In re Wayfair, Inc. Sec. Litig.

471 F.Supp.3d 332

IN RE WAYFAIR, INC. SECURITIES LITIGATION

This Document Relates to: All Actions

Civil Action No. 19-10062-DPW

United States District Court, D. Massachusetts.

Filed July 8, 2020

MEMORANDUM AND ORDER

DOUGLAS P. WOODLOCK, UNITED STATES DISTRICT JUDGE

After Wayfair, Inc., an online home goods retailer, missed its quarterly financial projection by .002% one quarter, several individuals who say they consequently lost money in the stock market initiated the two lawsuits I have consolidated before me. This putative class action litigation is brought against Wayfair and its three most senior officers, all of whom also serve as directors, to recover those losses. Because I find Plaintiffs have not adequately alleged material misstatements of fact, demonstrated actionable scienter, or shown loss causation, I will grant Defendants’ motion to dismiss.

IBACKGROUND¹

Wayfair is a huge online home goods store. As online retail has grown and Wayfair has faced increasing competition, Wayfair has spent more and more money on advertising — $191 million in 2014, $278 million in 2015, $409 million in 2016, $550 million in 2017, and $774 million in 2018 — to leverage revenue. Revenue correspondingly increased: Wayfair's annual revenue was $1.32 billion in 2014, $2.25 billion in 2015, $3.38 billion in 2016, $4.72 billion in 2017, and $6.78 billion in 2018.

During the alleged class period (August 2, 2018-October 31, 2018), Wayfair's advertising-revenue leverage was worse (deleveraged) than in previous years. Plaintiffs assert that Defendants knew of this problem but concealed it from investors. The defendants, Plaintiffs contend, in fact made false statements to the public about Wayfair's financial position and, in particular, that defendant Niraj Shah, Wayfair CEO and President and Co-Chairman of the Board of Directors, made these false and misleading statements during this time period:

• So ad spend, if you look at it sequentially over the last few years, it continues to drift down .... the costs get less and less on the advertising.

• And what you see, no matter which way you cut, you can see systematically that actually as customers increasingly repeat, the effective ad cost to get them [to] come back goes down and those models are kind of self-learning .... [W]e're highly confident that we understand what each tranche costs us. And you pretty much clearly see it coming down.

• And we talked about advertising. We talked about the payback cycle and keeping that very tight .... But when you take the profit margin we talk about, and you multiply it by a very large top line, you start talking about a very significantly profitable company.

• The U.S. has now been EBITDA² profitable, 6 of the last 7 quarters .... you can actually see how growing very quickly actually evolves you into the profitable model.

Wayfair's stock price during the class period reached $151.20 per share on September 14, 2018. During that same time period, the individual defendants, Shah, Steven K. Conine, Co-Chair of the Board of Directors, and Michael D. Fleisher, Chief Financial Officer, collectively sold $69 million of their personally held Wayfair shares in dozens of transactions. The record before me does not clearly indicate whether this was unusual transactional activity for those individuals.

Before the stock market opened on November 1, 2018, the day Wayfair would be filing its 3Q 2018 SEC Form 10-Q, Defendants disclosed in a press release and a conference call that their 3Q results were worse than anticipated. In the conference call, Defendant Fleisher said that Wayfair's advertising had deleveraged in a year to year comparison between 3Q 2017 and 3Q 2018, from 11.8% in 3Q 2017 to 11.9% in 3Q 2018.³ According to the amended complaint, however, Defendants had "misleadingly signaled during the Class Period" that they were experiencing positive leverage. Defendant Fleisher explained during the call that the two factors driving the incremental expense which resulted in a loss were advertising spending, which was higher than usual because of paybacks ("we continued to see great opportunities within our paybacks") and headcount hiring.

On November 1, 2018, following that conference call, Wayfair stock suffered a 12.8% loss, closing at $96.16 a share. Wayfair had an EBITDA loss of $76.4 million, a net loss of $151.7 million ($1.69/share), and negative free cash flow of $58.8 million. Plaintiffs characterize these losses as "much worse than Defendants had signaled during the Class Period [August 2, 2018 – October 31, 2018]." On November 2, 2018, the stock price fell an additional 3.3%.

