate additional spending to be in the range of $13.5 million to $15.5 million on R&D to support achievement of our strategic plan during the remainder of 2015. We have various unfunded pension plans outside the U.S. These plans have significant pension costs and liabilities that are developed from actuarial valuations. For the first quarter of 2015, our contribution to these plans was $1.2 million. Our total funding expectation for 2015 is $4.2 million. We believe our current cash position and cash generated from operations will be adequate to fund these requirements. Acquisition of property, plant, and equipment during the first quarter of 2015 totaled $5.8 million compared to $3.3 million during the same period in 2014. We anticipate our capital expenditures, used primarily to upgrade information technology, improve our production capabilities, and upgrade facilities, to be in the range of $14.2 million to $19.2 million for the remainder of 2015. Senior Secured Credit Facility On December 11, 2013, we entered into a new $200.0 million five-year senior secured multi-currency revolving credit facility (2013 Senior Secured Credit Facility) agreement (2013 Credit Agreement) with a syndicate of lenders. As of March 29, 2015, we were in compliance with all of our covenants, and although we cannot provide full assurance, we expect to be in compliance for the next twelve months. Dividend Historically, we have never paid a cash dividend (except for a nominal cash distribution in April 1997 to redeem the rights outstanding under our 1988 Shareholders’ Rights Plan). On March 5, 2015 we declared a special dividend (the Dividend) of $0.50 per outstanding common share for all shareholders of record as of March 20, 2015. The Dividend reflects our commitment to building shareholder value through the execution of our strategic plan and a disciplined approach to capital allocation. After the special dividend, we believe we have the appropriate level of liquidity both to fund our internal initiatives and act quickly on any strategic opportunities. The dividend was payable on April 10, 2015. Dividend distributions to shareholders are recognized as a liability in the period in which the dividend is formally approved by our Board of Directors and communicated to shareholders. As of March 29, 2015, we have a liability of $21.4 million recorded as Dividend Payable on the Consolidated Balance Sheets. The dividend was recorded as a reduction of Additional Capital in Stockholders' Equity. The dividend does not provide any cash payment or benefit to stock options, restricted stock units, or performance shares, and instead only applies to the outstanding common stock and as outlined in the executive and director deferred compensation plans. We have recorded a non- cash liability of $0.4 million included in Dividend Payable on the Consolidated Balance Sheets for the amounts credited to the executive and director deferred compensation plan accounts on April 10, 2015. Provisions for Restructuring During September 2014, we initiated the Profit Enhancement Plan focused on increasing profitability through strategic headcount reductions and the streamlining of manufacturing processes. Total costs of the plan through March 29, 2015 are $6.7 million. Total annual savings of the Profit Enhancement Plan are expected to approximate $8 million, with an expected $7 million in savings to be realized in 2015. 32 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 37 of 139 PageID: 1116 Table of Contents As of December 2014, our expanded Global Restructuring Plan including Project LEAN has been substantially completed with total costs incurred to date of $60 million. With initiatives to stabilize sales, actively manage margins, reduce operating expense and effectively manage working capital, the plan has effectively lowered costs and we expect to maintain these savings in future periods. Off-Balance Sheet Arrangements We do not utilize material off-balance sheet arrangements apart from operating leases that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. We use operating leases as an alternative to purchasing certain property, plant, and equipment. There have been no material changes to the discussion of these rental commitments under non-cancelable operating leases presented in our Annual Report on Form 10-K for the year ended December 28, 2014 except as discussed in the Contractual Obligations section. Contractual Obligations There have been no material changes to the table entitled “Contractual Obligations” presented in our Annual Report on Form 10-K for the year ended December 28, 2014. The table of contractual obligations excludes our gross liability for uncertain tax positions, including accrued interest and penalties, which totaled $32.9 million as of March 29, 2015, and $31.9 million as of December 28, 2014, because we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities. Recently Adopted Accounting Standards See Note 1 to the Consolidated Financial Statements for additional information related to recently adopted accounting standards. New Accounting Pronouncements and Other Standards See Note 1 to the Consolidated Financial Statements for additional information related to new accounting pronouncements and other standards. 33 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 38 of 139 PageID: 1117 Table of Contents Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Except as noted below, there have been no significant changes to the market risks as disclosed in Part II - Item 7A. - “Quantitative And Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended December 28, 2014. Exposure to Foreign Currency We manufacture products in the U.S., Europe, and the Asia Pacific region for both the local marketplace and for export to our foreign subsidiaries. The foreign subsidiaries, in turn, sell these products to customers in their respective geographic areas of operation, generally in local currencies. This method of sale and resale gives rise to the risk of gains or losses as a result of currency exchange rate fluctuations on inter-company receivables and payables. Additionally, the sourcing of product in one currency and the sales of product in a different currency can cause gross margin fluctuations due to changes in currency exchange rates. We selectively purchase currency forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts guarantee a predetermined exchange rate at the time the contract is purchased. This allows us to shift the effect of positive or negative currency fluctuations to a third-party. Transaction gains or losses resulting from these contracts are recognized at the end of each reporting period. We use the fair value method of accounting, recording realized and unrealized gains and losses on these contracts. These gains and losses are included in Other Gain (Loss), net on our Consolidated Statements of Operations. As of March 29, 2015, we had currency forward exchange contracts with notional amounts totaling approximately $8.6 million. The fair values of the forward exchange contracts were reflected as a $0.3 million asset included in Other Current Assets in the accompanying Consolidated Balance Sheets. The contracts are in the various local currencies covering primarily our operations in the U.S. and Western Europe. Historically, we have not purchased currency forward exchange contracts where it is not economically efficient, specifically for our operations in South America and Asia, with the exception of Japan. 34 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 39 of 139 PageID: 1118 Table of Contents Item 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Management, with the participation of the Chief Executive Officer and Acting Chief Financial Officer, conducted an evaluation (as required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the Exchange Act)) of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Acting Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting that occurred during our first fiscal quarter of 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 35 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 40 of 139 PageID: 1119 Table of Contents PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS See Note 12 to the Consolidated Financial Statements for the discussion of legal proceedings under Contingencies, which is incorporated herein by reference. 36 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 41 of 139 PageID: 1120 Table of Contents Item 1A. RISK FACTORS There have been no material changes from December 28, 2014 to the significant risk factors and uncertainties known to us that, if they were to occur, could materially adversely affect our business, financial condition, operating results and/or cash flow. For a discussion of our risk factors, refer to Part I - Item 1A - “Risk Factors”, contained in our Annual Report on Form 10-K for the year ended December 28, 2014. Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None. Item 3. DEFAULTS UPON SENIOR SECURITIES None. Item 4. MINE SAFETY DISCLOSURES Not Applicable. Item 5. OTHER INFORMATION None. 37 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 42 of 139 PageID: 1121 Table of Contents Item 6. EXHIBITS 38 Exhibit 3.1 Articles of Incorporation, as amended, are hereby incorporated by reference to Exhibit 3(i) of the Registrant's 1990 Form 10- K, filed with the SEC on March 14, 1991. Exhibit 3.2 By-Laws, as Amended and Restated, are hereby incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed with the SEC on August 4, 2010. Exhibit 3.3 Articles of Amendment to the Articles of Incorporation are hereby incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed with the SEC on December 28, 2007. Exhibit 10.1 2015 Employee Stock Purchase Plan is hereby incorporated by reference to Exhibit 99.1 to our Registration Statement on Form S-8, filed with the SEC on March 31, 2015. Exhibit 31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 Certification of the Acting Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.1 Certification of the Chief Executive Officer and the Acting Chief Financial Officer pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 43 of 139 PageID: 1122 Table of Contents SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 39 CHECKPOINT SYSTEMS, INC. May 6, 2015 /s/ James M. Lucania James M. Lucania Acting Chief Financial Officer and Treasurer Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 44 of 139 PageID: 1123 Table of Contents INDEX TO EXHIBITS 40 Exhibit 3.1 Articles of Incorporation, as amended, are hereby incorporated by reference to Exhibit 3(i) of the Registrant's 1990 Form 10- K, filed with the SEC on March 14, 1991. Exhibit 3.2 By-Laws, as Amended and Restated, are hereby incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed with the SEC on August 4, 2010. Exhibit 3.3 Articles of Amendment to the Articles of Incorporation are hereby incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed with the SEC on December 28, 2007. Exhibit 10.1 2015 Employee Stock Purchase Plan is hereby incorporated by reference to Exhibit 99.1 to our Registration Statement on Form S-8, filed with the SEC on March 31, 2015. Exhibit 31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 Certification of the Acting Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.1 Certification of the Chief Executive Officer and the Acting Chief Financial Officer pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 45 of 139 PageID: 1124 EXHIBIT 31.1 Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, George Babich, Jr., certify that: 1. I have reviewed this Form 10-Q of Checkpoint Systems, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15 (f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. By: /s/ George Babich, Jr. Name: George Babich, Jr. Title: President and Chief Executive Officer Date: May 6, 2015 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 46 of 139 PageID: 1125 EXHIBIT 31.2 Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, James M. Lucania, certify that: 1. I have reviewed this Form 10-Q of Checkpoint Systems, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15 (f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. By: /s/ James M. Lucania Name: James M. Lucania Title: Acting Chief Financial Officer and Treasurer Date: May 6, 2015 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 47 of 139 PageID: 1126 EXHIBIT 32.1 CERTIFICATION FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned executive officers of Checkpoint Systems, Inc. (the “Company”) hereby certify that this Quarterly Report on Form 10-Q for the quarter ended March 29, 2015 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission upon request. This certification accompanies the Report and shall not be treated as having been filed as part of the Report. Date: May 6, 2015 By: /s/ George Babich, Jr. Name: George Babich, Jr. Title: President and Chief Executive Officer By: /s/ James M. Lucania Name: James M. Lucania Title: Acting Chief Financial Officer and Treasurer Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 48 of 139 PageID: 1127 Exhibit Y Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 49 of 139 PageID: 1128 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q For the quarterly period ended June 28, 2015 OR For the transition period from ___________________ to Commission File No. 1-11257 CHECKPOINT SYSTEMS, INC. (Exact name of Registrant as specified in its charter) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.05 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ APPLICABLE ONLY TO CORPORATE ISSUERS: As of July 30, 2015, there were 42,161,314 shares of the Company’s Common Stock outstanding. þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Pennsylvania 22-1895850 (State of Incorporation) (IRS Employer Identification No.) 101 Wolf Drive, PO Box 188, Thorofare, New Jersey 08086 (Address of principal executive offices) (Zip Code) 856-848-1800 (Registrant’s telephone number, including area code) Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o (Do not check if a smaller reporting company) Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 50 of 139 PageID: 1129 Table of Contents CHECKPOINT SYSTEMS, INC. FORM 10-Q Table of Contents 2 Page PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statements of Comprehensive Income (Loss) 5 Consolidated Statements of Equity 6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 27 Item 3. Quantitative and Qualitative Disclosures About Market Risk 39 Item 4. Controls and Procedures 40 PART II. OTHER INFORMATION 41 Item 1. Legal Proceedings 41 Item 1A. Risk Factors 42 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42 Item 3. Defaults Upon Senior Securities 42 Item 4. Mine Safety Disclosures 42 Item 5. Other Information 42 Item 6. Exhibits 43 SIGNATURES 44 INDEX TO EXHIBITS 45 Rule 13a-14(a)/15d-14(a) Certification of George Babich, Jr., President and Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification of James M. Lucania, Acting Chief Financial Officer and Treasurer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 XBRL Instance Document XBRL Taxonomy Extension Schema Document XBRL Taxonomy Extension Calculation Linkbase Document XBRL Taxonomy Extension Definition Linkbase Document XBRL Taxonomy Extension Label Linkbase Document XBRL Taxonomy Extension Presentation Linkbase Document Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 51 of 139 PageID: 1130 Table of Contents CHECKPOINT SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) See Notes to Consolidated Financial Statements. (amounts in thousands) June 28, 2015 December 28, 2014 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 99,104 $ 135,537 Accounts receivable, net of allowance of $7,642 and $8,526 109,643 131,720 Inventories 92,462 91,860 Other current assets 24,733 25,928 Deferred income taxes 5,334 5,557 Total Current Assets 331,276 390,602 REVENUE EQUIPMENT ON OPERATING LEASE, net 1,060 1,057 PROPERTY, PLANT, AND EQUIPMENT, net 77,336 76,332 GOODWILL 166,083 173,569 OTHER INTANGIBLES, net 58,584 64,940 DEFERRED INCOME TAXES 22,901 25,284 OTHER ASSETS 5,934 6,882 TOTAL ASSETS $ 663,174 $ 738,666 LIABILITIES AND EQUITY CURRENT LIABILITIES: Short-term borrowings and current portion of long-term debt $ 186 $ 236 Accounts payable 41,122 48,928 Accrued compensation and related taxes 19,245 27,511 Other accrued expenses 36,860 44,204 Income taxes - 1,278 Unearned revenues 8,337 7,663 Restructuring reserve 3,089 6,255 Accrued pensions - current 4,104 4,472 Other current liabilities 16,519 17,504 Total Current Liabilities 129,462 158,051 LONG-TERM DEBT, LESS CURRENT MATURITIES 65,146 65,161 FINANCING LIABILITY 31,349 33,094 ACCRUED PENSIONS 99,306 108,920 OTHER LONG-TERM LIABILITIES 28,682 30,140 DEFERRED INCOME TAXES 15,163 15,369 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS’ EQUITY: Preferred stock, no par value, 500,000 shares authorized, none issued - - Common stock, par value $.10 per share, 100,000,000 shares authorized, 46,117,768 and 45,840,171 shares issued, 42,081,856 and 41,804,259 shares outstanding 4,612 4,584 Additional capital 424,067 441,882 Accumulated deficit (18,483) (12,331) Common stock in treasury, at cost, 4,035,912 and 4,035,912 shares (71,520) (71,520) Accumulated other comprehensive (loss) income, net of tax (44,610) (34,684) TOTAL STOCKHOLDERS' EQUITY 294,066 327,931 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 663,174 $ 738,666 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 52 of 139 PageID: 1131 3 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 53 of 139 PageID: 1132 Table of Contents CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) See Notes to Consolidated Financial Statements. 4 Quarter Six months (13 weeks) Ended (26 weeks) Ended (amounts in thousands, except per share data) June 28, 2015 June 29, 2014 June 28, 2015 June 29, 2014 Net revenues $ 147,550 $ 170,925 $ 276,092 $ 318,331 Cost of revenues 86,053 98,418 158,058 183,538 Gross profit 61,497 72,507 118,034 134,793 Selling, general, and administrative expenses 51,891 55,369 103,197 109,715 Research and development 4,921 3,810 9,464 7,692 Restructuring expense 284 341 1,588 2,233 Litigation settlement 8,980 - 8,980 - Acquisition costs 41 - 120 - Other operating income (132) - (493) - Operating (loss) income (4,488) 12,987 (4,822) 15,153 Interest income 232 285 459 552 Interest expense 990 1,199 1,928 2,455 Other gain (loss), net (859) (442) (488) (528) (Loss) earnings before income taxes (6,105) 11,631 (6,779) 12,722 Income tax (benefit) expense (698) 1,777 (627) 2,997 Net (loss) earnings $ (5,407) $ 9,854 $ (6,152) $ 9,725 Net (loss) earnings per common share: Basic (loss) earnings per share $ (0.13) $ 0.23 $ (0.14) $ 0.23 Diluted (loss) earnings per share $ (0.13) $ 0.23 $ (0.14) $ 0.23 Dividend declared per share $ - $ - $ 0.50 $ - Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 54 of 139 PageID: 1133 Table of Contents CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) See Notes to Consolidated Financial Statements. 5 Quarter Six months (13 weeks) Ended (26 weeks) Ended (amounts in thousands) June 28, 2015 June 29, 2014 June 28, 2015 June 29, 2014 Net (loss) earnings $ (5,407) $ 9,854 $ (6,152) $ 9,725 Other comprehensive (loss) income, net of tax: Pension liability adjustments, net of tax benefit of $432, $112, $435 and $222, respectively (489) 277 3,942 555 Foreign currency translation adjustment 1,031 470 (13,868) 875 Total other comprehensive income (loss), net of tax $ 542 $ 747 $ (9,926) $ 1,430 Comprehensive (loss) income $ (4,865) $ 10,601 $ (16,078) $ 11,155 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 55 of 139 PageID: 1134 Table of Contents CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF EQUITY (Unaudited) See Notes to Consolidated Financial Statements. 6 (amounts in thousands) Common Stock Additional Capital Accumulated Deficit Treasury Stock Accumulated Other Comprehensive Income (Loss) Total Equity Shares Amount Shares Amount Balance, December 29, 2013 45,484 $ 4,548 $ 434,336 $ (23,284) 4,036 $ (71,520) $ 2,245 $ 346,325 Net earnings 10,953 10,953 Exercise of stock-based compensation and awards released 356 36 907 943 Tax benefit on stock-based compensation (14) (14) Stock-based compensation expense 5,781 5,781 Deferred compensation plan 872 872 Pension liability adjustments (17,263) (17,263) Foreign currency translation adjustment (19,666) (19,666) Balance, December 28, 2014 45,840 $ 4,584 $ 441,882 $ (12,331) 4,036 $ (71,520) $ (34,684) $ 327,931 Net loss (6,152) (6,152) Exercise of stock-based compensation and awards released 278 28 (97) (69) Tax benefit on stock-based compensation (223) (223) Stock-based compensation expense 2,998 2,998 Deferred compensation plan 891 891 Dividend declared ($0.50 per share) (21,384) (21,384) Pension liability adjustments 3,942 3,942 Foreign currency translation adjustment (13,868) (13,868) Balance, June 28, 2015 46,118 $ 4,612 $ 424,067 $ (18,483) 4,036 $ (71,520) $ (44,610) $ 294,066 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 56 of 139 PageID: 1135 Table of Contents CHECKPOINT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) See Notes to Consolidated Financial Statements. 7 (amounts in thousands) Six months (26 weeks) ended June 28, 2015 June 29, 2014 Cash flows from operating activities: Net (loss) earnings $ (6,152) $ 9,725 Adjustments to reconcile net (loss) earnings to net cash (used in) provided by operating activities: Depreciation and amortization 13,206 12,490 Amortization of debt issuance costs 217 217 Interest on financing liability 980 1,127 Deferred taxes (39) (194) Stock-based compensation 2,998 2,898 Provision for losses on accounts receivable 204 473 Excess tax benefit on stock-based compensation (99) (79) (Gain) loss on disposal of fixed assets (195) 81 Restructuring related asset impairment - 172 Decrease (increase) in operating assets: Accounts receivable 16,646 26,398 Inventories (4,908) (16,527) Other assets 534 3,357 (Decrease) increase in operating liabilities: Accounts payable (5,418) (7,625) Income taxes (1,137) (2,341) Unearned revenues - current 1,133 985 Restructuring reserve (2,742) (2,437) Other liabilities (15,588) (7,421) Net cash (used in) provided by operating activities (360) 21,299 Cash flows from investing activities: Acquisition of property, plant, and equipment and intangibles (10,475) (6,774) Cash receipts on note receivable from sale of discontinued operations 142 142 Other investing activities 223 44 Net cash used in investing activities (10,110) (6,588) Cash flows from financing activities: Proceeds from stock issuances 1,100 951 Excess tax benefit on stock-based compensation 99 79 Net change in factoring and bank overdrafts (23) (107) Proceeds from long-term debt - 1,043 Payment of long-term debt (48) (7,198) Dividend paid (20,980) - Net cash used in financing activities (19,852) (5,232) Effect of foreign currency rate fluctuations on cash and cash equivalents (6,111) 374 Net (decrease) increase in cash and cash equivalents (36,433) 9,853 Cash and cash equivalents: Beginning of period 135,537 121,573 End of period $ 99,104 $ 131,426 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 57 of 139 PageID: 1136 Table of Contents CHECKPOINT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES The Consolidated Financial Statements include the accounts of Checkpoint Systems, Inc. and its majority-owned subsidiaries (collectively, the “Company”). All inter-company transactions are eliminated in consolidation. The Consolidated Financial Statements and related notes are unaudited and do not contain all disclosures required by generally accepted accounting principles in annual financial statements. The Consolidated Balance Sheet as of December 28, 2014 is derived from the Company's audited Consolidated Financial Statements at December 28, 2014. Refer to our Annual Report on Form 10-K for the fiscal year ended December 28, 2014 for the most recent disclosure of our accounting policies. The Consolidated Financial Statements include all adjustments, consisting of normal recurring adjustments, necessary to state fairly our financial position at June 28, 2015 and December 28, 2014 and our results of operations for the thirteen and twenty-six weeks ended June 28, 2015 and June 29, 2014 and changes in cash flows for the twenty-six weeks ended June 28, 2015 and June 29, 2014. The results of operations for the interim period should not be considered indicative of results to be expected for the full year. Reclassifications Certain reclassifications have been made to prior period information to conform to the current period presentation. Customer Rebates We record estimated reductions to revenue for customer incentive offerings, including volume-based incentives and rebates. The accrual for these incentives and rebates, which is included in the Other Accrued Expenses section of our Consolidated Balance Sheets, was $13.0 million and $12.5 million as of June 28, 2015 and December 28, 2014, respectively. We record revenues net of an allowance for estimated return activities. Return activity was immaterial to revenue and results of operations for all periods presented. Warranty Reserves We provide product warranties for our various products. These warranties vary in length depending on product and geographical region. We establish our warranty reserves based on historical data of warranty transactions. The following table sets forth the movement in the warranty reserve which is located in the Other Accrued Expenses section of our Consolidated Balance Sheets: 8 (amounts in thousands) Six months ended June 28, 2015 June 29, 2014 Balance at beginning of year $ 4,379 $ 4,521 Accruals for warranties issued, net 1,068 2,232 Settlements made (1,667) (1,874) Foreign currency translation adjustment (161) 18 Balance at end of period $ 3,619 $ 4,897 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 58 of 139 PageID: 1137 Table of Contents Accumulated Other Comprehensive Income (Loss) The components of Accumulated Other Comprehensive Income (Loss), net of tax, for the six months ended June 28, 2015 were as follows: The significant items reclassified from each component of other comprehensive income (loss) for the three months ended June 28, 2015 and June 29, 2014 were as follows: The significant items reclassified from each component of other comprehensive income (loss) for the six months ended June 28, 2015 and June 29, 2014 were as follows: 9 (amounts in thousands) Pension plan Foreign currency translation adjustment Total accumulated other comprehensive income (loss) Balance, December 28, 2014 $ (35,036) $ 352 $ (34,684) Foreign currency translation adjustment 2,881 (13,868) (10,987) Amounts reclassified from other comprehensive income 1,061 - 1,061 Net other comprehensive income (loss) 3,942 (13,868) (9,926) Balance, June 28, 2015 $ (31,094) $ (13,516) $ (44,610) (amounts in thousands) June 28, 2015 June 29, 2014 Details about accumulated other comprehensive income (loss) components Amount reclassified from accumulated other comprehensive income (loss) Affected line item in the statement where net loss is presented Amount reclassified from accumulated other comprehensive income (loss) Affected line item in the statement where net loss is presented Amortization of pension plan items Actuarial loss (1) $ (733) $ (386) Prior service cost (1) (7) (3) (740) Total before tax (389) Total before tax 432 Tax benefit 112 Tax benefit Total reclassifications for the period $ (308) Net of tax $ (277) Net of tax (1) These accumulated other comprehensive income components are included in the computation of net periodic pension costs. Refer to Note 9 of the Consolidated Financial Statements. (amounts in thousands) June 28, 2015 June 29, 2014 Details about accumulated other comprehensive income (loss) components Amount reclassified from accumulated other comprehensive income (loss) Affected line item in the statement where net loss is presented Amount reclassified from accumulated other comprehensive income (loss) Affected line item in the statement where net loss is presented Amortization of pension plan items Actuarial loss (1) $ (1,483) $ (771) Prior service cost (1) (13) (6) (1,496) Total before tax (777) Total before tax 435 Tax benefit 222 Tax benefit Total reclassifications for the period $ (1,061) Net of tax $ (555) Net of tax (1) These accumulated other comprehensive income components are included in the computation of net periodic pension costs. Refer to Note 9 of the Consolidated Financial Statements. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 59 of 139 PageID: 1138 Table of Contents Dividend On March 5, 2015, we declared a special dividend (the Dividend) of $0.50 per outstanding common share for all shareholders of record as of March 20, 2015. This Dividend reflects our commitment to building shareholder value through the execution of our strategic plan and a disciplined approach to capital allocation. After the Dividend, we believe we have the appropriate level of liquidity both to fund our internal initiatives and act quickly on any strategic opportunities. The cash dividend of $21.0 million was paid to common shareholders on April 10, 2015. Dividend distributions to shareholders are recognized as a liability in the period in which the dividend is formally approved by our Board of Directors and communicated to shareholders. The Dividend was recorded as a reduction of Additional Capital in Stockholders' Equity. The Dividend does not provide any cash payment or benefit to stock options, restricted stock units, or performance shares, and instead only applies to the outstanding common stock and as outlined in the executive and director deferred compensation plans. The non-cash portion of the Dividend of $0.4 million was credited to the executive and director deferred compensation plan deferred stock accounts on April 10, 2015 in accordance with the plans. Subsequent Events We perform a review of subsequent events in connection with the preparation of our financial statements. The accounting for and disclosure of events that occur after the balance sheet date, but before our financial statements are issued, are reflected where appropriate or required in our financial statements. Refer to Note 14 of the Consolidated Financial Statements. Recently Adopted Accounting Standards In April 2014, the FASB issued ASU 2014-08 “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (ASU 2014-08). Under ASU 2014-08, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Additionally, ASU 2014-08 requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations, including disclosure of pretax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. ASU 2014-08 was effective for fiscal and interim periods beginning on or after December 15, 2014, which for us was December 29, 2014, the first day of our 2015 fiscal year. The adoption of this standard has not had a material effect on our consolidated results of operations and financial condition. New Accounting Pronouncements and Other Standards In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09), which creates a new Topic, Accounting Standards Codification Topic 606. The standard is principle-based and provides a five-step model to determine when and how revenue is recognized. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB approved the deferral of the effective date by one year. The accounting standard is now effective for annual and interim periods beginning after December 15, 2017, which for us is January 1, 2018, the first day of our 2018 fiscal year. The final ASU permits organizations to adopt the new revenue standard early, but not before annual and interim periods beginning after December 15, 2016. We are currently evaluating the impact of adopting this guidance. In June 2014, the FASB issued ASU 2014-12 “Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (ASU 2014-12). ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in ASU 2014-12 are effective for annual periods and interim periods beginning after December 15, 2015, which for us is December 28, 2015, the first day of our 2016 fiscal year. Early adoption is permitted. We have not early adopted ASU 2014-12. Entities may apply the amendments in ASU 2014-12 either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. We plan to apply this guidance prospectively 10 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 60 of 139 PageID: 1139 Table of Contents to all awards granted or modified after the effective date. The adoption of this standard is not expected to have a material effect on our consolidated results of operations and financial condition. In August 2014, the FASB issued ASU 2014-15 “Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (ASU 2014-15). Continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, “Presentation of Financial Statements-Liquidation Basis of Accounting.” Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the new criteria in ASU 2014-15 should be followed to determine whether to disclose information about the relevant conditions and events. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. We have not early adopted ASU 2014-15. The adoption of this standard is not expected to have a material effect on our consolidated results of operations and financial condition. In January 2015, the FASB issued ASU 2015-01 “Income Statement-Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items” (ASU 2015-01). The amendments in ASU 2015-01 eliminate from GAAP the concept of extraordinary items. Although the amendments will eliminate the requirements in Subtopic 225-20 for reporting entities to consider whether an underlying event or transaction is extraordinary, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. ASU 2015-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, which for us is December 28, 2015, the first day of our 2016 fiscal year. