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In re Tyson Foods, Inc. Securities Litigation

United States District Court, W.D. Arkansas, Fayetteville Division

July 26, 2017

IN RE TYSON FOODS, INC. SECURITIES LITIGATION

          MEMORANDUM OPINION

          TIMOTHY L. BROOKS UNITED STATES DISTRICT JUDGE

         I. BACKGROUND

         The ready-to-cook chicken that you buy at your local grocery store is called a broiler chicken. Demand for broiler chicken has remained relatively constant, rising slightly but steadily since the 1950s. Furthermore, demand for broiler chicken has been inelastic; that is, insensitive to changes in price. The price for chicken may rise or drop, but the number of consumers who buy chicken remains about the same. As a result, industry-wide profitability is closely tethered to the price of chicken, rather than to expanding or contracting market demand.

         This characteristic of the market has historically caused a problem for chicken producers. When the price of chicken is high, producing broiler chicken becomes more profitable. Producers thus bring more chicken to market, increasing supply. The increased supply, coupled with the stable demand, then drives down the formerly-high price. Broiler chickens become less profitable, producers are forced to cut supply, and the price eventually rises again. The cyclical nature of the industry causes “brutal swings” in price, leading to “death matches between chicken producers.” (Doc. 43, ¶ 34 (alteration and quotation omitted)).

         Defendant Tyson Foods, Inc. is the nation's largest chicken producer, and was traditionally not immune to its industry's volatility. Indeed, for the ten-year period preceding the Great Recession, Tyson's chicken margins fluctuated between 1.2% and 7.0%, and in no two consecutive years was Tyson able to sustain an increase in profit margin. During this time, or more specifically from 2001-2008, the average price per chicken was $0.696/lb for “WOG Broilers”[1] and $0.615/lb for “grade A whole birds.” Id. at ¶ 206. But something changed for the industry and Tyson as the Recession took hold and the nation began its slow road to economic recovery. Industry chicken prices increased steadily, hitting an average of $0.967/lb for WOG Broilers and $0.852/lb for grade A whole birds between 2009 to mid-2016. Tyson's chicken margins increased substantially as well. For example, in 2014, Tyson achieved a 7.9% margin. A year later it had increased its margin to 12.0%, and in each of the first three quarters of 2016, Tyson posted margins above 13.0%.

         Tyson's financials and its stock prices increased significantly along with these improved margins. From fiscal year 2011 to fiscal year 2014, Tyson's chicken segment's annual operating income “rose from $164 million to $883 million, a more than five-fold increase.” Id. at ¶ 38. “In 2013 and 2014, Tyson's chicken segment achieved best-in-history earnings and record-breaking earnings per share.” Id. Tyson's $778 million profit in 2013, in fact, was a record high for the company. Id. at ¶ 205. On November 23, 2015, Tyson reported its fiscal year 2015 financial results. They included “full year chicken segment revenues of $11.39 billion and overall revenues of $41.3 billion, chicken segment net income of $1.36 billion and overall net income of $2.17 billion.” Id. at ¶ 281. The market responded favorably to these results, and Tyson's stock price rose from $43.65 on November 20, 2015, to $48.09 by close of market on November 23. Id. at ¶ 288.

         Tyson's record results continued into the next year. On February 5, 2016, Tyson announced its first quarter financials. It reported “chicken segment revenues of $2.63 billion, overall revenues of $9.15 billion, chicken segment net income of $358 million, [and] overall net income of $776 million.” Id. at ¶ 292. Once again the market responded favorably, and Tyson's stock price shot up from $51.95 on February 4, 2016, to $57.10 on the 5th. Id. at ¶ 302. Tyson's second quarter financials were similarly impressive. It achieved “chicken segment revenues of $2.73 billion, overall revenues of $9.17 billion, chicken segment net income of $347 million, [and] overall net income of $704 million.” Id. at ¶ 304. And, Tyson's third quarter results followed suit. Its August 8, 2016 disclosures listed “chicken segment revenues of $2.74 billion, overall revenues of $9.4 billion, chicken segment net income of $380 million, [and] overall net income of $767 million.” Id. at ¶ 323. In the days following this announcement, Tyson's stock price topped $75.00. Id. at ¶ 333. By September 22, 2016, its stock had reached a high of $76.76. Id. at ¶ 7.

