Town of Davie Police Pension Plan v. Pier 1 Imports Inc et al

Brief/Memorandum in Support

N.D. Tex.October 21, 2016

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF TEXAS DALLAS DIVISION TOWN OF DAVIE POLICE PENSION PLAN, individually and on behalf of all others similarly situated, Plaintiff, v. PIER 1 IMPORTS, INC., ALEXANDER W. SMITH, and CHARLES H. TURNER, Defendants. Case No. 3:15-CV-3415-D Honorable Sidney A. Fitzwater DEFENDANTS’ BRIEF IN SUPPORT OF MOTION TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT BRACEWELL LLP Stephen B. Crain Bradley J. Benoit 711 Louisiana Street, Suite 2300 Houston, Texas 77002 Telephone: (713) 221-1305 Facsimile: (713) 221-1212 stephen.crain@bracewelllaw.com brad.benoit@bracewelllaw.com Joseph M. Cox 1445 Ross Avenue, Suite 3800 Dallas, Texas 75202 Telephone: (214) 468-3800 Facsimile: (800) 404-3970 joe.cox@bracewelllaw.com Counsel for Defendants Pier 1 Imports, Inc., Alexander W. Smith and Charles H. Turner Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 1 of 58 PageID 989 -i- TABLE OF CONTENTS Page PRELIMINARY STATEMENT .....................................................................................................1 THE CONTEXT OF PLAINTIFF’S ALLEGATIONS ...................................................................4 ARGUMENT ...................................................................................................................................7 I. PLAINTIFF’S CLAIMS FOR VIOLATION OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5 SHOULD BE DISMISSED ..................................7 A. The Complaint Does Not Satisfy Rule 9(b) and PSLRA Particularity Requirements. ..........................................................................................................7 B. The Complaint Does Not Plead The Requisite Strong Inference Of Scienter. .................................................................................................................10 1. Plaintiff Has No Valid Allegation Of Motive. ...........................................10 2. Plaintiff Does Not Adequately Plead Conscious Misbehavior Or Severe Recklessness...................................................................................12 a. Plaintiff’s Allegations Of Increasingly Large Amounts Of Inventory Do Not Establish A Strong Inference Of Scienter. .........................................................................................13 b. Plaintiff’s Allegations Of Markdown Risk From Inventory Levels Do Not Establish A Strong Inference Of Scienter. ............14 (1) Pier 1 Grew Inventory For Anticipated Sales. ...................14 (2) Plaintiff Has Not Alleged Pier 1 Set Fraudulent Sales Goals. ........................................................................15 (3) Pier 1 Disclosed Sales Shortfalls And Inventory Increases. ............................................................................19 (4) Investors Were Not Misled Regarding Markdown Risk. ...................................................................................21 c. Plaintiff’s Allegations Of Costs And Logistical Problems From Inventory Levels Do Not Establish A Strong Inference Of Scienter. ....................................................................25 d. Plaintiff’s Other Scienter Allegations Also Fail. ...........................29 (1) The March 2014 Town Hall Meeting ................................29 (2) “Temporal Proximity” .......................................................31 (3) Executive Resignations ......................................................32 (4) Share Repurchases And Dividend Increases ......................33 (5) Supposed “Revelation” Of “The Fraud” ............................34 Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 2 of 58 PageID 990 -ii- C. Plaintiff Does Not Adequately Plead That Defendants Made Any Materially False Or Misleading Statements Or Omissions....................................34 1. Many Challenged Statements Are Mere Puffery Or Opinion. ...................35 2. The Forward-Looking Statements Are Not Actionable. ............................37 3. The Challenged Statements Are Otherwise Not Actionable......................43 a. Control Of Inventory And Inventory Levels .................................43 b. Clean Inventory/Healthy Complexion/Markdown Risk ................47 c. SOX Certifications .........................................................................48 4. Plaintiff’s Allegations Regarding Omissions Are Not Actionable. ...........49 II. PLAINTIFF’S CLAIMS UNDER SECTION 20(A) OF THE EXCHANGE ACT SHOULD BE DISMISSED. ..............................................................................................50 III. CONCLUSION ..................................................................................................................50 Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 3 of 58 PageID 991 -iii- TABLE OF AUTHORITIES Page(s) CASES ABC Arbitrage Plaintiffs Grp. v. Tchuruk, 291 F.3d 336 (5th Cir. 2002) .......................................................................................7, 8, 9, 18 Abrams v. Baker Hughes, Inc., 292 F.3d 424 (5th Cir. 2002) .................................................................................24, 27, 32, 33 In re Alamosa Holdings, Inc. Sec. Litig., 382 F. Supp. 2d 832 (N.D. Tex. 2005) ................................................................................8, 20 Ashcroft v. Iqbal, 556 U.S. 662 (2009) ...................................................................................................................7 Barrie v. Intervoice-Brite, Inc., 2002 WL 1841631 (N.D. Tex. Aug. 8, 2002) ..........................................................................45 Cent. Laborers’ Pension Fund v. Integrated Elec. Servs. Inc., 497 F.3d 546 (5th Cir. 2007) ...................................................................................................11 Chill v. Gen. Elec. Co., 101 F.3d 263 (2d Cir. 1996)...............................................................................................11, 13 Coates v. Heartland Wireless Commc’ns, Inc. (Coates I), 26 F. Supp. 2d 910 (N.D. .........................................................................................................15 Coates v. Heartland Wireless Commc’ns, Inc. (Coates II), 55 F. Supp. 2d 628 (N.D. Tex. 1999) ....................................................................12, 15, 22, 31 Coates v. Heartland Wireless Commc’ns, Inc. (Coates III), 100 F. Supp. 2d 417 (N.D. Tex. 2000) ..................................................9, 11, 13, 16, 19, 24, 25 Commc’ns Workers of Am. Plan for Employees’ Pension and Death Benefits v. CSK Auto Corp., 525 F. Supp. 2d 1116 (D. Ariz. 2007) .....................................................................................36 In re Crocs, Inc. Secs. Litig., 774 F. Supp. 2d 1122 (D. Colo. 2011) ...............................................................................14, 16 DiLeo v. Ernst & Young, 901 F.2d 624 (7th Cir. 1990) .....................................................................................................9 Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005) ...................................................................................................................7 Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 4 of 58 PageID 992 -iv- Fant v. Perelman, 1999 WL 199078 (S.D.N.Y. Apr. 9, 1999)..............................................................................31 Fener v. Belo Corp., 425 F. Supp. 2d 788 (N.D. Tex. 2006) ........................................................................17, 18, 20 Fialkov v. Microsoft Corp., 72 F. Supp. 3d 1220 (W.D. Wash. 2014) .................................................................................36 Fin. Acquisition Partners LP v. Blackwell, 440 F.3d 278 (5th Cir. 2006) .....................................................................................................1 In re Ford Motor Co. Sec. Litig., 381 F.3d 563 (6th Cir. 2004) ...................................................................................................35 Garfield v. NDC Health Corp., 466 F.3d 1255 (11th Cir. 2006) ...............................................................................................49 Hillson Partners Ltd. P’ship v. Adage, Inc., 42 F.3d 204 (4th Cir. 1994) .....................................................................................................40 Ind. Elec. Workers’ Pension Trust Fund IBEW v. Shaw Grp., Inc., 537 F.3d 527 (5th Cir. 2008) ........................................................................................... passim In re Key Energy Servs., Inc. Sec. Litig., 2016 WL 1305922 (S.D. Tex. Mar. 31, 2016) .........................................................................10 Kurtzman v. Compaq Computer Corp., 2002 WL 32442832 (S.D. Tex. Mar. 30, 2002) .................................................................31, 32 Lain v. Evans, 123 F. Supp. 2d 344 (N.D. Tex. 2000) ....................................................................................35 Local 731 I.B. of T. Excavators & Pavers Pension Trust Fund v. Diodes, Inc., 810 F.3d 951 (5th Cir. 2016) ...................................................................................7, 10, 13, 17 Milano v. Perot Sys. Corp., 2006 WL 929325 (N.D. Tex. Mar. 31, 2006) ................................................................9, 35, 37 Mogensen v. Body Cent. Corp., 15 F. Supp. 3d 1191 (M.D. Fla. 2014) ...................................................................23, 26, 36, 37 N. Port Firefighters’ Pension-Local Option Plan v. Temple-Inland, Inc., 936 F. Supp. 2d 722 (N.D. Tex. 2013) ......................................................................................8 Nathenson v. Zonagen Inc., 267 F.3d 400 (5th Cir. 2001) ...................................................................................................37 Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 5 of 58 PageID 993 -v- Oppenheimer v. Novell, Inc., 851 F. Supp. 412 (D. Utah 1994) ...........................................................................10, 32, 34, 37 Owens v. Jastrow, 789 F.3d 529 (5th Cir. 2015) ...................................................................................................13 Patel v. Parnes, 253 F.R.D. 531 (C.D. Cal. 2008) ...............................................................................................1 Pearlstein v. BlackBerry Ltd., 93 F. Supp. 3d 233 (S.D.N.Y. 2015)..................................................................................31, 50 Pitten v. Jacobs, 903 F. Supp. 937 (D.S.C. 1995) ...................................................................................21, 24, 40 R2 Invs. LDC v. Phillips, 401 F.3d 638 (5th Cir. 2005) .............................................................................................10, 12 Rosenzweig v. Azurix Corp., 332 F.3d 854 (5th Cir. 2003) .............................................................................................14, 32 In re Secs. Litig. BMC Software, Inc., 183 F. Supp. 2d 860 (S.D. Tex. 2001) .......................................................................................1 Southland Secs. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353 (5th Cir. 2004) .................................................................................10, 11, 30, 35 Spitzberg v. Houston Am. Energy Corp., 758 F.3d 676 (5th Cir. 2014) ...................................................................................................41 Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) .............................................................................................................1, 10 Tuchman v. DSC Commc’ns Corp., 14 F.3d 1061 (5th Cir. 1994) ...................................................................................................11 Williams v. WMX Techs., Inc., 112 F.3d 175 (5th Cir. 1997) .....................................................................................................8 STATUTES 15 U.S.C. § 78u-4 ......................................................................................................................7, 10 15 U.S.C. § 78u-5 ....................................................................................................................37, 39 RULES Fed. R. Civ. P. 8 ...............................................................................................................................7 Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 6 of 58 PageID 994 -vi- Fed. R. Civ. P. 9(b) ..........................................................................................................................7 Fed. R. Civ. P. 10b-5........................................................................................................................7 Fed. R. Civ. P. 12(b)(6)....................................................................................................................7 Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 7 of 58 PageID 995 PRELIMINARY STATEMENT Pier 1 Imports, Inc. (“Pier 1”) is a specialty retailer based in Fort Worth that employs about 24,000 people selling decorative home furnishings at more than 1000 stores and through its website, Pier1.com. 1 In an often-repetitive jumble of a pleading, plaintiff claims that Pier 1 purposefully misstated the status of its inventory, its capacity for managing its inventory, and the costs and price risks associated with its inventory. Broadly speaking, much of what Pier 1 sells falls into two categories: (1) specific seasonal merchandise (e.g., Christmas-related items) that is ordered and sold, with any remainder after the season ends being discounted and cleared and (2) merchandise that is sold throughout the year and, in the case of many of these products, year after year. 2 While the pricing of items in this second category may be subject to promotional discounting, inventory of this nature (including some seasonally-relevant items) is less subject to obsolescence; “excess” quantities of this type of inventory can generally be addressed by reducing the volume of subsequent orders. 3 Ordering the goods that Pier 1 sells is complicated. Most of the merchandise Pier 1 sells is manufactured throughout the world and must be ordered at least six months in advance of 1 Complaint, ¶ 24; Defendants’ Appendix (“Defs.’ App.”) at 458-59 [FY15 10-K (Apr. 28, 2015), at 4-5]. In ruling on a motion to dismiss, courts must consider documents incorporated into the complaint by reference and matters of which a court may take judicial notice. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). Documents incorporated by reference are not limited to those attached to the complaint; where the plaintiff relies upon or partially quotes from documents such as earnings conference call transcripts, press releases, and analyst reports in support of a claim, courts may evaluate the complete documents in deciding a motion to dismiss. See, e.g., In re Secs. Litig. BMC Software, Inc., 183 F. Supp. 2d 860, 882-84 (S.D. Tex. 2001). A court can also take judicial notice of analysts’ reports to determine whether and when information was provided to the market. See Patel v. Parnes, 253 F.R.D. 531, 548-49 (C.D. Cal. 2008). Courts may rely on “public disclosure documents required by law to be, and that have been, filed with the SEC, and documents that the plaintiff either possessed or knew about and upon which they relied in bringing the suit.” Fin. Acquisition Partners LP v. Blackwell, 440 F.3d 278, 286 (5th Cir. 2006). The Appendix contains documents that the Court can, under these principles, consider. 2 Defs.’ App. at 808 [Q4 FY15 Earnings Call (Apr., 8, 2015), at 8]. 3 In this way, Pier 1 is different from other types of retailers, such as clothing stores, which have little or no ability to carry significant volumes of inventory over periods longer than a single season. Defs.’ App. at 767 [Q2 FY15 Earnings Call (Sept. 17, 2014), at 16] (noting that “a relatively small percentage of our purchases are in merchandise which has a short shelf life”). Regarding the distinction between seasonal and non-seasonal items, see ¶ 160 (discussing seasonal items becoming obsolete) and Defs.’ App. at 351 [FY14 10-K (Apr. 29, 2014), at 9] (disclosing the risks of holiday items being marked down significantly to clear inventory). Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 8 of 58 PageID 996 -2- projected sales periods. 4 Pier 1 must predict what will sell and in what volumes long before the period in which it will sell. Pier 1 specifically warned the investing public, both before and during the class period, of this and other challenges: The success of the Company’s specialty retail business depends largely upon its ability to predict trends in decorative home furnishings and gifts consistently and to provide merchandise that satisfies consumer demand in a timely manner. Consumer preferences often change and may not be reasonably predicted.… The seasonal nature of the business leads the Company to purchase, and requires it to carry, a significant amount of inventory prior to its peak selling season. As a result, the Company may be vulnerable to evolving home furnishing trends, changes in customer preferences, and pricing shifts, and may misjudge the timing and selection of merchandise purchases. The Company’s failure to anticipate, predict and respond in a timely manner to changing decorative home furnishing and gift trends could lead to lower sales and additional discounts and markdowns in an effort to clear merchandise, which could have a negative impact on merchandise margins and, in turn, the results of operations. 5 Plaintiff posits that Pier 1 intentionally over-ordered goods and then lied about the impacts of excess inventory. But why? Why would Pier 1 intentionally (to say nothing of “fraudulently”) set out on a course that would, as Pier 1 says itself, “lead to lower sales and additional discounts … which could have a negative impact on merchandise margins and, in turn, the results of operations?” It would not; and it did not. What Pier 1 actually did was to predict future sales incorrectly, leading to a temporary excess of inventory and resulting costs. Pier 1 reports its inventory levels, sales figures, and costs. Plaintiff mounts no real challenge to the accuracy of any of Pier 1’s reported numbers. Instead, plaintiff criticizes Pier 1’s characterization of its inventory during earnings calls. Plaintiff cites Pier 1’s use of the term “clean inventory” and, without basis, equates excess inventory to inventory that is not “clean.” 6 Using broad strokes and a flawed premise, plaintiff then claims that Pier 1’s use of the 4 Defs.’ App. at 459, 461 [FY15 10-K (Apr. 28, 2015), at 5, 7]. 5 Defs.’ App. at 348 [FY14 10-K (Apr. 29, 2014), at 6]; see also Defs.’ App. at 188 [FY13 10-K (Apr. 30, 2013), at 5] (providing a similar disclosure). 6 See, e.g., ¶ 202(b) (“The Company amassed excess, rather than ‘clean’ inventory.”). Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 9 of 58 PageID 997 -3- term “clean inventory” was misleading. Assuming, as plaintiff seems to suggest, that part of what “clean inventory” refers to is inventory that is “not subject to excessive mark-down risk,” 7 plaintiff makes no particularized allegation that a material portion of the inventory was subject to excessive markdown risk at the time of the statements. 8 In painting crudely, plaintiff ignores the distinction between goods subject to markdown risk (such as seasonal items) and goods historically less subject to markdown risk. 9 Pier 1 orders inventory that it expects to sell. It projects sales figures across thousands of distinct items of merchandise and then orders inventory, trying to keep expected sales and inventory aligned. Too little inventory and there is nothing to sell; too much inventory leads to additional costs and price risk. 10 As plaintiff notes about a hypothetical retailer: “If their sales fail to meet their goals, earnings and cash flow can quickly turn negative.” 11 Plaintiff rings this bell repeatedly, alleging that Pier 1 consistently lied when it made variants of this statement: “[I]nventories are in line with expectations.” In public filings and during earnings calls, Pier 1 told the world that its inventories were increasing to fulfill anticipated sales. Nothing in plaintiff’s allegations demonstrates that those statements were untrue at the time they were made, even if Pier 1’s expectations of future sales turned out to be wrong. Plaintiff’s case takes a turn for the absurd when plaintiff suggests that Pier 1 purposefully set unattainable sales goals. 12 Again, why? Plaintiff can point to no motive. There is no 7 ¶¶ 7, 25 & n.1. 8 Marking down a substantial amount of its merchandise is a regular part of Pier 1’s business model. Indeed, for several years preceding the class period, Pier 1 sold approximately half of its products with clearance or promotional markdowns. Defs.’ App. at 695 [Q3 FY14 Earnings Call (Dec. 19, 2013), at 9] (“[I]f you recall, our business model has been running for the last three, four years at about 50% regular price and 50% either clearance or promotional activity.”). As discussed below, it can do so given its very high profit margins on its products. 9 Defs.’ App. at 779 [Q3 FY15 Earnings Call (Dec. 18, 2014), at 5] (noting the lack of markdown risk in non- seasonal goods). 10 ¶ 32. 11 Id. 12 ¶¶ 7, 57, 202. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 10 of 58 PageID 998 -4- allegation of insider trading. Plaintiff notes the individual defendants’ participation in a performance-based long-term incentive plan, 13 but courts uniformly reject similar allegations as offering no basis on which to infer improper motive. Unable to allege any conceivable motive to commit fraud, plaintiff pleads, at best, “fraud by hindsight” and more correctly, “inaccurate forecasting by hindsight.” There is literally nothing that plaintiff has pointed to, in one hundred pages, to show that any of defendants’ statements were knowingly untrue when made. THE CONTEXT OF PLAINTIFF’S ALLEGATIONS The class period canvasses the years in which Pier 1 was evolving from a brick-and- mortar retailer into an “omni-channel” retailer, selling both in stores and online. 14 Pier 1 now had to order inventory for both sales channels. And Pier 1, of course, had no precise way of knowing how successful its online sales would be and how many of those sales, if any, would reduce in-store purchases. Pier 1 therefore ordered goods for what it estimated-but did not know-would happen with its online sales. 15 Ultimately, sales were less than what Pier 1 had estimated. As plaintiff itself acknowledges: “What Pier 1 failed to anticipate was that growth in e-commerce business wouldn’t simply be additive to its overall sales. It also meant less traffic to its brick and mortar stores where costs are fixed. That left Pier 1 with too much inventory.” 16 The class period also covers a holiday period, November 2013 through January 2014, 17 that produced disappointing sales for Pier 1 because of severe weather in regions of the US. 18 13 ¶ 155. 14 ¶¶ 2, 34. 15 Defs.’ App. at 351 [FY14 10-K (Apr. 29, 2014), at 9] (discussing the risks of the omni-channel transition). 16 ¶ 132. 17 Pier 1’s fiscal year 2014 ran from March 3, 2013 to March 1, 2014; fiscal year 2015 ran from March 2, 2014 to February 28, 2015; fiscal year 2016 ran from March 1, 2015 to February 27, 2016. The quarters cover March to May (Q1), June to August (Q2), September to November (Q3), and December to February (Q4). 18 Defs.’ App. at 691 [Q3 FY14 Earnings Call (Dec. 19, 2013), at 5] (Alex Smith: “Unfortunately, we did experience a fair amount of disruption in the first and second weeks of December.”); Defs.’ App. at 332 [8-K (Apr. 10, 2014), at Ex. 99.1] (Alex Smith: “[W]e concluded the year with a difficult fourth quarter-due to an unusually high number of snowstorms which impacted approximately two-thirds of our selling days in many of our key markets.”). Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 11 of 58 PageID 999 -5- This is the most important season for most retailers and, as Pier 1 disclosed, certainly the most important for Pier 1. 19 In the lead-up to FY15, Pier 1 ordered goods expecting that sales during Q4 FY15 would bounce back from the weather-induced problems of the prior year and improve upon historic totals for the same period in prior years. 20 Pier 1’s ordering strategy led to a large volume of inventory that Pier 1 publicly reported: Inventory at the end of the third quarter totaled $536 million, up about 25 percent versus a year ago. This growth reflects a combination of factors. Primarily a year-over-year increase in merchandise in transit due to earlier deliveries in advance of the Chinese New Year. 21 Merchandise related to the planned increase in online only [sales] … and additional inventory to support higher sales. 22 Pier 1 disclosed its volume of inventory and the factors that led to increased inventory levels. Sales in FY 2015, particularly in the fourth quarter (December 2014 to February 2015), fell below management’s expectations. On the year-end earnings call for FY15, Alex Smith discussed the challenges associated with transitioning to an omni-channel retailer: “Over the past year particularly, our financial performance against our self-stated objectives and guidance has been poor, which has been very frustrating for all of us. The new Pier 1 Imports … business model is different. The way our customers behave is very different.” 23 On the same call, Laura Coffey, interim CFO, summarized the intersection between the sales plan and inventory expenses: “[T]he majority of these expenses can be traced to incremental costs within our distribution centers, which resulted from higher than normal inventory levels. As a result of the shortfall to our sales plan, we had elevated inventory levels, which resulted in much higher 19 Defs.’ App. at 191 [FY13 10-K (Apr. 30, 2013), at 8]. 20 Defs.’ App. at 765 [Q2 FY15 Earnings Call (Sept. 17, 2014), at 14] (Charles Turner: “We definitely have more of an opportunity in the fourth quarter as we anniversary some of that disruptive weather.”). 21 Chinese New Year effectively shuts down production and shipment of Chinese goods for about three weeks. The timing of the Chinese New Year can cause goods to be ordered well in advance of the date that those goods would typically be ordered, skewing year-over-year comparisons of inventory levels. 22 Defs.’ App. at 781 [Q3 FY15 Earnings Call (Dec. 18, 2014), at 7]. 23 Defs.’ App. at 804 [Q4 FY15 Earnings Call (Apr. 8, 2015), at 4]. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 12 of 58 PageID 1000 -6- processing costs that we did not adequately forecast.” 24 Smith later elaborated: “[W]hat we’re seeing is what everybody else is seeing is more and more customers are doing more and more … shopping online… [S]o, yes, we’re missing those people who are just coming in for a browse and making an impulse purchase whilst they are there. That’s the new world that we live in.” 25 Like other traditional brick and mortar retailers, Pier 1 had to adjust its methods to match an entirely new world. Resolving excess inventory levels takes time. In April 2015, Smith noted that “our purchases will be less than our sales …. [A]s we move through the year, our inventories will moderate.” 26 By the next earnings release, the inventories had moderated: “I think as the time has gone on, the teams have done a great job at re-forecasting and adjusting their [purchases].” 27 Smith and Coffey both confirmed their expectation that inventory levels by the end of Q3 FY16 would be below the inventory levels of the same period of the previous year. 28 That happened, as subsequently reported: “To update you on our inventory position, … our inventories are now down year-over-year, so the cause of our problems is going away, but the [economic] fallout continues, and we expect it to continue to be the case for the balance of the year.” 29 The facts alleged do not support the fraudulent conspiracy that plaintiff invents. A more compelling and cogent inference can be drawn. Pier 1 predicted sales levels that did not materialize. When sales targets were missed, the inventory built up. That led to unanticipated costs and impacts to margin. These factors contributed to disappointing earnings. When earnings disappointed, the stock dropped. This is not the stuff of securities fraud. 24 Defs.’ App. at 807 [Q4 FY15 Earnings Call (Apr. 8, 2015), at 7]. 25 Defs.’ App. at 837 [Q1 FY16 Earnings Call (June 17, 2015), at 14]. 26 Defs.’ App. at 813 [Q4 FY15 Earnings Call (Apr. 8, 2015), at 13]. 27 Defs.’ App. at 842 [Q1 FY16 Earnings Call (June 17, 2015), at 19]. 28 Id. 29 Defs.’ App. at 848 [Q2 FY16 Earnings Call (Sept. 24, 2015), at 4]. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 13 of 58 PageID 1001 -7- ARGUMENT To state a claim under § 10(b) and Rule 10b-5, a plaintiff must allege: (1) a material misrepresentation or omission; (2) scienter, (3) a connection between the misrepresentation or omission and the purchase and sale of a security, (4) reliance upon the misrepresentation or omission, (5) economic loss, and (6) loss causation. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005). Rule 8 and Rule 12(b)(6) require that the complaint contain sufficient factual matter to state a claim for relief that is plausible on its face. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Rule 9(b) imposes a higher standard, requiring the plaintiff to plead with “particularity the circumstances constituting fraud.” Fed. R. Civ. P. 9(b). The Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u-4, raises the pleading bar even higher in two respects. See Local 731 I.B. of T. Excavators & Pavers Pension Trust Fund v. Diodes, Inc., 810 F.3d 951, 956 (5th Cir. 2016). First, the plaintiff must “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). Second, the plaintiff must, “with respect to each act or omission … state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Id. § 78u-4(b)(2)(A). I. PLAINTIFF’S CLAIMS FOR VIOLATION OF SECTION 10(B) OF THE EXCHANGE ACT AND RULE 10B-5 SHOULD BE DISMISSED A. The Complaint Does Not Satisfy Rule 9(b) and PSLRA Particularity Requirements. Under Rule 9(b) and the PSLRA, a plaintiff must allege the “who, what, when, where, and how” of its claims. ABC Arbitrage Plaintiffs Grp. v. Tchuruk, 291 F.3d 336, 350 (5th Cir. 2002). To avoid dismissal, plaintiff must: (1) specify each statement alleged to have been misleading; (2) identify the speaker; (3) state when and where the statement was made; (4) plead with particularity the contents of the false representations; (5) plead with particularity what the Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 14 of 58 PageID 1002 -8- person making the misrepresentation obtained thereby; and (6) explain the reason or reasons why the statement is misleading, i.e., why the statement is fraudulent. Id. Plaintiff has not pled fraud with particularity. The Court is left to infer misconduct from a “puzzle pleading” that fails to connect any statement or alleged omission with particularized allegations that defendants acted fraudulently. See N. Port Firefighters’ Pension-Local Option Plan v. Temple-Inland, Inc., 936 F. Supp. 2d 722, 737 (N.D. Tex. 2013) (noting that the PSLRA forbids “puzzle pleading” and that “’it is the parties’ burden to present succinct pleadings which clearly lay out’ the required elements” (quoting In re Alamosa Holdings, Inc. Sec. Litig., 382 F. Supp. 2d 832, 857-58 (N.D. Tex. 2005))). Plaintiff does not cite a conversation or document that demonstrates that any individual defendant intended to, or had any reason to, mislead investors. Nor does plaintiff make any allegation of what any individual defendant obtained by supposedly misleading investors. Instead, plaintiff attempts to make up for a lack of substance with two often-used, but legally insufficient, pleading tactics. The first tactic is pleading in volume in hopes that it will mask the absence of substance, or at least obfuscate the issues. See Williams v. WMX Techs., Inc., 112 F.3d 175, 178 (5th Cir. 