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We have not early adopted ASU 2015-01. The adoption of this standard is not expected to have a material effect on our consolidated results of operations and financial condition. In February 2015, the FASB issued ASU 2015-02 “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (ASU 2015-02). ASU 2015-02 modifies existing consolidation guidance related to (i) limited partnerships and similar legal entities, (ii) the evaluation of variable interests for fees paid to decision makers or service providers, (iii) the effect of fee arrangements and related parties on the primary beneficiary determination, and (iv) certain investment funds. These changes reduce the number of consolidation models from four to two and place more emphasis on the risk of loss when determining a controlling financial interest. This guidance is effective for public companies for fiscal years beginning after December 15, 2015, which for us is December 28, 2015, the first day of our 2016 fiscal year. The adoption of this standard is not expected to have a material effect on our consolidated results of operations and financial condition. In April 2015, the FASB issued ASU 2015-03 “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (ASU 2015-03). The amendments in ASU 2015-03 change the presentation of debt issuance costs in financial statements requiring an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2016, which for us is December 26, 2016, the first day of our 2017 fiscal year. Early adoption is permitted. We have not early adopted ASU 2015-03. The new guidance will be applied retrospectively to each prior period presented. The adoption of this standard is not expected to have a material effect on our consolidated results of operations and financial condition. In April 2015, the FASB issued ASU 2015-04 “Compensation-Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets” (ASU 2015-04). The amendments in ASU 2015-04 provide a practical expedient for employers with fiscal year-ends that do not fall on a month-end by permitting those employers to measure defined benefit plan assets and obligations as of the month-end that is closest to the entity's fiscal year-end. ASU 2015-04 is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2015, which for us is December 28, 2015, the first day of our 2016 fiscal year. Early adoption is permitted. We have not early adopted ASU 2015-04. The adoption of this standard is not expected to have a material effect on our consolidated results of operations and financial condition. In April 2015, the FASB issued ASU 2015-05 “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (ASU 2015-05). The amendments in ASU 2015-05 help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance as to whether an arrangement includes the sale or license of software. ASU 2015-05 is effective for public business entities for fiscal 11 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 61 of 139 PageID: 1140 Table of Contents years, and interim periods within those years, beginning after December 15, 2015, which for us is December 28, 2015, the first day of our 2016 fiscal year. Early adoption is permitted. We have not early adopted ASU 2015-05. The adoption of this standard is not expected to have a material effect on our consolidated results of operations and financial condition. In June 2015, the FASB issued ASU 2015-10 “Technical Corrections and Improvements” (ASU 2015-10). The amendments in ASU 2015-10 provide technical corrections and improvements to a wide range of Topics in the Accounting Standards Codification (the Codification). The purpose of these amendments are to correct unintended differences between original guidance and the Codification, to provide clarification through updating wording or correcting references, to streamline or simplify the Codification through minor changes, and to make other minor improvements to the guidance which are not expected to have a significant effect on current accounting practice. ASU 2015-10 is effective for fiscal and interim periods beginning on or after December 15, 2015, which for us is December 28, 2015, the first day of our 2016 fiscal year. We are in the process of evaluating the adoption of this ASU, and do not expect this to have a material effect on our consolidated results of operations and financial condition. In July 2015, the FASB issued ASU 2015-11 “Inventory (Topic 330): Simplifying the Measurement of Inventory” (ASU 2015-11). The amendments in ASU 2015-11 simplify the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. ASU 2015-11 is effective for fiscal and interim periods beginning on or after December 15, 2016, which for us is December 26, 2016, the first day of our 2017 fiscal year. Early application is permitted. We have not early adopted ASU 2015-11. The new guidance must be applied prospectively after the date of adoption. We are in the process of evaluating the adoption of this ASU, and do not expect this to have a material effect on our consolidated results of operations and financial condition. Note 2. INVENTORIES Inventories consist of the following: Note 3. GOODWILL AND OTHER INTANGIBLE ASSETS We had intangible assets with a net book value of $58.6 million and $64.9 million as of June 28, 2015 and December 28, 2014, respectively. The following table reflects the components of intangible assets as of June 28, 2015 and December 28, 2014: 12 (amounts in thousands) June 28, 2015 December 28, 2014 Raw materials $ 19,341 $ 21,085 Work-in-process 3,181 3,264 Finished goods 69,940 67,511 Total $ 92,462 $ 91,860 June 28, 2015 December 28, 2014 (amounts in thousands) Amortizable Life (years) Gross Amount Gross Accumulated Amortization Gross Amount Gross Accumulated Amortization Finite-lived intangible assets: Customer lists 6 to 20 $ 76,611 $ 59,330 $ 79,110 $ 58,873 Trade name 1 to 30 25,170 17,021 27,172 18,031 Patents, license agreements 3 to 14 55,657 51,036 58,060 52,448 Internal-use software 3 to 7 23,805 15,887 24,034 14,758 Other 2 to 6 7,018 6,915 7,029 6,867 Total amortized finite-lived intangible assets 188,261 150,189 195,405 150,977 Indefinite-lived intangible assets: Trade name 20,512 - 20,512 - Total identifiable intangible assets $ 208,773 $ 150,189 $ 215,917 $ 150,977 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 62 of 139 PageID: 1141 Table of Contents Amortization expense for the three and six months ended June 28, 2015 was $2.7 million and $5.4 million, respectively. Amortization expense for the three and six months ended June 29, 2014 was $2.7 million and $5.6 million, respectively. Estimated amortization expense for each of the five succeeding years is anticipated to be: The changes in the carrying amount of goodwill are as follows: The following table reflects the components of goodwill as of June 28, 2015 and December 28, 2014: We perform an assessment of goodwill by comparing each individual reporting unit’s carrying amount of net assets, including goodwill, to their fair value at least annually during the October month-end close and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The May 2011 acquisition of the Shore to Shore businesses included a purchase price payment to escrow of $17.5 million related to the 2010 performance of the acquired business. This amount is subject to adjustment pending final determination of the 2010 performance and could result in an additional purchase price payment of up to $6.3 million. We are currently involved in an arbitration process in order to require the seller to provide audited financial information related to the 2010 performance. Once the final information is received and the calculation of the final purchase price is agreed to by both parties, the final adjustment to the purchase price will be recognized through earnings. Acquisition related costs incurred in connection with the transaction, including legal and other arbitration-related costs, are recognized within Acquisition Costs in the Consolidated Statement of Operations and approximate $41 thousand and $0.1 million for the three and six months ended June 28, 2015, respectively, without a comparable expense for the three and six months ended June 29, 2014. 13 (amounts in thousands) 2015 (1) $ 10,780 2016 $ 10,390 2017 $ 9,318 2018 $ 3,435 2019 $ 2,439 (1) The estimated amortization expense for the remainder of 2015 is anticipated to be $5.4 million. (amounts in thousands) Merchandise Availability Solutions Apparel Labeling Solutions Retail Merchandising Solutions Total Balance as of December 29, 2013 $ 159,157 $ 2,116 $ 24,591 $ 185,864 Translation adjustments (9,511) - (2,784) (12,295) Balance as of December 28, 2014 $ 149,646 $ 2,116 $ 21,807 $ 173,569 Translation adjustments (5,703) - (1,783) (7,486) Balance as of June 28, 2015 $ 143,943 $ 2,116 $ 20,024 $ 166,083 June 28, 2015 December 28, 2014 (amounts in thousands) Gross Amount Accumulated Impairment Losses Goodwill, Net Gross Amount Accumulated Impairment Losses Goodwill, Net Merchandise Availability Solutions $ 178,377 $ 34,434 $ 143,943 $ 192,303 $ 42,657 $ 149,646 Apparel Labeling Solutions 83,720 81,604 2,116 84,407 82,291 2,116 Retail Merchandising Solutions 114,510 94,486 20,024 124,127 102,320 21,807 Total goodwill $ 376,607 $ 210,524 $ 166,083 $ 400,837 $ 227,268 $ 173,569 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 63 of 139 PageID: 1142 Table of Contents Note 4. DEBT Debt as of June 28, 2015 and December 28, 2014 consisted of the following: 2013 Senior Secured Credit Facility On December 11, 2013, we entered into a new $200.0 million five-year senior secured multi-currency revolving credit facility (2013 Senior Secured Credit Facility) agreement (2013 Credit Agreement) with a syndicate of lenders. All obligations under the 2013 Senior Secured Credit Facility are irrevocably and unconditionally guaranteed on a joint and several basis by certain domestic subsidiaries. Collateral under the 2013 Senior Secured Credit Facility includes a 100% stock pledge of domestic subsidiaries and a 65% stock pledge of all first-tier foreign subsidiaries, excluding our Japanese subsidiary. All domestic tangible and intangible personal property, excluding any real property with a value of less than $5 million, are also pledged as collateral. Borrowings under the 2013 Senior Secured Credit Facility, other than swingline loans, bear interest at our option of either (i) a spread ranging from 0.25% to 1.25% over the Base Rate (as described below), or (ii) a spread ranging from 1.25% to 2.25% over the LIBOR rate, and in each case fluctuating in accordance with changes in our leverage ratio, as defined in the 2013 Credit Agreement. The "Base Rate" is the highest of (i) the Federal Funds Rate, plus 0.50%, (ii) the Administrative Agent’s prime rate, and (iii) a daily rate equal to the one-month LIBOR rate, plus 1.00%. Swingline loans bear interest of a spread ranging from 0.25% to 1.25% over the Base Rate. We pay an unused line fee ranging from 0.20% to 0.40% per annum on the unused portion of the 2013 Senior Secured Credit Facility. Pursuant to the terms of the 2013 Senior Secured Credit Facility, we are subject to various requirements, including covenants requiring the maintenance of (i) a maximum total leverage ratio of 3.00 and (ii) a minimum interest coverage ratio of 3.00. We are in compliance with the maximum total leverage ratio and minimum interest coverage ratio as of June 28, 2015. The 2013 Senior Secured Credit Facility also contains customary representations and warranties, affirmative and negative covenants, notice provisions and events of default, including change of control, cross- defaults to other debt, and judgment defaults. Upon a default under the 2013 Senior Secured Credit Facility, including the non-payment of principal or interest, our obligations under the 2013 Credit Agreement may be accelerated and the assets securing such obligations may be sold. As of June 28, 2015, there were $1.4 million in issued letters of credit outstanding under the 2013 Senior Secured Credit Facility. Financing Liability In June 2011, we sold, to a financial institution in Spain, rights to future customer receivables resulting from the negotiated extension of previously executed sales-type lease arrangements, whose receivables were previously sold. The 2011 transaction qualified as a legal sale without recourse. However, until the receivables are recognized, the proceeds from the fiscal 2011 legal sale are accounted for as a financing arrangement and reflected as Financing Liability in our Consolidated Balance Sheets. The balance of the financing liability is $31.3 million and $33.1 million as of June 28, 2015 and December 28, 2014, respectively. We impute a non-cash interest charge on the financing liability using a rate of 6.365%, which we recognize as interest expense, until our right to recognize the legal sales permits us to de-recognize the liability and record operating income on the sale. We recognized interest expense related to the financing liability for the three and six months ended June 28, 2015 of $0.5 million and $1.0 million, respectively. The recognized interest expense related to the financing liability for the three and six months ended June 29, 2014 was $0.6 million and $1.1 million, respectively. 14 (amounts in thousands) June 28, 2015 December 28, 2014 2013 Senior Secured Credit Facility: $200 million variable interest rate revolving credit facility maturing in 2018 $ 65,000 $ 65,000 Full-recourse factoring liabilities 46 83 Bank overdraft credit facility 73 65 Capital leases with maturities through 2020 213 249 Total 65,332 65,397 Less current portion 186 236 Total long-term portion $ 65,146 $ 65,161 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 64 of 139 PageID: 1143 Table of Contents During fiscal 2016 through 2018, when we are permitted to recognize the lease receivables upon the commencement of the lease extensions, we expect to de-recognize both the associated receivables and the related financing liability and record other operating income on the sale. At this point, our obligation under the financing liability will have been extinguished. In March 2015, we again sold rights to future customer receivables to a financial institution in Spain resulting from the negotiated extension of previously executed sales-type lease arrangements. The 2015 transaction qualified as a legal sale without recourse. For the three and six months ended June 28, 2015, we recognized $0.1 million and $0.5 million of income, respectively, on the sale in Other Operating Income on our Consolidated Statement of Operations. A portion of the receivables were previously sold to another financial institution and we did not complete the reacquisition of these receivables until after the end of the first quarter of 2015. Therefore, a portion of the proceeds from the fiscal 2015 legal sale were accounted for as a financing arrangement and reflected as Financing Liability in our Consolidated Balance Sheets until the reacquisition of the receivables was completed in the second quarter of 2015. Note 5. STOCK-BASED COMPENSATION Stock-based compensation cost recognized in operating results (included in selling, general, and administrative expenses) for the three and six months ended June 28, 2015 was $1.5 million and $3.0 million ($1.5 million and $2.9 million, net of tax), respectively. For the three and six months ended June 29, 2014, the total compensation expense was $1.4 million and $2.9 million ($1.4 million and $2.8 million, net of tax), respectively. The associated actual tax benefit realized for the tax deduction from option exercises of share-based payment units and awards released equaled $0.1 million and $0.1 million for the six months ended June 28, 2015 and June 29, 2014, respectively. Stock Options Option activity under the principal option plans as of June 28, 2015 and changes during the six months ended June 28, 2015 were as follows: The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between our closing stock price on the last trading day of the second quarter of fiscal 2015 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 28, 2015. This amount changes based on the fair market value of our stock. The total intrinsic value of options exercised for the six months ended June 28, 2015 and June 29, 2014 was $40 thousand and $0.1 million, respectively. As of June 28, 2015, $1.4 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted- average period of 2.2 years. The fair value of share-based payment units was estimated using the Black-Scholes option pricing model. The table below presents the weighted- average expected life in years. The expected life computation is based on historical exercise patterns and post-vesting termination behavior. The expected dividend yield is based on the estimate of annual dividends expected to be paid at the time of the grant. Volatility is determined using changes in historical stock prices. The interest rate for periods within the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. 15 Number of Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Outstanding at December 28, 2014 2,349,447 $ 17.77 3.98 $ 2,716 Granted 266,080 13.40 Exercised (11,377) 9.42 Forfeited or expired (381,538) 18.89 Outstanding at June 28, 2015 2,222,612 $ 17.10 4.70 $ 758 Vested and expected to vest at June 28, 2015 2,120,446 $ 17.26 4.47 $ 755 Exercisable at June 28, 2015 1,717,387 $ 18.37 3.47 $ 554 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 65 of 139 PageID: 1144 Table of Contents The weighted-average fair values and assumptions were as follows: Restricted Stock Units Nonvested restricted stock units as of June 28, 2015 and changes during the six months ended June 28, 2015 were as follows: The total fair value of restricted stock awards vested during the first six months of 2015 was $3.8 million as compared to $2.9 million in the first six months of 2014. As of June 28, 2015, there was $4.7 million of unrecognized stock-based compensation expense related to nonvested restricted stock units (RSUs), including amounts related to performance-based RSUs detailed below. That cost is expected to be recognized over a weighted- average period of 1.9 years. The following performance-based awards of restricted stock units (RSUs) are included in the balance of nonvested RSUs at June 28, 2015 in the table above. There were no new awards of performance-based RSUs in the first six months of 2015. On February 27, 2014, RSUs were awarded to certain key employees as part of the LTIP 2014 plan. The number of shares for these units varies based on the growth of our earnings before interest, taxes, depreciation, and amortization (EBITDA) during the January 2014 to December 2016 performance period. The final value of these units will be determined by the number of shares earned. The value of these units is charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated award amounts and estimated forfeitures rates. The weighted average price for these RSUs was $14.90 per share. Compensation expense of $0.1 million and $0.1 million was recognized in connection with these RSUs for the six months ended June 28, 2015 and June 29, 2014, respectively. As of June 28, 2015, total unamortized compensation expense for this grant was $0.5 million. As of June 28, 2015, the maximum achievable RSUs outstanding under this plan are 137,820 units. These RSUs reduce the shares available to grant under the Checkpoint Systems, Inc. Amended and Restated 2004 Omnibus Incentive Compensation Plan (the 2004 Plan). On February 27, 2013, RSUs were awarded to certain key employees as part of the LTIP 2013 plan. These awards have a market condition. The number of shares for these units varies based on the relative ranking of our total shareholder return (TSR) against the TSRs of the constituents of the Russell 2000 Index during the January 2013 to December 2015 performance period. The final value of these units will be determined by the number of shares earned. The value of these units is charged to compensation expense on a straight-line basis over the vesting period with periodic adjustments to account for changes in anticipated award amounts and estimated forfeitures rates. The grant date fair value for these RSUs was $11.91 per share. Additional RSUs related to the LTIP 2013 plan were awarded on May 28, 2013, with a grant date fair value of $11.56 per share. Compensation expense of $8 thousand and $47 thousand was recognized in connection with these RSUs for the six months ended June 28, 2015 and June 29, 2014, respectively. As of June 28, 2015, total unamortized compensation expense for these grants was $31 thousand. As of June 28, 2015, the maximum achievable RSUs outstanding under this plan are 22,500 units. These RSUs reduce the shares available to grant under the 2004 Plan. 16 Six months ended June 28, 2015 June 29, 2014 Weighted-average fair value of grants $ 5.48 $ 6.42 Valuation assumptions: Expected life (in years) 5.51 5.12 Expected dividend yield 0.00% 0.00% Expected volatility 45.95% 48.12% Risk-free interest rate 1.541% 1.464% Number of Shares Weighted- Average Vest Date (in years) Weighted- Average Grant Date Fair Value Nonvested at December 28, 2014 940,857 0.56 $ 17.11 Granted 331,000 $ 12.61 Vested (290,938) $ 12.93 Forfeited (33,644) $ 14.73 Nonvested at June 28, 2015 947,275 1.23 $ 16.91 Vested and expected to vest at June 28, 2015 850,831 1.15 Vested and deferred at June 28, 2015 424,375 - Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 66 of 139 PageID: 1145 Table of Contents 2015 Incentive Award Plan In April 2015, the Board of Directors adopted the Checkpoint Systems, Inc. 2015 Incentive Award Plan (the 2015 Plan), with shareholder approval obtained at the annual meeting of shareholders held on June 3, 2015. Upon approval of the 2015 Plan, no additional awards are to be made under the Checkpoint Systems, Inc. Amended and Restated 2004 Omnibus Incentive Compensation Plan (the 2004 Plan). All awards previously granted under the 2004 Plan will remain subject to the terms of the 2004 Plan. The 2015 Plan authorizes the issuance of a total of 3,877,777 shares of common stock, which will be reduced by any shares issued pursuant to awards granted under the 2004 Plan after December 28, 2014. This represents an increase of 1,252,766 shares over the current reserve in the 2004 Plan. In addition, subject to certain limitations, shares covered by an award granted under the 2015 Plan or shares covered by an award previously granted under the 2004 Plan which expire or are canceled without having been exercised in full or that are forfeited or repurchased shall be added to the shares of Common Stock authorized for issuance under the 2015 Plan. 2015 Employee Stock Purchase Plan In April 2015, the Board of Directors adopted the 2015 Employee Stock Purchase Plan (the 2015 ESPP), with shareholder approval obtained at the annual meeting of shareholders held on June 3, 2015. The 2015 ESPP is designed to replace the Checkpoint Systems, Inc. 423 Employee Stock Purchase Plan (the Prior ESPP). We exhausted the number of shares available for issuance under the Prior ESPP at the end of March 2015. In connection with the adoption of the 2015 ESPP, we registered an additional 600,000 shares of common stock in a Registration Statement on Form S- 8 under the Securities Act of 1933, as amended, on March 31, 2015. Other Compensation Arrangements On March 15, 2010, we initiated a plan in which time-vested cash unit awards were granted to eligible employees. The time-vested cash unit awards under this plan vest evenly over two or three years from the date of grant. The total amount accrued related to the plan equaled $0.4 million as of June 28, 2015, of which $0.3 million and $0.5 million was expensed for the three and six months ended June 28, 2015. The total amount accrued related to the plan equaled $0.4 million as of June 29, 2014, of which $0.3 million and $0.6 million was expensed for the three and six months ended June 29, 2014. The associated liability is included in Accrued Compensation and Related Taxes in the accompanying Consolidated Balance Sheets. On May 2, 2013 a cash-based performance award was awarded to our CEO under the terms of our LTIP 2013 plan. Our relative TSR performance determines the payout as a percentage of an established target cash amount of $0.4 million. Because the final payout of the award is made in cash, the award is classified as a liability and the fair value is marked-to-market each reporting period. As of June 28, 2015, the fair value of the award is $0.05 per dollar of the target cash amount awarded. The value of this award is charged to compensation expense on a straight-line basis over the vesting period. Compensation expense of $103 thousand was reversed in the first six months of 2015. For the first six months of 2014, $29 thousand was charged to compensation expense. The associated liability is included in Accrued Compensation and Related Taxes in the accompanying Consolidated Balance Sheets. To determine the fair value of the cash-based performance award as of June 28, 2015, we used a Monte Carlo simulation using the following assumptions: (i) expected volatility of 32.82%, (ii) risk-free rate of 0.08%, and (iii) an expected dividend yield of zero. Note 6. SUPPLEMENTAL CASH FLOW INFORMATION Cash payments for interest and income taxes for the six months ended June 28, 2015 and June 29, 2014 were as follows: As of June 28, 2015 and June 29, 2014, we accrued $0.9 million and $0.6 million of capital expenditures, respectively. These amounts were excluded from the Consolidated Statements of Cash Flows at June 28, 2015 and June 29, 2014 since they represent non-cash investing activities. Accrued capital expenditures at June 28, 2015 and June 29, 2014 are included in Accounts Payable and Other Accrued Expenses on the Consolidated Balance Sheets. A special dividend was declared on March 17 (amounts in thousands) Six months ended June 28, 2015 June 29, 2014 Interest $ 724 $ 1,026 Income tax payments $ 3,575 $ 4,014 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 67 of 139 PageID: 1146 Table of Contents 5, 2015. The cash portion of the Dividend of $21.0 million was paid to common shareholders on April 10, 2015. The non-cash portion of the Dividend of $0.4 million was also credited to the executive and director deferred compensation plan deferred stock accounts on April 10, 2015 in accordance with the plans. Note 7. EARNINGS PER SHARE The following data shows the amounts used in computing earnings per share and the effect on net earnings and the weighted-average number of shares of dilutive potential common stock: Anti-dilutive potential common shares are not included in our earnings per share calculation. The Long-term Incentive Plan restricted stock units were excluded from our calculation due to performance vesting criteria not being met. The number of anti-dilutive common share equivalents for the three and six months ended June 28, 2015 and June 29, 2014 were as follows: Note 8. INCOME TAXES The effective tax rate for the six months ended June 28, 2015 was 9.2% as compared to 23.6% for the six months ended June 29, 2014. The change in the effective tax rate for the six months ended June 28, 2015 was due to the mix of income between subsidiaries and increased losses for entities with valuation allowances for which no tax benefit is received. We evaluate our deferred income taxes quarterly to determine if valuation allowances are required or should be adjusted. We are required to assess whether valuation allowances should be established against their deferred tax assets based on all available evidence, both positive and negative, using a “more likely than not” standard. In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with loss carryforwards not expiring, and tax 18 Quarter Six months (13 weeks) Ended (26 weeks) Ended (amounts in thousands, except per share data) June 28, 2015 June 29, 2014 June 28, 2015 June 29, 2014 Net (loss) earnings available to common stockholders $ (5,407) $ 9,854 $ (6,152) $ 9,725 Shares: Weighted-average number of common shares outstanding 42,071 41,678 41,961 41,609 Shares issuable under deferred compensation agreements 885 360 845 353 Basic weighted-average number of common shares outstanding 42,956 42,038 42,806 41,962 Common shares assumed upon exercise of stock options and awards - 273 - 308 Unvested shares issuable under deferred compensation arrangements - 13 - 17 Dilutive weighted-average number of common shares outstanding 42,956 42,324 42,806 42,287 Basic (loss) earnings per share $ (0.13) $ 0.23 $ (0.14) $ 0.23 Diluted (loss) earnings per share $ (0.13) $ 0.23 $ (0.14) $ 0.23 Quarter Six months (13 weeks) Ended (26 weeks) Ended (amounts in thousands) June 28, 2015 June 29, 2014 June 28, 2015 June 29, 2014 Weighted-average common share equivalents associated with anti-dilutive stock options and restricted stock units excluded from the computation of diluted EPS(1) 2,424 2,315 2,317 2,107 (1) Stock options and awards of 146 thousand and 219 thousand shares and deferred compensation arrangements of 21 thousand and 29 thousand shares were anti-dilutive in the first three and six months of 2015 and were therefore excluded from the earnings per share calculation due to our net loss for the period. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 68 of 139 PageID: 1147 Table of Contents planning alternatives. We operate and derive income across multiple jurisdictions. As each of the respective lines of business experiences changes in operating results across their geographic footprint, we may encounter losses in jurisdictions that have been historically profitable, and as a result might require additional valuation allowances to be recorded against certain deferred tax asset balances. As of June 28, 2015 and December 28, 2014, we had net deferred tax assets of $10.4 million and $12.8 million, respectively. At December 28, 2014, the U.S. had a valuation allowance of $108.3 million recorded against its net deferred tax assets of $96.1 million. The amount of valuation allowance recorded was greater than the net domestic deferred tax asset after consideration of deferred tax liabilities associated with non amortizable assets such as goodwill and indefinite lived intangibles. The valuation allowance is reviewed quarterly and will be maintained until there is sufficient positive evidence to support a release. At each reporting date, we consider new evidence, both positive and negative, that could impact the future realization of deferred tax assets. We will consider a release of the valuation allowance once there is sufficient positive evidence that it is more likely than not that the deferred tax assets will be realized. Any release of the valuation allowance will be recorded as a tax benefit increasing net income. Included in Other Current Assets as of June 28, 2015, is a current income tax receivable of $6.9 million. This amount represents a net receivable of $2.4 million as of December 28, 2014, year to date estimated tax payments made in excess of refunds received in the amount of $3.9 million, and current tax benefit recorded on our year to date pretax income of $0.6 million. Included in Other Current Liabilities is our current deferred tax liability of $2.7 million. The total amount of gross unrecognized tax benefits that, if recognized, would affect the effective tax rate was $8.9 million and $16.4 million at June 28, 2015 and December 28, 2014, respectively. Penalties and tax-related interest expense are reported as a component of Income Tax Expense on our Consolidated Statement of Operations. During the six months ended June 28, 2015 we recognized no interest and penalties expense compared to an interest and penalties benefit of $0.1 million during the six months ended June 29, 2014. As of June 28, 2015 and December 28, 2014, we had accrued interest and penalties related to unrecognized tax benefits of $2.8 million and $4.3 million, respectively. As of June 28, 2015 and December 28, 2014, $16.1 million and $16.1 million, respectively, of our unrecognized tax benefits, penalties, and interest were recorded as a component of Other Long-Term Liabilities on the Consolidated Balance Sheets. We file income tax returns in the U.S. and in various states, local and foreign jurisdictions. We are routinely examined by tax authorities in these jurisdictions. It is possible that these examinations may be resolved within twelve months. Due to the expiration of various statutes of limitation and the potential resolution of federal, state, and foreign examinations, it is reasonably possible that the gross unrecognized tax benefits balance may decrease within the next twelve months by $4.6 million. We are currently under audit in the following major jurisdictions: India - 2012 to 2013, France - 2012 to 2013, and Canada - 2011 to 2014. During the current quarter we resolved an audit with the German tax authorities for tax years 2006 to 2009 with no impact to income tax expense. The following major jurisdictions have tax years that remain subject to examination: Germany - 2010 to 2014, United States - 2011 to 2014, China - 2012 to 2014 and Hong Kong - 2008 to 2014. Our tax returns for open years in all jurisdictions are subject to changes upon examination. We operate under tax holidays in certain countries, which are effective through dates ranging from 2015 to 2017, and may be extended if certain additional requirements are satisfied. The tax holidays are conditional upon our meeting certain employment and investment thresholds. 19 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 69 of 139 PageID: 1148 Table of Contents Note 9. PENSION BENEFITS The components of net periodic benefit cost for the three and six months ended June 28, 2015 and June 29, 2014 were as follows: We expect the cash requirements for funding the pension benefits to be approximately $4.3 million during fiscal 2015, including $2.2 million which was funded during the six months ended June 28, 2015. Note 10. FAIR VALUE MEASUREMENT, FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Fair Value Measurement We utilize the market approach to measure fair value for our financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The fair value hierarchy is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels: Because our derivatives are not listed on an exchange, we value these instruments using a valuation model with pricing inputs that are observable in the market or that can be derived principally from or corroborated by observable market data. Our methodology also incorporates the impact of both ours and the counterparty’s credit standing. 20 Quarter Six months (13 weeks) Ended (26 weeks) Ended (amounts in thousands) June 28, 2015 June 29, 2014 June 28, 2015 June 29, 2014 Service cost $ 297 $ 283 $ 601 $ 565 Interest cost 525 917 1,060 1,833 Expected return on plan assets (33) (1) (67) (1) Amortization of actuarial loss 733 386 1,483 771 Amortization of prior service costs 7 3 13 6 Net periodic pension cost $ 1,529 $ 1,588 $ 3,090 $ 3,174 Level 1 Inputs are quoted prices in active markets for identical assets or liabilities. Level 2 Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data. Level 3 Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 70 of 139 PageID: 1149 Table of Contents The following tables represent our assets and liabilities measured at fair value on a recurring basis as of June 28, 2015 and December 28, 2014 and the basis for that measurement: We believe that the fair values of our current assets and current liabilities (cash, accounts receivable, accounts payable, and other current liabilities) approximate their reported carrying amounts. The carrying values and the estimated fair values of non-current financial assets and liabilities that qualify as financial instruments and are not measured at fair value on a recurring basis at June 28, 2015 and December 28, 2014 are summarized in the following table: Long-term debt is carried at the original offering price, less any payments of principal. The carrying amount of the Senior Secured Credit Facility approximates fair value due to the variable rate nature of its interest at current market rates. The related fair value measurement has generally been classified as Level 2 in the fair value hierarchy. June 28, 2015 (amounts in thousands) Total Fair Value Measurement June 28, 2015 Quoted Prices In Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Foreign currency forward exchange contracts $ 19 $ - $ 19 $ - Total assets $ 19 $ - $ 19 $ - Foreign currency forward exchange contracts $ 37 $ - $ 37 $ - Total liabilities $ 37 $ - $ 37 $ - December 28, 2014 (amounts in thousands) Total Fair Value Measurement December 28, 2014 Quoted Prices In Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Foreign currency forward exchange contracts $ 55 $ - $ 55 $ - Total assets $ 55 $ - $ 55 $ - Foreign currency forward exchange contracts $ 23 $ - $ 23 $ - Total liabilities $ 23 $ - $ 23 $ - June 28, 2015 December 28, 2014 (amounts in thousands) Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Long-term debt (including current maturities and excluding capital leases and factoring)(1) 2013 Senior secured credit facility $ 65,000 $ 65,000 $ 65,000 $ 65,000 (1) The carrying amounts are reported on the Consolidated Balance Sheets under the indicated captions. Nonrecurring Fair Value Measurements In connection with our restructuring plans, we recorded impairment losses in restructuring expense during the six months ended June 29, 2014 of $0.2 million due to the impairment of certain long-lived assets for which the carrying value of those assets may not be recoverable based upon our estimated cash flows. Assets with carrying amounts of $0.2 million were written down to their fair values of $21 thousand. Given that the impairment losses were determined using internal estimates of future cash flows or upon non-identical assets using significant unobservable inputs, we have classified the remaining fair value of long-lived assets as Level 3 in the fair value hierarchy. Refer to Note 11 of the Consolidated Financial Statements. