Dismissal of Would-Be Class Suit Against Kid Brands Over Customs Compliance Affirmed
Nov. 18 –The U.S. Court of Appeals for the Third Circuit Nov. 15 affirmed the dismissal of a would-be securities class action accusing Kid Brands Inc.(KID) of misleading investors about the company’s financial performance and compliance with customs laws (Rahman v. Kid Brands, Inc. , 3d Cir., No. 12-4257, 11/15/13).
Judge Morton Ira Greenberg agreed with the lower court that plaintiff Shah Rahman failed to plead scienter with sufficient particularity under the Private Securities Litigation Reform Act.
Import Practices & Procedures
The appeals court explained that Kid Brands imports inexpensive infant furniture and products for resale. In December 2010, the U.S. Customs and Border Protection informed Kid Brands that it was conducting an assessment of its import practices and procedures. Subsequently, the Kid Brands board hired an outside law firm to investigate the company’s practices. However, the appeals court recounted, Kid Brands did not publicly disclose that it was subject to the CBP assessment or that it had hired the law firm.
On March 15, 2011, the appeals court said, Kid Brands disclosed that one of its subsidiaries had violated U.S. law by “misidentifying the manufacturer and shipper of certain products” and that it anticipated $7 million in fines to resolve issues arising from the CBP assessment. As a result, Kid Brands’ stock price fell significantly by the end of that day. Five months later, Kid Brands filed a Form 10-Q and issued a Form 8-K, indicating that two of its other subsidiaries had evaded custom duties, and that it estimated over $10 million in liabilities “for wrongful practices extending over a period of nearly five years.” As a result, Kid Brands’ stock price fell even more.
Rahman filed the would-be securities class action on March 22, 2011 against Kid Brands and its officers, alleging violations of 1934 Securities Exchange Act Sections 10(b), 20(a), and Rule 10b-5. The lower court dismissed Rahman’s first and second amended complaints, finding that Rahman failed to satisfy PSRLA’s heightened scienter pleading standard. Rahman appealed.
Affirming, the appeals court agreed with the lower court that Rahman failed to plead scienter with sufficient particularity. Specifically, the appeals court noted that to plead scienter, Rahman relied on the testimony of confidential witnesses. Finding that the confidential witnesses offered “little more than generalized allegations with few specifics and even less concrete support,” the appeals court concluded that discounting their testimony “is necessary in this case.”
Further, the appeals court held that Rahman’s allegations “cannot support the existence of” corporate scienter. We “neither have accepted nor rejected the doctrine of corporate scienter in securities fraud actions, and we do not do so now,” it explained.
The appeals court added that even if it were to recognize the doctrine of corporate scienter, Rahman’s case “would not come within the doctrine” and would not survive a dismissal motion.As such, the appeals court affirmed the lower court’s order, dismissing the second amended complaint with prejudice.
Rahman was represented by David A.P. Brower of Brower Piven, New York; Jeffrey W. Herrmann of Cohn, Lifland, Pearlman, Herrman & Knopf, Saddle Brook, N.J.; and Lewis S. Kahn and Kim E. Miller of Kahn Swick & Foti, Madisonville, La., and New York.
Kid Brands and the individual defendants were represented by Robert J. Del Tufo, Jay B. Kasner, Christopher R. Gette, Rachel J. Barnett, Matthew S. Barkan, and Andrew Muscato of Skadden, Arps, Slate, Meagher& Flom, Newark, N.J. and New York; Eric B. Fisher and Jeffrey Rhodes of Dickstein Shapiro, New York and Washington; Stefano V. Calogero of Windels, Marx, Lane & Mittendorf, Madison, N.J.; and Rebecca Brazzano, C. Dennis Southard IV, and David A. Wilson of Thompson Hine, Washington.