david schwartz, : civil no. 13-05978 individually and on ... filein the united states district court...

IN THE UNITED STATES DISTRICT COURTFOR THE EASTERN DISTRICT OF PENNSYLVANIA

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DAVID SCHWARTZ, : CIVIL NO. 13-05978 Individually and on Behalf :of all Others Similarly :Situated, : : : Plaintiff, : : : v : : : :URBAN OUTFITTERS, INC., :RICHARD A. HAYNE, FRANK :J. CONFORTI, TEDFORD G. :MARLOW, DAVID W. McCREIGHT :and DAVID HAYNE, : : Philadelphia, Pennsylvania : September 19, 2014 Defendants. : 1:51 p.m.

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TRANSCRIPT OF HEARINGBEFORE THE HONORABLE L. FELIPE RESTREPO

UNITED STATES DISTRICT JUDGE

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APPEARANCES:

For the Plaintiff: JESSE S. JOHNSON, ESQUIRE STEPHEN R. ASTLEY, ESQUIRE Robbins Geller Rudman & Dowd, LLP 120 East Palmetto Park Road Suite 500 Boca Raton, FL 33432

DEBORAH R. GROSS, ESQUIRE Law Offices of Bernard M. Gross, PC 100 Penn Square East John Wanamaker Building, Suite 450 Philadelphia, PA 19107

Transcribers Limited17 Rickland DriveSewell, NJ 08080

856-589-6100 - 856-589-9005

Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 of 53

2

APPEARANCES: (continued)

For the Plaintiff: COREY D. HOLZER, ESQUIRE Holzer & Holzer, LLC 1200 Ashwood Parkway Suite 410 Atlanta, GA 30338

For the Defendants: MARC J. SONNENFELD, ESQUIRE KAREN PIESLAK POHLMANN, ESQUIRE JASON H. WILSON, ESQUIRE Morgan, Lewis & Bockius, LLP 1701 Market Street Philadelphia, PA 19103-2921

GLEN A. BODZY, ESQUIRE MICHAEL D. SILBERT, ESQUIRE Urban Outfitters, Inc. 5000 South Broad Street Philadelphia, PA 19112-1495

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Audio Operator: Nelson Malave

Transcribed by: Donna M. Anders

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Proceedings recorded by electronic soundrecording, transcript produced by computer-aidedtranscription service.