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 71 of 139 PageID: 1150 21 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 72 of 139 PageID: 1151 Table of Contents Financial Instruments and Risk Management We manufacture products in the U.S., Europe, and the Asia Pacific region for both the local marketplace and for export to our foreign subsidiaries. The foreign subsidiaries, in turn, sell these products to customers in their respective geographic areas of operation, generally in local currencies. This method of sale and resale gives rise to the risk of gains or losses as a result of currency exchange rate fluctuations on inter-company receivables and payables. Additionally, the sourcing of product in one currency and the sales of product in a different currency can cause gross margin fluctuations due to changes in currency exchange rates. Our major market risk exposures are movements in foreign currency and interest rates. We have historically not used financial instruments to minimize our exposure to currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries. We have used third-party borrowings in foreign currencies to hedge a portion of our net investments in and cash flows derived from our foreign subsidiaries. A reduction in our third-party foreign currency borrowings will result in an increase of foreign currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries. We enter into forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts are entered into with major financial institutions, thereby minimizing the risk of credit loss. We will consider using interest rate derivatives to manage interest rate risks when there is a disproportionate ratio of floating and fixed-rate debt. We do not hold or issue derivative financial instruments for speculative or trading purposes. We are subject to other foreign exchange market risk exposure resulting from anticipated non-financial instrument foreign currency cash flows which are difficult to reasonably predict, and have therefore not been included in the table of fair values. All listed items described are non-trading. The following table presents the fair values of derivative instruments included within the Consolidated Balance Sheets as of June 28, 2015 and December 28, 2014: The following table represents the amounts affecting the Consolidated Statements of Operations for the three and six months ended June 28, 2015 and June 29, 2014: We selectively purchase currency forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts guarantee a predetermined exchange rate at the time the contract is purchased. This allows us to shift the effect of positive or negative currency fluctuations to a third-party. Transaction gains or 22 June 28, 2015 December 28, 2014 Asset Derivatives Liability Derivatives Asset Derivatives Liability Derivatives (amounts in thousands) Balance Sheet Location Fair Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives not designated as hedging instruments Foreign currency forward exchange contracts Other current assets $ 19 Other current liabilities $ 37 Other current assets $ 55 Other current liabilities $ 23 Total derivatives not designated as hedging instruments 19 37 55 23 Total derivatives $ 19 $ 37 $ 55 $ 23 Quarter Six months (13 weeks) Ended (26 weeks) Ended June 28, 2015 June 29, 2014 June 28, 2015 June 29, 2014 (amounts in thousands) Amount of Gain (Loss) Recognized in Income on Derivatives Location of Gain (Loss) Recognized in Income on Derivatives Amount of Gain (Loss) Recognized in Income on Derivatives Location of Gain (Loss) Recognized in Income on Derivatives Amount of Gain (Loss) Recognized in Income on Derivatives Location of Gain (Loss) Recognized in Income on Derivatives Amount of Gain (Loss) Recognized in Income on Derivatives Location of Gain (Loss) Recognized in Income on Derivatives Derivatives not designated as hedging instruments: Foreign exchange forwards and options $ 564 Other gain (loss), net $ (36) Other gain (loss), net $ 275 Other gain (loss), net $ (66) Other gain (loss), net Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 73 of 139 PageID: 1152 Table of Contents losses resulting from these contracts are recognized at the end of each reporting period. We use the fair value method of accounting, recording realized and unrealized gains and losses on these contracts. These gains and losses are included in Other Gain (Loss), net on our Consolidated Statements of Operations. As of June 28, 2015, we had currency forward exchange contracts with notional amounts totaling approximately $5.4 million. The fair values of the forward exchange contracts were reflected as a $19 thousand asset and a $37 thousand liability included in Other Current Assets and Other Current Liabilities in the accompanying Consolidated Balance Sheets. The contracts are in the various local currencies covering primarily our operations in the U.S. and Western Europe. Historically, we have not purchased currency forward exchange contracts where it is not economically efficient, specifically for our operations in South America and Asia, with the exception of Japan. Note 11. PROVISION FOR RESTRUCTURING Profit Enhancement Plan During September 2014, we initiated the Profit Enhancement Plan focused on increasing profitability through strategic headcount reductions and the streamlining of manufacturing processes. The projects included in this plan are currently underway, with final headcount reductions expected to be recognized by the fourth quarter of 2015. For the six months ended June 28, 2015, the net charge to earnings of $1.7 million represents the current year activity related to the Profit Enhancement Plan. Total costs of the plan are $7.0 million through the end of the second quarter of 2015. Termination benefits are planned to be paid 1 month to 24 months after termination. Global Restructuring Plan (including LEAN) During September 2011, we initiated the Global Restructuring Plan focused on further reducing our overall operating expenses by including manufacturing and other cost reduction initiatives, such as consolidating certain manufacturing facilities and administrative functions to improve efficiencies. This plan was further expanded in the first quarter of 2012 and again during the second quarter of 2012 to include Project LEAN. All projects in our Global Restructuring Plan including Project LEAN have been substantially completed. For the six months ended June 28, 2015, the net release to earnings of $0.1 million represents the current year activity related to the Global Restructuring Plan including Project LEAN. Total costs related to the plan of $60 million have been incurred through June 28, 2015. All terminations for the plan were substantially completed during the fourth quarter of 2014. Termination benefits are planned to be paid 1 month to 24 months after termination. Restructuring expense for the three and six months ended June 28, 2015 and June 29, 2014 was as follows: 23 Quarter Six months (13 weeks) Ended (26 weeks) Ended (amounts in thousands) June 28, 2015 June 29, 2014 June 28, 2015 June 29, 2014 Profit Enhancement Plan Severance and other employee-related charges $ 170 $ - $ 1,516 $ - Other exit costs 116 - 163 - Global Restructuring Plan (including LEAN) Severance and other employee-related charges (13) 272 (102) 1,844 Asset impairments - - - 172 Other exit costs 11 99 11 242 SG&A Restructuring Plan Severance and other employee-related charges - (30) - (25) Total $ 284 $ 341 $ 1,588 $ 2,233 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 74 of 139 PageID: 1153 Table of Contents Restructuring accrual activity for the six months ended June 28, 2015 was as follows: Note 12. CONTINGENCIES We are involved in certain legal and regulatory actions, all of which have arisen in the ordinary course of business, except for the matters described in the following paragraphs. Additionally, management believes that the ultimate resolution of such matters is unlikely to have a material adverse effect on our consolidated results of operations and/or financial condition, except as described below. Matters related to All-Tag Security S.A. and All-Tag Security Americas, Inc. We originally filed suit on May 1, 2001, alleging that the disposable, deactivatable radio frequency security tag manufactured by All-Tag Security S.A. and All-Tag Security Americas, Inc.'s (jointly All-Tag) and sold by Sensormatic Electronics Corporation (Sensormatic) infringed on a U.S. Patent No. 4,876,555 (the 555 Patent) owned by us. On April 22, 2004, the United States District Court for the Eastern District of Pennsylvania (the Pennsylvania Court) granted summary judgment to defendants All-Tag and Sensormatic on the ground that the 555 Patent was invalid for incorrect inventorship. We appealed this decision. On June 20, 2005, we won an appeal when the United States Court of Appeals for the Federal Circuit (the Appellate Court) reversed the grant of summary judgment and remanded the case to the Pennsylvania Court for further proceedings. On January 29, 2007 the case went to trial, and on February 13, 2007, a jury found in favor of the defendants on infringement, the validity of the 555 Patent and the enforceability of the 555 Patent. On June 20, 2008, the Pennsylvania Court entered judgment in favor of defendants based on the jury's infringement and enforceability findings. On February 10, 2009, the Pennsylvania Court granted defendants' motions for attorneys' fees designating the case as an exceptional case and awarding an unspecified portion of defendants' attorneys' fees under 35 U.S.C. § 285. Defendants sought approximately $5.7 million plus interest. We recognized this amount during the fourth fiscal quarter ended December 28, 2008 in litigation settlements on the Consolidated Statement of Operations. On March 6, 2009, we filed objections to the defendants' bill of attorneys' fees. On November 2, 2011, the Pennsylvania Court finalized the decision to order us to pay the attorneys' fees and costs of the defendants in the amount of $6.6 million. The additional amount of $0.9 million was recorded in the fourth quarter ended December 25, 2011 in the Consolidated Statement of Operations. On November 15, 2011, we filed objections to and appealed the Pennsylvania Court's award of attorneys' fees to the defendants. Following the filing of briefs and the completion of oral arguments, the Appellate Court reversed the decision of the Pennsylvania Court on March 25, 2013. As a result of the final decision, we reversed the All-Tag reserve of $6.6 million in the first quarter ended March 31, 2013. The Appellate Court decision was appealed by All-Tag and Sensormatic to the U.S. Supreme Court. While the appeal was still pending, the U.S. Supreme Court agreed to hear two cases (Octane Fitness, LLC v. ICON Health & Fitness, Inc. and Highmark, Inc. v. Allcare Health Management Systems) arguing that the governing standard for finding a case exceptional under 35 U.S.C. § 285 was too rigid. On December 30, 2013, based on the Supreme Court’s willingness to re-evaluate the exceptional case standard, defendants requested that the Supreme Court also hear our case. On April 29, 2014, the Supreme Court issued its rulings in Octane Fitness and Highmark and relaxed the standard for determining when a case is exceptional. As a result, on May 5, 2014, the Supreme Court vacated the judgment of the Appellate Court in our case 24 (amounts in thousands) Accrual at Beginning of Year Charged to Earnings Charge Reversed to Earnings Cash Payments Exchange Rate Changes Accrual at June 28, 2015 Profit Enhancement Plan Severance and other employee-related charges $ 4,082 $ 2,206 $ (690) $ (2,878) $ (264) $ 2,456 Other exit costs(1) - 163 - (163) - - Global Restructuring Plan (including LEAN) Severance and other employee-related charges 2,050 61 (163) (1,232) (153) 563 Other exit costs (2) 15 11 - (11) - 15 SG&A Restructuring Plan Severance and other employee-related charges 108 - - (45) (8) 55 Total $ 6,255 $ 2,441 $ (853) $ (4,329) $ (425) $ 3,089 (1) During the first six months of 2015, there was a net charge to earnings of $0.2 million primarily due to restructuring agent costs and legal costs in connection with the restructuring plan. (2) During the first six months of 2015, there was a net charge to earnings of $11 thousand primarily due to lease costs in connection with the restructuring plan. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 75 of 139 PageID: 1154 Table of Contents (reinstating the Pennsylvania Court’s exceptional case finding) and sent the case back to the Appellate Court for further consideration in light of the new standards set forth in Octane Fitness and Highmark. On June 10, 2014, defendants filed a motion in the Appellate Court asking that the Appellate Court either affirm the Pennsylvania Court’s exceptional case finding outright or send the case back to the Pennsylvania Court so that it could consider the case again under the new exceptional case standard. On June 23, 2014, we filed our opposition to the motion to remand and moved the Appellate Court to once again reverse the Pennsylvania Court’s exceptional case finding. On October 14, 2014, the Appellate Court remanded the case to the Pennsylvania Court for further proceedings. We do not believe it is probable that the case will ultimately be decided against us and therefore there is no amount reserved for this matter as of June 28, 2015. Matter related to Universal Surveillance Corporation EAS RF Anti-trust Litigation Universal Surveillance Corporation (USS) filed a complaint against us in the United States Federal District Court of the Northern District of Ohio (the Ohio Court) on August 19, 2011. USS claims that, in connection with our competition in the electronic article surveillance market, we violated the federal antitrust laws (Sherman Act and Clayton Act) and state antitrust laws (Ohio Valentine Act). USS also claims that we violated the federal Lanham Act, the Ohio Deceptive Trade Practices Act, and the Ohio Trade Secrets Act, and engaged in conduct that allegedly disparaged USS and tortiously interfered with USS's business relationships and contracts. USS is seeking injunctive relief as well as approximately $65 million in claimed damages for alleged lost profits, plus treble damages and attorney's fees under the Sherman Act. We have neither recorded a reserve for this matter nor do we believe that there is a reasonable possibility that a loss has been incurred. Our legal fees related to the USS matter were being paid pursuant to our coverage under insurance policies with American Home Assurance Company and National Union Fire Insurance Company of Pittsburgh, Pa. (AIG). On July 9, 2014, AIG filed a complaint against us in the Superior Court of New Jersey (the New Jersey Court) claiming that AIG has no duty to defend or indemnify us under the insurance policies as they relate to the USS matter. AIG also claims reimbursement of legal fees, costs, and expenses previously paid by AIG on our behalf that are not covered by insurance as well as our reimbursement of AIG’s legal costs related to this matter. AIG continued to pay on our behalf most of our legal fees, costs, and expenses related to this matter. In May 2015, we engaged in formal discussions with AIG regarding the possibility of reaching a settlement of this matter in advance of the scheduled hearing in July 2015. In early June, we discussed the possibility of settling this matter with our Board of Directors and, on June 3, 2015, we obtained their approval to make a settlement offer. On June 26, 2015, we entered into a settlement with AIG. Pursuant to the settlement, we paid approximately $9.0 million to AIG in exchange for full and final resolution of this matter between the parties. Further pursuant to this settlement, each party will be responsible for a portion of the legal fees, costs, and expenses at issue in the litigation, and AIG is released from any further obligation with respect to future defense costs and indemnity in connection with the USS litigation. Matter related to Zucker Derivative Suit On June 24, 2014, a complaint was filed by Lawrence Zucker in a shareholder derivative suit on behalf of himself, others who are similarly situated and derivatively on behalf of us, of which we are also a nominal defendant, against our Board of Directors (the Board of Directors) in the Court of Common Pleas of Allegheny County, Pennsylvania, under the caption Zucker v. Checkpoint Systems, Inc., et al., No. GD-14-11035. The plaintiff generally asserts claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment against our Board of Directors for allegedly exceeding its authority under our Amended and Restated 2004 Omnibus Incentive Compensation Plan (the Plan). The plaintiff seeks, in addition to other relief, (i) a declaration that certain of the awards granted under the Plan in 2013 were ultra vires; (ii) rescission of awards allegedly granted in violation of the Plan; (iii) monetary damages; (iv) equitable or injunctive relief; (v) direction by the court that we reform our corporate governance and internal procedures and (vi) an award of attorneys’ fees and other fees and costs. The outcome of this matter cannot be predicted with any certainty. We intend to defend vigorously our interests in this matter. Note 13. BUSINESS SEGMENTS We report our financial results in three segments: Merchandise Availability Solutions (MAS), Apparel Labeling Solutions (ALS), and Retail Merchandising Solutions (RMS). 25 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 76 of 139 PageID: 1155 Table of Contents Our MAS segment, which is focused on loss prevention and Merchandise Visibility™ (RFID), includes EAS systems, EAS consumables, Alpha® high-theft solutions, RFID systems and software and non-U.S. and Canada-based CheckView®. ALS includes the results of our radio frequency identification (RFID) labels business, coupled with our data management platform and network of service bureaus that manage the printing of variable information on apparel labels and tags. Our RMS segment includes hand-held labeling applicators and tags, promotional displays, and customer queuing systems. Note 14. SUBSEQUENT EVENTS Share Repurchase Program In July 2015, our Board of Directors approved a stock repurchase program that authorized the repurchase of up to $30 million of our common stock. The repurchase program will be funded using our available cash and is expected to be executed over the next two years. We are authorized to repurchase from time to time shares of our outstanding common stock on the open market or in privately negotiated transactions. The timing and amount of stock repurchases, and the prices at which such purchases may be made, will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. The share repurchase program may be suspended, modified or discontinued at any time and we have no obligation to repurchase any amount of our common stock under the program. 26 Quarter Six months (13 weeks) Ended (26 weeks) Ended (amounts in thousands) June 28, 2015 June 29, 2014 June 28, 2015 June 29, 2014 Business segment net revenue: Merchandise Availability Solutions $ 91,327 (1) $ 111,478 (2) $ 172,853 (3) $ 204,942 (4) Apparel Labeling Solutions 46,942 47,659 84,127 89,740 Retail Merchandising Solutions 9,281 11,788 19,112 23,649 Total revenues $ 147,550 $ 170,925 $ 276,092 $ 318,331 Business segment gross profit: Merchandise Availability Solutions $ 43,122 $ 51,262 $ 84,407 $ 95,204 Apparel Labeling Solutions 14,843 17,251 26,391 31,336 Retail Merchandising Solutions 3,532 3,994 7,236 8,253 Total gross profit 61,497 72,507 118,034 134,793 Operating expenses 65,985 (5) 59,520 (6) 122,856 (7) 119,640 (8) Interest expense, net (758) (914) (1,469) (1,903) Other gain (loss), net (859) (442) (488) (528) (Loss) earnings before income taxes $ (6,105) $ 11,631 $ (6,779) $ 12,722 (1) Includes net revenue from EAS systems, Alpha® and EAS consumables of $33.9 million, $26.1 million, and $24.3 million, respectively, representing more than 10% of total revenue. (2) Includes net revenue from EAS systems, Alpha® and EAS consumables of $46.4 million, $30.7 million, and $28.3 million, respectively, representing more than 10% of total revenue. (3) Includes net revenue from EAS systems, Alpha® and EAS consumables of $65.2 million, $47.2 million, and $46.4 million, respectively, representing more than 10% of total revenue. (4) Includes net revenue from EAS systems, Alpha® and EAS consumables of $86.5 million, $55.5 million and $52.7 million, respectively, representing more than 10% of total revenue. (5) Includes a $0.3 million restructuring charge, a $9.0 million litigation settlement, and a $41 thousand acquisition charge. (6) Includes a $0.3 million restructuring charge. (7) Includes a $1.6 million restructuring charge, a $9.0 million litigation settlement, a $0.8 million management transition charge, and a $0.1 million acquisition charge. (8) Includes a $2.2 million restructuring charge. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 77 of 139 PageID: 1156 Table of Contents Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information Relating to Forward-Looking Statements This report includes information that constitutes forward-looking statements. Forward-looking statements often address our expected future business and financial performance, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” or “will.” By their nature, forward-looking statements address matters that are subject to risks and uncertainties. Any such forward-looking statements may involve risk and uncertainties that could cause actual results to differ materially from any future results encompassed within the forward- looking statements. Factors that could cause or contribute to such differences include: the impact upon operations of accounting policies review and improvement; the impact upon operations of legal and compliance matters or internal controls review, improvement and remediation, including the detection of wrongdoing, improper activities, or circumvention of internal controls; our ability to successfully implement our strategic plan; our ability to manage growth effectively including our ability to integrate acquisitions and to achieve our financial and operational goals for our acquisitions; changes in economic or international business conditions; foreign currency exchange rate and interest rate fluctuations; lower than anticipated demand by retailers and other customers for our products; slower commitments of retail customers to chain-wide installations and/or source tagging adoption or expansion; possible increases in per unit product manufacturing costs due to less than full utilization of manufacturing capacity as a result of slowing economic conditions or other factors; our ability to provide and market innovative and cost-effective products; the development of new competitive technologies; our ability to maintain our intellectual property; competitive pricing pressures causing profit erosion; the availability and pricing of component parts and raw materials; possible increases in the payment time for receivables as a result of economic conditions or other market factors; our ability to comply with covenants and other requirements of our debt agreements; changes in regulations or standards applicable to our products; our ability to successfully implement global cost reductions in operating expenses including, field service, sales, and general and administrative expense, and our manufacturing and supply chain operations without significantly impacting revenue and profits; our ability to maintain effective internal control over financial reporting; risks generally associated with information systems upgrades and our company-wide implementation of an enterprise resource planning (ERP) system and additional matters disclosed in our Securities and Exchange Commission filings. For a more detailed discussion of these and other factors, see “Risk Factors” and “Management’s Discussion and Analysis of Results of Operations and Financial Condition” in our 2014 Form 10-K, filed on March 5, 2015 with the Securities and Exchange Commission. The forward-looking statements included in this document are made only as of the date of this document, and we undertake no obligation to update these statements to reflect subsequent events or circumstances, other than as may be required by law. Overview We are a leading global manufacturer and provider of technology-driven, loss prevention, inventory management and labeling solutions to the retail and apparel industry. We provide integrated inventory management solutions to brand, track, and secure goods for retailers and consumer product manufacturers worldwide. We are a leading provider of, and earn revenues primarily from the sale of Merchandise Availability Solutions, Apparel Labeling Solutions, and Retail Merchandising Solutions. Merchandise Availability Solutions consists of electronic article surveillance (EAS) systems, EAS consumables, Alpha® solutions, and radio frequency identification (RFID) systems, software and services. Apparel Labeling Solutions includes our web-based data management service and network of service bureaus to manage the printing of variable information on price and promotional tickets, graphic tags and labels, adhesive labels, fabric and woven tags and labels, apparel branding tags, fully integrated tags and labels and RFID tags and labels. Retail Merchandising Solutions consists of hand-held labeling systems (HLS) and retail display systems (RDS). Applications of these products include primarily retail security, asset and merchandise visibility, automatic identification, and pricing and promotional labels and signage. Operating directly in 27 countries, we have a global network of subsidiaries and distributors, and provide customer service and technical support around the world. Our results are heavily dependent upon sales to the retail market. Our customers are dependent upon retail sales, which are susceptible to economic cycles and seasonal fluctuations. Furthermore, as approximately two-thirds of our revenues and operations are located outside the U.S., fluctuations in foreign currency exchange rates have a significant impact on reported results. We report our financial results in three segments: Merchandise Availability Solutions (MAS), Apparel Labeling Solutions (ALS), and Retail Merchandising Solutions (RMS). 27 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 78 of 139 PageID: 1157 Table of Contents Our MAS segment, which is focused on loss prevention and Merchandise Visibility™ (RFID), includes EAS systems, EAS consumables, Alpha® high-theft solutions, RFID systems and software and non-U.S. and Canada-based CheckView®. ALS includes our RFID labels business, coupled with our data management platform and network of service bureaus that manage the printing of variable information on apparel labels and tags. Our RMS segment includes hand-held labeling applicators and tags, promotional displays, and customer queuing systems. The revenues and gross profit for each of the segments are included in Note 13 of the Consolidated Financial Statements. Our business strategy is to be a provider of inventory management solutions that give retailers ready insight into the on-shelf availability of merchandise in their stores. Additionally, our business strategy is focusing on improving revenues and profitability, reducing costs, and improving working capital management. In support of this strategy, we provide to retailers, manufacturers and distributors our EAS systems and consumables, Alpha® high-theft solutions, Merchandise Visibility™ (RFID) products and services, and METO® hand-held labeling products. In Apparel Labeling, we are focusing on those products that support our strategy and leveraging our competitive advantage in the transfer and printing of variable data onto apparel labels. We will also consider acquisitions that are aligned with our strategic plan. Our solutions help customers identify, track, and protect their assets. We believe that innovative new products and expanded product offerings will provide opportunities to enhance the value of legacy products while expanding the product base in existing customer accounts. We intend to maintain our leadership position in key hard goods markets (supermarkets, drug stores, mass merchandisers, and music and electronics retailers), expand our market share in soft goods markets (specifically apparel), and maximize our position in under-penetrated markets. We also intend to continue to capitalize on our installed base with large global retailers to promote source tagging. Furthermore, we plan to leverage our knowledge of radio-frequency (RF) and identification technologies to assist retailers and manufacturers in realizing the benefits of RFID. To achieve these objectives, we expect to continuously enhance and expand our technologies and products, and provide superior service to our customers. We intend to offer customers a wide variety of integrated shrink management solutions, apparel labeling, and retail merchandising solutions characterized by superior quality, ease-of-use, and good value, with enhanced merchandising opportunities. In 2014, we reiterated our commitment to this strategy and our focus on innovation and internally-developed technologies with the appointment of a Senior Vice President of Innovation. We are building a corporate development and mergers and acquisitions (M&A) team to complement our internally-developed innovation with targeted strategic acquisitions. Our Apparel Labeling business was assembled over the past few years through numerous acquisitions to support our penetration into the apparel industry and to support the growth of our RFID strategy. We have made changes to right-size the Apparel Labeling footprint in order to profitably provide on-time, high quality products to our apparel customers so that retailers can effectively merchandise their products. Simultaneously, we reduced our Apparel Labeling product offerings to only those that are also necessary to support our RFID strategy. During September 2014, we initiated the Profit Enhancement Plan focused on increasing profitability through strategic headcount reductions and the streamlining of manufacturing processes. Total costs of the plan through June 28, 2015 are $7 million. Total annual savings of the Profit Enhancement Plan are expected to approximate $8 million, with an expected $6 million in savings to be realized in 2015. Future financial results will be dependent upon our ability to successfully implement our strategic focus, expand the functionality of our existing product lines, develop or acquire new products for sale through our global distribution channels, convert new large chain retailers to our solutions for shrink management, merchandise visibility and apparel labeling, and reduce the cost of our products and infrastructure to respond to competitive pricing pressures. We believe that our base of recurring revenue (revenues from the sale of consumables into the installed base of security systems, apparel tags and labels, hand-held labeling tools and services from maintenance), repeat customer business, the anticipated effect of our restructuring activities, our existing cash balances, and our borrowing capacity should provide us with adequate cash flow and liquidity to execute our strategic plan. Critical Accounting Policies and Estimates We have presented our Critical Accounting Policies and Estimates in Part II - Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 28, 2014 (the "2014 Annual Report"). There have been no material changes to our Critical Accounting Policies and Estimates set forth in our 2014 Annual Report. 28 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 79 of 139 PageID: 1158 Table of Contents Results of Operations All comparisons are with the prior year period, unless otherwise stated. Net Revenues Our unit volume is driven by product offerings, number of direct sales personnel, recurring sales and, to some extent, pricing. Our base of installed systems provides a source of recurring revenues from the sale of disposable tags, labels, and service revenues. Our customers are substantially dependent on retail sales, which are seasonal, subject to significant fluctuations, and difficult to predict. In addition, current economic trends have particularly affected our customers, and consequently our net revenues have been, and may continue to be impacted in the future. Historically, we have experienced lower sales in the first half of each year. Analysis of Statement of Operations Thirteen Weeks Ended June 28, 2015 Compared to Thirteen Weeks Ended June 29, 2014 The following table presents for the periods indicated certain items in the Consolidated Statement of Operations as a percentage of total revenues and the percentage change in dollar amounts of such items compared to the indicated prior period: 29 Percentage of Total Revenue Percentage Change In Dollar Amount Quarter (13 weeks) ended June 28, 2015 (Fiscal 2015) June 29, 2014 (Fiscal 2014) Fiscal 2015 vs. Fiscal 2014 Net revenues Merchandise Availability Solutions 61.9 % 65.2 % (18.1)% Apparel Labeling Solutions 31.8 27.9 (1.5) Retail Merchandising Solutions 6.3 6.9 (21.3) Net revenues 100.0 100.0 (13.7) Cost of revenues 58.3 57.6 (12.6) Gross profit 41.7 42.4 (15.2) Selling, general, and administrative expenses 35.2 32.4 (6.3) Research and development 3.3 2.2 29.2 Restructuring expenses 0.2 0.2 (16.7) Litigation settlement 6.1 - N/A Acquisition costs - - N/A Other operating income (0.1) - N/A Operating (loss) income (3.0) 7.6 (134.6) Interest income 0.2 0.2 (18.6) Interest expense 0.7 0.7 (17.4) Other gain (loss), net (0.6) (0.3) (94.3) (Loss) earnings before income taxes (4.1) 6.8 (152.5) Income tax (benefit) expense (0.4) 1.0 (139.3) Net (loss) earnings (3.7)% 5.8 % (154.9)% Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 80 of 139 PageID: 1159 Table of Contents Net Revenues Revenues for the second quarter of 2015 compared to the second quarter of 2014 decreased $23.3 million, or 13.7%, to $147.6 million from $170.9 million. Foreign currency translation had a negative impact on revenues of approximately $14.6 million, or 8.5%, in the second quarter of 2015 as compared to the second quarter of 2014. Merchandise Availability Solutions Merchandise Availability Solutions (MAS) revenues decreased $20.2 million, or 18.1%, during the second quarter of 2015 compared to the second quarter of 2014. After considering the foreign currency translation negative impact of $10.0 million, or 9.0%, revenues decreased $10.2 million primarily due to decreases in EAS Systems, Alpha®, and EAS Consumables, partially offset by increases in Merchandise Visibility™ (RFID). EAS Systems revenues decreased in the second quarter of 2015 as compared to the second quarter of 2014, primarily due to the sunset of some chain-wide projects in North America, Europe, and Asia. In July 2015, we began a new EAS hardware roll-out with a major Asian retailer. We expect 2015 roll-outs to improve our year-over-year comparison in the second half of 2015. Alpha® revenues decreased in the second quarter of 2015 as compared to the second quarter of 2014, primarily due to weaker sales in the U.S. and to a lesser extent decreases in sales in Europe, Asia Pacific, and International Americas. This is due to strong sales in 2014 without comparable levels of demand in 2015. We expect our global Alpha® revenues in 2015 to remain constant despite significant competition entering the market. Growth is expected to be hindered due to lack of new customer build-ups which occurred in previous years and increased competitive pressure. EAS Consumables revenues decreased in the second quarter of 2015 as compared to the second quarter of 2014, primarily due to weaker EAS labels sales in the U.S. and to a lesser extent decreases in sales in Europe and Asia Pacific, offset by increases in Hard Tag @ Source™ revenues in the U.S. We continue to pursue selective growth opportunities by working with customers, vendors, and expanding to new categories. Merchandise Visibility™ (RFID) revenues increased in the second quarter of 2015 as compared to the second quarter of 2014 primarily due to a substantial roll-out with RFID enabled technology in Europe in the second quarter of 2015, with less significant roll-outs in the second quarter of 2014. We continue to expand the number of retailers piloting with RFID-based inventory management solutions. We remain confident in our ability to grow this business as our solutions continue to deliver strong return on investment results to our customers. The rate of adoption remains under pressure due to financial challenges at key retail customers. Apparel Labeling Solutions Apparel Labeling Solutions (ALS) revenues decreased $0.6 million, or 1.5%, in the second quarter of 2015 as compared to the second quarter of 2014. After considering the foreign currency translation negative impact of $2.5 million, the increase of $1.9 million in ALS revenues was primarily due to increases in Europe resulting from higher demand for RFID labels. RFID labels grew more than 20% year-over-year due to new customer roll-outs with RFID enabled technology, while our legacy ticket and tag business was effectively flat despite significant competitive pricing pressures in certain geographies. We expect to see some modest growth during the remainder of 2015 in our Apparel Labeling Solutions business as we continue to build on new business developments in both our core and RFID labels businesses. 