# Petition for Writ of Certiorari — Longman v. Food Lion, Inc.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 2000
- **Citation:** 529 U.S. 1067

## Text

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991313 FEBO3

OFFICE OF THE CLERK

__No.

Supreme Court of the United States

DAVID I. LONGMAN; JEFFREY FEINMAN; P..UL M. GARDNER,
Defined Plan Trust; EDWARD HANKIN and LINDA HANKIN,

Petitioners,
versus

FOOD LION, INCORPORATED; TOM E. SMITH,

Respondents.
On Petition for Writ of Certiorari to
the United States Court of Appeals
for the Feire Circuit
y“t>
PETITION FOR CERTIORARI
WEISS & YOURMAN David M. Clark
The French Building Counsel of Record
551 Fifth Avenue, Suite 1600 John F. Bloss
New York, NY 10176 CLARK BLOSS & McIVER,PLLC
(212) 682-3025 125 S. Elm Street, Suite 600
P. O. Box 1349
WOLF HALDERSTEIN Greensboro, NC 27402
ADLER FREEMAN & HERZ, (336) 275-7275
LLP
270 Madison Ave
New York, NY 10016
(212) 545-4600

Attorneys for Petitioners

QUESTION PRESENTED

Whether, in a securities fraud action, a public statement is
sufficient, as a matter of law, to rebut the “fraud on the
market” presumption established by this Court regardless of
the credibility of the statement’s source.

ii

TABLE OF CONTENTS
PAGE
Questions Presented ........................ i
SOO OF COMIN 6s oss cs Ce li
ile! Amelie. a iv
Opiniones Pl oo A ee l
Jurisdictional Statement ..................... l

Kelevant Constitutional} Provisions, Treaties,
Statutes, Ordinances, and Regulations Involved ... l
Statement of the Case .................... ars 3
Proceedings Below ......................._. 4

atement of Fact... os. ssd hank eee 5

Reasons for Granting the Writ .....-----+-+-+-> 15

THE COURT BELOW ERRED IN RULING THAT
THE PRESUMPTION THAT PETITIONERS
RELIED ON RESPONDENTS’ MISREPRESEN-
TATIONS WAS DEFEATED BY THE
EXISTENCE OF PUBLIC STATEMENTS
CONTRADICTING THE MISREPRESENTA-
TIONS, NOTWITHSTANDING THE
OVERWHELMING EVIDENCE THAT THE
MARKET DID NOT CONSIDER THE SOURCE
OF THE CONTRADICTORY STATEMENTS TO

i ace dune ses ewe erwroseres 17
a, Ske rie ered ereknogebeenns 24
Appendix

Decision of the Circuit Court(App A) ... la

Decision ef the District Court of 1/4/99
(eee ee 29a

Decision of the District Court of 6/18/98
OSS > A ee eee S4a

iV

Order Denying Rehearing (App D)

hh. A oe oe we

Vv

TABLE OF AUTHORITIES
CASES: |

Associated Randall Bank v. Griffin, 3 F.3d 208,
213-14 (7 Cir. 1993). ....-- ee eee eee

Basic Inc. v Levinson, 485 U.S. 224, 238
CUIGE Rc xccc sv sdecncie eaves wes nes

Berry v. Valence Tech., Inc., 175 F.3d 699, 706
(9th Cir. 1999) ...... cece ee ee eens

Braxton v. United States, 500 U.S. 344 (1991).

Ernst & Ernst v. Hochfelder, 425 U.S. 195, 196
2) eee renner hi eer

Finkel v. Docutel/Olivetti Corp., 817 F.2d 356,
360 (S™ Cir. 1987) .....-- cece eee ees

Gasner v. Board of Supervisors, 103 F.3d 351,
356 (4th Cir. 1996). ......--- 2+ e ee

Grossman v. Novell, Inc., 120 F.3d 1112, 1122
(10 Cir. 1997) 2... eee ee ee eee eee

Heflin v. United States, 358 U.S. 415 (1959) ..

22

16

17

17

22

16

v1

In re Taxable Mun. Bonds Litig., [1994-1995
Transfer Binder] Fed. Sec. L. Rep.

(CCH) § 98,405 at 90,780 (E.D. La. Sept.

| reer rr rr re Tire sy Cre

Kaplan v. Rose, 49 F.3d 1363, 1376 (9% Cir.
Lo) re rere re ey rrr ya ei

Longman vy. Food Lion, Inc., 197 F.3d 675 (4
Cle, SORE kc nic cb ae eae es

Ockerman v. May Zima & Co., 27 F.3d 1151,
F456 06* Cie, TORU cnc cicespactuess

Provenz v. Miller, 102 F.3d 1478, 1492 (9% Cir.
1946), cert. denied, 188 S. Ct. 48 (1997);

Pure Oil Co. v. Suarez, 384 U.S. 202 (1966);

Sailors v. Northern States Power Co., 4 F.3d
610, 613 (8® Cir. 1993) 2... vc cccesces

Schneider v. Vennard (In re Apple Computer
Sec. Litig.), 886 F.2d 1109 (1989), cert.
denied, 496 U.S. 943 (1990). ........

Shaw v. Digital Equip. Corp., 82 F.3d 1194,
1214 w.25 CA" CR. TFG) cce avenues

19,

tJ
nN

21

16

19

ee ee — - I EEE EEE EEE
e.
©

Vii

TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438
1) rere eine ress sre 21

Wielgos v. Commonwealth Edison Co., 892 F.2d

509, 516 (7 Cir. 1989) ........-.-.- 21
COURT RULES:
F.R.C.P. Rule 12(O(6) .. 1... ee eee eee eee 21
Sup. Ct. R. 10(c); 2c. eee eee eee ee eee eee 16
REGULATIONS:
yee PS Se. Bn rae eo passim
STATUTES:
CER Toe &, BRR eer ree ee |
p RE Sade Gs | | GR ee eer |

OTHER AUTHORITIES:

Vill

John M. Newman, Jr., et al., Basic Truths: The
Implications of the
Fraud-On-The-Market Theory for
Evaluating the “Misleading” and
“Matcriality” Elements of Securities
Fraud Claims, 20 J. Corp. L. 571, 576
(re Pere Ts terre or 22

The Fraud-on-the-Market Theory, 95 Harv. L.
Rev. 1143, 1159(1982) ........--+-: 23

ee

|

Petitioners, David I. Longman, Jeffrey Feinman, Paul N.
Gardner Defined Plan Trust, Edwin Hankin, and Linda
Hankin, and a class of similarly situated persons, respectfully
request that a writ of certiorari be issued to review the
judgment of the United States Court of Appeals for the
Fourth Circuit in this case.

OPINIONS BELOW

The opinion of the United States Court of Appeals for the
Fourth Circuit is reported at Longman v. Food Lion, Inc., 197
F.3d 675 (4" Cir. 1999) at App A). The opinion of the
district court in Longman v. Feod Lion, Inc., Nos.
4:92CV696 and 4:92CV705 (M.D.N.C. June 18, 1998) (App.
C), is not published.

STATEMENT OF JURISDICTION
The judgment of the United States Court of Appeals for
the Fourth Circuit was entered on October 7, 1999. The
Fourth Circuit denied a timely petition for rehearing on

November 5, 1999. (App. D).

The iurisdiction of this Court is invoked under 28 U.S.C.
§ 1254(1).

CONSTITUTIONAL AND STATUTORY
PROVISIONS INVOLVED

15 U.S.C. § 78j(b) provides:
It shall be unlawful for any person, directly

or indirectly, by the use of any means or
instrumentality of interstate commerce or of

2

the mails, or of any facility of any national
securities exchange—
* * *

(b)To use or employ, in connection
with the purchase or sale of any
security registered on a_ national
securities exchange or any security
not so registered, any manipulative
or deceptive device or contrivance in
contravention of such rules and
regulations as the Commission may
prescribe as necessary or appropriate
in the public interest or for the
protection of investors.

17 C.F.R. 240.10b-5 provides:

It shall be unlawful for any person, directly
or indirectly, by the use of any means or
instrumentality of interstate commerce, or of
the mails or of any facility of any national
securities exchange,

(a)To employ any device, scheme, or
artifice to defraud,

(b)To make any untrue statement of
a material fact or to omit to state a
material fact necessary in order to
make the statements made, in the
light of the circumstances under

3

which they were made, _ not
misleading, or

(c)To engage in any act, practice, or
course of business which operates or
would operate as a fraud of deceit
upon any person, in connection with
the purchase or sale of any security.

STATEMENT OF THE CASE

This case involves the “fraud on the market” presumption
established by this Court to relieve a plaintiff in a securities
fraud action of the burden of proving his actual reliance upon
a corporation’s public misrepresentations. The fundamental
question presented in this petition is whether the fraud on the
market presumption may be rebutted, as a matter of law, by a
public | statement contradicting the — corporation’s
misrepresentations without regard to the credibility of the
public statement’s source.

"Inder the analysis of the court below, such a public
statement, even from the least reputable source, will
conclusively operate to defeat the presumption—even, as
here, in the face of overwhelming evidence that the market
completely disregarded the statement. Moreover, once such a
statement is made, whatever its source, the appellate court’s
ruling permits the corporation to re-publicize its outright false
statements with impunity—again, exactly the situation in this
case. The Fourth Circuit’s ruling, if it is allowed to stand,
promises effectively to eliminate the fraud on the market
presumption in that jurisdiction.

4

Proceedings Below

Petitioner Longman filed his class action complaint on
November 12, 1992. Petitioners Feinman, Paul N. Gardner
Defined Trust Plan, and Hankins filed a similar class action
on November 13, 1992. Both the Longman and Feinman
complaints alleged, inter alia, causes of action for securities
fraud under § 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5 thereunder. The gravamen of petitioners’
complaints, for purposes relevant here, is that respondent
Food Lion, Inc. (“Food Lion”), a grocery store chain, and its
president, respondent Tom E. Smith, failed to disclose, and
expressly denied, widespread illegal labor practices that
artificially inflated its earnings and margins and, in turn, the
value of its stock.

The district court consolidated the cases on March 16,
1994. On Cctober 17, 1994, the court certified the cases as a
class action for open market purchasers of Food Lion stock
between May 7, 1990 and November 5, 1992 (the “Class
Period’).

On June 18, 1998, the United States District Court for the
Middle District of North Carolina, per Judge James A. Beaty,
granted respondents’ motion for summary judgment and
dismissed the action. The district court ruled that Food
Lion’s illegal labor practices were fully disclosed to the
public on September 11. 1991—the date of an announcement
by the United Food and Commercial Workers Union
(UFCW) that it had filed a complaint against Food Lion with
the United States Department of Labor (DOL). As a result of
such “full disclosure to the market,” the district court

5

determined that investors who purchased Food Lion stock
after that date did not justifiably rely on Food Lion’s
allegedly material omissions. Investors who purchased
before the “full disclosure” date of September 11, 1991, the
court ruled, were barred by limitations since their actions
were filed more than one year after that date. (App -}.

On October 7, 1999, a divided panel of the Fourth Circuit
affirmed. The majority concluded that respondents’ faise and
misleading statements were not material as a matts: of law,
since the UFCW had announced, during the Class Period, that
it was filing a complaint with DOL requesting that DOL file
a Fair Labor Standard Act (FLSA) class action against Food
Lion:

Plaintiffs’ securities fraud claim cannot
succeed because, despite the fact that Food
Lion denied the charges, the nature of the
off-the-clock claims and the claims’ risk to
earnings were in fact well known to the
market before the [end of the Class Period],
and therefore Food Lion’s omissions were not
material. . . . The market had a full
opportunity to evaluate these claims and to
reflect their risk in the market price for Food
Lion stock.

(App. A).

Judge Murnaghan, in dissent, wrote:

6

The majority incorrectly suggest that any
public information § contradicting Food
Lion’s misleading statements forecloses the
possibility of finding that these statements
were material. However, the controlling
principle is that in a fraud on the market
case, Food Lisn’s failure to disclose material
information may be excused where that
information has been made credibly
available to the market by other sources. . . .
The majority does not analyze whether the
allegations against Food Lion came from a
credible source.

(App. A) (emphasis in original; citations, footnoteomitted).

The Fourth Circuit denied petitioners’ petition for
rehearing and rehearing en banc on November 5, 1999.

(App. D).
Statement of Facts

Throughout the Class Period, Food Lion failed to
disclose, and expressly denied, the illegal labor practices that
artificially inflated its earnings and profit margins, and in
turn, the value of its stock. Petitioners purchased Food Lion
stock during the Class Period in reliance on the integrity of
the price set by the market. However, upon the public
disclosure of Food Lion’s illegal practices in a November 5,
1992 broadcast of the ABC news program PrimeTime Live
(PTL), and an announcement by DOL on November 7, 1992,
that it would file a FLSA class action against Food Lion, the

7

market corrected the price of Food Lion’s common stock,
much to petitioners’ detriment.

Petitioners adduced extensive evidence that Food Lion’s
oppressive labor policies resulted in widespread illegal labor
practices, and that Food Lion’s management was aware of
such widespread violations during the Class Period. Food
Lion had in place a time-management quota system called
“Effective Scheduling,’ which required employees to
perform certain duties within specified times. If the
employee failed to complete the tasks within the allotted
time, he or she was faced with two choices: (1) be fired or (2)
finish the work “off the clock.”

Food Lion’s top management was well aware that its
effective scheduling labor practice inevitably resulted in
employees working off \the clock. The overwhelming
evidence of the existence of, and Food Lion’s knowledge of,
widespread labor law violations includes (1) a report to top
Food Lion officials prepared by a Food Lion lawyer who had
been directed to investigate off-the-clock work at Food Lion,
concluding that Food Lion’s labor policies would
unavoidably result in off-the-clock work throughout the Food
Lion system; (2) internal survey responses, circulated to top
Food Lion executives, from employees of more than 30 Food
Lion stores complaining of oppressive working conditions in
which employees frequently worked from 10 to 40 hours per
week off-the-clock in order to perform all the duties required
of them; (3) internal investigative reports, copied to top Food
Lion executives, detailing rampant federal labor law
violations throughout the Food Lion system; and (4)
numerous’ internal memoranda, circulated among

8

management officials, discussing reports of widespread
illegal labor practices.