3

(The following was heard in open court at 1:511

p.m.)2

THE COURT: Sit down, please.3

I just want to make it clear that4

notwithstanding the fact that Chelsea Stine allowed5

everybody into the room, she is one of my law clerks. 6

She recently left Morgan but she’s not working on this7

case, will not work on this case, and I will not discuss8

this case with Ms. Stine.9

Any questions about Ms. Stine?10

MR. SONNENFELD: No.11

MR. JOHNSON: No, sir.12

THE COURT: All right. Okay. So this is13

defense counsel’s motion. Let me hear from defense14

counsel.15

MR. SONNENFELD: If I may proceed, Your Honor,16

I’m Marc Sonnenfeld from Morgan, Lewis and Bockius17

representing the defendants. With me at counsel table18

are my colleagues Karen Pohlmann and Jason Wilson.19

Sitting behind them is Glen Bodzy who is the20

general counsel of the defendant, Urban Outfitters, and21

next to him is Michael Silbert who is the associate22

general counsel.23

This is a claim for alleged violations of the24

Federal Securities Law, Section 10b and 20(a) of the25


4

Securities Exchange Act of 1934. This case is notable,1

I would submit, Your Honor, for the absence of the2

indicia of fraud that usually accompany a securities3

fraud case. 4

Typically a securities fraud case follows the5

announcement of large problems, such as a restatement, a6

bankruptcy, an indictment, an FDA finding not to approve7

a drug. Here this lawsuit followed the announcement of8

good news as I’ll explain.9

Urban Outfitters last year announced record10

results -- and those two words, record results, are11

important -- record results for the time period through12

July 31st, 2013, more than half of the so-called class13

period. 14

Plaintiff concedes that the Urban Outfitters’15

brand which is one of the Urban brands which plaintiff16

claims was troubled, had comparable store sales that17

increased by six percent and five percent for the first18

and second quarters of 2014, which goes through July of19

2013, and for the fiscal year of 2014, rather, which20

were in 2013 at a time when the competitors were21

struggling and had double digit declines.22

THE COURT: Sorry. Ma’am, are you here for23

the Urban Outfitters’ case?24

(Pause in proceedings.)25


5

MR. SONNENFELD: The results for the Urban1

Outfitters’ brand were disclosed when the quarterly2

results were announced during the putative class period,3

so there was nothing secret about that. 4

This suit was filed because in the middle of5

the third fiscal quarter of 2014, on September 9th,6

2013, the company stated in an SEC filing that, "Thus7

far during the third quarter of fiscal 2014, comparable8

retail segment net sales are mid-single digit positive." 9

And those are the mid-single digit positive.10

The market apparently had been expecting high11

single digit positive, and Urban Outfitters’ stock price12

declined, but this was just a mid-quarter update and13

ultimately Urban Outfitters did report record sales for14

that quarter which ended October 31st of 2013 and high15

single digit results for the third fiscal quarter of16

2014. In other words, unlike most securities fraud17

cases, the company had not imploded, it had done well.18

Now, having made this brief introduction, I’d19

like to discuss briefly the heightened pleading standard20

that applies here. In evaluating the sufficiency of the21

plaintiff’s complaint, it’s very important to keep in22

mind that this is a securities fraud claim to which the23

heightened pleading requirements of the Private24

Securities Litigation Reform Act of 1995 apply. That25


6

makes the pleading standard here different from every1

other kind of civil litigation of which I’m aware.2

The plaintiffs’ averments are not just tested3

against the Iqbal and Twombly standard for plausibility. 4

Under the PSLRA’s heightened standards which are even5

higher than Rule 9(b), the plaintiff must plead6

particularized facts based on reliable sources that7

survive the motion to dismiss. The PSLRA was enacted in8

1995 --9

THE COURT: Let me ask you, because10

plaintiff’s counsel is going to stand up here and tell11

me that those particularized facts begin at paragraph12

87.13

MR. SONNENFELD: Well, we would say that the14

particularized facts are not particularized, and they’re15

not particularized because they simply state in16

conclusory terms that -- well, let me say, they rely17

upon the testimony of so-called confidential witnesses. 18

They don’t tie the facts to any witness. 19

THE COURT: Well, the confidential witnesses20

are identified as the store managers at the various21

stores.22

MR. SONNENFELD: They’re identified by the23

store managers.24

THE COURT: I understand you have a problem25


7

with the Milwaukee manager who wasn’t there at the1

relevant time.2

MR. SONNENFELD: Right. But --3

THE COURT: So let’s discount that for the4

moment. What do you make of the statements or the facts5

as it were tethered to the testimony of the other store6

managers? Is that enough?7

MR. SONNENFELD: That’s not enough, Your8

Honor.9

THE COURT: Why not?10

MR. SONNENFELD: It’s not enough, and when you11

look at the other cases, you look at the -- for example,12

the Avaya case which is the leading case after the13

Supreme Court decided Tellabs, you look at the more14

recent case in the KidsCare, Kids case, the witnesses15

are tethered to the facts. They deal with a degree of16

specificity. They tell how much things were off. 17

Here you have three store managers, 50018

stores, you have two on the West Coast and one on the19

East Coast here. Nothing to say that these are20

generalized trends and nothing -- and this is21

particularly important to show -- that any of them had22

any communications with the senior management or with23

the named defendants here. 24

Unlike the other cases, none of them were25


8

senior managers reporting to the CEO or the CFO. They1

are instead people at the store manager level. One had2

some lower level responsibilities at the home office,3

but none are reporting to the -- you know, to Mr. Hayne,4

the CEO, or to Mr. Conforti who was the CFO or to Mr.5

Marlow who is the -- the group president for the Urban6

brand. And --7

THE COURT: What do I make of the analyst8

statements, if anything?9

MR. SONNENFELD: You don’t make anything of10

the analyst statements, Your Honor, and for this reason. 11

The analyst statements are not statements by the12

company, and we know from the teachings of the Supreme13

Court that the company is not responsible for the14

analyst statements. The company is not responsible15

unless there is some showing that the company was16

intertwined with the analyst statements. 17

And the cases from our Third Circuit that deal18

with analyst statements are legion, and we can even go19

back to the Burlington Coat case by -- opinion by then20

Judge, now Justice Alito saying that -- that the company21

is not responsible for -- you know, for the analyst22

statements.23

And we look at the Supreme Court decision in24

the Janus case, Justice Thomas’ case there. Defendants25


9

in securities cases are only responsible for the1

statements that they make. 2

And I believe we also have the more recent3

decision by -- I think this is discussed in the4

Cabletron case by the First Circuit and I believe in the5

Swanson case by the Third Circuit, that the issuer is6

not responsible for the analyst statements except in7

rare circumstances where you’re intertwined with the8

analyst statements. 9

We don’t have any of that here. So the fact10

that the analyst may have expected double digit sales,11

that is not -- that is not the fault of the company.12

In fact, if I can make a hand-up here, I think13

this may help put some of this in perspective.14

THE COURT: Thanks. Does plaintiff’s counsel15

have a copy?16

MR. SONNENFELD: I have copies for them.17


MR. SONNENFELD: I have broken out, and this19

appears in the complaint, what was disclosed by the20

company. 21

And here we see for the fourth quarter of22

2013, we have -- which is the period ending January23

31st, 2014, Urban Outfitters as a whole is up 1124

percent. The Urban brand is up 11 percent. For the25


10

first quarter of 2014, which ends April 30th, 2013,1

Urban Outfitters as a whole is up nine percent. The2

Urban brand is up six percent. Meanwhile, competitors3

are down 11 percent.4

The second quarter, which is the time period5

ending July 31st, 2013, second quarter, 2014, the6

company is up nine percent. The Urban brand is up five7

percent. Competitors are down 10.66 percent. 8

So all of this information is available. It’s9

