Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 1 of 53 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA - - DAVID SCHWARTZ, Individually and on Behalf of all Others Similarly Situated, : : : : : : Plaintiff, : : : v : : : : URBAN OUTFITTERS, INC., : RICHARD A. HAYNE, FRANK : J. CONFORTI, TEDFORD G. : MARLOW, DAVID W. McCREIGHT : and DAVID HAYNE, : : : Defendants. : CIVIL NO. 13-05978 Philadelphia, Pennsylvania September 19, 2014 1:51 p.m. - - TRANSCRIPT OF HEARING BEFORE THE HONORABLE L. FELIPE RESTREPO UNITED STATES DISTRICT JUDGE - - APPEARANCES: For the Plaintiff: JESSE S. JOHNSON, ESQUIRE STEPHEN R. ASTLEY, ESQUIRE Robbins Geller Rudman & Dowd, LLP 120 East Palmetto Park Road Suite 500 Boca Raton, FL 33432 DEBORAH R. GROSS, ESQUIRE Law Offices of Bernard M. Gross, PC 100 Penn Square East John Wanamaker Building, Suite 450 Philadelphia, PA 19107 Transcribers Limited 17 Rickland Drive Sewell, NJ 08080 856-589-6100 - 856-589-9005 Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 2 of 53 2 APPEARANCES: (continued) For the Plaintiff: COREY D. HOLZER, ESQUIRE Holzer & Holzer, LLC 1200 Ashwood Parkway Suite 410 Atlanta, GA 30338 For the Defendants: MARC J. SONNENFELD, ESQUIRE KAREN PIESLAK POHLMANN, ESQUIRE JASON H. WILSON, ESQUIRE Morgan, Lewis & Bockius, LLP 1701 Market Street Philadelphia, PA 19103-2921 GLEN A. BODZY, ESQUIRE MICHAEL D. SILBERT, ESQUIRE Urban Outfitters, Inc. 5000 South Broad Street Philadelphia, PA 19112-1495 - - - Audio Operator: Nelson Malave Transcribed by: Donna M. Anders - - - Proceedings recorded by electronic sound recording, transcript produced by computer-aided transcription service. Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 3 of 53 3 1 2 (The following was heard in open court at 1:51 p.m.) 3 THE COURT: Sit down, please. 4 I just want to make it clear that 5 notwithstanding the fact that Chelsea Stine allowed 6 everybody into the room, she is one of my law clerks. 7 She recently left Morgan but she’s not working on this 8 case, will not work on this case, and I will not discuss 9 this case with Ms. Stine. 10 Any questions about Ms. Stine? 11 MR. SONNENFELD: 12 MR. JOHNSON: 13 THE COURT: No, sir. All right. 14 defense counsel’s motion. 15 counsel. 16 No. MR. SONNENFELD: Okay. So this is Let me hear from defense If I may proceed, Your Honor, 17 I’m Marc Sonnenfeld from Morgan, Lewis and Bockius 18 representing the defendants. 19 are my colleagues Karen Pohlmann and Jason Wilson. 20 With me at counsel table Sitting behind them is Glen Bodzy who is the 21 general counsel of the defendant, Urban Outfitters, and 22 next to him is Michael Silbert who is the associate 23 general counsel. 24 25 This is a claim for alleged violations of the Federal Securities Law, Section 10b and 20(a) of the Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 4 of 53 4 1 Securities Exchange Act of 1934. 2 I would submit, Your Honor, for the absence of the 3 indicia of fraud that usually accompany a securities 4 fraud case. 5 This case is notable, Typically a securities fraud case follows the 6 announcement of large problems, such as a restatement, a 7 bankruptcy, an indictment, an FDA finding not to approve 8 a drug. 9 good news as I’ll explain. 10 Here this lawsuit followed the announcement of Urban Outfitters last year announced record 11 results -- and those two words, record results, are 12 important -- record results for the time period through 13 July 31st, 2013, more than half of the so-called class 14 period. 15 Plaintiff concedes that the Urban Outfitters’ 16 brand which is one of the Urban brands which plaintiff 17 claims was troubled, had comparable store sales that 18 increased by six percent and five percent for the first 19 and second quarters of 2014, which goes through July of 20 2013, and for the fiscal year of 2014, rather, which 21 were in 2013 at a time when the competitors were 22 struggling and had double digit declines. 23 24 25 THE COURT: Sorry. Ma’am, are you here for the Urban Outfitters’ case? (Pause in proceedings.) Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 5 of 53 5 1 MR. SONNENFELD: The results for the Urban 2 Outfitters’ brand were disclosed when the quarterly 3 results were announced during the putative class period, 4 so there was nothing secret about that. 5 This suit was filed because in the middle of 6 the third fiscal quarter of 2014, on September 9th, 7 2013, the company stated in an SEC filing that, "Thus 8 far during the third quarter of fiscal 2014, comparable 9 retail segment net sales are mid-single digit positive." 10 And those are the mid-single digit positive. 11 The market apparently had been expecting high 12 single digit positive, and Urban Outfitters’ stock price 13 declined, but this was just a mid-quarter update and 14 ultimately Urban Outfitters did report record sales for 15 that quarter which ended October 31st of 2013 and high 16 single digit results for the third fiscal quarter of 17 2014. 18 cases, the company had not imploded, it had done well. 19 In other words, unlike most securities fraud Now, having made this brief introduction, I’d 20 like to discuss briefly the heightened pleading standard 21 that applies here. 22 plaintiff’s complaint, it’s very important to keep in 23 mind that this is a securities fraud claim to which the 24 heightened pleading requirements of the Private 25 Securities Litigation Reform Act of 1995 apply. In evaluating the sufficiency of the That Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 6 of 53 6 1 makes the pleading standard here different from every 2 other kind of civil litigation of which I’m aware. 3 The plaintiffs’ averments are not just tested 4 against the Iqbal and Twombly standard for plausibility. 5 Under the PSLRA’s heightened standards which are even 6 higher than Rule 9(b), the plaintiff must plead 7 particularized facts based on reliable sources that 8 survive the motion to dismiss. 9 1995 -- 10 THE COURT: The PSLRA was enacted in Let me ask you, because 11 plaintiff’s counsel is going to stand up here and tell 12 me that those particularized facts begin at paragraph 13 87. 14 MR. SONNENFELD: Well, we would say that the 15 particularized facts are not particularized, and they’re 16 not particularized because they simply state in 17 conclusory terms that -- well, let me say, they rely 18 upon the testimony of so-called confidential witnesses. 19 They don’t tie the facts to any witness. 20 THE COURT: Well, the confidential witnesses 21 are identified as the store managers at the various 22 stores. 23 24 25 MR. SONNENFELD: They’re identified by the store managers. THE COURT: I understand you have a problem Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 7 of 53 7 1 with the Milwaukee manager who wasn’t there at the 2 relevant time. 3 MR. SONNENFELD: 4 THE COURT: Right. But -- So let’s discount that for the 5 moment. 6 as it were tethered to the testimony of the other store 7 managers? 8 9 What do you make of the statements or the facts Is that enough? MR. SONNENFELD: That’s not enough, Your Honor. 10 THE COURT: Why not? 11 MR. SONNENFELD: It’s not enough, and when you 12 look at the other cases, you look at the -- for example, 13 the Avaya case which is the leading case after the 14 Supreme Court decided Tellabs, you look at the more 15 recent case in the KidsCare, Kids case, the witnesses 16 are tethered to the facts. 17 specificity. 18 They deal with a degree of They tell how much things were off. Here you have three store managers, 500 19 stores, you have two on the West Coast and one on the 20 East Coast here. 21 generalized trends and nothing -- and this is 22 particularly important to show -- that any of them had 23 any communications with the senior management or with 24 the named defendants here. 25 Nothing to say that these are Unlike the other cases, none of them were Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 8 of 53 8 1 senior managers reporting to the CEO or the CFO. 2 are instead people at the store manager level. 3 some lower level responsibilities at the home office, 4 but none are reporting to the -- you know, to Mr. Hayne, 5 the CEO, or to Mr. Conforti who was the CFO or to Mr. 6 Marlow who is the -- the group president for the Urban 7 brand. 