Despite this overwhelming evidence of internal corporate
knowledge of widespread illegal labor practices, Food Lion
continually and vociferously denied any knowledge of such
practices throughout the Class Period. There is no question
that Food Lion published during the Class Period several
false and misicading statements about its Jabor practices and
policies—and the Fourth Circuit did not hold otherwise.
Indeed, the evidence that Food Lion made numerous false
public statements about its illegal labor practices is
undisputed.

For exemple, on May 7, 1990—the first day of the
Class Pericd—Food Lion filed with the Securities and
Exchange Commission its Annual Report to Stockholders for
the year ending December 31, 1989. The report boasted
about decreased selling and administrative costs, as well as
“improved operating efficiencies,” but in no way suggested
that Food Lion had discounted its labor costs by means of
illegal practices. The document referred to Food Lion’s labor
practices in glowing terms, alluding to “expand{ed] financial
rewards for employees,’ as well as the company’s
commitment to “insur[ing] that Food Lion employees receive
competitive wages and excellent benefits.”

Food Lion, on August 30, 1990, issued a press release in
response to calls by the UFCW for a boycott of Food Lion
stores. The press release falsely portrayed Food Lion
employees as well-compensated persons working in positions
that were highly sought after by the work force, as follows:

call —_----
A
4
f

9

The fact is, Food Lion opens more than 100
stores each year and adds more than 5,000
employees each year. Food Lion could not do
this without offering competitive wages and
excellent benefits. On average, Food Lion
receives three to four applications for every
available job.

(Emphasis added).

In a September 11, 1991 press release, the UFCW
disclosed that it had filed a complaint with the DOL
requesting that the government bring a class action suit
against Food Lion. The UFCW press release described its
complaint before the DOL as alleging that Food Lion had
derived about 37% of its after-tax profit from illegal work.
The press release further disclosed that the union’s complaint
asked the DOL to seek an injunction requiring Food Lion to
desist from further use of its Effective Scheduling System,
Food Lion’s time-management quota system.

Food Lion, on the same date, publicly denied the
UFCW’s allegations and impugned the UFCW’s motives.
Food Lion’s September 11, 1991 press release asserted that it
had a “very clear policy against working off the clock,” and
cautioned that “[iJt should be kept in mind that this same
union was previously involved in another Fair Labor
Standards Act (FLSA) Complaint in which it was discovered
many of the allegations were totally without merit.” The
press release did not mention that Food Lion had entered into
two secret compliance agreements with the DOL and had

53
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NL

wa

10

paid substantial fines as a result of illegal labor practices in
the previous three years.'

The next day, Food Lion issued an even stronger denial of
the union’s claims. Food Lion’s September 12, 1991 press
release include’ .xe following passages:

The UFCW’s most recent claims of illegal
employment practices by Food Lion and its
employees insult the hard work and integrity
of all Food Lion employees. Those
ingredients are the key to Food Lion’s success
and ability tc bring customers extra low
prices. /t is not off the clock work by
employees or other illegal employment
practices as the UFCW-sponsored
propaganda alleges. . . . (Ojur employees’
hard work and company efficiencies in

' Before the Class Period, Food Lion had been the target of investigations
and disciplinary actions for its illegal labor practices; however, the
punitive measures resuiting from the earlier investigations were kept in
strict confidence. Three years before the PTL broadcast, Food Lion
entered into a compliance agreement with the DOL and consented to pay
$300,000.00 in wages related to off-the-clock work. This 1989
settlement agreement, however, was confidential and was not disclosed
even to most Food Lion employees. After a second DOL investigation,
Food Lion, on October 11, 1990, entered into another compliance
agreement and iurther agreed to pay all back wages earned by
participants in a sham “training” program. The terms of this 1990
settlement were not disclosed to the investing public or even to most
Food Lion employees. In both compliance agreements, Food Lion
explicitly agreed to assume accountability for monitering and enforcing
the company’s compliance with the FLSA.

1]

operations result in lower prices which
threaten unionized competitors.

Food Lion denies the claims of employee
mistreatment, but the public doesn’t have to
accept the word of either the Company or the
union. Let employees and the free
marketplace decide that. If employees don’t
want to work at Food Lion, they don’t have to.
The fact that Food Lion receives four or five
job ar-licants for every job opening and
consistently has one of the lowest employee
turnover rates in the supermarket industry,
should tell you more about the UFCW’s
propaganda than anything Food Lion says.
This same union was involved two years ayo
in another FLSA “class action” lawsuit against
the company. Upon investigation of the
UFCW-instigated claims, however, it was
discovered most of the allegations were totally
without merit and at least one of the
complainants had never even worked for Food
Seer

Such results from previous lawsuits by this
same union against Food Lion make it all the
more important to recognize that this latest
Complaint is simply a charge filed with the
Department of Labor by a labor union which
is trying to destroy Food Lion and its
employees’ jobs.

——

12

(Emphasis added).

A week later, on September 19, 1991, Food Lion’s Class
A stock was trading at $18.25, up from the $17.00 price after
the UFCW’s announcement. UFCW’s announcement that it
had filed a comp! unt with the DOL did not negatively impact
the price of Food Lion’s stock, for a variety of reasons. First,
as conceded by Food Lion’s own expert, the reports of the
company’s labor violations before and during the Class
Pericd were not “wideiy reported.” More importantly, due to
Food Lion’s efforts to discredit the UFCW’s claims,
combined with the lack of any public statement by the DOL
on Food Lion’s labor practices during the Class Period,
leading market analysts discounted the UFCW’s claims as
mere “harassment,” and even suggested that it was a good
time to buy Fvod Lion - stock. For example,
Robinson-Humphrey’s October 8, 1991 company report on
Food Lion recites:

in this latest move, the union filed a complaint
with [DOL] claiming that a significant portion
of Food Lion’s profits are derived from illegal
off-the-clock work of employees.

Bottom line, we have yet to see a complaint
trom this union which accurately documents
illegal practices and believe that this latest
action is a form of harassment.

The Robinson-Humphrey report recommended purchasing
Food Lion stock.

13

Paine Webber’s November 21, 1991 Report on Food Lion
stated:

The [UFCW] has named Food Lion as a top
priority target for unionization and toward this
end has essayed a variety of pressure tactics
over the years. Yet the union has neither
gotten to first base with employees nor
disrupted business.

Likewise, Goldman Sachs’ October 2, 1991 Research
Brief on Food Lion discounted the validity of the UFCW’s
claims:

We regard this complaint as another attempt
by the union to establish collective bargaining
agreements at Food Lion. . . . [W]e note that
the same union has brought allegations in the
past, which have been largely unsubstantiated.

See also Decl. of Lee Wilder dated 1/24/96 (stock analyst
states that he “discounted the merit of the UFCW’s charges”
in light of Food Lion’s insistence that the union’s allegations
were groundless). In contrast, respondents have come
forward with no evidence that any brokerage firm or stock
analyst was influenced in his analysis of Food Lion’s stock
by the union’s claims.

Even Food Lion’s own expert economist, Frederick C.
Dunbar, conceded at deposition that Food Lion’s denials of
FLSA violations affected the total mix of information
available to the market:

| TEE

14

| think that if Food Lion had issued
absolutely no press release and had been
silent, there may have been a different result.
If Food Lion admitted the charges, which
Food Lion never did, it’s hard to say what
would have happened to the stock price.

On February 27, 1992, in response to UFCW’s
announcement that the union had filed a supplemental
complaint with the DOL alleging additional new claims,
Food Lion issued yet another press release expressly denying
the claims: “UFCW = snensored claims of extensive
wage/hour violations are simply untrue. . . . Food Lion denies
this and other UFCW sponsored allegations of mistreatment
of employees.”

Food Lion’s offenses were first disclosed to the public in
credible fashion on November 5, 1992—the last day of the
Class Period—when the ABC news program PrimeTime Live
presented an exposé on Food Lion’s labor and sanitation
practices. The PTL broadcast was the result of six months of
investigation by ABC. The P7L team interviewed 70
then-current and former employees at stores across the
southeastern United States. In addition to undercover footage
of repugnant sanitary practices which were the inevitable
result of Food Lion’s brutal scheduling system, Diane
Sawyer, the narrator of the broadcast, reported as follows:

Over and over again, we were told that for
workers, Food Lion is a kind of pressure
cooker. The employees all said that the

15

company pays good salaries and has excellent
benefits, including profit sharing. But there’s
a flip side, a time-management policy called
effective scheduling, which critics charge
forces a lot of workers to finish the work on
their own time....

Many employees told us that the pace
[required by Effective Scheduling] 1s
pounding. And since very little overtime 1S
permitted, at the end of the day good workers
were faced with an impossible choice: leave
work unfinished jeopardizing their jobs, or
stay and finish, giving extra hours to the
company without pay. It’s called working
off-the-clock, and it’s illegal.

The day after the PTL broadcast, the price of Food Lion’s
stock plunged. The company’s Class A stock fell from $9%
per share to as low as $6 1/8 per share, a new low for the
year, before closing at $8%, down $1 per share. Food Lion’s
Class B stock dropped from $10 per share to $6 5/8 per share,
a decrease of $1 3/8 per share.

After the DOL announced tivo days later, on November 7,
1992, that it intended to bring a complaint against Food Lion
alleging labor law violations, the company’s Class A shares
decreased by an additional $.50 per share on extremely heavy
trading volume.

On August 3, 1993, the DOL reported that Food Lion had
agreed to pay the largest settlement of a FLSA claim ever

16

negotiated, a total of $16.2 million to settle claims for its
violations of federal laws regulating overtime, the minimum
wage, and child labor. Even more significantly, DOL
ordered Food Lion to submit detailed quarterly updates on
reported labor violations, thus precluding Food Lion from
enforcing policies inevitably resulting in widespread
off-the-clock work that artificially inflated profits. Even
today, Food Lion stock has not recovered.

REASONS FOR GRANTING THE WRIT

As previously discussed, the Fourth Circuit
concluded—in the face of undisputed evidence that the
market discounted the UFCW’s accusations that Food Lion
was engaged in widespread violations of the FLSA—that the
UFCW’s allegations provided the market, as a matter of law,
with “a full opportunity to evaluate these claims and to reflect
their risk in the market price for Food Lion stock.” (App. A).
The Fourth Circuit’s ruling that the presumption of reliance
on a corporation’s misrepresentations may be rebutted by
establishing the existence of any contrary public statement,
regardless of the market’s view of the credibility of its
source, cannot be harmonized with relevant decisions of this
Court and directly conflicts with the decisions of other United
States courts of appeals. A failure by a lower court to adhere
to a decision of this Court is grounds for granting a writ of
certiorari, Sup. Ct. R. 10(c); see Pure Oil Co. v. Suarez, 384
U.S. 202 (1966); Heflin v. United States, 358 U.S. 415
(1959), as is the existence of a Circuit split. Sup. Ct. R.
10(a); see, e.g., Braxton v. United States, 500 U.S. 344
(1991).

4
3

17

THE COURT BELOW ERRED IN RULING THAT
THE PRESUMPTION THAT PETITIONERS RELIED
ON RESPONDENTS’ MISREPRESENTATIONS WAS
DEFEATED BY THE EXISTENCE OF PUBLIC
STATEMENTS CONTRADICTING THE
MISREPRESENTATIONS, NOTWITHS fr ANDING
THE OVERWHELMING EVIDENCE THAT THE
MARKET DID NOT CONSIDER THE SOURCE OF
THE CONTRADICTORY STATEMENTS TO BE
CREDIBLE.

Petitioners’ securities law claims arise under § 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5. To
establish liability under § 10(b) and Rule 10b-5, petitioners
must prove the following elements: (1) the respondents made
a false or misleading statement or omission of material fact,
Basic Inc. v. Levinson, 485 U.S. 224, 238 (1988), (2) with
scienter, Ernst & Ernst v. Hochfelder, 425 U.S. 195, 196
(1976), (3) upon which the petitioners justifiably relied, /d. at
206 (4) that proximately caused the petitioners’ damages,
e.g., Gasner v. Board of Supervisors, 103 F.3d 351, 356 (4th
Cir. 1996).

The sole ground articulated by the court below for
affirmance on the labor practices question was that the
UFCW’s September 11, 1991 press release fully disclosed to
the market the existence of Food Lion’s widespread illegal
labor practices. Because a dispute of fact plainly exists as to
whether the information of Food Lion’s labor policies came
from a source credible to the market, however, summary
judgment should not have been granted.

18

This Court, in Basic v. Levinson, supra, instructed that
when purchasers of stock on an open and developed market
pursue a § 10(b) and Rule 10b-5 claim, they are relieved of
proving the element of direct reliance. Rather, it is presumed
that a materially false or misleading statement regarding a
corporation or its business defrauded purchasers of its stock
even if they did not directly rely on the statement because
they are deemed to have relied instead on the integrity of the
price set by the market. The Court reasoned as follows:

The modern securities markets,
literally involving millions of shares changing
hands daily, differ from the face-to-face
transactions contemplated by early fraud
cases, and our understanding of Rule 10b-5’s
reliance requirement must encompass these
differences. ...

Requiring a plaintiff to show a speculative
state of facts, i.e., how he would have acted if
omitted material information had been
disclosed, . . . or if the misrepresentation had
not been made, . . . would place an
unnecessarily unrealistic evidentiary burden
on the Rule 10b-5 plaintiff who has traded on
an impersonal market. . . .

Recent empirical studies have tended to
confirm Congress’ premise that the market
price of shares traded on well-developed
markets reflects all publicly available
information, and, hence, any material

2 Raa

19

misrepresentations. . . . Because most publicly
available information is reflected in market
price, an investor’s reliance on any public
material misrepresentations, therefore, may be
presumed for purposes of a Rule 10b-5 action.

