In re Party City Securities Litigation

147 F.Supp.2d 282

In re: PARTY CITY SECURITIES LITIGATION

No. CIV.A. 99-1353(AJL).

United States District Court, D. New Jersey.

May 29, 2001.

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Robert J. Berg, Bernstein Liebhard & Lifshitz LLP, Fort Lee, NJ, Joseph H. Weiss, James E. Tullman, Weiss & Yourman, New York, NY, for Plaintiffs.

Jeffrey Greenbaum, Sills Cummis Radin Tischman Epstein & Gross, P.A., Newark, NJ, for Defendant Party City Corp.

Stephen Greiner, Willkie Farr & Gallagher, New York City, for Defendant Party City Corp.

Jennifer L. Colyer, Fried Frank Harris Shriver & Jacobson, New York City, for Defendant David Lauber.

Bruce I. Goldstein, Saber, Schlesinger, Satz & Goldstein, Newark, NJ, for Defendant Steven Mandell.

Wayne A. Cross, Dewey Ballantine LLP, New York City for Defendant Steven Mandell.

OPINION

LECHNER, District Judge.

This is an action for securities fraud brought on behalf of purchasers of Party City Corporation ("Party City") common stock ("Party City Stock"), seeking damages for violations of Sections 10(b) ("Section 10(b)") and 20(a) ("Section 20(a)") of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 ("Rule 10b-5") promulgated thereunder, 17 C.F.R. § 240.10b-5, from Party City, Steven Mandell ("Mandell") and David Lauber ("Lauber") (collectively, the "Defendants"). The asserted class period is from 26 February 1998 through 18 March 1999 (the "Class Period"). Jurisdiction is alleged pursuant to 28 U.S.C. § 1331.

Currently pending is a motion to dismiss (the "Motion to Dismiss") the second amended complaint (the "Second Amended Complaint") pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure ("Rule 12(b)(6)").¹ For the reasons set forth below, the Motion to Dismiss is granted.

Facts²

A. The Parties

Party City is a Delaware Corporation with its principal place of business in Rockaway, New Jersey. Second Amended Complaint at ¶ 10. Party City is a retailer of party supplies which it markets through a nationwide network of discount stores. Id.

Mandell was the founder and former President, Chief Executive Officer and Director of Party City. Id. at ¶ 11. Mandell signed quarterly reports on Form 10-Q filed with the Securities and Exchange Commission (the "SEC"). Id. Mandell also issued statements on behalf of Party City. Id.

Lauber is the former Chief Financial Officer and Principal Accounting Officer and Director of Party City. Id. at ¶ 12. Lauber signed quarterly reports on Form 10-Q filed with the SEC. Id. Lauber also issued statements on behalf of Party City. Id.

B. Procedural History

This action is a consolidation of several cases filed against Party City, Mandell and Lauber³ seeking to recover for alleged violations of the Exchange Act.

By order, dated 13 September 1999, (the "13 September 1999 Order") plaintiffs (the "Plaintiffs") were directed to file a consolidated amended complaint (the "Consolidated Amended Complaint"). 13 September 1999 Order at 4. The 13 September 1999 Order further provided that within seven business days of service of the Consolidated Amended Complaint, the Defendants were to notify the Plaintiffs if they intended to move against the complaint and, if so, the basis for such a motion. Id. Within five business days of such notification, the Plaintiffs were required to advise the Defendants of their intention to either stand on the Consolidated Amended Complaint or to amend. Id.

On 18 October 1999, the Plaintiffs filed the Consolidated Amended Complaint. By letter, dated 27 October 1999, (the "27 October 1999 Letter") the Defendants notified the Plaintiffs of their intent to move to dismiss the Consolidated Amended Complaint, as well as the basis of such a motion. 27 October 1999 Letter, attached as Ex. B to the Greiner Aff. By letter, dated 3 November 1999, (the "3 November 1999 Letter") counsel for the Plaintiffs responded that they would "stand firm" on the Consolidated Amended Complaint. 3 November 1999 Letter, attached as Ex. E to the Greiner Aff.

On 3 December 1999, the Defendants served their motion to dismiss. Notwithstanding their previously stated decision to "stand firm" on the Consolidated Amended Complaint, the Plaintiffs included a footnote in their opposition to the motion asking for leave to again amend their complaint in the event the motion to dismiss was granted. Plaintiffs' Memorandum of Law in Opposition to Defendants' Motion to Dismiss at 38 n. 12, attached as Ex. W to the Greiner Aff.