8 9 10 They One had And -THE COURT: What do I make of the analyst statements, if anything? MR. SONNENFELD: You don’t make anything of 11 the analyst statements, Your Honor, and for this reason. 12 The analyst statements are not statements by the 13 company, and we know from the teachings of the Supreme 14 Court that the company is not responsible for the 15 analyst statements. 16 unless there is some showing that the company was 17 intertwined with the analyst statements. 18 The company is not responsible And the cases from our Third Circuit that deal 19 with analyst statements are legion, and we can even go 20 back to the Burlington Coat case by -- opinion by then 21 Judge, now Justice Alito saying that -- that the company 22 is not responsible for -- you know, for the analyst 23 statements. 24 25 And we look at the Supreme Court decision in the Janus case, Justice Thomas’ case there. Defendants Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 9 of 53 9 1 in securities cases are only responsible for the 2 statements that they make. 3 And I believe we also have the more recent 4 decision by -- I think this is discussed in the 5 Cabletron case by the First Circuit and I believe in the 6 Swanson case by the Third Circuit, that the issuer is 7 not responsible for the analyst statements except in 8 rare circumstances where you’re intertwined with the 9 analyst statements. 10 We don’t have any of that here. So the fact 11 that the analyst may have expected double digit sales, 12 that is not -- that is not the fault of the company. 13 14 In fact, if I can make a hand-up here, I think this may help put some of this in perspective. 15 16 THE COURT: Thanks. Does plaintiff’s counsel have a copy? 17 MR. SONNENFELD: I have copies for them. 18 (Pause in proceedings.) 19 MR. SONNENFELD: I have broken out, and this 20 appears in the complaint, what was disclosed by the 21 company. 22 And here we see for the fourth quarter of 23 2013, we have -- which is the period ending January 24 31st, 2014, Urban Outfitters as a whole is up 11 25 percent. The Urban brand is up 11 percent. For the Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 10 of 53 10 1 first quarter of 2014, which ends April 30th, 2013, 2 Urban Outfitters as a whole is up nine percent. 3 Urban brand is up six percent. 4 are down 11 percent. 5 The Meanwhile, competitors The second quarter, which is the time period 6 ending July 31st, 2013, second quarter, 2014, the 7 company is up nine percent. 8 percent. 9 The Urban brand is up five Competitors are down 10.66 percent. So all of this information is available. It’s 10 all disclosed in the quarterly statements filed by the 11 company with the Securities and Exchange Commission 12 known as the 10-Qs available to the investing public. 13 And this is all disclosed. 14 Then, you know, on September 9th in the middle 15 of the third quarter, the company did in a 10-Q filing 16 announcing the second quarter results, did say that thus 17 far during the third quarter comparable retail segment 18 net sales are mid-single digit positive. 19 would have applauded that as good news in this industry, 20 and apparently the market was expecting double digit 21 sales. 22 Most people That is not because of the company, and, in 23 fact, when the -- when the quarter ended on October 31st 24 of 2014 -- of ‘13 -- October 31st, 2013, which is the 25 third quarter fiscal 2014, the company as a whole is up Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 11 of 53 11 1 seven percent even though the Urban brand was down one 2 percent and competitors were down 11.33 percent. 3 So the question is and what it comes back to 4 is, you know, where is the fraud here? 5 the Burger King commercial several years ago, where’s 6 the beef? 7 It’s almost like And where is -- where is the fraud here? And the suggestion that back in March of 2013 8 which is the beginning of the class period that Mr. 9 Hayne or Mr. Conforti, the CEO and CFO, or Mr. Marlow 10 are going to know how sales went or are going to go in 11 September of 2013 is -- you know, it’s ridiculous. 12 THE COURT: But what, if anything, do I make 13 in the plaintiff’s argument that Mr. Conforti and Mr. 14 Hayne, and I use their words, I believe they say dumped 15 stock in the amount of about $51 million? 16 MR. SONNENFELD: Well, let me deal with that 17 both on a legal basis and on a factual basis. 18 legal basis, let’s go back if we could to the decision 19 in the Burlington Coat Factory by then Judge, now 20 Justice Alito, so the opinion takes on a greater 21 significance because of the position the author -- 22 THE COURT: 23 MR. SONNENFELD: On a I get that, I get that. -- the author holds today. 24 In Burlington Coat -- and there are a lot of 25 similarities in Burlington Coat and this case, you have Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 12 of 53 12 1 similar industries and similar allegations, and there 2 the dismissal was affirmed. 3 although decided after the enactment of the PSLRA. It is a pre-PSLRA case, 4 But what Judge Alito said there was that in 5 today’s world much of executive compensation comes in 6 the form of stock and stock options. 7 executives are compensated. 8 there was a sale of stock is not enough to, by itself, 9 to establish scienter, and in Burlington Coat, Judge That’s how And the mere fact that 10 Alito rejected the allegations of scienter based on 11 stock sales. 12 The first post-PSLRA decision in the Third 13 Circuit to address this principle was the Advanta case, 14 a decision by then Chief Judge Scirica of the Third 15 Circuit, who reiterated what Judge Alito had said in 16 Burlington Coat in rejecting stock sales as a basis for 17 finding scienter, that this is how executives are 18 compensated and rejected that as a basis for finding 19 scienter. 20 Now, in Advanta, the Third Circuit said that 21 scienter could be established either through motive and 22 opportunity which can be shown by -- sometimes by stock 23 sales or by extreme recklessness and so forth. 24 25 Along came Tellabs and the world changed after Tellabs because Tellabs was the Supreme Court Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 13 of 53 13 1 pronouncement on how we -- how we show the pleading 2 stage scienter. 3 address the issue of scienter after Tellabs, which is 4 the Avaya case, and, again, Chief Judge Scirica and a 5 lengthy decision, Chief Judge Scirica abandoned motive 6 and opportunity as an avenue for showing scienter and 7 said, therefore, that stock sales alone are not enough 8 to show scienter. 9 addition to that. 10 And in the first Third Circuit case to You need something more, something in Now, let’s -- so that’s the standard and the 11 backdrop on stock sales, and we see that reiterated, you 12 know, most recently as in the -- the Rahman case 13 decision quite recently in the last year, 2013. 14 let’s look at the facts here. 15 16 The CFO, Mr. Hayne, is alleged to have sold shares in March of 2013. 17 18 But THE COURT: After the report was made, correct? 19 MR. SONNENFELD: 20 THE COURT: 21 MR. SONNENFELD: March of 2013 which is -- March 22nd -- March 25th. Right, right. This is after 22 the report of the -- of the fiscal -- of the end of the 23 fiscal year for the fourth quarter of 2013. 24 in that quarter in which the shares -- the sales were 25 made, sales were up six percent in the Urban brand, up And, again, Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 14 of 53 14 1 nine percent for the company, up five percent in the 2 next quarter for the Urban brand, up nine percent for 3 the company. 4 There are no sales by Mr. Hayne after March, 5 2013. 6 of 2013 knew what was going to happen in September of 7 2013 in this industry is ridiculous. 8 To suggest -- to suggest that Mr. Hayne in March 9 I mean, just as an aside, where my father had a clothing store on Germantown Avenue. 10 it until I was seven years old. 11 manage. 