         A. Tyson Credits Financial Success to New Strategy

         Tyson and certain of its executives attributed this financial success to a variety of factors. One was Tyson's decision to improve its “product mix” by increasing its offerings of “value-added products”; that is, processed chicken products that can be sold for a higher price than commodity chicken parts. Id. at ¶ 42. Frozen chicken fingers might be an example of such a product. As Defendant Donald J. Smith, Tyson's former President and CEO, explained in a 2015 conference call with investors, Tyson's “chicken business model is primarily value-added as a large branded component and is anchored in consumer insights and demand, and has only a small amount of commodity exposure.” Id. at ¶ 283. Defendant Noel White, Tyson's COO and former President of Poultry, echoed this sentiment in a 2016 press release, stating that Tyson had “upgraded its product mix into more branded, value-added items.” Id. at ¶ 321. Smith reiterated in early 2016 that Tyson was “finding ways to upgrade . . . raw material into value-added, high margin opportunities.” Id. at ¶ 298. Defendant Donnie King, who was Tyson's President of North American Operations and who Smith labelled “the architect” who had “led the charge” in expanding Tyson's chicken margins, declared in May of 2016 that Tyson “made a conscious decision” to change its business model to be “in a number one brand position” and to “add value to products.” Id. at ¶ 314. Defendant Dennis Leatherby, Tyson's CFO, described Tyson's business model as being in “a much better position, ” in August of 2016, “because [Tyson has] the value-added mix.” Id. at ¶ 328.

         Coupled with its efforts to change its product mix to include more branded, value-added items, Tyson implemented a newly developed “buy-versus-grow” strategy. Formerly, Tyson would grow-that is, raise from egg to slaughter-substantially all of the chicken it brought to market, rather than purchasing some of its chicken from competing producers. Indeed, as late as 2008, Tyson's then-CFO openly rejected the idea of purchasing some of its supply, stating, “we're not going to . . . go out and buy open market meat to subsidize other people's growth.” Id. at ¶ 158 (alteration omitted, ellipses in original) (quoting Tyson's then-CFO, Wade Miquelon). But by 2012, Tyson had adopted a markedly different strategy: it began buying chicken from other producers to re-sell to its customers. For example, where Tyson's value-added products called for just a part of the chicken-say, a breast-Tyson would purchase the part from another producer, rather than growing the whole chicken itself. By 2014, this strategy led Tyson to purchase over 4 million pounds of broiler chicken on the open market per week. This figure increased to approximately 10% of Tyson's chicken sales by late 2015, or about 17.6 million pounds per week. Id. at ¶ 160-61.

         The buy-versus-grow strategy, according to Tyson executives, had important benefits. For one, it allowed Tyson to better hedge against the cyclical price changes in the broiler chicken industry. As Smith explained in November of 2015, Tyson had “proven that by purchasing up to 10% of [its] chicken needs on the open market and further processing it into value-added convenience foods, [Tyson] can produce strong stable returns even in times of falling commodity chicken pricing.” Id. at ¶ 283. King described the strategy's benefit similarly: Tyson's business model is built “with the flexibility so that if chicken margins are really low, if there is excess supply . . . we go buy the raw material. In a situation where chicken might be tight, where sales came in much higher than what was projected . . . then we would grow the animal.” Id. at ¶ 316. White elaborated that “in oversupply situations, when commodity prices are low, we will go into the market and buy raw materials from a number of our competitors, take those products and add value to those through some type of further processing or cooking process.” Id. at ¶ 319.