1997) (“A complaint can be long-winded, even prolix, without pleading with particularity. Indeed, such a garrulous style is not an uncommon mask for an absence of detail.”). In this case, much of that volume consists of statements from confidential witnesses, none of whom provide allegations that ascribe fraudulent intent to the individual defendants. Mere anecdotal accounts of perceived problems in parts of corporate operations and differences of opinion from former employees regarding corporate strategy do not suffice to establish fraud. See Ind. Elec. Workers’ Pension Trust Fund IBEW v. Shaw Grp., Inc., 537 F.3d 527, 539-40 (5th Cir. 2008) (allegations from numerous confidential sources that “problems were widely known throughout the Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 15 of 58 PageID 1003 -9- company” do not adequately allege that the defendants acted with scienter). This is particularly true when the allegations come, as they do here, from former employees who were not part of senior management and do not report directly to senior management. The complaint fails to plead the details necessary to suggest that these confidential witnesses had visibility into the overall state of the company or any meaningful interaction with the individual defendants. See id. (noting the lack of weight given to confidential allegations generally and stating that the sources must, “[a]t the very least … be described ‘with sufficient particularity to support the probability that a person in the position occupied by the source … would possess the information pleaded’” (quoting ABC Arbitrage, 291 F.3d at 353)). Unsupported conclusions and speculation about the mental state of the individual defendants do not satisfy basic pleading requirements, much less the rigorous pleading requirements for fraud. See Milano v. Perot Sys. Corp., 2006 WL 929325, at *3 (N.D. Tex. Mar. 31, 2006) (“The court … does not accept conclusory allegations, unwarranted deductions, or legal conclusions.”). The second tactic is taking forward-looking statements, immaterial and vague puffery, and statements of opinion from the individual defendants, and then claiming fraud based on later events or subsequent poor performance: At one time the firm bathes itself in a favorable light. Later the firm discloses that things are less rosy. The plaintiff contends that the difference must be attributable to fraud. “Must be” is the critical phrase, for the complaint offers no information other than the differences between the two statements of the firm’s condition. Ind. Elec., 537 F.3d at 536 (quoting DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990)). Claims based on fraud by hindsight are invalid. See Coates v. Heartland Wireless Commc’ns, Inc. (Coates III), 100 F. Supp. 2d 417, 429 (N.D. Tex. 2000). Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 16 of 58 PageID 1004 -10- B. The Complaint Does Not Plead The Requisite Strong Inference Of Scienter. For each alleged statement or omission, plaintiff must state with particularity facts giving rise to a “strong inference” that defendants acted with scienter. 15 U.S.C. § 78u-4(b)(2)(A). Scienter is an intention to deceive, manipulate, or defraud. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007). In evaluating scienter, courts “must consider plausible, nonculpable explanations for the defendant’s conduct, as well as inferences favoring the plaintiff.” Id. at 322-24. The inference of scienter “must be more than merely ‘reasonable’ or ‘permissible’-it must be cogent and compelling” such that “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. 30 Plaintiff has not met this burden. 1. Plaintiff Has No Valid Allegation Of Motive. An important overlay to a review of the complaint is that plaintiff has not alleged any motive to mislead investors. The lack of motive undermines an inference of scienter. See In re Key Energy Servs., Inc. Sec. Litig., 2016 WL 1305922, at *34 (S.D. Tex. Mar. 31, 2016); see also Oppenheimer v. Novell, Inc., 851 F. Supp. 412, 418 (D. Utah 1994) (“Courts have looked with skepticism at allegations of wrongdoing in cases where there was no apparent motive for it.”). Although the absence of motive is not dispositive, Tellabs, 551 U.S. at 325, the strength of circumstantial allegations of conscious misbehavior in the absence of motive “must be correspondingly greater.” R2 Invs. LDC v. Phillips, 401 F.3d 638, 644 (5th Cir. 2005). One motive that can be alleged is insider stock sales at suspicious times or in suspicious amounts. Local 731, 810 F.3d at 960. Plaintiff makes no such allegations here, indicating that 30 To determine corporate scienter, courts look to the state of mind of the individual corporate officials who make or issue statements rather than the collective knowledge of all of the corporation’s officers and employees acquired in the course of their employment. See Southland Secs. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 366 (5th Cir. 2004). Because plaintiff fails to plead scienter of any individual defendant, it has also failed to plead scienter as to Pier 1. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 17 of 58 PageID 1005 -11- defendants did not act with scienter. See Cent. Laborers’ Pension Fund v. Integrated Elec. Servs. Inc., 497 F.3d 546, 553 (5th Cir. 2007) (a defendant’s retention of a large amount of stock “indicates he did not possess scienter regarding the alleged fraud, because otherwise he would have sold these shares before the price fell”). Plaintiff asserts only one alleged motive: that defendants’ compensation “was tied directly to the Company’s stock price.” 31 Plaintiff cites the use of a Total Shareholder Returns (“TSR”) metric in awarding long-term performance-based stock options. 32 A desire to increase a company’s stock price is a generalized motive that “could be imputed to any publicly-owned, for-profit endeavor,” and it is therefore insufficient to support an inference of scienter. Coates III, 100 F. Supp. 2d at 431 (quoting Chill v. Gen. Elec. Co., 101 F.3d 263, 268 (2d Cir. 1996)). For this reason, incentive compensation cannot be the basis of a securities fraud claim. Ind. Elec., 537 F.3d at 544. Were it otherwise, “the executives of virtually every corporation in the United States would be subject to fraud allegations.” Tuchman v. DSC Commc’ns Corp., 14 F.3d 1061, 1068 (5th Cir. 1994). Even in conjunction with other allegations, incentive compensation would be probative only in an extraordinary case. Ind. Elec., 537 F.3d at 544. Beyond their general insufficiency to plead scienter, plaintiff’s allegations ignore how Pier 1’s compensation is structured. The awards of TSR performance-based restricted shares do not vest at all and are forfeited if Pier 1’s stock fails to meet an objective performance criteria by the end of a three-year measurement period running from the date of the award. 33 Plaintiff does 31 ¶ 155. 32 Id. 33 See Defs.’ App. at 154-55 [8-K (Mar. 7, 2013), Ex. 10.3, at §§ 3(b), 5] (describing the terms applicable to Smith); Defs.’ App. at 176-77 [8-K (Apr. 18, 2013, Ex. 10.4, at §§ 3(b), 5] (describing the terms applicable to Turner). The shares did not vest if Pier 1’s total shareholder return had a percentile rank of 40% or less within a peer group of similar companies. The shares would vest in increasing percentages as the performance within the peer group improved. See Defs.’ App. at 154 [8-K (Mar. 7, 2013), Ex. 10.3, at § 3(b)]; Defs.’ App. at 176 [8-K (Apr. 18, 2013), Ex. 10.4, at § 3(b)]. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 18 of 58 PageID 1006 -12- not allege the implausible scheme that defendants could have artificially inflated the stock for such a long period of time and do not allege that any TSR performance-based shares ever vested. Defendants were incented, as executives should be, to generate long-term stock price improvement from successful business practices. In fact, a greater number of their restricted stock awards were subject to vesting requirements of meeting service longevity or EBITDA targets. 34 This, among other common-sense factors, eviscerates plaintiff’s theory that defendants were purposefully pursuing unrealistic sales plans that generated a glut of inventory. As plaintiff alleges, buying inventory for sales that do not materialize can quickly result in a deleterious effect on earnings and stock performance. 35 The individual defendants were incented in all forms of long-term compensation to avoid these consequences, supporting a strong inference that the issues Pier 1 experienced were at most, a result of inaccurate forecasting, not fraud. See Coates v. Heartland Wireless Commc’ns, Inc. (Coates II), 55 F. Supp. 2d 628, 636 (N.D. Tex. 1999) (“[M]ismanagement alone does not support a strong inference of fraud ….”). 2. Plaintiff Does Not Adequately Plead Conscious Misbehavior Or Severe Recklessness. Lacking any allegation of a plausible motive to defraud, plaintiff bears the heavy burden to plead scienter through strong circumstantial evidence of conscious misbehavior or severe recklessness. R2, 401 F.3d at 644-45. It has not carried this burden. To allege conscious misbehavior, plaintiff must state with particularity facts giving rise to a strong inference that defendants knew that a statement or omission was false or misleading. Coates II, 55 F. Supp. 2d at 635; see also Ind. Elec., 537 F.3d at 534. In doing so, plaintiff may not rely on fraud by hindsight. See Coates II, 55 F. Supp. 2d at 635. Severe recklessness 34 Defs.’ App. at 141 [8-K (Mar 7, 2013), Item 5.02(e)] (granting Smith four times as much restricted stock subject to EBITDA and time-based vesting requirements); Defs.’ App. at 165 [8-K (Apr. 18, 2013), Ex. 10.1] (granting Turner 20% greater amount of restricted stock subject to EBITDA and time-based vesting requirements). 35 ¶ 32. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 19 of 58 PageID 1007 -13- requires an extreme departure from the standard of ordinary care, not merely simple or even inexcusable negligence. Local 731, 810 F.3d at 957. The allegations must show “a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it.” Id. (quoting Owens v. Jastrow, 789 F.3d 529, 536 (5th Cir. 2015)). The facts alleged “must, in fact, approximate an actual intent to aid in the fraud being perpetrated.” Coates III, 100 F. Supp. 2d at 424 (quoting Chill, 101 F.3d at 269)). a. Plaintiff’s Allegations Of Increasingly Large Amounts Of Inventory Do Not Establish A Strong Inference Of Scienter. Much of the complaint consists of allegations that Pier 1 had large amounts of inventory. 36 Notably absent, however, is any allegation that Pier 1 misreported the amount of its inventory. Indeed, Pier 1’s financial statements accurately disclosed increasing inventory levels, which, while accelerating between Q3 FY15 and Q1 FY16, were consistent with the pattern of increasing inventories during the years preceding the class period: End-of-Period Inventory Balances and Quarter v. Quarter Change %37 Fiscal Year First Quarter Second Quarter Third Quarter Fourth Quarter 2012 $315.1 million $370.7 million $367.9 million $322.5 million 2013 $333.5 million +5.8% $420.8 million +13.5% $417.5 million +13.5% $356.1 million +10.4% 2014 $383.3 million +14.9% $444.7 million +5.7% $429.1 million +2.8% $377.7 million +6.1% 2015 $417.6 million +8.9% $513.8 million +15.5% $535.5 million +24.8% $478.8 million +26.8% 2016 $501.7 million +20.1% $533.6 million +3.9% $503.0 million -6.1% $405.9 million -15.2% Pier 1 also disclosed investments to improve its ability to store and handle increasing 36 See, e.g., ¶¶ 64, 68, 75, 78-79, 82-85, 91, 93-94, 102-03. 37 The data in the chart comes from various 10-Qs and 10-Ks. See Defs.’ App. at 8, 31, 54, 110, 251, 275, 299, 377, 535, 560, 584, 640. The percentages reflect the change from the same quarter of the prior year. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 20 of 58 PageID 1008 -14- inventories-an increase of almost two million square feet of space from FY13 to FY16. 38 Allegations premised on an undisclosed increase in inventory levels that was in fact disclosed to investors cannot create a strong inference of scienter. See Rosenzweig v. Azurix Corp., 332 F.3d 854, 868 (5th Cir. 2003) (“It is difficult to form a ‘strong inference’ of scienter from the alleged undercapitalization of a company when plaintiffs appear to concede that the company accurately disclosed its capital structure and financial obligations in its prospectus.”). b. Plaintiff’s Allegations Of Markdown Risk From Inventory Levels Do Not Establish A Strong Inference Of Scienter. Plaintiff asserts that defendants nevertheless misled investors by not disclosing the imminent markdown risk that the elevated inventory levels presented. 39 This also fails. (1) Pier 1 Grew Inventory For Anticipated Sales. Plaintiff bases its argument in part on an assumption that elevated inventory levels will inexorably lead to costly markdowns. 40 But plaintiff ignores that retailers routinely build inventory for anticipated sales. See In re Crocs, Inc. Secs. Litig., 774 F. Supp. 2d 1122, 1145 (D. Colo. 2011) (noting that inventory buildup was done to meet anticipated demand). Plaintiff’s argument is also belied by plaintiff’s acknowledgement that too little inventory “can do damage too, reducing a firm’s sales and gross margins.” 41 The complaint adds that “[t]he problem arises because they try to build up assets (stores and inventory) in anticipation of sales. If their sales fail to meet their goals, earnings and cash flow can quickly turn negative.” 42 Pier 1 therefore faced the task of trying to achieve a “Goldilocks” level and mix of inventory: enough to drive sales, but not too much, made up of products that will sell while 38 Defs.’ App. at 196 [FY13 10-K (Apr. 30, 2013), at 13] (3.6 million square feet); Defs.’ App. at 617 [FY16 10-K (Apr. 26, 2016), at 14] (5.5 million square feet). 39 See, e.g., ¶ 109. 40 See, e.g., ¶ 202(i) (“The Company’s massive inventory meant that the excess, unsold merchandise posed a serious, undisclosed markdown risk.”). 41 ¶ 32. 42 Id. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 21 of 58 PageID 1009 -15- avoiding ones that will not. Stating the obvious, predicting future demand is not an exact science; it involves subjective judgment. The challenge is heightened by the fact that Pier 1 typically commits to buy most products at least six months before they arrive in stores to allow sufficient time for manufacture and transport of international goods. Pier 1 specifically and prominently disclosed this risk of investment. 43 As common sense would dictate, Pier 1 purchased inventory because it anticipated sales, not because it expected markdowns. (2) Plaintiff Has Not Alleged Pier 1 Set Fraudulent Sales Goals. Plaintiff asserts that defendants knew that the inventory was in excess of the sales that could be achieved and therefore knew that markdowns were imminent but failed to disclose these facts. 44 In particular, plaintiff alleges that defendants knew sales goals were unrealistic but still continued to purchase inventory that they knew could not be sold without markdowns. 45 Without even considering other deficiencies in these allegations, this theory defies common sense. Plaintiff offers no plausible reason for defendants to push sales goals that they knew could not be attained. Indeed, plaintiff asserts that Turner was forcibly terminated for “botching” sales goals. 46 And there is even less reason to purchase inventory that defendants knew could not be sold without costly markdowns, particularly given plaintiff’s allegation that defendants were attuned to the detrimental impact this would have on the business. 47 The sheer implausibility of this theory prevents any inference of scienter. See Coates II, 55 F. Supp. 2d at 643 (rejecting allegations of scienter as “facially implausible”). The more plausible and compelling inference is that defendants actually believed at the time the purchases were made that the inventory could be sold. See Coates v. Heartland Wireless Commc’ns, Inc. (Coates I), 43 Defs.’ App. at 188 [FY13 10-K (Apr. 30, 2013), at 5]; Defs.’ App. at 348 [FY14 10-K (Apr. 29, 2014), at 6]. 44 ¶¶ 7, 202. 45 ¶¶ 57, 202(d). 46 ¶ 147. 47 ¶¶ 25-33. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 22 of 58 PageID 1010 -16- 26 F. Supp. 2d 910, 921 (N.D. Tex. 1998) (statement of belief that subscribers may return and providing incentives refuted the allegation that defendants knew subscribers would be lost). Plaintiff alleges no particularized facts showing that the defendants knew sales goals were unrealistic. Plaintiff can only muster generic allegations that “[i]t became clear to the Executive Defendants by the beginning of the Class Period that the unrealistic sales they had predicted were not materializing and would not any time soon.” 48 This conclusory statement does not satisfy basic pleading standards. See Coates III, 100 F. Supp. 2d at 425. The increasing inventories during FY15 were consistent with the company’s steady sales growth over the prior years (with the exception of the weather-impacted Q4 FY14): Quarterly Net Sales and Same Quarter % Change49 Fiscal Year First Quarter Second Quarter Third Quarter Fourth Quarter 2012 $334.6 million $339.6 million $382.7 million $476.8 million 2013 $361.1 million +7.9% $367.6 million +8.3% $424.5 million +10.9% $522.6 million50 +9.6% 2014 $394.9 million +9.4% $395.6 million +7.6% $465.5 million +9.7% $515.8 million -1.3% 2015 $419.1 million +6.1% $418.6 million +5.8% $484.5 million +4.1% $543.6 million +5.4% 2016 $432.0 million +3.1% $430.0 million +2.7% $472.5 million -2.5% $542.3 million -0.2% Based on these sales growth trends, it was reasonable-not fraudulent-for defendants to have planned for, and made, inventory purchases anticipating subsequent growth. See In re Crocs, 774 F. Supp. 2d at 1152 (“[T]he Court finds that the inference that Case acted with scienter is not 48 ¶ 57. 49 The chart summarizes financial data from Pier 1’s 10-Ks. Defs.’ App. at 132, 239, 395, 509, 659. The percentages reflect the change from the same quarter of the prior year. 50 Q4 FY13 was a 14-week period for which $551.6 million of revenue was reported, with all other indicated periods being 13 weeks. Defs.’ App. at 239 [FY13 10-K (Apr. 30, 2013), at 56]. The amount of $522.6 million reported above excludes $29 million of reported revenue for the 14th week to provide more consistent comparisons. Defs.’ App. at 719 [Q4 FY14 Earnings Call (Apr. 10, 2014), at 7] (estimating that the extra week in FY13 contributed approximately $29 million in total sales). Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 23 of 58 PageID 1011 -17- as compelling as the plausible opposing inference that Case made the complained of statements out of hopefulness about Croc’s future sales ….”). Plaintiff alleges that “the Company” or “management” manually overrode automated allocation forecasts from the Demand Chain Management (“DCM”) computer system. 51 This allegation is a form of impermissible group pleading; it does not particularly allege involvement or knowledge of the individual defendants. See Local 731, 810 F.3d at 957; see also Fener v. Belo Corp., 425 F. Supp. 2d 788, 801 (N.D. Tex. 2006) (allegations not specific to the defendant in question are an impermissible form of group pleading). Allegations that any practice was “pretty well known” or a “way of life” at Pier 1 52 also fail to plead with the required specificity any knowledge of the defendants. See Ind. Elec., 537 F.3d at 539-40. But even if defendants were aware of and involved in the manual overrides, it would not establish scienter. There is nothing nefarious about corporate management applying human judgment to modify computer guidance. Though plaintiff describes DCM as a “fail-safe system,” 53 implying that defendants should have slavishly followed its guidance, this is a conclusory allegation that is untethered to any statement from any defendant (or, for that matter, from any confidential witness). There is no allegation that the system was prescient generally, that Pier 1 consistently relied on its unadjusted values, or that the system perfectly anticipated sales growth. Instead, the allegations at most show a difference of “opinion” between management and a computer program regarding sales predictions, a far cry from anything that could plead a strong inference of scienter. The only allegation that attempts to plead personal knowledge of the individual defendants that the sales plans were unattainable purportedly comes from a former buyer in the 51 ¶ 63. 52 Id. 53 ¶ 202(d). Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 24 of 58 PageID 1012 -18- furniture department. 54 Apart from the general principle that “courts must discount allegations from confidential sources,” Ind. Elec., 537 F.3d at 535, plaintiff has not alleged facts demonstrating how a buyer in a single department could possess knowledge of the beliefs of the top executives at the company regarding annual sales goals for the entire company. See id. (“At the very least, such sources must be described ‘with sufficient particularity to support the probability that a person in the position occupied by the source … would possess the information pleaded ….’” (quoting ABC Arbitrage, 291 F.3d at 353)). The only specific allegation attributed to the buyer is that, through the first quarter of FY15, she was 20% below targeted sales and that this information was communicated to defendants at a meeting she apparently did not attend. 55 That information, assuming it was in fact communicated to defendants, would not bear on whether defendants could have nevertheless believed that annual sales targets for the entire company were achievable. The anonymous buyer’s assertion that “everyone,” including the CEO and senior VPs, “‘knew’ that Pier 1 was not going to meet the plans,” 56 is a vague and conclusory allegation that cannot support a strong inference of scienter. See Fener, 425 F. Supp. 2d at 814. Similarly, the statement that “senior executives ‘oversold’ the sales plans to investors” 57 is not only impermissible group pleading, but it is vague and conclusory. Most of plaintiff’s claims regarding allegedly unrealistic sales goals consist of opinions supposedly offered by confidential witnesses that the sales forecasts were unrealistic. 58 These allegations fail to give rise to a strong inference of scienter because (1) the confidential witnesses do not reference documents or conversations showing defendants knew the sales goals were 54 ¶¶ 70-71. 55 ¶ 71. 56 Id. 57 Id. 58 ¶¶ 63-67, 69-70, 72-75, 78, 86, 88. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 25 of 58 PageID 1013 -19- unrealistic and (2) the allegations merely reflect either a hindsight assessment or a difference of opinion regarding sales predictions-typically by junior or administrative personnel. Finally, plaintiff alleges that defendants must have known that the sales goals were unrealistic because there were unidentified reports and meetings in which defendants allegedly learned that sales were falling short of expectations and because no employee bonuses were paid for FY14 and FY15. 59 But alleging that sales ultimately failed to meet goals does not demonstrate that defendants knew the goals were unattainable when they were set; this is an impermissible attempt to allege fraud by hindsight. See Coates III, 100 F. Supp. 2d at 429. (3) Pier 1 Disclosed Sales Shortfalls And Inventory Increases. Plaintiff claims that when defendants stated that inventory levels were according to plan, defendants “misleadingly failed to disclose that the sales plan was in fact failing in real-time.” 60 But plaintiff does not allege that defendants misreported sales results; they were reported every quarter. Indeed, defendants discussed sales shortfalls at the end of FY14 and throughout FY15 in earnings calls, including multiple acknowledgements that sales failed to meet expectations. 61 The fact that sales were below expectations for the end of FY14 and during the first quarters of FY15, however, did not mean that inventories were out of line with management’s then-existing expectations. Defendants expressed the reasons why they were optimistic that 59 ¶¶ 67, 136. 60 ¶ 56. 61 Defs.’ App. at 715 [Q4 FY14 Earnings Call (Apr. 10, 2014), at 3] (“[S]ales and earnings in the holiday quarter were pressured by the significant weather disruption …. The quarter was disappointing for all of us ….”); Defs.’ App. at 736 [Q1 FY15 Earnings Call (June 19, 2014), at 3] (“[O]verall the quarter did not unfold as we planned. Store sales and profitability were disappointing, impacted by softer traffic and a higher level of promotional activity than we anticipated.”); Defs.’ App. at 754-55 [Q2 FY15 Earnings Call (Sept. 17, 2014), at 3-4] (“In the second quarter, subdued store traffic resulted in sales below our expectations. … So, from a sales and margin standpoint, the first half did not unfold as we anticipated ....”); Defs.’ App. at 777 [Q3 FY 15 Earnings Call (Dec. 18, 2014), at 3] (“After a strong start in September, our third quarter sales were somewhat softer than anticipated.… The soft store traffic patterns that we saw in Q2 continued into Q3.”); Defs.’ App. at 430 [8-K (Feb. 10, 2015), at Ex. 99.1] (disclosing “softer than expected sales in January and February” and noting that January sales were “well below our forecast, which had overestimated the recapture of lost sales from last year’s storms”); Defs.’ App. at 804 [Q4 FY15 Earnings Call (Apr. 8, 2015), at 4] (“Over the past year particularly, our financial performance against our self-stated objectives and guidance has been poor ….”). Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 26 of 58 PageID 1014 -20- sales would improve, particularly in the “peak holiday season” and “all-important fourth quarter.” 62 Pier 1 disclosed an aggressive fourth quarter sales forecast, including the post- holiday sales period, based in part on the expectation that sales would significantly improve over the weather-impacted Q4 FY14. 63 And Pier 1 disclosed to investors the importance of the fourth quarter and the risks associated with “failure to predict consumer demand correctly during these months,” including “gross margin erosion if merchandise must be marked down significantly to clear inventory.” 64 The fact a forecast could be fairly characterized as aggressive is no indication of fraud. See Fener, 425 F. Supp. 2d at 804 (noting that “setting of aggressive targets by management” was not a basis for inferring scienter (quoting In re Alamosa Holdings, 382 F. Supp. 2d at 858)). No facts are alleged to show that defendants did not honestly hold these beliefs, as they had much to lose in performance and credibility by being wrong. Plaintiff contends that defendants assured investors that it managed its inventory levels to track actual sales and consumer demand throughout FY15. 65 The reality is that defendants accurately disclosed not only that sales were disappointing, but also that inventory was up versus prior years (9% in Q1 FY15, 15% in Q2 FY15, and 25% in Q3 FY15). 66 Plaintiff asserts that defendants misled investors by attributing the increase to taking on more inventory in advance of the Chinese New Year rather than sales shortfalls, 67 but (1) sales shortfalls were disclosed in 62 Defs.’ App. at 740 [Q1 FY15 Earnings Call (June 19, 2014), at 7]; Defs.’ App. at 761 [Q2 FY15 Earnings Call (Sept. 17, 2014), at 10]. 63 Defs.’ App. at 740 [Q1 FY15 Earnings Call (June 19, 2014), at 7]; Defs.’ App. at 761, 765 [Q2 FY15 Earnings Call (Sept. 17, 2014), at 10, 14]; Defs.’ App. at 430 [8-K (Feb. 10, 2015), at Ex. 99.1]; Defs.’ App. at 808 [Q4 FY15 Earnings Call (Apr. 8, 2015), at 8]. 64 Defs.’ App. at 351 [FY14 10-K (Apr. 29, 2014), at 9]; see also Defs.’ App. at 191 [FY13 10-K (Apr. 30, 2013), at 8] (disclosing the same risk). 65 ¶ 49. 66 Defs.’ App. at 739 [Q1 FY15 Earnings Call (June 19, 2014), at 6]; Defs.’ App. at 760 [Q2 FY15 (Sept. 17, 2014), at 9]; Defs.’ App. at 781 [Q3 FY15 Earnings Call (Dec. 18, 2014), at 7]. 67 ¶ 50. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 27 of 58 PageID 1015 -21- each quarter, (2) defendants attributed only a part of the increase to the Chinese New Year, 68 and (3) plaintiff does not allege that the Chinese New Year did not account for part of the increase. Contrary to suggestions that defendants hid that inventory was growing out of line with sales, defendants discussed during the Q3 FY15 earnings call their expectation that inventory growth would “more closely approximate the growth in sales beginning in FY16 second quarter.” 69 Defendants disclosed that inventory growth was then in excess of sales growth and was expected to remain in that condition for multiple quarters. This occurred well before plaintiff claims that defendants first made a “dramatic disclosure” of “fail[ing] to keep inventory in line with sales” on February 10, 2015. 70 The publicly disclosed facts regarding disappointing sales and increasing inventory refute any allegations of fraud. See Pitten v. Jacobs, 903 F. Supp. 937, 949 (D.S.C. 1995) (a disclosed increase in inventory levels could not support scienter). (4) Investors Were Not Misled Regarding Markdown Risk. Plaintiff’s assumption that elevated inventory levels and missed sales goals would necessarily lead to markdowns is flawed for another reason: markdown risk is a function of the mix of the inventory. As plaintiff alleges, certain inventory is more susceptible to becoming obsolete and requiring clearance markdowns, such as purely seasonal merchandise and new products that fail to take root with customers. 71 On the other hand, Pier 1 has many proven products that are consistently sold throughout the year, year after year, without markdowns. 72 Excess inventory of these latter categories can be managed by adjusting future purchases. 73 68 Defs.’ App. at 739 [Q1 FY15 Earnings Call (June 19, 2014), at 6]; Defs.’ App. at 760 [Q2 FY15 Earnings Call (Sept. 17, 2014), at 9]; Defs.’ App. at 781 [Q3 FY15 Earnings Call (Dec. 18, 2014), at 7]. 69 Defs.’ App. at 781 [Q3 FY15 Earnings Call (Dec. 18, 2014), at 7]. 70 ¶ 173. 71 ¶¶ 36, 160. 72 Defs.’ App. at 808 [Q4 FY15 Earnings Call (Apr. 8, 2015), at 8]. 73 Id. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 28 of 58 PageID 1016 -22- Plaintiff further confuses this issue in discussing “clean” inventory. Contrary to plaintiff’s assumption, excess inventory is not per se inventory that is not “clean.” 74 As explained below, defendants used “clean inventory” to refer to an absence of stockpiles of obsolete items that required clearance activity. Pier 1’s perception of markdown risk includes at least two considerations: (1) forecasts of anticipated sales and (2) whether the product can be expected to be sold later (and therefore can be held in inventory for later sale without clearance markdowns). When plaintiff decries as fraud statements that inventory was “clean,” “healthy,” and did not pose a significant markdown risk, plaintiff ignores these factors. Beyond anecdotal accounts from confidential witnesses of an unquantified amount of product that had to be marked down before reaching stores, 75 the complaint is bereft of any attempt to show the inventory that Pier 1 held was of a nature to create a known markdown risk. The anecdotal accounts do not allege that the amount of clearance inventory was out of line with prior periods, much less that the defendants knew of a material issue that they failed to disclose. See Coates II, 55 F. Supp. 2d at 638 (“It cannot be strongly inferred that a person who conceals immaterial information acts with intent to defraud.”). Unlike plaintiff, defendants did account for the nature of the inventory in discussing “clean inventory” and markdown risk:  At the end of FY14, Turner described “an increased level of promotional activity and the clearing of seasonal inventory” that “allowed us to enter fiscal 2015 in a clean inventory position.” 76  In Q1 FY15, Smith stated that “[w]e are being more aggressive than last year in terms of how we clear out the SKUs that we are not going forward with. So that we are good and clean for when Harvest and Halloween ships.” 77 74 ¶ 202(b). 75 ¶¶ 80, 160. 76 Defs.’ App. at 719 [Q4 FY14 Earnings Call (Apr. 10, 2014), at 7]. 