Lachman v. Revlon, Inc.

487 F.Supp.3d 111

Theodore LACHMAN, individually and on behalf of all others similarly situated, Plaintiffs,

v.REVLON, INC., Paul Meister, Debra Perelman, Victoria Dolan, Wendel F. Kralovich, Siobhan Anderson, Fabian T. Garcia, Juan R. Figuereo, and Christopher H. Peterson, Defendants.

19-cv-2859 (RPK) (RER)

United States District Court, E.D. New York.

Signed September 17, 2020

Joshua Lon Crowell, Casey Sadler, Pro Hac Vice, Glancy Prongay & Murray LLP, Los Angeles, CA, Phillip Kim, the Rosen Law Firm, New York, NY, for Plaintiffs.

Akash Mayank Toprani, Matthew A. Schwartz, Nicolas Bourtin, Sharon L. Nelles, Sullivan and Cromwell LLP, New York, NY, for Defendants.

MEMORANDUM & ORDER

RACHEL P. KOVNER, United States District Judge:

Plaintiffs in this putative class action have brought securities fraud claims against Revlon and various current and former Revlon executives. The claims arise out of defendants’ public statements about a system that Revlon implemented for tracking different areas of the company's operations with a single piece of software. The launch of that new software platform went poorly. It caused production delays, led to lost sales, and created a material weakness in the company's internal controls over financial reporting. These disruptions, in turn, led to a sharp decline in Revlon's stock price.

Revlon and its executives disclosed risks associated with adopting the new platform before the transition occurred. And they acknowledged harms from the flawed transition afterward. But plaintiffs contend that defendants downplayed the risks of moving to the new software platform before the transition and the severity of the impact on Revlon's business after the transition took place. In doing so, plaintiffs argue, defendants made material misrepresentations and omissions, in violation of Section 10(b) of the Securities Exchange Act of 1934 ("the Exchange Act"), 15 U.S.C. § 78j(b), and Securities and Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5. Plaintiffs also assert that the current and former executives named as defendants are civilly liable for the material misstatements and omissions under Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), which imposes "control-person" liability on individuals who directly or indirectly controlled persons or entities found liable for any violation of the Exchange Act.

Defendants have moved to dismiss this lawsuit under Federal Rules of Civil Procedure 9(b) and 12(b)(6). As explained below, defendants’ motion is granted. Plaintiffs have failed to adequately plead any material misstatement or omission of fact, as necessary for liability under Section 10(b) and Rule 10b-5. They have also failed to set out facts supporting a strong inference that the defendants acted with an intent to deceive, manipulate, or defraud, as required for liability under those provisions due to the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act ("PSLRA"). Plaintiffs’ claims against the individual defendants under Section 20(a) must be dismissed because of the failure of plaintiffs’ primary claims under the Exchange Act and Rule 10b-5.

BACKGROUND

The facts set forth below are taken from the amended Complaint and are assumed to be true for the purposes of deciding defendants’ motion to dismiss. See Simon v. KeySpan Corp. , 694 F.3d 196, 198 (2d Cir. 2012).

1. The Parties

Plaintiff Theodore Lachman filed this putative class action on behalf of himself and others who purchased or otherwise acquired Revlon securities from March 3, 2017 to March 28, 2019 (the "Class Period"). The defendants are Revlon, an international beauty cosmetics company whose shares are traded on the New York Stock Exchange, Am. Compl. ¶ 12 (Dkt. #21), and eight of the company's current and former executives. Defendant Paul Meister served as Executive Vice Chairman of the company from January 2018 to November 2018 and was Revlon's interim Principal Executive Officer from January to May 2018. Id. ¶ 13. Defendant Debra Perelman has served as the company's President and Chief Executive Officer ("CEO") since May 2018. Id. ¶ 14. She also served as Chief Operating Officer ("COO") from January to November 2018. Ibid. Defendant Victoria Dolan has served as Chief Financial Officer ("CFO") since March 2018. Id. ¶ 15. Defendant Wendel F. Kralovich served as Senior Vice President and as Chief Accounting Officer & Controller from October 2017 to December 2018. Id. ¶ 16. Defendant Siobhan Anderson served as Vice President, Chief Accounting Officer, Corporate Controller, and Treasurer from October 2014 to August 2017. Id. ¶ 17. Defendant Fabian T. Garcia served as the company's President and CEO from April 2016 to January 2018. Id. ¶ 18. Defendant Juan R. Figuereo served as CFO from April 2016 to June 2017. Id. ¶ 19. Finally, defendant Christopher H. Peterson served as Revlon's COO from April 2017 to July 2018, and as CFO from June 2017 to March 2018. Id. ¶ 20.