         The buy-versus-grow strategy had another financial benefit for Tyson. Rather than growing a whole bird, Tyson could decide to buy only the most desirable parts of the animal-namely, the breasts-to be used in its value-added products. This meant that Tyson would not have to worry about selling the less desirable, and lower priced, portions of the bird-namely, the leg quarters. Smith remarked in February of 2016 that he couldn't remember Tyson ever “selling fewer leg quarters than we are today-and the Buy vs. Grow certainly plays a part of that.” Id. at ¶ 298. King confirmed this benefit a few months later, stating that Tyson doesn't “have excess chicken pieces or parts to sell.” Id. at ¶ 314.

         Tyson also attributed its increased financial outlook to cost-reduction measures. King declared in May of 2016 that Tyson had “taken well over $1 billion out of [its] cost structure.” Id. at ¶ 314. White acknowledged these savings a month later, explaining:

We've invested a fair amount of money in our plants and facilities to make sure those structures are right. We've invested in what we call one piece flow, which means that the production processes are all in flow. We gain from an efficiency standpoint, yield standpoint, and more processes we put in place, the better that we've gotten. So there's about $1 billion in costs that have come out of our system.

Id. at ¶ 319. Tyson complimented these cost-reduction measures with changes to its pricing structure. For example, Tyson “mov[ed] away from fixed price contracts in its chicken business and towards contracts that relied on spot prices, thereby allowing Tyson to benefit from rising chicken prices . . . .” Id. at ¶ 119. In 2009, Smith described this change as “dramatically” reducing “the amount of fixed-price contracts that we have over 90 days with our customers.” Id.

         B. Plaintiffs Attribute Tyson's Success to Antitrust Conspiracy

         Lead Plaintiffs Employees' Retirement System of the State of Hawaii (“Hawaii ERS”) and Blue Sky, [2] representing a proposed class of Tyson investors, have a different, more sinister, explanation for Tyson's sustained period of financial success. According to them, Tyson engaged in an industry-wide antitrust conspiracy aimed at depressing the domestic supply of broiler chickens, thus keeping prices and margins high. As described above, the broiler chicken industry is one characterized by steady, inelastic demand. When supply is low relative to the market's demand, chicken prices are naturally high. But, when chicken prices are high, producers make more money per chicken, creating an incentive for them to sell more chicken, lest their competitors gain market share by taking advantage of the high prices. The supply of chicken thus increases, correspondingly driving the price down. Paradoxically, then, it is advantageous for the industry as a whole to keep supply low (and prices high), but for the individual producers in the industry to increase supply when prices are high (consequently making prices low again). To counteract this paradox, chicken producers would all have to agree to keep supply low when prices are high, so that all can enjoy the high price of chicken without the risk of ceding market share to their competitors. This was the nature of the alleged conspiracy run by the broiler chicken industry, including Tyson, from 2008-2016.

         Crucial to the broiler chicken industry's alleged antitrust conspiracy-and to any antitrust conspiracy, for that matter-was the producers' abilities to monitor each other's activities, else rogue participants “cheat” by increasing supply on their unsuspecting cohorts. Enter Agri Stats, Inc., a company that according to Lead Plaintiffs provided just the tool to facilitate this monitoring. Its business model works as follows: Substantially all of the broiler chicken producers in America supply Agri Stats with a tremendous amount of detailed data about their operations. This includes data on sales prices and quantities, the sizes and characteristics of hatcheries and flocks, feed costs, and other operational and financial information. Agri Stats then compiles this data and organizes it into several categories, providing to subscribers not only the minutiae of the industry's finances and operations as a whole, but also that of individual producers.

         Though Agri Stats' reports are confidential to industry subscribers, a 2014 Agri Stats monthly report obtained by Bloomberg exceeded 500 pages and contained extraordinary detail. One page, for example, showed “an extensive revenue breakdown for 33 poultry plants, covering granular data in a number of areas, including product mixes-something most companies would characterize as proprietary.” Id. at ¶ 60 (alteration and emphasis omitted). The reports are “nominally anonymous, ” but contain such detail that “the producers can accurately identify the companies behind the metrics.” Id. at ¶ 61.