30 (amounts in millions) Dollar Amount Change Percentage Change Quarter (13 weeks) ended June 28, 2015 (Fiscal 2015) June 29, 2014 (Fiscal 2014) Fiscal 2015 vs. Fiscal 2014 Fiscal 2015 vs. Fiscal 2014 Net revenues: Merchandise Availability Solutions $ 91.3 $ 111.5 $ (20.2) (18.1)% Apparel Labeling Solutions 47.0 47.6 (0.6) (1.5) Retail Merchandising Solutions 9.3 11.8 (2.5) (21.3) Net revenues $ 147.6 $ 170.9 $ (23.3) (13.7)% Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 81 of 139 PageID: 1160 Table of Contents Retail Merchandising Solutions Retail Merchandising Solutions (RMS) revenues decreased $2.5 million, or 21.3%, in the second quarter of 2015 as compared to the second quarter of 2014. After considering the foreign currency translation negative impact of $2.1 million, the decrease of $0.4 million in RMS reflects the sunset of a major project in North America and softer retail display sales in Asia. We anticipate Hand-held Labeling Solutions (HLS) will face difficult revenue trends due to the continued shifts in market demand for HLS products. Gross Profit During the second quarter of 2015, gross profit decreased $11.0 million, or 15.2%, to $61.5 million from $72.5 million in the second quarter of 2014. The negative impact of foreign currency translation on gross profit was approximately $3.8 million, or 5.2%, in the second quarter of 2015 as compared to the second quarter of 2014. Gross profit, as a percentage of net revenues, decreased to 41.7% in the second quarter of 2015 from 42.4% in the second quarter of 2014. Merchandise Availability Solutions Merchandise Availability Solutions gross profit as a percentage of Merchandise Availability Solutions revenues increased to 47.2% in the second quarter of 2015 from 46.0% in the second quarter of 2014. The increase in the gross profit percentage of Merchandise Availability Solutions was due primarily to higher margins in EAS Systems, Alpha®, and Merchandise Visibility (RFID) due primarily to our operational initiatives in field service, professional services, pricing and supply chain optimization. The margin improvement was partially offset by the stronger U.S. Dollar eroding overall supply chain margins, as well as unfavorable manufacturing variances in our EAS Consumables factories from lower production volumes and higher input costs. Apparel Labeling Solutions Apparel Labeling Solutions gross profit as a percentage of Apparel Labeling Solutions revenues decreased to 31.6% in the second quarter of 2015 from 36.2% in the second quarter of 2014. The decrease in the gross profit percentage of Apparel Labeling Solutions is mainly due to the weaker Euro, accelerated depreciation on machinery in Asia that has been removed from production, under-absorption due to lower production volumes and competitive pricing pressures in certain geographies due to market overcapacity. Retail Merchandising Solutions The Retail Merchandising Solutions gross profit as a percentage of Retail Merchandising Solutions revenues increased to 38.1% in the second quarter of 2015 from 33.9% in the second quarter of 2014. The increase in Retail Merchandising Solutions gross profit percentage was primarily due to our margin improvement initiatives. Selling, General, and Administrative Expenses Selling, general, and administrative (SG&A) expenses decreased $3.5 million, or 6.3%, during the second quarter of 2015 compared to the second quarter of 2014. Foreign currency had a favorable impact on the 2015 expense of $4.8 million. After considering the foreign currency translation impact, SG&A expenses increased $1.3 million. The benefits of our cost reduction initiatives were more than offset by incremental spending increases related to our strategic initiatives. Research and Development Expenses Research and development (R&D) expenses were $4.9 million, or 3.3% of revenues, in the second quarter of 2015 compared to the $3.8 million, or 2.2% of revenues in the second quarter of 2014, as we have increased our investment in the development of new products and solutions. Restructuring Expenses Restructuring expenses were $0.3 million, or 0.2% of revenues in the second quarter of 2015 compared to $0.3 million or 0.2% of revenues in the second quarter of 2014. The decrease is due to the wind-down of the Global Restructuring Plan, including Project LEAN partially offset by additional expense incurred related to the initiation of our Profit Enhancement Plan in September 2014. 31 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 82 of 139 PageID: 1161 Table of Contents Litigation Settlement During the second quarter of 2015, we incurred a litigation settlement expense of $9.0 million relating to a litigation settlement entered into by us on June 26, 2015 with AIG related to its claims for reimbursement of legal fees, costs, and expenses previously paid by AIG on our behalf for the defense of the USS matter as described in Note 12 to the Consolidated Financial Statements. Other Operating Income Other operating income for the second quarter of 2015 increased $0.1 million from the comparable quarter in 2014. The increase is due to the sale of customer-related receivables associated with the renewal and extension of sales-type lease arrangements which occurred in March 2015. A portion of the proceeds from the legal sale, as described in Note 4 to the Consolidated Financial Statements, was accounted for as a financing arrangement as of the end of the first quarter of 2015 until the reacquisition of the receivables was completed in the second quarter of 2015. There were no sales of customer-related receivables in the second quarter of 2014. Interest Income and Interest Expense Interest income for the second quarter of 2015 was $0.2 million which is comparable to the $0.3 million recognized in the second quarter of 2014. Interest expense for the second quarter of 2015 decreased $0.2 million from the comparable quarter in 2014. The decrease in interest expense was primarily due to significant reductions in the outstanding balance on our Senior Secured Credit Facility as well as a reduction in non-cash imputed interest expense on our Financing Liability resulting from the weakening of the Euro against the US Dollar. Other Gain (Loss), net Other gain (loss), net was a net loss of $0.9 million in the second quarter of 2015 compared to a net loss of $0.4 million in the second quarter of 2014. The change was primarily due to a $0.9 million foreign exchange loss during the second quarter of 2015 compared to a $0.3 million foreign exchange loss in the second quarter of 2014. The increased foreign exchange loss is primarily attributed to U.S. Dollar and Euro fluctuations versus currencies in emerging markets where hedging is either impossible or impractical. Income Taxes The effective tax rate for the second quarter of 2015 was 11.4% as compared to 15.3% for the second quarter of 2014. The change in the effective tax rate was due to the mix of income between subsidiaries and increased losses in entities with valuation allowances for which no tax benefit is received. Net (Loss) Earnings Net loss was $5.4 million, or $(0.13) per diluted share, during the second quarter of 2015 compared to net earnings of $9.9 million, or $0.23 per diluted share, during the second quarter of 2014. The weighted-average number of shares used in the diluted earnings per share computation was 43.0 million and 42.3 million for the second quarters of 2015 and 2014, respectively. 32 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 83 of 139 PageID: 1162 Table of Contents Twenty-six Weeks Ended June 28, 2015 Compared to Twenty-six Weeks Ended June 29, 2014 The following table presents for the periods indicated certain items in the Consolidated Statement of Operations as a percentage of total revenues and the percentage change in dollar amounts of such items compared to the indicated prior period: Net Revenues Revenues for the first six months of 2015 compared to the first six months of 2014 decreased $42.2 million, or 13.3%, to $276.1 million from $318.3 million. Foreign currency translation had a negative impact on revenues of approximately $26.1 million, or 8.2%, in the first six months of 2015 as compared to the first six months of 2014. 33 Percentage of Net Revenues Percentage Change In Dollar Amount Six months (26 weeks) ended June 28, 2015 (Fiscal 2015) June 29, 2014 (Fiscal 2014) Fiscal 2015 vs. Fiscal 2014 Net revenues Merchandise Availability Solutions 62.6 % 64.4 % (15.7)% Apparel Labeling Solutions 30.5 28.2 (6.3) Retail Merchandising Solutions 6.9 7.4 (19.2) Net revenues 100.0 100.0 (13.3) Cost of revenues 57.2 57.7 (13.9) Gross profit 42.8 42.3 (12.4) Selling, general, and administrative expenses 37.4 34.4 (5.9) Research and development 3.4 2.4 23.0 Restructuring expenses 0.6 0.7 (28.9) Litigation settlement 3.3 - N/A Acquisition costs - - N/A Other operating income (0.2) - N/A Operating (loss) income (1.7) 4.8 (131.8) Interest income 0.2 0.2 (16.8) Interest expense 0.7 0.8 (21.5) Other gain (loss), net (0.3) (0.2) 7.6 (Loss) earnings before income taxes (2.5) 4.0 (153.3) Income tax (benefit) expense (0.3) 0.9 (120.9) Net (loss) earnings (2.2)% 3.1 % (163.3)% (amounts in millions) Dollar Amount Change Percentage Change Six months (26 weeks) ended June 28, 2015 (Fiscal 2015) June 29, 2014 (Fiscal 2014) Fiscal 2015 vs. Fiscal 2014 Fiscal 2015 vs. Fiscal 2014 Net revenues: Merchandise Availability Solutions $ 172.9 $ 205.0 $ (32.1) (15.7)% Apparel Labeling Solutions 84.1 89.7 (5.6) (6.3) Retail Merchandising Solutions 19.1 23.6 (4.5) (19.2) Net revenues $ 276.1 $ 318.3 $ (42.2) (13.3)% Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 84 of 139 PageID: 1163 Table of Contents Merchandise Availability Solutions Merchandise Availability Solutions (MAS) revenues decreased $32.1 million, or 15.7%, during the first six months of 2015 compared to the first six months of 2014. After considering the foreign currency translation negative impact of $18.0 million, revenues decreased $14.1 million, or 6.9%, primarily due to decreases in EAS systems and Alpha®. There were also less significant decreases in EAS consumables and CheckView®. These decreases were partially offset by an increase in Merchandise Visibility™ (RFID). EAS systems revenues decreased in the first six months of 2015 as compared to the first six months of 2014, primarily due to large roll-outs in the U.S., Europe, and Asia that were ongoing in the first six months of 2014 without comparable projects for 2015. In July 2015, we began a new EAS hardware roll-out with a major Asian retailer. We expect 2015 roll-outs to improve our year-over-year comparison in the second half of 2015. Merchandise Visibility (RFID) revenues increased in the first six months of 2015 as compared to the first six months of 2014 as the business continues to gain traction with installations at several major retailers in the Europe. We continue to expand the number of retailers piloting with RFID-based inventory management solutions. We remain confident in our ability to grow this business as our solutions continue to deliver strong return on investment results to our customers. The rate of adoption remains under pressure due to financial challenges at key retail customers. Alpha® revenues decreased in the first six months of 2015 as compared to the first six months of 2014, primarily due to strong sales in the U.S. and Asia with key customers in 2014 without comparable levels of demand in 2015. The decrease was partially offset by increases in Europe and International Americas primarily due to larger orders completed in the first six months of 2015 without comparable orders in 2014. We expect growth to be hindered due to lack of new customer build-ups which occurred in previous years and increased competitive pressure. EAS consumables revenues decreased in the first six months of 2015 as compared to the first six months of 2014, primarily due to decreased EAS label revenues in the U.S. and Europe. This decrease was partially offset by increases in Hard Tag @ Source™ revenues in the U.S. We continue to pursue selective growth opportunities by working with customers, vendors, and expanding to new categories. We now only provide CheckView® CCTV services in Asia in connection with EAS systems when our customers require combined security solutions. Due to our decreased focus on this business, our CheckView® Asia revenues decreased in the first six months of 2015 as compared to the first six months of 2014. This decline was mostly attributable to decreases in revenue in the first quarter of 2015 compared to the first quarter of 2014. Apparel Labeling Solutions Apparel Labeling Solutions (ALS) revenues decreased $5.6 million, or 6.3%, in the first six months of 2015 as compared to the first six months of 2014. After considering the foreign currency translation negative impact of $4.0 million, the revenues decreased $1.6 million, or 1.8%, driven by declines in sales volumes in Europe due to the impact of some market share loss and lower volumes with some key retailers. We expect to see some modest growth during the remainder of 2015 in our Apparel Labeling Solutions business as we continue to build on new business developments in both our core and RFID labels businesses. Retail Merchandising Solutions Retail Merchandising Solutions (RMS) revenues decreased $4.5 million, or 19.2%, in the first six months of 2015 as compared to the first six months of 2014. After considering the foreign currency translation negative impact of $4.0 million, the revenues decreased $0.5 million, or 2.2%, due to decreases in Hand-held Labeling Solutions (HLS) revenues reflecting the sunset of a major project in the U.S. partially offset by increases in Retail Display Solutions revenues. We anticipate HLS will continue to face difficult revenue trends due to the on-going shifts in market demand for HLS products. Gross Profit During the first six months of 2015, gross profit decreased $16.8 million, or 12.4%, to $118.0 million from $134.8 million in the first six months of 2014. Foreign currency translation had a negative impact on gross profit of approximately $7.0 million, or 5.2%, in the first six months of 2015 as compared to the first six months of 2014. Gross profit, as a percentage of net revenues, increased to 42.8% in the first six months of 2015 from 42.3% in the first six months of 2014. 34 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 85 of 139 PageID: 1164 Table of Contents Merchandise Availability Solutions Merchandise Availability Solutions gross profit as a percentage of Merchandise Availability Solutions revenues increased to 48.8% in the first six months of 2015 from 46.5% in the first six months of 2014. The increase in the gross profit percentage of Merchandise Availability Solutions was due primarily to higher margins in EAS Systems, Alpha®, and Merchandise Visibility (RFID) due primarily to our operational initiatives in field service, professional services, pricing and supply chain optimization. Alpha® margins increased due to manufacturing cost savings, margin enhancement initiatives and favorable mix of sales towards higher margin products. Merchandise Visibility margins also increased as revenue growth drove strong utilization of our professional services team. The margin improvement was partially offset by the stronger U.S. Dollar eroding overall supply chain margins, as well as unfavorable manufacturing variances in our EAS Consumables factories from lower production volumes and higher input costs. Apparel Labeling Solutions Apparel Labeling Solutions gross profit as a percentage of Apparel Labeling Solutions revenues decreased to 31.4% in the first six months of 2015, from 34.9% in the first six months of 2014. The decrease in the gross profit percentage of Apparel Labeling Solutions is mainly due to the weaker Euro, accelerated depreciation on machinery in Asia that has been removed from production, overhead under-absorption due to lower production volumes and competitive pricing pressures in certain geographies due to market overcapacity. Retail Merchandising Solutions Retail Merchandising Solutions gross profit as a percentage of Retail Merchandising Solutions revenues increased to 37.9% in the first six months of 2015 from 34.9% in the first six months of 2014. The increase in Retail Merchandising Solutions gross profit percentage was primarily due to improvements in manufacturing efficiencies in the first six months of 2015 and an unfavorable inventory reserve adjustment recorded in the first six months of 2014 without a comparable adjustment in the first six months of 2015. Selling, General, and Administrative Expenses Selling, general, and administrative (SG&A) expenses decreased $6.5 million, or 5.9%, during the first six months of 2015 compared to the first six months of 2014. Foreign currency had a favorable impact on the 2015 expense of $8.7 million. After considering the foreign currency translation impact, SG&A expenses increased $2.2 million primarily due to management transition costs of $0.8 million incurred in the first quarter of 2015 without comparable expense in 2014. The benefits of our cost reduction initiatives were offset by incremental spending increases related to our strategic initiatives. Research and Development Expenses Research and development (R&D) expenses were $9.5 million, or 3.4% of revenues, in the first six months of 2015 and $7.7 million, or 2.4% of revenues, in the first six months of 2014, as we have increased our investment in the development of new products and solutions. Restructuring Expenses Restructuring expenses were $1.6 million, or 0.6% of revenues, in the first six months of 2015 compared to $2.2 million, or 0.7% of revenues, in the first six months of 2014. The decrease is a result of the completion of Project LEAN partially offset by additional expense incurred related to the continued execution of our Profit Enhancement Plan. Litigation Settlement During the second quarter of 2015, we incurred a litigation settlement expense of $9.0 million relating to a litigation settlement entered into by us on June 26, 2015 with AIG related to its claims for reimbursement of legal fees, costs, and expenses previously paid by AIG on our behalf for the defense of the USS matter as described in Note 12 to the Consolidated Financial Statements. Acquisition Costs Acquisition costs were $0.1 million for the first six months of 2015 without a comparable expense in 2014. The increase is due to additional legal and arbitration-related costs incurred for the May 2011 acquisition of the Shore to Shore businesses. 35 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 86 of 139 PageID: 1165 Table of Contents Other Operating Income Other operating income for the first six months of 2015 increased $0.5 million from the comparable first six months of 2014. The increase is due to the sale of customer-related receivables associated with the renewal and extension of sales-type lease arrangements in the first six months of 2015. There were no sales of customer-related receivables in the first six months of 2014. Interest Income and Interest Expense Interest income was $0.5 million in the first six months of 2015 compared to $0.6 million in the first six months of 2014. The decrease in interest income was primarily due to decreased interest income recognized for sales-type leases. Interest expense for the first six months of 2015 decreased $0.5 million from the first six months of 2014. The decrease in interest expense was primarily due to significant reductions in the outstanding balance on our Senior Secured Credit Facility as well as a reduction in non-cash imputed interest expense on our Financing Liability resulting from the weakening of the Euro against the US Dollar. Other Gain (Loss), net Other gain (loss), net was a net loss of $0.5 million in the first six months of 2015 compared to a net loss of $0.5 million in the first six months of 2014. The balances were primarily due to foreign exchange losses during the first six months of 2015 and 2014, respectively. The foreign exchange losses are primarily attributed to the U.S. Dollar and Euro fluctuations versus currencies in emerging markets where hedging is either impossible or impractical. Income Taxes The year to date effective tax rate for the first six months of 2015 was 9.2% as compared to the year to date effective rate for the first six months of 2014 of 23.6%. The change in the effective tax rate was due to the mix of income between subsidiaries and increased losses in entities with valuation allowances for which no tax benefit is received. Net (Loss) Earnings Net loss was $6.2 million, or $(0.14) per diluted share, during the first six months of 2015 compared to net earnings of $9.7 million, or $0.23 per diluted share, during the first six months of 2014. The weighted-average number of shares used in the diluted earnings per share computation was 42.8 million and 42.3 million for the first six months of 2015 and 2014, respectively. Liquidity and Capital Resources We continue to execute our strategic plan in a volatile global economic environment. Our liquidity needs have been, and are expected to continue to be driven by acquisitions, capital investments, product development costs, potential future restructuring related to the rationalization of the business, and working capital requirements. We have met our liquidity needs primarily through cash generated from operations. Based on an analysis of liquidity utilizing conservative assumptions for the next twelve months, we believe that cash on hand from operating activities and funding available under our credit agreement should be adequate to service debt and working capital needs, meet our capital investment requirements, potential repurchases under our share repurchase program, other potential restructuring requirements, product development requirements, internally developed innovation and targeted strategic acquisitions requirements. We believe that our base of recurring revenue (revenues from the sale of consumables into the installed base of security systems, apparel tags and labels, hand-held labeling tools and services from maintenance), repeat customer business, the anticipated effect of our restructuring activities, and our cash position and borrowing capacity should continue to provide us with adequate cash flow and liquidity to continue with the successful execution of our strategic plan. We have worked to reduce our liquidity risk by implementing working capital improvements while reducing expenses in areas that will not adversely impact the future potential of our business. We evaluate the risk and creditworthiness of all existing and potential counterparties for all debt, investment, and derivative transactions and instruments. Our policy allows us to enter into transactions with nationally recognized financial institutions with a credit rating of “A” or higher as reported by one of the credit rating agencies that is a nationally recognized statistical rating organization by the U.S. Securities and Exchange Commission. The maximum exposure permitted to any single counterparty is $50.0 million. Counterparty credit ratings and credit exposure are monitored monthly and reviewed quarterly by our Treasury Risk Committee. 36 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 87 of 139 PageID: 1166 Table of Contents As of June 28, 2015, our cash and cash equivalents were $99.1 million compared to $135.5 million as of December 28, 2014. A significant portion of this cash is held overseas and can be repatriated. We do not expect to incur material costs associated with repatriation. Cash and cash equivalents changed in 2015 primarily due to $19.9 million of cash used in financing activities, $10.1 million of cash used in investing activities, an unfavorable $6.1 million effect of foreign currency, and $0.4 million of cash used in operating activities. Cash used in operating activities was $21.7 million higher during the first six months of 2015 compared to the first six months of 2014. Our cash from operating activities was negatively impacted by a decrease in operating income, an increase in accounts receivable and other assets, and a decrease in other current liabilities, which was offset by decreased inventory investments and increased income taxes and accounts payable balances. Cash used in investing activities was $3.5 million higher during the first six months of 2015 compared to the first six months of 2014. This was primarily due to an increase in the acquisition of property, plant, and equipment during the first six months of 2015 compared to the first six months of 2014. Cash used in financing activities was $14.6 million higher during the first six months of 2015 compared to the first six months of 2014. This was due primarily to the payout of our dividend, which was partially offset by a reduction of debt levels in the first six months of 2014 compared to the first six months of 2015. Our percentage of total debt to total equity as of June 28, 2015, was 22.2% compared to 19.9% as of December 28, 2014. As of June 28, 2015, our working capital was $201.8 million compared to $232.6 million as of December 28, 2014. We continue to reinvest in the Company through our investment in technology and process improvement. Our investment in R&D amounted to $9.5 million and $7.7 million during the first six months of 2015 and 2014, respectively. These amounts are reflected in cash used in operations, as we expense our R&D as it is incurred. We anticipate additional spending to be in the range of $8.5 million to $10.5 million on R&D to support achievement of our strategic plan during the remainder of 2015. We have various unfunded pension plans outside the U.S. These plans have significant pension costs and liabilities that are developed from actuarial valuations. For the first six months of 2015, our contribution to these plans was $2.2 million. Our total funding expectation for 2015 is $4.3 million. We believe our current cash position and cash generated from operations will be adequate to fund these requirements. Acquisition of property, plant, and equipment during the first six months of 2015 totaled $10.5 million compared to $6.8 million during the same period in 2014. We anticipate our capital expenditures, used primarily to upgrade information technology, improve our production capabilities, and upgrade facilities, to be in the range of $9.5 million to $14.5 million for the remainder of 2015. Senior Secured Credit Facility On December 11, 2013, we entered into a new $200.0 million five-year senior secured multi-currency revolving credit facility (2013 Senior Secured Credit Facility) agreement (2013 Credit Agreement) with a syndicate of lenders. As of June 28, 2015, we were in compliance with all of our covenants, and although we cannot provide full assurance, we expect to be in compliance for the next twelve months. Dividend Historically, we have never paid a cash dividend (except for a nominal cash distribution in April 1997 to redeem the rights outstanding under our 1988 Shareholders’ Rights Plan). On March 5, 2015, we declared a special dividend (the Dividend) of $0.50 per outstanding common share for all shareholders of record as of March 20, 2015. This Dividend reflects our commitment to building shareholder value through the execution of our strategic plan and a disciplined approach to capital allocation. After the Dividend, we believe we have the appropriate level of liquidity both to fund our internal initiatives and act quickly on any strategic opportunities. 37 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 88 of 139 PageID: 1167 Table of Contents The cash portion of the Dividend of $21.0 million was paid to common shareholders on April 10, 2015. Dividend distributions to shareholders are recognized as a liability in the period in which a dividend is formally approved by our Board of Directors and communicated to shareholders. The dividend was recorded as a reduction of Additional Capital in Stockholders' Equity. The Dividend does not provide any cash payment or benefit to stock options, restricted stock units, or performance shares, and instead only applies to the outstanding common stock and as outlined in the executive and director deferred compensation plans. The non-cash portion of the Dividend of $0.4 million was credited to the executive and director deferred compensation plan deferred stock accounts on April 10, 2015 in accordance with the plans. Provisions for Restructuring During September 2014, we initiated the Profit Enhancement Plan focused on increasing profitability through strategic headcount reductions and the streamlining of manufacturing processes. Total costs of the plan through June 28, 2015 are $7 million. Total annual savings of the Profit Enhancement Plan are expected to approximate $8 million, with an expected $6 million in savings to be realized in 2015. As of December 2014, our expanded Global Restructuring Plan including Project LEAN has been substantially completed with total costs incurred to date of $60 million. With initiatives to stabilize sales, actively manage margins, reduce operating expense and effectively manage working capital, the plan has effectively lowered costs and we expect to maintain these savings in future periods. Off-Balance Sheet Arrangements We do not utilize material off-balance sheet arrangements apart from operating leases that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. We use operating leases as an alternative to purchasing certain property, plant, and equipment. There have been no material changes to the discussion of these rental commitments under non-cancelable operating leases presented in our Annual Report on Form 10-K for the year ended December 28, 2014 except as discussed in the Contractual Obligations section. Contractual Obligations There have been no material changes to the table entitled “Contractual Obligations” presented in our Annual Report on Form 10-K for the year ended December 28, 2014. The table of contractual obligations excludes our gross liability for uncertain tax positions, including accrued interest and penalties, which totaled $28.0 million as of June 28, 2015, and $31.3 million as of December 28, 2014, because we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities. Recently Adopted Accounting Standards See Note 1 to the Consolidated Financial Statements for additional information related to recently adopted accounting standards. New Accounting Pronouncements and Other Standards See Note 1 to the Consolidated Financial Statements for additional information related to new accounting pronouncements and other standards. 38 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 89 of 139 PageID: 1168 Table of Contents Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Except as noted below, there have been no significant changes to the market risks as disclosed in Part II - Item 7A. - “Quantitative And Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended December 28, 2014. Exposure to Foreign Currency We manufacture products in the U.S., Europe, and the Asia Pacific region for both the local marketplace and for export to our foreign subsidiaries. The foreign subsidiaries, in turn, sell these products to customers in their respective geographic areas of operation, generally in local currencies. This method of sale and resale gives rise to the risk of gains or losses as a result of currency exchange rate fluctuations on inter-company receivables and payables. Additionally, the sourcing of product in one currency and the sales of product in a different currency can cause gross margin fluctuations due to changes in currency exchange rates. We selectively purchase currency forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts guarantee a predetermined exchange rate at the time the contract is purchased. This allows us to shift the effect of positive or negative currency fluctuations to a third-party. Transaction gains or losses resulting from these contracts are recognized at the end of each reporting period. We use the fair value method of accounting, recording realized and unrealized gains and losses on these contracts. These gains and losses are included in Other Gain (Loss), net on our Consolidated Statements of Operations. As of June 28, 2015, we had currency forward exchange contracts with notional amounts totaling approximately $5.4 million. The fair values of the forward exchange contracts were reflected as a $19 thousand asset and a $37 thousand liability included in Other Current Assets and Other Current Liabilities in the accompanying Consolidated Balance Sheets. The contracts are in the various local currencies covering primarily our operations in the U.S. and Western Europe. Historically, we have not purchased currency forward exchange contracts where it is not economically efficient, specifically for our operations in South America and Asia, with the exception of Japan. 39 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 90 of 139 PageID: 1169 Table of Contents Item 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Management, with the participation of the Chief Executive Officer and Acting Chief Financial Officer, conducted an evaluation (as required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the Exchange Act)) of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Acting Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting that occurred during our second fiscal quarter of 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 40 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 91 of 139 PageID: 1170 Table of Contents PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS See Note 12 to the Consolidated Financial Statements for the discussion of legal proceedings under Contingencies, which is incorporated herein by reference. 41 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 92 of 139 PageID: 1171 Table of Contents Item 1A. RISK FACTORS There have been no material changes from December 28, 2014 to the significant risk factors and uncertainties known to us that, if they were to occur, could materially adversely affect our business, financial condition, operating results and/or cash flow. For a discussion of our risk factors, refer to Part I - Item 1A - “Risk Factors”, contained in our Annual Report on Form 10-K for the year ended December 28, 2014. Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None. Item 3. DEFAULTS UPON SENIOR SECURITIES None. Item 4. MINE SAFETY DISCLOSURES Not Applicable. Item 5. OTHER INFORMATION None. 42 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 93 of 139 PageID: 1172 Table of Contents Item 6. EXHIBITS 43 Exhibit 3.1 Articles of Incorporation, as amended, are hereby incorporated by reference to Exhibit 3(i) of the Registrant's 1990 Form 10- K, filed with the SEC on March 14, 1991. Exhibit 3.2 By-Laws, as Amended and Restated, are hereby incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed with the SEC on August 4, 2010. Exhibit 3.3 Articles of Amendment to the Articles of Incorporation are hereby incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed with the SEC on December 28, 2007. Exhibit 10.1 2015 Employee Stock Purchase Plan is hereby incorporated by reference to Exhibit 99.1 to our Registration Statement on Form S-8, filed with the SEC on March 31, 2015. Exhibit 31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 Certification of the Acting Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.1 Certification of the Chief Executive Officer and the Acting Chief Financial Officer pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 94 of 139 PageID: 1173 Table of Contents SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 44 CHECKPOINT SYSTEMS, INC. August 3, 2015 /s/ James M. Lucania James M. Lucania Acting Chief Financial Officer and Treasurer Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 95 of 139 PageID: 1174 Table of Contents INDEX TO EXHIBITS 45 Exhibit 3.1 Articles of Incorporation, as amended, are hereby incorporated by reference to Exhibit 3(i) of the Registrant's 1990 Form 10- K, filed with the SEC on March 14, 1991. Exhibit 3.2 By-Laws, as Amended and Restated, are hereby incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed with the SEC on August 4, 2010. Exhibit 3.3 Articles of Amendment to the Articles of Incorporation are hereby incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed with the SEC on December 28, 2007. Exhibit 10.1 2015 Employee Stock Purchase Plan is hereby incorporated by reference to Exhibit 99.1 to our Registration Statement on Form S-8, filed with the SEC on March 31, 2015. Exhibit 31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 Certification of the Acting Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.1 Certification of the Chief Executive Officer and the Acting Chief Financial Officer pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 96 of 139 PageID: 1175 EXHIBIT 31.1 Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, George Babich, Jr., certify that: 1. I have reviewed this Form 10-Q of Checkpoint Systems, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15 (f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. By: /s/ George Babich, Jr. Name: George Babich, Jr. Title: President and Chief Executive Officer Date: August 3, 2015 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 97 of 139 PageID: 1176 EXHIBIT 31.2 Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, James M. Lucania, certify that: 1. I have reviewed this Form 10-Q of Checkpoint Systems, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15 (f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. By: /s/ James M. Lucania Name: James M. Lucania Title: Acting Chief Financial Officer and Treasurer Date: August 3, 2015 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 98 of 139 PageID: 1177 EXHIBIT 32.1 CERTIFICATION FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned executive officers of Checkpoint Systems, Inc. (the “Company”) hereby certify that this Quarterly Report on Form 10-Q for the quarter ended June 28, 2015 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission upon request. This certification accompanies the Report and shall not be treated as having been filed as part of the Report. Date: August 3, 2015 By: /s/ George Babich, Jr. Name: George Babich, Jr. Title: President and Chief Executive Officer By: /s/ James M. Lucania Name: James M. Lucania Title: Acting Chief Financial Officer and Treasurer Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 99 of 139 PageID: 1178 Exhibit Z Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 100 of 139 PageID: 1179 Company Name: Checkpoint Systems Company Ticker: CKP US Date: 2015-05-06 Event Description: Q1 2015 Earnings Call Market Cap: 416.06 Current PX: 9.89 YTD Change($): -3.209 YTD Change(%): -24.498 Bloomberg Estimates - EPS Current Quarter: 0.120 Current Year: 0.465 Bloomberg Estimates - Sales Current Quarter: 159.000 Current Year: 604.500 Page 1 of 13 Q1 2015 Earnings Call Company Participants • James Lucania • George Babich Other Participants • Saliq Jamil Khan • Chris P. McGinnis • Lisa Springer • Jeffrey Ted Kessler • Andrew R. Jones MANAGEMENT DISCUSSION SECTION Operator Greetings and welcome to the Checkpoint Systems' First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce James Lucania, Acting Chief Financial Officer and Treasurer at Checkpoint Systems. Thank you, Mr. Lucania. You may begin. James Lucania Thanks, Diego. Good afternoon and welcome to Checkpoint Systems' first quarter 2015 earnings conference call. With me today is George Babich, our President and Chief Executive Officer. Non-GAAP measures discussed on this call are defined and reconciled with GAAP measures on statements attached to our earnings release. The release and a brief supplemental financial presentation are available on our Investor Relations website and a replay of this call will be made available on the site shortly after the call is finished. We remind you that, during the call, we may make certain statements that reflect our current views and estimates about our future financial results. These forward-looking statements are subject to the Safe Harbor statements including in this afternoon's release. Now, I'll turn the call over to George. George Babich Thanks, Jim. Good afternoon and thank you for joining us today. We appreciate you being with us and trust that you've had an opportunity to read our first quarter earnings release and financial review supplement issued just after the market closed. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 101 of 139 PageID: 1180 Company Name: Checkpoint Systems Company Ticker: CKP US Date: 2015-05-06 Event Description: Q1 2015 Earnings Call Market Cap: 416.06 Current PX: 9.89 YTD Change($): -3.209 YTD Change(%): -24.498 Bloomberg Estimates - EPS Current Quarter: 0.120 Current Year: 0.465 Bloomberg Estimates - Sales Current Quarter: 159.000 Current Year: 604.500 Page 2 of 13 And I know I don't need to introduce Jim Lucania, as you all know him quite well by now. Jim has been with us for two-and-a-half years, most recently serving as our Vice President of Finance, heading up the Corporate Financial Planning and Analysis, Corporate Treasury and Investor Relations departments, before stepping into the role of Acting CFO in March. As previously announced, we will evaluate both internal and external candidates to fill this important role on a permanent basis. I have every confidence in Jim's ability to shepherd the finance department through this transition period. This afternoon, I will give an overview of the first quarter performance and then I'll turn the call back over to Jim to walk through the financial details. I'll follow up with a discussion of our strategic initiatives as well as some corporate governance news, and then we will open the call to your questions. Okay. So we're off to a good start in 2015, recording top-line results in line with our expectations and bottom-line results better than expected. While net revenues were down 5% in the quarter on a constant currency basis, gross profit margins improved to 44%, an increase of 170 basis points versus the first quarter of 2014, and more than 800 basis points higher than in the first quarter of 2013. In fact, this was Checkpoint's highest recorded first quarter gross profit margin since 1994. Despite lower revenue driven by unprecedented strengthening of the U.S. dollar and the sunset of our large 2014 EAS hardware project, we were able to keep our non-GAAP adjusted diluted earnings per share flat at $0.04. We are working hard on the execution of our long-term strategic growth initiatives and working equally hard to secure our next significant equipment rollout. We're making good progress on both fronts. While we do not have any contract signed at this point, I'm gaining confidence that we will secure at least one additional new hardware rollout during later this year. Turning to the businesses, Merchandise Availability Solutions delivered a solid start to the year, slightly exceeding our expectations. The organic top-line decline of 4.2% was primarily due to the sunset of our Family Dollar EAS installation, and we benefited from strong Merchandise Visibility performance right out of the gate. RFID project revenue are even more difficult to forecast than our EAS projects, [ph] as we'll have to (4:18) predict both the timing of the project launches as well as estimate certain revenues based on the percentage of completion of recognition rules. Gross profit margins increased to 50.6%, more than 360 basis points higher than the first quarter of last year and more than 1,000 basis points higher than the first quarter in 2013. Margins were up slightly across nearly all product categories and we benefited both from favorable mix towards higher margin products and services and foreign currency effects. Now, in contrast, ALS had a difficult start to the year. Organic revenues declined 8%, primarily due to the impact of some top customers moving to lower price trim solutions, as well as certain customer-specific market share losses in both the Europe and the U.S. Gross margins declined to 31.1%, primarily related to the accelerated depreciation of some equipment in Asia that will be taken out of service as well as some inefficiencies in certain factories due to lower volumes. Sales in our Merchandise Visibility business, which includes all components of our end-to-end RFID solution, the hardware, software, professional services, field service, labels and tags reported across both the MAS and the ALS lines of business, increased by more than 41% organically versus the first quarter of 2014. We have and we will continue to invest heavily in expanding our capabilities and geographic reach in this vitally important market. Now to Retail Merchandising Solutions. RMS revenues in the first quarter decreased by $100,000 on a constant currency basis. Strong sales volume in our retail display business nearly offset the lost handheld labeling revenue due to the sunset of the Family Dollar rollout in the U.S. last year. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 102 of 139 PageID: 1181 Company Name: Checkpoint Systems Company Ticker: CKP US Date: 2015-05-06 Event Description: Q1 2015 Earnings Call Market Cap: 416.06 Current PX: 9.89 YTD Change($): -3.209 YTD Change(%): -24.498 Bloomberg Estimates - EPS Current Quarter: 0.120 Current Year: 0.465 Bloomberg Estimates - Sales Current Quarter: 159.000 Current Year: 604.500 Page 3 of 13 While RMS continues to face industry headwinds in Europe and Asia, we were able to increase our gross profit margins by more than 170 basis points compared to the first quarter of 2014 through tight expense control, the benefit of our profit improvement initiatives and better overhead absorption. At this time, I'll turn the call back over to Jim. James Lucania Thanks, George. First quarter revenue was $128.5 million, a decrease of 12.8% over last year. Foreign currency translation effects resulted in 7.8 percentage points of that decline or $11.5 million. Gross profit was $56.5 million, $5.7 million less than last year's first quarter. Foreign currency translation contributed $3.3 million of this decline. Our gross profit margin for the quarter increased more than 170 basis points to 44%. As George said, this is our highest recorded first quarter gross profit margin since the first quarter of 1994, despite reduced overhead absorption due to lower production volumes in some of our factories. The strong margin performance together with the favorable currency impact on our SG&A helped to deliver non-GAAP operating income of $1.9 million, compared with $4.1 million in the first quarter of 2014. Our first quarter of 2015 results were unfavorably impacted by the incremental investment spending on our strategic initiatives. Adjusted EBITDA in the quarter was $10 million; $1.7 million lower than the first quarter of 2014. Now, I'll break these results down by segment. MAS revenue decreased by 12.8% to $81.5 million. Excluding the impact of foreign currency translation, MAS revenue decreased by 4.2%. Revenue in our EAS Systems and EAS Consumables and related businesses declined 12.6% and 1.9%, respectively, as we faced a difficult comparison with our Family Dollar rollout in North America and a number of smaller rollouts in Europe. Our Alpha business declined 8% compared to the first quarter last year. Again, this decrease is primarily due to the impact of the Family Dollar rollout in North America, partially offset by strong sales growth in key accounts in Europe and Latin America. The hardware, software and service component of our Merchandise Visibility business grew more than 150%, albeit from a small base versus the first quarter last year. Gross profit margin for MAS increased by over 360 basis points from 47% to 50.6%. Margins improved in nearly all products through manufacturing cost reductions and other profit enhancement initiatives. We also experienced better field service and professional service utilization rates offsetting the unfavorable impact of lower production volumes in our factories. The strengthening dollar also impacted MAS margins favorably in the quarter. While our revenue was translated to U.S. dollars at first quarter average exchange rates, the portion of our gross profit earned in our U.S. dollar-denominated supply chain unit was locked-in at more favorable U.S. dollar exchange rates in 2014. These MAS margin levels are not sustainable and are expected to decline by several hundred basis points in the next three quarters, reflecting the full impact of the stronger dollar flowing through the supply chain. Now to ALS. Revenues decreased by 11.6% to $37.2 million. Excluding the impact of foreign currency translation, ALS revenue decreased by 8%. $3 million of this decline was related to the legacy ticket and tag business, reflecting some competitive market share losses and the impact of certain customers moving to lower price trim solutions. Segment gross profit margins fell to 31.1% from 33.5%. The decline was primarily related to the one-time impact of accelerated depreciation for some equipment we plan to take out of production as well as lower manufacturing volumes in the few of our factories contributing to some overhead under-absorption. And now to RMS. Revenues decreased 17.1% to $9.8 million. Excluding foreign currency translation, RMS revenue fell [indiscernible] (10:58) $100,000 or 0.9%. The decline was attributable to the sunset of the Family Dollar rollout in 2014 and nearly offset by a strong growth in our retail display business in Europe and Latin America. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 103 of 139 PageID: 1182 Company Name: Checkpoint Systems Company Ticker: CKP US Date: 2015-05-06 Event Description: Q1 2015 Earnings Call Market Cap: 416.06 Current PX: 9.89 YTD Change($): -3.209 YTD Change(%): -24.498 Bloomberg Estimates - EPS Current Quarter: 0.120 Current Year: 0.465 Bloomberg Estimates - Sales Current Quarter: 159.000 Current Year: 604.500 Page 4 of 13 Gross profit margins increased by nearly 180 basis points from 35.9% to 37.7%, principally due to our profit improvement initiatives and higher volumes driving better overhead absorption in our factories. On to SG&A. Expenses for the first quarter decreased by $3 million from $54.3 million in 2014 to $51.3 million in 2015. Foreign currency translation effects reduced SG&A by $4 million. The $1 million organic increases was related to investments in our strategic initiatives and so one-time costs, partially offset by savings related to our profit improvement plan. Non-GAAP diluted earnings per share was $0.04, flat to last year. Cash used by our operations was $400,000, compared with cash flow provided by operations of $8.6 million in the same period last year. Capital expenditures increased in the first quarter from $3.3 million in 2014 to $5.8 million this year, reflecting increased investments in spending for our strategic initiatives. And now on to guidance. Our guidance for fiscal year 2015 remains unchanged. We continue to expect net revenue in the range of $575 million to $625 million, adjusted EBITDA in the range of $55 million to $68 million, non-GAAP diluted earnings per share in the range of $0.40 to $0.50. As a reminder, our guidance assumes a continuation of the current foreign currency exchange rate environment. As we discussed on the last call, over two-thirds of our sales are denominated in foreign currencies. We now estimate that our 2015 revenue guidance would be approximately $50 million higher at constant 2014 foreign exchange rates, while the impact on adjusted EBITDA is estimated to be approximately $7 million. As George mentioned, while we still have no contract signed for a major hardware rollout in 2015, our guidance also assumes that one additional project begins in the second half of the year. The benefit of this project is offsetting the incremental revenue lost in translation due to further strengthening of the U.S. dollar over the past two months. Our adjusted EBITDA and earnings guidance still assumes $7 million to $10 million of incremental investments in R&D and SG&A, partially funded through savings delivered by our profit improvement plans. We have and will continue to increase our investment in capital expenditures to drive growth, and expect total CapEx to be up to $25 million for fiscal 2015. We expect the primary benefits of these strategic initiative investments to begin in 2016. The effective tax rate assumed in our guidance remains unchanged at approximately 35%, after giving consideration to non-GAAP adjustments. We continue to monitor our profitability in the U.S. to determine whether there is sufficient evidence that all or a portion of our U.S. income tax valuation allowance should be released. If this occurs, the resulting affected income tax rate on U.S. income would significantly impact our reported earnings per share. Please note that all these adjustments would have no impact on our cash tax obligations and we expect our 2015 cash income tax expense to be approximately $5 million to $6 million, regardless of whether the valuation allowance remains in place or is released. And now, I'll turn the call back over to George. George Babich Okay, Jim. Well, there's no question 2015 will be a challenging year. While there's nothing better than to post steady, organic EBITDA growth each and every year, this is simply not the reality of our business, as we've discussed numerous times. Our revenue and profitability remains dependent on large capital commitments from our retail customers. But we're working hard every day to expand both our addressable market and to grow our share of wallet within our existing installed base. We remain committed to our long-term strategic growth initiatives I outlined on the last call. A summary of our initiatives - the activities related to those initiatives - is on slide seven of the supplemental financial review package that was filed earlier today. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 104 of 139 PageID: 1183 Company Name: Checkpoint Systems Company Ticker: CKP US Date: 2015-05-06 Event Description: Q1 2015 Earnings Call Market Cap: 416.06 Current PX: 9.89 YTD Change($): -3.209 YTD Change(%): -24.498 Bloomberg Estimates - EPS Current Quarter: 0.120 Current Year: 0.465 Bloomberg Estimates - Sales Current Quarter: 159.000 Current Year: 604.500 Page 5 of 13 We are investing CapEx dollars to ensure our EAS, ALS, and RFID manufacturing footprint is optimized and our capabilities remain best in class. We're investing in talent to target untapped markets and explore new vertical markets. We are increasing our investment in R&D to maintain our position as the innovation leader in our industry. We're exploring strategic acquisitions and partnerships to round out a portfolio of products, software, and services to ensure that we remain number one retail solutions provider in the world. We still expect these 2015 incremental investments will total up to $17 million, including CapEx of $7 million and the $7 million to $10 million on the P&L impact. Most of those benefits, as we've said before, will begin to take root in 2016 and 2017, where we expect the full impact. Finally, on the governance side, as you undoubtedly noticed in our proxy filed on April 27, we will have a vacancy on our board of directors following the Annual Meeting of Shareholders next month. At its next meeting, the governance committee will kick off a formal search process for a new director. Adding a new director is one of the most important decisions a board can make and our board takes this responsibility very seriously. As has always been the case at Checkpoint, the board welcomes and deeply values the input of our shareholders during this critical process. With what will be our fourth new director in approximately 4.5 years, the board is again demonstrating its commitment to strong governance, ensuring that the group is periodically but consistently refreshed, while aiming to align our directors' individual and collective expertise with the strategic direction of the company. With that, operator, Diego, I'll turn this back over to you for questions. Q&A Operator Thank you sir. At this time, we'll conduct our question-and-answer session. [Operator Instructions] Thank you. Our first question comes from Saliq Khan with Imperial Capital. Please state your question.
: Great. Thank you. Hey, George. Hey, Jim. : Hey, Saliq. : You guys - Jeff couldn't make it today, so I'm going to be filling in for him. And just couple of quick question to clarify a couple of things. You guys have been incredibly successful when it comes to reducing the costs and increasing the margins over the last two years or so. You spoke not only today but previously you've spoken tremendously about being able to go ahead and engaging those growth initiatives that you have. Could you clarify for us what exactly those growth initiatives look like for you, either from a location perspective for both under-penetrated markets that you've spoken about previously?
: Let me start with - this is George, Saliq. Thanks for the question. Let me start with - first, if we go back three years ago, the year two of my stepping into this role was about improving processes, driving the efficiencies throughout the organization. We took a lot of cost out in year one, low-hanging fruit. The second year, we expected to employ a more disciplined approach using a scalpel and Six Sigma Lean type techniques to drive cost out. As you recall, 2014, we improved our gross profit margins by over 400 basis points, which was driven by these initiatives. We're focused on pricing, and cost take-out, and mix management, and just better operational management of the business, as well as the efficiencies throughout the supply chain. In 2015, we continue those initiatives. They certainly began in 2014, but this was - and before that, quite frankly. But many of them have a long runway with respect to implementing the change and then realizing the benefits. So they will continue to flow through the P&L. In addition, in 2015, we launched some new initiatives, specifically focused on our supply chain and advanced supply chain, optimization project. We've engaged with outside consultants to help us get more defined on what we need to do Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 105 of 139 PageID: 1184 Company Name: Checkpoint Systems Company Ticker: CKP US Date: 2015-05-06 Event Description: Q1 2015 Earnings Call Market Cap: 416.06 Current PX: 9.89 YTD Change($): -3.209 YTD Change(%): -24.498 Bloomberg Estimates - EPS Current Quarter: 0.120 Current Year: 0.465 Bloomberg Estimates - Sales Current Quarter: 159.000 Current Year: 604.500 Page 6 of 13 to improve the supply chain and not only for benefits in working capital, obviously, but also benefits on the P&L and the way of cost reductions. We've also launched a significant project on our field service organization to try to bring best practices to the field service function around the world, where we have gathered over the past 12 months to 18 months substantial data and metrics on how our field service operation functions. We noticed significant differences. And I think we will see some benefits from that flowing through in 2015. And then, in addition, we've launched a formal process to take a look at using outside consultants and the best practices that would be employed to set up our sales organization and how it ought to be around the world, whether there are opportunities to structure differently, whether there are opportunities to gain some synergies across our lines of business that we have today. So there are some new initiatives that in addition to what we've been doing for the past couple of years, and I expect all of these to contribute in 2015, and those that we're launching this year contribute primarily in 2016 and beyond. So there's a lot going on in that regard. And I'll let Jim talk to anything I might have missed. : Yeah. I think that's right on the operational side. We're continuing to do what we've been doing for the last couple of years and that's going after the biggest buckets of spend and optimizing them one step at a time. And so, that's the next step after the manufacturing organization and the pricing - the way we go to market and price deals. The next big buckets after that are on the field service side and are on the operations supply chain side. : Great. That was very detailed. I definitely appreciate that. And Jim, to your last point, you talked about pricing as well. I think it was last quarter that we had heard where RFID sales had nearly doubled. The one interesting thing about is there's been a lot of focus on RFID I think since 2006, and the retailer are focused on it and the investors are focused on it. But we're still seeing that the cost is relatively high. With that being said, what type of innovations are you hearing about or are you finding out that the retailers are asking for that you guys are working on over the next, say, 12 months to 15 months.
: Yeah, Saliq. Again, I'll start. I'd say like retailers do regardless of the project, they're looking for lower cost. Give them a tag, give them an RFID tag, that is cost - let's give them hardware that costs less than it does today. So, that's number one, first and foremost in their minds. And I will say that this is not because there's not an ROI. It's pretty clear that there is an ROI. : Definitely.
: But there's significant payback. The second thing they're looking for is technology that helps them with the operational compliance end of the RFID program. So they don't have to rely on store employees or warehouse employees to be performing the RFID process manually if there's technology that can help. They'd like to see us help in that regard. And I'd say the third thing they're looking for is to provide more in the way of data analytics, so ton of data that they get, RFID-related data as well as other data in the store, and if there's a way that we can help them translate that into what they call actionable insights, they would certainly appreciate that as well. So... : Okay.
: ...from the standpoint of what they're looking for, I think it probably falls into those three buckets. And each retailer is approaching it a little bit differently and at a little different pace, but generally I think that's what their mindset is. : And George, just one last question as well then I'll hop back in the queue, which is the additional contract that we are - you've talked about then we're hopeful that would happen by the end of the year. Is there any more clarity that you could give on it, either from a size perspective or segment or even from a geographic Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 106 of 139 PageID: 1185 Company Name: Checkpoint Systems Company Ticker: CKP US Date: 2015-05-06 Event Description: Q1 2015 Earnings Call Market Cap: 416.06 Current PX: 9.89 YTD Change($): -3.209 YTD Change(%): -24.498 Bloomberg Estimates - EPS Current Quarter: 0.120 Current Year: 0.465 Bloomberg Estimates - Sales Current Quarter: 159.000 Current Year: 604.500 Page 7 of 13 perspective?
: Well, I'd rather not get real specific on it. With all due respect to the customer, we do not have - at this point, do not have a signed contract. I do feel that we're continuing to move in that direction with the customer. I can tell you that, as you know, in a large part it will be dependent upon how their business does and whether their commercial business is successful this year. They will, like many retailers, wait to get to an indication of that before they make significant investment. It's as you know largely dependent upon fourth quarter results. But I expect that they will make a decision before the fourth quarter and that we will be prepared to begin that process, once they do make that decision to sign a contract. We are currently gearing up for it. We're making investments in the hardware and the staffing side of things to be sure that we are prepared. So I'm gaining enough confidence to begin to do that. But I don't know when or for sure that they will sign a contract. It's something that's been in the works for years now. And I would, as I said on the call last quarter, also say that the two that we had expected in 2015 were not included in our guidance, were not in North America. One was in Europe and one was in Asia. One of them is an EAS rollout and one of them is a Merchandise Visibility rollout. But beyond that, I'd prefer not to give any more granular details to that. : Perfect. Thank you, guys. I appreciate it.
: All right, Saliq. Thanks. Operator Our next question comes from Chris McGinnis with Sidoti & Company. Please state your question. : Afternoon. Thanks for taking my question.
: Hey, Chris. : Just a follow-up I guess on this last question. It sounds like you have a little bit more confidence in that deal coming through, but what makes you - what gives you more confidence than you had last quarter when you pulled that out of your guidance and you're putting in your guidance?
: Well, what I'm - I guess what we're trying to do is reflect the fact that we continue to work with the customer, try to be creative with the customer, try to understanding their business and read the tea leaves, so to speak. We believe that our guidance, as we gave it in March, can stand as is despite the strengthening of the U.S. dollar since we gave that guidance. And we believe that, even if this - we didn't get any of this business later in the year that we can maintain our existing guidance. But as you recall, our guidance was it had a pretty wide spread on it. And for the reasons that I've just mentioned, on the downside currency and the upside, maybe something would come through with one of these customers. And I think because it's - rather than it being in the beginning of the year like we hoped, if it comes through in the back-end of the year, it will be only a partial impact on us in 2014. We'll need to be out of the - if we get into start, we'll need to be out sometime in late November before the Christmas selling season begins. So we have a very narrow window for us to realize the benefits this year. So it's not a major swing factor in our guidance by any means, like it would have been had it been launched at the beginning of the year as we expected. If it happens, it will offset the currency and possibly more. If it doesn't happen, we have other things that we think enable us to be able to hold to our guidance that we gave to you in March. So it's just a work-in-process update, if you will, on how things are going with a customer. With respect to the second rollout that we were anticipating for 2015, again, I have confidence that that, as I said in March, will happen. I don't have any visibility into it happening in 2015. The visibility is no better on 2015. It could Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 107 of 139 PageID: 1186 Company Name: Checkpoint Systems Company Ticker: CKP US Date: 2015-05-06 Event Description: Q1 2015 Earnings Call Market Cap: 416.06 Current PX: 9.89 YTD Change($): -3.209 YTD Change(%): -24.498 Bloomberg Estimates - EPS Current Quarter: 0.120 Current Year: 0.465 Bloomberg Estimates - Sales Current Quarter: 159.000 Current Year: 604.500 Page 8 of 13 happen. It could begin. But I certainly don't expect it - we're sitting here in May - I don't expect it to have a significant impact on our results in 2015 either. But both of them are still alive and well, and we continue to move down that path with those customers and we will see where it ends up. But we'll report back once we're able to do that. : Sure, thanks for that. Can you just maybe talk about, I guess, in the labeling, sounds like a little bit of maybe competitive pressures. Just maybe talk about maybe what's happening there and maybe is that on the low-end, the high-end?
: Yeah. Well, Apparel Labeling, as you know, tough business. We are focused in our Apparel Labeling business in tickets and tags and some of the basics where customers have begun to rationalize what trim they're putting on garments. And they've been rationalizing the costs and they're trying to bring the cost down on the trim. And so, we're always under that pressure and it's one of the reasons why we made the decision to make some significant CapEx investments into ALS this year, so that we continue to drive productivity improvements and cost reductions, as the customers are looking for that. So it's a continuous battle in ALS. It's also a year-over-year comparison, how we did last year versus how we're doing this year. It is a issue of competitive pressures, as our competition continues to win share and lose share. So, some quarters we win share, some quarters we lose a little bit of share. But I'd say that what's really encouraging is that our RFID portion of our business is strong. As I mentioned, our Merchandise Visibility business year-over-year is up 41%. So, I still feel very good about that. I feel very good about the operational improvements that we are achieving in the ALS plants all around the world and what we expect to achieve with the additional CapEx investment. So it's a lumpy business like our other businesses. I'm not, at this point, moving off of what we think we're going to be able to achieve for the year. I think we're still confident - comfortable with what we initially thought in our guidance, our budgets, et cetera. : Sure. And I guess just two points on margin. A quick question on how much was the MAS gross margin helped by, I guess, the lack of maybe hardware sales, with the big rollout coming. Can you maybe just walk through some of the puts and takes on the gross margin side for that?
: Yeah. I'll let Jim. But let me just - I'll just comment that we do - as you know, there is - and it's not really the hardware as it is the field service installation that brings the margin down on what we call hardware because there we bundle the two of them together. And there is some - and at times, when we put a contract together with a customer where it might be more advantageous to that customer to have a lower price on the hardware and then it's a razor blade impact, and then we make it up on the consumables. Having said that, certainly not having a rollout in the numbers has an impact in the first quarter. There are other things at play here, the most significant of which Jim can explain better than I can. So I'll let Jim talk. : Yeah. I mean, you're partially right there on the mix. So certainly mix is helping and really where it's helping there is on the RFID side. Because of that, you're recording revenue over a fixed cost base. Our cost base in RFID solutions is really a professional service workforce that's more of a G&A type item that flows through COGS. And when we get to record a lot of revenue in a quarter, the margins are high. When we record less revenue in a quarter, the margins are lower for that product and the mix of business moved towards that product a bit. You're also seeing, yes, the hardware, a little bit smaller percentage of the total MAS revenue than before where as it skews toward consumables, the blended margin obviously improves. Similar with the Hard Tag @ Source program that tends to be a higher - it's like a consumable product - so tends to be higher margin. When it skews towards that, margins increase a little bit. And then one of the big drivers I mentioned in the prepared remarks was this impact of currency, which is a little bit of an interesting mathematical exercise. When currency is unfavorably impacting revenue, we're translating that foreign Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 108 of 139 PageID: 1187 Company Name: Checkpoint Systems Company Ticker: CKP US Date: 2015-05-06 Event Description: Q1 2015 Earnings Call Market Cap: 416.06 Current PX: 9.89 YTD Change($): -3.209 YTD Change(%): -24.498 Bloomberg Estimates - EPS Current Quarter: 0.120 Current Year: 0.465 Bloomberg Estimates - Sales Current Quarter: 159.000 Current Year: 604.500 Page 9 of 13 revenue in the first quarter at the first quarter current rates. But given the length of our supply chain in some products, we actually locked-in inter-company margin during the fourth quarter when rates were much more favorable. So, when we sell-through that inventory, that profit is released from the elimination unit at a higher exchange rate. So you're seeing sort of a little bit artificially higher margins in MAS during the first quarter and that will balance out as the full impact of the lower euro, lower yen and our sales units are flowed through the supply chain. : Sure. And I was going to ask about that as well. So, on the - so, whenever maybe if the dollar weakens, would you see the negative impact of that as well? Like, you don't think that in the first case that happened, all right, go.
