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Hogan v. Pilgrim's Pride Corp.

United States District Court, D. Colorado

March 14, 2018

PATRICK HOGAN, Individually and on Behalf of All Others Similarly Situated, Plaintiffs,
v.
PILGRIM'S PRIDE CORPORATION, WILLIAM W. LOVETTE, individually, and FABIO SANDRI, individually, Defendants.

          ORDER ON MOTION TO DISMISS

          R. BROOKE JACKSON, UNITED STATES DISTRICT JUDGE

         This matter is before the Court on defendants Pilgrim's Pride Corporation's, William W. Lovette's, and Fabio Sandri's Motion to Dismiss the Amended Class Action Complaint, ECF No. 34. For the reasons discussed below, the motion is GRANTED.

         BACKGROUND

         This is a securities class action claim brought by lead plaintiff George James Fuller[1]against defendants on behalf of a purported class of investors in Pilgrim's Pride Corporation (“Pilgrim's”). ECF No. 29 at 1. According to the second amended complaint, which I will refer to simply as “the complaint, ” Pilgrim's is one of the largest producers and sellers of chicken in the United States. Id. at 11. Pilgrim's focuses on the production and sale of broilers, which are chickens under the age of 13 weeks that make up 98% or more of the chicken sold in the United States. Id. Pilgrim's is vertically-integrated, meaning that it owns or controls nearly all aspects of broiler production, from breeding, hatching, rearing, and feeding, to processing and selling. Id. at 13. The market for broilers is characterized by inelastic demand, meaning that demand does not meaningfully change when the price of the good changes, although a change in supply will change the price of the good. Id. at 12. As a result of broiler market characteristics, the price and supply of broilers have historically followed a “boom and bust” cycle, in which rising prices for broilers would incentivize rising production to capitalize on higher prices-the “boom.” Id. The resulting oversaturation in the market would lead to a decrease in prices, and thus a decrease in production-the “bust.” Id.

         Plaintiff's complaint alleges on information and belief that beginning in 2008, after “a particularly low trough in the ordinary business cycle” and following its emergence from a bankruptcy in 2009, Pilgrim's conspired with other major players in the United States broiler market to cut production, thereby limiting supply and ensuring prices would stay high. Id. at 22, 31-32, 138. According to the complaint, Pilgrim's and its co-conspirators conducted two coordinated production cuts, the first between 2008 and 2009 and the second between 2011 and 2012. Id. at 32. These production cuts were achieved through various means, including reducing eggs, reducing broiler breeder flocks, destroying chicks or eggs, temporarily or permanently shutting down facilities, and exporting eggs or chicks. Id. These coordinated cuts allegedly resulted in “an artificial stabilization in the industry even during a time of soaring feed costs.” Id. at 33. The complaint additionally alleges that Pilgrim's and its co-conspirators continued to depress supply to the United States in the period from 2013 to 2016 by increasing broiler exports and cutting production overall. Id. at 35-37.

         Plaintiff alleges that this broiler price-fixing conspiracy was facilitated through the conspirators' use of Agri Stats, a private reporting service that compiles detailed confidential data on nearly all aspects of broiler production including inventory, production, and pricing data. Id. at 23-25. According to plaintiff, Pilgrim's and its co-conspirators had the capacity to de-anonymize the Agri Stats data to determine which data corresponded to which industry member, thereby allowing the conspirators to track and coordinate their participation in the conspiracy. Id. at 26. Plaintiff also points to the “cliquish” nature of the industry and numerous industry conferences and events at which industry members may have associated to coordinate the production cuts at issue. Id. at 16-19.

         The final element of Pilgrim's price-fixing conspiracy, according to plaintiff, was the manipulation of the Georgia Department of Agriculture's (“GDA”) Georgia Dock Broiler pricing index, one of the three primary indices that tracks broiler prices.[2] Id. at 37. The Georgia Dock index price was compiled by a weekly telephone call to the top broiler producers in the state, who would report the price they offered to companies with whom they had contracts, such as grocery stores. Id. at 38. The Georgia Dock influenced “prices for roughly 25% of the entire U.S. Broiler market, ” but unlike the other two primary price indices, the Georgia Dock did not require verification of reported prices. Id. The Georgia Dock price was higher than the other two primary indices “nearly every day” between 2007 and 2016, and “diverge[d] sharply in 2011-2012 and during the class Period.” Id. at 39. Plaintiff alleges that this divergence between the Georgia Dock price index and the other two major price indices is evidence that the broiler industry was manipulating the index as part of the price-fixing conspiracy.