all disclosed in the quarterly statements filed by the10

company with the Securities and Exchange Commission11

known as the 10-Qs available to the investing public. 12

And this is all disclosed.13

Then, you know, on September 9th in the middle14

of the third quarter, the company did in a 10-Q filing15

announcing the second quarter results, did say that thus16

far during the third quarter comparable retail segment17

net sales are mid-single digit positive. Most people18

would have applauded that as good news in this industry,19

and apparently the market was expecting double digit20

sales.21

That is not because of the company, and, in22

fact, when the -- when the quarter ended on October 31st23

of 2014 -- of ‘13 -- October 31st, 2013, which is the24

third quarter fiscal 2014, the company as a whole is up25


11

seven percent even though the Urban brand was down one1

percent and competitors were down 11.33 percent.2

So the question is and what it comes back to3

is, you know, where is the fraud here? It’s almost like4

the Burger King commercial several years ago, where’s5

the beef? And where is -- where is the fraud here? 6

And the suggestion that back in March of 20137

which is the beginning of the class period that Mr.8

Hayne or Mr. Conforti, the CEO and CFO, or Mr. Marlow9

are going to know how sales went or are going to go in10

September of 2013 is -- you know, it’s ridiculous.11

THE COURT: But what, if anything, do I make12

in the plaintiff’s argument that Mr. Conforti and Mr.13

Hayne, and I use their words, I believe they say dumped 14

stock in the amount of about $51 million? 15

MR. SONNENFELD: Well, let me deal with that16

both on a legal basis and on a factual basis. On a17

legal basis, let’s go back if we could to the decision18

in the Burlington Coat Factory by then Judge, now19

Justice Alito, so the opinion takes on a greater20

significance because of the position the author --21

THE COURT: I get that, I get that.22

MR. SONNENFELD: -- the author holds today. 23

In Burlington Coat -- and there are a lot of24

similarities in Burlington Coat and this case, you have25


12

similar industries and similar allegations, and there1

the dismissal was affirmed. It is a pre-PSLRA case,2

although decided after the enactment of the PSLRA. 3

But what Judge Alito said there was that in4

today’s world much of executive compensation comes in5

the form of stock and stock options. That’s how6

executives are compensated. And the mere fact that7

there was a sale of stock is not enough to, by itself,8

to establish scienter, and in Burlington Coat, Judge9

Alito rejected the allegations of scienter based on10

stock sales.11

The first post-PSLRA decision in the Third12

Circuit to address this principle was the Advanta case,13

a decision by then Chief Judge Scirica of the Third14

Circuit, who reiterated what Judge Alito had said in15

Burlington Coat in rejecting stock sales as a basis for16

finding scienter, that this is how executives are17

compensated and rejected that as a basis for finding18

scienter.19

Now, in Advanta, the Third Circuit said that20

scienter could be established either through motive and21

opportunity which can be shown by -- sometimes by stock22

sales or by extreme recklessness and so forth.23

Along came Tellabs and the world changed after24

Tellabs because Tellabs was the Supreme Court25


13

pronouncement on how we -- how we show the pleading1

stage scienter. And in the first Third Circuit case to2

address the issue of scienter after Tellabs, which is3

the Avaya case, and, again, Chief Judge Scirica and a4

lengthy decision, Chief Judge Scirica abandoned motive5

and opportunity as an avenue for showing scienter and6

said, therefore, that stock sales alone are not enough7

to show scienter. You need something more, something in8

addition to that.9

Now, let’s -- so that’s the standard and the10

backdrop on stock sales, and we see that reiterated, you11

know, most recently as in the -- the Rahman case12

decision quite recently in the last year, 2013. But13

let’s look at the facts here.14

The CFO, Mr. Hayne, is alleged to have sold15

shares in March of 2013.16

THE COURT: After the report was made,17

correct?18

MR. SONNENFELD: March of 2013 which is --19

THE COURT: March 22nd -- March 25th.20

MR. SONNENFELD: Right, right. This is after21

the report of the -- of the fiscal -- of the end of the22

fiscal year for the fourth quarter of 2013. And, again,23

in that quarter in which the shares -- the sales were24

made, sales were up six percent in the Urban brand, up25


14

nine percent for the company, up five percent in the1

next quarter for the Urban brand, up nine percent for2

the company. 3

There are no sales by Mr. Hayne after March,4

2013. To suggest -- to suggest that Mr. Hayne in March5

of 2013 knew what was going to happen in September of6

2013 in this industry is ridiculous. 7

I mean, just as an aside, where my father had8

a clothing store on Germantown Avenue. We lived above9

it until I was seven years old. He had one store to10

manage. 11

The thought that he would have known in March12

of a year what sales would be in September with one13

store to manage is ridiculous, much less here to think14

that Mr. Hayne, presiding over 500 stores in disparate15

locations would know what sales would be six months16

later, to attribute any -- any scienter to a sale made17

six months before the so-called truth comes out in the18

words of the plaintiffs, six months before the September19

9th announcement, is just ridiculous.20

Another fact about Mr. Hayne that appears in21

the publically filed documents, if you look in the22

proxy, and I think this is consistent with the teachings23

by Judge Alito in Burlington and reiterated by Judge24

Scirica in the Advanta and Avaya cases, Mr. Hayne25


15

doesn’t get a salary. He gets a dollar a year. He gets1

his stock, and he sold some stock to do things we do2

with our compensation, but that’s the form of3

compensation. 4

And I think what Judge Alito said about5

compensation in Burlington and Judge Scirica said in6

Avaya is certainly borne out by how Urban Outfitters7

compensates Mr. Hayne here. 8

So the fact that he sold some shares six9

months before the so-called truth comes out in the words10

of the plaintiff, I think is just a leap of faith to tie11

that -- and I would suggest that that would be12

inconsistent with how the issue of stock sales has been13

treated by the Third Circuit consistently even up14

through the Rahman decision last year by Judge15

Greenberg, so -- also affirming the dismissal of the16

10b-5 class action.17

As to Mr. Conforti, one thing that the18

plaintiffs overlook as to Mr. Conforti, and he is the19

CFO, is that Mr. Conforti exercised options. So for20

each of the options that he exercised, he had to pay21

what’s called a strike price and then there’s an22

exercise price, the price at which the options were23

exercised. 24

This all appears on Mr. Conforti’s Form 4s25


16

which we attached as Exhibit 12 to our motion to1

dismiss. That’s a form filed with the SEC after an2

officer sells shares. 3

And if you look at the Form 4s for Mr.4

Conforti, you’ll see that each of these was the exercise5

of options. They were options that had been vested over6

a five-year period. And when you subtract the strike7

price from the exercise price and total up the sales,8

you come to some $200,000, which is far less than what9

the plaintiffs are attributing was the profit. The10

profit was some $200,000 and you divide that over a11

five-year period and you look at Mr. Conforti’s level of12

compensation to be the CFO of a public company. 13

And, again it reflects the teachings of Judge14

-- of Judge Alito when he decided -- now Justice Alito15

in Burlington and Judge Scirica that this is how16

executives are compensated, and this is not, you know, a17

staggering amount of money. 18

So -- and, again, I believe that the stock19

sales by Mr. Conforti, there was a sale of a small20

amount in, I believe, April, and then some others, you21

know, in September. But, again, very -- you know, very22

small amounts. So -- and, again, if you -- if you go23

back to the hand-up and you look at the chart here, it’s24

not like bad news. 25


17

I mean, the plaintiffs like to make a big deal1

out of, among other things, the ViroPharma case. It’s a2

recent decision by Judge Jones. There, ViroPharma3

ultimately had to announce that it didn’t get FDA4

approval to extend the period of exclusivity for its5

lead -- its lead drug that it manufactured. That’s bad6

news. 7

