Case of the Day: Davis v. Skullcandy, Inc., 2018 U.S. Dist. LEXIS 46548 (D. Utah Mar. 21, 2018)

Summary:

Investor filed a securities fraud claim against the defendant for allegedly misleading the investors. The specific misleading statement, allegedly, was the statement made during the earnings conference call that sales growth in China was "at the fastest pace" among its sales regions, although the sales were in fact not particularly strong in China. Rather, according to the plaintiffs, the defendant engaged in "channel stuffing" in which it unloaded inventory upon the Chinese intermediary who could not sell the products. Plaintiffs claimed the "channel stuffing" scheme unraveled the next quarter when the sales suffered, causing a drop to the defendant's share price.

The court granted the motion to dismiss on the Sections 10(b) and 20(a) claims of the Securities Exchange Act. The court found that noting a strong performance in China was not false, nor was there any scienter in what was at most a "mere[ ] misunderstanding the state of the market in China."

Takeaway:

For any manufacturing or consumer goods company, the statement that "we are doing well in the China market" would be one often uttered. Good to see that it stays clear of the threshold for securities fraud.