         With this monitoring tool in hand, Tyson allegedly planned the antitrust conspiracy with its competitors during a series of industry conferences. The industry's higher-ups, including Tyson executives, gathered at the National Chicken Council's annual meeting on October 2, 2008, in the midst of significant turmoil in the economy at large and the chicken industry specifically. Shortly thereafter, the industry's leading chicken producers began announcing cuts to production levels. Pilgrim's Pride, Perdue, Wayne Farms, and Sanderson Farms all made such announcements in late 2008. Tyson followed by announcing a 5% production cut in January of 2009. Later that month, Tyson's senior executives met with leaders from other major chicken producers at the International Poultry Expo in Atlanta, Georgia. Another round of production cuts across the industry followed. Similar meetings continued throughout 2009, and producers sustained the agreed-upon production cuts during that time.

         One of the methods used across the industry for cutting production was reducing the size of broiler breeder flocks. As its name implies, a broiler breeder is a hen that lays the fertilized eggs that become broiler chickens. From 2008 to 2009, the industry-wide broiler breeder population dropped from north of 58 million hens to south of 54 million. “Because Broiler breeder flocks are created from a limited pool of grandparent Broilers . . . it takes substantial time to re-populate a Broiler breeder flock that has been reduced through early slaughter.” Id. at ¶ 114. By reducing the size of their broiler breeder flocks, and by sharing that information through Agri Stats, participants in the alleged conspiracy could be assured of their allies' commitments to long-term production cuts.

         By mid-2009, these coordinated efforts had led to record high prices for WOG broilers. By mid-2010, the industry had enjoyed sustained high prices for a year. The price-per-pound for WOG broilers was $0.93 in May 2009, and $0.95 in May 2010. This consistent high price, according to Lead Plaintiffs, caused some conspirators to “lose discipline and start increasing production, as they had done in previous decades.” Id. at ¶ 124. An oversupply of chicken thus began to depress prices by late 2010, threatening to renew the price cycle that had previously plagued the industry.

         Tyson and its alleged co-conspirators sought to address this issue promptly. Following the January 2011 International Poultry Expo, “Tyson signaled the continuing need to cut supply of chicken in the United States.” Id. at ¶ 127. The industry responded by instituting another round of production cuts in the first half of 2011. For example, Cagle's “reported that it had begun a 20% reduction in production at a deboning operation, ” Sanderson Farms “announced that [it] would be delaying the development and construction of a North Carolina Broiler complex, ” House of Raeford “announced a 10% reduction in egg sets, ” Mountaire Farms “announced it was abandoning a 3-5% capacity increase, ” and Tyson itself “cut production by pulling eggs from its incubators to reduce Broiler volumes.” Id. at ¶¶ 127, 132. Production cuts continued throughout 2011 and 2012, as industry executives gathered at a series of conferences and events, giving them the opportunity to coordinate reductions. These cuts included further decreases to the size of the industry-wide broiler breeder flock. The number of broiler breeders stood at ¶ 2011 high of 56 million, but by late 2012 the flock had been reduced to around 49 million. With supply limited, the price of chicken rose accordingly, and the record profits detailed above soon followed.

         Two other facets of the alleged conspiracy are worth describing. The first involves the industry's efforts to suppress domestic supply by increasing exports. During 2013 and 2014, Mexico experienced an outbreak in the avian flu. This led to the culling of Mexican breeder hens, and gave the industry guise to further reduce the size of its domestic breeder flock by exporting breeders and their eggs to Mexico. Exportation continued through 2015, with Tyson noting in May that “it was sending 3% of its eggs to Mexico to ‘fill incubators.'” Id. at ¶ 173. This industry-wide practice is evidence of an antitrust conspiracy, per Lead Plaintiffs, because chickens hatched in the United States fetch a higher price than those born in Mexico. Thus, unless one producer could be sure that the others would also forgo the higher profits associated with American-hatched chickens, the exportation scheme would be individually disadvantageous.