12 We lived above He had one store to The thought that he would have known in March 13 of a year what sales would be in September with one 14 store to manage is ridiculous, much less here to think 15 that Mr. Hayne, presiding over 500 stores in disparate 16 locations would know what sales would be six months 17 later, to attribute any -- any scienter to a sale made 18 six months before the so-called truth comes out in the 19 words of the plaintiffs, six months before the September 20 9th announcement, is just ridiculous. 21 Another fact about Mr. Hayne that appears in 22 the publically filed documents, if you look in the 23 proxy, and I think this is consistent with the teachings 24 by Judge Alito in Burlington and reiterated by Judge 25 Scirica in the Advanta and Avaya cases, Mr. Hayne Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 15 of 53 15 1 doesn’t get a salary. 2 his stock, and he sold some stock to do things we do 3 with our compensation, but that’s the form of 4 compensation. 5 He gets a dollar a year. He gets And I think what Judge Alito said about 6 compensation in Burlington and Judge Scirica said in 7 Avaya is certainly borne out by how Urban Outfitters 8 compensates Mr. Hayne here. 9 So the fact that he sold some shares six 10 months before the so-called truth comes out in the words 11 of the plaintiff, I think is just a leap of faith to tie 12 that -- and I would suggest that that would be 13 inconsistent with how the issue of stock sales has been 14 treated by the Third Circuit consistently even up 15 through the Rahman decision last year by Judge 16 Greenberg, so -- also affirming the dismissal of the 17 10b-5 class action. 18 As to Mr. Conforti, one thing that the 19 plaintiffs overlook as to Mr. Conforti, and he is the 20 CFO, is that Mr. Conforti exercised options. 21 each of the options that he exercised, he had to pay 22 what’s called a strike price and then there’s an 23 exercise price, the price at which the options were 24 exercised. 25 So for This all appears on Mr. Conforti’s Form 4s Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 16 of 53 16 1 which we attached as Exhibit 12 to our motion to 2 dismiss. 3 officer sells shares. 4 That’s a form filed with the SEC after an And if you look at the Form 4s for Mr. 5 Conforti, you’ll see that each of these was the exercise 6 of options. 7 a five-year period. 8 price from the exercise price and total up the sales, 9 you come to some $200,000, which is far less than what They were options that had been vested over And when you subtract the strike 10 the plaintiffs are attributing was the profit. 11 profit was some $200,000 and you divide that over a 12 five-year period and you look at Mr. Conforti’s level of 13 compensation to be the CFO of a public company. 14 The And, again it reflects the teachings of Judge 15 -- of Judge Alito when he decided -- now Justice Alito 16 in Burlington and Judge Scirica that this is how 17 executives are compensated, and this is not, you know, a 18 staggering amount of money. 19 So -- and, again, I believe that the stock 20 sales by Mr. Conforti, there was a sale of a small 21 amount in, I believe, April, and then some others, you 22 know, in September. 23 small amounts. 24 back to the hand-up and you look at the chart here, it’s 25 not like bad news. But, again, very -- you know, very So -- and, again, if you -- if you go Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 17 of 53 17 1 I mean, the plaintiffs like to make a big deal 2 out of, among other things, the ViroPharma case. 3 recent decision by Judge Jones. 4 ultimately had to announce that it didn’t get FDA 5 approval to extend the period of exclusivity for its 6 lead -- its lead drug that it manufactured. 7 news. 8 9 It’s a There, ViroPharma That’s bad And the issue in ViroPharma was, well, you knew the FDA wasn’t going to give you exclusivity 10 plaintiffs alleged. 11 times by the FDA you weren’t going to get exclusivity, 12 and here are six documents the plaintiff said in 13 ViroPharma where the FDA told you that you weren’t going 14 to get exclusivity, and, nonetheless, you made these 15 optimistic statements about getting exclusivity. 16 You knew that you were told five We don’t have any of that here. We don’t have 17 -- and this goes back to your question on particularity 18 -- we don’t have any documents -- we don’t have any 19 documents tying the plaintiffs, unlike the half dozen 20 documents that Judge Jones cited in ViroPharma. 21 don’t have documents. 22 We We don’t have anything other than the 23 untethered conclusions that the plaintiff puts in often 24 without even tying them to a specific former employer -- 25 just saying former employee said, and the particular -- Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 18 of 53 18 1 not showing how any particular former employee would 2 have had reason to know any -- any particular fact. 3 4 I think I might have cut you off. I’m sorry, Your Honor. 5 THE COURT: No, no. At the end of the day, 6 what you’re telling me is the news was -- was not as 7 good as it was expected, and that doesn’t lead us to 8 action -- something that can be sued over. 9 MR. SONNENFELD: That’s right. It was not as 10 good as could be expected. 11 anything that the company had said in the past. 12 what the plaintiffs have said is, well -- instead of 13 making -- even if it’s not in the statement case, the 14 plaintiffs may say, well, it’s an omission case. 15 what was -- you know, what was omitted? 16 It doesn’t render false I think But The company had disclosed what it’s required 17 to disclose. It had its quarterly filings with the SEC 18 which broke down sales among other metrics, you know, by 19 brand, by quarter, that was available. 20 this chart was available to the -- to the investing 21 public. 22 up up seven percent for the company as a whole. And even as it was for the quarter, they wound 23 THE COURT: 24 MR. SONNENFELD: 25 Everything on So what’s the right answer here? Well, the right answer, Your Honor, is the case should be dismissed. Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 19 of 53 19 1 THE COURT: With or without prejudice? 2 MR. SONNENFELD: Well, that’s also a good 3 question. 4 which the Court were to dismiss. 5 6 I would say it would depend upon the basis on THE COURT: You put me in -- you’re the expert. 7 MR. SONNENFELD: Okay. I would -- I would 8 have to concede, Your Honor, that if the case were 9 dismissed for a lack of particularity for having to meet 10 -- having failed to meet the pleading standard, if, for 11 example, they had not pled fraud with the particularity 12 required by the PSLRA or hadn’t pled a strong inference 13 of scienter as required by the PSLRA and the teachings 14 of Tellabs and Avaya, if that were the basis, then the 15 plaintiffs would be entitled to leave to replead in 16 order to try to meet that pleading standard. 17 On the other hand, if the Court were to 18 dismiss on a variety of other bases which are not 19 curable by amendment, then the dismissal, we would urge, 20 should be with prejudice. 21 some of the statements as being puffery, and that’s a 22 term that’s used here -- the statement’s just puffery 23 and it’s not capable of having -- being the basis of a 24 securities fraud case, well, the statement remains what 25 it is. If, for example, we challenge Amendment wouldn’t cure that. Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 20 of 53 20 1 We challenged some of the statements on the 2 basis of the PSLRA safe harbor for forward-looking 3 statements. 4 the Judge in any case were to grant a motion to dismiss 5 based on the -- the safe harbor of the PSLRA, then I 6 would submit that’s not curable by amendment, and, 7 therefore, leave to amend would not be required. 8 9 If the Judge, if Your Honor were to -- or So I think a simple answer to your question is it depends upon the basis for dismissal, but if the 10 basis for dismissal were the failure to meet the -- the 11 heightened pleading requirements, as much as I’d like to 12 say the plaintiffs are on their second bite of the 13 apple, because they had an original complaint and an 14 amended complaint, I think the -- I would not want to 15 invite the Court into an error, but -- 16 17 18 THE COURT: Would you suggest that maybe it would be futile? MR. SONNENFELD: I would suggest it would be 19 futile, and it certainly would be futile if the 20 dismissal were on the basis of the safe harbor or 21 puffery or a variety of other bases that we have made in 22 our motion. 