: Yeah. Exactly. And it will be that similar kind of three-month or four-month lag, right. If you follow a product from the point of manufacture in China through a final sale somewhere in France, there's a long length of time there. And profit is locked-in in the supply chain as soon as that product ships out of the factory. : Sure. All right. Thanks for that. And then, just lastly on the ALS margin, it sounds like there's a lot of almost one-time things happening this year. Do you expect that margin profile - or where could that margin profile go in 2016 once you take kind of the machines offline and kind of lap this year?
: Yeah. Chris, I think that it will continue where we - this upward path that we began in 2012 from low 20%s and targeting to get into the mid-30%s. How far into the - call it, how close to 40%, yet to be seen, but that certainly is what we're targeting. And a little bit of bumpy road along the way here as we take this equipment out of service. And as I said, as we invest in new equipment and we see some improvements in the margin as we implement new systems within the ALS units, ERP systems, and things along those lines which will take a couple of years, but I definitely - I see that path continuing and I wouldn't read anything into this particular quarter's decline year-over-year at all. : Sure. Understood. All right. Thank you very much for the time today.
: Okay. You're welcome. Thank you. Operator Our next question comes from Lisa Springer with Singular Research. Please state your question. : Thank you. My question has been asked and answered already.
: Okay. Operator [Operator Instructions] Our next question comes from Jeffrey Kessler with Imperial Capital. : Hi, George.
: Hey, Jeff. : One of the things that I think that you've been doing to try to improve your value proposition has been the use of middleware or OATSystems, or the old OATSystems if you want to call it that, into trying to get better integration for your customers, both your end users and anybody else who's installing or helping you install the system and integrating it with other parts of the business, whether it's the sub-ERP system or whether it's HR when people are doing bad stuff, things like that. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 109 of 139 PageID: 1188 Company Name: Checkpoint Systems Company Ticker: CKP US Date: 2015-05-06 Event Description: Q1 2015 Earnings Call Market Cap: 416.06 Current PX: 9.89 YTD Change($): -3.209 YTD Change(%): -24.498 Bloomberg Estimates - EPS Current Quarter: 0.120 Current Year: 0.465 Bloomberg Estimates - Sales Current Quarter: 159.000 Current Year: 604.500 Page 10 of 13 I'm just wondering how far along are you in making sure that your ability to integrate the Checkpoint Systems stays ahead of the competition, that's really what I'm trying to get to. That the ease of integration and ease of use, because some of your competition is talking about not just integration but unification. And I'd kind of like to hear how you want to stay in front this?
: Yeah. Okay, Jeff. Great. Well, I'm really - this is really an exciting area and Uwe Sydon joined us almost a year ago and the impact is being felt as we sit here today. We've hired software architects and engineers in the software space. We do have an initiative in place to bring all three of our platforms for EVOLVE, S3i, Alpha products and RFID on to the OATSystem platform. It'll be one platform in store. We also have a tremendous roadmap of enhancements to that platform, which we haven't disclosed yet, which as we get a little bit further down the path here, I will want to disclose it because it's interesting, very interesting technological changes. So this is a critically important area in my opinion. I think that, in software, as you know, you're ahead for a period of time and then somebody can leapfrog you and then you need to leapfrog them. We are making significant investments in the people, in the technology, and using internal and external resources to ensure that we have the number one software suite out there, one that can be utilized for more than what it has been thus far, one that can be utilized to help retailers improve the shoppers' experience ultimately. So it's a real exciting area. We don't have - we aren't in a position to disclose the details at this time. But we are moving - quite honestly, I mean I'm never satisfied with the pace. This is one area where we're moving in a really rapid pace and I feel good about it, Jeff. : Okay. And one other question with regard to integration, and it's a follow-up with regard to - I don't know if you've answered the question earlier today or not, but with regard to your ability to improve you source-tagging programs to get more manufacturers at the bequest maybe of the retailers to start taking these on, so that you can offer kind of a one-stop shop value proposition to the retailer and make it easier for them to use the product, again, trying to stay ahead of your competition?
: Yeah. That's another great question, timely as well for two reasons. One is that we - it's one of the strategic initiatives that we've outlined that we really want to focus on exploiting this competitive advantage that we think that we have. We're doing a couple of things there, investing in outside resources, bringing in some help to get as closer to the CPGs in that regard. And I think that it's early and it will take sometime to go beyond where we are today. But we have one of the leading source-tagging, if not the leading source-tagging, operations in this space. We have a tremendous Hard Tag @ Source program, with certain customers in particular in the U.S. and in Europe. We also, as we speak, are in the process of putting together yet another source-tagging symposium. It'll take place in the next... : Next month, yeah. : Next month and the first week of June at one of the largest retailers in the U.S. with customers, current customers and prospective customers attending, industry experts as well as ourselves attending. And it's I think the third in our last 18 months that is being put on. We've done tremendous amount of work with these customers to help them understand which products are common across their different businesses, where we can go to the manufacturer and show the data now to the manufacturer to say that this is compelling, you now have a substantial critical mass here between these customers that we currently are doing business with to help and send them to do more source-tagging. So those types of things, more data, more analytics, more help, I mean along those lines to show not only our customers where the opportunities are, but to take it to the CPGs. So there's a couple of really good initiatives going on here in source-tagging. It's another area where we think we are the leaders and we want to stay ahead of the competition, so... : And just quickly, the major pushback on source-tagging, because it's been around for a while now, has been the inability of - not your - I guess, your inability or the ability of the retailers to get any type of consistent data across which lines - inline insertion the manufacturers need that's going to be consistent and always Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 110 of 139 PageID: 1189 Company Name: Checkpoint Systems Company Ticker: CKP US Date: 2015-05-06 Event Description: Q1 2015 Earnings Call Market Cap: 416.06 Current PX: 9.89 YTD Change($): -3.209 YTD Change(%): -24.498 Bloomberg Estimates - EPS Current Quarter: 0.120 Current Year: 0.465 Bloomberg Estimates - Sales Current Quarter: 159.000 Current Year: 604.500 Page 11 of 13 have the right tags on them as opposed to having to shift lines often on. I mean, has that been the major problem?
: That is problem. And to the extent that we can get multiple customers together with common SKUs... : Yeah.
: ...and there are hundreds of hundreds of SKUs that we've identified that are common, go to the manufacture. It enables them to make these longer runs and manage their inventory more effectively. So, that is a piece of it, Jeff. There's no doubt about it. But we're making more progress in that area. There's new products that we're coming out with that will potentially change the game and will be compelling to not only the retailer, but more compelling to the CPGs because they'll be selling more inventory as well. The second area is - in this - we think it's a great opportunity is working with them, CPGs. And with our latest products and improved product, we have new studies we - maybe a year ago we produced the TUV study that tested our products in high-speed insertion against all of our competitors and there was no comparison as far as defect rates. We were literally zero and their defect rate coming out of the high-speed insertion was close to 25%, I think, on average, if my memory serves me correctly. So we're doing another one - we're engaging them to do another study. And as we continue to develop new products and we develop the data to refill them that it does make sense and we can demonstrate that our products in the high-speed insertion process are more reliable. We think these all line up in a favorable way for us. : Okay. Thank you very much.
: Thanks, Jeff. Operator Thank you. Our next question comes from Andrew Jones with North Star Partners. Please state your question. : Hi. I was trying to understand the bridge for the guidance. Going back to the fourth quarter, you guys talked about FX impact of, I guess, it must be specifically $43 million and that that would hurt EBITDA by $3 million to $4 million. And now you've updated it to $50 million and the impact is $7 million. So I was wondering why the incremental $7 million has such a negative EBITDA impact compared to what we were told the last quarter?
: Yep. : Yeah. It's just a mix, right. So I think we operate in something like 83 currency payers. And it's not as simple as just saying the euro moved here versus the dollar. We have to look at the various currency payers and the inter-company sales between our units and various currencies. So it's quite a complicated calculation and requires some big assumptions and estimations to drop down revenues relatively easy. The inter-company profit impact is a little bit harder to forecast, but we think we have it as right as we can get it. : In addition, the dollar has strengthened since the last time we gave... : And so, if you look at our selling, the dollar has strengthened versus our selling currencies and has weakened versus our major production currency, which is the RMB in China, Chinese yuan. : Okay. And then, my other question was the acquisitions that you talk about making, could you give us some sense as to where it is that you have gaps and how much you would be willing to spend on an acquisition and whether or not it would be accretive if you did it?
: Sure. I think the approach that we've taken on this is, and dealing with advisers and looking at close to 200 various targets over the past 9, 10 months, is initially to stay close to our core. Our core business being our - in any way, shape or form - our retail business that we're in today, where we have substantial installed base around Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 111 of 139 PageID: 1190 Company Name: Checkpoint Systems Company Ticker: CKP US Date: 2015-05-06 Event Description: Q1 2015 Earnings Call Market Cap: 416.06 Current PX: 9.89 YTD Change($): -3.209 YTD Change(%): -24.498 Bloomberg Estimates - EPS Current Quarter: 0.120 Current Year: 0.465 Bloomberg Estimates - Sales Current Quarter: 159.000 Current Year: 604.500 Page 12 of 13 the world and where we can leverage our sales force. So it's loss prevention types, products. So, looking at those opportunities. It's also obviously in the RFID space, which is probably the number one priority given the growth rate that's going on in the RFID space, we think that that's obviously a place that we ought to focus. But it's more around what we call our MAS business, so EAS, Alpha and RFID, not so much outside of those areas in the ALS or RMS business. So it's - number one - and we think that the potential for success is much greater in that space than going outside a step or two. The second part of it is that it will have to pass through tremendous filters and due diligence here. We have - I'm a former financial guy, Jim's a financial guy - there's financial people everywhere that will take a look at it. And certainly, we would expect any acquisition to deliver return on invested capital in excess of our weighted average capital, risk adjusted, okay, so that we begin to drive our overall ROIC for the entire business higher. So, that's absolutely crucial as we look at these things. And the third question, I think, was about size. Today, we have a bank agreement that has a 3 times leverage ratio on it and I think today we're net $65 million cash positive. So we certainly would, at a minimum, be able to use that capacity that's on our balance sheet. And we would operate within those parameters. Going outside of those parameters would take a - it would have to be a very compelling argument and a very compelling return that we could generate. But I generally would like to stay within that 3 times EBITDA. : So we could see a $150 million acquisition?
: Yeah. We can certainly handle that with our current structure. : Okay. And if you guys have looked at 200 different acquisitions in the last nine months, I mean, how do you handle that? I mean, what's - it sounds like that would take all of your time. What kind of expenses are you incurring to look at that many acquisitions?
: Yeah. Some of them - bankers come in and they'll throw anything on the table - and some of them are easier to discard than others. And there has been tremendous burden. So, about a year ago, I moved - I've created a separate group to look at it and we use - we do count on our bankers to help us. We have some outside consulting to help us. It's built into our investment spending that we've talked about of $7 million to $10 million. And so - but we do have dedicated resources on it as well as everybody else that we're only working 12 hours a day, now they can work at least 18 hours a day. Some of them, though, were pretty easy to get past. Some of them we have gotten into in quite a bit of detail and we've gotten past that first phase. And then a few have come out the other end that we're in the process of looking a little bit more carefully at. So we're filtering through it. When you think about the space we operate in, quite frankly, it's not an unlimited number of opportunities or targets that are out there. We operate a duopoly, and we and our competitor are the two biggest in the MAS space. And so what I'd like to - where I'd like to see us go with this is fully explore what the opportunities are within our space and I think we're getting near the end of that list, and make sure that it does make sense. We aren't going to do an acquisition just to do an acquisition. So we'll continue to look at it and discuss it with the board and with the investors as we move along. Operator Thank you. There are no further questions at this time. I'll turn the conference back to management for closing remarks. George Babich Okay. Well, thank you very much everyone for joining us today. And as always, thank you very much to all of my colleagues at Checkpoint for their incredible dedication throughout the past quarter. And I look forward to that same thing as we move forward. So, have a great day. Take care. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 112 of 139 PageID: 1191 Company Name: Checkpoint Systems Company Ticker: CKP US Date: 2015-05-06 Event Description: Q1 2015 Earnings Call Market Cap: 416.06 Current PX: 9.89 YTD Change($): -3.209 YTD Change(%): -24.498 Bloomberg Estimates - EPS Current Quarter: 0.120 Current Year: 0.465 Bloomberg Estimates - Sales Current Quarter: 159.000 Current Year: 604.500 Page 13 of 13 Operator This concludes today's conference. All parties can disconnect. Thank you. This transcript may not be 100 percent accurate and may contain misspellings and other inaccuracies. This transcript is provided "as is", without express or implied warranties of any kind. Bloomberg retains all rights to this transcript and provides it solely for your personal, non-commercial use. Bloomberg, its suppliers and third-party agents shall have no liability for errors in this transcript or for lost profits, losses, or direct, indirect, incidental, consequential, special or punitive damages in connection with the furnishing, performance or use of such transcript. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of Bloomberg LP. © COPYRIGHT 2015, BLOOMBERG LP. All rights reserved. Any reproduction, redistribution or retransmission is expressly prohibited. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 113 of 139 PageID: 1192 Exhibit AA Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 114 of 139 PageID: 1193 Company Name: Checkpoint Systems Company Ticker: CKP US Date: 2015-08-04 Event Description: Q2 2015 Earnings Call Market Cap: 346.99 Current PX: 8.23 YTD Change($): -4.869 YTD Change(%): -37.171 Bloomberg Estimates - EPS Current Quarter: 0.090 Current Year: 0.465 Bloomberg Estimates - Sales Current Quarter: 151.000 Current Year: 604.500 Page 1 of 7 Q2 2015 Earnings Call Company Participants • James Lucania • George Babich Other Participants • Jeffrey T. Kessler • Chris P. McGinnis MANAGEMENT DISCUSSION SECTION Operator Greetings, ladies and gentlemen, and welcome to the Checkpoint Systems' Second Quarter 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] It's now my pleasure to introduce James Lucania, Acting Chief Financial Officer and Treasurer at Checkpoint Systems. Thank you, Mr. Lucania, you may begin. James Lucania Good morning. Welcome to Checkpoint Systems' second quarter 2015 earnings conference call. With me today is George Babich, President and Chief Executive Officer. Non-GAAP measures discussed on this call are defined and reconciled with GAAP measures on statements attached to our earnings release. The release and a brief supplemental financial review presentation are available on our Investor Relations Web site, and a replay of the call will be made available on the Web site shortly after the call. We remind you that during this call, we may make certain statements that reflect our current views and estimates about our future financial results. These forward-looking statements are subject to the Safe Harbor statements included in this afternoon's release or yesterday afternoon's release. Now, I'll turn the call over to George. George Babich Thanks, Jim. Good morning, and thank you everyone for joining us today. We appreciate being with us, and hope you've had an opportunity to read our second quarter earnings release and the financial review supplement issued yesterday after the market closed. Overall, I'm pleased to report that the top and bottom line results for the second quarter in line with management's expectations. While we continue to face a number of challenges in our business, including enormous year-over-year foreign currency headwinds, the sunset of our significant 2014 EAS hardware rollouts, and some challenging market Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 115 of 139 PageID: 1194 Company Name: Checkpoint Systems Company Ticker: CKP US Date: 2015-08-04 Event Description: Q2 2015 Earnings Call Market Cap: 346.99 Current PX: 8.23 YTD Change($): -4.869 YTD Change(%): -37.171 Bloomberg Estimates - EPS Current Quarter: 0.090 Current Year: 0.465 Bloomberg Estimates - Sales Current Quarter: 151.000 Current Year: 604.500 Page 2 of 7 dynamics in ALS, we're executing on our operational strategic plans. And our 2015 investments and top line growth initiatives are beginning to gain traction. Constant currency revenues were down 5.1% in the quarter, reflecting a sunset of our significant 2014 EAS hardware rollouts. The decline was partially offset by a solid 3.8% top-line growth in our ALS segment, reflecting the continuing growth trend in RFID as well as some wins in the legacy tickets and tags business. Unfortunately, gross profit margins decreased about 70 basis points to 41.7%. While we continue to benefit from our cost reduction and process improvement initiatives, there are two areas presenting some notable challenges. First, competitive pressures are increasing in our ALS business. We're seeing some year-over-year average selling price erosion in certain geographies as our competitors battle for market share to fill their under-utilized factories. At the same time, we're absorbing annual wage increases for our factory workforce in the emerging markets and are prevented by some local regulations from flexing our workforce through the use of seasonal temporary labor. Increasing our sales volume year-over-year helped to soften the second quarter impact of these market pressures. But we do expect these conditions to continue into the second half of the year, and it will pressure our second half profitability in ALS. Second, both sales and production volumes of EAS consumables are down year-over-year with the sunset of the Family Dollar initial tag-up program. These volume reductions paired with our annual wage inflation in our factories and the negative impacts of the stronger U.S. dollar on our supply chain profits led to some unfavorable manufacturing variances and lower overall EAS consumable margins. We expect our upcoming volume increases should help to mitigate these effects going forward, and therefore we expect EAS and consumable margins to improve in the second half of the year. On the customer side, I mentioned on our last call that we're close to securing a contract for a major new EAS rollout. I'm extremely pleased to report that a few weeks ago we signed this chainwide, multiyear EAS swap out with a major Asian retailer. While the full details of this project remain confidential at this time, we are removing a competitor's installed equipment and replacing it with a suite of our evolved EAS and Alpha solutions as well as an ambitious RF source tagging program that is expected to deliver significant ROI through shrinkage reduction. Certain key components of the solution are dual purpose, RF and RFID, establishing a clear pathway to our future chainwide RFID deployment. As part of this program, new RFID pilot stores are under way with the objective to increase sales through enhanced on-shelf availability and improved shoppers' experience. The rollout has begun, and we expect to recognize revenue from these installations over the second half of 2015 and well into 2016; better late than never. In addition, we also reached agreement with one of our largest North American customers. We will upgrade all of their Checkpoint RF EAS antennas with the next-generation of duel RF and RFID-ready antennas. This will be a chainwide EAS upgrade to our newly launched E10.2 antenna that is prewired for a simple upgrade to our high-performing and industry-best Wirama RFID reader. This new antenna will enable the use of RFID for EAS as well as inventory management to increase sales, improve the overall customer experience, and provide deeper insights into the traditional loss prevention function. On the merchandise visibility front, we're making tremendous progress. We are now in discussions with more than 30 retailers regarding implementation of our RFID solutions. This is an increase of approximately 50% in our project pipeline as compared to last year, reflecting a palpable change in the tone of discussions around RFID. We now see much more of a pull from our customers as opposed to the push sales model of the past few years. Retailers are beginning to review RFID as table stakes to compete in the 21st century omnichannel retail reality. In fact, we have recently reached agreement with one of our largest European customers to initiate an expansion of our RFID relationship by beginning to deploy our merchandise visibility solutions in 150 stores and warehouses in France beginning in the second half of 2015 and continuing into 2016; better late than never. Our OAT software has been expanded to include the functionality for distribution centers, where we also will be installing our world-class mass RFID tag reading solutions. Stores will be equipped with our high-performance RFID POS solution, with our OAT software suite running on handheld readers. This represents the next step forward with this Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 116 of 139 PageID: 1195 Company Name: Checkpoint Systems Company Ticker: CKP US Date: 2015-08-04 Event Description: Q2 2015 Earnings Call Market Cap: 346.99 Current PX: 8.23 YTD Change($): -4.869 YTD Change(%): -37.171 Bloomberg Estimates - EPS Current Quarter: 0.090 Current Year: 0.465 Bloomberg Estimates - Sales Current Quarter: 151.000 Current Year: 604.500 Page 3 of 7 retailer, who we expect to deploy worldwide our end-to-end merchandise visibility solutions beginning in the DCs into the back of the store stock rooms, and finally into the store. With the momentum building and the pull being generated by retailers, we hope to announce a number of RFID and RFID-inspired projects in the future. So while we continue to face a number of challenges in our businesses, we also continue to transform our legacy businesses by expanding our RFID capabilities while gaining share in this fast-growing market. At this time, let me turn the call back over to Jim to walk through the quarterly financial results. James Lucania Thanks, George. Second quarter revenue was $147.6 million, a decrease of 13.7% over the last year but in line with our expectations. Foreign currency translation effects resulted in 8.5 percentage points of that decline or $14.6 million. Gross profit was $61.5 million, $11 million less than last year's second quarter and also in line with our expectations. Foreign currency translation contributed $3.8 million of this decline. Our gross profit margin for the quarter decreased approximately 70 basis points to 41.7%. The overall margin decline reflects a revenue mix shift away from relatively higher-margin MAS, and toward relatively lower-margin ALS. The sunset of our major hardware rollouts in 2014 and our incremental R&D and SG&A investments and our strategic initiatives led to a non-GAAP operating income of $4.8 million, $8.5 million less than the $13.3 million in the second quarter of 2014. Similarly, adjusted EBITDA in the quarter was $12.8 million versus $21 million in the second quarter of 2014. Now, I'll break these results down by segment. MAS revenues decreased by 18.1% to $91.3 million. Excluding the impact of foreign currency translation, MAS revenue decreased by 9.1%. Revenue in our EAS systems and EAS consumables and related businesses declined 15.8% and 6.8% respectively, as we faced the difficult comparison with our Family Dollar rollout in North American and a number of smaller rollouts in Europe. The Hard Tag at Source program within EAS consumables grew 8.1% in the quarter, primarily due to strong volume growth with our major North American apparel account. Our Alpha business declined 9% compared to the second quarter last year. Again, this decrease was primarily due to the impact of the Family Dollar rollout in North America, partially offset by strong sales growth in key accounts in Europe and Latin America. The hardware, software, and service component of our merchandise visibility business grew by 43.6% versus the second quarter last year. Gross profit margin for MAS increased by 120 basis points from 46% to 47.2%. Margins improved in nearly all products through manufacturing cost reductions and other profit enhancement initiatives. These margin improvement initiatives more than offset the year-over-year impact of the strengthening U.S. dollar on our foreign currency supply chain profits. We continue to face margin pressures in EAS consumables due to the unfavorable impact of lower production volumes in our factories as well as significant labor cost increases. We expect our EAS consumables production volumes to increase in the back half of the year, so these negative year-over-year comparisons should begin to improve. Now to ALS. Revenues decreased by 1.5% to $47 million. Excluding the impact of foreign currency, organic ALS revenue grew by 3.8%. RFID label revenues grew by more than 20% year-over-year, while our legacy ticket and tag business was effectively flat. Increased volume with certain key accounts, as well as competitive market share wins helped to offset significant competitive pricing pressures in certain geographies. ALS segment gross profit margin fell to 31.6% from 36.2%. The decline was due to the strengthening of the U.S. dollar, the accelerated depreciation for certain machinery in Asia that's been removed from production, over- and under-absorption due to lower production volumes. And some competitive pricing pressures in certain geographies due to market oversupply. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 117 of 139 PageID: 1196 Company Name: Checkpoint Systems Company Ticker: CKP US Date: 2015-08-04 Event Description: Q2 2015 Earnings Call Market Cap: 346.99 Current PX: 8.23 YTD Change($): -4.869 YTD Change(%): -37.171 Bloomberg Estimates - EPS Current Quarter: 0.090 Current Year: 0.465 Bloomberg Estimates - Sales Current Quarter: 151.000 Current Year: 604.500 Page 4 of 7 Now to RMS. Revenue decreased 21.3% to $9.3 million. Excluding foreign currency translation effects, RMS revenue fell just $400,000 or 3.5%. The decline was attributable to the sunset of the Family Dollar rollout in 2014 and softer retail display sales in Asia. Gross profit margins increased by 420 basis points from 33.9% to 38.1%, principally due to our profit improvement initiatives. On to SG&A. Expenses for the second quarter decreased by $3.5 million from $55.4 million in 2014 to $51.9 million in 2015. Foreign currency translation effects reduced SG&A by $4.8 million. The $1.3 million constant currency increase was related to investments in our strategic initiatives, and some one-time costs partially offset by savings related to our profit improvement plan. Non-GAAP diluted earnings per share was $0.10, down from $0.25 last year. Cash flow provided by our operations was $100,000, compared with $12.7 million in the same period last year. And this year's amount includes a $9 million one-time litigation settlement payment. Capital expenditures increased in the second quarter from $3.5 million, in 2014, to $4.7 million this year, reflecting increased investment spending related to our strategic initiatives. Now on to guidance. Our guidance for fiscal year 2015 remains unchanged. We continue to expect net revenues in the range of $575 million to $625 million, adjusted EBITDA in the range of $55 million to $68 million, and non-GAAP diluted net earnings per share in the range of $0.40 to $0.50. As a reminder, our guidance assumes a continuation of the current foreign currency exchange rate environment. As we discussed in the last call, over two-thirds of our sales are denominated in foreign currencies. We still estimate that our 2015 revenue guidance would be approximately $50 million higher at constant 2014 foreign exchange rates, while the impact on adjusted EBITDA is approximately $7 million. As George mentioned, we've signed a contract for a major hardware rollout with a leading Asian retailer, and we've added several RFID and RFID-inspired projects to the revenue pipeline. While a portion of these projects were included in our prior guidance, the inclusion of the full 2015 benefit of these projects is helping to offset the ASP and margin pressures that we expect to continue in ALS for the rest of the year. And we remain confident in our ability to deliver on our EBITDA commitment. Our adjusted EBITDA and earnings guidance still assumes $7 million to $10 million of incremental investment in R&D and SG&A, partially funded through savings delivered by our profit improvement plans. We have and will continue to increase on our investment in capital expenditures to drive growth, and expect total CapEx to be up to $25 million for fiscal 2015. We expect the primary benefits of these initiative investments to begin in 2016. The effective tax rate assumed in our earnings guidance remains 35% after giving consideration to non-GAAP adjustments. As you know, this is the hardest number to forecast in Checkpoint, as it varies wildly with our geographic revenue mix. But we continue to expect our 2015 cash income tax expense to be approximately $5 million to $6 million. Now, I'll turn the call back over to George. George Babich Okay, thanks Jim. As you all know well, our revenue and profitability remains dependent on large capital commitments from our retail customers, typically in the second half of the year. With our busiest season remaining ahead of us, there are certain risks to our forecast. The rubber meets the road each year in September through December. However, with the recent EAS wins, the expansion of our RFID projects, and our deepening RFID pipeline, we're extremely confident in our ability to deliver these results, and our ability to grow from here well into the future. To that end, the board recently authorized the share repurchase program of up to $30 million over the next two years. This new share repurchase program reflects our financial strength, and our confidence in our current and long term growth prospects. Share repurchases are a key element of our capital allocation strategy, which aims to maximize shareholder value while maintaining the financial flexibility to pursue organic investments and strategic acquisitions as Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 118 of 139 PageID: 1197 Company Name: Checkpoint Systems Company Ticker: CKP US Date: 2015-08-04 Event Description: Q2 2015 Earnings Call Market Cap: 346.99 Current PX: 8.23 YTD Change($): -4.869 YTD Change(%): -37.171 Bloomberg Estimates - EPS Current Quarter: 0.090 Current Year: 0.465 Bloomberg Estimates - Sales Current Quarter: 151.000 Current Year: 604.500 Page 5 of 7 opportunities arise. With our stock trading below historical valuation levels, we believe that it's prudent to support our stock through this capital allocation strategy. With that, Jim, I'd now like to open the call up to questions and take a couple before we sign off. Q&A Operator Thank you. [Operator Instructions] Our first question comes from the line of Jeff Kessler with Imperial Capital. Please proceed with your question. : Thank you. With regard to the installation cost that you're going to be incurring over in Asia, will those costs be affected by forex well, meaning will those costs be lower relative to the cost you would have expended in North America?
: Hey, Jeff. It's Jim. : Hi, Jim.
: Hi. Most of our EAS antenna production, basically all of our EAS antenna production is in China. And the exchange rate difference you'll see in our supplement presentation of China versus the U.S. dollar has not been nearly as significant as many of the other countries that we sell into. : Okay. The annualizing of the Family Dollar installation, at what point do we get to a spot in which you're not comparing yourself to that installation surge anymore? I'm realizing there's going to be overlapping - I understand there will be, hopefully, overlapping installations. I want to try to find out when we're not going to be getting these negative comps like we had in the first and second quarter.
: Yes, Jeff, it's George. The program began, as you know, and ran all the way through 2014 and into early 2015. So we'll see these comps for a little bit longer. : All right, one final question. It was interesting that you mentioned the Wirama. I'm wondering to what extent are you able to sell this now as part of a larger omnichannel program. Are you having success in getting a wireless inventory management system out there, or is this just in spots where they're still piloting and testing it?
: Well, as you know, Jeff, with our installation of RFID in Decathlon, in France, we utilized our Wirama technology in the antennas. And as I mentioned, with the North American retailer that we're not disclosing it at this point, we're changing out all of their antennas chainwide so that they're in a position to utilize the RFID technology - Wirama technology at the point of exit as they expand their RFID program with us. And then thirdly, the Asian EAS swap-out, clearly a big piece of that was wrapped around positioning for the transition to RFID as EAS and using RFID. And I'm hopeful that we'll also be able to install the Wirama technology. : Okay, was that a selling point in the swap out negotiation?