IIMOTION TO DISMISS STANDARD

As a general proposition, a complaint must assert factual allegations that are more than merely speculative in order to survive a motion to dismiss under Fed. R. Civ. P. 12(b)(6). Isham v. Perini Corp. , 665 F. Supp. 2d 28, 33 (D. Mass. 2009). In evaluating the plaintiffs’ allegations in the complaint, I may look only to the "facts alleged in the pleadings, documents attached as exhibits or incorporated by reference in the complaint and matters of which judicial notice can be taken." Id. at 33 (citing Nollet v. Justices of the Trial Court of Mass., 83 F.Supp.2d 204, 208 (D. Mass. 2000) aff'd, 248 F.3d 1127 (1st Cir. 2000) ). In evaluating the complaint, I must accept all factual allegations as true and draw all reasonable inferences in the light most favorable to the plaintiffs. Isham , 665 F.Supp.2d at 33 (citing Langadinos v. Am. Airlines, Inc., 199 F.3d 68, 69 (1st Cir. 2000) ).

More specific requirements are in play for securities litigation. The First Circuit has directed that "[t]o state a claim under Section 10(b) of the Securities Exchange Act, plaintiffs must adequately plead ‘(1) a material misrepresentation or omission; (2) scienter; (3) a connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation.’ " Metzler Asset Management v. Kingsley , 928 F.3d 151, 158 (1st Cir. 2019) (quoting In re Biogen Inc. Securities Lit. , 857 F.3d 34, 41 (1st Cir. 2017) ). In addition, "[a] complaint alleging a violation of 10(b) must also meet the heightened pleading standards of the PSLRA [Private Securities Litigation Reform Act], which requires that the complaint ‘specify each statement alleged to have been misleading’ as well as ‘the reason or reasons why the statement is misleading.’ " In re Biogen , 857 F.3d at 41 (quoting 15 U.S.C. § 78u-4(b)(1) ).

IIICLASS CERTIFICATION

Federal Rule of Civil Procedure 23(c)(1)(a) directs a court to act on a motion for class certification "[a]t an early practicable time." In light of the rigorous analysis I would be required to undertake in order to determine whether class certification is appropriate in this Private Securities Litigation Reform Act litigation, I am of the view that addressing the case at the threshold through a motion to dismiss is the best course. See generally 3 Newberg on Class Actions § 7:9 (5th ed.) ("Given the early nature of most motions to dismiss, courts will often handle them prior to deciding a motion for class certification."); cf. In re New Motor Vehicles Canadian Exp. Antitrust Litig. , 522 F.3d 6, 26–27 (1st Cir. 2008) ("[I]t is not uncommon to defer final decision on certifications pending completion of relevant discovery."). Accordingly, I follow the direction chosen by the defendants in first filing a motion to dismiss and consider the dispositive question whether the case, irrespective of class treatment, presents claims upon which relief may be granted.

IVSECTION 10(b) ALLEGATIONS

Plaintiffs allege securities fraud under § 10(b) of the Securities and Exchange Act. That section provides:

It shall be unlawful for any person, directly or indirectly ... (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

15 U.S.C.A. § 78j.

A. Whether Plaintiffs Have Pled Any Actionable Misstatements or Omissions

To state a claim for securities fraud, Plaintiffs must allege a material misrepresentation or omission. Metzler , 928 F.3d at 158. Under the Private Securities Litigation Reform Act, at the pleading stage a complaint "alleging securities fraud [must] ‘specify each statement alleged to have been misleading’ and ‘the reason or reasons why the statement is misleading.’ " Mehta v. Ocular Therapeutix, Inc. , 955 F.3d 194, 206 (1st Cir. 2020) (quoting 15 U.S.C. § 78u-4(b)(1) ). Plaintiffs allege four material omissions and approximately twelve actionable misstatements.

I examine each of the statements as part of a group of similar statements.

1. Statements Showing Defendants’ Confidence in Wayfair's Performance

Several of the defendants’ alleged statements are merely generalized expressions of confidence in Wayfair's performance. Those statements are:

• August 2, 2018 press release, Defendant Shah :

• "We are delighted with the progress that we are making and the way in which we are positioned to keep taking market share as dollars shift online."

• August 2, 2018 conference call, Defendant Fleisher :

• "We remain incredibly bullish about our business, both in the near term and long term. The investments we have been making to bring our customers the best possible offering are clearly working with strength across our customer KPIs [key performance indicators] and our market share growing, as a result."

Those statements are not actionable.

[C]ourts have demonstrated a willingness to find immaterial as a matter of law a certain kind of rosy affirmation commonly heard from corporate managers and numbingly familiar to the marketplace—loosely optimistic statements that are so vague, so lacking in

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