485 U.S. at 243-47 (citations, footnotes omitted).

The Basic Court’s discussion in dicta of methods that the
defendant corporation in that case could rebut the
presumption of fraud 1s significant here. The Court explained
that one method of rebuttal was to show that news of the
misrepresentation or omission “credibly entered the market
and dissipated the effects of the misstatements.” /d. at 249.

A year after Basic was issued, the Ninth Circuit published
Schneider v. Vennard (In re Apple Computer Sec. Litig.), 886
F.2d 1109 (1989), cert. denied, 496 U.S. 943 (1990). Apple
has become the leading case on the method of rebutting the
fraud on the market presumption by establishing that the
market discounted the corporation’s misrepresentations due
to competing, credible information—an analysis termed by
some courts as the “truth on the market” doctrine or
corollary. E.g., Provenz v. Miller, 102 F.3d 1478, 1492 (9"
Cir. 1996), cert. denied, 188 3. Ct. 48 (1997), Associated
Randall Bank v. Griffin, 3 F.3d 208, 213-14 (7 Cir. 1993).
Because the market necessarily places significant weight on a
corporation’s representations about its own operations, the
Apple court emphasized that statements refuting a
corporation’s claims that are published by sources not
deemed credible by the investing public should not operate to
rebut the presumption:

20

We conclude that in a fraud on the market
case, the defendant’s failure to disclose
material information may be excused where
that information has been made credibly
available to the market by other sources. The
issue . . . is Whether, in light of the press’
documentation . . ., a rational jury could
nonetheless find a “substantial likelihood” that
full disclosures by Apple would have
“significantly altered the ‘total mix’ of
information made available.” . . .

We stress the limits of our holding.
Scrutiny by the press will not ordinarily
excuse the type of unqualified exuberance
expressed by Apple and its officers in this
case. Even in a fraud on the market case,
corporate insiders are not relieved of their duty
to disclose material information where that
information has received only brief mention in
a few poorly-circulated or lightly-regarded
publications. The investing public justifiably
places heavy reliance on the statements and
opinions of corporate insiders. Jn order to
avoid Rule 10b-5 liability, any materia!
information which insiders fail to disclose
must be transmitted to the public with a
degree of intensity and credibility sufficient to
effectively counter-balance any misleading
impression created by the insiders’ one-sided
representations.

21

886 F.2d at 1115-16 (emphasis added; quoting 7SC /ndus.,
Inc. v. Northway, Inc., 426 U.S. 438 (1976).

A number of other Circuits have adopted Apple’s holding
that the fraud on the market presumption may sometimes be
rebutted when information contradicting a corporat: i’s false
statements is svfficiently publicized. Until te Fourth
Circuit’s ruling in this case, however, all of the appellate
courts adopting the “truth on the market” corollary have
required that the source of the competing information be
scrutinized to determine whether the market deemed it
credible. See, e.g., Shaw v. Digital Equip. Corp , 82 F.3d
1194, 1214 1.25 (1"* Cir. 1996) (“While evidence of actual
market knowledge might be proper grist for the summary
judgment mill on the question of materiality, it cannot be
properly considered in evaluating whether plaintiffs’
complaint is legally sufficient to survive a motion to dismiss
under Rule 12(b)(6)”); Wielgos v. Commonwealth Edison
Co., 892 F.2d 509, 516 (7 Cir. 1989) (where competing
information was sufficiently credible to affect stock price,
fraud on the market presumption could be rebutted: “Prompt
incorporation of news into stock price is the foundation for
the fraud-on-the-market doctrine and therefore supports the
truth-on-the-market doctrine as well’’); Sailors v. Northern
States Power Co., 4 F.3d 610, 613 (8 Cir. 1993)
(acknowledging that competing statements in poorly
circulated or lightly regarded sources would not relieve
corporation of duty to disclose material information, but
concluding that, in light of “repeated references” in mass
media and specialized press to information allegedly withheld
by corporation and testimony of market analysts that the
press reports negatively affected their analyses, nondisclosure

22

at issue “was public information that could have easily been
obtained by any investor”); Provenz v. Miller, supra, 102
F.3d at 1493 (respondents seeking summary judgment on
truth-on-the-market defense “bear a heavy burden of proof. . .
_ Summary judgment is proper only if [defendants] show that
‘no rational jury could find’ that the market was misled”
(quoting Kaplan v. Rose, 49 F.3d 1363, 1376 (9 Cir.
1994))); Berry v. Valence Tech., Inc., 175 F.3d 699, 706 (9th
Cir. 1999) (in reversing summary judgment based on
truth-on-the-market, court explained that Lev Dawson, the
respondent corporation’s founder and first CEO, “responded
publicly to [a negative Forbes magazine] article immediately
after it was published, refuting its ailegations and claiming
that (the corporation] was everything it purported to be... .
Given the lack of any notable adverse market reaction or
negative press follow-up, it would have been reasonable for a
shareholder to read Dawson’s letter and to conclude that
nothing was amiss”); Jn re Taxable Mun. Bonds Litig.,
[1994-1995 Transfer Binder] Fed. Sec. L. Rep. (CCH)
98,405 at 90,780 (E.D. La. Sept. 26, 1994) (“[I]t is a rare case
in which the respondent can carry its ‘staggering burden’
under the truth on the market defense, particulariy at the
summary judgment stage”). Cf Grossman v. Novell, Inc.,
120 F.3d 1112, 1122 (10% Cir. 1997) (“Particularly in a fraud
on the market case, the relevant inquiry concerns the total
mix of information available to the market at the time of the
allegedly fraudulent statements”); see generally John M.
Newman, Jr., et al., Basic Truths: The Implications of the
Fraud-On-The-Market Theory for Evaluating _ the
“Misleading” and “Materiality” Elements of Securities
Fraud Claims, 20 J. Corp. L. 571, 576 (1995) (“Under [the
truth on the market] doctrine, a defendart can escape liability

23

for a false statement—or one that reveals less than the full
truth—by showing that the market was not affected by the
misrepresentation because the truth of the matter was known
already and had been factored into market prices. The issue
of when the truth is actually ‘on the market’ often arises in
such cases’’).

Indeed, the Fourth Circuit’s analysis in this case
undercuts ihe logic of the fraud on the market theory,
articulated in Basic, that individual investors in modern
securities markets simply cannot absorb all the information
available to the market, but must instead rely on the price of a
stock as a reflection of its value. 485 U.S. at 243-44. If the
fraud on the market presumption can be rebutted as a matter
of law by cny public statement contradicting a corporation’s
misrepreseatation—regardless of the credibility of its source
or the statement’s failure to affect the stock price—an
investor wili be required to scrutinize all available
information to ensure the absence of any statement, whatever
its source, that might later operate to rebut the fraud on the
market presumption. But see Finkel v. Docutel/Olivetti
Corp., 817 F.2d 356, 360 (5" Cir. 1987) (“[T]he fraud on the
market theory rejects the traditional notion of the investor
who acts after carefully examining all available
information”): Ockerman v. May Zima & Co., 27 F.3d 1151,
1158 (6% Cir. 1994) (while “in a developed market,
sophisticated financial professionals can generally be
expected to read the publicly available information about a
security . . . , unsophisticated investors generally rely on a
security’s market price as reflecting the security’s value”);
Note, The Fraud-on-the-Market Theory, 95 Harv. L. Rev.
1143, 1159 (1982) (“Most SEC disclosure documents not

24

only go unread by their intended recipients but in fact ‘can be
used effectively only by market professionals” (quoting H.
Kripke, THt SEC AND CorPorRATE Disclosure at 14 (1979))).
It is straightforward that the Fourth Circuit's expansion of the
truth on the market corollary defies the logic underlying the
fraud on the market presumption.

CONCLUSION

The Fourth Circuit erred in ruling—in the face of
uncontroverted evidence that the market discounted as
incredible the UFCW’s accusations that Food Lion was
engaging in widespread violations of the FLSA—that the
UFCW’s press release provided the market, as a matter of
law, with “a full opportunity to evaluate these claims and to
reflect their risk in the market price for Food Lion stock.”
The court’s analysis disregards the teaching of Basic, 1s at
odds with the decisions of every other appellate court that has
addressed the issue, and defies reason. Accordingly, the
lower court’s order affirming summary judgment in favor of
respondents should be reversed.

Respectfully submitted, this the 3 day of February, 2000.

David M. Clark

Counsel of Record

John F. Bloss

CLARK BLOSS & McIVER, PLLC
125 S. Elm Street, Suite 600

P. O. Box 1349

Greensboro, NC 2749?

25
(336) 275-7275

WEISS & YOURMAN

The French Building

551 Fifth Avenue, Suite 1600
New York, NY 10176

(212) 682-3025

WOLF HALDERSTEIN ADLER
FREEMAN & HERZ, LLP

270 Madison Ave

New York, NY 10016

(212) 545-4600

EIT ee - = —_ a ————— -— Se

la

(Any footnotes trail end of each document)
No. 98-2116

UNITED STATES COURT OF APPEALS FOR THE
FOURTH CIRCUIT

DAVID I. LONGMAN; JEFFREY FEINMAN; PAUL M.
GARDNER, Defined Plan Trust, EDWARD HANKIN;
LINDA HANKIN,
Plaintiffs-Appellants,

V.

FOOD LION, INCORPORATED; TOM E. SMITH,
Defendants-Appellees,

and

LYNNE NEUFER-DALE,
Respondent,

ROBERT HARBRANT; JEFFREY FIEDLER; KEITH
MESTRICH; SEAN CUNNIFF; FOOD AND ALLIED
SERVICE TRADES DEPARTMENT, AFL-CIO;
RESEARCH ASSOCIATES OF AMERICA; NEEL
LATTIMORE; NICHOLAS W. CLARK; MAUREEN
DWYER; ALLEN Y. ZACK; CHARLES L. ULSCH;
SUSAN BARNETT; COOPERS & LYBRAND, LLP,

Movants.

May 4, 1999, Argued

2a
October 7, 1999, Decided

COUNSEL:
ARGUED: John Francis Bloss, Sr., CLARK & WHARTON,
Greensboro, North Carolina, for Appellants.

Richard L. Wyatt, Jr., AKIN, GU'MP, STRAUSS, HAUER &
FELD, L.L.P., Washington, D.C.; William Kearns Davis,
BELL, DAVIS & PITT, P.A., Winston-Salem, North
Carolina, for Appellees.

ON BRIEF: David M. Clark, CLARK & WHARTON,
Greensboro, North Carolina; Jeffery G. Smith, Shane
Rowley, WOLF, HALDERSTEIN, ADLER, FREEMAN &
HERTZ, L.L.P., New York, New York; Joseph H. Weiss,
David C. Katz, WEISS & YOURMAN, New York, New
York; Lubna Farugi, FARUQI & FARUQI, New York, New
York; B. Ervin Brown, Il, MOORE & BROWN,
Winston-Salem, North Carolina; Bernard Persky,
GOODKIND, LABATON, RUDOFF & SUCHAROW, New
York, New York, for Appellants.

Charles L. Warren, Larry E. Tanenbaum, Thomas P. McLish,
AKIN, GUMP, STRAUSS, HAUER & FELD, Les
Washington, D.C.; James T. Williams, Reid L. Phillips,
BROOKS, PIERCE, MCLENDON, HUMPHREY &
LEONARD, L.L.P., Greensboro, North Carolina, for
Appellees.

JUDGES:

Before WIDENER, MURNAGHAN, and NIEMEYER,
Circuit Judges. Judge Niemeyer wrote the opinion, in which
Judge Widener joined. Judge Murnaghan wrote a dissenting
opinion.

3a

OPINIONBY:
NIEMEYER

OPINION:

OPINION
NIEMEYER, Circuit Judge:

On the day after ABC aired its "PrimeTime Live"
television broadcast on November 5, 1992, detailing
allegedly widespread unsanitary practices and labor law
violations in grocery stores owned by Food Lion, Inc., the
price of Food Lion's Class A stock fell approximately 11%,
and the price of its Class B stock fell approximately 14%. A
week later, stockholders David Longman, Jeffrey Feinman,
and others who had purchased Food Lion stock during the
2-1/2-year period before the broadcast filed these two class
actions against Food Lion, which were later consolidated,
alleging securities fraud under § 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. The plaintiffs alleged that Food Lion
affirmatively misled the market and failed to disclose that its
earnings during the 2-1/2-year period were artificially
inflated due to its misrepresentations about and failure to
disclose widespread violations of federal labor laws and
pervasive, unsanitary food handling practices. They alleged
that these violations and practices were attributable to Food
Lion's "Effective Scheduling System," which required
employees to perform certain duties within specified times at
the risk of losing their jobs.

The district court granted Food Lion's motion for
summary judgment, concluding cs a matter of law that Food
Lion did not knowingly fail to disclose labor or sanitation
problems and finding that plaintiffs could not "prove

4a

justifiable reliance" as to labor problems because they had
already been disclosed and that the alleged sanitation
problems were not material. For the reasons that follow, we
affirm.

I

Food Lion is a publicly traded (over the counter)
company with headquarters in Salisbury, North Carolina, that
operates a chain of approximaiely 1,000 retail grocery stores
in the southeastern part of the United States. During the
relevant period, its earnings exceeded $ 200 million per year,
and it employed aLout 60,000 persons.

As a management tool, Food Lion has employed a labor
scheduling system, known as "Effective Scheduling," to
assist department managers in scheduling their workforces
based on the time that it should take an average employee to
complete various tasks. While some stores have never met
the goals set by the Effective Scheduling guidelines, others
consistently have met those goals. In their complaints,
plaintiffs alleged that the Effective Scheduling system
established guidelines that were not attainable for many
employees, thereby causing them to work "off the clock"
without additional pay and to cut comers, including
disregarding sanitary practices.