2. Revlon's Launch of a New Enterprise Resource Planning System

Revlon manufactures, markets, distributes, and sells beauty and personal-care products under multiple brand names worldwide. Id. ¶ 27. Like many large companies that operate across multiple segments of the supply chain, Revlon tracks its business activities using software known as an enterprise resource planning ("ERP") system. Id. ¶ 31. ERPs tie together processes such as accounting, procurement, project and risk management, compliance, and supply-chain operations and facilitate the flow of data between them. Ibid. Before 2014, Revlon utilized 21 separate ERP systems across 50 different entities. Id. ¶ 32; see id. ¶ 41.

In 2014, Revlon decided to combine its ERP processes through a single system called SAP that would be used across all of its business platforms. Id. ¶¶ 32, 41. To implement that upgrade, Revlon relied on the employees of a recently acquired subsidiary that was already using SAP. Id. ¶¶ 32, 34-35. The company's plan was to take the template that the subsidiary had used for its own SAP implementation and apply it to the operations of the newly merged company. Id. ¶¶ 34-35. Revlon created a team of about 100 people to the handle the transition, including IT consultants and subject matter experts. Id. at ¶ 34. But the team did not have experience using SAP in the retail context, nor had it applied SAP to manufacturing facilities as massive and complex as Revlon's. See id. ¶ 35.

As Revlon tested SAP before its rollout, it encountered problems implementing the software at its manufacturing facility in Oxford, North Carolina—the company's largest. Those problems led Revlon to delay company-wide adoption of SAP on four occasions. Id. ¶¶ 41-42. But problems with SAP continued even after the delays. Id. ¶¶ 43, 60-64. Revlon officials considered pushing back SAP's scheduled launch date yet again, but ultimately decided to move forward with the roll-out. Id. ¶ 44-45. SAP went live at Revlon's Oxford facility on February 1, 2018. Id. ¶¶ 46.

Almost immediately, Revlon experienced problems with SAP that impaired the company's manufacturing. Id. ¶ 54. One problem was that the systems for matters such as warehouse management and production were not properly integrated. Id. ¶¶ 55-56. Another was that Revlon had failed to adequately train its employees in the SAP system. Id. ¶ 48. As a result, the company had trouble resolving production problems as they cropped up. Id. ¶¶ 48-54. The production delays caused by the SAP roll-out created a massive backlog at the Oxford facility as orders went unfilled and items were lost in the production process. Id. ¶ 56. The Oxford plant's operations were set back by two months as a result. Id. ¶¶ 56, 58.

Revlon began a frantic effort to remediate the problems that the SAP launch had caused at the Oxford facility. Id. ¶¶ 66-67. High-level company officials convened "crisis management meetings" and allocated extra resources and money to address the situation. Id. ¶¶ 62, 68. Some employees worked seven days a week on the effort. Id. ¶¶ 62, 66. The company also brought in a former head of supply-chain management to help with remediation. Id. ¶ 66.

The company first publicly addressed the dysfunctional roll-out when it filed its 2017 Form 10-K on March 15, 2018.

Id. ¶ 70. The 10-K noted that the SAP transition had "disrupted the Company's business operations." Ibid. It stated that these disruptions "could have a material adverse effect on the Company's business, prospects, results of operations, financial condition and/or cash flows." Ibid. The 10-K also stated that Revlon could not "provide assurances that it will remedy the ERP systems issues in time to fully recover [lost] sales and/or that the ERP implementation will not continue to disrupt the Company's operations and its ability to fulfill customer orders." Id. ¶ 92. On the same day, the company hosted a conference call with investors and security analysts on which company executives discussed the SAP disruptions. See id. ¶ 71. Revlon executives continued to address the SAP roll-out in quarterly earnings reports and on conference calls when each of those reports was released. On the calls, Revlon executives acknowledged ongoing disruptions but emphasized the progress that was being made on remediation efforts and expressed confidence in the company's long-term prospects. See id. ¶¶ 73-75.

On March 18, 2019, Revlon disclosed that it was unable to timely file its annual report for 2018 because it had identified a material weakness in its internal controls over financial reporting ("ICFR") stemming from the SAP launch. Id. ¶ 77. The company stated, however, that it did not expect to restate its previously reported preliminary financial results for the year. Ibid. It also stated that it expected to file its annual report within 15 days. Ibid. Revlon's share price fell by approximately 6.87% on the announcement of this news. Id. ¶ 122.

Revlon filed...