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The Pension Trust Lead v. J.Jill, Inc.

United States District Court, D. Massachusetts

December 20, 2018

J.JILL, INC. et al., Defendants.


          Leo T. Sorokin United States District Judge.

         Now pending before the Court are two motions to dismiss the Amended Complaint, Doc. No. 40. One was filed by the “Company Defendants”: J.Jill Inc. (“J.Jill”), TowerBrook Capital Partners L.P. (“TowerBrook”), Paula Bennett, David Biese, Michael Rahamim, Andrew Rolfe, Travis Nelson, Marka Hansen, Michael Eck, and Michael Recht. Doc. No. 44. The other was filed by the “Underwriter Defendants”: Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. LLC, and Jefferies LLC. Doc. No. 46. For the reasons that follow, both motions to dismiss are ALLOWED.

         I. BACKGROUND

         J.Jill is a women's clothing brand with “an ‘omni-channel' sales and marketing platform, whereby it sells its products through a variety of sales channels, including brick-and-mortar retail stores, a sales catalog and the Company's website.” Doc. No. 40 ¶ 16. In May 2015, TowerBrook purchased J.Jill. Id. ¶ 19. In February 2017, J.Jill filed a Registration Statement and Prospectus with the Securities and Exchange Commission (“SEC”) in preparation for its upcoming initial public offering (“IPO”). Id. ¶ 25. J.Jill held its IPO on March 9, 2017, id. ¶ 1, selling approximately 12.5 million shares at $13 per share, id. ¶ 25.

         At the end of May 2017, “J.Jill announced its financial results for the first fiscal quarter of 2017, ” reporting that “total net sales had increased by 12.5% to $166.1 million, while its total comparable store sales had increased by approximately 9.9%, and the Company's gross margin had increased to 69.6% for the quarter.” Id. ¶ 42. However, J.Jill “provided surprisingly conservative guidance for the remainder of the year.” Id. It predicted “total comparable store sales to increase in the high single digits for the year, which implied a deceleration in the Company's sales growth.” Id. Its report indicated that J.Jill's “growth margin rate was expected to decline for the remainder of the year.” Id.

         On an earnings conference call held the same day to discuss the reported results, a UBS analyst “expressed ‘puzzlement' at the new expectations for the remainder of the year provided by the Company.” Id. ¶ 43. The analyst said, “it kind of leaves the back half of the year part of the puzzle lower than what we spoke to - lower than what you spoke to when you gave us the components during the IPO.” Id. In response, J.Jill's Chief Financial Officer (“CFO”), David Biese, “admitted that ‘the math isn't perfect' and stated that nothing had changed from the conditions impacting the Company's growth and prospects at the time of the IPO.” Id. He said, “I would tell you that we don't feel differently about the back half of the year . . . I don't see that there is anything different about the second half.” Id.

         On another earnings call held in August 2017 to discuss the results of the second fiscal quarter of 2017, “management for J.Jill revealed that competitive pressures had forced the Company to take higher markdowns and increase promotional activities.” Id. ¶ 45. Similarly, analysts on the call “expressed concern about the additional store closures, which would bring the total store closures to seven or eight for the year compared to just one in fiscal year 2016, and the ability of the Company to service its sizeable debt given the slowdown in profit growth.” Id. The plaintiff asserts that on the call, J.Jill's Chief Executive Officer (“CEO”), Paula Bennett, “admitted that the Company's already disappointing margin guidance for the quarter had been ‘too optimistic.'” Id.

         On “October 11, 2017, J.Jill issued a press release updating its guidance for the third quarter.” Id. ¶ 46. In this press release, Bennett stated:

We have experienced a lower than expected sales trend across both our retail and direct channels, and are updating our guidance for the quarter. We have been assessing the change in trend and have identified product and marketing calendar issues that are affecting traffic and conversion, and we are reacting quickly.

Id. The press release also reported that J.Jill “expected total company comparable sales of -3% to -5% with a moderate decline in gross margin as compared to last year.” Id. ¶ 47. The plaintiff filed suit on October 13, 2017, at which time J.Jill stock closed at $5.11 per share. Id. ¶ 48. The amended complaint, Doc. No. 40, alleges three counts under the Securities Act of 1933, 15 U.S.C. § 77: (1) a violation of § 11 against all defendants except TowerBrook, (2) a violation of § 12(a)(2) against all defendants, and (3) a violation of § 15 against the Company Defendants.

         The Court consolidated three related cases against the Defendants in December 2017 and appointed the Oregon Laborers Employers Pension Trust Fund as lead plaintiff. Doc. No. 28. Now pending are two motions to dismiss, one filed by the Company Defendants, Doc. No. 44, and the other filed by the Underwriter Defendants, Doc. No. 46.