And the issue in ViroPharma was, well, you8

knew the FDA wasn’t going to give you exclusivity9

plaintiffs alleged. You knew that you were told five10

times by the FDA you weren’t going to get exclusivity,11

and here are six documents the plaintiff said in12

ViroPharma where the FDA told you that you weren’t going13

to get exclusivity, and, nonetheless, you made these14

optimistic statements about getting exclusivity. 15

We don’t have any of that here. We don’t have16

-- and this goes back to your question on particularity17

-- we don’t have any documents -- we don’t have any18

documents tying the plaintiffs, unlike the half dozen19

documents that Judge Jones cited in ViroPharma. We20

don’t have documents. 21

We don’t have anything other than the22

untethered conclusions that the plaintiff puts in often23

without even tying them to a specific former employer --24

just saying former employee said, and the particular --25


18

not showing how any particular former employee would1

have had reason to know any -- any particular fact. 2

I think I might have cut you off. I’m sorry,3

Your Honor. 4

THE COURT: No, no. At the end of the day,5

what you’re telling me is the news was -- was not as6

good as it was expected, and that doesn’t lead us to7

action -- something that can be sued over.8

MR. SONNENFELD: That’s right. It was not as9

good as could be expected. It doesn’t render false10

anything that the company had said in the past. I think11

what the plaintiffs have said is, well -- instead of12

making -- even if it’s not in the statement case, the13

plaintiffs may say, well, it’s an omission case. But14

what was -- you know, what was omitted? 15

The company had disclosed what it’s required16

to disclose. It had its quarterly filings with the SEC17

which broke down sales among other metrics, you know, by18

brand, by quarter, that was available. Everything on19

this chart was available to the -- to the investing20

public. And even as it was for the quarter, they wound21

up up seven percent for the company as a whole.22

THE COURT: So what’s the right answer here?23

MR. SONNENFELD: Well, the right answer, Your24

Honor, is the case should be dismissed.25


19

THE COURT: With or without prejudice?1

MR. SONNENFELD: Well, that’s also a good2

question. I would say it would depend upon the basis on3

which the Court were to dismiss.4

THE COURT: You put me in -- you’re the5

expert.6

MR. SONNENFELD: Okay. I would -- I would7

have to concede, Your Honor, that if the case were8

dismissed for a lack of particularity for having to meet9

-- having failed to meet the pleading standard, if, for10

example, they had not pled fraud with the particularity11

required by the PSLRA or hadn’t pled a strong inference 12

of scienter as required by the PSLRA and the teachings13

of Tellabs and Avaya, if that were the basis, then the14

plaintiffs would be entitled to leave to replead in15

order to try to meet that pleading standard.16

On the other hand, if the Court were to17

dismiss on a variety of other bases which are not18

curable by amendment, then the dismissal, we would urge,19

should be with prejudice. If, for example, we challenge20

some of the statements as being puffery, and that’s a21

term that’s used here -- the statement’s just puffery22

and it’s not capable of having -- being the basis of a23

securities fraud case, well, the statement remains what24

it is. Amendment wouldn’t cure that. 25


20

We challenged some of the statements on the1

basis of the PSLRA safe harbor for forward-looking2

statements. If the Judge, if Your Honor were to -- or3

the Judge in any case were to grant a motion to dismiss4

based on the -- the safe harbor of the PSLRA, then I5

would submit that’s not curable by amendment, and,6

therefore, leave to amend would not be required. 7

So I think a simple answer to your question is8

it depends upon the basis for dismissal, but if the9

basis for dismissal were the failure to meet the -- the10

heightened pleading requirements, as much as I’d like to11

say the plaintiffs are on their second bite of the12

apple, because they had an original complaint and an13

amended complaint, I think the -- I would not want to14

invite the Court into an error, but --15

THE COURT: Would you suggest that maybe it16

would be futile?17

MR. SONNENFELD: I would suggest it would be18

futile, and it certainly would be futile if the19

dismissal were on the basis of the safe harbor or20

puffery or a variety of other bases that we have made in21

our motion. I would --22

THE COURT: Could these -- could the pleadings 23

in this, because they’re not particular enough, could24

they be recast and make it particular enough to do what25


21

we have to?1

MR. SONNENFELD: You know, I don’t know what 2

-- I’d say what they have here, no, based on what they3

have here, no, they couldn’t be recast. 4

But remember the legendary lawyer, Nate5

Richter, if you remember, he was a personal injury6

lawyer, he died just before I clerked for Judge Lord on7

this Court and Judge Lord had been one of his partners8

and told this story where Nate Richter had a slip and9

fall case before the Superior Court of Pennsylvania.10

The law in Pennsylvania at the time was in11

order to recover for a slip and fall you had to show12

that there were hills and ridges on the ice which would13

have put the property owner on notice. 14

And there was nothing in the record about15

hills and ridges, and Mr. Richter appealed, and the16

argument in the Superior Court, the panel said to Mr.17

Richter, well, it’s not in the record. What good is it18

going to do if we give you a new trial? And he said,19

you give me a new trial and I’ll find hills and ridges.20

So I -- I have never been able to fail to be21

amazed by the inventiveness of the plaintiffs. So I22

would submit an amendment would be futile, but I’m sure23

that when they stood up, they would give you reasons why24

an amendment would not be futile. And they would point25


22

to cases where, in the event of the failure to meet the1

heightened pleading requirements at least in the first2

instance, the plaintiffs were given a chance at the bat3

to try again, although it would be in this instance4

their third bite at the apple. So -- okay.5

THE COURT: Thank you, sir.6

MR. SONNENFELD: -- so I could go on, but I7

think if that -- if that --8

THE COURT: I think you’ve answered my9

question.10

MR. SONNENFELD: Okay. One other point I will11

point out as well, if I could, is the plaintiff here is12

an individual who purchased 100 shares. This isn’t like13

many of the securities cases these days that are brought14

by institutional plaintiffs with large holdings. This15

is a plaintiff with 100 shares. 100 shares is six16

hundred thousandths of a percent of the 146 million17

shares that are outstanding. This really is an18

infinitesimal amount of stock.19

THE COURT: So what do I make of that?20

MR. SONNENFELD: It’s just --21

THE COURT: What if I just --22

MR. SONNENFELD: -- it’s a point of23

practicality here. It’s simply -- it’s simply a point24

of practicality to this, and it -- it just demonstrates25


23

that we’re off on an exercise that makes no economic1

sense. 2

Thank you, Your Honor.3

THE COURT: Thank you.4


THE COURT: Good afternoon.6

MR. JOHNSON: Your Honor, good afternoon, may7

it please the Court, my name is Jesse Johnson. I’m with8

the law firm of Robbins, Geller, Rudman and Dowd.9

THE COURT: Right.10

MR. JOHNSON: We are the Court appointed lead11

counsel in this action. We represent -- I’m sorry. 12

With me today is Stephen Astley also of Robbins, Geller,13

Deborah Gross of the law offices of Bernard M. Gross --14

THE COURT: How are you?15

MR. JOHNSON: -- and also Corey Holzer of16

Holzer and Holzer.17

THE COURT: How are you?18

MR. JOHNSON: We represent the lead plaintiff19

here who is Mr. David Schwartz. Mr. Schwartz invested20

his hard-earned money into the common stock of Urban --21

of Urban Outfitters. 22

Your Honor, respectfully, I would -- I would23

think it’s a bit tacky to suggest that even a 100 share24

purchase by Mr. -- by Mr. Schwartz is somehow not good25


24

enough to bring an action.1

THE COURT: I don’t think that’s what counsel2

suggested. I think I understand what he suggested. So3

let’s talk about the specificity or lack thereof.4

MR. JOHNSON: Sure, Your Honor.5

THE COURT: So point to me with some clarity,6

start at paragraph A, what specific misrepresentations7

do you attribute to the defendant and not to the8

analysts. I have other questions about the analysts. 9

MR. JOHNSON: Understood.10

THE COURT: So very specifically, what was11