         Later in 2015, the avian flu outbreak caused export limitations on American-hatched chickens. Facing decreased exports and a potential corresponding rise in supply, the industry undertook further measures to keep domestic supply low. Chicken producers allegedly began breaking eggs instead of setting them for growth. And, producers began “dumping” large quantities of chicken thighs in Vietnam, selling them for 29% less than they could obtain in the domestic market.

         Second, participants in the alleged antitrust conspiracy engaged in a scheme to manipulate the Georgia Dock-an important industry price index upon which a high volume of sales contracts (especially with grocers) were based. As the Complaint describes it, four indices tracked broiler chicken prices. Each index relied on producers to report the prices of their sales to customers, allowing the index to compile the industry-average price. The Georgia Dock was the most important of the four, as it influenced chicken prices for approximately 25% of the entire U.S. market. The Georgia Dock was also the only index that did not verify the sales prices reported to it by producers. When producers would report data to the other three indices, the indices had systems in place to assure that the reported prices were accurate. The Urner Berry and USDA indices had “double verification” systems, while the EMI index required actual sales invoices. Id. at ¶ 179. The Georgia Dock, in contrast, essentially operated on a system of good faith.

         Beginning in mid-2014, the broiler chicken price listed by the Georgia Dock began diverging significantly from the Urner Barry and USDA indices.[3] By January 11, 2016, the divergence between the Georgia Dock and the USDA indices reached a high of $0.46/lb. The Georgia Dock listed a price of $1.12/lb, while the USDA's listed price was only $0.66/lb. Id. at ¶ 182. This divergence, according to Lead Plaintiffs, is hard to explain absent industry collusion:

The Georgia Dock removes prices that are 1 cent above or below the weighted average reported by participating producers, meaning that in order to manipulate the index and drive it higher than the verified indices, there must be either a systematic coincidence of higher prices for long periods of time among the reporting companies, or collusion. Moreover, in calculating the weighted average price, the prices supplied by the largest producers are weighed more heavily than those supplied by smaller producers, meaning that the largest producers, which include Tyson, can manipulate the index by colluding only with each other.

Id. at ¶ 183. As reports of this divergence and allegations of manipulation became public, officials within the Georgia Department of Agriculture (“GDA”) raised alarms about the Georgia Dock's susceptibility to manipulation and the potential for antitrust problems. By late 2016, amid public speculation about the possibility of manipulation, the GDA began requiring that producers certify their reported prices via affidavits. Nearly all of the producers refused, and by early 2017, the Georgia Dock stopped operating.

         As the industry's alleged antitrust conspiracy bore fruits in the form of higher margins, profits, and stock prices, the Tyson executives named in Lead Plaintiffs' Complaint made millions selling Tyson stock. From November 23, 2015 through August 26, 2016, Smith sold 202, 901 shares, compared to only 10, 000 shares during the year prior; Leatherby sold 204, 229 shares compared to 8, 000 shares the previous year; King sold 486, 343 shares compared to 70, 000 shares; and White sold 309, 456 shares compared to 50, 680. All told, the four defendants collectively realized proceeds of nearly $75 million during the aforementioned time frame. Id. at ¶ 242.

