On May 11, 2016, the Southern District of New York dismissed in full a securities class action complaint filed against Simpson Thacher client Weight Watchers International, Inc. (“Weight Watchers”).
Judge Lewis A. Kaplan found that Plaintiffs had failed to allege an actionable misstatement or omission. The decision is significant because it emphasizes the high bar facing plaintiffs under the Supreme Court’s decision in Omnicare regarding alleged misstatements that are statements of opinion. Additionally, it clarifies that confidential witness allegations—which are appearing with ever-greater frequency in securities complaints—are not, without strong supporting evidence, sufficient to survive a motion to dismiss, particularly where the allegations are “speculative,” reflect only “personal view[s]” or are otherwise “grandiose and hyperbolic.” The decision further emphasizes that a public company is not liable to its investors merely because its business experiences negative trends—in other words, there is “nothing fraudulent about a disappointing year.”
Relying on unnamed “confidential witnesses,” Plaintiffs alleged that Weight Watchers concealed various negative trends from its investors—specifically, that it was facing stiff competition from free diet and weight-tracking apps and that attendance and enrollment at its in-person meetings was declining—which would prevent Weight Watchers from achieving its earnings targets. At the same time, Plaintiffs alleged, Weight Watchers pushed through a tender offer to repurchase common stock at an artificially high price from its investors, including from its (now former) CEO and CFO and its controlling shareholder Artal.
Weight Watchers’ motion to dismiss the complaint for failure to state a claim explained that no information regarding competition from free online apps or other trends had been omitted from or misstated in Weight Watchers’ communications with its investors. Rather, Weight Watchers fully disclosed competition from online apps, problems in aspects of its business and declining attendance and program enrollment trends in its financial statements and earnings calls, among other places. The motion also argued that the complaint failed to demonstrate scienter because the simple reality was that from a business and financial perspective, 2012 was a disappointing year for Weight Watchers for a myriad of reasons—such as a thwarted celebrity advertisement campaign and a struggling national economy that impacted consumer discretionary spending—none of which even hinted at fraud. Further, the motion argued that Plaintiffs had failed to link any of the stock price drops alleged in the complaint to any supposedly withheld information. Instead, the more logical explanation for these price drops was Weight Watchers’ lowered earnings guidance on those dates.
The Simpson Thacher team included Lynn Neuner, George Wang, Rae Adams, Rachel Sparks Bradley and Tyler Bernstein.