misrepresented by the defendants? 12

MR. JOHNSON: I’d be happy to, Your Honor.13

Just to take a step back for one second,14

leading -- so the class period begins on March 12th,15

2013, and it goes through September 9th of 2013. 16

There’s references earlier, Urban Outfitters is a17

retailer. Like many retailers do, its fiscal year18

starts -- or, I’m sorry -- ends on January 31st. So19

even though we’re in the year 2013, there was the first20

quarter and the second quarter of fiscal year, 2014.21

THE COURT: Right. 22

MR. JOHNSON: And so Urban Outfitters has a23

number of brands under the corporate umbrella. The24

Urban Outfitters’ Namesake Brand is the center of the25


25

fraud here. It’s the largest of -- they have five1

brands -- of the even the three larger brands. To give2

you an idea, Your Honor --3

THE COURT: I read the complaint. I get it.4

MR. JOHNSON: Okay. Fine.5

THE COURT: Let’s get -- tell me with6

specificity what was the -- what misrepresentations do7

you rely on?8

MR. JOHNSON: Understood. So with9

specificity, and I’m happy to point Your Honor to a few10

examples.11

THE COURT: Yes.12

MR. JOHNSON: So, for instance, on -- this is13

paragraph 94, on March 11th of 2013 --14

THE COURT: Hold on. 15

MR. JOHNSON: Sure.16

THE COURT: 94. Okay. 17

MR. JOHNSON: Defendant Hayne stated, "I would18

say overall sales trends continue to be strong and very19

much like what we saw in the fourth quarter and in the20

holiday sales, and Urban," meaning the Urban brand, "is21

basically on par with what we saw in the fourth22

quarter."23

Now, Your Honor, what’s going on here is that24

the Urban Outfitters’ brand is coming off a very solid25


26

fourth quarter of 2013 and that’s leading into --1

THE COURT: Paragraph 94.2

MR. JOHNSON: 94, Your Honor. I’m sorry, 94.3

THE COURT: I’m at 94.4

MR. JOHNSON: This is defendant Hayne.5

THE COURT: Yes. Is --6

MR. JOHNSON: It’s during a -- I would say7

overall --8

THE COURT: Okay. "Sales trends continue to9

be strong"?10

MR. JOHNSON: Correct, correct. So that’s11

what I’m pointing the Court to right now.12

THE COURT: So that -- and you’re telling me13

that the sales trends at that point were not strong?14

MR. JOHNSON: That’s correct, Your Honor. In15

the -- in the complaint, we’ve spoken to numerous former16

-- former employees of the Urban Outfitters’ brand. 17

These are store managers, department managers. 18

These are major metropolitan areas throughout19

the country. We’re talking New York, New Jersey, Los20

Angeles, California, even the Midwest in Milwaukee. All21

of these employees reported the same thing to us, they22

all saw these -- these struggling trends at the store23

level, and that began in early 2013. 24

So in other words, Your Honor, you’re coming25


27

off in the Urban brand a very strong fourth quarter and1

the defendants are bragging going into March that the2

sales momentum was continuing, and in reality, what3

these -- what these employees are telling us is that the4

sales trends had actually started to decline going into5

this -- going into the class period.6

THE COURT: Your papers, I think, suggest --7

there are 500 stores, 500 retail --8

MR. JOHNSON: Well, Your Honor, the entire9

company may very well have 500. The Urban brand has10

about 230 stores. Of those 230 stores, about 175 are11

located in the U.S. Another 15 are in Canada. So North12

America has 190 of the 230 stores. That was as of the13

most recent Form 10-K filed in April of this year.14

THE COURT: And you have four in the --15

MR. JOHNSON: Your Honor, we have what I would16

-- what I would say is a representative sample, and it’s17

also important, Your Honor, to keep in mind, so we’ve18

only got witnesses from a handful of stores, fair19

enough. But, Your Honor, these witnesses have access,20

like all Urban Outfitters’ employees to an internal21

computer system called the Intranet. 22

Now, that Intranet connects all of the stores23

together around the country, North America, even the24

world, and what it shows in the Intranet is it shows25


28

every day updated daily sales figures. And so any1

employee from any store can access the Intranet on the2

computer within the store and they can see not only3

their store sales but also sales at other stores across4

town --5

THE COURT: Show -- where is that in the6

complaint?7

MR. JOHNSON: I’m sorry. So this -- you can8

find this at paragraphs 68 to 73, and in those9

paragraphs, Your Honor, it explains how the Intranet --10

not Internet but Intranet is set up and it explains the11

information available on that Intranet system. And so12

the employees that we spoke to could see not only their13

store sales but also sales throughout the rest of the14

company at all the other stores. 15

In fact, there was what was called an Urban16

sales page which was an aggregate of the total sales17

within the company right there on one page. You could18

see all of the North American segment, European segment,19

right there for everyone to see. 20

And so, Your Honor, when, back in March, when21

defendant Hayne is saying overall sales trends are22

great, continue to be very strong, in fact, we’ve been23

told by the witnesses and we’ve put in detail in the24

complaint that that really was not the case.25


29

Moving on to another example of a false1

statement, Your Honor, at paragraph 95, and this is also2

March 11, defendant Hayne again. He says, "There is no3

reason to believe that we couldn’t see a continued4

decrease in markdowns."5

So right now he’s speaking to gross margins. 6

Urban Outfitters is coming to the market saying that7

their profitability is as great as ever and that the8

gross margins are up and the markdowns -- they don’t9

have to institute as many sales. 10

Again, Your Honor, on the Intranet, every week11

there’s a newsletter called "The Slant". It’s -- and12

this is in the complaint. This is at -- again, within13

paragraphs 68 to 73, and "The Slant" would disseminate14

on a weekly basis what sales and promotions were being15

dictated by the corporate executives here in16

Philadelphia at the corporate offices, and that would go17

to all the stores. 18

And our witnesses also told us that beginning19

in 2013 continuing through the year that "The Slant" was20

dictating greater markdowns, more promotional campaigns,21

greater sale activity, and, again, this is to compensate22

for the declining sales trends that the stores were23

seeing. And, again, Your Honor, everyone had access to24

the Intranet, to "The Slant" and including the25


30

individual defendants would have access to the same1

system.2

Excuse me. Another example for a false3

statement for you, sir. Defendant Marlow on -- this is4

paragraph 98, and this is March 11, 2013. 5

"So I think we are in a pretty healthy place6

right now, and I like it the way the trends that we see7

in the market fashion-wise marry with the stories that8

we are telling at point of sale."9

What defendant Marlow is saying is that we10

have the right product mix, the right fashion assortment11

in our stores and it’s resonating with the consumer. 12

And, in fact, as I’ve just explained, the sales trends13

and the need for markdowns and the need for promotional14

activities says just the opposite.15

Another statement, Your Honor, on paragraph16

103, and this is from a UBS retail industry conference17

on March 13th. This is defendant Conforti. Again18

referring to the product mix, "Both Urban Outfitters and19

Anthropologie will tell you that they, as we talk about20

the archery target, that they are on target now."21

And then quickly, Your Honor, just a couple22

more examples. At paragraph 120, and this is the middle23

of the class period, this is May 20th of 2013. Again,24

defendant Marlow, "In regard to the overall content of25


31

the Urban brand mix" -- again, the fashion mix -- "we1

had good performance out of the fashion businesses in2

North America and in Europe."3

And then again, one last example, Your Honor,4

paragraph 133, and this is from late in the class5

period, from August 19th, defendant Hayne in talking6

about the second quarter financial results.7

"Turning to profits, higher sales, better8

initial margins, more compelling product and effective9

expense control all combined to create record earnings. 10

The improvements in product led to higher full price11

sell-throughs and lower merchandise markdowns."12

Again, that stands in contrast to what the13

witnesses are telling us what was going on on the ground14

level, among the stores and what was obvious from the15

sales data available on the Intranet. 16