         C. Tyson Stock Falls When Alleged Conspiracy Exposed

         The alleged conspiracy began to crest on September 2, 2016, when a group of customers in the broiler chicken industry filed a lawsuit in Chicago alleging an industry wide antitrust conspiracy to fix prices. See Maplevale Farms, Inc. v. Koch Foods, Inc., et al., No. 16-cv-08637 (N.D. Ill.) (Dkt. No. 1).[4] Then, on October 7, 2016, a veteran industry analyst at Pivotal Research Group issued a report supporting the theory that Tyson had been engaged in an antitrust conspiracy. The market reacted to the report immediately, and shares of Tyson dropped from $74.38 to $67.75 by the close of trading. Tyson's stock took another hit when the Wall Street Journal published an article on November 16, 2016, highlighting the Georgia Dock price manipulation allegations. The price-per-share fell from $69.02 to $66.70 by the close of trading. Five days later-if Lead Plaintiffs' allegations are to be believed-is when Tyson's chickens really came home to roost. On November 21, 2016, the company reported surprisingly poor results in its chicken segment. Net income had declined by $61 million compared to the prior year, and its margins dropped from over 12% to 7%. Furthermore, Tyson unexpectedly announced that Smith-its CEO-was retiring. The company's stock declined dramatically in response to these announcements, sliding from $67.36 to $57.60.

         D. Shareholder Suits Follow

         From October 17, 2016 through December 2, 2016, proposed classes of Tyson shareholders initiated four lawsuits against the company and certain of its executives. Cases filed in the Central District of California, Southern District of New York, and Southern District of Ohio were subsequently transferred to this Court, where the fourth case had been filed. On January 25, 2017, the Court issued an Opinion and Order (Doc. 33) consolidating the cases, appointing Hawaii ERS and Blue Sky as Lead Plaintiffs, and approving their choice of Bernstein Litowitz as lead counsel. The Court held a case management hearing on March 2, 2017, and on the same date issued a revised Scheduling Order (Doc. 42) giving Lead Plaintiffs until March 22, 2017 to file an amended complaint. The Order also set a May 3, 2017 deadline for Defendants to file a motion to dismiss, a May 26, 2017 deadline for Lead Plaintiffs to respond, a June 21, 2017 deadline for Defendants to reply, and a June 30, 2017 hearing on the anticipated motion to dismiss.

         Lead Plaintiffs filed their Amended Complaint (Doc. 43) on the deadline date. The Amended Complaint sets a class period of November 23, 2015 through November 18, 2016; names Tyson, Smith, Leatherby, King, and White as Defendants; and alleges violations of Sections 20(a) and 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder. More specifically, Lead Plaintiffs believe that Tyson's reported financial results, Defendants' representations about what accounted for those financial results, and Tyson's statements about the competitive nature of its industry, were all false and misleading. As expected, Defendants filed a Motion to Dismiss (Doc. 47) on May 3, 2017, contending that Lead Plaintiffs' Complaint fails to state a claim for which relief may be granted. Lead Plaintiffs' Response (Doc. 49) and Defendants' Reply (Doc. 50) were filed in turn, and the Court heard oral argument on June 30, 2017. Having considered the parties' exceptional briefings and their skilled presentations at oral argument, the Court now GRANTS Defendants' Motion to Dismiss.

         II. LEGAL STANDARD

         The general legal standard for evaluating a motion to dismiss brought under Rule 12(b)(6) of the Federal Rules of Civil Procedure is well known. The Court accepts all of a complaint's factual allegations as true, and construes them in the light most favorable to the plaintiff, drawing all reasonable inferences in its favor. See Ashley Cnty., Ark. v. Pfizer, Inc., 552 F.3d 659, 665 (8th Cir. 2009). The Court then asks whether the complaint contains “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)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. “A pleading that offers ‘labels and conclusions' or ‘a formulaic recitation of the elements of a cause of action will not do.' Nor does a complaint suffice if it tenders ‘naked assertion[s]' devoid of ‘further factual enhancement.'” Id. In other words, while “the pleading standard that Rule 8 announces does not require ‘detailed factual allegations, ' . . . it demands more than an unadorned, the defendant-unlawfully-harmed-me accusation.” Id.