77 Defs.’ App. at 745 [Q1 FY15 Earnings Call (June 19, 2014), at 12]. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 29 of 58 PageID 1017 -23-  In Q2 FY15, Smith stated that “a relatively small percentage of our purchases are in merchandise which has a short shelf life.” 78  In Q3 FY15, Smith stated that “[b]ecause the inventory growth is not in seasonal goods, we do not see any significant mark down risk.” 79  On January 8, 2015, Smith stated that “sell-through on our holiday assortments was on plan” and “[w]e are in the midst of our clearance efforts and beginning the transition to fresh spring looks ….” 80  In Q4 FY15, interim CFO Laura Coffey stated that “the complexion of our inventories level is healthy, and does not pose a significant immediate markdown risk. Approximately half of our inventory is comprised of new and seasonal SKUs, including outdoor, while the remaining 50% is comprised of long-standing collections of our products that do well for us day in and day out.” 81 Plaintiff does not allege that any of these statements were untrue. Nor has plaintiff alleged with particularity that defendants, in using the term “clean inventory,” knew that Pier 1 was stuck with a material amount of obsolete merchandise that required clearance markdowns. Instead, plaintiff relies on allegations that courts have found to be insufficient. Plaintiff alleges that defendants must have known of an undisclosed markdown risk because of their focus on inventory and use of systems to track inventory. 82 But these allegations do nothing to establish that a material markdown risk existed, much less that defendants knew of it when making the statements in question. These “must have known” allegations are inadequate. See Ind. Elec., 537 F.3d at 535 (noting scienter cannot be based on allegations of an executive’s “hands-on management style” and the alleged magnitude of the problem); Mogensen v. Body Cent. Corp., 15 F. Supp. 3d 1191, 1220-21 (M.D. Fla. 2014) (“To impute knowledge of or extremely reckless disregard for the truth from the mere existence of an internal reporting system, and the mere active engagement of management, would allow almost any securities 78 Defs.’ App. at 767 [Q2 FY15 Earnings Call (Sept. 17, 2014), at 16]. 79 Defs.’ App. at 779 [Q3 FY15 Earnings Call (Dec. 18, 2014), at 5]. 80 Defs.’ App. at 424 [8-K (Jan. 8, 2015), at Ex. 99.1]. 81 Defs.’ App. at 808 [Q4 FY15 Earnings Call (Apr. 8, 2015), at 8]. 82 ¶¶ 3, 25-29, 33, 41, 150-54, 164-72. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 30 of 58 PageID 1018 -24- fraud case to proceed into discovery.”); Pitten, 903 F. Supp. at 950 (rejecting allegations that defendants must have known because of sophisticated management information system). Plaintiff also alleges that defendants received regular reports and attended meetings regarding inventory levels, markdowns, and sales progress. 83 Plaintiff fails to provide details of what specific information inconsistent with public statements was provided to defendants. See Coates III, 100 F. Supp. 2d at 428 (noting that allegations of discussions of an issue do not demonstrate knowledge that a problem exists). Nor do the allegations provide details of a particular person or document that provided the concealed information or when defendants received the information. These allegations are inadequate. See Abrams v. Baker Hughes, Inc., 292 F.3d 424, 432 (5th Cir. 2002) (“Such allegations must have corroborating details regarding the contents of allegedly contrary reports, their authors and recipients.”). The allegations purportedly derived from confidential witnesses that others knew about inventory problems, including executives who reported to defendants, are insufficient. 84 They do not detail a known markdown risk, much less allege that specific information was communicated to the defendants. See Ind. Elec., 537 F.3d at 539-40. The complaint includes an allegation that Smith acknowledged at a review meeting in mid-2014 that “inventory problems were pervasive.” 85 The allegation does not mention any markdown risk, nor does it describe how inventory was considered to be a problem. This isolated allegation from a confidential witness is far too vague and general to support a strong inference of scienter. See Ind. Elec., 537 F.3d at 538-539 (rejecting similar allegations). 83 ¶¶ 62, 136-38, 168-70. 84 ¶¶ 60, 64-69, 71, 73-74, 139(a)-143, 160. 85 ¶ 136(c). Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 31 of 58 PageID 1019 -25- The remaining allegations are based on subsequent disclosures of markdown activity during FY16. 86 This is impermissible fraud by hindsight. See Coates III, 100 F. Supp. 2d at 429 (“Mere allegations that statements in one report should have been made in earlier reports do not make out a claim of securities fraud.”). Moreover, these allegations ignore several developments that occurred during FY16. Sales were below expectations, slowing the anticipated reduction in inventory. 87 In particular, outdoor furniture sales during the first quarter were disappointing due to competitors beginning promotions unusually early in the selling season. 88 Because outdoor furniture is somewhat seasonal and consumes a large amount of store space, this led to clearance activity that was unrelated to any inventory issue in the prior year. 89 Some of the markdowns were not clearance activity; Pier 1 discounts to match promotional activity of competitors. 90 Plaintiff claims that Pier 1 employed significant markdown and clearance efforts in Q2 FY16 “to clear the undisclosed inventory backlog.” 91 Not only were inventory levels disclosed, but plaintiff cites no facts to support the conclusory statement that significant markdown and clearance efforts were undertaken because of the size of inventory. Nor does plaintiff allege how much clearance activity was related to this supposed cause. Indeed, that quarter included the disclosed clearance activity for disappointing outdoor furniture sales in Q1 FY16. c. Plaintiff’s Allegations Of Costs And Logistical Problems From Inventory Levels Do Not Establish A Strong Inference Of Scienter. Plaintiff alleges that defendants misled investors about the costs and logistical problems caused by elevated inventory levels. In particular, plaintiff claims that Pier 1 did not have the infrastructure to handle excess inventory and that defendants did not “fully disclose” the cost of 86 ¶¶ 111, 121, 146. 87 Defs.’ App. at 826 [Q1 FY16 Earnings Call (June 17, 2015), at 3]; Defs.’ App. at 848 [Q2 FY16 Earnings Call (Sept. 24, 2015), at 4]. 88 Defs.’ App. at 826-27 [Q1 FY16 Earnings Call (June 17, 2015), at 3-4]. 89 Defs.’ App. at 848 [Q2 FY16 Earnings Call (Sept. 24, 2015), at 4]. 90 Defs.’ App. at 875, 878-79 [Q3 FY16 Earnings Call (Dec. 16, 2015), at 6, 9-10]. 91 ¶ 125. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 32 of 58 PageID 1020 -26- handling increased inventory or attribute those costs to inadequate infrastructure. 92 In support, plaintiff offers confidential witness statements providing anecdotal accounts of alleged difficulties associated with dealing with inventory and of additional costs that were supposedly incurred at individual stores and distribution centers. 93 With only one exception, none of these allegations make any attempt to plead knowledge of the individual defendants. The only effort to allege knowledge by any individual defendant is attributed to a former allocations analyst who purportedly said that Smith demanded “as early as late 2013” that the company needed to end the use of third party storage facilities, that Smith was aware that stores lacked a standardized method to track what was in outdoor storage, and that Smith was aware that the storage was extremely expensive. 94 This isolated allegation is attributed to a confidential witness and should be discounted on that basis alone. Ind. Elec., 537 F.3d at 535. There is also no indication of precisely when and where the allocations analyst, a non-executive, supposedly learned this information. There are no details of precisely what was communicated that created the alleged “awareness” on the part of Smith. There is no indication that use of this extra storage was prevalent. There is no allegation that Smith was otherwise informed of anything that was material to the business. These allegations do not demonstrate that Smith misreported these costs, that Smith knew that costs in FY15 would ultimately exceed forecasts, or that he did anything intending to defraud investors. Lacking any particularized allegation specific to the defendants, plaintiff is left to argue that “defendants must have known” because of what other employees knew. 95 But this is insufficient. See Ind. Elec., 537 F.3d at 539-40; see also Mogensen, 15 F. Supp. 3d at 1218 92 ¶¶ 89, 97. 93 ¶¶ 68, 77-108, 160. 94 ¶ 105. 95 See, e.g., ¶¶ 142-43. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 33 of 58 PageID 1021 -27- (rejecting allegations that a stale merchandise problem was a “huge concern” among lower and middle management and that knowledge of a short-staffing crisis was widespread). Plaintiff’s arguments that defendants must have known because of their positions and professed focus on inventory issues 96 also fail to establish a strong inference of scienter. See Abrams, 292 F.3d at 432. Further, plaintiff’s reliance on what was reported at later dates 97 is fraud by hindsight. The anecdotal allegations of inventory problems otherwise cannot support scienter. They do not demonstrate that any of these issues materially impacted Pier 1’s overall business in a way that was not timely disclosed. In the absence of documents or discussions showing that defendants actually knew of a material problem that they purposefully misrepresented or concealed, the Court would be left to speculate as to whether the gripes from anonymous former employees amount to anything more than just the vagaries of executing a large retail operation. It falls far short of raising a strong inference of scienter through severe recklessness. Plaintiff repeatedly asserts that there were “undisclosed costs” associated with handling inventory, 98 but these are nothing more than conclusory assertions. Plaintiff offers no particularized allegation that defendants knew of costs that went undisclosed in financial reporting. Plaintiff alleges that excess inventory results in additional costs and that “Company executives would have become aware of those increased costs as they were being paid.” 99 Accepting that defendants knew that increasing inventory would increase costs, that does not show that any costs were undisclosed. Indeed, defendants disclosed costs and expenses 96 ¶¶ 143, 164-69. 97 ¶ 143. 98 ¶¶ 1, 2, 7, 89, 135, 201, 202(e), 203, 207. 99 ¶ 161. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 34 of 58 PageID 1022 -28- associated with growing Pier 1’s distribution system. 100 Similarly, the fact that costs ultimately exceeded forecasts does not demonstrate that defendants knew the forecasts were inaccurate or that the costs were “undisclosed.” The only allegation with any bearing on whether costs were undisclosed is one attributed to an anonymous accounting system analyst. The analyst purportedly claimed that the accounting and finance groups were unable to account for and record the expenses associated with secondary distribution centers and warehouses and that “the very fact that some of these expenses were being incurred … did not reach the accounting department until a long time after they had begun to accrue, and as a result were not recorded properly.” 101 Of course, this is at odds with the conclusion that “Company executives would have become aware of these increased costs as they were being paid.” 102 It is also inconsistent with the allegation that the distribution center costs were “well known in the finance department.” 103 These internal inconsistencies foreclose any strong inference of scienter. If the costs were in fact known, there is no allegation that shows that they were not duly reported or that defendants concealed them. If the costs were in fact not known to the accounting department, there is no allegation that defendants were aware of this. In fact, rather than demonstrating an intentional concealment of 100 Pier 1’s costs are reflected in its quarterly financial statements, and plaintiff does not allege that those costs were misreported. Defendants also discussed costs associated with Pier 1’s growing business during FY14 and FY15. See, e.g., Defs.’ App. at 361 [FY14 10-K (Apr. 29, 2014), at 19] (describing that the 1 Pier 1 strategy had required investments in “systems, fulfillment centers, call centers, distribution networks and store development”); Defs.’ App. at 739 [Q1 FY15 Earnings Call (June 19, 2014), at 6] (disclosing increased hiring costs and startup costs for new fulfillment center); Defs.’ App. at 755, 759 [Q2 FY15 Earnings Call (Sept. 17, 2014), at 4, 8] (“ [O]ur profitability was further eroded because of the investments we made to ensure that we’re prepared for the growth that lies ahead. Most notably, we moved up our plans for a second e-commerce fulfillment center by two years, and increased our expenditures on headcounts and marketing.… Our fixed and variable fulfillment costs have grown significantly in the past year, with the expansion of e-comm sales and also the construction of our second fulfillment center. This is clearly reflected in the contraction of our gross profit as a percentage of sales.”); Defs.’ App. at 779- 80 [Q3 FY15 Earnings Call (Dec. 18, 2014), at 5-6] (“[O]ur profitability is currently constrained by investment in 1 Pier 1 … .The dollar increase [in fixed expenses] is primarily attributable to planned growth in headcount and associated costs to scale e-commerce and expand our organizational capabilities in support of 1 Pier 1.”). 101 ¶ 95. 102 ¶ 161. 103 ¶ 101. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 35 of 58 PageID 1023 -29- costs, the allegation merely suggests, at worst, that defendants did not have timely information regarding the costs being incurred and so could not have acted with scienter. Though plaintiff describes the February 2015 report of costs exceeding forecasts as revealing a fraud, 104 this is merely fraud by hindsight. There is no allegation that the individual defendants were aware at an earlier point of the extent to which the costs would exceed the forecasted expenses. A more compelling inference is that the extent of the extra costs became known near the time of the announcement. This inference is supported by the fact that the largest inventory levels during the entire class period occurred in Q3 and Q4 of FY15, the time period immediately preceding the announcement of costs exceeding forecast. Indeed, plaintiff’s allegations acknowledge that the costs increased most dramatically in Q3 and Q4 of FY15. 105 At most, plaintiff’s allegations suggest inaccurate cost forecasting or poor cost management; they do not support a strong inference of scienter. d. Plaintiff’s Other Scienter Allegations Also Fail. Plaintiff has made a hodgepodge of other inadequate scienter allegations. (1) The March 2014 Town Hall Meeting Pier 1 held a March 2014 “town hall” meeting during which Smith spoke to “a large gathering of Pier 1 employees.” 106 Plaintiff provides more than two-year old recollections from confidential witnesses of what was allegedly said at the meeting, including one who acknowledged that “she could not recall exactly when it occurred” and that it “left her with the impression” of certain things. 107 The Court should heavily discount these imprecise recollections. Ind. Elec., 537 F.3d at 535. 104 ¶ 114. 105 ¶ 100. 106 ¶ 8. 107 ¶ 136(g). Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 36 of 58 PageID 1024 -30- Setting aside whether the recollections are accurate, they do not show scienter. Even if Smith acknowledged (1) that sales goals were “overly high” during FY14, (2) that he had underestimated what it would take to achieve those goals during FY14, (3) that Pier 1 had been too ambitious with goals and merchandise purchases during FY14, (4) that Pier 1 had “‘tackled too much of e-commerce at once’ and were not ready for it when [it] began the initiative,” and (5) that he was guilty of planning, infrastructural, and execution failures, 108 this would reflect nothing more than a hindsight assessment of past performance. The slide that states “[w]e became victims of our own ambition” 109 is hopelessly ambiguous without taking into consideration the context of the slide and the statements surrounding it. At most, however, it would constitute another hindsight assessment of past performance. These hindsight assessments of a period that falls largely outside of the class period do not support a claim of fraud. See Southland Secs. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 382 (5th Cir. 2004). There is no allegation that Smith did not disclose disappointing performance to investors during FY14; he did. For example, in the Q2 FY14 earnings call, Smith told investors: [W]e are very disappointed with the performance of our Pier 1 Imports stores for the quarter, which clearly fell short of everyone’s expectations.… We know that we could and should have produced better performance from our Pier 1 Imports stores and believe [our] less-than-flawless decision-making occurred because we did not strike the right balance between short-term execution and long-term planning. This is something our Management team has prided itself on for the past 15 quarters, and I am not happy that our run has been broken. 110 In the Q4 FY14 earnings call, he assessed FY14 as one in which “we encountered some challenges along the way and concluded with a tough fourth-quarter ….” 111 He did so in the 108 ¶ 136(f)-(g). 109 ¶136(f). 110 Defs.’ App. at 669 [Q2 FY14 Earnings Call (Sept. 19, 2013), at 3]. 111 Defs.’ App. at 715 [Q4 FY14 Earnings Call (Apr. 10, 2014), at 3]. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 37 of 58 PageID 1025 -31- very same call in which he expressed the optimism that plaintiff claims to be inconsistent. 112 Assessing that the company had overly-optimistic ambition in FY14 is in no way inconsistent with believing that ambition would be an ingredient of success going forward or believing that the company was in great shape to succeed going forward. Plaintiff claims that Smith “internally acknowledged Pier 1’s inventory crisis,” 113 but it offers no factual allegation to support this conclusory statement. The notion that someone alleged to have defrauded investors would stand in front of an auditorium full of employees and publicly disclose the fraud is ludicrous. (2) “Temporal Proximity” Plaintiff claims the Court can find a strong inference of scienter from the “temporal proximity” of certain positive statements to subsequent negative announcements. 114 Courts that consider temporal proximity generally find that it is insufficient standing alone to plead fraud with particularity. Coates II, 55 F. Supp. 2d at 641 n.18; see also Pearlstein v. BlackBerry Ltd., 93 F. Supp. 3d 233, 247 (S.D.N.Y. 2015) (“Indeed, courts in this district have held that ‘temporal proximity alone does not raise a circumstantial inference of fraud.’” (quoting Fant v. Perelman, 1999 WL 199078, at *13 (S.D.N.Y. Apr. 9, 1999))). Temporal proximity allegations are weak at best because there may be intervening events or other explanations that account for the differences in the statements. Kurtzman v. Compaq Computer Corp., 2002 WL 32442832, at *12 (S.D. Tex. Mar. 30, 2002) (“Such a broad, unsupported generalization that proximity of a false statement to a public disclosure evidences scienter leaves unexamined the myriad of specific facts and circumstances that might have resulted in an unexpected public disclosure.”). And plaintiff can show no motive for its alternative explanation: that defendants fraudulently delayed delivering bad news. There is no 112 ¶ 136(f). 113 ¶ 137. 114 ¶¶ 144-146. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 38 of 58 PageID 1026 -32- allegation that defendants made unusual sales of stock during this period. One court has aptly explained the disincentive there would be to delaying the inevitable delivery of bad news: [T]here seems to be little value in artificially maintaining the value of stock holdings for such a limited time. Indeed, the plaintiff’s proposed motive actually seems to cut the other way; if one wishes to ‘maintain [an] image for success and growth,’ a bad report a few weeks after expressing optimism would seem to be counter-productive. There are no facts alleged which would support an inference that postponing the negative report for a few weeks would have any effect on Novell’s market position against Microsoft. Indeed, it would seem that a sudden, unexpected announcement would be far worse in this respect than a more gradual release of negative indicators from the beginning of the quarter. Oppenheimer, 851 F. Supp. at 417. There is no particularized allegation that the earlier statements were false when made. To the contrary, the allegations lead to a more compelling inference that intervening events, such as (1) sales falling below expectations in the critical fourth quarter of FY15, (2) an intervening appreciation of the fact that costs were exceeding forecasts, (3) continued sales disappointments in FY16, contributing to a gradual realization that online sales were cannibalizing stores sales rather than adding to them, and (4) clearance activity driven by flagging sales of outdoor products, account for the later negative announcements. These temporal proximity allegations are in reality merely fraud by hindsight. See Kurtzman, 2002 WL 32442832, at *12 n.9. (3) Executive Resignations Plaintiff claims that Turner’s resignation is evidence of fraud. 115 The Fifth Circuit has rejected similar claims, holding that executive resignations do not support scienter without allegations that the resignation was because the executive committed fraud. See Abrams, 292 F.3d at 434 (complaint pointed to no information that defendants resigned because of accounting irregularities); Rosenzweig, 332 F.3d at 867 (“[S]uccessive resignations of key officials … is more likely probative only of the fact that the company was failing.”). Plaintiff claims Turner’s 115 ¶¶ 147-49. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 39 of 58 PageID 1027 -33- resignation was “a thinly-disguised forcible termination … for having ‘botched’ sales goals,” 116 but, if true, this would not establish scienter. See Abrams, 292 F.3d at 434 (allegation that CFO resigned because of cost overruns and operational glitches did not have “scienter implications”). Plaintiff also claims that the Court can infer fraud because Turner allegedly did not receive his full retirement benefits, purportedly demonstrating that he was terminated for cause for inappropriate conduct. 117 The reality is that Turner received his full retirement benefits. The $1.08 million payment that plaintiff references was part of a retirement agreement attached to the FY15 10-K, and that agreement states that the payment is “in addition to any monies or benefits to which you are already otherwise entitled under the plans and arrangements described on Annex A to this Agreement (the “Other Retirement Benefits”) ….” 118 The agreement further provides that it “does not release or terminate any of your rights pursuant to … the Other Retirement Benefits, which shall continue in full force and effect in accordance with their respective terms.” 119 The same 10-K states that Turner had earned an early retirement benefit payment of $7,573,981 included in other accrued liabilities in FY15 that was to be paid in FY16. 120 Subsequent public disclosures make clear that it was paid in full. 121 (4) Share Repurchases And Dividend Increases In a bizarre twist, plaintiff alleges that the Court can infer fraud because Pier 1 repurchased shares and increased dividends in an effort “to conceal the true state of affairs at the Company.” 122 Under this logic (unadorned by any factual support), defendants bought stock at prices they knew to be inflated by their own fraud-the exact opposite of what one would expect 116 ¶ 147. 117 ¶¶ 148-49. 118 Defs.’ App. at 522 [FY15 10-K (Apr. 28, 2015), Ex. 10.21, at § 1]. 119 Id. at 523, § 2. 120 Defs.’ App. at 502 [FY15 10-K (Apr. 28, 2015), at 48]. 121 Defs.’ App. at 650-51 [FY16 10-K (Apr. 26, 2016), at 47-48]. 122 ¶ 158. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 40 of 58 PageID 1028 -34- if fraud was occurring. See Oppenheimer, 851 F. Supp. at 417 (“[P]laintiff is alleging that Novell was inflating the value of its stock against its own economic interests.”). The idea that defendants incurred these additional sizable costs (as well as that of increasing dividends) as part of some misguided plan to delay the inevitable is absurd. Rather than supporting a strong inference of scienter, the share repurchases compel the inference that defendants were acting on the belief that the stock was worth at least what was paid for it, or more. (5) Supposed “Revelation” Of “The Fraud” Plaintiff repeatedly refers to disclosures during calendar 2015 as revelations of fraud, admissions of fraud, or “corrective disclosures.” 123 To be clear, defendants did not during the class period, or at any time thereafter, restate prior financial reports. They never stated that some prior statement was untrue at the time it was made, and they never stated that they were correcting some prior disclosure. 124 Nor do the allegations show the later disclosures to be proof of fraud. A more compelling inference is that events presented an evolving situation that was truthfully disclosed as the defendants obtained additional results of operations and other information. Any claim that they should have known the information sooner is merely an allegation of mismanagement and fraud by hindsight. C. Plaintiff Does Not Adequately Plead That Defendants Made Any Materially False Or Misleading Statements Or Omissions. In scattershot fashion, plaintiff accuses defendants of fraud through numerous alleged misrepresentations and omissions. 125 Not only do the allegations fail to raise a strong inference of scienter, but they otherwise fail to state an actionable misrepresentation or omission. 123 See, e.g., ¶¶ 1, 9, 11, 118, 123, 128-29, 210, 212. 124 Pier 1 has filed five SEC quarterly reports since the filing of the initial complaint that placed the company and its auditors on notice of these allegations. No prior period financial statement or disclosure has been restated or corrected. 125 ¶¶ 174-208. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 41 of 58 PageID 1029 -35- 1. Many Challenged Statements Are Mere Puffery Or Opinion. Broad, generalized statements that constitute mere “puffery” are not actionable under federal securities laws. Milano, 2006 WL 929325, at *5. The Fifth Circuit has defined puffery as statements “of the vague and optimistic type that cannot support a securities fraud action … and contain no concrete factual or material misrepresentation.” See Southland, 365 F.3d at 372 (quoting Lain v. Evans, 123 F. Supp. 2d 344, 348 (N.D. Tex. 2000)). Even if misleading, these statements are ones that a reasonable investor would not view as material: Courts everywhere have demonstrated a willingness to find immaterial as a matter of law a certain kind of rosy affirmation commonly heard from corporate managers and numbingly familiar to the marketplace-loosely optimistic statements that are so vague, so lacking in specificity, or so clearly constituting the opinions of the speaker, that no reasonable investor could find them important to the total mix of information available. Milano, 2006 WL 929325, at *6 (quoting In re Ford Motor Co. Sec. Litig., 381 F.3d 563, 570-71 (6th Cir. 2004)). A remarkable number of the statements that plaintiff relies upon as the foundation of its case constitute mere puffery or statements of opinion, including at least the following:  “Strategically I believe we are in the best shape we have ever been and look forward to a year of strong growth in fiscal 2015.” 126  Pier 1’s inventories are “always well controlled.”127  Investment in systems “allows us to grow sales and not go crazy with inventory” and provides “added control over inventories.” 128  Planning and allocation capabilities “are so sophisticated.” “We expect our inventory growth to be well-controlled as it was in fiscal 2014” and “[o]ur merchandise and field teams are well prepared for this level of expansion.” 129  “[O]ur store inventories are extraordinarily well-controlled.”130 126 ¶¶ 47, 136, 138; Defs.’ App. at 719 [Q4 FY14 Earnings Call (Apr. 10, 2014), at 7]. 127 ¶ 175. 128 Id. 129 ¶ 177. 130 ¶ 182. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 42 of 58 PageID 1030 -36-  The Company’s “focus” was “on strategically managing its inventory purchases and monitoring its inventory levels to correspond with consumer demand.” 131 “The Company’s focus remains on making conservative inventory purchases” and “managing those inventories.” 132 The Company “continues to focus on strategically managing inventory levels and closely monitoring merchandise purchases to keep inventory in line with demand.” 133  “[W]e have such great processes for taking our mark-downs and clearing through the slow merchandise.” 134  “We are entering fiscal 2015 in a clean inventory position.”135  “I mean we continue to run a very clean inventory as I know you know.”136  “Because the inventory growth is not in seasonal goods, we do not see any significant mark down risk.” 137  “The business is well-positioned as we head into the early spring selling season.” 138  “Although fiscal 2015 ending inventories are higher than originally planned, their complexion is healthy and not believed to pose a substantial markdown risk.” “Importantly, the complexion of our current inventories level is healthy, and does not pose a significant immediate markdown risk.” 139 Courts have found similar statements to be mere puffery or opinion. See Fialkov v. Microsoft Corp., 72 F. Supp. 3d 1220, 1231 (W.D. Wash. 2014) (characterization of inventory levels as being in a “healthy range” was “the sort of vague statement of opinion that is insufficient to support a claim of securities fraud”); Mogensen, 15 F. Supp. 3d at 1213 (statements about the focus of management on inventory, improvements in inventory strategies, and other vague expressions of management’s opinions were ones that “[n]o reasonable investor would rely on … in making a decision to buy or sell”); Commc’ns Workers of Am. Plan for Employees’ Pension and Death Benefits v. CSK Auto Corp., 525 F. Supp. 2d 1116, 1121 (D. 131 ¶ 184. 132 ¶ 197. 133 Id. 134 ¶ 184. 135 ¶ 186; see also ¶ 187 (Turner’s similar statement). 136 ¶ 188. 137 ¶ 189; Defs.’ App. at 779 [Q3 FY15 Earnings Call (Dec. 18, 2014), at 5]. 138 ¶ 191. 139 ¶ 193; Defs.’ App. at 808 [Q4 FY15 Earnings Call (Apr. 8, 2015), at 8]. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 43 of 58 PageID 1031 -37- Ariz. 2007) (description of inventory system as “dynamic” was “too vague to constitute an actionable misrepresentation”); Oppenheimer, 851 F. Supp. at 416 (statement that management was comfortable with current inventory levels was merely “positive spin on publicly known facts”). 140 These statements are not the kind of concrete, verifiable, and objective facts that reasonable investors would rely upon in making investment decisions. See Milano, 2006 WL 929325, at *7; see also Mogensen, 15 F. Supp. 3d at 1213 (noting that the challenged statements were “too generalized to be susceptible to verification”). Nor has plaintiff pled with particularity that defendants knew information that contradicted any of these statements when they were made. See Mogensen, 15 F. Supp. 3d at 1213. 2. The Forward-Looking Statements Are Not Actionable. Many of the challenged statements are forward-looking statements entitled to the protection of the PSLRA’s safe harbor. 15 U.S.C. § 78u-5. Forward-looking statements include financial projections, plans and objectives of management for future operations, and statements of future economic performance. Id. § 78u-5(i). Such a statement, whether written or oral, cannot support a fraud claim in either of two circumstances: (1) if it 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, id. § 78u-5(c)(1)(A)(i), or (2) if plaintiff fails to prove that the statement was made with actual knowledge that it was false or misleading, id. § 78u-5(c)(1)(B)(i). 