Stock Plummets. Who’s to Blame?
When a stock price drops almost 75% in 20 months, it’s not shocking to discover a group of investors filed a lawsuit to recover losses. In August 2019 an appeals court issued an opinion in Municipal Employees’ Retirement System of Michigan v. Pier 1 imports, Inc., et al. The complaint: Pier 1 intentionally failed to timely disclose a substantial price markdown risk with rising inventory levels. During a period when new leadership worked to improve Pier 1’s on-line presence, things weren’t always rosy. Once Pier 1 announced the high inventory issue, their stock price, already sliding, dropped 12 percent overnight, and a second announcement caused the stock to plummet an additional 20 percent in just one day. The complaining party contended that Pier 1 leaders’ intentional misrepresentations about inventory resulted in securities fraud.
The trial and appellate courts disagreed ruling the investors had no securities fraud claim. A significant part of the opinion focused on complainants failing to prove “scienter,” a business law term meaning, “a mental state embracing intent to deceive, manipulate, or defraud.” The court’s analysis included, “Knowledge of high inventory does not necessarily equate to knowledge of significant markdown risk—an equally plausible inference is that Smith [CEO] and Turner [CFO] reasonably believed they could fix the excessive inventory problem without resorting to markdowns.” Municipal Employees’ Retirement System of Michigan v. Pier 1 Imports, Inc., et al.
A Riveting Court Opinion?
Think reading court opinions is boring? Admittedly, some opinions are as difficult to slog through as swampland in Louisiana, or maybe more appropriately, Fifth Avenue during the Christmas season. But when the court opinion begins with a quote from Coco Chanel, “Fashion changes, but style endures,” you must keep reading. While the opinion is not a page-turner, it does include a comparison of women’s fashion retail group Ann Taylor to Fort Worth-based furniture retailer, Pier 1 Imports. From a business law standpoint, the opinion cites a myriad of cases regarding scienter while applying the law to the current fact pattern.
The investors, in this case, were managing investments for a city’s retirement system. The motive behind the complex litigation may have been to help the retirees, or perhaps claimants felt the pressure of an investment decision gone bad. What we do know is not all investments are winners. Even when an investor researches a company, its leadership and watches economic and industry trends, the investor can still lose money. Hopefully, the Michigan retirees counting on this fund had managers with a diversified portfolio who analyzed financial statements and reviewed industry trends before investing.
Before you spend all your money on fashion or furnishings, or tape it under your Pier 1 table, seek the advice of experienced, successful investment advisors. Due diligence even in seemingly easy investments is a must, as is continued research and analysis. Diversify your portfolio, and evaluate your investments as the market and economy change. Most importantly, never let down your guard. Don’t rely on family and friends to provide advice. The traditional Ponzi schemes usually rely on family and friends to recommend their investments to others to perpetuate the securities fraud.
We hope your investments are sound and your rewards high. However, if you find yourself in need of a commercial lawyer or a breach of contract attorney, we are ready to put our decades of winning business law experience to work for you.
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For informational purposes, not part of the article: http://www.ca5.uscourts.gov/opinions/pub/18/18-10998-CV0.pdf