And, Judge, these -- we know that these17

statements were material -- I know that was brought up18

before -- these statements were material to the market19

and the analysts proved so. These analysts that are20

following the company’s stock day in and day out,21

quarter in, quarter out, they’re issuing reports every22

quarter or so, after every, you know, earnings release,23

after every 10-Q. They consistently pointed and praised24

the fact that Urban Outfitters as a company and Urban25


32

Outfitters as a brand was performing very strongly. 1

They highlighted the comparable sales growth,2

which I haven’t explained that yet. Sorry, it’s in the3

-- it’s in the amended complaint. This is at paragraphs4

38 to 42. Comparable sales growth is a key measure in5

the retail industry. 6

What it does is, it -- it shows the organic7

growth occurring within the organization. So, in other8

words, you factor out any growth from new store9

openings, from acquisitions, from remodeling stores to10

make them bigger. You’re looking at one store base from11

one year, that same store base the next year, how much12

have the sales grown? That’s the comparable. It’s even13

called the same store’s growth or even comps.14

And so what was going on here is that the15

analyst reports quarter in and quarter out were16

highlighting that Urban Outfitters’ comps were much17

higher, you know, counsel had from the complaint what18

the numbers broke down in terms of the company, the19

brand and its competitors. 20

The numbers were much higher than the21

competitors, and the analysts praised the company for22

the fact that it was able to rise above the quagmire of23

the teen retail market during the class period because24

its fashion content was selling, its product mix was on25


33

the mark, all these various things that the market was1

being told by the defendants. 2

And in terms of materiality, Your Honor, the3

question is whether the disclosure of an omitted fact4

would have been viewed by the reasonable investor as5

having significantly altered the total mix of6

information. That comes from the Supreme Court’s recent7

case, Matrixx Initiatives vs. Siracusano. 8

Here, Your Honor, the real sales trends going9

on, the real markdowns, the real promotional activities,10

those were all very material. And these are investors11

looking to invest in a retail company. It’s very12

important to know if that company is, in fact,13

maintaining sales growth, hitting the right marks with14

their -- with their product line and getting their15

customers in the door. 16

And investors were led to believe just that. 17

The analysts confirmed it as they -- and if I could just18

highlight for you a few of the analysts’ statements19

during the class period.20

On March 12th, it’s the beginning of the class21

period, this is paragraph 62(b). Janney Capital Markets22

wrote, "We believe the trends for spring are squarely in23

Urban Outfitters’ sweet spot." Again, that’s paragraph24

62(b), Your Honor.25


34

Moving further into the class period, on May1

21st, RBC Capital Markets --2

THE COURT: You’re telling me that these3

analysts relied on misrepresentations?4

MR. JOHNSON: Correct. They -- correct. The5

defendants would have the market believe that coming off6

a strong -- a strong holiday sales, you know, period in7

December and January, that that momentum carried right8

on through the class period. And this is at a time when9

there was no momentum whatsoever in the teen retail10

market which is the Urban Outfitters’ demographic, the11

brand demographic. 12

Free People and Anthropologie skew strictly to13

a female clientele, strictly to women and typically14

older in their late twenties, thirties, forties. So the15

market forces are much different for Free People and for16

Anthropologie versus the Urban Outfitters’ brand. 17

And so while its competitors in the malls,18

companies like Abercrombie and Fitch, Aeropostale, these19

are the competitors we have in the complaint, they had 20

-- they were averaging quarterly comparable sales growth21

of negative 11 percent. Their business was contracting. 22

At the same time, the defendants are saying that Urban23

Outfitters’ brand business is -- is great, has continued24

momentum, you know, great margins and that the product25


35

assortment was right on the mark.1

THE COURT: So the purpose of including the 2

analysts’ comments as it were as was suggested, they3

were relying on misrepresentations by the defendants? 4

MR. JOHNSON: Yes, Your Honor. It shows the5

materiality, which is the first element in the 10b6

claim, that these statements were material and that7

investors were absolutely paying attention to these8

statements.9

And if I could, Your Honor, turning to the10

second element of the 10b claim which would be scienter. 11

Here, given what the -- the witnesses have told us,12

there can be no doubt the defendants either knew or they13

were reckless in not knowing which does suffice for14

pleading scienter, in not knowing that --15

THE COURT: Knew what?16

MR. JOHNSON: I’m sorry?17

THE COURT: Knew what?18

MR. JOHNSON: They -- they knew of the Urban19

brand struggles throughout the class period, from March20

all the way through September. They knew -- and there’s21

numerous indicia that have been pled into the amended22

complaint. 23

Again, at paragraph 68 to 73, the detail I24

previously went over about what was available on the25


36

Intranet and what the store managers or the department1

managers saw. They saw weakening sales performance2

beginning in early 2013. They saw stores consistently3

unable to meet their sales targets. 4

They saw increased promotional activities and5

markdowns to the extent where one of the former managers6

thought that, given how many more markdowns and7

promotions there were, that the entire culture of the8

Urban Outfitters that he had known had now changed. 9

They saw that promotions were frequently being10

extended on the back end and even started earlier than11

expected. For instance, a three-day sale may turn into12

a six-day or a week-long sale because they were trying13

to counteract these declining sales trends. 14

They were trying to somehow get this product15

off the shelves, and, in fact, the witnesses also16

reported that they had storerooms, they had overflowing17

sale racks. They didn’t have enough racks for the sale18

items. They had product bursting at the seams, coming19

out of closets and out of back storerooms. And they20

reported just a general desperation by managers that --21

that things just were not going well and that somehow22

they needed to pick up the business. 23

And, again, defendants would have known about24

this through the data available on the Intranet. They25


37

would have known about the markdowns and the promotional1

campaigns necessary during the class period because they2

-- those very markdowns and promotional campaigns3

emanated from corporate headquarters here in4

Philadelphia and were sent to the stores using the5

Intranet.6

Also, Your Honor, in Urban Outfitters’ Form7

10-K for the last couple of years, the defendants brag8

about a sophisticated computer system that links9

literally every cash register in every store in the10

Urban Outfitters’ brand with the home office. And by11

having this communication line, the defendants were12

getting daily updates on exactly what was selling, how13

the inventory levels were changing, how sales prices14

would change and just the sales trends more generally. 15

And so, Your Honor, we would submit that when16

you -- when you look at all of these facts collectively,17

these indicia of scienter collectively which is what the18

Supreme Court counsels in Tellabs and in Matrixx that I19

cited earlier, they more than supply that strong20

inference of scienter that defendants did know or at a21

minimum were reckless, and recklessness suffices, that22

what they were saying to the market was not true and was23

misleading in that what was happening at the ground24

level with the stores was much different than what was25


38

being relayed to the market.1

And one last indicia of scienter, Your Honor,2

is that the defendants did sell $51 million worth of3

stock during this class period. It’s -- it’s absolutely4

one of the -- the indicia of scienter to be considered. 5

There’s no debate about that.6

THE COURT: Well, what do you make of Mr.7

Sonnenfeld’s argument, his rationale argument as to the8

sale of the stock? 9

MR. JOHNSON: I think that they’re red10

herrings. I think that the fact that -- to be probative11