: Oh, absolutely, absolutely. In fact, it was more important, quite frankly, than any other element, was their ability to move directly from RF EAS to RFID EAS, and do that with us quickly. : Okay. Thank you very much.
: You're welcome. Operator Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 119 of 139 PageID: 1198 Company Name: Checkpoint Systems Company Ticker: CKP US Date: 2015-08-04 Event Description: Q2 2015 Earnings Call Market Cap: 346.99 Current PX: 8.23 YTD Change($): -4.869 YTD Change(%): -37.171 Bloomberg Estimates - EPS Current Quarter: 0.090 Current Year: 0.465 Bloomberg Estimates - Sales Current Quarter: 151.000 Current Year: 604.500 Page 6 of 7 Thank you. Our next question comes from the line of Chris McGinnis with Sidoti and Company. Please proceed with your question. : Morning, and thanks for taking my questions. Just to kind of stay on path, I guess, of the RFID, you mentioned 30 pilots. Can you maybe just talk a little bit about that make-up of maybe where it is on a geographical basis, but also maybe the stages? Because, I mean, I've been working with these for a while, and it seems like you're a little bit more positive on the outlook surrounding that. Maybe just a couple of data points why you feel confident and maybe dig a little bit deeper into the portfolio that you have.
: I'd start by saying that we, if you remember, had the capability for RFID not all that long ago. I mean we literally launched the hardware and the software 18 months ago. And we're really ready to go to market. And we were - while we had 20 tests going, they were tests. And tests are different than going live, chainwide, with reliable and predictable performance. So as we entered 2015, one of the investments that we made was to expand our sales force efforts to bring additional customers on. And what we found is that, as I mentioned, it's really moved from a push it out to the customer, as it was in the first two years, to now, the customers are pulling it from us. So like any other retail technology, it does take time. And we are making progress, and to-date we have been very successful with those tests. I remain confident because of the pull that we're seeing, that they really do believe that it's required for them to compete in the omnichannel environment. And we're doing these tests on all three major continents, so it's not as if it's concentrated in one versus another. And we're in various stages, Chris, as anything from testing in our existing accounts, apparel accounts where we have EAS already, to expanding within accounts that we've already launched RFID, with - to actually in accounts where we do not have the EAS legacy business, but we're testing our technology and some differentiated technology in an attempt to potentially get into those accounts as well. So it's pretty broad. It takes time. And I think the time of the sales cycle is probably going to be shorter in the future than it has been in the past. But I'm encouraged by the breadth and depth and progress that we're making on the MV initiatives. : That sounds good. And I guess it's surprising a little bit to hear they're coming to you now. It's seemingly a little bit stronger just because maybe the market doesn't seem as strong. Is that just to stay competitive due to the online initiatives? Do you think that's the biggest driving factor?
: Yes, I think - two things. One is as we talked before, there's a bit of fits and starts in this evolution of MV, the whole RFID initiative, and whether it was 2008 going back on capital by the retailers, or it was the Round Rock patent litigation, there was always seems to be something getting in the way. Of course, it started with the costs being very high. Now the cost has come down, it's very affordable. The ROI is there. Online e-commerce is a real threat to retailers. It's expanded tremendously where a greater portion of sales are coming from online. And the other apparel retailers are adopting RFID, and their competitors see it. And I know that they need to start the process, because it does take time. So I think all of these things coming together influence the pace at which we'll see the adoption going forward. : Sounds great. Thanks for taking my questions and good luck in the second half.
: All right. Thanks, Chris. Operator Thank you. Ladies and gentlemen, at this time there are no further questions. I'd like to turn it back to George Babich for closing comments. George Babich Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 120 of 139 PageID: 1199 Company Name: Checkpoint Systems Company Ticker: CKP US Date: 2015-08-04 Event Description: Q2 2015 Earnings Call Market Cap: 346.99 Current PX: 8.23 YTD Change($): -4.869 YTD Change(%): -37.171 Bloomberg Estimates - EPS Current Quarter: 0.090 Current Year: 0.465 Bloomberg Estimates - Sales Current Quarter: 151.000 Current Year: 604.500 Page 7 of 7 All right. Well, Jen, thank you. Thank you everyone for joining us today. As always, I'd like to thank all of my Checkpoint colleagues worldwide for their continued efforts. Thanks, everyone, and have a great day. Operator Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. This transcript may not be 100 percent accurate and may contain misspellings and other inaccuracies. This transcript is provided "as is", without express or implied warranties of any kind. Bloomberg retains all rights to this transcript and provides it solely for your personal, non-commercial use. Bloomberg, its suppliers and third-party agents shall have no liability for errors in this transcript or for lost profits, losses, or direct, indirect, incidental, consequential, special or punitive damages in connection with the furnishing, performance or use of such transcript. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of Bloomberg LP. © COPYRIGHT 2015, BLOOMBERG LP. All rights reserved. Any reproduction, redistribution or retransmission is expressly prohibited. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 121 of 139 PageID: 1200 Exhibit BB Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 122 of 139 PageID: 1201 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): February 4, 2013 CHECKPOINT SYSTEMS, INC. (Exact name of Registrant as specified in its Articles of Incorporation) N/A (Former name or address, if changed since last report) Pennsylvania 22-1895850 (State of Incorporation) (IRS Employer Identification No.) 101 Wolf Drive, PO Box 188, Thorofare, New Jersey 08086 (Address of principal executive offices) (Zip Code) 856-848-1800 (Registrant’s telephone number, including area code) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below): [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 123 of 139 PageID: 1202 Appointment of President and Chief Executive Officer On February 4, 2013, the Board of Directors of Checkpoint Systems, Inc. ( “Checkpoint” or the “Company”) appointed George Babich, Jr. as President and Chief Executive Officer of Checkpoint. Prior to such appointment, Mr. Babich was acting as interim President and Chief Executive Officer of Checkpoint. Mr. Babich, age 61, served as interim President and Chief Executive Officer of Checkpoint since May 2012. Mr. Babich has been a member of Checkpoint’s Board of Directors since 2006 and will continue to serve as a director. Mr. Babich retired from The Pep Boys - Manny Moe & Jack in 2005. From 2004 to 2005, he was President of The Pep Boys - Manny, Moe & Jack, and Chief Financial Officer and President from 2002 to 2004. Prior to joining Pep Boys, Mr. Babich held various financial executive positions with Morgan, Lewis & Bockius LLP, The Franklin Mint, Pepsico Inc. and Ford Motor Company. He has been a member of the Board of Directors of Teleflex Incorporated since 2005 and currently serves as a member of the Audit Committee. Compensation Arrangement with President and Chief Executive Officer On February 4, 2013, in connection with Mr. Babich’s appointment, Mr. Babich and Checkpoint entered into an employment agreement, pursuant to which Mr. Babich will receive an annual base salary of $850,000, which will be reviewed annually by the Compensation Committee. In addition, Mr. Babich is eligible for an annual bonus of up to 100% of his base salary upon achievement of certain annual targeted goals and objectives, with the possibility of a maximum bonus of up to 150% upon achievement of specified goals and objectives beyond the target level. Mr. Babich also is entitled to participate in all pension plans as well as medical, dental and other benefit plans and perquisites generally available to the Company’s senior management and is subject to customary non-competition and confidentiality provisions. Mr. Babich received grants of restricted stock units (“Units”), comprising (i) 70,000 Units which vest and become nonforfeitable on December 31, 2013; (ii) 70,000 Units which vest and become nonforfeitable on December 31, 2014; and (iii) 60,000 Units which vest and become nonforfeitable if and when the closing price of the Company’s common stock has averaged at least $15.00 per share for 30 trading days after February 4, 2013 through December 31, 2014. If the board of directors elects not to renew Mr. Babich’s employment agreement on comparable terms for at least two (2) additional years beyond its initial termination date of December 31, 2014, the agreement and Mr. Babich’s employment will terminate on December 31, 2014, the termination will be considered a Termination Without Cause under his agreement and all of his time-based Units will become immediately vested, to the extent not already vested. The expiration of the term under any other circumstances shall be considered a termination by Mr. Babich without Good Reason. In the event of a Termination Without Cause or a Termination For Good Reason, all time-based Units become immediately vested, to the extent not already vested. Except as described below, within 45 days of his termination, the Company is obligated to pay to Mr. Babich a cash payment (“Severance Payment) in an amount equal to (i) all accrued but unpaid base salary through the date of his termination, plus (ii) one year’s base salary. If at any time up to Mr. Babich’s Termination Without Cause or Termination For Good Reason the closing price of the Company’s common stock has averaged at least $12.00 per share for 30 trading days, his Severance Payment shall be an amount equal to (i) all accrued but unpaid base salary through the date of his termination, plus (ii) one year’s base salary, plus (iii) the amount of any cash bonus awarded to Mr. Babich for the year preceding the year of his termination. If at any time up to Mr. Babich’s Termination Without Cause or Termination For Good Reason the closing price of the Company’s common stock has averaged at least $17.00 per share for 30 trading days, the Severance Payment shall be an amount equal to (i) all accrued but unpaid base salary through the date of his termination, plus (ii) two year’s base salary, plus (iii) two times the amount of any cash bonus awarded to Mr. Babich for the year preceding the year of his termination. In the event of a Termination Without Cause or a Termination For Good Reason within 12 months following a Change in Control (as defined in the agreement), all Units will vest, to the extent not already vested, and the Severance Payment shall be an amount equal to (i) all accrued but unpaid base salary through the date of his termination, plus (ii) two and one-half year’s base salary, plus (iii) if at any time up to Mr. Babich’s Termination Without Cause or Termination For Good Reason, the closing price of the Company’s common stock has averaged at least $12.00 per share for 30 trading days, the amount of any cash bonus awarded to Mr. Babich for the year preceding the year of termination, or two times the amount of any cash bonus awarded to Mr. Babich for the year preceding the year of termination if such average closing price was at least $17.00 per share. The foregoing description of the employment agreement does not purport to be complete and is qualified in its entirety by reference to the employment agreement, which is filed hereto as Exhibit 10.1 and is herein incorporated into this current report on Form 8-K by reference. Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers. Item Other Events Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 124 of 139 PageID: 1203 8.01 Item On February 4, 2013, the Company issued a press release announcing the appointment of George Babich as its President and Chief Executive Officer. A copy of the press release is attached to this Form 8-K as Exhibit 99.1 and is incorporated by reference herein. Item 9.01 Financial Statements and Exhibits (d) Exhibits 10.1 Employment Agreement dated February 4, 2013 by and between Checkpoint Systems, Inc. and George Babich. 99.1 Press Release dated April 17, 2012 issued by Checkpoint Systems, Inc. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 125 of 139 PageID: 1204 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Checkpoint Systems, Inc. Dated: February 8, 2013 By: /s/Raymond D. Andrews Raymond D. Andrews Senior Vice Presdient and Chief Financial Officer Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 126 of 139 PageID: 1205 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the “Agreement”) is entered into by and between GEORGE BABICH, JR. (“Executive”), and CHECKPOINT SYSTEMS, INC., a corporation organized and existing under the laws of the Commonwealth of Pennsylvania (“Company”) on this 4th day of February, 2013. WHEREAS, Executive has served as the Company’s Interim President and Chief Executive Officer since May 3, 2012; and WHEREAS, the Board of Directors of Company (“Board of Directors”) wishes to eliminate Executive’s interim status and to retain him and obtain his commitment to serve as President and Chief Executive Officer of Company on the terms set forth herein; NOW, THEREFORE, in consideration of the mutual covenants and obligations contained herein, and intending to be legally bound, the parties, subject to the terms and conditions set forth herein, agree as follows: 1. EMPLOYMENT AND TERM. Executive hereby agrees to be employed as President and Chief Executive Officer of Company effective as of the date of execution of this Agreement (the “Commencement Date”), and Company hereby agrees to retain Executive as President and Chief Executive Officer commencing as of such date. By executing this Agreement the Company confirms that the Board of Directors has approved this Agreement. The term of Executive’s employment as President and Chief Executive Officer under this Agreement (the “Term”) shall be the period commencing on the Commencement Date and ending on December 31, 2014. 2. DUTIES. During the Term, Executive will have the titles of President and Chief Executive Officer of Company. Executive shall report exclusively to and receive instructions from Company’s Board of Directors and shall have such duties and responsibilities customary for the positions of president and chief executive officer of public companies similarly situated. Without limitation, Executive shall have full authority and discretion relating to the general and day-to-day management of the affairs of the Company including, but not limited to, finances and other financial matters, compensation matters (other than with respect to the compensation of Executive himself and the other executive officers of the Company which shall be determined by the Compensation Committee of the Board of Directors), personnel matters (other than such matters that relate to Executive himself), budgeting, operations, intellectual property, investor relations, retention of professionals and strategic planning and implementation. Executive will be the most senior executive officer of the Company and all other executives and businesses of the Company will report to Executive or his designee. The foregoing language shall not be construed so as to limit the duties and responsibilities of the Board of Directors as described in the Company’s Articles of Incorporation and Bylaws. 3. OTHER BUSINESS ACTIVITIES. Executive shall serve the Company faithfully and shall devote his reasonable best efforts and substantially all of his business time, attention, skill and efforts to the performance of the duties required by or appropriate for his position as President and Chief Executive Officer. In furtherance of the foregoing, and not by way of limitation, for so long as he remains President and Chief Executive Officer of Company, Executive shall not directly or indirectly engage in any other business activities or pursuits, except for those arising from positions held as of the date hereof as a director or otherwise with charitable or business organizations, as identified by Executive to the Board of Directors or such other activities as would not interfere with Executive’s ability to carry out his duties under this Agreement. Notwithstanding the foregoing, Executive shall be permitted to engage in activities in connection with (i) service as a volunteer, officer or director or in a similar capacity of any charitable or civic organization, (ii) managing personal investments, and (iii) serving as a director, executor, trustee or in another similar fiduciary capacity for a non-commercial entity; provided, however, that any such activities do not interfere with Executive’s performance of his responsibilities and obligations pursuant to this Agreement. 4. BASE SALARY. The Company shall pay Executive a salary at the annual rate of Eight Hundred and Fifty Thousand Dollars ($850,000.00) (the “Base Salary”), payable pursuant to the Company’s normal practice, but no less frequently than monthly. The Base Salary shall be inclusive of all applicable income, Social Security and other taxes and charges which are required by law or requested to be withheld by Executive and which shall be withheld and paid in accordance with Company’s normal payroll practice for its senior management as in effect from time to time. 5. ANNUAL INCENTIVE COMPENSATION. Executive shall be eligible for an annual bonus of up to one hundred percent (100%) of Base Salary upon achievement of the targeted annual goals and objectives established by the Board of Directors in advance of or as soon as practicable following the commencement of each fiscal year of the Company. The goals and objectives established by the Board of Directors for any year shall make provision for a maximum bonus of up to one hundred and fifty percent (150%) of Base Salary upon achievement of specified goals and objectives beyond the target level. The Board of Directors shall consult with Executive in the development of targeted annual goals and objectives but shall have absolute discretion to establish same. Any compensation payable to Executive pursuant to this Section shall be paid to Executive during the calendar year following the applicable performance year but in any event no later than the date of publication of the Company’s audited financial statements for the prior fiscal year, whether or not Executive is then employed by the Company, except as otherwise expressly limited in this Agreement. 6. EQUITY INCENTIVES. As of the Commencement Date, each of the thirty-two thousand (32,000) restricted stock units and one hundred and twenty thousand (120,000) stock options granted to Executive in connection with his assumption of duties as Interim President and Chief Executive Officer shall be immediately vested to the extent not already vested. In addition to such other long term incentive opportunities which may be established by the Board of Directors for Executive as part of a Company-wide long term incentive program, as of the Commencement Date Executive shall be granted two hundred thousand (200,000) restricted stock units with respect to the Company’s common stock (the “RSUs”) subject to the terms and conditions set forth in this Agreement and the shareholder approved plan or plans under which the RSUs are granted. Seventy thousand (70,000) RSUs shall become vested on December 31, 2013, and another seventy thousand (70,000) RSUs Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 127 of 139 PageID: 1206 shall become vested on December 31, 2014, in each case subject to Executive’s continued service as President and Chief Executive Officer through the specified date, except as otherwise provided in this Agreement. The one hundred and forty thousand (140,000) RSUs described in the preceding sentence shall be referred to herein as the “Time Based RSUs.” The remaining sixty thousand (60,000) RSUs shall become vested only if and when the closing price of the Company’s common stock has averaged at least fifteen dollars ($15.00) per share for thirty (30) trading days after the Commencement Date through the end of the Term, except as otherwise provided in this Agreement. 7. OTHER BENEFITS. (a) PENSION PLANS. Executive shall be entitled to participate in all tax- qualified and non-tax-qualified pension plans maintained or contributed to by Company or for the benefit of its executives (collectively, the “Company Pension Plans”), in accordance with the terms of such Company Pension Plans as they may be amended from time to time in the discretion of the Company. (b) MEDICAL INSURANCE. During the Term of this Agreement, Executive shall be entitled to participate in any medical and dental insurance plans generally available to the senior management of Company, as such plans may be in effect from time to time. (c) OTHER BENEFIT PLANS. Executive shall be entitled to receive or participate in such further savings, deferred compensation, health or welfare benefit plans offered to Company’s senior management generally, in accordance with the terms of such plans as they may be amended from time to time in the discretion of the Company. (d) PERQUISITES; EXPENSES. The Company agrees to promptly reimburse Executive for all reasonable business expenses incurred by Executive in performing his duties pursuant to this Agreement, in accordance with Company’s reimbursement policies generally applicable to senior management. During the Term of this Agreement, Company agrees to provide Executive with such perquisites as are generally made available to senior management from time to time, including the perquisites provided as of the date the Board of Directors approves this Agreement. (e) VACATION. Executive shall be entitled to six (6) weeks paid vacation annually, and to cash compensation in respect of accrued but unused vacation days if Executive is terminated under the terms hereof, for the calendar year in which such termination occurs. (f) SEVERANCE UPON EXPIRATION OF TERM. If the Board of Directors elects not to offer an opportunity to Executive to extend the terms of this Agreement on comparable terms for at least two (2) additional years, this Agreement and Executive’s employment shall be terminated as of the end of the Term and Executive’s termination of employment shall be considered a Termination Without Cause for purposes of Section 10.2 of this Agreement. Executive’s termination of employment upon expiration of the Term under any other circumstances shall be considered a termination by Executive without Good Reason for purposes of this Agreement. 8. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. (a) Executive and Company acknowledge that Executive will, in the course of his employment, come into possession of confidential, proprietary business and technical information, and trade secrets of Company and its Affiliates (the “Proprietary Information”). Proprietary Information includes, but is not limited to, the following: - BUSINESS PROCEDURES. All information concerning the way Company and its Affiliates conduct their business, which is not publicly available or generally known in the industry or trade in which Company or its Affiliates compete (such as Company contracts, internal business procedures, controls, plans, licensing techniques and practices, supplier, subcontractor and prime contractor names and contacts and other vendor information, computer system passwords and other computer security controls, financial information, distributor information, and employee data) and the physical embodiments of such information (such as check lists, samples, service and operational manuals, contracts, proposals, printouts, correspondence, forms, listings, ledgers, financial statements, financial reports, financial and operational analyses, financial and operational studies, management reports of every kind, databases, employment or personnel records, and any other written or machine-readable expression of such information as are filed in any tangible media). - MARKETING PLANS AND CUSTOMER LISTS. All information which is not publicly available or generally known in the industry or trade in which Company or its Affiliates compete pertaining to Company’s and its Affiliates’ marketing plans and strategies; forecasts and projections; marketing practices, procedures and policies; goals and objectives; quoting practices, procedures and policies; and customer data including the customer list, contracts, representatives, requirements and needs, specifications, data provided by or about prospective customers, and the physical embodiments of such information. - BUSINESS VENTURES. All information which is not publicly available or generally known in the industry or trade in which Company or its Affiliates compete concerning new product development, negotiations for new business ventures, future business plans, and similar information and the physical embodiments of such information. - SOFTWARE. All information relating to Company’s and its Affiliates’ software or hardware in operation or various stages of research and development, which is not publicly available or generally known in industry or trade in which Company or its Affiliates compete and the physical embodiments of such information. - LITIGATION. Information which is not publicly available or generally known in the industry or trade in which Company or its Affiliates Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 128 of 139 PageID: 1207 (b) Executive acknowledges that the Proprietary Information is a valuable and unique asset of Company and its Affiliates. Executive agrees that he will not, at any time during his employment or for a period of five (5) years after the termination of his employment with Company, without the prior written consent of Company or its Affiliates, as applicable, either directly or indirectly divulge any Proprietary Information for his own benefit or for any purpose other than the exclusive benefit of Company and/or its Affiliates, or except as required by applicable law or in any judicial or administrative process with subpoena powers. 9. AGREEMENT NOT TO COMPETE. (a) Executive agrees that he shall not compete with Company or its Affiliates for the Restricted Period. The Restricted Period is defined as the period beginning on the date hereof and ending (i) if Executive is terminated for Cause (as defined in Section 10.4(a)) or Executive terminates this Agreement Without Good Reason (as defined in Section 10.2(b)), on the date which is twenty-four (24) months following the date of termination, (ii) if this Agreement is terminated by the Company for any reason other than Cause or Executive for Good Reason, on the date which is twelve (12) months following such termination, and (iii) if this Agreement terminates due to the expiration of the Term, on the date which is twelve (12) months following the expiration of the Term. (b) For the purposes of this Section 9, “compete” shall mean directly or indirectly through one or more intermediaries (i) working or serving as a director, officer, employee, consultant, agent, representative, or in any other capacity, with or without compensation, on behalf of one or more entities engaged in the Company’s Business (as defined below) in any country where Company (including any Affiliate) either engages in the Company’s Business at the time of Executive’s termination or where Company’s senior management, at the time of Executive’s termination, has developed a business plan or taken affirmative steps to engage in the Company’s Business, (ii) soliciting any employees of the Company other than a general solicitation via any communication medium directed generally to the public at large or to industry participants or if Executive’s employer solicited such employee without input or encouragement from Executive, and/or (iii) inducing any customer or business partner of the Company to breach a contract with the Company or otherwise cease doing business with the Company or any principal for whom the Company acts as agent to terminate such agency relationship. For purposes of this provision, the term “the Company’s Business” shall mean any business activity or line of business similar to the type of business conducted by Company, and/or its Affiliates at the time of Executive’s termination of employment or which Company, and/or its Affiliates at the time of Executive’s termination of employment or within one year prior thereto have developed a business plan or taken affirmative steps to enter into or conduct. Executive expressly agrees that the markets served by Company and its Affiliates extend worldwide and are not dependent on the geographic location of the executive personnel or the businesses by which they are employed and that the restrictions set forth in this Section 9 are reasonable and are no greater than are required for the protection of Company, and its Affiliates. For purposes of this Agreement, the term “Affiliate” shall be deemed to refer to Company and any entity (whether or not existing on the date hereof) controlled (i.e., more than 50% of the voting power) by the Company. 10. TERMINATION. Executive’s employment hereunder may be terminated during the Term upon the occurrence of any one of the events described in this Section 10 upon fifteen days prior written notice to Executive. Upon termination, Executive shall be entitled only to such compensation and benefits as described in this Section 10. 10.1. DISABILITY AND DEATH. (a) DISABILITY. If Executive becomes physically or mentally disabled to such an extent that he has not been able to perform the duties set forth in Section 2 of this Agreement, with or without a reasonable accommodation, for a period of more than 180 days, either consecutively or within any 365-day period (“Disability”), Company may terminate Executive’s employment hereunder. The determination of whether Executive has a Disability under this Agreement shall be made by the Board of Directors, which shall consider the information presented by Executive’s personal physician and by any other advisors, including any other physician, which the Board of Directors determines appropriate. The determination of the Board of Directors shall be final and binding, unless it is determined to have been arbitrary and capricious. If the employment of Executive terminates during the Term due to the Disability of Executive, Company shall provide to Executive (i) whatever benefits are available to him under any disability benefit plan(s) applicable to him at the time of such termination to the extent Executive satisfies the requirements of such plan(s), and compete regarding litigation and potential litigation matters and the physical embodiments of such information. - POLICY INFORMATION. Information which is not publicly available or generally known in the industry or trade in which the Company competes regarding the policies and positions that have been or will be advocated by Company and its Affiliates with governmental officials, the views of government officials toward such policies and positions, and the status of any communications that Company or its Affiliates may have with any government officials. - INFORMATION NOT GENERALLY KNOWN. Any information which (a) is not available to the public or within the industry or trade in which Company or its Affiliates compete, (b) gives Company or its Affiliates a significant advantage over its or their competitors, or (c) has significant economic value or potentially significant economic value to Company or its Affiliates, including the physical embodiments of such information. - “Proprietary Information” does not include (i) information which at the time of disclosure or thereafter is in the public domain or is known within the industry trade group in which Company operates or is already possessed by Executive, free of any confidentiality obligation, (ii) information disclosed to Executive in good faith by a third party who has an independent right to such information and who discloses the same to Executive, free of any confidentiality obligation, (iii) information which is independently developed by Executive, (iv) information which the Company generally discloses to third parties without imposing obligations of confidentiality thereon, and (v) information known by Executive prior to entering into this Agreement. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 129 of 139 PageID: 1208 (ii) the payments set forth in Section 10.1.(c). (b) DEATH. If Executive dies during the Term, Company shall pay to Executive’s executors, legal representatives or administrators the payments set forth in Section 10.1.(c). Except as specifically set forth in this Section 10.1 or under applicable laws, Company shall have no liability or obligation hereunder to Executive’s executors, legal representatives, administrators, heirs or assigns or any other person claiming under or through him by reason of Executive’s death, except that Executive’s executors, legal representatives or administrators will be entitled to receive any death benefit payable to them as beneficiaries under any insurance policy or other benefits plans in which Executive participates as an employee of Company and to exercise any rights afforded them under any benefit plan then in effect. (c) PAYMENT UPON DISABILITY OR DEATH. Upon termination of the employment of Executive due to death or Disability during the Term, Company shall pay an amount equal to all accrued but unpaid Base Salary through the date of termination of employment, plus a portion of the Average Annual Incentive Compensation (as defined in Section 10.2(d) below) pro-rated for the year through the date of termination, and all Time-Based RSUs shall become vested to the extent they are not already vested. 