United States District Court, D. Minnesota
Beaver County Employees' Retirement Fund; Erie County Employees' Retirement System; and Luc De Wulf, Individually and on Behalf of All Others Similarly Situated, Plaintiffs,
Tile Shop Holdings, Inc.; Robert A. Rucker; the Tile Shop, Inc.; Timothy C. Clayton; Peter J. Jacullo III; JWTS, Inc.; Peter H. Kamin; Todd Krasnow; Adam L. Suttin; William E. Watts; Robert W. Baird & Co. Incorporated; Citigroup Global Markets Inc.; CJS Securities, Inc.; Houlihan Lokey Capital, Inc.; Piper Jaffray & Co.; Sidoti & Company, LLC; Telsey Advisory Group LLC; and Wedbush Securities, Inc., Defendants
Matthew L. Mustokoff, Esq., Kessler Topaz Meltzer & Check, LLP, Radnor, PA; Joseph Russello, Esq., Robbins Geller Rudman & Dowd LLP, Melville, NY; Bryan L. Bleichner, Esq., Jeffrey D. Bores, Esq., and Karl L. Cambronne, Esq., Chestnut Cambronne, PA, Minneapolis, MN, on behalf of Plaintiffs.
Wendy J. Wildung, Esq., Faegre Baker Daniels LLP, Minneapolis, MN; David Pearson, Esq., Winthrop & Weinstine, PA, Minneapolis, MN; Scott A. Edelman, Esq., Milbank Tweed Hadley & McCloy LLP, New York, NY; Daniel J. Supalla, Esq., Briggs & Morgan, PA, Minneapolis, MN, on behalf of Defendants.
MEMORANDUM OPINION AND ORDER
ANN D. MONTGOMERY, UNITED STATES DISTRICT JUDGE.
On December 12, 2014, the undersigned United States District Judge heard oral argument on Defendants Tile Shop Holdings, Inc., Robert A. Rucker, The Tile Shop, Inc., and Timothy C. Clayton's (collectively, the " Tile Shop Defendants" ) Motion to Dismiss [Docket No. 81]; Defendants Peter J. Jacullo III, Peter H. Kamin, Todd Krasnow, Adam L. Suttin, William E. Watts, and JWTS, Inc.'s Motion to Dismiss [Docket No. 86]; and Defendants Robert W. Baird & Co., Inc., Citigroup Global Markets Inc., CJS Securities, Inc., Houlihan Lokey Capital, Inc., Piper Jaffray & Co., Sidoti & Company, LLC, Telsey Advisory Group LLC, and Wedbush Securities, Inc.'s (collectively, the " Underwriter Defendants" ) Motion to Dismiss [Docket 90]. Beaver County Employees' Retirement Fund (" Beaver County" ), Erie County Employees' Retirement System (" Erie County" ), and Luc De Wulf (collectively, the " Plaintiffs" ) oppose the motion. For the reasons set forth below, the motions are granted in part and denied in part.
This securities class action seeks relief under the Securities Act of 1933 on behalf of all individuals who purchased Tile Shop Holdings, Inc. (" Tile Shop" or the " Company" ) common stock pursuant or traceable to the registration statements and prospectuses issued in connection with secondary public offerings on December 12, 2012 (the " December Offering" ) and June 5, 2013 (the " June 2013 Offering" ) (collectively, the " Offerings" ). Claims are also asserted under the Securities and Exchange Act of 1934 for those who purchased stock between August 22, 2012 and January 28, 2014 (the " Class Period" ). All of Plaintiffs' claims are generally premised on Tile Shop's failure to disclose related-party transactions and relationships.
This action is a consolidation of two cases originally filed in the United States District Court for the Southern District of New York that were transferred to the District of Minnesota on March 13, 2014. Order Defs'. Mot. Transfer [Docket No. 42]. Pursuant to a consolidation order, a Consolidated Amended Complaint [Docket No. 66] (" CAC" ) was filed on May 23, 2014.
Plaintiffs Beaver County, Erie County, and Luc De Wulf purchased Tile Shop common stock during the Class Period and were appointed as co-lead Plaintiffs on February 13, 2014 by the Honorable Katherine Polk Failla, United States District Judge for the Southern District of New York. CAC ¶ 14; Order [Docket No. 35].