of --12

THE COURT: He would tell me that including13

that fact is a red herring.14

MR. JOHNSON: That’s not true at all. The15

motive and opportunity allegations are certainly to be16

considered in looking at the picture being painted by17

the complaint, looking at all of the indicia of18

scienter. And so you can absolutely and you should look19

at what stock sales happened during the class period,20

what is alleged.21

Now, these stock sales were also unusual in22

both scope and in timing. As Your Honor pointed out23

earlier, in March just a few days after the class period24

begins, there were hundreds of thousands of shares sold,25


39

bringing in millions of dollars, and then defendant1

Conforti, just a few days before the class period ends2

or a week or two before the class period ends, he then3

liquidates all but one percent of his holdings. 4

And so we have $50 million, which is a massive5

amount of money by defendant Hayne. Then we have6

another million dollars-plus from defendant Conforti who7

also liquidated 99 percent of his holdings during the8

class period. And in the meantime, there hadn’t been a9

single share of Urban stock sold by either of those10

defendants in the 18 months prior to the class period.11

And so what happened here, Your Honor, was12

that these defendants cashed in on their fraud. What13

they did was when the share price was artificially14

inflated because of their misrepresentations to the15

market, as you alluded to earlier, they dumped 1.316

million shares of common stock onto the market, and17

investors, such as my client, Mr. David Schwartz, then18

used their retirement savings to purchase those shares19

at artificially inflated prices.20

And then, Your Honor, I’d also like to address21

the last element which would be loss causation. Loss22

causation, ever since the Supreme Court’s decision in23

Dura Pharmaceuticals vs. Broudo, it’s been abundantly24

clear that there’s no heightened pleading requirement25


40

for loss causation. It’s a Rule 8(a) notice pleading. 1

It’s -- the standard requires that plaintiff fairly put2

defendants on notice of what his theory of loss3

causation is. And in the amended complaint, we’ve done4

just that. 5

By September, 2013, defendants could no longer6

hide the struggles of the Urban brand. So, as was7

referenced earlier, the second quarter Form 10-Q was8

filed with the SEC on September 9th. September 9th9

falls right in the middle of the third quarter. And so10

in that 10-Q, defendants provided an update that11

comparable sales growth, again, the most important12

metric as one retail consultant firm has confirmed, the13

most important metric in evaluating a retail -- you14

know, a retail business’ stock. 15

The comparable sales growth for the third16

quarter was tracking at mid-single digit positive. This17

comes after three consecutive quarters of nine to 1118

percent comparable sales growth.19

THE COURT: So they weren’t doing as well as20

they had hoped?21

MR. JOHNSON: They weren’t -- they weren’t22

doing as well. And what’s important here, Your Honor,23

is that the analysts that same day immediately24

pinpointed that it was the Urban brand that was dragging25


41

down the sales growth at Urban as an entire company. 1

There were a few different analysts’ reports issued2

between September 9th and 10th that pinpointed that. 3

These are at -- I can point Your Honor to paragraph 1474

of the amended complaint.5

Wells Fargo on September 9th issued a report6

entitled "Urban Stalling but Anthro, Free People7

Cruising." And that report stated, "Urban Outfitters8

running a fever. Our talks with management indicate9

that Urban Outfitters may have suffered from fashion10

misses."11

Oppenheimer that same day, September 9th,12

noted in a report that, "The Urban Division was13

lagging."14

And Janney Capital Markets on September 10th15

declared, "We believe the entire issue for Urban’s16

slowing sales stems from the Urban Outfitters’17

Division."18

Your Honor, when -- when this announcement was19

made on September 9th, it was after the market had20

closed. The very next day, on September 10th, the stock21

plunged more than ten percent. It fell from $42 and22

change per share to $38 and change per share. There23

were 14.1 million shares traded that day on September24

10th. That was eight times the average trading volume25


42

of the previous two weeks. In fact, those 14.1 million1

shares, that’s more shares traded on a single day than2

any other day in 2013 and in any other day since then in3

2014.4

And so the amended complaint pleads the clear5

causal link between what the defendants disclosed on6

September 9th, which is that the comparable sales growth7

was now way below what was expected and it was -- and it8

had fallen precipitously from what it had been the9

previous few quarters, contrasting that to what the10

defendants had told us throughout the class period,11

that, in fact, the assortment was selling well, that the12

assortment was spot-on, that growth margins were up,13

that markdowns were down and that generally the -- the14

sales momentum had continued from the successful holiday15

season right on through into the year 2013 which was --16

THE COURT: But what about every time the17

companies don’t meet their numbers, don’t meet their18

expectations? Does every time a company doesn’t meet19

its expectations, is that actionable?20

MR. JOHNSON: Not necessarily, Your Honor. 21

But here the fraud isn’t that they didn’t meet22

expectations. The fraud is that throughout the class23

period, during those six months, they gave the market24

every indication to believe that --25


43

THE COURT: They would hit their numbers. 1

They were going to hit their numbers.2

MR. JOHNSON: It wasn’t just that they were3

going to hit their numbers, Your Honor. It was that4

they had picked out the right product assortment, that5

they had continued sales momentum and that generally the6

company and the brand in particular were doing well. 7

But, in reality, as the witnesses have told us and as8

we’ve pled in detail in the complaint, that was not the9

case. 10

When you look at the sales data that’s11

available on the Intranet, when you look at "The Slant"12

which is the weekly newsletter that -- that gives the13

promotions and the markdowns for each quarter, it was14

getting worse and worse. It was significantly worse in15

all of the year 2013 than it had been in the months16

prior, and that’s the fraud, Your Honor.17

THE COURT: So where do we go from here?18

MR. JOHNSON: Your Honor --19

THE COURT: What’s the right answer? Same20

question, what’s the right answer?21

MR. JOHNSON: -- the right answer is that22

we’ve -- that the amended complaint has met the23

heightened pleading requirements, that we’ve pled in24

particularized detail exactly what the plausible claim25


44

of fraud is, that the amended complaint should be1

sustained and that we get to move forward with discovery2

so that we can get the evidence to prove these claims.3

THE COURT: All right. 4

MR. JOHNSON: Thank you, Your Honor.5

MR. SONNENFELD: Well, if I may reply briefly,6

Your Honor, I think that Mr. Johnson’s argument shows an7

amendment would be futile. So in answer to Your Honor’s8

last question to me, I think if that is what he seeks to9

do and then it would truly be futile.10

Turning to the stock sales, and Mr. Johnson11

referred to motive and opportunity. Motive and12

opportunity was under Advanta, 1999, a route to scienter13

in the Third Circuit, but post-Tellabs, as a result of14

Avaya, motive and opportunity is no longer a route to15

scienter. And Chief Judge Scirica made that clear in16

his Avaya decision which overruled Advanta to the extent17

that motive and opportunity was an alternative route to18

scienter.19

As far as the sales themselves, if you look at20

the three individual defendants, Mr. Marlow, who was the21

president and is the president of the Urban Outfitters’22

brand made no sales, he had zero sales. Mr. Hayne, the23

CEO, while he sold -- I believe it was five percent of24

his holdings, he still holds 95 percent. 25


45

So to suggest that he was involved in this1

fraud here, when 95 percent of his holdings he still has2

in the company is just illogical when you couple that3

with -- and offensive -- with -- you know, with the six-4

month earlier time period when these sales were made. 5

And then finally, Mr. Conforti, the CFO, while6

Mr. Johnson refers to a million dollars, that really is7

disingenuous. These are the exercise of options. You8

have to subtract the -- the strike price from the9