During the 2-1/2-year "Class Period" between May 7,
1990, when Food Lion issued its 1989 Annual report, and
November 5, 1992, when the PrimeTime Live broadcast
aired, plaintiffs purchased stock in Food Lion, allegedly
relying on its rosy statements about its relationship with its
employees and the cleanliness of its stores. Plaintiffs alleged
that during this period, Food Lion "reported optimistically
about its future" when, in fact, its profits and optimistic
outlook were dependent oi a system that required its

1
f
,

5a

employees to violate the labor laws and to pursue unsanitary
methods, facts which Food Lion failed to report.

In its 1989 Annual Report, circulated on May 7, 1990,
Food Lion stated that the Human Resources Department
"continues to insure that Food Lion employces receive
competitive wages and excellent benefits," tha: aithough
inflation led to higher costs, "these costs were recovered
primarily through improved operating efficiencies and an
increased average selling price per item;" and that "we will
continue to pay close attention to service levels and
cleanliness ii. our stores and believe we will achieve high
marks from customers in these areas." The report said
nothing about any widespread labor or sanitary problems.

During the Class Period, Food Lion continued to face and
to resist the efforts of the United Food and Commercial
Workers Union ("UFCW") to organize Food Lion workers.
When the union called for a boycott of Food Lion, the
company issued a press release on August 30, 1990, stating:

How ironic it is on this Labor Day weekend
for a union leader to call for the destruction
of more than 45,000 jobs of Food Lion
employees in retaliation for their desire to
remain union free. Suc: blatant threats and
arrogant disregard of true employee free
choice is the kind of coercion of employees
that totally desecrates the purpose and spirit
of Labor Day.

The fact is, Food Lion opens more tian 100
stores each year and adds more than 5,000
employees each year. Food Lion could not
do this without offering competitive wages

6a

and excellent benefits. On average, Food
Lion receives three to four applications for
every available job.

About a year later, on September 11, 1991, the UFCW
announced that it had filed a lengthy complaint with the
Department of Labor, accusing Food Lion of widespread
labor violations in tacitly encouraging employees to work
"off the clock" without pay. In its press release, the union
stated:

More than 37 percent of the after-tax profit
of the nation's fastest-growing retail food
chain, Food Lion, is derived from illegal
off-the-clock work of employees.

*** *

"Food Lion's profit is reported to exceed the
industry average," the complaint [filed with
the Department of Labor] states, "and its
profit advantage is widely attributed to more
efficient operations. With over one-third of
its profit derived from illegal off-the-clock
work, it is clear ihat Food Lion's profit
advantage is unfairly obtained."

* * *

Food Lion could owe as much as $ 194
million in back wages. With liquidated
damages allowed by law, its liability could
be "as high as $ 388 million."

7a

Food Lion responded with its own press release the same
day:

i Food Lion has a very clear policy against
F working off the clock. Employees, includir 5
managers, who have violated this polic:/
4 have received discipline up to and including
discharge.

This Complaint and news release by the
UFCW union is simply one more example
of the union's attempt to harass and coerce
Food Lion management into recognizing the
union without regard to the sentiments of
our employees.

Food Lion employees have repeatedly
rejected the UFCW union despite union
efforts for more than ten years.

** *

As has been the case in all other attacks on Food Lion by this
union, the company intends to defend itself vigorously in this
matter.

; On the following day, Food Lion issued another press
; release, stating:

The UFCW's most recent claims of illegal
employment practices by Food Lion and its
employees insult the hard work and integrity
of ali Food Lion employees. Those
ingredients are the key to Food Lion's

ei SE Ss ar RMS Le Sere V4 SLO

BLE COPY

8a

success and ability to bring customers extra
low prices. It is not off the clock work by
employees or other illegal employment
practices as the UFCW-sporsored
propaganda alleges.

* * *

Food Lion denies union claims of employee
mistreatment, but the public doesn’t have to
accept the word of either the Company or
the union. Let employees and the free
marketplace decide that.

***

Nothing has been proven and nothing has
been decided. Nevertheless, Food Lion is
immediately commencing a detailed
investigation of all the allegations in the
Complaint and will take appropriate action.

Several months later, on February 27, 1992, Food Lion
made further public statement with respect to the union's
claims:

As before, the UFCW union is simply
exploiting administrative charges and other
litigation as part of its effort to unionize
Food Lion. The fact is, Food Lion strictly
forbids working off-the-clock or other
wage/hour law violations. UFCW sponsored
claims of extensive wage/hour violations are

ASE adil Na WPT AE Aa A LUSSIER DALE LES SERRE, ROGET ROR GEE

ae es

;
;
bed
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a
b

9a

simply untrue. Food Lion management
diligently works to prevent even isolated
occurrences. When management discovers
them, those responsible receive appropriate
discipline, and the misconduct is stopped.

Food Lion's 1991 Annual Report, circulated on June 1,
1992, referred to "continued and constant harassment of Food
Lion by the United Food and Commercial Workers Union,"
but it also stated more positively, "We believe that Food
Lion's Extra Low Prices and its clean and conveniently
located store. ure especially well suited to the demands of our
customers." The report quoted a store manager as saying,
"Food Lion also provides job security, good wages, good
working conditions and some of the dest benefits in the
supermarket industry." The report also included an
unattributed statement that "Food Lion is one of the
best-managed high growth operators in the food retailing
industry." This Annual Report, like the 1989 Annual Report,
did not acknowledge any widespread labor violations or
sanitation problems.

Finally, in July 1992, Food Lion filed a form 10-Q with
the Securities and Exchange Commission which stated:

Management and legal counsel for the
Company are currently investigating and
evaluating the allegations contained in the
[UFCW] Complaints. The ultimate liability,
if any, which may result is not presently
determinable; however, in the opinion of
management, the Company has mezitorious
defenses to the allegations and the Company
intends to defend the allegations vigorously
and any liability will not have a material

10a

adverse effect on the financial condition or
results of operations of the Company.

On August 3, 1993, approximately one year after this public
filing (and sev~-s' months after the close of the Class Period),
the Departmer of Labor announced a settlement of the
UFCW-instigated complaints against Food Lion, in which
Food Lion agreed to pay $ 16.2 mitlion, $ 8.1 miilion in 1993
and $ 8.1 million in 1994. The $ 16.2 million represented $
13.2 million in back wages for current and former Food Lion
employees and $ 3 million in penalties. The cost of the
settlement to shareholders was 1.67 cents per share for each
year, 1993 and 1994 (i.e., $ 8.1 million divided by the
484,000,000 shares outstanding). Experts retained by both the
plaintiffs and the defendants agreed that the settlement was
not material to Food Lion's earnings. Indeed, the expert for
Food Lion stated that the settlement's effect on income was
"de minimis."

On November 5, 1992, after all of the publicity about
Food Lion's ongoing labor disputes but nine months before
the Department of Labor settlement, ABC broadcast a
PrimeTime Live episode about Food Lion stores, alleging
widespread unsanitary practices and off-the-clock work by
Food Lion employees. PrimeTime Live attributed these
deficiencies to Feod Lion's Effective Scheduling system. The
broadcast included interviews with former and current Food
Lion employees and a hidden camera investigation conducted
by two ABC employees who obtained jobs at three Food
Lion stores. The employees who were interviewed alleged
various unsanitary business practices, including pulling meat
out of a dumpster and selling it, bleaching fis: and pork with
Clorox "to et the smell out" and then selling them, mixing
rotten pork with other pork and selling it as fresh sausage,

lla

and cutting off the edge of a block of cheese that had been
nibbled by rats so that the rest of the block could be sold. An
employee stated that she used "fingernail polish remover to
take the dates off" of products so that they could be sold after
the manufacturer's date for sale had passed. The hidden
: camera investigation showed unsanitary practices, such as an
employee being instructed to alter the expiration date on ham
so that it could be sold weeks after its expiration date.

Several employees described how they worked extra
hours off the clock in order to be able to complete their
assigned tasks. Diane Sawyer, who narrated the broadcast,
summarized:

Dish bee Beth

: Over and over again, we were tuld that for
workers, Food Lion is a kind oi pressure
cooker. The employees all said the company
pays good salaries and has excellent
benefits, including profit sharing. But there's
j a flip side, a time-management policy called
4 Effective scheduling, which critics charge
forces a lot of workers to finish the work on
their own time.

DOSY aah Wola

** *

Many employees told us that [the] pace
[required by the Effective Scheduling
system] is pounding. And since very little
overtime is permitted, at the end of the day
good workers were faced with an impossible
choice. leave work unfinished, jeopardizing
their jobs, or stay and finish, giving extra

12a

hours to the company without pay. It's called
working off the clock, and it's illegal.

The day after the broadcast, Food Lion's Class A stock fell
from $ 9.25 per share to $ 8.25 per share, and its Class B
stock fell from £ 10.00 per share to $ 8.625 per share. Within
a week, the plaintiffs in these cases filed their class action
suits -. one on November 12, 1992, and the other on
November 13, 1992 -- alleging that they purchased Food
Lion stock based on artificially inflated earnings during the
Class Period. They alleged that Food Lion's profits during
that period before the broadcast had been attributable to these
illegal practices and that Food Lion failed to disclose them to
the market. The plaintiffs sued both Food Lion and its
chairman of the board, president and chief executive officer,
Tom E. Siaith.

In ite motion for summary judgment, Food Lion
presented evidence that no corporate policy authorized or
encouraged the unsanitary practices described in the
PrimeTime Live broadcast. It stated that, on the contrary, it
employs a team of auditors to ensure that its stores meet
internal sanitation standards, as well as state and local
regulatory standards. In addition, Food Lion pointed out that
it is regularly subject to a variety of federal, state, and local
inspections, including U.S. Department of Agriculture meat
inspections, U.S. Food and Drug Administration surveys and
evaluations, dairy inspections, and state and county food
safety inspections. On the average, Food Lion stated that each
store was inspected on an unscheduled, "surprise" basis
between one and one and a half times per year by state or
local health or agricultural inspectors. It claimed that it
consistently seceived very high marks from state food
sanitary authorities using numerical or alphabetical scales and

PRET ne EP A AOR SES BLP RRR eae a eR

13a

always passed inspection in states that use a pass/fail
inspection system. In one affidavit, Food Lion asserted that
its sanitation and food handling compliance record was as
good as, and in many cases better than, the records of its
principal competitors. Food Lion also stated that it has a
customer relations department that receives and investigates
customer complaints about the quality of store conditions and
products. Food Lion presented evidence that it served
approximately 400 million customers per year but only
received, on average, less than one complaint per store per
year regarding the quality of sanitation.

Food Lion also challenged the plaintiffs' claim of labor
law violations, presenting information that it was Food Lion's
policy to require employees to report all time worked. Food
Lion acknowledged that it has occasionally received reports
that an employee worked off the clock, but in each case it
investigated the report and corrected any violation. Food Lion
contended that it also audits its stores for off-the-clock work,
and internal audits showed that off-the-clock work occurred
relatively infrequently and that when such work did occur, it
was addressed appropriately and effectively. Food Lion
acknowledged that before the Class Period, it had been
charged with off-the-clock work involving a small number of
claims and that it had settled those claims with the
Department of Labor for $ 300,000. However, Food Lion
maintained that at no time during the Class Period did Food
Lion become aware of any evidence of widespread violatiors
of its policy against off-the-clock work.

The district court granted Food Lion's motion for
summary judgment, concluding first that the plaintiffs were
"unable to demonstrate that any alleged omission concerning
isolated instances of workplace errors [involving sanitation]
is actionable as a matter of law because there is not a

—

l4a

substantial likelihood that a reasonable investor would
consider these isolated instances of workplace errors
important in deciding whether to purchase Food Lion
securities." In addition, as to the alleged labor violations, the
court concluded that because the allegations had already been
disclosed to the market, the plaintiffs were unable to prove
"justifiable reliance on an alleged artificial stock price set by
the market." Finally, the court concluded that the plaintiffs
failed tc offer evidence that defendants acted "with scienter
by failing to disclose the alleged omission concerning
working off the clock or the aileged omission concerning
poor sanitation in Food Lion stores." For the same reasons,
the court dismissed all related claims against Smith, as well
as analogous claims alleged under state law.

This appeal followed.

II

The Securities Exchange Act of 1934, 1/5 U.S.C. § 78a et
seq., was "designed to protect investors against manipulation
of stock prices” through a philosophy of public disclosure.
Basic Inc. v. Levinson, 485 U.S. 224, 230, 99 L. Ed. 2d 194,
108 S. Ct. 978 (1988); Santa Fe Indus., Inc. v. Green, 430
U.S. 462, 477-78, 51 L. Ed. 2d 480, 97 S. Ct. 1292 (1977).
And it is well established that a private cause of action exists
for violation of § 10b of the Act, /5 U.S.C. § 78j(b), and for
violation of Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated
thereunder. See Ernst & Ernst v. Hochfelder, 425 U.S. 185,
196-97, 47 L. Ed. 2d 668, 96 S. Ct. 1375 (1976).

To establish liability under § 10b of the Securities Exchange
Act and under Rule 10b-5, a plaintiff must prove that, in

TENE aa aan ee aR aa ALE

RR iO aa A Serle. GRA RES AED ol PE EH A,

15a

connection with the purchase or sale of a security, "(1) the
defendant made a false statement or omission of material fact
(2) with scienter (3) upon which the plaintiff justifiably relied
nl (4) that proximately caused the plaintiffs damages."
Cooke v. Manufactured Homes, Inc., 998 F.2d 1256, 1261
(4th Cir. 1993) (quoting Myers v. Finkle, 950 F.2d 165, 167
(4th Cir. 1991)); see also Gasner v. Board of Supervisors,
103 F.3d 351, 356 (4th Cir. 1996).

