Thursday, December 12, 2019

Conspiracy chicken must come before fraud egg in price-fixing case

By Rodney F. Tonkovic, J.D.

A Second Circuit panel affirmed the dismissal of a fraud complaint where an underlying antitrust conspiracy was not alleged with the required particularity. The complaint alleged that a poultry processor engaged in price fixing that was not disclosed in its filings, rendering them false and misleading. The court held, however, that where a fraud complaint claims that statements were rendered false through the concealment of illegal activity, the underlying illegal acts must be pleaded with particularity, and the complaint failed to do so (Gamm v. Sanderson Farms, Inc., December 10, 2019, Winter, R.).

Pullet pricing. The action was brought by shareholders in Sanderson Farms, Inc., a processor of fresh and frozen chicken. The market for the type of chicken at issue—ready-to-cook chicken available at grocery stores, or "broilers"—is marked by boom and bust cycles in which rising prices lead to an oversupply of chicken, while demand stays stable, forcing down the market price and leading to supply cuts until the price eventually rises and the cycle repeats. In 2008, however, Sanderson, and several other large chicken producers, colluded to manipulate the chicken price index by coordinating supply reductions.

According to the complaint, the producers agreed to keep supply low while chicken prices were high, thus extending the "boom" portion of the cycle. For its part, Sanderson destroyed breeder hens and eggs and dumped excess inventories in foreign markets. Sanderson and its co-conspirators also allegedly worked to inflate the price of chicken reflected in an index known as the Georgia Dock. The index price eventually departed so significantly from the pricing reflected in other indexes that it was permanently suspended in December 2016.

The shareholders asserted that Sanderson's failure to disclose the conspiracy rendered various statements issued between December 2013 and November 2016 misleading. The company's SEC reports and accompanying press releases during this period noted that it competed with other firms but failed, the complaint alleged, to disclose the collusive conduct and the potential litigation and regulatory scrutiny that could result. The matter came to a head when several antitrust complaints were filed against Sanderson and other producers in late 2016, leading ultimately to a significant drop in share prices.

Wings clipped by lower court. This case is one of several shareholder suits against chicken producers that followed the antitrust suits and subsequent share price drops. The second amended complaint, filed in mid-2017, alleged that Sanderson made statements that were false and misleading because they failed to disclose material adverse information and misrepresented the company's finances. The district court, noting that the case was similar to an unsuccessful suit against Tyson Foods, dismissed the complaint because it failed to support the conspiracy allegation with particularized facts.

Conspiracy and fraud claims are yoked. At issue on appeal was whether the facts of the underlying price-fixing conspiracy were required to be pleaded with particularity or whether the merely needed to meet FRCP Rule 8's lower plausibility standard. It is well-established that when making securities fraud allegations on information and belief, a party must plead material misstatements and omissions with particularity. The court held that the clear language of the PSLRA, the existing case-law, and the stated intent of the securities laws all indicate that, "when a complaint claims that statements were rendered false or misleading through the non-disclosure of illegal activity, the facts of the underlying illegal acts must also be pleaded with particularity." The district court's judgment was accordingly affirmed.

In this case, the court explained, the alleged fraud and the alleged anticompetitive conspiracy were inseparable. The nondisclosure claims were entirely dependent on the predicate allegation that Sanderson participated in an antitrust conspiracy, so particularized facts about the conspiracy were required to explain what made the statements false or misleading. The court pointed out here that district courts in the Second and other circuits have all concluded that antitrust schemes must be pleaded with particularity in follow-on securities actions. Continuing, the court said that this pleading standard also comports with the intent and public policy rationale behind the PSLRA of deterring strike suits and other actions of dubious merit.

In this case, the shareholders alleged that Sanderson engaged in anticompetitive conduct, but did not explain how that conduct occurred and if it affected trade, the court said. Specifically, there were no facts alleging that Sanderson or its peers actually reduced supply and that any reduction was through a tacit or express agreement; the mere parallel conduct that was alleged was insufficient to show an antitrust conspiracy. There were also no facts pleaded showing that Sanderson provided the Georgia Dock with any false information. In sum, the court said, the complaint attempted to establish fraud by innuendo, and its pleadings were, thus, insufficient.

The case is No. 18-0284-cv.