140 See also Nathenson v. Zonagen Inc., 267 F.3d 400, 419 (5th Cir. 2001) (statements that a drug was “fast- acting” and an “improved formulation” were inactionable puffing and holding that “it is well-established that generalized positive statements about a company’s progress are not a basis for liability”); Milano, 2006 WL 929325, at *7 (generalized statements regarding hiring of quality employees were immaterial puffery, even if described as a “key strategy”). Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 44 of 58 PageID 1032 -38- The following challenged statements-in some instances with the addition of language omitted by plaintiff revealing the context of the statements-are forward-looking and not actionable:  September 17, 2014 8-K: “The Company has created a new business model and refined its financial model and expects, in the subsequent two fiscal years, on an annual basis beginning with fiscal 2016, to achieve progressive improvements across all of its financial metrics ….” 141 The 8-K refers investors to cautionary statements and risks in the latest 10-K and other SEC filings. 142 Pier 1’s 10-K discloses numerous risks and limitations in being able to accurately predict future performance, as well as the risk of failing to implement successfully new information technology systems. 143 Moreover, there is no allegation showing that Smith knew the statement to be untrue; in fact, plaintiff’s only alleged bases for fraud are Smith’s statement several months later that “[t]he failure to adequately forecast the revenue and expenses in our business is a financial issue which has been aggressively addressed” and the claim that Turner was terminated “for cause.” 144 Fraud by hindsight allegations do not avoid the safe harbor.  April 8, 2015 Earnings Call: “As we look forward, we are focused on accelerating growth and improving profitability. Our customers love what we do. They love our exclusive products, high service culture, and the fact that we are giving them more reasons to shop both online and in-store. The issue[s] that impacted our fourth-quarter results are transitory and have no bearing on the underlying strength of the Pier 1 Imports brand, nor our potential to drive organic growth and pursue new growth opportunities.” 145 As in each of its earnings calls, Pier 1 provided cautionary statements that management would be discussing forward-looking information and referring investors to the risk factors in the 141 ¶¶ 180-81; Defs.’ App. at 412 [8-K (Sept. 17, 2014), at Ex. 99.1]. 142 Defs.’ App. at 414 [8-K (Sept. 17, 2014), at Ex. 99.1]. 143 Defs.’ App. at 348-54 [FY14 10-K (Apr. 29, 2014), at 6-12]. 144 ¶ 181; Defs.’ App. at 430 [8-K (Feb. 10, 2015)]. 145 ¶¶ 182-83; Defs.’ App. at 806 [Q4 FY15 Earnings Call (Apr. 8, 2015), at 6]. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 45 of 58 PageID 1033 -39- 10-K and other SEC filings, 146 which included meaningful warnings about the limitations on projecting future performance. 147 The allegations fail to prove that Smith actually knew the statements to be untrue. In context, he was merely stating his expectation that the issues from the fourth-quarter would resolve (without putting any timeframe on precisely when), and that those issues did not change the underlying strength of the brand. Plaintiff’s claim that the April 2015 statements were fraudulent based on Smith’s December 2015 statement eight months later is fraud by hindsight. It also mischaracterizes both the April and December statements. The April 2015 statement put no definitive timeframe on when the inventory issues would resolve. Further, the December 2015 statement does not say, as plaintiff repeatedly asserts, that “it would in fact take Pier 1 18 months to bring its inventory levels in line with sales” 148 or that “excess inventory could not be ‘cleared’ without a lengthy period of costly markdowns lasting at least a year and [a] half.” 149 The December 2015 statement addresses the rate of inventory and sales growth. 150 It states the expectation that inventory levels would be down in the current fiscal year and that they would be “down a little bit further in FY17. So that over the next 18 months, we’re back to our normal trajectory where sales and inventory are in sync.” 151 While plaintiff paints this as a revelation that Pier 1 had a glut of troubled inventory that would require costly markdowns over at least 18 months, 152 the 146 Defs.’ App. at 802-03 [Q4 FY15 Earnings Call (Apr. 8, 2015), at 2-3]. Oral statements qualify for the safe harbor if: (1) the statement is accompanied by a cautionary statement that the oral statement is forward-looking and that actual results could differ materially, (2) the statement is accompanied by an oral statement that additional information that could cause actual results to differ materially is contained in a readily available document, such as SEC filings, (3) the statement identifies the document or portion thereof containing the additional information, and (4) the identified document contains appropriate cautionary language. 15 U.S.C. § 78u-5(c)(2)-(3). These requirements are met for each forward-looking statement made in earnings calls with analysts. 147 Defs.’ App. at 348-51 [FY14 10-K (Apr. 29, 2014), at 6-9]. 148 ¶ 183. 149 ¶ 6. 150 Defs.’ App. at 893 [Q3 FY16 Earnings Call (Dec. 16, 2015), at 24] ((“[W]e reminded you that for many years we managed to keep inventory and sales growing at approximately the same rate.”). 151 Id. 152 ¶ 9. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 46 of 58 PageID 1034 -40- statement says nothing of the sort. It merely reflects the expectation that sales (without any statement about markdowns) would bring inventory levels down and that, over the next 18 months (not “at least 18 months”), 153 Smith expected that, once the inventory had downsized, inventory would begin growing again at a rate similar to that of projected sales.  December 18, 2014 Earnings Call: Turner’s statement that one factor for increased inventory levels was “additional inventory to support higher sales.” 154 This statement reflected Turner’s forward-looking expectation heading into the critical fourth quarter that the additional inventory would be needed for anticipated sales. The FY14 10- K, to which Pier 1 directed investors, 155 disclosed the risk that Pier 1 could inaccurately predict future sales and the impact this could have on inventory levels and markdowns, particularly during the fourth quarter. 156 No allegation proves Turner knew this statement to be untrue at the time he made it. In fact, sales were higher in Q4 FY15 than in the prior year, and sales for the year overall also were up. 157 That sales were not as high as Pier 1 had projected is no proof of fraud. Pitten, 903 F. Supp. at 949 (“An inability to foresee the future does not constitute fraud.” (quoting Hillson Partners Ltd. P’ship v. Adage, Inc., 42 F.3d 204, 213 (4th Cir. 1994))).  June 17, 2015 Earnings Call: An analyst asked the question: “If I am understanding you correctly here it sounds like -- if you look at the business now, you’re going to be in a better position inventory-wise over the next few quarters than you initially planned, or let’s say, maybe when we were discussing the fourth quarter. Is that correct? Smith responded, “I think so. I think as the time has gone on, the teams have done a great job at re-forecasting and adjusting their open-to- buys, and I think we now expect to -- is it end of Q3 we expect to be below last year, Laura?” Laura Coffey then responded, “Yes. For the end of Q3 we expect to be below last year’s Q3 levels and we’re expecting our year-end inventory to be down in the range of 5% to 10% versus the last fiscal year in numbers.” 158 153 ¶ 1. 154 ¶ 189; Defs.’ App. at 781 [Q3 FY15 Earnings Call (Dec. 18, 2014), at 7]. 155 Defs.’ App. at 776-77 [Q3 FY 15 Earnings Call (Dec. 18, 2014), at 2-3]. 156 Defs.’ App. at 348-51 [FY14 10-K (Apr. 29, 2014), at 6-9]. 157 Defs’ App. at 474 [FY15 10-K (Apr. 28, 2015), at 20]; Defs.’ App. at 807 [Q4 FY15 Earnings Call (Apr. 8, 2015), at 7]. 158 ¶ 195; Defs.’ App. at 842 [Q1 FY16 Earnings Call (June 17, 2015), at 19]. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 47 of 58 PageID 1035 -41- Pier 1 provided cautionary statements referring investors to the risks described in the FY14 10-K, 159 which included warnings regarding the ability to predict sales. 160 But the reality is that plaintiff has mischaracterized Smith’s statement and failed to allege that what he said was untrue. Plaintiff claims fraud because inventory was still rising at the time, 161 but Smith’s statement reflects the expectation that inventories would not fall below the prior year until the third quarter. And despite plaintiff’s claim that inventories remained “excessive” in subsequent quarters, which would only be fraud by hindsight, inventory was down versus the prior year by 6% in Q3 FY16 and by 15% at the end of FY16, exceeding the prediction. 162 Certain statements are mixed present and forward-looking statements. The part of the statement that refers to the present is not entitled to the safe harbor, but the forward-looking portion is. Spitzberg v. Houston Am. Energy Corp., 758 F.3d 676, 691 (5th Cir. 2014). The following challenged statements contain forward-looking statements entitled to the safe harbor:  Inventory Control Statements: Smith’s December 2013 statement that Pier 1’s inventories are “always well controlled.” 163 Smith’s December 2013 statement: “I think we are really getting the results of all that investment now, which allows us to grow sales and not go crazy with inventory.” 164 Smith’s April 2014 statement: “By the end of fiscal 2015 we expect our total SKU count to be in the region of 11,000, a 30% increase over the 8,500 that we ended fiscal 2014 with. We know that increased breadth of assortments is a big driver of online sales. Fortunately, because we run our business with a single inventory and our planning and allocation capabilities are so sophisticated, we expect our inventory growth to be well-controlled as it was in fiscal 2014. Our merchandise and field teams are well prepared for this level of expansion.” 165 Smith’s beliefs that inventory would be well-controlled and that teams could handle the anticipated SKU-count expansion constitute forward-looking statements. Both earnings calls 159 Defs.’ App. at 825-26 [Q1 FY16 Earnings Call (June 17, 2015), at 2-3]. 160 Defs.’ App. at 348-51 [FY14 10-K (Apr. 29, 2014), at 6-9]. 161 ¶ 196. 162 Defs.’ App. at 874 [Q3 FY16 Earnings Call (Dec. 16, 2015), at 5]; Defs.’ App. at 640 [FY16 10-K (Apr. 26, 2016), at 37]; Defs.’ App. at 902 [Q4 FY16 Earnings Call (Apr. 13, 2016), at 4]. 163 ¶ 175; Defs.’ App. at 696 [Q3 FY14 Earnings Call (Dec. 19, 2013), at 10]. 164 ¶ 175; Defs.’ App. at 697 [Q3 FY14 Earnings Call (Dec. 19, 2013), at 11]. 165 ¶ 177; Defs.’ App. at 717 [Q4 FY14 Earnings Call (Apr. 10, 2014), at 5]. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 48 of 58 PageID 1036 -42- refer to cautionary warnings in the 10-Ks, 166 including the risk that Pier 1 would misjudge sales, resulting in excess inventory. 167 No allegation proves Smith knew the statements to be untrue- he would have had to know what sales for the remainder of the year would be. That a shortfall in sales resulted in excess inventory that created logistical difficulties is merely fraud by hindsight.  Statements Regarding “Clean Inventory,” Risk of Markdowns, and Positioning of Business: Smith’s February 2014 statement that “[w]e are entering fiscal 2015 in a clean inventory position.” 168 Turner’s April 2014 statement describing “an increased level of promotional activity and the clearing of seasonal inventory which was more than anticipated due to the weather disruptions” and noting that “this allowed us to enter fiscal 2015 in a clean inventory position.” 169 Smith’s June 2014 statement that gross margin pressure was “not so much in markdown pressure, I mean we continue to run a very clean inventory as I know you know.” 170 Smith’s December 2014 statement that “[b]ecause the inventory growth is not in seasonal goods, we do not see any significant markdown risk.” 171 Smith’s January 2015 statement that “we believe the business is well-positioned as we head into the early spring selling season.” 172 Smith’s April 2015 statement (and a similar statement from Laura Coffey on the same day) that “[a]lthough fiscal 2015 ending inventories are higher than originally planned, their complexion is healthy and not believed to pose a substantial markdown risk.” 173 These statements are forward-looking in that they reflect expectations that products in inventory could be sold without costly, unplanned markdowns. Pier 1 disclosed the risks that these predictions could be wrong. 174 Plaintiff also fails to prove that the speakers knew these statements to be false at the time they were made. Merely saying that inventories were large or that products were eventually placed on markdown in response to sales trends does not demonstrate actual knowledge that the statements were false when made. 166 Defs.’ App. at 688-89 [Q3 FY14 Earnings Call (Dec. 19, 2013), at 2-3]; Defs.’ App. at 714 [Q4 FY14 Earnings Call (Apr. 10, 2014), at 2]. 167 Defs.’ App. at 188-92 [FY13 10-K (Apr. 30, 2013), at 5-9]; Defs.’ App. at 348-51 [FY14 10-K (Apr. 29, 2014), at 6-9]. 168 ¶ 186; Defs.’ App. at 323 [8-K (Feb. 28, 2014), at Ex. 99.1]. 169 ¶ 187; Defs.’ App. at 719 [Q4 FY14 Earnings Call (Apr. 10, 2014), at 7]. 170 ¶ 188; Defs.’ App. at 740 [Q1 FY15 Earnings Call (June 19, 2014), at 7]. 171 ¶ 189; Defs.’ App. at 779 [Q3 FY15 Earnings Call (Dec. 18, 2014), at 5]. 172 ¶ 191; Defs.’ App. at 924 [8-K (Jan. 8, 2015), at Ex. 99.1]. 173 ¶ 193; Defs.’ App. at 442 [8-K (Apr. 8, 2015), at Ex. 99.1]; Defs.’ App. at 808 [Q4 FY15 Earnings Call (Apr. 8, 2015), at 8]. 174 Defs.’ App. at 188-92 [FY13 10-K (Apr. 30, 2013), at 5-9]; Defs.’ App. at 348-51 [FY14 10-K (Apr. 29, 2014), at 6-9]. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 49 of 58 PageID 1037 -43-  April 2015 Statement Regarding Distribution Centers: “Preventing us from growing our merchandise margin as fast as we would like are the incremental distribution costs caused by our excess inventory. Excluding these costs, our distribution network is still not quite the level of efficiency we know it capable of, but the investments of the past few years into our distribution center network will continue to bear fruit, and enable us to generate further improvement in merchandise margin dollars going forward.” 175 The stated expectations regarding the impact of investments in distribution centers are forward-looking statements. Risks relevant to those predictions, such as an inability to predict future sales, were disclosed. 176 Plaintiff has not alleged that improvements in merchandise margins did not occur, much less prove that Smith actually knew this statement to be untrue. 3. The Challenged Statements Are Otherwise Not Actionable. Even if any of the statements that plaintiff challenges could be interpreted as stating a present fact or historical condition, they are nevertheless non-actionable. As noted above, many of the statements are immaterial puffery. Plaintiff also has failed to allege particularized facts demonstrating that any material statements were untrue or that defendants knew them be untrue or acted severely recklessly at the time the statements were made. a. Control Of Inventory And Inventory Levels Plaintiff complains about statements in December 2013 and April 2014 that inventories were well-controlled. 177 These statements are too vague to support a securities fraud claim. Indeed, the statements raise questions about what it means to have well-controlled inventory. Plaintiff seems to argue primarily that the statements were intended to communicate that inventory levels were not excessive. 