It is the first element that is at issue in this case -- whether
Food Lion made a false statement or omission of material
fact. To establish this element, plaintiffs must point to a
factual statement or omission -- that is, one that is
demonstrable as being true or false. See Virginia Bankshares,
Inc. v. Sandberg, 501 U.S. 1083, 1091-96, 115 L. Ed. 2d 929,
111 S. Ct. 2749 (1991) (observing that even opinivn in the
proper context can be demonstrably true or false and
therefore factual); see also 7 Louis Loss & Joel Seligman,
Securities Regulation 3423 (3d ed. 1991). Also, the statement
must be false, or the omission must render public statements
misleading. See 17 C.F.R. § 240.10b-5. And finally, any
statement or omission of fact must be material. Materiality is
an objective concept, “involving the significance of an
omitted or misrepresented fact to a reasonable investor."
Gasner, 103 F.3d at 356 (citing TSC Industries, Inc. v.
Northway, Inc., 426 U.S. 438, 445, 48 L. Ed. 2d 757, 96 S.
Ct. 2126 (1976)). Thus, a fact stated or omitted is material if
there is a substantial likelihood that a reasonable purchaser or
seller of a security (1) would consider the fact important in
deciding whether to buy or sell the security or (2) would have
viewed the total mix of information made available to be
significantly altered by disclosure of the fact. See Basic. 485
U.S. at 231-32 (adopting standard from TSC Industries, 426
U.S. at 448-49); Gasner, 103 F.3d at 356.

16a

These components -- a factual statement or omission that is
false or misleading and that is material-- interact to provide a
core requirement for a securities fraud claim. While opinion
or puffery will often not be actionable, in particular contexts
when it is both factual and material, it may be actionable.
Thus, for example, a CEO's expression of "comfort" with a
financial analyst's prediction of his company's future earnings
was held not to be factual in that, as a future projection, it
was not capable of being proved false. See Malone v.
Microdyne Corp., 26 F.3d 471, 479-80 (4th Cir. 1 994); see
also Raab v. General Physics Corp., 4 F.3d 286, 289 (4th
Cir. 1993) (holdiug similar statement predicting future
growth not material because "the market price of a share is
not inflated by vague statements predicting growth"). On the
other hand, the Supreme Court has held that an opinion by
board members to minority stockholders that the stock price
of $ 42 for the purchase of their shares was a "high value"
and represented a "fair" transaction could be both factual and
material. See Virginia Bankshares, 501 U.S. at 1090-93. In
Virginia Bankshares, the Court noted that the opinions could
be false and factual if the directors did not believe what they
said they believed and proof could be had "through the
orthodox evidentiary process." Id. at 1093. In addition, the
court found "no serious question" that the statements could be
materia! in that shareholders, knowing that directors have
greater knowledge and expertise as well as a fiduciary duty to
sharehoiders, often act on what their board members say they
believe. Jd. at 1090.

With these relevant principles in hand, we turn to the
misstatements and omissions that plaintiffs in this case allege
"caused" them to nurchase Food Lion stock during the Class
Period.

17a
Ill

The essence of the plaintiffs’ claim is that during the Class
Period, Food Lion's earnings were “artificially inflated due to
Food Lion's widespread violations of federal labor laws and
pervasive unsanitary food-handling practices" and that Food
Lion failed to disclose these facts and, indeed, publicly
denied them. Plaintiffs contend that the true facts were "first
disclosed to the public in credibie fashion" when ABC News
aired PrimeTime Live on No'ember 5, 1992, presenting "an
expose on Food Lion's labor and sanitation practices."
Relying on the "integrity of the market" theory, the plaintiffs
claimed that they purchased Food Lion stock "at artificially
inflated prices and [there fore] were damaged." They alleged
further that "had the plaintiffs and the other Class members
known the truth, they would not have purchased Food Lion's
common stock at the prices they did or at all.”

Plaintiffs thus make two claims: (1) that Food Lion's labor
practices illegally "forced employees to work overtime
without pay," resulting in overstated profits, and (2) that
Food Lion's "widespread unsanitary conditions and sale of
spciled meat inflated sales." We address each claim in turn.

A

Throughout the Class Period, Feod Lion expressed, in public
statements, substantial pride in the fact that its employees
were well-paid and enjoyed good benefits. It claimed that it
provided its employees with job security, good working
conditions, and "some of the best benef:ts in che supermarket
industry." Its Annual Reports for 1989 and 1991 and similar
public statements expressed a belief that "Food Lion is one of

18a

the best-managed high growth operators in the food retailing
industry."?

Plaintiffs claim that these rosy statements about employee
compensation and benefits masked Food Lion's real labor
problems that were created by its Effective Scheduling
system and by the UFCW's complaint filed with the
Department of Labor charging Food Lion with wage/hour
violations. Plaintiffs’ contention focuses on the allegation that
Food Lion knew about employees being forced to work oft
the clock and that, even though the practice was widespread,
it failed to disclose it. Because such work provided
productivity from employees without compensation, the
plaintiffs' theory goes, the practice illegally and artificially
inflated Food Lion's earnings.

In addition, plaintiffs contend that, to the extent that the
practices were made public by the UFCW and others, Food
Lion's response was deceptive in explicitly denying or giving
the implicit impression that it did not have significant
amounts of off-the-clock work. For example, Food Lion said
ini response to the UFCW’'s complaint that it "intends to
defend itself vigorously in this matter;" that the company's
success was based upon the "hard work and integrity of all
Food Lion employees," rather than on any "illegal
employment practices;" and that "UFCW sponsored claims of
extensive wage/hour violations are simply untrue." Likewise,
in a filing with the SEC, Food Lion stated that while the
“ultimate liability, if any, which may result [from the UFCW
complaint] is not presently determinable. . ., in the opinion of
management, the Company has meritorious defenses to the
allegations and the Company intends to defend the
allegations vigorously and any liability will not have a
material adverse effect on the financial condition or results of

BEST AVAL

19a

operations of the Company." Plaintiffs also point to the fact
that, during this same period, Food Lion omitted to admit that
its profits were substantially dependent on this off-the-clock
work.

Plaintiffs' securities fraud claim cannot succeed because,
despite the fact that Food Lion denied the charges, the nature
of the off-the-clock claims and the claims' risk to earnings
were in fact well known to the market before the PrimeTime
Live broadcast, and therefore Food Lion's omissions were not
material. See Hillson Partners Ltd. Partnership v. Adage,
Inc., 42°F.3d 204, 212-13 (4th Cir. 1994) (noting that the
securities laws do not require disclosure of information that is
already in the public domain). On September 11, 1991, for
instance, more than a year before the PrimeTime Live
broadcast, the UFCW publicly announced that it had filed a
complaint with the Department of Labor, asserting that 183
people had claimed to have illegally worked off the clock,
that "more than 37 percent of the after tax profit" of Food
Lion was attributable to off the clock work, and that "Food
Lion could owe as much as $ 194 million in back wages."
The union warned that Food Lion's liability could be as inigh
as $ 388 million based on claims for liquidated damages.
Even as Food Lion denied the claims, however, it
nevertheless promised to conduct an investigation of the
allegations and take appropriate action. The market had a full
opportunity to evaluate these claims and to reflect their risk
in the market price for Food Lion stock. See Raab, 4 F.3d at
289 (discussing "the presumption that the market price has
internalized all publicly available information"). The
PrimeTime Live broadcast added nothing to inform the
market further. Rather, it simply repeated earlier charges
through experiences of seven employees.

20a

Because the market was thus informed of the union's charges
before PrimeTime Live aired, what PrimeTime Live
disclosed was not material. Indeed, even the much larger
problem alleged more than a year earlier by the union was not
material. Food Lion settled all of the claims made by the
union with the Department of Labor for $ 16.2 million, $ 8.1
million payable in each of 1993 and 1994. During the saiae
period, Food Lion's earnings exceeded $ 200 million per
year. Experts on both sides agree that this settlement,
reflecting a charge of less than two cents per share for e2ch
year, was not material to Food Lion's stock price. And
consistent with this conclusion, Food Lion's share price did
not drop following annovncement of the Department of
Labor settlement.

In short, the off-the-clock violations disclosed during
PrimeTime Live were already publicly available and,
therefore, were not material either to Food Lion's earnings or
the price of its stock. See Gasner, 103 F. 3d at 356.

B

We turn now to the second category of alleged misstatements
and omissions by Food Lion--those which related to
unsanitary practices. The plaintiffs have juxtaposed Food
Lion's ongoing public statements about the cleanliness of its
stores with the PrimeTime Live broadcast which revealed
allegedly widespread unsanitary practices. In its 1989 Annual
Report, Food Lion stated: "We will continue to pay close
attention to service levels and cleanliness in our stores and
believe we will achieve high marks from customers in these
areas." Similarly, in its- 199] Annual Report, Food Lion
stated: "We believe that Food Lion's Extra Low Prices and its

2la

clean and conveniently located stores are especially well
: suited to the demands of our customers."

On their face, these statements are the kind of puffery and
generalizations that reasonable investurs cou'? ~ot have
relied upon when deciding whether to buy stock. “ ze Gasner,
103 F.3d at 356; see also Raab, 4 F.3d at 290 ("The market
price of a share is not inflated by [such] vague statements").
Additionally, the plaintiffs have presented no evidence that
Food Lion's stores were not generally clean or that customers
complained about the lack of cleanliness in their stores. To
the extent that the plaintiffs claim that these ciean-stores
representations masked the existence of unsanitary practices,
they point to the broadcast from PrimeTime Live to support
their claim.

Before considering the broadcast, the district court noted that,
with a few exceptions, most of the broadcast was
inadmissible hearsay. None of the people who spoke were
under oath or subject to cross examination. In the absence of
the evidence presented by the PrimeTime Live broadcast, or
at least most of it, the district court was left with the
affidavits of Food Lion which demonstrated that it had no
corporate policy, written or unwritten, that would permit or
encourage unsanitary food-ha idling practices. The court
noted that Food Lion had "an avdit staff in place who
conducted surprise inspections of Food Lion stores to ensure
that the stores complied with health and sanitation policies."
And the court concluded that Food Lion's efforts were
apparently sufficient to satisfy federal, state, and local
inspections which revealed that Food Lion's record was "just
as good, if not better, than its competitors’ inspection
reports.”

22a

But even considering the entire PrimeTime Live broadcast,
the district court stated it "still does not present evidence of
widespread unsanitary conditions of which Defendants
knew." It noted that "with respect to the sanitary conditions at
Food Lion's 1.900 stores, the [PrimeTime Live] broadcast is
insufficient to draw any conclusions about Food Lion's
operations as a whole." The court pointed out that the
broadcast was filmed at only 3 of Food Lion's almost 1,000
stores and that out of 69,000 active employees and 40,000
former ernployees, PrimeTime Live interviewed a total of 70
current and former employees, 22 of whom had left the
employ of Food Lion as much as 8 years before the Class
Period. The district court concluded:

To the extent that there are any isolated

instances of workplace errors, . . . not only is

there not a substantial likelihood that the

reasonable investor would consider the

limited instances of workplace errors

important in deciding whether to purchase

Food Lion securities, but the Court also

finds . . . that Defendants were taking steps

to remedy these isolated problems. As a

result, the Court finds that to the extent that

there is any omission by Defendants in their

Annual and Quarterly Reports of isolated

instances of workplace errors, this omission

not only is not material as required by § 10b

but also could not make any affirmative

statements misleading in Defendants’

Annual and Quarterly Reports.

(Citations omitted).

23a

We agree with the district court that, based on the record
in this case, Food Lion was not required to make public
statements about the existence of various sanitation problems
that were revealed from time to time. These day-to-day
conditions were not shown to be material to the price of Food
Lion's stock. We also agree, as earlier noted, that the public
statements that it did make were no more than soft, puffing
statements about clean and convenientiy located stores that
no reasonable investor could rely upon in buying or selling
Food Lion stock. Accordingly, we conclude that Food Lion
did not defraud the market with false statements or omissions
of material fact as required to maintain an action under §
1U(b) of the Securities Exchange Act and Ruie 10b-5
promulgated thereunder. See Hillson Partners, 42 F.3d at
219 (noting that materiality depends on the "magnitude" of
the event in light of total company activity).

IV

Plaintiffs also sued Tom E. Smith, the CEO of Food Lion,
under § 20(a) of the Securities Exchange Act, which
provides:

Every perscn who, directly or indirectly,
controls any person liable under any
provision of this chapter or of any rule or
regulation thereunder shall also be liable
jointly and severally with and to the same
extent as such controlled person to any
person to whom such controlled person is
liable, unless the contro!ling person acted in
good faith and did not directly or indirectly

24a

induce the act or acts constituting the
violation or cause of action.

15 U.S.C. § 78t(a). Even if Tom Smith had sufficient
"control" over Food Lion such that he couid be held liable
under § 20(a) for any of the alleged securities violation by
Food Lion, we conclude that because there is nc evidence of
any such violation in this case, Tom Smith cannot be held
liable, vicariously or otherwise.

For the foregoing reasons, the judgment of the district
court is

AFFIRMED.

| Where, as here, a plaintiff pursues a securities fraud action
based on a fraud-on-the-market theory, he may, to
demonstrate reliance, rely on a presumption of direct reliance
created by his reliance on the integrity of the market.

In face-to-face transactions, the inquiry into
an investors reliance upon information is
into the subjective pricing of that
information by that investor. With the
presence of 2 market, the market is
interposed between selier and buyer and,
ideally, transmits information to the investor
in the processed form of a market price.
Thus the market is performing a substantial
part of the valuation process performed by
the investor in a face-to-face transaction.
The market is acting as the unpaid agent of
the investor, informing him that given all the

25a

information available to it, the value of the
stock is worth the market price.

