Alert March 22, 2012

Recent Securities Decisions

In re Smith & Wesson Holding Corp. Securities Litigation

The U.S. Court of Appeals for the First Circuit recently affirmed the grant of summary judgment in favor of a defendant in a securities class action, holding that the allegation that it had made false or misleading statements was not supported by the evidence.  In re Smith & Wesson Holding Corp. Sec. Litig., 2012 U.S. App. LEXIS 3259 (1st Cir. Feb. 17, 2012).  The class of stock purchasers claimed that Smith & Wesson falsely implied through various public statements that its reported sales figures were supported by strong existing demand.  Although the District Court had certified the class, it rejected the claims on summary judgment.

In affirming the District Court’s ruling, the First Circuit began by observing that “[p]urely forward looking statements … enjoy considerable protection” under the safe harbor provisions of the Private Securities Litigation Reform Act.  This did not end the court’s inquiry, however, because the public statements implied “that the sales numbers represented market demand at the time of the sales, which concerned past factual conditions.”

Nevertheless, the court held that there was insufficient evidence on two of the required elements for a Section 10(b) and Rule 10b-5 claim:  (i) a misrepresentation or omission and (ii) scienter.  First, it explained that using discounts and promotions is “neither inherently fraudulent nor always innocent; size, design, purpose, transparency, and history are all relevant.”  In this case, the class introduced no credible evidence showing that Smith & Wesson’s sales methods were “unusual, represented a significant percentage of the reported sales for the quarter, or were otherwise suspect.”  Indeed, the court observed that the class was “surprisingly light in quantitative evidence that the discounts exceeded what was traditional.”

Second, as to the allegation that the defendant delayed disclosing a change in demand, the court concluded that “Section 10(b) is primarily a fraud provision and a showing of either conscious intent to defraud or a high degree of recklessness is required.”  The class was required to, but could not, offer “evidence of subjective bad intent, or, alternatively, misstatements or omissions so blatantly improper that bad intent or recklessness can be inferred.”