23 I would -- THE COURT: Could these -- could the pleadings 24 in this, because they’re not particular enough, could 25 they be recast and make it particular enough to do what Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 21 of 53 21 1 2 we have to? MR. SONNENFELD: You know, I don’t know what 3 -- I’d say what they have here, no, based on what they 4 have here, no, they couldn’t be recast. 5 But remember the legendary lawyer, Nate 6 Richter, if you remember, he was a personal injury 7 lawyer, he died just before I clerked for Judge Lord on 8 this Court and Judge Lord had been one of his partners 9 and told this story where Nate Richter had a slip and 10 fall case before the Superior Court of Pennsylvania. 11 The law in Pennsylvania at the time was in 12 order to recover for a slip and fall you had to show 13 that there were hills and ridges on the ice which would 14 have put the property owner on notice. 15 And there was nothing in the record about 16 hills and ridges, and Mr. Richter appealed, and the 17 argument in the Superior Court, the panel said to Mr. 18 Richter, well, it’s not in the record. 19 going to do if we give you a new trial? 20 you give me a new trial and I’ll find hills and ridges. 21 What good is it And he said, So I -- I have never been able to fail to be 22 amazed by the inventiveness of the plaintiffs. So I 23 would submit an amendment would be futile, but I’m sure 24 that when they stood up, they would give you reasons why 25 an amendment would not be futile. And they would point Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 22 of 53 22 1 to cases where, in the event of the failure to meet the 2 heightened pleading requirements at least in the first 3 instance, the plaintiffs were given a chance at the bat 4 to try again, although it would be in this instance 5 their third bite at the apple. 6 THE COURT: 7 MR. SONNENFELD: 8 11 Thank you, sir. -- so I could go on, but I think if that -- if that -- 9 10 So -- okay. THE COURT: I think you’ve answered my question. MR. SONNENFELD: Okay. One other point I will 12 point out as well, if I could, is the plaintiff here is 13 an individual who purchased 100 shares. 14 many of the securities cases these days that are brought 15 by institutional plaintiffs with large holdings. 16 is a plaintiff with 100 shares. 17 hundred thousandths of a percent of the 146 million 18 shares that are outstanding. 19 infinitesimal amount of stock. 20 THE COURT: 21 MR. SONNENFELD: 22 THE COURT: 23 MR. SONNENFELD: This isn’t like This 100 shares is six This really is an So what do I make of that? It’s just -- What if I just --- it’s a point of 24 practicality here. It’s simply -- it’s simply a point 25 of practicality to this, and it -- it just demonstrates Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 23 of 53 23 1 that we’re off on an exercise that makes no economic 2 sense. 3 Thank you, Your Honor. 4 THE COURT: 5 (Pause in proceedings.) 6 THE COURT: 7 MR. JOHNSON: Thank you. Good afternoon. Your Honor, good afternoon, may 8 it please the Court, my name is Jesse Johnson. 9 the law firm of Robbins, Geller, Rudman and Dowd. 10 THE COURT: 11 MR. JOHNSON: I’m with Right. We are the Court appointed lead 12 counsel in this action. 13 With me today is Stephen Astley also of Robbins, Geller, 14 Deborah Gross of the law offices of Bernard M. Gross -- 15 THE COURT: 16 MR. JOHNSON: 17 We represent -- I’m sorry. How are you? -- and also Corey Holzer of Holzer and Holzer. 18 THE COURT: 19 MR. JOHNSON: How are you? We represent the lead plaintiff 20 here who is Mr. David Schwartz. 21 his hard-earned money into the common stock of Urban -- 22 of Urban Outfitters. 23 Mr. Schwartz invested Your Honor, respectfully, I would -- I would 24 think it’s a bit tacky to suggest that even a 100 share 25 purchase by Mr. -- by Mr. Schwartz is somehow not good Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 24 of 53 24 1 enough to bring an action. 2 THE COURT: I don’t think that’s what counsel 3 suggested. I think I understand what he suggested. 4 let’s talk about the specificity or lack thereof. 5 MR. JOHNSON: 6 THE COURT: So Sure, Your Honor. So point to me with some clarity, 7 start at paragraph A, what specific misrepresentations 8 do you attribute to the defendant and not to the 9 analysts. I have other questions about the analysts. 10 MR. JOHNSON: 11 THE COURT: Understood. So very specifically, what was 12 misrepresented by the defendants? 13 MR. JOHNSON: 14 Just to take a step back for one second, I’d be happy to, Your Honor. 15 leading -- so the class period begins on March 12th, 16 2013, and it goes through September 9th of 2013. 17 There’s references earlier, Urban Outfitters is a 18 retailer. 19 starts -- or, I’m sorry -- ends on January 31st. 20 even though we’re in the year 2013, there was the first 21 quarter and the second quarter of fiscal year, 2014. Like many retailers do, its fiscal year 22 THE COURT: 23 MR. JOHNSON: So Right. And so Urban Outfitters has a 24 number of brands under the corporate umbrella. The 25 Urban Outfitters’ Namesake Brand is the center of the Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 25 of 53 25 1 fraud here. It’s the largest of -- they have five 2 brands -- of the even the three larger brands. 3 you an idea, Your Honor -- 4 THE COURT: 5 MR. JOHNSON: 6 THE COURT: I read the complaint. Okay. To give I get it. Fine. Let’s get -- tell me with 7 specificity what was the -- what misrepresentations do 8 you rely on? 9 MR. JOHNSON: Understood. So with 10 specificity, and I’m happy to point Your Honor to a few 11 examples. 12 THE COURT: 13 MR. JOHNSON: 14 Yes. So, for instance, on -- this is paragraph 94, on March 11th of 2013 -- 15 THE COURT: 16 MR. JOHNSON: 17 THE COURT: 18 MR. JOHNSON: Hold on. Sure. 94. Okay. Defendant Hayne stated, "I would 19 say overall sales trends continue to be strong and very 20 much like what we saw in the fourth quarter and in the 21 holiday sales, and Urban," meaning the Urban brand, "is 22 basically on par with what we saw in the fourth 23 quarter." 24 25 Now, Your Honor, what’s going on here is that the Urban Outfitters’ brand is coming off a very solid Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 26 of 53 26 1 fourth quarter of 2013 and that’s leading into -- 2 THE COURT: 3 MR. JOHNSON: 4 THE COURT: 5 MR. JOHNSON: 6 THE COURT: 7 MR. JOHNSON: 8 9 10 11 12 13 14 15 Paragraph 94. 94, Your Honor. I’m sorry, 94. I’m at 94. This is defendant Hayne. Yes. Is -- It’s during a -- I would say overall -THE COURT: Okay. "Sales trends continue to be strong"? MR. JOHNSON: Correct, correct. So that’s what I’m pointing the Court to right now. THE COURT: So that -- and you’re telling me that the sales trends at that point were not strong? MR. JOHNSON: That’s correct, Your Honor. In 16 the -- in the complaint, we’ve spoken to numerous former 17 -- former employees of the Urban Outfitters’ brand. 18 These are store managers, department managers. 19 These are major metropolitan areas throughout 20 the country. 21 Angeles, California, even the Midwest in Milwaukee. 22 of these employees reported the same thing to us, they 23 all saw these -- these struggling trends at the store 24 level, and that began in early 2013. 25 We’re talking New York, New Jersey, Los All So in other words, Your Honor, you’re coming Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 27 of 53 27 1 off in the Urban brand a very strong fourth quarter and 2 the defendants are bragging going into March that the 3 sales momentum was continuing, and in reality, what 4 these -- what these employees are telling us is that the 5 sales trends had actually started to decline going into 6 this -- going into the class period. 7 8 THE COURT: Your papers, I think, suggest -- there are 500 stores, 500 retail -- 9 MR. JOHNSON: Well, Your Honor, the entire 10 company may very well have 500. The Urban brand has 11 about 230 stores. 12 located in the U.S. 13 America has 190 of the 230 stores. 14 most recent Form 10-K filed in April of this year. Of those 230 stores, about 175 are Another 15 are in Canada. 