Basic, 485 U.S. at 244 (quoting Jn re LTV Sec. Litig., 88
F.R.D. 134, 143 (N.D. Tex. 1980)). Accordingly, where
material false statements or omissions have been
disseminated to "an impersonal, weil-developed market for
securities, the reliance of individual plaintiffs on the integrity
of the market price may be presumed." 485 U.S. at 247; see
also Malone v. Microdyne Corp., 26 F.3d 471, 476 n.5 (4th
Cir. 1994). Rut this fraud-on-the-market presumption is
rebuttable. See Basic, 485 U.S. at 250; see also id. at 25] (
White, J., concurring in part and dissenting in part) (agreeing
with the majority that the presumption "must be capable of
being rebutted by a showing that a »!cintiff did not 'rely’ on
the market price").

in this case, the parties apparently agree that the market
for Food Lion's stock is well-developed and efficient, and
there is no suggestion that plaintiffs did not rely on the
martet price of Food Lion's stock.

2 While not material to our holding, we note that we can find
nothing in the record that would make these general
statements by Food Lion, standing alone, actionable. First,
these statements are immaterial puffery that is not actionable
under the securities laws. See, e.g., Raab, 4 F.3d at 289-90;
Howard v. Haddad, 962 F.2d 328, 331 (4th Cir. 1992).
Second, there is no evidence in the record that Food Lion
employees were not well paid; that Food Lion did not have
"some of the best benefits" in the industry; or that Food Lion
was not well managed. Third, whether or not these statements
are true, they do not bear on plaintiffs’ claims that Food Lion
forced its employees to work off the clock. Even if Food

26a

Lion's employees worked overtime without pay, they could
still be well paid compared to other employees in the
industry.

DISSENTBY.
MURNAGHA

DISSENT:

MURNAGHAN, Circuit Judge, dissenting:

I respectfully dissent. The majority opinion claims that Food
Lion's failure to disclose its "off the clock" policy was not
material because the market was fully informed of any risks
in the price of Food Lion's stock. The majority relies on the
press reports reflecting the dispute between Food Lion and
thc UFCW over Food Lion's employment practices. In doing
so, the majority cites Hillson Partners Ltd. Partnership v.
Adage, Inc., 42 F.3d 204 (4th Cir. 1994), and Raab v.
General Physics Corp., 4 F.3d 286 (4th Cir. 1993).

In Hillson Partners and Raab, the corporation-defendants
made misleading statements to the market about their
economic situations. In both cases, however, the defendants
admitted their financial problems through additional public
disclosures. See Hillson Partners, 42 F.3d at 212 (defendant
disclosed the financial problems of its subsidiary in its
Annual Report and a Form 10K filing); Raab, 4 F.3d at 289
(defendant issued a press release informing the market of an
impending reduction in its earnings on the same day as the
misleading statements in its Annual Report). Because the
market had access to the defendants’ financi2! problems, we
held that the misleading statements were not material to the
plaintiffs’ decisions to purchase stock. See Hillson Partners,
42 F.3d at 212-13; Raab, 4 F.3d at 289.

nai

eed 27a

Hillson Partners and Raab do not control the case at bar. The
majority incorrectly suggests that any public information
contradicting Food Lion's misleading statements forecloses
the possibility of finding that those statements were material.
However, the controlling principle is that "in a fraud on the
market case, Food Lion's failure to disclose material
informaiion may be excused where that information has been
made credibly available to the market by other sources."
Raab, 4 F.3d at 289 (quoting In re Apple Sec. Litig., 886 F.2d
1109, 1115 (9th Cir. 1989) (emphasis added)); see also Basic
Inc. v. Levinson, 485 U.S. 224, 248-49, 99 L. Ed. 2d 194, 108
S. Ct. 978 (1988). The majority does not analyze whether the
allegations against Food Lion came from a credible source. !

Here, the market first heard about Food Lion's problems
through an employment dispute between Food Lion and the
UFCW. Food Lion had been resisting the efforts of the
UFCW to organize Food Lion's workers. In August of 1990,
the UFCW called for a boycott of Food Lion's stores to
protest Food Lion's opposition to the union. Food Lion
responded by accusing the UFCW of "the kind of coercion of
employees that totally desecrates the purpose and spirit of
Labo: Day." The public thus was aware that Food Lion and
the UFCW were involved in a bitter dispute over whether
Food Lion's stores would unionize.

In September of 1991, the UFCW filed its complaint with
the Department of Labor, citing Food Lion's policy of
encouraging "off the clock" work by employees. Food Lion
responded by denying the UFCW's claim. Food Lion also
suggested that the claim was an effort to use unmeritorious
litigation to force Food Lion to unionize. Food Lion stated in
a public statement that "as before, the UFCW union is simply
exploiting administrative charges and other litigation as part
of its effort to unionize Food Lion . . . . UFCW sponsored

28a

claims of extensive wage/hour violations are simply untrue."
Food Lion thus characterized the UFCW's claim as merely
another tactic in an ongoing labor dispute.

The information available to the public when the
plaintiffs purchas:-d Food Lion stock came from an admitted
adversary of Fuod Lion. Given the history of antagonism
between the parties and Food Lion's vehement denials, the
information about Food Lion's policies did not come from a
credible source. A dispute of fact, therefore, exists as to
whether Food Lion's representations were material to the
plaintiffs’ decisions to purchase Food Lion vtock.

Because a dispute of fact exists as te whether Food Lion's
representations were material, the district court's grant of
summary judgment to Food Lion was inappropriate. | would
reverse the district court's grant of summary judgment in
favor of Food Lion.’

| Obviously, we did not have to analyze whether the negative
information in Hillson Partners aid Raab came from a
credible source. In both cases, the information came from the
defendant's own statements.

? For the same reasons, I would reverse the district court's
grant of summary judgment in favor of defendant Tom
Smith.

29a
4:92CV696, 4:92CV705
UNITED STATES DISTRICT COURT FOR THE MIDDLE
DISTRICT OF NORTH CAROLINA
DAVID I. LONGMAN,
Plaintiff,

Vv.

FOOD LION, INC. and TOM E. SMITH,
Defendants.

JEFFREY FEINMAN, PAUL N. GARDNER DEFINED
PLAiW TRUST and EDWIN HANKIN and LINDA
HANKIN,

Plaintiffs,

Vv.

FOOD LION, INC. and TOM E. SMITH, Defendants.

January 4, 19¥9, Decided

January 4, 1999, Filed

COUNSEL:
For DAVID I. LONGMAN, plaintiff (92-C'V-696): DAVID
M. CLARK, CLARK & WHARTON, GREENSBORO, NC.

| TT

30a

For DAVID I. LONGMAN, plaintiff (92-CV-696): JOSEPH
H. WEISS, MOSHE BALSAM, DAVID KATZ, LAW
OFFICES OF WEISS & YOURMAN, NEW YORK, NY.

For DAVID I. LONGMAN, plaintiff (92-CV-696):
STANLEY D. BERNSTEIN, KREINDLER &
KREINDLER, NEW YORK, NY.

For JEFFREY FEINMAN, GARDNER, PAUL M.,
DEFINED PLAN TRUST, EDWARD HANKIN, LINDA
HANKIN, plaintiffs (92-CV-705): B. ERVIN BROWN, II,
MOORE AND BROWN, WINSTON-SALEM, NC.

For JEFFREY FEINMAN, plaintiff (92-CV-705): JEFFREY
H. SQUIRE, KAUFMAN, MALCHMAN, KIRBY %&
SQUIRE, NEW YORK, NY.

For JEFFREY FEINMAN, plaintiff (92-CV-705):
MICHAEL J. FUCHS, WOLF, POPPER, ROSS, WOLF &
JONES, NEW YORK, NY.

For JEFFREY FEINMAN, plaintiff (92-CV-705): LUBNA
M. FARUQI, FARUQI & FARUQI, LLP, NEW YORK, NY.

For GARDNER, PAUL M., DEFINED PLAN TRUST,
plaintiff (92-CV-705): LAWRENCE A. SUCHAROW,
GOODKIND, LABATON, RUDOFF & SUCHAROW,
NEW YORK, NY.

For EDWARD HANKIN, LINDA HANKIN, plaintiffs
(92-CV-705): JEFFREY G. SMITH, SHANE T. ROWLEY,
WOLF, HALDENSTEIN, ADLER, FREEMAN & HERZ,
NEW YORK, NY.

3la

For EDWARD HANKIN, LINDA HANKIN, plaintiffs
(92-CV-705): DAVID BROWER, WOLF, HALDENSTEIN,
ADLER, FREEMAND & HERZ, NEW YORK, NY.

For FOOD LION, INC., TOM E. SMITH, defendants
(92-CV-696, 92-CV-705): JAMES T. WILLIAMS, JR.,
ROBERT A. SINGER, REID L. PHILLIPS, BROOKS,
PIERCE, MCLENDON, HUMPHREY & LEONARD,
GREENSBORO, NC.

For FOOD LION, INC., defendant (92-CV-696, 92-CV-705):
RICHARD L. WYATT, JR., CLINTON R. BATTERTON,
AKIN GUMP STRAUSS HAUER & FELD, L.L-P.,
WASHINGTON, DC.

For TOM E. SMITH, defendant (92-CV-696, 92-CV-705):
DANIEL ALAN M. RULEY, WILLIAM KEARNS DAVIS,
BELL, DAVIS & PITT, P.A., WINSTON-SALEM, NC.

For LYNNE NEUFER-DALE, respondent (92-CV-696,
92-CV-705): HARRELL HUGH STEVENS, JR.,
EVERETT, GASKINS, HANCOCK & STEVENS,
RALEIGH, NC.

For LYNNE NEUFER-DALE, respondent (92-CV-696,
92-CV-705): RANDALL J. TURK, MILLER, CASSIDY,
LARROCA & LEWIN, WASHINGTON, DC.

For ROBERT HARBRANT, JEFFREY FIEDLER, KEITH
MESTRICH, SEAN CUNNIFF, FOOD AND ALLIED
SERVICE TRADES DEPARTMENT, AFL-CIO,
RESEARCH ASSOCIATES OF AMERICA, movants
(92-CV-696, 92-CV-705): THOMAS E. GRAHAM,

a
SS dea s

32a

KILPATRICK STOCKTON, L.L-P., WINSTON-SALEM,
NC.

For NEEL LATTIMORE, NICHOLAS W. CLARK,
MAUREEN DWYER, ALLEN Y. ZACK, CHARLES L.
ULSCH, movants (92-CV-696, 92-CV-705): CHARLES E.
JOHNSON, CHARLOTTE, NC.

For SUSAN BARNETT, movant (92-CV-696, 92-CV-705):
HARRELL HUGH STEVENS, JR., EVERETT, GASKINS,
HANCOCK & STEVENS, RALEIGH, NC.

For COOPERS & LYBRAND, movent (92-CV-696,
92-CV-705): MARK A. ASH, JAMES Y KERR, II, SMITH,
ANDERSON, BLOUNT, DORSETT, MITCHELL &
JERNIGAN, RALEIGH, NC.

JUDGES:
James A. Beaty, Jr., United States District Judge.

OPINIONBY:
James A. Beaty, Jr.

OPINION:
MEMORANDUM OPINION

BEATY, District Judge.

This matter is before the Court pursuant to Plaintiffs’
Motion to Strike Confidentiality Order [Document # 234).
Plaintiffs request that all of the documents and material in the
judicial record be released from the seal which was imposed
on confidential documents as part of the Court's December 2,

oo

33a

1994 Confidentiality Order. For the reasons that follow,
Plaintiffs’ request is denied. )

|. FACTUAL BACKGROUND

On June 18, 1998, the Court granted Defendants’ Motion
for Summary Judgment and thereby resolved the underlying
dispute in this case. The facts of the dispute are fully set
forth in the Memorandum Opinion accompanying that Order.
Plaintiffs have appealed the summary judgment decision to
the Fourth Circuit.

However, the current dispute revolves around the
Confidentiality Order entered during discovery in this case.
During pretria! discovery, Defendants moved for a protective
order to limit discovery of confidential business information
pursuant to Fed. R. Civ. P. 26(c). On March 16, 1994, the
Court granted Defendants’ request for a protective order, and
directed the parties to "meet and determine whether or not
they [could] stipulate to the contents of this order." The
parties agreed to a Confidentiality Order, which was entered
by the Court on December 2, 1994.

| Under the terms of the Confidentiality Order, any party
| had the power to stamp discovery material as "confidential."
) Material stamped "confidentiai" could only be disclosed to
certain parties who needed access for purposes of this
litigation. Under the Order, a party could challenge the
"confidential" designation by filing an application with the
Court challenging the confidentiality of a specific document
or category of documents. For discovery material submitted
to this Court in connection with a motion to dismiss or
motion for summary judgment, any discovery material
designated as "confidential" was required to be filed under
seal.

34a

Defendants turned over numerous documents during
discovery, with many documents and categories of
documents stamped "confidential." Plaintiffs did not
challenge any of the confidentiality designations during
discovery. Plaintiffs submitted much of this discovery
material to the Court, including over nine binders of
documents, at the summary judgment stage. All of the
material that was stamped "confidential" was filed under seal,
as required by the Confidentiality Order.

Plaintiffs now seek to generally strike the Confidentiality
Order, at the very least as it pertains to material that is part of
the "judicial record." Thus, Plaintiffs seek to unseal the entire
record on appeal, and request full public disclosure of the
discovery material in the nine volumes submitted in
connection ‘vith the summary judgment motion. Plaintiffs
claim that they are proceeding under Paragraph Twelve of the
Confidentiality Order, which provides that "nothing in this
order shall prevent any party or other person from seeking
modification of this order... ."

I]. PROCEDURAL POSTURE

Local Rule of Appellate Procedure 10(d) provides that "in
the rare event that a change of circumstances occurs during
the pendency of an appeal that warrants reconsideration of a
sealing issue decided below, or initial consideration of the
need to seal all or part of the record on appeal, an appropriate
motion may be filed with the Clerk of the Court of Appeals. .
-_ Material contained in the record subject to a protective
order remains subject to that order on appeal unless modified
or amended by the Court of Appeals." Defendants contend
that under this rule, Plaintiffs’ motion may only be brought

35a

before the Fourth Circuit while the case is on appeal, and
may only be brought if Plaintiffs can indicate a "change of
circumstances during the pendency of [the] appeal."