         According to the complaint, this multi-pronged conspiracy to cut production and raise broiler prices led to Pilgrim's ensuing financial stability and success and artificially increased the value of Pilgrim's securities. The crux of plaintiff's complaint is that during the Class Period between February 21, 2014 and November 17, 2016, defendants made untrue or misleading public statements by failing to disclose the price-fixing conspiracy and instead touting legitimate causes for Pilgrim's success. See Id. at 51-106 (citing annual and quarterly Securities Exchange Commission filings, press releases, and earnings calls throughout the Class Period referring, for example, to the chicken industry as “highly competitive” when in fact Pilgrim's had been allegedly colluding to inflate the price of chicken). Plaintiff asserts that “[d]efendants falsely assured investors that this stabilization was attributable to the implementation of its legitimate business strategy over the previous years, but this was not true.” Id. at 33. Plaintiff alleges that defendants' conspiracy came to light in a series of revelations in 2016, including a private antitrust class action complaint filed in the Northern District of Illinois containing evidence of collusion and price-fixing between 2008 and 2016. Id. at 21-22. Plaintiff also points to a subsequent analyst report about the case and two newspaper articles about the alleged conspiracy. Id. As a result of these revelations, according to plaintiff, the price of Pilgrim's securities dropped from $23.54 on September 2, 2016 to $18.61 on November 17, 2016 “and continued to slide” to the detriment of the company's investors. Id. at 107-10.

         Plaintiff thus raises three claims in his securities class action complaint: two claims for violations of § 10(b) of the Securities and Exchange Act (the “Exchange Act”) and Rule 10b-5 promulgated thereunder against all defendants, and one claim for violation of § 20(a) of the Exchange Act against defendants Lovette (Pilgrim's Chief Executive Officer and President during the Class Period) and Sandri (Pilgrim's Chief Financial Officer during the Class Period). Id. at 142-44. “Section 10(b) of the Exchange Act prohibits the ‘use or employ[ment], 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 Commission may prescribe.'” In re Gold Res. Corp. Sec. Litig., 776 F.3d 1103, 1108 (10th Cir. 2015) (citing 15 U.S.C. § 78j(b)). “[R]ule 10b-5 implements § 10(b) by making it unlawful 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 . . . not misleading . . . in connection with the purchase or sale of any security.'” Id. (quoting 17 C.F.R. § 240.10b-5)). Section 20(a) of the Exchange Act establishes liability for “[e]very person who . . . controls any person liable under any provision of this chapter or of any rule or regulation thereunder.” 15 U.S.C. § 78t(a). To establish controlling person liability, a plaintiff must establish both a primary violation and the alleged controlling person's control over the primary violator. Maher v. Durango Metals, Inc., 144 F.3d 1302, 1305 (10th Cir. 1998). Defendants move to dismiss all three claims. ECF No. 34. The motion has been fully briefed. ECF Nos. 35, 36.

         STANDARD OF REVIEW

         When “faced 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.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). “[C]ourts must consider the complaint in its entirety, as well as other 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.” Id.

         Complaints in civil actions generally should contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. (8)(a)(2). “A plaintiff suing under Section 10(b), however, bears a heavy burden at the pleading stage.” In re Level 3 Commc'ns, Inc. Sec. Litig., 667 F.3d 1331, 1333 (10th Cir. 2012). To state a securities fraud claim, a plaintiff's complaint must allege that:

(1) the defendant made an untrue or misleading statement of material fact, or failed to state a material fact necessary to make statements not misleading; (2) the statement complained of was made in connection with the purchase or sale of securities; (3) the defendant acted with scienter, that is, with intent to defraud or recklessness; (4) the plaintiff relied on the misleading statements; and (5) the plaintiff suffered damages as a result of his reliance.

Id. (citing Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1095 (10th Cir. 2003)).

         Prior to the passage of the Private Securities Litigation Reform Act of 1995 (PSLRA), Federal Rule of Civil Procedure Rule 9(b) governed the pleading requirements for securities fraud actions. City of Philadelphia v. Fleming Cos., 264 F.3d 1245, 1258 (10th Cir. 2001). Now, however, under the PSLRA, a heightened pleading standard applies to the first and third elements of securities fraud claims, also referred to as falsity and scienter, respectively. Id. Thus, with respect to falsity and scienter the PSLRA requires that:

(1) [T]he 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.
(2) [T]he complaint shall, with respect to each act or omission alleged to violate this chapter, 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)(1)-(2). In this case, defendants seek to dismiss plaintiff's complaint on the grounds that it fails to adequately plead falsity, scienter, and loss causation. ECF No. 34 at 2-3. Because the failure to plead falsity is dispositive, I need not consider the parties' arguments with respect to either of the remaining two elements.

         Although the parties agree that the PSLRA's heightened pleading standard applies to the element of falsity, they disagree about whether the heightened standard applies only to the allegedly misleading or untrue statements, or if it also applies to the facts that establish the alleged underlying price-fixing conspiracy. Compare ECF No. 34 at 7 (defendants arguing that “‘if the complaint fails to allege facts [with particularity] which would establish such an illegal scheme, then the securities law claims premised on the nondisclosure of the alleged scheme are fatally flawed'”) (quoting In re Mirant Corp. Sec. Litig., No. 02-CV-1467-RWS, 2009 WL 48188, at *17 (N.D.Ga. Jan. 7, 2009)) (alteration in original)) with ECF No. 35 at 9 (plaintiff asserting that “[t]he PSLRA's heightened pleading standards apply only to allegations ...


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