exercise price and you get a net of around $200,000 for10

options that had vested over a period of five years, and11

he has many other unvested options. He may have sold12

the -- most of his vested options. He has many other13

unvested options, and this appears in the -- in the14

public filing. So I think that is disingenuous.15

Mr. Johnson directed our attention to many16

paragraphs of the complaint, but when you look at these17

paragraphs of the complaint, for the most part, they’re18

not tethered to any particular witness. They just refer19

to "former employees told us." It isn’t like most of20

the --21

THE COURT: Do you need to identify which22

employees said what?23

MR. SONNENFELD: Yes. In most of these cases,24

you look at the ones that we have cited, they’ll say25


46

that CW-1 told us that on July 1st, 2013, he attended a1

meeting with the CEO at which the CFO said you’re not2

going to make the numbers, or CW-2 told us that when you3

looked at the Intranet online on date X it would show4

you that sales were declining by whatever. You don’t5

have it tethered to any individuals. 6

And even in his argument today, Mr. Johnson7

didn’t tie his argument to what was alleged in the8

complaint. It’s what he claims witnesses told him,9

without regard to whether they’re in the complaint or10

not. The complaint only references six so-called11

confidential witnesses. But then when you get into the12

allegations of the paragraphs, it just says "former13

employees told us." 14

It doesn’t say CW-1 said this, CW-2 said that. 15

It then doesn’t have documents. He refers to this16

Intranet. He doesn’t say what the Intranet would have17

shown. He doesn’t say what the sales would have been on18

any particular day or the numbers or anything else. And19

you look at the cases that we have cited for this20

proposition, there is a great degree of specificity of21

what the CWs claim was told or what would have -- what22

they would have seen if they had looked or whatever. We23

don’t have any of that.24

What we do have is the hand-up I made here25


47

which comes from the complaint, and the hand-up that we1

have here that comes, you know, from the complaint shows2

that sales were up for the Urban brand, you know, in the3

first and second quarters, that is for the time period4

ending April 30th, 2013 and July 31st, 2013. We have5

periods of record sales. There is no allegation that6

this is wrong. 7

There’s no allegation that anything -- and by8

this, I’m putting my hand up -- but this is based on the9

allegations in the complaint which are based on the10

public filings of the company and the 10-Q. There’s no11

allegation that it’s wrong, either as to the fourth12

quarter of 2013 or the first and second quarters of13

2014. You have periods of record sales. And the irony14

here ultimately is that for the third quarter of 201415

ending October 31st, you again have record sales and16

they’re up seven percent.17

Now, Mr. Johnson tells us well, the analysts18

were expecting more. Well, you look at Justice Thomas’19

position in Janus, he says you’ve got to make a20

statement to be liable for it. You see some discussion21

in Judge -- in Judge Alito’s decision in Burlington22

about liability for analysts. 23

There’s discussion in the Third Circuit about24

a First Circuit decision, the telephone case that we25


48

cite in our brief, a recent First Circuit decision,1

about entanglement. You have to show how the issuer was2

sort of entangled with the analyst. We have none of3

that here. The company is not responsible for what4

analysts said or didn’t say.5

And just a final point is, Mr. Johnson6

referred to the August 19th statement by the company. 7

The August 19th statement by the company was made after8

-- after the date that the plaintiff here had purchased9

his hundred shares, so he couldn’t possibly have relied10

on the August 19th statement. 11

And under the teachings of the Third Circuit12

in the Klein case and the decision by Judge McLaughlin13

in the NutriSystem case, plaintiff doesn’t have standing14

to challenge a statement made by the company after he15

purchased his shares because he couldn’t have relied on16

it. So --17

THE COURT: I’m sorry, go ahead.18

MR. SONNENFELD: -- so unless Your Honor has19

any questions, I think we’ve covered everything else in20

our briefs.21

THE COURT: Yes. Mr. Johnson, just22

specifically with respect to Mr. Sonnenfeld’s argument23

that in the complaint the statements aren’t tethered to24

any specific witness. Do you need to do that?25


49

MR. JOHNSON: Well, Your Honor, that’s simply1

-- that’s not required. If I can just quickly go2

through what the Third Circuit has said on the3

confidential witness front. It’s not required. There’s4

no -- there’s no requirement that the complaint give the5

specific witness and what he or she said. 6

THE COURT: Because we’ll agree that that --7

that doesn’t appear in this complaint, correct?8

MR. JOHNSON: Yes, yes, we will agree there. 9

Here -- what’s in the complaint is that there10

are -- there are six confidential witnesses of which11

five worked at various stores around the country. And12

those five reported the same sales trends as I -- as I13

indicated earlier, and they also had access to the14

Intranet which showed sales trends, not just for their15

stores, but for all the stores.16

And so there’s really -- even if the complaint17

did say this -- you know, this former store manager at18

this store or that former manager at that store saw this19

at that store or that at that store, it wouldn’t make a20

difference, because what the complaint relies on is the21

fact that the -- among all of the stores --22

THE COURT: The aggregate knowledge.23

MR. JOHNSON: Correct. And that aggregate24

knowledge is available through the Intranet. 25


50

What the Third Circuit standards require is1

that you plead enough information within the amended2

complaint so that you can trust and rely on who the3

witnesses were and what they provided. Here we give the4

stores where they worked. We give the time periods5

where they worked. We give the -- their reporting6

structure and we give their job responsibility. There’s7

no reason to question or to in any way discredit that8

those witnesses would have known what we’re pleading in9

the amended complaint in terms of, as I said, the sales10

data and whatnot.11

And, Your Honor, just one last thing on the12

stock sales front. There’s a Third Circuit case, In re13

Suprema, Inc. Securities Litigation. In that case,14

there were stock sales by two of the six named15

individual defendants and those stock sales totaled $716

million. 17

The Third Circuit found that was a strong18

inference of scienter and that the strong inference of19

scienter was not negated by the fact that those same two20

defendants still maintained 62 and 69 percent of their21

holdings. 22

So counsel makes a big deal out of the fact23

that defendant Hayne sold $50 million worth of stock but24

still retained 94 percent of his holdings. That25


51

retention of holdings does not negate the strong1

inference there is from the actual $50 million sold2

during the class period.3

Unless the Court has any additional questions,4

I’ve --5

THE COURT: Just a comment here.6

MR. SONNENFELD: I have two very quick7

comments, Your Honor. I’m not bringing any notes up.8

Suprema was pre-Avaya. Suprema was pre-9

Tellabs, and I think it has to be discounted by that10

fact.11

With respect to the degree of particularity12

required as to a CW, I would respectfully direct the13

Court’s attention to the Third Circuit’s decision in the14

Chubb case. Chubb, Judge Cowen goes through the indicia15

of particularity required of the CW there. 16

The Court was troubled by the lack of17

particularity of the CWs in the Chubb case. And then18

Avaya -- and the Chubb, it was I think two or three19

years before Avaya, but then Avaya -- and Avaya, Judge 20

-- Chief Judge Scirica cites Chubb with approval and21

says it is still good law were his words in the Third22

Circuit. So I think both Chubb and Avaya are the best23

statement of what is required of the CWs in the24

complaint.25


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THE COURT: All right. We’ll take about a1

five-minute recess. I’ll be right back.2

MR. SONNENFELD: Thank you, Your Honor.3

(Recess taken at 2:51 p.m.)4

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david schwartz, : civil no. 13-05978 individually and on ... filein the united states district court...

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