         The legal standard in this case is different from the general standard in important respects. Section 10(b) of the Exchange Act prohibits the “use or employ, in connection with the purchase or sale of any security . . . [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 318 (2007) (alterations in original) (quoting 15 U.S.C. § 78j(b)). The SEC has implemented § 10(b) through Rule 10b-5, which makes it unlawful:

(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5. To sustain a Rule 10b-5 action, [5] a plaintiff must show “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Stoneridge Inv. Partners, LLC v. Sci.-Atlanta, 552 U.S. 148, 157 (2008); see also Minneapolis Firefighters' Relief Ass'n v. MEMC Elec. Materials, Inc., 641 F.3d 1023, 1028 (8th Cir. 2011) (quoting Stoneridge).[6]

         Perceiving that litigation brought under Rule 10b-5 was wrought with abuses and frivolities, such as “nuisance filings, targeting of deep-pocket defendants, vexatious discovery requests, and manipulation by class action lawyers of [their] clients, ” Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 81 (2006) (quotation omitted), Congress enacted the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Pub. L. No. 104-67; 109 Stat. 737. The PSLRA aimed to address these abuses by “install[ing] both substantive and procedural controls” for Rule 10b-5 actions. Tellabs, 551 U.S. at 320. This included the imposition of heightened pleading standards on Rule 10b-5 plaintiffs.

         First, “the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1); see also In re Cerner Corp. Sec. Litig., 425 F.3d 1079, 1083 (8th Cir. 2005) (“[T]he plaintiff must plead falsity by specifying each allegedly misleading statement and the reasons why each statement is misleading.”). To satisfy this heightened pleading standard, “a securities plaintiff often must plead the ‘who, what, when, where and how' of the misleading statements or omissions.” Cornelia I. Crowell GST Trust v. Possis Med., Inc., 519 F.3d 778, 782 (8th Cir. 2008) (quoting In re K-tel Int'l, Inc. Sec. Litig., 300 F.3d 881, 890 (8th Cir. 2002)).

         Second, the complaint must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2)(A) (emphasis added); see also McCrary v. Stifel, Nicolaus & Co., 687 F.3d 1052, 1056 (8th Cir. 2010) (“[T]he allegations should give rise to more than just a plausible or reasonable inference of scienter.”). “[I]n determining whether the pleaded facts give rise to a ‘strong' inference of scienter, the court must take into account plausible opposing inferences.” Tellabs, 551 U.S. at 323. The Eighth Circuit has stated that the “strong inference” requirement can be satisfied in three ways: “(1) from facts demonstrating a mental state embracing an intent to deceive, manipulate, or defraud; (2) from conduct which rises to the level of severe recklessness; or (3) from allegations of motive and opportunity.” Cornelia I. Crowell, 519 F.3d at 782.

         With these heightened pleading requirements in mind, the Court must still “accept Plaintiffs' factual allegations as true and . . . draw all reasonable inferences in their favor.” McCrary, 687 F.3d at 1056; see also Tellabs, 551 U.S. at 322 (“[F]aced with a Rule 12(b)(6) motion to dismiss a § 10(b) action, courts must, as with any motion to dismiss for failure to plead a claim on which relief can be granted, accept all factual allegations in the complaint as true.”); In re NVE Corp. Sec. Litig., 527 F.3d 749, 752 (8th Cir. 2008) (“[W]e accept all factual allegations in the securities § 10(b) complaint as true like any motion to dismiss for failure to plead a claim.”); Detroit Gen. Ret. Sys. v. Medtronic, Inc., 621 F.3d 800, 804-05 (8th Cir. 2010) (reciting the general 12(b)(6) pleading standard in a PSLRA case). The Court must also consider “sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice.” Tellabs, 551 U.S. at 322.

         The parties disagree about how the ordinary 12(b)(6) standard jives with the PSLRA's heightened standards in two respects. Before the Court can proceed to discuss the parties' substantive arguments, it must resolve these procedural disputes.