         To survive a motion to dismiss under Rule 12(b)(6), “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). The court “must accept all well-pleaded facts alleged in the Complaint as true and draw all reasonable inferences in favor of the plaintiff.” Watterson v. Page, 987 F.2d 1, 3 (1st Cir. 1993). “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Iqbal, 556 U.S. at 678. The Court “may augment these facts and inferences with data points gleaned from documents incorporated by reference into the complaint, matters of public record, and facts susceptible to judicial notice.” Haley v. City of Boston, 657 F.3d 39, 46 (1st Cir. 2011) (citing In re Colonial Mortg. Bankers Corp., 324 F.3d 12, 15 (1st Cir. 2003). The Court draws all reasonable inferences in the plaintiff's favor in resolving the pending motions to dismiss, and has before it: (1) the Registration Statement, Doc. No. 45-1, (2) the Prospectus, Doc. No. 45-2, and (3) a Transcript of the May 31, 2017 Earnings Call for J.Jill Inc., Doc. No. 57-1.[1]

         Section 11 of the Securities Act of 1933 imposes liability in cases where “any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” 15 U.S.C. § 77k(a). Similarly, § 12(a)(2) imposes liability in cases where a prospectus or oral communication “includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading.” Id. § 77l(a)(2). “Claims under sections 11 and 12(a)(2) are therefore Securities Act siblings with roughly parallel elements” and often present two central issues: “(1) the existence of either a misstatement or an unlawful omission; and (2) materiality.” In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 359-60 (2d Cir. 2010).

         The First Circuit has held that “an actionable § 11 omission may arise when a registration statement fails to comply with Item 303 or 503 of SEC Regulation S-K.” Silverstrand Investments v. AMAG Pharm., Inc., 707 F.3d 95, 102 (1st Cir. 2013) (citing Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1202 n.3 (1st Cir. 1996)). Item 303 requires disclosure of “any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.” 17 C.F.R. § 229.303(a)(3)(ii). To survive a motion to dismiss on a failure to disclose theory, “a complaint must allege (1) that a registrant knew about an uncertainty before an offering; (2) that the known uncertainty is reasonably likely to have material effects on the registrant's financial condition or results of operation; and (3) that the offering documents failed to disclose the known uncertainty.” Silverstrand, 707 F.3d at 103 (internal quotation marks and citation omitted).

         Additionally, Item 503 requires that a prospectus “provide under the caption ‘Risk Factors' a discussion of the most significant factors that make the offering speculative or risky.” 17 C.F.R. § 229.503. Therefore, to survive 12(b)(6) dismissal, the complaint must “allege sufficient facts to infer that a registrant knew, as of the time of an offering, that (1) a risk factor existed; (2) the risk factor could adversely [a]ffect the registrant's present or future business expectations; and (3) the offering documents failed to disclose the risk factor.” Silverstrand, 707 F.3d at 103.

         However, the Supreme Court has held that in the context of § 11, “a sincere statement of pure opinion is not an ‘untrue statement of material fact,' regardless whether an investor can ultimately prove the belief wrong.” Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 135 S.Ct. 1318, 1327 (2015). For opinion statements, § 11 liability may attach in three cases: 1) “if the speaker did not hold the belief she professed, ” id., 2) “if the supporting fact she supplied [was] untrue, ” id., and 3) “if a registration statement omits material facts about the issuer's inquiry into or knowledge concerning a statement of opinion, and if those facts conflict with what a reasonable investor would take from the statement itself, ” id. at 1329. However, “[t]he reasonable investor understands a statement of opinion in its full context, and § 11 creates liability only for the omission of material facts that cannot be squared with such a fair reading.” Id. at 1330. To successfully plead a § 11 claim, the plaintiff therefore

must identify particular (and material) facts going to the basis for the issuer's opinion-facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have-whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.

Id. at 1332.


         The plaintiff alleges that the Registration Statement “contained untrue statements of material fact and omitted to disclose material information that was required to be disclosed pursuant to the regulations governing its preparation.” Doc. No. 40 ¶ 26. However, the complaint does not identify any statements in either the Registration Statement or Prospectus which the plaintiff asserts were factually untrue. Rather, the complaint asserts that the Registration Statement “created the misleading impression that the Company's unique business strategy had insulated it from adverse industry trends.” Id. ¶ 27. Therefore, the complaint alleges an actionable omission based on the failure to disclose five statements:

(i) that J.Jill's purportedly unique and superior sales and marketing approach had not insulated the Company from adverse trends affecting the overall retail industry; (ii) that J.Jill's historic gross margin growth was not sustainable and would not continue, as it relied on revenues from shipping fees, increased promotional efforts and other short-term boosts to revenues; (iii) that the Company was carrying increasing amounts of slow moving inventory and would need to significantly mark down sales items and increase promotional efforts in an attempt to continue its sales growth; (iv) that the Company's brick-and-mortar stores were failing, as they were experiencing difficulty attracting customers and maintaining profitability, which would result in the Company shuttering up to eight stores in fiscal year 2017, with the rate of store closures accelerating; and (v) that J.Jill's business, prospects and ability to service its long-term debt had been materially impaired.

Id. Using virtually the same language, the complaint alleges that the Registration Statement and Prospectus violated Items 303 and 503 by failing to disclose:

(i) that the Company's purportedly unique business strategy had not insulated J.Jill from adverse trends affecting the wider industry; (ii) that the Company would in fact have to increase promotions and markdowns to continue the rate of sales growth; and (iii) that J.Jill would have to shutter up to eight times ...

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