However, under Local Rule 10(d), "the Court of Appeals
expects that motions to seal all or any part of the record will
be presented to, and resolved by, the lower court . . . during
the course of trial, hearing, or other proceeding below." In
addition, under Local Rule 10(e), "disputes concerning the
accuracy or composition of the record on appeal should be
resolved in the trial court in the first instance." When the
Fourth Circuit was presented with a similar motion to unseal
a record while the case was on appeal in Rushford v. New
Yorker Magazine, Inc., the Fourth Circuit chose to remand
the case to the district court to resolve the issues that were
raised for the first time in that motion. See Rushford, 846
F.2d 249, 250-51 (4th Cir. 1988). The Fourth Circuit
remanded the motion, despite the fact that Local Rule 10(d)
provided that "material contained in the record subject to a
protective order remains subject to that order on appeal
unless modified or 2mended by the Court of Appeals." Local
R. App. P. 10(d) (1988).

Plaintiffs’ motion is currently pending before this Court,
and, in this Court's view, it would not be an effective use of
judicial resources to decide the issue on procedural grounds
without reaching the merits, only to have the Fourth Circuit
remand the case to this Court for a determination of the
merits of these newly raised issues. Therefore, this Court will
consider Plaintiffs’ motion to strike the Confidentiality Order,
while acknowledging that the Fourth Circuit may conclude
that such a motion to unseal the record is best directed to that
Court for initial consideration during the pendency of an
appeal, pursuant to Local Rule 10(d).

————f); see also Andrews, 823 F. Supp. at 365
(acknowledgir . that actions brought after Lampf apply the
one-year/iiuree-year statute of limitations). The doctrine of
equitable tolling does not apply. Cooke, 998 F.2d at 1264.
The Fourth Circuit has determined that the statute of
limitation: for securities fraud begins to run ‘when the fraud
is either actually known or should have been discovered by
the exercise of due diligence.” Andrews, 823 F. Supp. at 365
(quoting Newman v. Prior, 518 F.2d 97, 100 (4th Cir. 1975)).
In a fraud on the market case, the statute of limitations begins
to run when the market knew or could have discovered the
alleged fraud in connection with the securities sale. See
Cooke. 998 F2d at 1262-63. Furthermore, as the Fourth
Circuit has explained,

[i]nquiry notice is triggered by evidence of the
possibility of fraud, not by complete exposure to the
alleged scam.. Merely bringing suit after the scheme
has been laid bare through the efforts of others. will
not satisfy the requirements of due diligence when
there have been made prior warnings that something
was amiss.

Brumbaugh v. Princeton Partners, 985 F.2d 157, 162 (4th Cir.
1993).

Plaintiffs filed both lawsuits now before this Court one week
after the November 5, 1992 PTL broadcast. Plaintiffs allege
that PTL revealed that Food Lion’s time management system
called Effective Scheduling forced employees to work off the

99a

clock. (Am. Compl. § 27.) Plaintiffs further allege that the
PTL broadcast revealed that the DOL was investigating Food
Lion’s labor practices regarding its off the clock work
requirements. (Am. Compl. §] 28.) Because the Court has
found that information concerning working off the clock as a
result of the Effective Scheduling System, the DOL
investigation, and the possible effects of labor violations on
Food Lion’s net profits was made credibly available to the
market beginning September 11, 1991, the Court also finds
that the statute of limitations for bringing any legal action
relating to this information began running on that date. See
Cooke, 998 F.2d at 1263 (finding that the date on which the
market was apprised of the information was also the date on
which the statute of limitations commenced running). Thus,
to the extent that the statute of limitations began running on
September 11, 1991, and because the Longman Complaint
was not filed until November 12, 1992 and the Feinman
Complaint was not filed until November 13, 1992, those
Plaintiffs who purchased Food Lion stock prior to September
11, 1991 are barred by the one-year statute of limitations. The
Court will grant Defendants’ motions for summary judgment
as to those 7laintiffs who purchased Food Lion stock prior to
September 11, 1991.

a Scienter

Notwithstanding the Court’s consideration of the
previous issues, Defendants argue that they are nevertheless

entitled to summary judgment on the § 10(b) and Rule 10b-5
claims because Plaintiffs are unable to prove that any alleged
omissions were made with scienter. Scienter is defined as “‘a
mental state embracing intent to decei’2, manipulate, or
defraud.” Malone, 26 F.3d at 478 (quoting Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 194.n.12, 96S. Ct. 1375, 138 1-82

100a

n.12, 47 L. Ed. 2d 668, 677 n.12 (1976)). Severe recklessness
may also satisfy the scienter requirement. Simpson v.
Specialty Retail Concepts, Inc., 908 F. Supp. 323, 328
(M.D.N.C. 1995); see Malone, 26 F.3d at 479 n.9 (stating
that “[mJost ci-cuits have held that recklessness also may
satisfy the scier er requirement”). Just as with the question of
materiality, “issues of intent typically go to the jury and
defendants are not entitled to summary judgment as a matter
of law ‘on the ground of lack of scienter unless the plaintiff
has failed to present facts that can support an inference that
defendants acted «ith an intent to deceive,’ manipulate, or
defraud.” Malone, 26 F.3d at 479 (quoting Wechsler v.
Steinberg, 733 F.2d 1054, 1058-59 (2nd Cir. 1984)).

The Court will address the issue of scienter in light of
what Plaiatiffs contend were the two omissions from Food
Lion’s Annual and Quarterly Reports—that is, (a) Defendants
made statements about Food Lion’s higher than industry
profit margins but did not disclose that its profit margins
were based on illegal labor practices which were attributable
to its Effective Scheduling System, and (b) Defendants made
statements about Food Lion’s high regard for good sanitation
but did not disclose that its Effective Scheduling System
caused employees to engage in unsanitary practices in order
to avoid having to work off the clock. The Court notes that
Defendants deny Plaintiffs’ contentions that Food Lion
engaged in illegal labor practices and had unsanitary
conditions as a result of the demands of the Effective
Scheduling System.

a. Scienter With Respect To
Working Off The Clock

|

10la

Defendants contend that there is insufficient evidence
to create a genuine issue of material fact with respect to
scienter from which a reasonable jury could infer that
Defendants acted with the intent to defraud, or acted with
severe recklessness, by not disclosing, as Plaintiffs contend,
Defendants’ knowledge that employees were working off the
clock as a result of the Effective Scheduling System.
Conversely, Plaintiffs argue that the August 2, 1990
Simonsen Letter clearly shows that Defendants were aware of
violations of the FLSA as a resuit of the Effective Scheduling
System; Plainuffs further contend that Defendants acted with
an intent to defraud the market, or acted with severe
recklessness, by not disclosing Defendants’ knowledge of the
effect of Food Lion’s Effective Scheduling System. At the
February 18, 1998 hearing, Plaintiffs submitted the following
statements from the Simonsen Letter which Plaintiffs contend
support their argument that Defendants acted with scienter:

(1) One general area of concern of the supervisors is
the perceived harshness with which management has
reacted to particular rules violations.

(2) Another general area of concern is how recent
management actions will affect cur compliance with
the rule against working off the clock. On the one
hand, supervision believes that our current
compliance with the rule ‘against working off the
clock] is excellent and the test it has ever been. On
the other hand, however, supervision believes that
recent developments will result in a_ significant
amount of working off the clock.

(3) Two developments to which supervision points are
the improved audit of product entering the stores

102a

(thus, decreasing the ability of department
management to cheat on the case counts).

(4) One supervisor put it this way: “Every one in this
room does everything he can to stop working off the
clock. The amount of working off the clock now is
the smallest it’s ever been or will be. But, with these
kinds of requirements, department heads will have
one of three choices: cheat on effective scheduling as
best they can; work off the clock as best they can; or
get fired.”

(5) We have discussed the making of a videotape with
Tom. Smith addressing the problem of working off the
clock. Given the current attitudes of supervision and
department heads, I fear that any such additional
efforts at communicating the rule against working off
the clock, without a perceived reduction in production
pressure, would be very cynically received.

(Pls.’ Ex. A, attached to Pls.' Resp. to Defs.’ Supp. Mem. on
Admiss. of Simonsen Letter.) However, even viewing this
letter in its entirety, the Court finds that this letter only
reflects Simonsen’s recollection as to the supervisors
assumptions or observations as to employees working off the
ciock. After reviewing the Simonsen Letter, the Court finds
that the Simonsen Letter is not evidence from which a
reasonable jury could infer that Defendants intended to
deceive the market See Malone 26 F.3d at 479.

Furthermore, the Court also finds that a consideration
of the other evidence before this Court fails to reveal an
intent to defraud on behalf of Defendants. For example,
Defendants’ evidence shows that whether it is called

103a

“effective scheduling,” “demand scheduling,” or “target
scheduling,” Food Lion is not the only store that employs a
labor scheduling system where work is monitored according
to a given amount of time. (Dawson Aff. J 4; Vedeikis ] 7.)
Furthermore, Defendants offered evidence that Food Lion is
better at monitoring off the clock violations than some of its
competitors. (Bolick § 11; Vedeikis J 7.) The evidence also
shows that Food Lion has policies in place for ensuring that
employees know that working off the clock is prhibited.
(Dinse Aff. § 3.) For examp!s, when an employee begins
working at Food Lion, the employee goes through an
orientation process which includes a review of Food Lion’s
off the clock policy statement. (Id.) Every year thereafter, the
employee must read and sign an acknowledgment of this
policy. (Id.) This policy is contained in the Personnel
Handbook distributed to each employee. (Id.) Food Lion also
has employee hotlines through which employees may

anonymously report off the clock violations. (Id. 4 4.)
Finally, Food Lion conducts anonymous employee surveys in
which employees are requested to report off the clock
violations. (Id.) If, through any of these means, an off the
clock violation is reported, Food Lion conducts an
investigation into this allegation. (Vedeikis § 5.) If it is
determined that an employee intentionally worked off the
clock, that employee is disciplined in accordance with Food
Lion policy. (Id.) If it is determined that the empioyee’s
supervisor knew about the employee working off the clock
but ignored it, the employee is paid for the time and the
supervisor is terminated. (Id.) A consideration of this
evidence does not lead the Court to believe that a reasonable
jury could infer that Defendants acted with an intent to
defraud or acted with severe recklessness in making
statements concerning employment practices.

104a

Moreover, Plaintiffs’ own evidence demonstrates how
Food Lion’s policies were designed to prevent labor
violations such as working off the clock. For example,
although Plaintiffs have offered evidence of incident reports
that show that Defendants were aware of instances of off the
clock violations, in all but a few of these reports, the evidence
also shows that Food Lion took some form of corrective or
Gisciplinary action pursuant to Food Lion policy. (See Pls.’
Exs. 26, 27, 29, 45, 47, 49, 60.) Similarly, although Plaintiffs
have offered a mc.no from Tom Smith that demonstrates that
he was also aware of off the clock problems, Tom Smith’s
memo to Jerry Helms, Senior Vice president and Chief
Operating Officer of the company, solicits Helms’ opinion as
to the Audit Department’s suggestions as to “what can be
done to cut down on the amount of cheating done on
Effective Scheduling.” (Pls.’ Ex. 11.) Finally, although
Plaintiffs have offered evidence of employee statements such
as ““[w]orking ‘off the clock’ is a way of life at Food Lion,”
“Food Lion knows that people work off the clock,” and “its
impossible to get the job done if you don’t [work off the
clock],” (Pls.” Exs. 12-14), the Court notes that ill of these
comments were solicited by Food Lion in its employee
opinion surveys as a means of monitoring the effectiveness cf
its employment practices. As a result, the Court finds that,
even when considering the Simonsen Letter, the evidence
before this Court is not consistent with an intent to defraud
the market. The Court finds that the evidence before this
Court fails to support an inference that Defendants knowingly
omitted material information about employees working off
the clock from their Annual and Quarterly Reports, in bad
faith, with ar intent to defraud the market, or with severe
recklessness. The Court therefore finds that Defendants are
entitled to summary judgment based on the absence of

Seca arte “Lona

ON

105a

evidence of scienter as to the issue of omissions by
Defendants as to the effect of the Effective Scheduling
System on employees working off the clock.

h. Scienter With Respect To Poor
Sanitation

The Court has previously determined that Plaintiffs’
evidence fails to demoiustrate that Food Lion had a
widespread sanitation problem as a result of its Effective
Scheduling System. Rather, the Court has found that the
evidence simply shows isolated instances of workplace
errors. The Court also has determined that this evidence of
isolated instances of workplace errors is not niaterial as a
matter of law. Defendants argue that even if these isolated
instances of misconduct are material, which they deny,
Plaintiffs still have not presented any evidence that creates a
genuine issue of material fact that Defendants, with scienter,
omitted information about isolated instances of workplace
misconduct. In support of this argument, Defendants have
offered affidavits of thirty-seven managers, vice presidents,
and other executives which all confirm that statements made
in Defendants’ Annual and Quarterly Reports aboui
conditions throughout Food Lion stores were made in good
faith and that no one had seen anything like the conditions
depicted on PTL. Defs.’ Exs. in Support of Food Lion’s Mot.

for Summ. J.)