15 THE COURT: 16 MR. JOHNSON: So North That was as of the And you have four in the -Your Honor, we have what I would 17 -- what I would say is a representative sample, and it’s 18 also important, Your Honor, to keep in mind, so we’ve 19 only got witnesses from a handful of stores, fair 20 enough. 21 like all Urban Outfitters’ employees to an internal 22 computer system called the Intranet. 23 But, Your Honor, these witnesses have access, Now, that Intranet connects all of the stores 24 together around the country, North America, even the 25 world, and what it shows in the Intranet is it shows Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 28 of 53 28 1 every day updated daily sales figures. 2 employee from any store can access the Intranet on the 3 computer within the store and they can see not only 4 their store sales but also sales at other stores across 5 town -- 6 7 8 9 THE COURT: And so any Show -- where is that in the complaint? MR. JOHNSON: I’m sorry. So this -- you can find this at paragraphs 68 to 73, and in those 10 paragraphs, Your Honor, it explains how the Intranet -- 11 not Internet but Intranet is set up and it explains the 12 information available on that Intranet system. 13 the employees that we spoke to could see not only their 14 store sales but also sales throughout the rest of the 15 company at all the other stores. 16 And so In fact, there was what was called an Urban 17 sales page which was an aggregate of the total sales 18 within the company right there on one page. 19 see all of the North American segment, European segment, 20 right there for everyone to see. 21 You could And so, Your Honor, when, back in March, when 22 defendant Hayne is saying overall sales trends are 23 great, continue to be very strong, in fact, we’ve been 24 told by the witnesses and we’ve put in detail in the 25 complaint that that really was not the case. Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 29 of 53 29 1 Moving on to another example of a false 2 statement, Your Honor, at paragraph 95, and this is also 3 March 11, defendant Hayne again. 4 reason to believe that we couldn’t see a continued 5 decrease in markdowns." 6 He says, "There is no So right now he’s speaking to gross margins. 7 Urban Outfitters is coming to the market saying that 8 their profitability is as great as ever and that the 9 gross margins are up and the markdowns -- they don’t 10 have to institute as many sales. 11 Again, Your Honor, on the Intranet, every week 12 there’s a newsletter called "The Slant". 13 this is in the complaint. 14 paragraphs 68 to 73, and "The Slant" would disseminate 15 on a weekly basis what sales and promotions were being 16 dictated by the corporate executives here in 17 Philadelphia at the corporate offices, and that would go 18 to all the stores. 19 It’s -- and This is at -- again, within And our witnesses also told us that beginning 20 in 2013 continuing through the year that "The Slant" was 21 dictating greater markdowns, more promotional campaigns, 22 greater sale activity, and, again, this is to compensate 23 for the declining sales trends that the stores were 24 seeing. 25 the Intranet, to "The Slant" and including the And, again, Your Honor, everyone had access to Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 30 of 53 30 1 individual defendants would have access to the same 2 system. 3 Excuse me. Another example for a false 4 statement for you, sir. 5 paragraph 98, and this is March 11, 2013. 6 Defendant Marlow on -- this is "So I think we are in a pretty healthy place 7 right now, and I like it the way the trends that we see 8 in the market fashion-wise marry with the stories that 9 we are telling at point of sale." 10 What defendant Marlow is saying is that we 11 have the right product mix, the right fashion assortment 12 in our stores and it’s resonating with the consumer. 13 And, in fact, as I’ve just explained, the sales trends 14 and the need for markdowns and the need for promotional 15 activities says just the opposite. 16 Another statement, Your Honor, on paragraph 17 103, and this is from a UBS retail industry conference 18 on March 13th. 19 referring to the product mix, "Both Urban Outfitters and 20 Anthropologie will tell you that they, as we talk about 21 the archery target, that they are on target now." 22 This is defendant Conforti. Again And then quickly, Your Honor, just a couple 23 more examples. At paragraph 120, and this is the middle 24 of the class period, this is May 20th of 2013. 25 defendant Marlow, "In regard to the overall content of Again, Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 31 of 53 31 1 the Urban brand mix" -- again, the fashion mix -- "we 2 had good performance out of the fashion businesses in 3 North America and in Europe." 4 And then again, one last example, Your Honor, 5 paragraph 133, and this is from late in the class 6 period, from August 19th, defendant Hayne in talking 7 about the second quarter financial results. 8 9 "Turning to profits, higher sales, better initial margins, more compelling product and effective 10 expense control all combined to create record earnings. 11 The improvements in product led to higher full price 12 sell-throughs and lower merchandise markdowns." 13 Again, that stands in contrast to what the 14 witnesses are telling us what was going on on the ground 15 level, among the stores and what was obvious from the 16 sales data available on the Intranet. 17 And, Judge, these -- we know that these 18 statements were material -- I know that was brought up 19 before -- these statements were material to the market 20 and the analysts proved so. 21 following the company’s stock day in and day out, 22 quarter in, quarter out, they’re issuing reports every 23 quarter or so, after every, you know, earnings release, 24 after every 10-Q. 25 the fact that Urban Outfitters as a company and Urban These analysts that are They consistently pointed and praised Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 32 of 53 32 1 Outfitters as a brand was performing very strongly. 2 They highlighted the comparable sales growth, 3 which I haven’t explained that yet. 4 -- it’s in the amended complaint. 5 38 to 42. 6 the retail industry. 7 Sorry, it’s in the This is at paragraphs Comparable sales growth is a key measure in What it does is, it -- it shows the organic 8 growth occurring within the organization. So, in other 9 words, you factor out any growth from new store 10 openings, from acquisitions, from remodeling stores to 11 make them bigger. 12 one year, that same store base the next year, how much 13 have the sales grown? 14 called the same store’s growth or even comps. 15 You’re looking at one store base from That’s the comparable. It’s even And so what was going on here is that the 16 analyst reports quarter in and quarter out were 17 highlighting that Urban Outfitters’ comps were much 18 higher, you know, counsel had from the complaint what 19 the numbers broke down in terms of the company, the 20 brand and its competitors. 21 The numbers were much higher than the 22 competitors, and the analysts praised the company for 23 the fact that it was able to rise above the quagmire of 24 the teen retail market during the class period because 25 its fashion content was selling, its product mix was on Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 33 of 53 33 1 the mark, all these various things that the market was 2 being told by the defendants. 3 And in terms of materiality, Your Honor, the 4 question is whether the disclosure of an omitted fact 5 would have been viewed by the reasonable investor as 6 having significantly altered the total mix of 7 information. 8 case, Matrixx Initiatives vs. Siracusano. 9 That comes from the Supreme Court’s recent Here, Your Honor, the real sales trends going 10 on, the real markdowns, the real promotional activities, 11 those were all very material. 12 looking to invest in a retail company. 13 important to know if that company is, in fact, 14 maintaining sales growth, hitting the right marks with 15 their -- with their product line and getting their 16 customers in the door. 17 And these are investors It’s very And investors were led to believe just that. 18 The analysts confirmed it as they -- and if I could just 19 highlight for you a few of the analysts’ statements 20 during the class period. 