Tile Shop is a speciality retailer of manufactured and natural stone tiles, setting, and maintenance materials headquartered in Plymouth, Minnesota. CAC ¶ 15. As of October 1, 2013, Tile Shop operated 80 stores in 25 states. Id. Robert A. Rucker is--and was, at the time of the Offerings and throughout the Class Period--the Chief Executive Officer (" CEO" ), President, director, and co-founder of Tile Shop. Id. ¶ 16. Rucker signed the registration statements issued with the Offerings. Id. The Tile Shop, Inc. (" TSI" ) is a Minnesota corporation wholly owned and operated by Rucker, who is its sole director and has sole voting and investment power in the securities it holds. Id. ¶ 17.
Timothy C. Clayton is--and was, at the time of the Offerings and throughout the Class Period--Tile Shop's Chief Financial Officer (" CFO" ) and Senior Vice President. Clayton also signed the registration statements issued with the Offerings. Id. ¶ 18. Together, Rucker and Clayton are referred to as the " Officer Defendants."
Peter J. Jacullo, Peter H. Kamin, Todd Krasnow, Adam L. Suttin, and William E. Watts are--and were at the time of the Offerings and throughout the Class Period--directors of Tile Shop who signed the registration statements issued with the Offerings. Id. ¶ ¶ 19, 21-24. Jacullo, Kamin, Krasnow, Suttin, and Watts are referred to as the " Director Defendants."
JWTS, Inc. (" JWTS" ) is a Delaware corporation wholly owned by Jacullo, who is its sole director and may be deemed to have sole voting and investment power over the securities it holds. Id. ¶ ¶ 19-20.
Robert W. Baird & Co., Citigroup Global Markets Inc., CJS Securities, Inc., Houlihan Lokey Capital, Inc., Piper Jaffray & Co., Sidoti & Company, LLC, Telsey Advisory Group LLC, and Wedbush Securities, Inc. (collectively, the " Underwriter Defendants" ) are investment banking firms that served as underwriters for the Offerings. Id. ¶ ¶ 26-34.
B. Background Facts
1. Tile Shop and Beijing Pingxiu
Tile Shop was co-founded by Rucker and Rodney Sill in or about 1985. Id. ¶ 67. Rucker and Sill co-owned the Company until Rucker acquired Sill's interest in or around 2002. Id. ¶ 41. As CEO and President, Rucker claimed to be personally involved in establishing international supplier relationships and sourcing materials for use in manufacturing Tile Shop products. Id. ¶ 176. Rucker traveled to Turkey, China, and other locations. Id. ¶ ¶ 40, 135. According to a former Tile Shop employee, Tile Shop's pre-Class Period CFO, Jim Beukelman, was responsible for setting up foreign entities to serve as middlemen with vendors based in Turkey and China. Id. ¶ 40. According to the same former employee, sometime during 2002, Rucker's brother-inlaw, Fumitake Nishi, began working for the Company. Id. ¶ 41. Around this time, Rucker tasked Nishi to scout vendors in China and they traveled to China together to negotiate with sourcing vendors. Id. ¶ 40.
Beijing Pingxiu (" BP" ), a Chinese export trading company, was formed on March 3, 2008 and was at that time owned by Jian and Pan Zhang (together, the " Zhangs" ). Id. ¶ ¶ 4, 43. Jian is related through marriage to Rucker's wife and Pan, who is Jian's son, is Rucker's nephew. Id. ¶ 168. As early as 2009, Tile Shop began receiving product from BP in China. Id. ¶ 48. Beginning in fiscal year 2011 and continuing until 2013, Nishi was employed as a purchasing supervisor for Tile Shop. Id. ¶ 169.
Late in 2011, Nishi purportedly acquired BP and Tile Shop began purchasing greater amounts of product from BP. Id. ¶ 43. In fiscal year 2011, 8.3 percent of Tile Shop product sold was purchased from BP. Id. This percentage grew to 32.2 percent in fiscal year 2013. Id. ¶ 159. In this time period, Nanyang Helin Stone Co. Ltd. (" Nanyang" ), a Tile Shop vendor, also began selling stone accessory products to Tile Shop. Id. ¶ 4. Nishi owned a majority interest in Nanyang. Id. ¶ 164. Tile Shop purchased $1.7 million, $2.1 million, and $2.8 million of product from Nanyang in fiscal years 2011, 2012, and 2013, respectively. Id. ¶ 164.