178 If this is what these statements conveyed, it does not demonstrate an actionable misrepresentation. Management’s beliefs regarding whether 175 ¶ 182; Defs.’ App. at 805 [Q4 FY15 Earnings Call (Apr. 8, 2015), at 5]. 176 Defs.’ App. at 188-92 [FY13 10-K (Apr. 30, 2013), at 5-9]; Defs.’ App. at 348-51 [FY14 10-K (Apr. 29, 2014), at 6-9]. 177 ¶¶ 175, 182. 178 ¶ 176. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 50 of 58 PageID 1038 -44- inventory levels were excessive necessarily implicate predictions about sales. Plaintiff has not alleged facts demonstrating that defendants knew in December 2013 and April 2014 that inventory levels were excessive relative to the sales that were predicted to occur during FY15. The complaint also fails to plead that defendants knew in December 2013 and April 2014 that the inventory levels did then, or eventually would, exceed Pier 1’s infrastructural capabilities. Again, management’s expectation of what the company would have to handle was a function of its sales expectations. Moreover, despite general accounts from confidential witnesses of problems at stores and distribution centers, there is no allegation that defendants were informed of a material inventory problem that exceeded company norms. Nor are there allegations to show defendants knew that costs for handling inventory would exceed forecasts. Another possible meaning for control of inventories is ensuring that the company did not have large stockpiles of obsolete inventory, such as out-of-date seasonal inventory or SKUs that were not selling. But there is no particularized allegation that Pier 1 was stuck with an unusual amount of obsolete inventory in December 2013 or April 2014. Yet another possible meaning for control of inventories is the process and systems for planning inventory purchases and allocating them to stores. Indeed, plaintiff complains about statements defendants made in this same timeframe about the sophistication of these capabilities and the investments that had been made in planning and allocation systems that were said to give control over inventories. 179 But plaintiff does not allege that the investments to improve these systems did not in fact happen; nor does plaintiff allege that these investments were ineffective in improving past performance. And while plaintiff proffers the conclusory statement from a 179 ¶¶ 175-79. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 51 of 58 PageID 1039 -45- confidential witness that the allocations infrastructure was neither sophisticated nor scalable, 180 no detailed allegations show what the issues were or that defendants were aware of those issues. Plaintiff also complains about disclosures regarding store level inventories. Plaintiff claims that a December 2014 statement that “store level inventory has increased only slightly” and a June 2015 statement that “the impact of that inventory is felt most intensely by the distribution centers because our store inventories are extraordinarily well-controlled” were misrepresentations. 181 Plaintiff relies solely on alleged anecdotal snapshots from confidential witnesses working in discrete areas of the company; those few snapshots, even if true, cannot be the basis of a challenge to the accuracy of overall company data regarding store inventory levels. Plaintiff provides no allegations of internal data or reports showing these statements to be false. Plaintiff also alleges that defendants made misrepresentations about Pier 1’s focus on inventory, making conservative inventory purchases, and strategically managing inventory. 182 There is, however, no allegation that Pier 1 did not in fact have this focus. Cf. Barrie v. Intervoice-Brite, Inc., 2002 WL 1841631, at *9 (N.D. Tex. Aug. 8, 2002) (statement that company “continued to focus on maintaining sales momentum” was not shown to be false when made). Indeed, the complaint includes descriptions of executives and employees who defendants tasked with inventory purchases and management, as well as the processes that existed to conduct such efforts with defendants’ input and supervision. 183 The fact that inventory became excessive merely alleges fraud by hindsight. Moreover, the fact that Pier 1 made a later assessment that its sales targets were aggressive both fails to show that it knew the targets to be wrong at the time they were set or that the inventory purchases were not considered 180 ¶¶ 89, 176, 178. 181 ¶¶ 182, 189. 182 ¶¶ 184, 197. 183 See, e.g., ¶¶ 29, 59-62. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 52 of 58 PageID 1040 -46- “conservative” in other ways. Plaintiff, for example, does not allege that Pier 1 bet big on high- risk inventory, such as exclusively seasonal merchandise or untested SKUs, that can quickly become obsolete-as opposed to making “conservative” purchases of non-seasonal inventory that had a longer life-span and proven SKUs with a higher chance of success. Plaintiff attempts to assail Pier 1’s disclosures of actual inventory levels by claiming that Smith falsely stated in December 2013 that inventories were “running now at sort of historical lows.” 184 However, the same earnings call discloses that overall inventory was up 3% over the prior year. 185 The full statement (adding back what plaintiff did not provide the Court) makes clear that the historical low reference was to levels of clearance inventory, not overall inventory: Let me talk about the clearance inventory first. I think you’ve heard us speak on previous calls. Our inventory levels are running now at sort of historical lows. Frankly, they are not fluctuating very much, because we have such great processes for taking our mark-downs and clearing through the slow merchandise. You know we have said in the past that it is-you do lose some sales when your inventory, your clearance inventory goes down. 186 Plaintiff does not allege that the statements regarding clearance inventory levels were false. Though plaintiff has to acknowledge that Pier 1 disclosed the increase in its actual inventory levels, it maintains that defendants misled investors by how they characterized the increases. For example, plaintiff complains that during Q2 FY15, defendants attributed part of the increase in inventory to the timing of Chinese New Year rather than “poor sales.” 187 But plaintiff does not allege that Chinese New Year was not in fact a cause of the increase in inventory. Nor can it deny that sales disappointments were disclosed throughout FY15. Plaintiff similarly complains about statements that inventory was “in-line with the Company’s 184 ¶¶ 184-85. 185 Defs.’ App. at 693 [Q3 FY14 Earnings Call (Dec. 19, 2013), at 7]. 186 Defs.’ App. at 703 [Q3 FY14 Earnings Call (Dec. 19, 2013), at 17] (emphasis added). 187 ¶¶ 50, 51, 55. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 53 of 58 PageID 1041 -47- expectations,” again claiming a failure to acknowledge a sales shortfall. 188 But plaintiff has not alleged with particularity that inventory was materially above the expectations of management, and Pier 1 disclosed its sales and the fact that those sales were disappointing. Plaintiff even complains about a October 2015 filing (near the end of the class period) that cash spent in the first half of FY16 (March-September 2015) was primarily because of an increase in inventories, which was primarily due to seasonal build of inventory for the fall and holiday selling seasons. 189 Plaintiff asserts that this latter statement suggested that inventory build-ups were not attributable to excessive orders, 190 but the statement did nothing of the sort. It addressed only cash flow for new purchases, 191 and plaintiff has not alleged facts showing that cash was not primarily used to build inventories for the fall and holiday selling seasons. Any inventory from FY15 would not be part of the FY16 purchasing cash flows, and Pier 1 had already discussed the issues that it had experienced with existing inventory buildups. Pier 1 disclosed its actual inventory levels, which showed inventory levels increasing over time before eventually decreasing. Under those circumstances, there can be no misrepresentation of present or past fact. b. Clean Inventory/Healthy Complexion/Markdown Risk Plaintiff asserts that defendants misled investors with statements that it had a “clean inventory,” that there was a “healthy complexion” of inventory, and that they did not see any significant or immediate markdown risk. 192 Plaintiff bases its claim on conclusory statements that “the Company was not in a ‘clean’ inventory position and in fact faced significant, 188 ¶ 199. 189 ¶ 126. 190 Id. 191 Defs.’ App. at 572 [Q2 FY16 10-Q (Oct. 7, 2015), at 18]. 192 ¶¶ 184-93. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 54 of 58 PageID 1042 -48- undisclosed markdown risk.” 193 Such conclusory statements do not satisfy the requirement to plead with particularity. Plaintiff offers only two “explanations” for its conclusions: (1) the assertion that because inventories were at excessive levels, the inventory must have been subject to markdown risk and (2) the assertion that because Pier 1 eventually experienced markdowns later, it must have been aware of the risk sooner. 194 Neither works. The mere fact that inventory levels were high does not imply that the goods were subject to an immediate markdown risk. Instead, the critical issue-addressed by defendants’ statements of a “healthy complexion”-is the mix of the inventory. Plaintiff makes no particularized allegations showing that there was an extant material markdown risk at the time of these statements, much less demonstrate that defendants were aware of it. The effort to rely on markdowns occurring later not only ignores the new developments that explain that markdown activity, but it is an impermissible allegation of fraud by hindsight. Plaintiff criticizes a June 2014 statement in which Smith stated that margin pressures were due to a promotional environment and not so much to markdown pressure. 195 Again, plaintiff fails to make any allegation that this statement was untrue when made. c. SOX Certifications Plaintiff asserts that Pier 1’s Sarbanes-Oxley (“SOX”) certifications were fraudulent misrepresentations. 196 For these certifications to support a claim of fraud, there must be facts establishing that the officer who signed the certifications had a “reason to know, or should have suspected, due to the presence of glaring accounting irregularities or other ‘red flags,’ that the financial statements contained material misstatements or omissions.” Ind. Elec., 537 F.3d at 545 193 ¶¶ 186-88. 194 ¶¶ 3, 12, 111-12, 121, 142, 146, 194-96, 202(i). 195 ¶ 49. 196 ¶¶ 199-201. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 55 of 58 PageID 1043 -49- (quoting Garfield v. NDC Health Corp., 466 F.3d 1255, 1266 (11th Cir. 2006)). Plaintiff has not made any particularized allegation that the financial statements contained material misstatements or omissions, much less that defendants were aware of glaring accounting irregularities or other red flags. 197 In fact, the only allegation is from a confidential witness saying that Pier 1’s accounting systems did not timely record and report costs and that Pier 1 struggled with undisclosed inventory backlogs throughout its distribution network. Setting aside the lack of details and conclusory nature of the allegations, particularly with respect to “undisclosed” inventory backlogs, there is no allegation that defendants were aware of these issues. 198 4. Plaintiff’s Allegations Regarding Omissions Are Not Actionable. Plaintiff’s claims of fraud by omission 199 also should be dismissed. “In general, a corporation ‘does not commit securities fraud merely by failing to disclose all nonpublic material information in its possession.” Ind. Elec., 537 F.3d at 541. Liability only arises where there is a duty to speak, such as when a statement made is misleading without disclosure of the omitted information. Id. The alleged omissions are largely duplicative of the arguments plaintiff makes in asserting that affirmative statements were misleading. Plaintiff has not demonstrated that any statement defendants made was in fact misleading so as to trigger a duty to disclose something 197 Plaintiff suggests or implies that Pier 1 should have written down its inventory, referencing FASB Accounting Standards Codification 330-10-35-2 and GAAP regulation ASC 275-10. ¶¶ 157, 204, 208. As alleged, both standards require a markdown only if the value of the inventory falls below the lower of cost or market. Pier 1 discloses that its inventory is stated “at the lower of weighted average cost or market value” and that “to the extent that the cost of inventory exceeds the expected selling prices less reasonable costs to sell, provisions are made to reduce the carrying amount of the inventory.” Defs.’ App. at 485 [FY15 10-K (Apr. 28, 2015), at 31]. Plaintiff makes no allegation that Pier 1 failed to abide by this policy. Indeed, Pier 1’s products carry very high margins such that Pier 1 can implement deep markdowns and still make profits above the carrying cost. Defs.’ App. at 474 [FY15 10-K (Apr. 28, 2015), at 20] (describing merchandise margins for FY14 and FY15 of 59% and 58% and gross profit margins of 42% and 40%); Defs.’ App. at 694 [Q3 FY14 Earnings Call (Dec. 19, 2013), at 8] (describing ability of business model to handle promotional discounting). 198 As noted above, the company and its auditors, confronted with these allegations, have continued to make SEC filings with no restatements or corrections of prior period errors. 199 ¶¶ 202-08. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 56 of 58 PageID 1044 -50- additional. Further, as discussed in connection with scienter, there is no allegation that demonstrates that defendants intentionally omitted material information to investors. Plaintiff’s reliance on Item 303 of Regulation S-K does not aid its argument. To establish a duty to disclose under Item 303, plaintiff would have to demonstrate that defendants were aware of “known trends ... that have had or that the registrant reasonably expects will have a material ... unfavorable impact on ... revenues.” As explained in connection with the scienter allegations, there is no allegation that establishes a recognizable trend that defendants omitted to disclose. See Pearlstein, 93 F. Supp. 3d at 245 (rejecting claims based on Item 303 when there was no plausible allegation of knowledge of a recognizable trend). II. PLAINTIFF’S CLAIMS UNDER SECTION 20(A) OF THE EXCHANGE ACT SHOULD BE DISMISSED. Control person liability under Section 20(a) of the Securities Exchange Act of 1934 is secondary only and cannot exist in the absence of a primary violation. See Ind. Elec., 537 F.3d at 545. Because there is no primary violation, there is no liability under Section 20(a). Id. III. CONCLUSION "A complaint can be long-winded, even prolix, without pleading with particularity.” Despite months of investigation and preparation-including consulting, apparently, as many former Pier 1 employees as could be found-plaintiff has typed a one hundred page complaint that is devoid of particularity. It is fatally deficient. The complaint should be dismissed with prejudice. Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 57 of 58 PageID 1045 -51- DATED: October 21, 2016 Respectfully submitted, /s/ Stephen B. Crain Stephen B. Crain (Attorney In Charge) Texas Bar No. 04994580 Bradley J. Benoit Texas Bar No. 24012275 BRACEWELL LLP 711 Louisiana Street, Suite 2300 Houston, Texas 77002 Telephone: (713) 221-1305 Facsimile: (713) 221-1212 stephen.crain@bracewelllaw.com brad.benoit@bracewelllaw.com Joseph M. Cox BRACEWELL LLP 1445 Ross Avenue, Suite 3800 Dallas, Texas 75202 Telephone: (214) 468-3800 Facsimile: (800) 404-3970 joe.cox@bracewelllaw.com Counsel for Defendants Pier 1 Imports, Inc., Alexander W. Smith and Charles H. Turner CERTIFICATE OF SERVICE I certify that this brief was electronically filed with the Clerk of the Court using the CM/ECF system, which will send email notification of this filing to all attorneys of record. /s/ Stephen B. Crain Stephen B. Crain #5316723.8 Case 3:15-cv-03415-D Document 69 Filed 10/21/16 Page 58 of 58 PageID 1046