21 On March 12th, it’s the beginning of the class 22 period, this is paragraph 62(b). Janney Capital Markets 23 wrote, "We believe the trends for spring are squarely in 24 Urban Outfitters’ sweet spot." 25 62(b), Your Honor. Again, that’s paragraph Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 34 of 53 34 1 2 3 4 5 Moving further into the class period, on May 21st, RBC Capital Markets -THE COURT: You’re telling me that these analysts relied on misrepresentations? MR. JOHNSON: Correct. They -- correct. The 6 defendants would have the market believe that coming off 7 a strong -- a strong holiday sales, you know, period in 8 December and January, that that momentum carried right 9 on through the class period. And this is at a time when 10 there was no momentum whatsoever in the teen retail 11 market which is the Urban Outfitters’ demographic, the 12 brand demographic. 13 Free People and Anthropologie skew strictly to 14 a female clientele, strictly to women and typically 15 older in their late twenties, thirties, forties. 16 market forces are much different for Free People and for 17 Anthropologie versus the Urban Outfitters’ brand. 18 So the And so while its competitors in the malls, 19 companies like Abercrombie and Fitch, Aeropostale, these 20 are the competitors we have in the complaint, they had 21 -- they were averaging quarterly comparable sales growth 22 of negative 11 percent. 23 At the same time, the defendants are saying that Urban 24 Outfitters’ brand business is -- is great, has continued 25 momentum, you know, great margins and that the product Their business was contracting. Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 35 of 53 35 1 assortment was right on the mark. 2 THE COURT: So the purpose of including the 3 analysts’ comments as it were as was suggested, they 4 were relying on misrepresentations by the defendants? 5 MR. JOHNSON: Yes, Your Honor. It shows the 6 materiality, which is the first element in the 10b 7 claim, that these statements were material and that 8 investors were absolutely paying attention to these 9 statements. 10 And if I could, Your Honor, turning to the 11 second element of the 10b claim which would be scienter. 12 Here, given what the -- the witnesses have told us, 13 there can be no doubt the defendants either knew or they 14 were reckless in not knowing which does suffice for 15 pleading scienter, in not knowing that -- 16 THE COURT: 17 MR. JOHNSON: 18 THE COURT: 19 MR. JOHNSON: Knew what? I’m sorry? Knew what? They -- they knew of the Urban 20 brand struggles throughout the class period, from March 21 all the way through September. 22 numerous indicia that have been pled into the amended 23 complaint. They knew -- and there’s 24 Again, at paragraph 68 to 73, the detail I 25 previously went over about what was available on the Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 36 of 53 36 1 Intranet and what the store managers or the department 2 managers saw. 3 beginning in early 2013. 4 unable to meet their sales targets. 5 They saw weakening sales performance They saw stores consistently They saw increased promotional activities and 6 markdowns to the extent where one of the former managers 7 thought that, given how many more markdowns and 8 promotions there were, that the entire culture of the 9 Urban Outfitters that he had known had now changed. 10 They saw that promotions were frequently being 11 extended on the back end and even started earlier than 12 expected. 13 a six-day or a week-long sale because they were trying 14 to counteract these declining sales trends. 15 For instance, a three-day sale may turn into They were trying to somehow get this product 16 off the shelves, and, in fact, the witnesses also 17 reported that they had storerooms, they had overflowing 18 sale racks. 19 items. 20 out of closets and out of back storerooms. 21 reported just a general desperation by managers that -- 22 that things just were not going well and that somehow 23 they needed to pick up the business. 24 25 They didn’t have enough racks for the sale They had product bursting at the seams, coming And they And, again, defendants would have known about this through the data available on the Intranet. They Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 37 of 53 37 1 would have known about the markdowns and the promotional 2 campaigns necessary during the class period because they 3 -- those very markdowns and promotional campaigns 4 emanated from corporate headquarters here in 5 Philadelphia and were sent to the stores using the 6 Intranet. 7 Also, Your Honor, in Urban Outfitters’ Form 8 10-K for the last couple of years, the defendants brag 9 about a sophisticated computer system that links 10 literally every cash register in every store in the 11 Urban Outfitters’ brand with the home office. 12 having this communication line, the defendants were 13 getting daily updates on exactly what was selling, how 14 the inventory levels were changing, how sales prices 15 would change and just the sales trends more generally. 16 And by And so, Your Honor, we would submit that when 17 you -- when you look at all of these facts collectively, 18 these indicia of scienter collectively which is what the 19 Supreme Court counsels in Tellabs and in Matrixx that I 20 cited earlier, they more than supply that strong 21 inference of scienter that defendants did know or at a 22 minimum were reckless, and recklessness suffices, that 23 what they were saying to the market was not true and was 24 misleading in that what was happening at the ground 25 level with the stores was much different than what was Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 38 of 53 38 1 being relayed to the market. 2 And one last indicia of scienter, Your Honor, 3 is that the defendants did sell $51 million worth of 4 stock during this class period. 5 one of the -- the indicia of scienter to be considered. 6 There’s no debate about that. 7 THE COURT: It’s -- it’s absolutely Well, what do you make of Mr. 8 Sonnenfeld’s argument, his rationale argument as to the 9 sale of the stock? 10 MR. JOHNSON: 11 herrings. 12 of -- 13 14 I think that they’re red I think that the fact that -- to be probative THE COURT: He would tell me that including that fact is a red herring. 15 MR. JOHNSON: That’s not true at all. The 16 motive and opportunity allegations are certainly to be 17 considered in looking at the picture being painted by 18 the complaint, looking at all of the indicia of 19 scienter. 20 at what stock sales happened during the class period, 21 what is alleged. 22 And so you can absolutely and you should look Now, these stock sales were also unusual in 23 both scope and in timing. As Your Honor pointed out 24 earlier, in March just a few days after the class period 25 begins, there were hundreds of thousands of shares sold, Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 39 of 53 39 1 bringing in millions of dollars, and then defendant 2 Conforti, just a few days before the class period ends 3 or a week or two before the class period ends, he then 4 liquidates all but one percent of his holdings. 5 And so we have $50 million, which is a massive 6 amount of money by defendant Hayne. Then we have 7 another million dollars-plus from defendant Conforti who 8 also liquidated 99 percent of his holdings during the 9 class period. And in the meantime, there hadn’t been a 10 single share of Urban stock sold by either of those 11 defendants in the 18 months prior to the class period. 12 And so what happened here, Your Honor, was 13 that these defendants cashed in on their fraud. 14 they did was when the share price was artificially 15 inflated because of their misrepresentations to the 16 market, as you alluded to earlier, they dumped 1.3 17 million shares of common stock onto the market, and 18 investors, such as my client, Mr. David Schwartz, then 19 used their retirement savings to purchase those shares 20 at artificially inflated prices. 