In re: SKECHERS USA, INC. SECURITIES LITIGATION

Background

The Pension Fund Plaintiffs—Local #817 IBT Pension Fund, Local 272 Labor-Management Pension Fund, and Chester County Employees Retirement Fund—filed a federal securities-fraud class action on behalf of people and entities that purchased Skechers USA, Inc. common stock between October 20, 2017, and July 19, 2018. They sued Skechers, its chief executive officer Robert Greenberg, its chief operating officer and former chief financial officer David Weinberg, and its chief financial officer John Vandemore.

The complaint asserted claims under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. The plaintiffs focused on statements made during earnings calls and in Securities and Exchange Commission filings about whether Skechers’s selling, general, and administrative expenses would grow more slowly than sales—a relationship the parties called “leverage.” The plaintiffs alleged that Skechers knew its planned retail expansion and its use of costly third-party distribution operations in China would prevent it from achieving the expected leverage.

The defendants moved to dismiss the consolidated amended complaint under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not state a legally sufficient claim.

Issues and governing standards

To plead a claim under Section 10(b) and Rule 10b-5, the plaintiffs had to allege a material misstatement or omission, a required fraudulent state of mind, a connection with the purchase or sale of securities, reliance, and loss caused by the alleged fraud. Because the case involved securities fraud, the complaint also had to satisfy heightened pleading requirements under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act. Those rules required the complaint to identify the misleading statements, their speakers, when and where they were made, why they were misleading, and particular facts supporting a strong inference of the defendants’ fraudulent intent.

The court also considered the statutory safe harbor for forward-looking statements. That protection can apply when a forward-looking statement is identified as such and accompanied by meaningful warnings about specific risks that could cause actual results to differ.

Court’s analysis

The court held that the cautionary language cited by the defendants did not trigger the safe harbor. The warnings generally discussed possible fluctuations in sales and expenses, but they did not specifically address the alleged risk arising from Skechers’s operational structure in China and its effect on leverage.

Nevertheless, the court concluded that the plaintiffs had not adequately pleaded an actionable misstatement or omission. The statements made during the earnings calls generally expressed management’s predictions and opinions about future expenses and leverage; they did not guarantee a particular level of leverage by a particular date. The court considered the statements in context and rejected the argument that the word “certainly” transformed one prediction into a guarantee.

The court separately considered Weinberg’s explanation that higher first-quarter 2018 expenses resulted from a “later event.” It treated that statement as an after-the-fact explanation of the difference between prior guidance and actual results. The complaint did not allege facts showing that the explanation was false, because it did not identify the underlying cause of the difference.

The court held that statements in Skechers’s 2017 third-quarter and 2018 first-quarter filings about managing expenses in line with expected sales were non-actionable “puffery,” meaning statements too general for a reasonable investor to rely on as a concrete promise. The statement in the 2017 annual filing was also not adequately alleged to be false. The complaint relied partly on a later statement that Skechers was focused on growth, but it did not provide a basis for connecting that later statement to what management said in the 2017 annual filing.

A central pleading defect was the absence of allegations about Skechers’s projected sales. The court explained that leverage depended on the relationship between the growth rates of expenses and sales. Allegations that expenses were planned in advance, or that expenses in China were increasing, did not establish that management’s belief about companywide leverage was false without facts about expected sales growth and the company’s global operations.

The court also rejected the plaintiffs’ reliance on securities analysts’ reports. The complaint did not show that the cited analysts represented the broader market, and the reports generally reflected the analysts’ own projections based on statements the court had already found non-actionable. The court concluded that analysts’ reactions could not convert otherwise non-actionable statements into actionable misstatements.

The omission claims also failed. The plaintiffs did not adequately allege that defendants had to disclose future selling, general, and administrative expenses to keep the challenged statements from being misleading. The court found that the complaint did not connect the advance commitment of some retail-store expenses to total company expenses at a specific future time. The claim under Item 303 of Securities and Exchange Commission Regulation S-K likewise failed because the complaint did not provide enough facts to infer a known, material trend in Skechers’s global expenses during a specific period. The court also noted that Skechers’s filings disclosed expense figures for the relevant period and the corresponding period of the prior year, allowing a reasonable investor to calculate the alleged trend.

For purposes of completeness, the court also held that the complaint failed to plead the required fraudulent state of mind as to the individual defendants. The alleged stock sales were not sufficiently unusual or suspicious when considered in context. The incentive-based compensation allegations did not show a particular motive to make the challenged statements, and performance-based compensation generally was insufficient by itself. The defendants’ senior positions and access to company information also did not establish fraudulent intent without identifying specific contrary reports or information. The court characterized the theory that later results proved earlier statements fraudulent as impermissible “fraud by hindsight.”

The complaint also failed to plead fraudulent intent as to Skechers itself. The plaintiffs did not adequately allege that an individual whose intent could be attributed to the company acted with the required state of mind, or that knowledgeable corporate officials approved misleading statements. General allegations that Skechers’s officers and agents knew of or recklessly disregarded contrary information were insufficient.

Disposition

The court concluded that the plaintiffs failed to state a claim under Section 10(b) and Rule 10b-5. Because the Section 10(b) claim failed, the related Section 20(a) claim also failed. Judge Naomi Reice Buchwald granted the defendants’ motion to dismiss the consolidated amended complaint, directed the Clerk of Court to enter judgment and close the case, and denied the plaintiffs’ request for leave to amend. The order resolved docket entry 45.