Minute Order of December 21, 2004. However, the Supreme Court’s decision in Dura has given
the court occasion to order additional briefing from the parties on the issue of loss causation. As
Judge Posner informs us, the law is an “activity,” and evolves over time as judges decide cases.
See Richard A. Posner, REASONING BY ANALOGY, 91 CorNELL L. REV. 761, 770 (2006). Here,
the judges of the Supreme Court have clearly indicated that plaintiffs in securities fraud actions
must both allege and prove that the defendants” misrcpresentations or other fraudulent conduct
have proximately caused plaintiffs’ cconomic losses. In this case, the court determines that
Plaintiffs have failed to properly make this allegation. Defendants’ Motion for Judgment on the
Pleadings is therefore granted.

IT IS SO ORDERED

wren’ Meret Re

CHARLES RONALD NORGLE;J Ang
United States District Court

DATED: July 10, 2006

14



or the omission of any material fact “necessary in order to make the statements made. . . not
misleading.” 1d, (quoting 17 C.F.R. § 240.10b-5). Under the Private Securities Litigation
Reform Act (“PSLRA”),

a securitics fraud complaint must (1) ‘specify each statement alleged to have been
misleading, the reason or reasons why the statement is misleading, and, if an
allegation regarding the statement or omission is made on information and belief, the
complaint shall state with particularity all facts on which that belief is formed’ and
(2) ‘state with particularity facts giving rise to a strong inference that the defendant
acted with the required state of mind.’ 15 U.S.C. § 78u-4(b)(1), (2). In other words,
plaintiffs must not only plead a violation with particularity, they must also marshal
sufficient facts to convince a court at the outset that the defendants likely intended
‘to deceive, manipulate, or defrand.’

Makor Issues & Rights, Ltd. V. Tellabs, inc., 437 F.3d 588, 594 (7th Cir. 2006) (quoting Emst &

Ernst y. Hochfelder, 425 U.S. 185, 193 (1976)). For the purposes of this motion, however, the
most important pleading requirement imposed by the PSLRA is that plaintiffs in securities fraud
cases must allege “the traditional elements of causation and loss.” Dura, 544 U.S. at 345-46
(citing 15 U.S.C. § 78u-4(b)(4)).

The elements of a Section 10(b) claim are as follows: “(1) ‘a material misrcpresentation
or omission,” (2) ‘scienter, i.e., a wrongful state of mind,’ (3) ‘a connection with the purchase or
sale of a security,’ (4) ‘reliance, often referred to in cases involving public securities markets
(fraud-on-the-market cases) as transaction causation,’ (5) ‘economic loss,’ and (6) ‘loss

causation.”” DH2, Inc. v. Athanassiades, 404 F. Supp. 2d 1083, 1095-96 (N.D. Ill. 2005)

(quoting Dura, 544 U.S. at 341-42); sce also Makor Issues, 437 F.3d at 595. The court now turns

its attention to the key issuc, for this motion, of loss causation.



{T]he complaint exhibits the same defective pleading identified by the Supreme

Court in Dura. First, [plaintiffs’] complaint engages in a thorough exposition of the

allegedly false and misleading statements. Then it alleges that [plaintiffs] purchased

the Defendants’ stock at an inflated price as a result of Defendants’

misrcpresentation and suffered a loss (although it had already sold its stock) when

the Defendants made an unfavorable earnings announcement. Wholly absent from

its pleading, however, is a nexus between the misrepresentation of which [plaintiffs]

complain and the losses they suffered. Without more, the [plaintiffs’] complaint

states that ‘as a direct and proximate result’ of Defendants’ conduct [plaintiffs]

suffered losscs by purchasing Defendants’ stock at an inflated rate. The Court’s

opinion in Dura does not merely require a plaintiff to include the magic words

‘direct and proximate’ in connection with its alleged loss. Plaintiffs must do more

than use talismanic language to curc an otherwise inadequately pled complaint.
Id. (emphasis added). This court went on to emphasize that plaintiffs in private securities actions
must plead the specific causal link between defendants’ alleged misrepresentations and plaintiffs’
alleged economic losses. “Plaintiffs are charged with pleading the connection, listing what it is,
thereby giving defendants notice of the losses it alleges.” Id. at 919. Judge Taylor ultimately
found that the plaintiffs in this case had failed to properly plead loss causation, and granted
defendants’ motion to dismiss. Id. at 921.