21 What And then, Your Honor, I’d also like to address 22 the last element which would be loss causation. Loss 23 causation, ever since the Supreme Court’s decision in 24 Dura Pharmaceuticals vs. Broudo, it’s been abundantly 25 clear that there’s no heightened pleading requirement Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 40 of 53 40 1 for loss causation. 2 It’s -- the standard requires that plaintiff fairly put 3 defendants on notice of what his theory of loss 4 causation is. 5 just that. 6 It’s a Rule 8(a) notice pleading. And in the amended complaint, we’ve done By September, 2013, defendants could no longer 7 hide the struggles of the Urban brand. So, as was 8 referenced earlier, the second quarter Form 10-Q was 9 filed with the SEC on September 9th. September 9th 10 falls right in the middle of the third quarter. 11 in that 10-Q, defendants provided an update that 12 comparable sales growth, again, the most important 13 metric as one retail consultant firm has confirmed, the 14 most important metric in evaluating a retail -- you 15 know, a retail business’ stock. 16 And so The comparable sales growth for the third 17 quarter was tracking at mid-single digit positive. 18 comes after three consecutive quarters of nine to 11 19 percent comparable sales growth. 20 21 22 THE COURT: This So they weren’t doing as well as they had hoped? MR. JOHNSON: They weren’t -- they weren’t 23 doing as well. And what’s important here, Your Honor, 24 is that the analysts that same day immediately 25 pinpointed that it was the Urban brand that was dragging Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 41 of 53 41 1 down the sales growth at Urban as an entire company. 2 There were a few different analysts’ reports issued 3 between September 9th and 10th that pinpointed that. 4 These are at -- I can point Your Honor to paragraph 147 5 of the amended complaint. 6 Wells Fargo on September 9th issued a report 7 entitled "Urban Stalling but Anthro, Free People 8 Cruising." 9 running a fever. And that report stated, "Urban Outfitters Our talks with management indicate 10 that Urban Outfitters may have suffered from fashion 11 misses." 12 Oppenheimer that same day, September 9th, 13 noted in a report that, "The Urban Division was 14 lagging." 15 And Janney Capital Markets on September 10th 16 declared, "We believe the entire issue for Urban’s 17 slowing sales stems from the Urban Outfitters’ 18 Division." 19 Your Honor, when -- when this announcement was 20 made on September 9th, it was after the market had 21 closed. 22 plunged more than ten percent. 23 change per share to $38 and change per share. 24 were 14.1 million shares traded that day on September 25 10th. The very next day, on September 10th, the stock It fell from $42 and There That was eight times the average trading volume Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 42 of 53 42 1 of the previous two weeks. 2 shares, that’s more shares traded on a single day than 3 any other day in 2013 and in any other day since then in 4 2014. 5 In fact, those 14.1 million And so the amended complaint pleads the clear 6 causal link between what the defendants disclosed on 7 September 9th, which is that the comparable sales growth 8 was now way below what was expected and it was -- and it 9 had fallen precipitously from what it had been the 10 previous few quarters, contrasting that to what the 11 defendants had told us throughout the class period, 12 that, in fact, the assortment was selling well, that the 13 assortment was spot-on, that growth margins were up, 14 that markdowns were down and that generally the -- the 15 sales momentum had continued from the successful holiday 16 season right on through into the year 2013 which was -- 17 THE COURT: But what about every time the 18 companies don’t meet their numbers, don’t meet their 19 expectations? 20 its expectations, is that actionable? 21 Does every time a company doesn’t meet MR. JOHNSON: Not necessarily, Your Honor. 22 But here the fraud isn’t that they didn’t meet 23 expectations. 24 period, during those six months, they gave the market 25 every indication to believe that -- The fraud is that throughout the class Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 43 of 53 43 1 2 THE COURT: They would hit their numbers. They were going to hit their numbers. 3 MR. JOHNSON: It wasn’t just that they were 4 going to hit their numbers, Your Honor. 5 they had picked out the right product assortment, that 6 they had continued sales momentum and that generally the 7 company and the brand in particular were doing well. 8 But, in reality, as the witnesses have told us and as 9 we’ve pled in detail in the complaint, that was not the 10 11 It was that case. When you look at the sales data that’s 12 available on the Intranet, when you look at "The Slant" 13 which is the weekly newsletter that -- that gives the 14 promotions and the markdowns for each quarter, it was 15 getting worse and worse. 16 all of the year 2013 than it had been in the months 17 prior, and that’s the fraud, Your Honor. 18 THE COURT: 19 MR. JOHNSON: 20 THE COURT: 21 22 It was significantly worse in So where do we go from here? Your Honor -What’s the right answer? Same question, what’s the right answer? MR. JOHNSON: -- the right answer is that 23 we’ve -- that the amended complaint has met the 24 heightened pleading requirements, that we’ve pled in 25 particularized detail exactly what the plausible claim Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 44 of 53 44 1 of fraud is, that the amended complaint should be 2 sustained and that we get to move forward with discovery 3 so that we can get the evidence to prove these claims. 4 THE COURT: All right. 5 MR. JOHNSON: 6 MR. SONNENFELD: Thank you, Your Honor. Well, if I may reply briefly, 7 Your Honor, I think that Mr. Johnson’s argument shows an 8 amendment would be futile. 9 last question to me, I think if that is what he seeks to 10 So in answer to Your Honor’s do and then it would truly be futile. 11 Turning to the stock sales, and Mr. Johnson 12 referred to motive and opportunity. Motive and 13 opportunity was under Advanta, 1999, a route to scienter 14 in the Third Circuit, but post-Tellabs, as a result of 15 Avaya, motive and opportunity is no longer a route to 16 scienter. 17 his Avaya decision which overruled Advanta to the extent 18 that motive and opportunity was an alternative route to 19 scienter. And Chief Judge Scirica made that clear in 20 As far as the sales themselves, if you look at 21 the three individual defendants, Mr. Marlow, who was the 22 president and is the president of the Urban Outfitters’ 23 brand made no sales, he had zero sales. 24 CEO, while he sold -- I believe it was five percent of 25 his holdings, he still holds 95 percent. Mr. Hayne, the Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 45 of 53 45 1 So to suggest that he was involved in this 2 fraud here, when 95 percent of his holdings he still has 3 in the company is just illogical when you couple that 4 with -- and offensive -- with -- you know, with the six- 5 month earlier time period when these sales were made. 6 And then finally, Mr. Conforti, the CFO, while 7 Mr. Johnson refers to a million dollars, that really is 8 disingenuous. 9 have to subtract the -- the strike price from the These are the exercise of options. You 10 exercise price and you get a net of around $200,000 for 11 options that had vested over a period of five years, and 12 he has many other unvested options. 13 the -- most of his vested options. 14 unvested options, and this appears in the -- in the 15 public filing. 16 He may have sold He has many other So I think that is disingenuous. Mr. Johnson directed our attention to many 17 paragraphs of the complaint, but when you look at these 18 paragraphs of the complaint, for the most part, they’re 19 not tethered to any particular witness. 20 to "former employees told us." 21 the -- 22 THE COURT: 23 employees said what? 24 25 They just refer It isn’t like most of Do you need to identify which MR. SONNENFELD: Yes. In most of these cases, you look at the ones that we have cited, they’ll say Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 46 of 53 46 1 that CW-1 told us that on July 1st, 2013, he attended a 2 meeting with the CEO at which the CFO said you’re not 3 going to make the numbers, or CW-2 told us that when you 4 looked at the Intranet online on date X it would show 5 you that sales were declining by whatever. 