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(Article from Securities Law Alert, September/October 2018) 

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On October 3, 2018, the Fifth Circuit affirmed dismissal of a securities fraud action alleging that a grocery retailer made misstatements concerning the company’s  “commitment to transparency, quality and corporate responsibility,” among other alleged misstatements. Emps. Ret. Sys. v. Whole Foods Mkt., 2018 WL 4770729 (5th Cir. 2018) (King, J.). The court held these “generalized statements” constituted inactionable puffery even though the retailer had “built a brand around holding itself to higher ethical standards than its competitors.” The court found that a “reasonable investor” would not assess the company’s value based on such “self-serving statements.” Rather, reasonable investors would “rely on facts to determine whether” the company is in fact “transparent and otherwise holds itself to high standards.”

The Fifth Circuit also held that plaintiffs failed to allege loss causation. According to plaintiffs, the retailer’s financial statements were inflated as a result of companywide weights-and-measures-related overcharging violations. Plaintiffs contended that a July 29, 2015 stock price drop reflected a corrective disclosure of these alleged accounting misstatements, even though the market had been aware of the overcharging violations for several weeks. Plaintiffs alleged that “revenues failed to meet expectations because [the retailer’s] customers took exception to the possibility of being defrauded and voted with their feet.” But plaintiffs did not allege that “the disappointing sales numbers somehow represented customer dissatisfaction with [the retailer’s] accounting practices.” The court found plaintiffs’ theory of loss causation “conflate[d] the nonactionable weights-and measures fraud with the allegedly actionable securities fraud.” The court explained that even if the retailer had “not record[ed] the ill-gotten receipts as revenue,” the retailer’s customers “would have reacted just as negatively” to news of the overcharging violations and plaintiffs “would have suffered the exact same harm regardless of whether [the retailer] had overstated its revenue.” The Fifth Circuit concluded plaintiffs “fail[ed] to identify a decline in stock price that shortly followed a corrective disclosure.”