3. Plaintiffs in this case have failed to properly plead loss causation
As the court has explained, Plaintiffs have alleged seven material mistepresentations by

Defendants. In order to survive this Motion for Judgment on the Pleadings, Plaintiffs must
properly allege a causal nexus between these misrepresentations and their economic losses. Scc
id. at 918. Plaintiffs, though, need not meet a heightened pleading standard in making this causal
allegation. See Dura, 544 U.S. at 346 (“We concede that the Federal Rules of Civil Procedure
require only a ‘short and plain statement of the claim showing that the pleader is entitled to

relicf.” FED. R. Civ. P. 8(a)(2). And we assume, at least for argument’s sake, that neither the

Rules nor the securities statutes impose any special further requirement in respect lo the pleading

10


Supreme Court granted certiorari because the Ninth Circuit’s views on loss causation differed

from those of other Circuits. Dura, 544 U.S. at 340.

In considering this issue, the Supreme court reasoned that “in cases such as this one (i.c.
fraud-on-the-market cases) an inflated purchase price will not itself constitute or proximately
cause the relevant economic loss.” Id, at 342. Justice Breyer, writing for a unanimous court, first
indicated that at (he time of such a transaction, the purchaser has not suffered a loss, as “the
inflated purchase payment is offset by ownership of a share that at that instant possesses
equivalent value.” Id. More importantly, however, even if the purchaser does suffer a future loss
when the stock price decreascs, this loss may or may not be ultimately caused by an earlier
misrepresentation.

When the purchaser subsequently resells such shares, even at a lower price, that

lower price may reflect, not the earlier misreprescntation, but changed economic

circumstances, changed investor expectations, new industry-specific or firm-specific

facts, conditions, or other events, which taken separately or together account for

some or all of that lower price . . . Given the tangle of factors affecting price, the

most logic alone permits us to say is that the higher purchase price will sometimes

play a role in bringing about a future loss.

Id, at 342-43, An inflated purchase price may therefore “touch upon,” or “sometimes play a tole
in bringing about a future loss,” but this ‘tis not to cause a loss, and it is the latter (he law
requires.” Id, at 343 (citing 15 U.S.C. § 78u-4(b)(4)).

Under the PSLRA, Justice Breyer indicated, plaintiffs in securities fraud actions have

“the burden of proving” that any alleged misrepresentations made by defendants caused the
loss for which the plaintiff seeks to recover.’” Id. at 345-46 (quoting 15 U.S.C. § 78u-4(b)(4)).
Congress thus clearly intended “to permit private securities fraud actions for recovery where, but

only where, plaintiffs adequately allege and prove the traditional elements of causation and loss.”


2. Dura and its progeny

As the court has noted above, a plaintiff asserting a claim of securities fraud must allege
and prove that “defendant’s fraud caused an economic loss.” Dura, 544 U.S. at 338. Tn Dura, the
Supreme Court overtumed a Ninth Circuit decision holding that “‘a plaintiff can satisfy this
requirement - a requirement that courts call ‘loss causation’ - simply by alleging in the complaint
and subsequently establishing that ‘the price’ of the security “on the date of purchase was
inflated because of the misrepresentation.”” Id, (quoting Broudo v. Dura Pharms., 339 F.3d 933,
938 (9th Cir, 2003).

Plaintiffs in Dura were individuals who purchased stock in Dura Pharmaceuticals, Inc.
These individuals brought a securities fraud class action suit against Dura, alleging that Dura had
made false statements regarding the profitability of its drug sales, and future Food and Drug
Administration (“FDA”) approval of a new asthmatic spray device. Id. at 339. After Dura
announced that its earnings would be less than expected, and that the FDA would not approve the
spray device, Dura’s stock lost significant value. Id. The District Court dismissed the complaint,
holding that the drug profitability claim “failed to adequately allege an appropriate state of mind -
..;” and that “[iJn respect to the plaintiffs’ spray device claim . . . the complaint failed
adequately to allege ‘loss causation.” Id, at 340. The complaint included only the following
allegation regarding the economic losses caused by Dura’s misstatement about the spray device:
“[iJn reliance on the integrity of the market, [the plaintiffs] . . . paid artificially inflated prices for
Dura securities,” and the plaintiffs thereby suffered damages. Id, The Ninth Circuit reversed,
holding that “plaintiffs establish loss causation if they have shown that the price on the date of

purchase was inflated because of the misreprcsentation.” Broudo, 339 F.3d at 938. The



