On December 10, 2019, the United States Court of Appeals for the Second Circuit affirmed the dismissal of a putative class action asserting claims under Section 10(b) of the Securities Exchange Act of 1934 against a chicken producing company and certain of its executives. Gamm v. Sanderson Farms, Inc., —F.3d—, 2019 WL 6704666 (2d Cir. 2019). Plaintiffs alleged that defendants’ SEC filings contained misrepresentations because they failed to disclose an illegal antitrust conspiracy to drive up chicken prices by reducing supply and to manipulate a chicken price index. The Court held that the complaint was properly dismissed because plaintiffs failed to plead with sufficient particularity facts supporting the alleged antitrust conspiracy, explaining that “when a securities fraud complaint claims that statements were rendered false or misleading through the nondisclosure of illegal activity, the facts of the underlying illegal acts must be pleaded with particularity in accordance with the requirements of Rule 9 and the PSLRA.” Id. at *9.
Plaintiffs acknowledged that their allegations of misstatements and omissions had to be pleaded with particularity under the PSLRA and Rule 9(b) of the Federal Rules of Civil Procedure, but they argued that facts of the underlying antitrust conspiracy only needed to meet the plausibility standard of Rule 8. Id. at *6. The Court rejected that argument, holding that, because plaintiffs’ nondisclosure and material omission claims were entirely dependent upon the predicate allegation that defendants participated in a collusive antitrust conspiracy, plaintiffs’ allegations “must also provide particularized facts about the underlying conspiracy” in order to properly allege with the requisite particularity “all facts” upon which their securities fraud claim was based. Id. The Court reasoned that “[u]ntil and unless they have done so, appellants’ complaint had not met the burden of explaining what rendered the statements materially false or misleading.” Id. On this basis, the Court held that the facts of the underlying anticompetitive conduct needed to be pleaded with particularity. Id. at *7. The Court then assessed whether plaintiffs had alleged the basic elements of an antitrust conspiracy. Id. at *8. With respect to the alleged collusive activities to reduce supply, the Second Circuit determined that “[a]lthough appellants do allege that [defendants] engaged in ‘anticompetitive’ conduct, there is virtually no explanation as to how that collusive conduct occurred, and whether and how it affected trade.” Id. The Court noted that plaintiffs failed to allege that defendants or any other chicken producers were successful in reducing the supply of chicken, or that any reduction in supply resulted from an anticompetitive agreement. Id. Moreover, the Court emphasized that plaintiffs failed to allege “when [the company] decided on its course of supply reduction, which industry peers were a part of that decision, how specific supply reductions were performed by each of the different poultry producers, what information [the company] knew about its peers’ supply reductions, if any, and — perhaps most basic of all — whether [the company] actually reduced chicken supply, and if so, by what volume.” Id.
With respect to the alleged conspiracy to manipulate the chicken price index, plaintiffs alleged that the company and other chicken producers submitted artificially high prices to the government agency that maintained the index, and coordinated these activities by learning about the prices other producers were submitting through a service that collected such information for the industry. The Court held, however, that plaintiffs’ allegations failed to show “when and how” the company used this service, or to allege what communications the company had with the government agency that maintained the index, when that information was provided, and whether it was false. Id. And the Court concluded that “[t]he complaint is entirely silent” as to whether the alleged manipulative conduct “unreasonably restrained trade, and whether that restraint affected interstate commerce.” Id.
This decision confirms that securities fraud plaintiffs within the Second Circuit are required to allege with particularity the elements of the alleged illegal conduct supposedly giving rise to a securities violation, and is likely to serve as persuasive authority outside of the Second Circuit.