         First, Defendants suggest that “although reasonable inferences are generally drawn in a plaintiff's favor when considering a 12(b)(6) motion, that is not the case under the PSLRA when it comes to the matter of scienter pleading.” (Doc. 48, p. 17). Lead Plaintiffs, meanwhile, counter that it is perfectly appropriate for the Court to draw reasonable inferences in the scienter analysis. See Doc. 49, p. 70. Despite the parties' rhetorical disagreement, the scienter standard they set forth is substantively the same.

         The Court's obligation is indeed to draw reasonable inferences in the scienter context, but it is also to weigh those inferences against “plausible opposing inferences.” Tellabs, 551 U.S. at 323. The former cog of the operation is carried over from the 12(b)(6) standard, where the Court's obligation is to view the facts in the light most favorable to plaintiffs, and draw reasonable inferences therefrom. The Court would not normally draw opposing inferences as part of such an inquiry; that requirement is introduced into the evaluation by the PSLRA. Indeed, Defendants acknowledge that the PSLRA requires a weighing test, which (of course) presupposes inferences on both sides: those drawn in Lead Plaintiffs' favor and those drawn against them. See Doc. 48, p. 17. Thus, the Court believes Defendants' position is not actually that it would be improper to draw reasonable inferences in Lead Plaintiffs' favor, but that the Court must also draw opposing inferences. This appears to be Lead Plaintiffs' position as well, see Doc. 49, p. 69, and certainly reflects the Court's understanding. As the Supreme Court succinctly explained in Tellabs:

The strength of an inference cannot be decided in a vacuum. The inquiry is inherently comparative: How likely is it that one conclusion, as compared to others, follows from the underlying facts? To determine whether the plaintiff has alleged facts that give rise to the requisite “strong inference” of scienter, a court must consider plausible, nonculpable explanations for the defendant's conduct, as well as inferences favoring the plaintiff.

551 U.S. at 323-24.

         The parties' second disagreement pertains to the legal standard for evaluating Lead Plaintiffs' underlying allegation that Tyson participated in an antitrust conspiracy. Specifically, they disagree about whether Lead Plaintiffs must plead the facts of the alleged conspiracy with particularity. Compare Doc. 48, p. 45, with Doc. 49, pp. 57-58. The source of their disagreement once again arises from the intersection of the general pleading standard and the PSLRA's heightened pleading standard.

         As outlined above, a securities plaintiff must identify a defendant's allegedly false or misleading statements with particularity. To satisfy this requirement, the complaint should plead who made the false or misleading statement, what they said, when and where they said it, and how the statement was false or misleading. E.g., Cornelia I. Crowell, 519 F.3d at 782. A complaint may, for example, accuse Colonel Mustard of saying that his enterprise was incredibly profitable, on July 4, 2017, in the library, even though his business's profitability was only possible because it was a Ponzi scheme. The question the parties disagree on regards the “how” aspect of this inquiry: Must the underlying facts purporting to establish the allegation that Colonel Mustard's business was a Ponzi scheme be pleaded with particularity? Or is it sufficient to particularize only the allegation itself, with the underlying facts subjected to the less demanding general pleading standard?

         Defendants direct the Court to a string of cases applying the heightened particularity standard to underlying allegations of wrongdoing. See In re Immucor, Inc. Sec. Litig., 2011 WL 2619092, at *4 (N.D.Ga. June 30, 2011) (“Where false or misleading statements are based on the failure to disclose illegal activity, the allegations about the underlying illegal activity must also be stated with particularity.”); In re Mirant Corp. Sec. Litig., 2009 WL 48188, at *17 (N.D.Ga. Jan. 7, 2009) (“In cases alleging securities fraud based on the failure to disclose the existence of an underlying illegal scheme, the basis for the illegality must be pled with particularity.”); In re JP Morgan Chase Sec. Litig., 363 F.Supp.2d 595, 632 (S.D.N.Y. 2005) (“Plaintiffs contend that JPM Chase made material omissions in failing to disclose its violations of 18 U.S.C. Sections 215 and 1005. Plaintiffs have failed to allege with particularity that JPM Chase or its agents violated these statutes.”); see ...


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