2. The Offerings
Tile Shop began trading on the NASDAQ on August 22, 2012 under the ticker symbol TTS. Id. ¶ ¶ 83-85. Interests in The Tile Shop LLC were exchanged for cash, promissory notes, and 32 million shares of Tile Shop common stock. Id. ¶ 85. Tile Shop conducted the Offerings to provide an opportunity for certain stock holders to cash out. Id. ¶ 89.
On about November 28, 2012, Tile Shop filed a Form S-1 Registration Statement, which, after amendment, was declared effective by the SEC on December 12, 2012. Id. ¶ 103. The following day, certain selling stockholders, including Tile Shop executives and directors, sold 5.175 million shares of common stock at $15 per share to the public. Id. ¶ 104. Of these shares, Rucker and TSI, Jacullo and JWTS, Suttin, and Watts sold 1,823,937 shares, in exchange for $27,359,055 in gross proceeds. Id. ¶ ¶ 105, 109.
On or about May 24, 2013, Tile Shop filed a Form S-1 Registration Statement, which, after amendment, was declared effective by the SEC on June 4, 2013. Id. ¶ 106. Again, on the following day, certain selling stockholders, including Tile Shop executives and directors, sold 4,887,500 shares of common stock at $24.25 per share to the public. Id. ¶ 107. Of these shares, Rucker and TSI, Jacullo and JWTS, Kamin, and Krasnow sold 1,715,000 shares, for $27,359,055 in gross proceeds. Id. ¶ ¶ 108-09.
C. The Gotham Report
On November 14, 2013, Gotham City Research (" Gotham" ) published a report that identified connections between Rucker, Nishi, Tile Shop, and BP that Tile Shop had not previously disclosed. Id. ¶ ¶ 159-61. Gotham's report claimed that Tile Shop's margins and profits were inflated and that its earnings were overstated due to favorable transactions between the related parties. Id. ¶ 160. That same day, ostensibly in response to the Gotham report, Tile Shop issued a press release announcing an investigation into its relationship with BP. Id. ¶ 162. The market reacted by Tile Shop's share price dropping by almost 39% on an unusually high volume of trading. Id. ¶ 163.
On January 28, 2014, Tile Shop filed a Form 8-K and an attached press release dated the previous day with the SEC. Id. ¶ 164. The press release disclosed the general relationship between Rucker and Nishi, and Tile Shop, BP, and Nanyang but denied that vendors were either over or underpaid through these relationships. Id. The press release also stated a number of steps the Company would or had already taken in response, including terminating Nishi's employment. Id. ¶ 165. The press release claimed that Tile Shop's internal investigation did not uncover any other related-party transactions requiring disclosure. Id. ¶ 166. Finally, the press release stated that the Company would " file an amended Annual Report on Form 10-K for fiscal 2012, which will include disclosure of Mr. Nishi's previously unknown ownership interests in BP and Nanyang, and the salary paid to Mr. Nishi as a Company employee." Id.
On February 28, 2014, Tile Shop filed its annual report on Form 10-K. Id. ¶ 168. Here, for the first time, the other relationships between Rucker's family members and BP, and Nishi and another business involved with Tile Shop, Best Cheer Stone Group LTD (" Best Cheer Stone" ), were publicly disclosed. Id.
Item 404 of Regulation S-K obligates public companies to disclose transactions with certain related parties, including the brother-in-law of a director or an executive, if the transaction exceeds $120,000. 17 C.F.R. § 229.404. Rule 4-08(k)(1) of Regulation S-X provides that " [r]elated party transactions should be identified and the amounts stated on the face of the balance sheet, income statement, or statement of cash flows." 17 C.F.R. § 210.4-08(k)(1).
Plaintiffs assert three claims against various defendants arising from the Securities Act of 1933 (the " 1933 Act" ). The claims are all generally predicated on the non-disclosure of Nishi's relationships with BP and Tile Shop. First, Plaintiffs allege Tile Shop, the Officer Defendants, the Director Defendants and the Underwriter Defendants violated Section 11 because the Registration Statements for the Offerings were inaccurate and misleading. Id. ¶ ¶ 201-09. Second, Plaintiffs allege Tile Shop, TSI, the Officer Defendants, JWTS, Inc., and the Underwriter Defendants violated Section 12(a)(2) because the prospectuses included untrue statements of material fact and failed to disclose material facts. Id. ¶ ¶ 210-17. Finally, Plaintiffs allege TSI, JWTS, Inc., the Officer Defendants, and the Director Defendants violated Section 15 by their status as control persons of Tile Shop. Id. ¶ ¶ 218-23.