10.2. TERMINATION BY COMPANY WITHOUT CAUSE; TERMINATION BY EXECUTIVE FOR GOOD REASON. (a) TERMINATION BY COMPANY WITHOUT CAUSE. The Company may terminate Executive’s employment hereunder at any time for any reason other than Cause, Disability or Death upon thirty (30) days written notice to Executive (“Termination Without Cause”). (b) TERMINATION BY EXECUTIVE FOR GOOD REASON. Executive may terminate his employment hereunder at any time for Good Reason (“Termination for Good Reason”). For purposes of this Agreement, Good Reason shall mean (i) a material reduction in the titles, duties, position, authority or responsibilities of Executive; (ii) a reduction in Executive’s Base Salary or incentive compensation bonus opportunity as set forth in Section 5 hereof or a material reduction in Executive’s compensation arrangements or benefits; (iii) a substantial failure of Company to perform any material provision of this Agreement; or (iv) a relocation of Company’s executive offices to a distance of more than fifty (50) miles from its location as of the date of this Agreement, unless such relocation results in Company’s executive offices being closer to Executive’s then primary residence or does not substantially increase the average commuting time of Executive. (c) In the event of a Termination Without Cause or a Termination For Good Reason, all Time-Based RSUs shall become vested to the extent not already vested, and except as provided in Section 10.2(d), (e) or (f) below, the Company shall pay to Executive within forty-five (45) days after termination a cash payment (the “Severance Payment) in an amount equal to (i) all accrued but unpaid Base Salary through the date of termination of employment, plus (ii) one year’s Base Salary. (d) If at any time after January 1, 2013 through the date of Executive’s Termination Without Cause or Termination For Good Reason the closing price of the Company’s common stock has averaged at least twelve dollars ($12.00) per share for thirty (30) trading days, the Severance Payment shall be an amount equal to (i) all accrued but unpaid Base Salary through the date of termination of employment, plus (ii) one year’s Base Salary, plus (iii) the amount of any cash bonus awarded to Executive for the year preceding the year of termination. (e) If at any time after the Commencement Date through the date of Executive’s Termination Without Cause or Termination For Good Reason the closing price of the Company’s common stock has averaged at least seventeen dollars ($17.00) per share for thirty (30) trading days, the Severance Payment shall be an amount equal to (i) all accrued but unpaid Base Salary through the date of termination of employment, plus (ii) two (2) year’s Base Salary, plus (iii) two (2) times the amount of any cash bonus awarded to Executive for the year preceding the year of termination. (f) In the event of a Termination Without Cause or a Termination For Good Reason within twelve (12) months following a Change in Control (as defined below), all RSUs shall become vested to the extent not already vested, and the Severance Payment shall be an amount equal to (i) all accrued but unpaid Base Salary through the date of termination of employment, plus (ii) two and one-half (2.5) year’s Base Salary, plus (iii) if at any time after January 1, 2013 through the date of Executive’s Termination Without Cause or Termination For Good Reason, the closing price of the Company’s common stock has averaged at least twelve dollars ($12.00) per share for thirty (30) trading days, the amount of any cash bonus awarded to Executive for the year preceding the year of termination, or two (2) times the amount of any cash bonus awarded to Executive for the year preceding the year of termination if such average closing price was at least seventeen dollars ($17.00) per share. (g) For the number of months of base salary to be paid under this Section 10.2, Executive shall continue to participate, on the same terms and conditions as are in effect immediately prior to Termination Without Cause or Termination For Good Reason, in Company’s health and medical plans provided to the Executive pursuant to Section 7(b). In order for Executive to receive such continued coverage, Executive shall pay to Company on the last day of each month preceding the month that the health and medical coverage continuation shall be provided, the full cost of the monthly premiums equal to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") cost of continued health and medical coverage under the health and medical plans of Company. The first such payment shall be paid to Company on the last day of the month in which date of the Executive's termination occurs. Executive shall receive a monthly reimbursement payment (each such payment, a "Monthly Health Payment") during the period of coverage, on the first payroll date of each month, equal to the monthly COBRA cost of continued health and medical coverage under the health and medical plans of Company, less the amount that Executive would be required to contribute for health and medical coverage if Executive were an active employee. The Monthly Health Payments under this subsection (g) shall commence on the first payroll date occurring in the month following the month in which the date of the Executive's termination occurs and shall continue for the period for which base salary is paid under this Section 10.2. The COBRA continuation coverage period under section 4980B of the Code shall begin coincident with the first day of the month following the month in which the Executive's termination occurs. Anything herein to the contrary notwithstanding, the Employer shall have no obligation to continue to maintain any plan, program or level of benefits solely as a result of this Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 130 of 139 PageID: 1209 Agreement. (h) This Agreement is intended to comply with section 409A of the Code and its corresponding regulations, or an exemption, and payments may only be made under this Agreement upon an event and in a manner permitted by section 409A, to the extent applicable. Severance benefits under the Agreement are intended to be exempt from section 409A under the “short-term deferral” exception, to the maximum extent applicable, and then under the “separation pay” exception, to the maximum extent applicable. Notwithstanding Section 10.2(c), (d), (e) and (f) above, the payment to the Executive set forth therein (but not the vesting of RSUs), shall be delayed in accordance with this Subsection (h) if necessary to comply with Section 409A of the Code, thereby avoiding adverse tax consequences to the Executive pursuant to Section 409A of the Code. The six (6)-month delay described in the preceding sentence shall be necessary if (i) the Executive is a specified employee (“Specified Employee”) (within the meaning of Section 409A of the Code) as of the date of his termination pursuant to this Section 10.2, and (ii) the Executive’s termination of employment pursuant to this Section 10.2 is not deemed to result from an involuntary separation from service (within the meaning of Section 409A of the Code). 10.3. CHANGE IN CONTROL. For purposes of this Agreement, “Change in Control” shall mean an occurrence of one or more of the following events: 10.4. TERMINATION FOR CAUSE; TERMINATION BY EXECUTIVE WITHOUT GOOD REASON. (a) TERMINATION FOR CAUSE. The Company may terminate the employment of Executive for Cause at any time during the Term. For purposes of this Agreement, Cause shall mean that Executive has committed an act of Misconduct (as defined below) or that there has been a willful and continuing failure of Executive to substantially perform his obligations under this Agreement, other than as a result of Executive’s death or Disability, following receipt of written notice requesting such performance and notifying Executive of the specifics regarding such failure to perform. For purposes of this Agreement, “Misconduct” shall mean: (i) embezzlement, fraud, or breach of fiduciary duty by Executive, in each case, with respect to the Company; (ii) personal dishonesty of Executive materially injurious to the Company; (iii) an unauthorized and intentional disclosure of any Proprietary Information in breach of Executive’s duty of loyalty; (iv) conviction of, or entering a plea of nolo contendere or guilty to, a felony criminal offense; or (v) competing with the Company while employed by the Company or during the Restricted Period, in contravention of Section 9. (b) TERMINATION BY EXECUTIVE WITHOUT GOOD REASON. Executive may terminate his employment hereunder at any time without Good Reason (as defined in Section 10.2(b)). (c) In the event Executive’s employment with Company is terminated by Company for Cause or by Executive without Good Reason, Executive shall receive all accrued but unpaid Base Salary, and benefits as of the effective date of Termination. In the event Executive’s employment with Company is terminated by the Company for Cause or by Executive during the Term of this Agreement without Good Reason, Executive shall forfeit all unvested RSUs granted under this Agreement. 10.5. POSSIBLE CUT-BACK. Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that receipt of all payments or distributions from Company, or its Affiliates, to Executive in the nature of compensation, whether paid or payable pursuant to this Agreement or otherwise, would subject Executive to the excise tax under Section 4999 of the Code, the amount of “parachute payments” (within the meaning of Section 280G of the Code) paid or payable pursuant to this Agreement (the “Agreement Payments”) shall be reduced to the greatest amount of Agreement Payments that can be paid that would not result in the imposition of the excise tax under Section 4999 of the Code (the “Reduced Amount”) only if it is determined that Executive would be better-off, on a net after-tax basis, if the Agreement Payments were reduced to the Reduced Amount. All determinations required to be made under this Section 10.5 shall be made by an independent (i) an acquisition of any voting securities of Company (the “Voting Securities”) by any “person” or “group” (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934) other than an employee benefit plan of Company, immediately after which such Person has “Beneficial Ownership” (within the meaning of Rule 13d-3 under the Exchange Act) of more than fifty percent (50%) of the combined voting power of Company’s then outstanding Voting Securities; (ii) within any 18-month period, the individuals who were directors of the Company as of the date the Board of Directors approved this Agreement (the “Incumbent Directors”) ceasing for any reason other than death, disability, retirement or by reason of the plan adopted by the Board of Directors on even date herewith to expand the number of members of the Board to constitute at least a majority of the Board of Directors, provided that any director who was not a director as of the date the Board of Directors approved this Agreement shall be deemed to be an Incumbent Director if such director was appointed or nominated for election to the Board of Directors by, or on the recommendation or approval of, at least a majority of directors who then qualified as Incumbent Directors, provided further that any director appointed or nominated to the Board of Directors to avoid or settle a threatened or actual proxy contest shall in no event be deemed to be an Incumbent Director; (iii) satisfaction of all conditions to a merger, consolidation, or reorganization involving Company that results or would result in the stockholders of Company immediately before such merger, consolidation or reorganization owning, directly or indirectly, immediately following such merger, consolidation or reorganization, less than fifty percent (50%) of the combined voting power of the corporation which survives such transaction as the ultimate parent entity, unless such merger, consolidation or reorganization is not thereafter consummated; or (iv) a sale of all or substantially all of the assets of Company. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 131 of 139 PageID: 1210 accounting firm (the “Accounting Firm”), and all fees and expenses of the Accounting firm shall be borne solely by Company. The Accounting Firm shall provide detailed supporting calculations to both the Company and Executive, and absent manifest error, shall be binding upon both parties 11. OTHER AGREEMENTS. Executive represents and warrants to Company that: (a) Executive has informed the Company in writing of any restrictions, agreements or understandings whatsoever to which Executive is a party or by which he is bound that could prevent or make unlawful Executive’s execution of this Agreement or Executive’s employment hereunder, or which could be inconsistent or in conflict with this Agreement or Executive’s employment hereunder, or could prevent, limit or impair in any way the performance by Executive of his obligations hereunder. (b) Executive shall disclose the existence and terms of the restrictive covenants set forth in this Agreement to any employer by whom Executive may be employed during the Term (which employment is not hereby authorized) or during the Restricted Period as defined in the Agreement Not to Compete by and between Executive and Company set forth in Section 9 hereof. 12. RECOUPMENT. Notwithstanding any provision of this Agreement to the contrary, any incentive based compensation, or any other compensation, paid or payable to Executive pursuant to this Agreement or any other agreement or arrangement with the Company which is subject to recovery under any law, government regulation, order or stock exchange listing requirement, will be subject to such deductions and clawback (i.e., recovery) solely to the extent required to be made pursuant to law, government regulation, order or stock exchange listing requirement (or any policy of the Company adopted pursuant to, and consistent with, any such law, government regulation, order or stock exchange listing requirement). Executive specifically authorizes the Company to withhold from his future wages or other compensatory amounts any amounts that may become due under this provision, whether such wages or other compensatory amounts are payable during or after the Term. 13. SURVIVAL OF PROVISIONS. The provisions of this Agreement shall survive the termination of Executive’s employment hereunder and the payment of all amounts payable and delivery of all post-termination compensation and benefits pursuant to this Agreement incident to any such termination of employment. 14. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon Company and its successors or permitted assigns and Executive and his executors, administrators or heirs. The Company shall require any successor or successors expressly to assume the obligations of Company under this Agreement. The Company’s failure to obtain the agreement of any successor or assign to assume the obligations of this Agreement shall be considered “Good Reason” for purposes of Section 10.2(b). For purposes of this Agreement, the term “successor” shall include the ultimate parent corporation of any corporation involved in a merger, consolidation, or reorganization with or including the Company that results in the stockholders of Company immediately before such merger, consolidation or reorganization owning, directly or indirectly, immediately following such merger, consolidation or reorganization, securities of another corporation, regardless of whether any such merger, consolidation or reorganization is deemed to constitute a Change in Control for purposes of this Agreement. Executive may not assign any obligations or responsibilities under this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of Company. At any time prior to a Change in Control, Company may provide, without the prior written consent of Executive, that Executive shall be employed pursuant to this Agreement by any of its Affiliates or Company, and in such case all references herein to the “Company” shall be deemed to include any such entity, provided that (i) such action shall not relieve Company of its obligation to make or cause an Affiliate to make or provide for any payment to or on behalf of Executive pursuant to this Agreement, and (ii) Executive’s duties and responsibilities shall not be significantly diminished as a result thereof. The Board of Directors may not assign any or all of its responsibilities hereunder to any committee of the Board of Directors. 15. EXECUTIVE BENEFITS. This Agreement shall not be construed to be in lieu of or to the exclusion of any other rights, benefits and privileges to which Executive may be entitled as an executive of Company under any retirement, pension, profit-sharing, insurance, hospitalization or other plans or benefits which may now be in effect or which may hereafter be adopted. 16. BOARD OF DIRECTORS SERVICE. Subject to re-election by a vote of stockholders, Executive shall continue to serve on the Board of Directors through the Term and shall tender his resignation from the Board of Directors upon expiration of the Term, or upon any earlier termination of his employment, which resignation may or may not be accepted. 17. NOTICES. All notices required to be given to any of the parties of this Agreement shall be in writing and shall be deemed to have been sufficiently given, subject to the further provisions of this Section 16, for all purposes when presented personally to such party, or sent by facsimile transmission, any national overnight delivery service, or certified or registered mail, to such party at its address set forth below: (a) If to Executive: George Babich, Jr. 3 Woodford Lane Malvern, PA 19355-2801 With a copy to: Case 1:15-cv-08007-RBK-KMW Docum nt 20-2 Filed 08/04/16 Pag 132 of 139 PageID: 1211 Robert J. Lichtenstein, Esquire Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, PA 19103-2921 (b) If to Company: Checkpoint Systems, Inc. 101 Wolf Drive Thorofare, NJ 08086 Attn: Vice President and General Counsel With a copy to: Checkpoint Systems, Inc. 101 Wolf Drive Thorofare, NJ 08086 Attn: Chairman of the Board of Directors Such notice shall be deemed to be received when delivered if delivered personally, upon electronic or other confirmation of receipt if delivered by facsimile transmission, the next business day after the date sent if sent by a national overnight delivery service, or three (3) business days after the date mailed if mailed by certified or registered mail. Any notice of any change in such address shall also be given in the manner set forth above. Whenever the giving of notice is required, the giving of such notice may be waived in writing by the party entitled to receive such notice. 18. ENTIRE AGREEMENT; AMENDMENTS. This Agreement and any other documents, instruments or other writings delivered or to be delivered in connection with this Agreement as specified herein constitute the entire agreement among the parties with respect to the subject matter of this Agreement and supersede all prior and contemporaneous agreements, understandings, and negotiations, whether written or oral, with respect to the terms of Executive’s employment by Company. This Agreement may be amended or modified only by a written instrument signed by all parties hereto. 19. WAIVER. The waiver of the breach of any term or provision of this Agreement shall not operate as or be construed to be a waiver of any other or subsequent breach of this Agreement. 20. GOVERNING LAW. This Agreement shall be governed and construed as to its validity, interpretation and effect by the laws of the Commonwealth of Pennsylvania. 21. SEVERABILITY. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or such provisions, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 22. SECTION HEADINGS. The section headings in this Agreement are for convenience only; they form no part of this Agreement and shall not affect its interpretation. 23. COUNTERPARTS. This Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute one and the same instrument. 24. SPECIFIC ENFORCEMENT. Executive acknowledges that the restrictions contained in Sections 8 and 9 hereof are reasonable and necessary to protect the legitimate interests of Company and its Affiliates and that Company would not have entered into this Agreement in the absence of such restrictions. Executive also acknowledges that any breach by him of Sections 8 or 9 hereof will cause continuing and irreparable injury to Company for which monetary damages would not be an adequate remedy. Executive shall not, in any action or proceeding by Company to enforce Sections 8 or 9 of this Agreement, assert the claim or defense that an adequate remedy at law exists. In the event of such breach by Executive, Company shall have the right to enforce the provisions of Sections 8 and 9 of this Agreement by seeking injunctive or other relief in any court, and this Agreement shall not in any way limit remedies at law or in equity otherwise available to Company. In the event that the provisions of Sections 8 or 9 hereof should ever be adjudicated to exceed the time, geographic, or other limitations permitted by applicable law in any applicable jurisdiction, then such provisions shall be deemed reformed in such jurisdiction to the maximum time, geographic, or other limitations permitted by applicable law. 25. ARBITRATION. Any dispute or claim other than those referred to in Section 23, arising out of or relating to this Agreement or otherwise relating to the employment relationship between Executive and Company (including but not limited to any claims under Title VII of the Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 133 of 139 PageID: 1212 Civil Rights Act of 1964, as amended; the Americans with Disabilities Act; the Age Discrimination in Employment Act; the Family Medical Leave Act; and the Employee Income Retirement Security Act) shall be submitted to Arbitration, in Philadelphia County, Commonwealth of Pennsylvania, and except as otherwise provided in this Agreement shall be conducted in accordance with the rules of, but not under the auspices of, the American Arbitration Association. The arbitration shall be conducted before an arbitration tribunal comprised of three individuals, one selected by Company, one selected by Executive, and the third selected by the first two. The parties and the arbitrators selected by them shall use their best efforts to reach agreement on the identity of the tribunal within ten (10) business days of either party to this Agreement submitting to the other party a written demand for arbitration. The proceedings before the tribunal shall take place within twenty (20) business days of the selection thereof. Executive and Company agree that such arbitration will be confidential and no details, descriptions, settlements or other facts concerning such arbitration shall be disclosed or released to any third party without the specific written consent of the other party, unless required by law or court order or in connection with enforcement of any decision in such arbitration. The parties shall equally divide the costs of the arbitrators, and, subject to Section 12, each party shall bear his or its attorneys’ fees and other costs, except that the arbitrators may specifically direct one party to bear a greater portion or the entire cost of the arbitration, including all attorneys fees, if the arbitrators determine that such party acted in bad faith. 26. INDEMNIFICATION. During the Term and thereafter, the Company agrees to indemnify and hold the Executive harmless in connection with actual, potential or threatened actions or investigations related to Executive’s services for or employment by the Company and/or its subsidiaries in the same manner as other officers and directors to the extent provided in the Company’s by-laws and to be covered by D&O insurance to the maximum extent, and length, of coverage of any other officer or director of the Company during his employment with the Company and thereafter as in effect as of the date of termination of employment. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed the day and year first written above. By: /s/ William S. Antle, III Chairman of the Board By: /s/ George Babich, Jr. George Babich, Jr. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 134 of 139 PageID: 1213 Checkpoint Systems, Inc. 101 Wolf Drive Thorofare, NJ 08086 USA Tel.: +800-257-5540 Fax: +856-848-0937 www.checkpointsystems.com News COMPANY CONTACT: Annette Geraghty 856-251-2174 GEORGE BABICH, JR. ELECTED PRESIDENT AND CHIEF EXECUTIVE OFFICER OF CHECKPOINT SYSTEMS, INC. Thorofare, New Jersey, February 4, 2013 - Checkpoint Systems, Inc. (NYSE: CKP) announced today that the Company’s Board of Directors elected George Babich, Jr. to the position of President and Chief Executive Officer, effective immediately. Mr. Babich, age 60, served as interim President and Chief Executive Officer of Checkpoint since May 2012. Mr. Babich has been a member of Checkpoint’s Board of Directors since 2006 and will continue to serve as a director. He is a respected business leader with more than 30 years of financial, business operations, and strategic planning experience in the retail, consumer products, manufacturing, and service sectors. From 2004 to 2005, he was President of Pep Boys - Manny, Moe & Jack, and Chief Financial Officer and President from 2002 to 2004. His experience also includes senior financial management positions at Pepsico Inc., Ford Motor Company, and The Franklin Mint. He is a member of the Board of Directors of Teleflex Incorporated (NYSE: TFX). Bill Antle, Chairman of the Board of Checkpoint, said, “I am delighted that George has agreed to remain in a permanent capacity as President and Chief Executive Officer. When he stepped into the interim role last May, George faced a difficult set of circumstances with persistent economic uncertainty, volatile retail markets and internal problems weighing heavily on Checkpoint’s performance. Since that time, much has been accomplished. Checkpoint’s strategic direction has been redefined, its organization right-sized to match present economic conditions, and a rigorous series of programs put in place to cut costs and improve performance. Throughout the past nine months, George’s turnaround experience and astute leadership were invaluable.” During Mr. Babich’s interim leadership, Checkpoint adjusted its business strategy, broadening its value proposition as a shrink management company to be a provider of inventory management solutions that give retailers insight into the availability of merchandise in their stores. In conjunction with this strategic shift, the Company identified a set of sweeping measures to right-size its global operations, cut costs, reduce working capital and increase revenue. Project LEAN, a new plan designed to quickly improve profitability, was launched in the second quarter of 2012. The plan is expected to generate annual savings of $35 million in 2013 in addition to $67 million in savings from the Company’s previously disclosed SG&A Restructuring Plan while positioning the company for sustained revenue growth. Mr. Babich commented, “I welcome this permanent appointment to serve as Checkpoint’s President and CEO and I am excited to continue the transformation we began in May. Since the day I began in my interim role, I was impressed by the collective efforts of all our employees who are helping to build a strong, thriving and profitable business. Their hard work and commitment is inspiring and I look forward to a bright future for Checkpoint.” Mr. Antle concluded, “The Board agreed that George is the right leader for the job. From the onset, he began to articulate to employees that important changes were needed to deliver acceptable, sustainable growth for the Company’s shareholders. Today, George and his senior leadership team are moving forward with an intense focus to deliver the kind of results shareholders expect and deserve.” Checkpoint Systems, Inc. Checkpoint Systems is a global leader in shrink management, merchandise visibility and apparel labeling solutions. Checkpoint enables retailers and their suppliers to reduce shrink, improve shelf availability and leverage real-time data to achieve operational excellence. Checkpoint solutions are built upon more than 40 years of RF technology expertise, diverse shrink management offerings, a broad portfolio of apparel labeling solutions, market-leading RFID applications, innovative high-theft solutions and its Web-based Check-Net® data management platform. As a result, Checkpoint customers enjoy increased sales and profits by improving supply-chain efficiencies, by facilitating on-demand label printing and by providing a secure open-merchandising environment enhancing the consumer’s shopping experience. For more information, visit www.checkpointsystems.com. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 135 of 139 PageID: 1214 Exhibit CC Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 136 of 139 PageID: 1215 Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 14A Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ) Filed by the Registrant ⌧ Filed by a Party other than the Registrant ¨ Check the appropriate box: Checkpoint Systems, Inc. (Name of Registrant as Specified In Its Charter) N/A (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): ¨ Preliminary Proxy Statement ¨ Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) ⌧ Definitive Proxy Statement ¨ Definitive Additional Materials ¨ Soliciting Material under §240.14a-12 ⌧ No fee required. ¨ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. (1) Title of each class of securities to which transaction applies: (2) Aggregate number of securities to which transaction applies: (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): (4) Proposed maximum aggregate value of transaction: (5) Total fee paid: ¨ Fee paid previously with preliminary materials. Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 137 of 139 PageID: 1216 Table of Contents (3) All Checkpoint deferred shares are 100% vested, except with respect to 203 of Mr. Lucania’s deferred shares. The number of Checkpoint deferred shares shown reflects the number of shares for all contributions to the Deferred Compensation Plans through April 7, 2016. Additional Checkpoint deferred shares may accrue for contributions made to the Deferred Compensation Plans after April 7, 2016 and prior to the closing of the merger. Executive Officer Employment Agreements and Termination Policy Each of Checkpoint’s executive officers is party to an employment agreement with Checkpoint and/or participates in the Termination Policy, each of which provides for severance payments and benefits upon certain terminations of employment. Except with respect to Mr. Babich, the severance payments and benefits the executive officers would be entitled to under the Termination Policy generally exceed the amount of severance payments and benefits available under the applicable employment agreement. Therefore, severance would generally be payable to Mr. Babich pursuant to his individual employment agreement and to our other executive officers pursuant to the Termination Policy. Pursuant to his employment agreement, in the event Mr. Babich is terminated without cause or resigns for good reason, in each case, within twelve (12) months following the merger, Mr. Babich would be entitled to receive the following compensation and benefits: (i) a lump sum payment equal to the sum of 2.5 times his annual base salary and two times the amount of any cash bonus awarded to Mr. Babich for the year preceding his year of termination; and (ii) reimbursement for healthcare continuation pursuant to COBRA for a period of thirty six (36) months following termination. In addition, Mr. Babich would become entitled to accelerated vesting of all restricted stock units held by him as of the date of termination. In addition, Mr. Babich would be entitled to a payment equal in value to 60,000 Checkpoint restricted stock units, which amount is otherwise scheduled to be delivered under Mr. Babich’s employment agreement on January 2, 2017. For purposes of Mr. Babich’s employment agreement, “cause” generally means Mr. Babich’s commission of an act of “misconduct” or his willful and continuing failure to substantially perform his obligations under the employment agreement, other than as a result of his death or disability, following receipt of written notice. “Misconduct” generally means Mr. Babich’s (i) embezzlement, fraud or breach of fiduciary duty with respect to the company, (ii) personal dishonesty that is materially injurious to the company, (iii) unauthorized and intentional disclosure of any proprietary information of the company in breach of his duty of loyalty, (iv) conviction of, or entering a plea of nolo contendere or guilty to, a felony criminal offense, or (v) a violation of his non-competition covenant. For purposes of Mr. Babich’s employment agreement, “good reason” generally means (i) a material reduction in his titles, duties, position, authority or responsibilities, (ii) a reduction in his base salary or bonus opportunity or a material reduction in his compensation arrangements or benefits, (iii) the company’s substantial failure to perform any material provision of the employment agreement, or (iv) a relocation of the company’s executive offices by more than 50 miles, unless such relocation results in the company’s executive offices being closer to Mr. Babich’s primary residence or does not substantially increase his average commuting time. Pursuant to the Termination Policy, in the event either of Mr. Levin or Mr. Wrigley is terminated without cause or the executive terminates employment for one of the enumerated reasons set forth in the Termination Policy (which we refer to in this proxy statement as “good reason”), in each case, at any time following the merger, the executive would be entitled to receive thirty six (36) months base salary continuation. In the event Mr. Lucania is terminated without cause or resigns for good reason, in each case, following the merger, he would be entitled to receive the following compensation and benefits: (i) twenty seven (27) months base salary continuation, (ii) 75% of the amount of any cash bonus awarded to Mr. Lucania for the year preceding his year of termination and (iii) reimbursement for healthcare continuation pursuant to COBRA for a period of twenty seven (27) months. In addition, each of Messrs. Levin, Wrigley and Lucania would be entitled to accelerated vesting of all equity awards held by the executive as of the date of termination. For purposes of the Termination Policy, “cause” generally means the executive’s (i) willful and continued insubordination or failure or refusal to perform the executive’s duties after notice by the company, (ii) dishonesty in the performance of the executive’s duties, (iii) subjection to a judgment, decree or final order of a judicial or 49 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 138 of 139 PageID: 1217 Table of Contents administrative body effectively preventing the executive from the substantial performance of the executive’s duties or causing substantial damage to the company or to its business reputation, (iv) conviction of a felony or a crime involving moral turpitude which renders the executive unfit to continue the executive’s office or causes substantial damage to the company or its business reputation, or (v) serious violations of company policies. For purposes of the Termination Policy, “good reason” generally means, following the occurrence of a change in control and subject to the company’s receipt of notice and an opportunity to cure, (i) the executive’s assignment to duties substantially inconsistent with the executive’s position, duties, responsibilities or status, or a substantial reduction in the executive’s duties, (ii) relocation of the executive’s principal office by more than thirty (30) miles, or (iii) a material reduction in executive’s base salary. Any termination for “good reason” must occur within two years following the initial existence of the event giving rise to good reason. Employee Stock Purchase Plan Each outstanding purchase right under the ESPP was exercised on the last payroll pay date occurring prior to March 31, 2016, for the purchase of Checkpoint common stock in accordance with the terms of the ESPP, which was the final exercise date under the ESPP. No further shares will be issued under the ESPP. Shares of Checkpoint common stock issued pursuant to the exercise of purchase rights under the ESPP on or before March 31, 2016, shall be converted into the right to receive the merger consideration in accordance with the terms of the merger agreement on the same basis as all other shares of Checkpoint common stock that are issued and outstanding immediately prior to the effective time of the merger. Employee Benefits The merger agreement requires CCL to provide through December 31, 2016, each employee of Checkpoint who continues to be employed by CCL following the closing of the merger (as we may sometimes refer to in this proxy statement as a “continuing Checkpoint employee”), total compensation, including base salary rate, commission, target bonus and benefits, in amounts, in the aggregate, no less favorable than the total compensation provided to each Checkpoint employee immediately prior to the closing of the merger. For a detailed description of these requirements, please see the section entitled “Terms of the Merger Agreement-Employee Benefits Matters” beginning on page 71 of this proxy statement. Indemnification and Insurance Pursuant to the terms of the merger agreement, our directors and executive officers may be entitled to certain indemnification and an extension of coverage under directors’ and officers’ liability insurance policies. Such indemnification and insurance coverage is further described in the section entitled “Terms of the Merger Agreement-Directors’ and Officers’ Indemnification and Insurance” beginning on page 72 of this proxy statement. Certain Projections Prepared by the Management of Checkpoint Other than quarterly and annual financial guidance provided to investors, which it may update from time to time, Checkpoint does not as a matter of course make public long-term projections as to future revenues, earnings or other financial results due to, among other reasons, the inherent uncertainty of the underlying assumptions and estimates. However, Checkpoint is including internal financial projections that were made available to our Board in connection with the evaluation of the merger. This information also was provided to Checkpoint’s financial advisors and certain of the projections were shared with the CCL board of directors and CCL’s financial advisors. The inclusion of this information should not be regarded as an indication that any of Checkpoint, CCL, their respective financial advisors or any other recipient of this information considered, or now considers, it to be necessarily predictive of actual future results, or that it should be construed as financial guidance, and it should not be relied on as such. 50 Case 1:15-cv-08007-RBK-KMW Document 20-2 Filed 08/04/16 Page 139 of 139 PageID: 1218 LATHAM & WATKINS LLP Kegan A. Brown 885 Third Avenue New York, NY 10022 Tel: (212) 906-1200 kegan.brown@lw.com Kevin H. Metz (pro hac vice) Sarah A. Greenfield (pro hac vice) 555 Eleventh Street NW Washington, DC 20004 Tel: (202) 637-2200 kevin.metz@lw.com sarah.greenfield@lw.com Attorneys for Defendants Checkpoint Systems, Inc., George Babich, Jr., Jeffery O. Richard, and James M. Lucania UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY STEPHEN MEIER, Individually and On Behalf of All Others Similarly Situated, Plaintiff, v. CHECKPOINT SYSTEMS, INC., GEORGE BABICH, JR., JEFFERY O. RICHARD AND JAMES M. LUCANIA, Defendants. No. 1:15-cv-08007 (RBK)(KMW) CERTIFICATE OF SERVICE I, Kegan A. Brown, hereby certify pursuant to 28 U.S.C. § 1746 that: 1. I am a member of the law firm of Latham & Watkins LLP, attorneys for Defendants Checkpoint Systems, Inc., George Babich, Jr., Jeffery O. Richard, and James M. Lucania (collectively, “Defendants”), in the above-captioned matter. Case 1:15-cv-08007-RBK-KMW Document 20-3 Filed 08/04/16 Page 1 of 2 PageID: 1219 2 2. I am a member in good standing of the bar of this Court. 3. On this date, I filed a true and correct copy of the Reply Memorandum of Law in Support of Defendants’ Motion to Dismiss Plaintiff’s Amended Complaint, dated 8/4/16, and the Supplemental Declaration of Sarah A. Greenfield in Further Support of Defendants’ Motion to Dismiss Plaintiff’s Amended Complaint, dated 8/4/16, with the Court via the CM/ECF system thereby effectuating service upon all counsel of record via electronic means. I hereby certify under the penalty of perjury that the foregoing is true and correct. Dated: August 4, 2016 New York, New York LATHAM & WATKINS LLP By: s/ Kegan A. Brown Kegan A. Brown 885 Third Avenue New York, NY 10022 Tel: (212) 906-1200 kegan.brown@lw.com Attorneys for Defendants Checkpoint Systems, Inc., George Babich, Jr., Jeffrey O. Richard, and James M. Lucania Case 1:15-cv-08007-RBK-KMW Document 20-3 Filed 08/04/16 Page 2 of 2 PageID: 1220
