On February 27, 2017, Judge Katherine Polk Failla of the United States District Court for the Southern District of New York dismissed with prejudice a putative class action brought on behalf of purchasers of Wal-Mart de México SAB de CV (“Wal-Mex”) American Depositary Shares (“ADRs”) against Wal-Mex, Wal-Mart Stores, Inc. (“Wal-Mart”), and two Wal-Mex executives. Fogel v. Wal-Mart de México Sab de CV, — F. Supp. 3d —, 2017 WL 751155 (S.D.N.Y. 2017). The complaint alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder based on allegations that Wal-Mex’s annual reports for 2004 through 2011 failed to disclose an alleged bribery scheme. In a detailed and thorough opinion that provides an overview of the state of Rule 10b-5 jurisprudence in the Second Circuit, the Court held that many of plaintiff’s claims were time barred, and that plaintiff failed to state a claim with respect to those claims that were timely.

Wal-Mex is the Central American subsidiary of Wal-Mart, which owns and operates retail stores. In April 2012, the New York Times published an article exposing an internal investigation by Wal-Mart of alleged bribery at Wal-Mex over the 2005-2006 time period. Upon publication of the Times article, Wal-Mex ADRs fell 12.2%. Plaintiff filed suit against Wal-Mex and one of its former executives on April 5, 2013, and then subsequently amended the complaint twice to add new defendants and claims, first in December 2014 and then in April 2016.

The Court first analyzed whether the claims brought in each of the three complaints were timely. Noting that the Sarbanes-Oxley act of 2002 (“SOX”) has a 5-year statute of repose that is intended to provide an end date for exposure and is necessarily triggered by the underlying misstatement, and not by discovery of a cause of action, the Court dismissed claims based on alleged misrepresentations in Wal-Mex’s 2004, 2005, and 2006 annual reports—all of which were published more than five years before plaintiff first sued. The statute of repose similarly barred claims about alleged misstatements made more than five years before plaintiff’s first or second amended complaints to the extent they were first asserted in those complaints.

The Court then turned to SOX’s 2-year statute of limitations. Under the statute of limitations, plaintiff’s claims began to accrue only after (1) plaintiff actually purchased Wal-Mex’s ADRs and (2) plaintiff uncovered (or a reasonably diligent plaintiff would have uncovered) facts sufficient to state a cause of action, including adequately pleading that defendants acted with fraudulent intent. The Court held that these conditions were satisfied no later than April 24, 2012, the last day a putative class member could have bought a Wal-Mex ADR and three days after publication of the Times article. As a result, claims against Wal-Mart and one officer defendant (the Wal-Mex CEO) were untimely because they were first asserted in the amended complaint filed in December 2014. The Court reasoned that these claims did not relate back to the initial complaint under Federal Rule of Civil Procedure 15(c) because there was no allegation that such claims were intended to be brought originally—nor would one have been reasonable: Wal-Mart was known to be the parent of Wal-Mex and Wal-Mex’s CEO had been identified in Wal-Mex annual reports. Accordingly, the Court concluded that plaintiff had purposely chosen not to name these defendants in the initial complaint. The Court also held that certain new allegations could not relate back because defendants had not been put on notice of them.

The Court then addressed the remaining claims based on alleged misrepresentations in Wal-Mex’s annual reports for 2007-2011. The Court found that plaintiff’s allegation that the Wal-Mex executive acted with scienter was inadequate because it was based entirely on the executive’s supervisory position. 2007 WL 751155, at *16. Without additional indicia of scienter, courts in the Second Circuit have regularly dismissed such “they had to have known” allegations. See Strougo v. Barclays PLC, 105 F. Supp. 3d 330, 350 (S.D.N.Y. 2015). Similarly, plaintiff failed to plead scienter as to Wal-Mex because the complaint did not adequately plead scienter on the part of any Wal-Mex employee that could be fairly be imputed to Wal-Mex. Finally, the Court noted that plaintiff had not alleged any actionable misrepresentation or omission because all of the statements plaintiff had identified were “inactionable, immaterial puffery,” and in any event plaintiff had not even pleaded facts showing that the statements were false.

This thoughtful opinion touches on several key issues in securities law practice, including relation back, the statute of repose, and imputation of fraudulent intent, and provides an excellent primer Rule 10b-5 practice within the Second Circuit.

Click here to view the judgement.