The shareholders of Nash Finch Company filed a securities fraud class action, alleging that the company and its officers made materially false and misleading statements concerning its acquisition of two major food distribution centers, including misrepresenting the increase in revenues and earnings that would result from the acquisitions. The complaint also alleged that the misrepresentations enabled the individual defendants to sell shares of Nash Finch stock at a higher price than they would otherwise have received. Defendants moved to dismiss, contending, among other things, that the alleged misrepresentations were not actionable because they were accompanied by cautionary language and that plaintiffs failed to adequately plead scienter as required by the Private Securities Litigation Reform Act (PSLRA). The court rejected these arguments.

The court found that the safe harbor that protects forward-looking statements accompanied by meaningful cautionary language did not support dismissal. After ruling that cautionary language cannot be “meaningful” if a defendant had actual knowledge of the falsity of the allegedly false forward looking statement, the court found that plaintiffs’ allegations raised fact questions as to whether defendants knew their statements of anticipated revenues and earnings growth were false when made. In reaching this conclusion, the court determined that plaintiffs’ allegations that defendants had “actual knowledge” of the falsity of their statements, which allegations were based on information from confidential witnesses formerly employed by Nash Finch and other reliable sources, satisfied PSLRA’s heightened pleading standards.

The court also found that plaintiffs adequately pleaded scienter, noting that allegations of “motive and opportunity” can establish scienter and that insider sales may be probative of motive. After finding that the timing and amount of the defendants’ sales were suspicious and “dramatically inconsistent” with their prior trading practices, the Court ruled that the sales, coupled with plaintiffs’ allegations of defendants’ knowing misrepresentations and the unexpected resignations of senior officers after the Securities and Exchange Commission began an insider trading investigation, established a strong inference of scienter as required under the PSLRA. (In re Nash Finch Co. Securities Litigation, 2007 WL 1266658 (D. Minn. May 1, 2007)