Plaintiffs contend that the Simonsen Letter and Dr.
Gilbreath’s expert report, which the Court has discussed
earlier, creates = genuine issue of maicrial fact concerning
whether Defendants acted with scienter when they omitted to
disclose what they allegedly knew about the alleged
sanitation problems throughout Food Lion stores. However,

106a

the Court does not agree that this evidence demonstrates that
Defendants acted with scienter by not disclosing what they
knew about the isolated instances of sanitation problems in a
few of Food Lion stores. First, with respect to the Simonsen
Letter and the issue of scienter, the Court finds that the
Simonsen Letter makes no mention of any sanitation
problems nor draws any connection between Efiective
Scheduling and sanitation. Second, although Dr. Gilbreath
gives his opinion that because store managers were evaluuted
based on their ability to effectively implement the Effective
Scheduling System, this had the potential to cause the
extensive and widespread practice by Food Lion managers,
inter alia, to minimize time spent on certain fixed tasks, the
Court finds that Dr. Gilbreath’s opinion is not any evidence
of an intent to defraud by Defendants. As a result, the Court
finds that neither the Simonsen Letter nor the Gilbreath report
are sufficient evidence from which a reasonable jury could
infer that Defendants omitted information about any
sanitation problems with the intent to deceive the market or
with severe recklessness. Thus, the Court will grant
Defendants summary judgment motions on the basis of iack
of scienter with respect to Defendants’ failure to disclose
what Food Lion knew about any alleged sanitation problems
in Food Lion stores.

4. Summary of the Court’s Findings

Based on the above discussion, the Court finds that
Plaintiffs are unable to demonstrate that any alleged om'ssion
concerning isolated instances of workplace errors is
actionable as a matter of law because there is not a substantial
likelihood that a resonable investor would consider these
isolated instances of workplace errors important in deciding
whether to purchase Food Lion securities. Therefore, the

107a

Court finds that Plaintiffs are unable to establish materiality
as to any alleged omissions concerning isolated instances of
workplace errors in sanitation in Food Lion stores.

The Court further finds that any alleged omission
concerning the allegations of employees working off the
clock, and the alleged cffects of off the clock on Food Lion
profits, was fully disclosed in the previously mentioned press
releases and Food Lion’s Annual and Quarterly Reports as of
September 11, 1991. Therefore, as to those Plaintiffs who
purchased Food Lion stock as of September 11, 1991, the
Court finds that those Plaintiffs are unable to prove justifiable
reliance on an alleged artificial stock price set by the market
as a result of any optimistic statements about Food Lion’s
higher than industry profit margins.

To the extent that September 11, 1991 has been
accepted by the Court as the date of disclosure, the Court
further finds that as to those Plaintiffs who purchased Food
Lion stock prior to September 11, 1991, the market was on
notice at that time, or should have discovered, the risks
associated with the allegations that Food Lion had engaged in
labor violations. Because these Plaintiffs failed to bring an
action within one year from the date of disclosure, the Court
finds that those Plaintiffs who purchased Food Lion stock
prior to September 11, 1991 are time barred by the one-year
statute of limitation.

Finally, based on the Court’s prior discussion of
scienter, the Court finds that Plaintiffs have failed to offer
evidence that Defendants acted with scienter by failing to
disclose the alleged omission concerning working off the
clock or the alleged omission concerning poor sanitation in
Food Lion stores. As a result, the Court finds that as a matter

faa nN MEER

108a

of law, based on the elements as set forth in Cooke, Plaintiffs
have failed to demonstrate a securities fraud claim pursuant
to § 10(b) and Rule 10b-5. fn25 Therefore, the Court will
grant Defendant Food Lion and Defendant Tem Smith’s
motions for summary judgment as to Plaintiffs’ securities
fraud claim.

B. PLAINTIFFS’ SECURITIES FRAUD
CLAIM UNDER SECTION 20(a)

It is well settled that where the primary liability ¢
10(b) claim fails, there can be no secondary controlling
person liability under § 20(a). In re Cryomedical Sciences,
884 F. Supp. at 1011; 15 U.S.C. § 78t(a) (stating that a
controlling person sha!! be liable to the same extent as such
controlled person). Thus, because the Court has found that
Plaintiffs have failed to demonstrate primary liability under §
10(b) of the Securities Exchange Act, the Court finds that
Plaintiffs also cannot maintain a claim under § 20(a) against
Defendant Tom Smith as a controlling person. The Court will
grant Defendant Tom Smith’s Motion for Summary
Judgment as to this claim.

i. STATE LAW CLAIMS

Finally, by granting Defendants’ motions for
summary judgment as to Plaintiffs’ federal claims under §§
10(b) and 20(a) of the Securities Exchange Act, the Court
finds that there is no basis for exercising jurisdiction over
Plaintiffs’ state law claims for fraud, deceit, and negligent
misrepresentation. See 22 U.S.C. § 1367(c). As a result, the
Court will dismiss this action in its entirety.

109a

B PLAINTIFFS’ MOTION FOR PARTIAL
SUMMARY JUDGMENT

Having granted Defendant Food Lion’s Motion for
Summary Judgment and Defendant Tom Smith’s Motion for
Summary Judgment, and having dismissed this 2..10n, the
Court finds that Plaintiffs’ Motion for Partial Summary
Judgment is hereby rendered moot.

VI. CONCLUSION

Motion to Respond [For the above stated reasons, Plaintiffs’
Motion to Strike, or in the alternative, Document # 223] 1s
denied. Defendant Food Lion’s Motion for Summary
Judgment [Document # 190] and Defendant Tom Smith’s
Motion for Summary Judgment [Document # 188] are
granted and this action is dismissed. Plaintiffs’ Motion for
Partial Summary Judgment [Document # 192] is hereby
rendered moot. An Order and Judgment consistent with this
Memorandum Opinion will be filed contemporaneously
herewith.

This, the day of 1998.

United States District Judge

110a

Footnotes

fnlTwo separate, but substantially identical,
complaints initially were filed by the present group of
Plaintiffs. The Longman Complaint was filed on November
12, 1992, and the Feinman Complaint was filed on November
13, 1992. The Longman Complaint was amended on January
20, 1993. Finding that the Longman and Feinman cases are
identical for all practical purposes, Judge Erwin consolidated
these cases in an Order filed with this Court on March 16,
1994. For purposes of the discussion in this Memorandum
Opinion, both the Longman Amended Complaint and the
Feinman Complaint raise the same issues before this Court
and will jointly be referred to as “the Complaint.”

fn2 October 17, 1994 Order [Document # 53]
granting Plaintiffs’ Motion to Certify Class.

fn3 Section 10(b) provides:
It shall be unlawful for any person, directly or

indirectly, by the use of any means.
(b) To use or employ, in connection with the
purchase or sale of any security registered on a
national securities exchange or any security
not so registered, any manipulative or
deceptive device or contrivance in
contravention of such rules and regulations as
the Commission may prescribe as necessary or
appropriate in the public interest or for the
protecticn.of investors. |

1S U S.C. § 78j(b).

fn4 Section 20(a) provides:

llla

(a) Every person who, directly or indirectly,
controls any person liable under any provision of this
chapter or of any rule or regulation thereunder shall
also be liable jointly and severally with and to the
same extent as such controlled person to anv person to
whom such controlled person is liable, u.less the
controlling person acted in good faith and did not
directly or indirectly induce the act or acts
constituting the violation or cause of action.

15 U.S.C. § 78t(a).

fn5 15 U.S.C. §§ 78a et seq.
fn6 Rule 10b-5 provides:

It shall be unlawful for any person, directly or
indirectly, by the use of any means or instrumentality
of interstate commerce, or of the mails or of any
facility of any national securities exchange,

(a) To employ any device, scheme, or artifice
to defraud,

(b) To make any untrue statement of a material

fact or to omit to state a material fact necessary

in order to make the statements made, in the
light of the circumstances under which they
were made, not misleading, or

(c} To engage in any act, practice, or course of

business which operates or would operate as a

fraud or deceit upon any person,
in connection with the purchase or sale of any
security.

17 C.F.R. § 240.10b-S.

j

112a

fn7 Defense Thirteen alleges that the United Food
and Commercial Worker’s Union (“UFCW”) and others
acting in concert with it had been engaging in a “corporate
campaign” to attack and cause injury to the business and
property of Food Lion with the intention of eliminating and
reducing competition from Food Lion in markets where the
UFCW represented employees of compeiiiig retail stores.
Defense Fourteen claims that ABC did not accurately
broadcast the facts concerning Food Lion and that the UFCW
and ABC acted to reinforce the negative impact of the PTL
story. Defenses Fieen and Sixteen assert equitable estoppel
defenses. Defense Seventeen asserts an in pari delicto
defense. Defense Eighteen asserts an unclean hands defense.

fn8 Plaintiffs’ and Defendants’ briefs aiso discuss
statements made by Senator Tom Lantos at a congressional
hearing before the Employment and Housing Subcommittee.
Plaintiffs offer Senator Lantos' statements to counter
Defendants’ argument that some Food Lion employees
voluntarily worked off the clock. (See Pls.’ Mem. of Law in
Opp’n to Food Lion’s Mot. for Summ. J. at 9-10.) However,
because Senator Lantos’ statements are not relevant to the
issues discussed in this Memorandum Opinion, the Court
declines to address the admissibility of these statements.

fn9A fter a review of all of the statements, particularly
those emphasized by Plaintiffs, the Court notes that many of
these statements are not actionable because they are forward
looking statements about Food Lion’s prospects in the future.
See Raab v. General Physics Corp., 4 F.3d 286, 289 (4th Cir.
1993) (stating that predictions about future growth are not
material). If this was the basis of Plaintiffs’ claim, then there
would be no securities fraud claim as to those statements
because soft, puffing statements are generally not material as

Bibi Kc in to nisab dase

113a

a matter of law. See Recognizing this, Plaintiffs argued at the
February 18, 1998 hearing that this is not a case about
projections. Rather, as Plaintiffs argued, this is a case about
what Defendants omitted to say in their Annual and Quarterly
Reports about current facts concerning Food Lion. Therefore,
the Court will not discuss this case in the context of a
projections case to determine whether the statements made in
the Annual and Quarterly Reports are actionable or are
merely soft statements generally not actionable as a matter of
law. Rather, the Court wil! address Plaintiffs’ arguments that
Defendants engaged in securities fraud because Defendants
omitted material information from Food Lion’s Annual and
Quarterly Reports.

fn10 In addition to the PTL broadcast, Plaintiffs have
also submitted forty hours of undercover footage as an
exhibit in response to Defendants’ motions for summary
judgment.
(See Pls.’ Ex. 66.) However, Plaintiffs state that “[for the
purposes of ruling on this [summary judgment] motion,
Plaintiffs believe that it is sufficient for the Court to consider
only the PTL Video and other materials submitted by
Plaintiffs, without need to resort to the undercover footage.”
(Pls. Resp. to Defs.’ Supp. Mem. on the Admiss. of
PrimeTime Live Broadcast at 1 n.1.) Therefore, because
Plaintiffs state that the forty hours of unedited footage
supports and confirms the accuracy of the edited PTL
broadcast (see Pis.” Mem. of Law in Opp’n to Food Lion’s
Mot. for Summ. J. at 3 and because Plaintiffs believe that the
PTL broadcast is sufficient for purposes of the summary
judgment motions before this Court, the Court will not
corsider the content of this unedited footage and will
consider only the PTL broadcast as made available to this
Court through a transcript of the broadcast. See Pls.’ Ex. A,

1l4a

attached to Pls.’ Resp. to defs.' Supp. Mem. on Admiss. of
PTL.)

fnl1 Hearsay is defined as “a statement, other than
one made by the declarant while
testifying at th> ial .. . offered . . . to prove the truth of the
matter asserted.” Fed. R. Evid. 80 1(c).

fnl2 Although the PTL broadcast also contains
statements by two “experts in the fie!4 of food handling and
safety,” Plaintiffs make no arguments concerning whether
these statements are admissible. Theretore, the Court declines
to address the admissibility of these statements.

fnl3 Rule 803(1) provides that “[a] statement
describing or explaining an event or condition made while the
declarant was perceiving the event or condition, or

immediately thereafter,” is not excluded by the hearsay rule.
Fed. R. Evid. 803(1).

fn14 Rule 803(2) provides that “{a] statement relating
to a startling event or condition made while the declarant was
under the stress of excitement caused by the event or

condition” is not excluded by the hearsay rule. Fed. R. Evid.
803(2).

fnl15 Rule 803(3) provides that “[a] statement of the
declarant’s then existing state of mind, emotion, sensation, or
physical condition (such as intent, plan, motive, design,
mental feeling, pain, and bodily health), but not including a
statement of memory or belief to prove the fact remembered
or believed unless it relates to ihe execution, revocation,
identification, or terms of declarant’s will” is not excluded
from the hearsay rule. Fed. R. Evid. 803(3).

115a

fni6 Rule 804 provides in pertinent part:

(a)Definition of unavailability. “Unavailability as a
witness” includes situations in
which :the declarant-

(1)is exempted by ruling of the court
on the ground of privilege from testifying
concerning the subject matter of the
declarant’s statement; or

(2)persists in refusing to testify
concerning the subject matter of the
declarant’s statement despite an order of the
court to do so; or

(3)testifies to lack of memory of the
subject matter of the declarant’s statement; or

(4)is unable to be present or to testify
at the hearing because of death or then
existing physical or mental illness or infirmity;
or

(5)is absent from the hearing and the
proponent of a statement has been unable to
procure the declarant’s attendance or
testimony. . . by process or other reasonable
means. .

(b)Hearsay exceptions. The following are not
excluded by the hearsay rule if the declarant is
unavailable as a witness:

(3)Statement against interest. A statement
which was at the time of its making so far
contrary to the declarant’s pecuniary or
proprietary interest, or so far tended to subject

| a

Rg va No AND AR

1l6a

. the declarant to civil or criminal liability, . . .
that a reasonable person in the declarant’s
position would not have made the statement
unless believing it to be true.

tnl7 The Court is also not persuaded by Plaintiffs’
argument that the Court should consider the statements made
by the former employees regardless of any exception to the
hearsay rule.(See Pls.’ Resp. to Defs.” Supp. Mem. on the
Admiss. of PTL at 10-12.)

fnl8 Rule 1006 provides, in pertinent part, that “‘[t]he
contents of voluminous writings, records, or photographs
which cannot conveniently be examined in court may be
presented in the form of a.. summary.” Fed. R. Evid. 1006.

fnl19Althoug

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386004_0986%3A1. Public record. Not legal advice.