In addition, Plaintiffs assert two claims against various defendants arising from the Securities and Exchange Act of 1934 (the " 1934 Act" ). The factual predicate of these claims also arises from the non-disclosure of Nishi's involvement with BP and Tile Shop. First, Plaintiffs allege Tile Shop and the Officer Defendants violated Section 10(b) and Rule 10b-5 for disseminating or approving false or misleading statements. Id. ¶ ¶ 224-27. Second, Plaintiffs allege the Officer Defendants, the Director Defendants, TSI, and JWTS violated Section 20(a) as controlling persons of Tile Shop. Id. ¶ ¶ 228-31.
A. Motion to Dismiss Standard of Review
Rule 12 of the Federal Rules of Civil Procedure provides that a party may move to dismiss a complaint for failure to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). In considering a motion to dismiss under Rule 12(b)(6), the pleadings are construed in the light most favorable to the nonmoving party, and the facts alleged in the complaint must be taken as true. Hamm v. Groose, 15 F.3d 110, 112 (8th Cir. 1994); Ossman v. Diana Corp., 825 F.Supp. 870, 879-80 (D. Minn. 1993). Any ambiguities concerning the sufficiency of the claims must be resolved in favor of the nonmoving party. Ossman, 825 F.Supp. at 880.
A pleading must contain " enough facts to state a claim to relief that is plausible on its face." Bell A. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). " A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw a reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009). Determining whether a complaint states a plausible claim for relief is " a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. " But where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged--but not 'shown'--'that the pleader is entitled to relief.'" Id. (quoting Fed.R.Civ.P. 8(a)(2)).
B. The 1934 Act
Plaintiffs assert a Section 10(b) and Rule 10b-5 claim against Tile Shop and the Officer Defendants, and a Section 20(a) claim against the Officer Defendants, the Director Defendants, TSI, and JWTS.
1. Section 10(b) and Rule 10b-5
Plaintiffs claim Tile Shop and the Officer Defendants disseminated or approved statements in SEC documents, press releases, and conference calls that they knew to be misleading by inclusion of misrepresentations and disregarded and failed to disclose material facts. Tile Shop and the Officer Defendants argue that, with the one exception of failing to disclose Nishi's involvement, Plaintiffs have failed to identify any actionable misleading statements or omissions made by Tile Shop. To the extent Plaintiffs identify the omissions of the Nishi relationship on the registration statements, Tile Shop and the Officer Defendants argue the claim fails due to lack of scienter.
Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, make it unlawful to use any manipulative or deceptive device or contrivance in connection with the purchase or sale of securities. Rule 10b-5 further makes it unlawful " [t]o 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 light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5(b). To proceed on claims under § 10(b) and Rule 10b-5, four elements must be established:
(1) misrepresentations or omissions of material fact or acts that operated as a fraud or deceit in violation of the rule; (2) causation, often analyzed in terms of materiality and reliance; (3) scienter on the part of the defendants; and (4) economic harm caused by the fraudulent activity occurring in connection with the purchase and sale of a security.
In re K-Tel Int'l, Inc. Sec. Litig., 300 F.3d 881, 888 (8th Cir. 2002).
a. Standard of Review
Section 10(b) and Rule 10b-5 claims are subjected to the heightened pleading standards imposed by the Private Securities Litigation Reform Act (" PSLRA" ). Private Securities Litigation Reform Act of 1995, 109 Stat. 737 (1995); Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 321, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). The PSLRA requires that the facts constituting the alleged violation and the facts demonstrating scienter--the defendant's intention to " deceive, manipulate, or defraud" --be pled with particularity. Id. at 313 (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194, n.14, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976)).
The PSLRA functions to heighten the pleading standard required to survive a motion to dismiss in two ways. First, " the complaint must '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.'" In re Hutchinson Tech., Inc. Sec. Litig.,536 F.3d 952, 958 (8th Cir. 2008) (quoting 15 U.S.C. § 78u-4(b)(1)). Next, " the complaint must, '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 ...