District Of Delaware Partially Sustains Securities Fraud Case Against Automotive Parts Distributor For False Sales Growth Projections

On February 7, 2020, Judge Richard G. Andrews of the United States District Court for the District of Delaware granted in part and denied in part motions to dismiss a putative securities class action against an automotive aftermarket parts provider (the "Company"), certain members of its management (the "Company Individual Defendants"), a hedge fund that owned approximately four percent of the Company's shares, and the fund's Chief Executive Officer who was a member of the Company's board of directors. In re Advance Auto Parts, Inc., Sec. Litig., No. CV-18-212-RGA (D. Del. Feb. 7, 2020). Plaintiffs alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making misleading misstatements and omissions about the Company's projected growth and financial condition. The Court dismissed the claims to the extent it found them to be puffery or lacking sufficient allegations of falsity, but denied the motion with respect to claims based on statements related to projections and opinions regarding the Company's financial outlook.

Plaintiffs alleged that defendants made false and misleading statements and omissions regarding the Company's increased sales and operating margins in 2016 and 2017. Specifically, plaintiffs alleged that defendants knew that the Company's internal forecasts predicted negative growth when it had stated publicly that it projected growth in sales. The complaint identified 16 false or misleading public statements made in the Company's quarterly investor earnings calls and press releases. After categorizing each of the statements as (i) projection; (ii) opinion; (iii) puffery; or (iv) lacking in falsity, the Court allowed the claims based on projections and opinions to proceed, but dismissed claims based on puffery and statements lacking in sufficient allegations of falsity.

Projections: The Court first addressed statements constituting projections for the 2017 fiscal year, including, among others, statements that the Company will "deliver positive sales comp growth and a modest increase in operating margin"; that "comparable store sales will grow between 0% to 2%"; and that the "adjusted operating margin [will] increase between 15 basis points to 35 basis points for the year." Relying on information allegedly obtained from a confidential informant, plaintiffs alleged that the Company's internal projections for that period forecasted "growth of negative 3%." Although defendants argued...