On 22 February 2000, a status conference was held (the "22 February 2000 Status Conference"). When questioned about their request to amend the Consolidated Amended Complaint, the Plaintiffs responded that they had developed information they believed warranted further amendment. The Plaintiffs were subsequently permitted to file the Second Amended Complaint. The Second Amended Complaint was filed on 28 February 2000. Thereafter, the Defendants filed the instant Motion to Dismiss.⁴

C. Background

As stated, Party City is a retailer of party supplies. Party City operates a network of company owned retail outlets in the United States and its franchisees operated outlets in the United States, Puerto Rico, Canada, Spain and Portugal.

The allegations in the Second Amended Complaint are based upon an "investigation made by and through [counsel]." Second Amended Complaint at Preamble. The Second Amended Complaint alleges Defendants disseminated materially false and misleading information concerning the financial condition of Party City in order to artificially inflate the price of Party City Stock. Id. at ¶ 1. The Second Amended Complaint further alleges the financial and accounting systems employed by Party City were in disarray, causing the financial results reported by Party City during the Class Period to be materially inaccurate and overstated. Id. at ¶ 30. The Second Amended Complaint asserts that as a result of the alleged misrepresentations and omissions of the Defendants, the true operating status and financial condition of Party City was not known. Id. It is alleged this misinformation caused Party City Stock to trade at artificially high prices during the Class Period. Id.

1. Alleged Materially False and Misleading Statements

The following press releases, reports and statements are alleged to have been materially false and misleading.

a. The 26 February 1998 Press Release

On 26 February 1998, Party City issued a press release (the "26 February Press Release") announcing its 1997 fourth quarter and year-end results. Id. at ¶ 26. The 26 February 1998 Press Release stated net income for the fourth quarter of 1997 increased 137% to $7,305,000, or $.57 per "diluted share," compared with net income of $3,077,000, or $.29 per diluted share, for 1996. Id. The 26 February 1998 Press Release further stated net income for fiscal year 1997 increased 104% to $7,670,000, or $.64 per diluted share, compared to net income of $3,756,000, or $.38 per diluted share, for fiscal year 1996. Id. Commenting on the 1997 fiscal year results, Mandell stated:

We are delighted with the strong sales and earnings results Party City achieved in 1997. Despite our aggressive store opening schedule, we were able to manage our growth effectively, as evidenced by our improved operating margin. We are also very pleased with the 16% comparable store sales growth in 1997, compared with the 18% comparable store sales growth achieved in 1996. These solid results are testimony to the management team and the support systems we have put into place to manage our expansion.

As we head into 1998, we have already made significant head way in our aggressive store opening schedule. We have opened six company-owned stores this year, as compared to two store openings at this point last year. We have signed 38 leases for additional company-owned store locations to open in 1998. With such a healthy head start this early in the year, we are confident in our ability to accomplish our 1998 expansion plans.

Id. (quoting the 26 February 1998 Press Release) (emphasis in the Second Amended Complaint).

b. The 1997 Form 10-K

On 31 March 1998, Party City filed its 1997 Form 10-K (the "1997 Form 10-K") with the SEC. Second Amended Complaint at ¶ 28. In addressing its internal inventory controls, Party City stated:

The Company's management continuously reviews new and existing product selections to provide the widest and most current assortment of party supplies. In pursuit of this goal, management attends various industry trade shows including the National Annual Halloween Trade Show in Rosemont, Illinois and the Toy Fair in New York. In an effort to keep abreast of new and popular merchandise, management views presentations given specifically for the Company by its major vendors. The Company utilizes its inventory tracking system to give the purchasing staff constant feedback on customers' preferences.

All of the merchandise purchased by the Super Stores is shipped directly from suppliers to the stores. The purchasing decisions and inventory control are facilitated by the use of sophisticated point-of-sale inventory control technology. Almost all merchandise is bar coded either by the supplier prior to delivery or at the time of receipt at the store. Consistent with the Party City Super Store concept, almost all inventory is displayed on the shelves with little or no space used for stocking.

The MIS system is a vital tool for increasing the efficiency of store operations. The Company believes that its management information system is an important factor in allowing the Company to support its rapid growth and enhance its competitive position in the industry. Through the MIS system, store managers are able to quickly evaluate the sales performance of their stores and of individual items in their stores, while also replenishing stock...