6 have it tethered to any individuals. 7 You don’t And even in his argument today, Mr. Johnson 8 didn’t tie his argument to what was alleged in the 9 complaint. It’s what he claims witnesses told him, 10 without regard to whether they’re in the complaint or 11 not. 12 confidential witnesses. 13 allegations of the paragraphs, it just says "former 14 employees told us." The complaint only references six so-called 15 But then when you get into the It doesn’t say CW-1 said this, CW-2 said that. 16 It then doesn’t have documents. 17 Intranet. 18 shown. 19 any particular day or the numbers or anything else. 20 you look at the cases that we have cited for this 21 proposition, there is a great degree of specificity of 22 what the CWs claim was told or what would have -- what 23 they would have seen if they had looked or whatever. 24 don’t have any of that. 25 He refers to this He doesn’t say what the Intranet would have He doesn’t say what the sales would have been on What we do have is the hand-up I made here And We Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 47 of 53 47 1 which comes from the complaint, and the hand-up that we 2 have here that comes, you know, from the complaint shows 3 that sales were up for the Urban brand, you know, in the 4 first and second quarters, that is for the time period 5 ending April 30th, 2013 and July 31st, 2013. 6 periods of record sales. 7 this is wrong. 8 9 We have There is no allegation that There’s no allegation that anything -- and by this, I’m putting my hand up -- but this is based on the 10 allegations in the complaint which are based on the 11 public filings of the company and the 10-Q. 12 allegation that it’s wrong, either as to the fourth 13 quarter of 2013 or the first and second quarters of 14 2014. 15 here ultimately is that for the third quarter of 2014 16 ending October 31st, you again have record sales and 17 they’re up seven percent. 18 You have periods of record sales. There’s no And the irony Now, Mr. Johnson tells us well, the analysts 19 were expecting more. 20 position in Janus, he says you’ve got to make a 21 statement to be liable for it. 22 in Judge -- in Judge Alito’s decision in Burlington 23 about liability for analysts. 24 25 Well, you look at Justice Thomas’ You see some discussion There’s discussion in the Third Circuit about a First Circuit decision, the telephone case that we Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 48 of 53 48 1 cite in our brief, a recent First Circuit decision, 2 about entanglement. 3 sort of entangled with the analyst. 4 that here. 5 analysts said or didn’t say. 6 You have to show how the issuer was We have none of The company is not responsible for what And just a final point is, Mr. Johnson 7 referred to the August 19th statement by the company. 8 The August 19th statement by the company was made after 9 -- after the date that the plaintiff here had purchased 10 his hundred shares, so he couldn’t possibly have relied 11 on the August 19th statement. 12 And under the teachings of the Third Circuit 13 in the Klein case and the decision by Judge McLaughlin 14 in the NutriSystem case, plaintiff doesn’t have standing 15 to challenge a statement made by the company after he 16 purchased his shares because he couldn’t have relied on 17 it. So -- 18 THE COURT: I’m sorry, go ahead. 19 MR. SONNENFELD: -- so unless Your Honor has 20 any questions, I think we’ve covered everything else in 21 our briefs. 22 THE COURT: Yes. Mr. Johnson, just 23 specifically with respect to Mr. Sonnenfeld’s argument 24 that in the complaint the statements aren’t tethered to 25 any specific witness. Do you need to do that? Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 49 of 53 49 1 MR. JOHNSON: Well, Your Honor, that’s simply 2 -- that’s not required. 3 through what the Third Circuit has said on the 4 confidential witness front. 5 no -- there’s no requirement that the complaint give the 6 specific witness and what he or she said. 7 8 9 10 THE COURT: If I can just quickly go It’s not required. There’s Because we’ll agree that that -- that doesn’t appear in this complaint, correct? MR. JOHNSON: Yes, yes, we will agree there. Here -- what’s in the complaint is that there 11 are -- there are six confidential witnesses of which 12 five worked at various stores around the country. 13 those five reported the same sales trends as I -- as I 14 indicated earlier, and they also had access to the 15 Intranet which showed sales trends, not just for their 16 stores, but for all the stores. 17 And And so there’s really -- even if the complaint 18 did say this -- you know, this former store manager at 19 this store or that former manager at that store saw this 20 at that store or that at that store, it wouldn’t make a 21 difference, because what the complaint relies on is the 22 fact that the -- among all of the stores -- 23 THE COURT: 24 MR. JOHNSON: 25 The aggregate knowledge. Correct. And that aggregate knowledge is available through the Intranet. Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 50 of 53 50 1 What the Third Circuit standards require is 2 that you plead enough information within the amended 3 complaint so that you can trust and rely on who the 4 witnesses were and what they provided. 5 stores where they worked. 6 where they worked. 7 structure and we give their job responsibility. 8 no reason to question or to in any way discredit that 9 those witnesses would have known what we’re pleading in 10 the amended complaint in terms of, as I said, the sales 11 data and whatnot. 12 Here we give the We give the time periods We give the -- their reporting There’s And, Your Honor, just one last thing on the 13 stock sales front. 14 Suprema, Inc. Securities Litigation. 15 there were stock sales by two of the six named 16 individual defendants and those stock sales totaled $7 17 million. 18 There’s a Third Circuit case, In re In that case, The Third Circuit found that was a strong 19 inference of scienter and that the strong inference of 20 scienter was not negated by the fact that those same two 21 defendants still maintained 62 and 69 percent of their 22 holdings. 23 So counsel makes a big deal out of the fact 24 that defendant Hayne sold $50 million worth of stock but 25 still retained 94 percent of his holdings. That Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 51 of 53 51 1 retention of holdings does not negate the strong 2 inference there is from the actual $50 million sold 3 during the class period. 4 5 Unless the Court has any additional questions, I’ve -- 6 THE COURT: 7 MR. SONNENFELD: 8 comments, Your Honor. Just a comment here. I have two very quick I’m not bringing any notes up. Suprema was pre-Avaya. 9 Suprema was pre- 10 Tellabs, and I think it has to be discounted by that 11 fact. 12 With respect to the degree of particularity 13 required as to a CW, I would respectfully direct the 14 Court’s attention to the Third Circuit’s decision in the 15 Chubb case. 16 of particularity required of the CW there. 17 Chubb, Judge Cowen goes through the indicia The Court was troubled by the lack of 18 particularity of the CWs in the Chubb case. And then 19 Avaya -- and the Chubb, it was I think two or three 20 years before Avaya, but then Avaya -- and Avaya, Judge 21 -- Chief Judge Scirica cites Chubb with approval and 22 says it is still good law were his words in the Third 23 Circuit. 24 statement of what is required of the CWs in the 25 complaint. So I think both Chubb and Avaya are the best Case 2:13-cv-05978-LFR Document 26 Filed 10/07/14 Page 52 of 53 52 1 2 THE COURT: five-minute recess. All right. We’ll take about a I’ll be right back. 3 MR. SONNENFELD: 4 (Recess taken at 2:51 p.m.) 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Thank you, Your Honor. * * * FOE-11.12094 Case Document 26 Filed 10/07/14 Page 53 of 53 CERTIFICATION I, Donna M. Anders, do hereby certify that the foregoing is a true and correct transcript from the electronic sound recordings of the proceedings in the above?captioned matter. Dete' Donna M. Anders