& Pipefitters Local 572 Pension Fund y. Cisco Systems, Inc., held that where plaintiff had made

very specific allegations as to defendants’ “manipulative conduct, fraudulent course of business,
and false statements,” and tied those allegations to a “steep drop in the price of Cisco’s stock
after Cisco Defendants began to disclose the alleged ‘truth’ about its financial condition,”
plaintiffs had properly pled loss causation. 411 F. Supp. 2d 1172, 1177-78 (N.D. Cal. 2005).

An Eastem District of Michigan court, however, granted defendants’ motion to dismiss
because the plaintiffs failed to adequately plead loss causation. Inre Compuware Sec. Litigation,
386 F. Supp. 2d 913 (E.D. Mich. 2005). The court finds Judge Taylor’s reasoning in this case
both instructive and persuasive. The complaint in this case was filed by a group of investors who
purchased Compuware common stock. Id. at 914-15. Plaintiffs alleged that defendants “issued a
series of false and misleading statements, which were designed to conceal from the mvesting
public serious problems” with Compuware’s business. Id, at 915, Plaintiffs further alleged that
when these problems became publicly known, and it became apparent that Compuware would
have to significantly restructure its business operations, Compuware’s stock price dropped 25%
in one day. Id, Plaintiffs filed suit under Section 10(b) and 20(a) of the Act, and SEC rule 10b-
5. Id.

Judge Taylor noted that the complaint contained three central allegations: (1) that “as a
direct and proximate result of Defendants wrongful conduct, [plaintiffs] suffered damages in
connection with their respective purchases and sales of the Company’s common stock . . . .”, (2)
thal defendants announced the initiation of litigation against a competitor, and (3) that
defendants’ misrepresentations in regard to its business problems had concealed a “revenuc
shortfall, requiring a goodwill impairment and restructuring charges in excess of $365 million.”
Id. at 918. Judge Taylor then explained why such pleadings are inadequate under Dura.

9


UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION
IN RE SARA LEE CORPORATION ) Lead Case 03 C 3202
SECURITIES LITIGATION ) Honorable Charles R. Norgle
OPINION AND ORDER

Charles R, Norgle, District Judge

Before the court is Sara Lee Defendants’ Motion for Judgment on the Pleadings. For the
following reasons, the Motion is granted,

I. BACKGROUND

A. Facts

Defendant Sara Lee is a Maryland Corporation with its principal place of business in
Chicago, Illinois. Sara Lee currently has three global lines of business through which it markets
and manufactures products: Food and Beverage, Intimates and Underwear, and Houschold
Products. Defendant C. Steven McMillan (“McMillan”) was Chairman of the Board of
Directors, President, and Chief Executive Officer of Sara Lee during the relevant time period.
Defendant Lambertus M. de Kool (“de Kool”) was Executive Vice President and Chief Financial
Officer of Sara Lee during the relevant time period. Lead Plaintiffs Boca Raton General
Employees Retirement Fund and Central Laborer’s Pension Fund purchased the common stock
of Sara Lee at allegedly inflated prices between August 1, 2002 and April 24, 2003.

In their Consolidated Amended Complaint, Plaintiffs allege that Defendants engaged in a
fraudulent scheme to mislead the investing public as to Sara Lec’s overall business and financial

condition, causing Plaintiffs to purchase Sara Lee’s stock, Specifically, Plaintiffs allege that



Reshaping efforts carried out over the last two years, and 1 [McMillan] expect the company’s
improved sales and profit performance to strengthen throughout fiscal 2003.” Id., 9114.
“Savings from out Reshaping efforts, including more than $50 million in the meat group alone,
should total about $135 million next year.” Id., 4 126. “As a result of our Reshaping program,
for the first time in scveral years we are seeing a growth in operating income. In this first
quarter, we project that operating income will grow more than 20% over the year ago period, and
for the full fiscal year we anticipate that it will grow more than 15% with increased operating
income from all lines of business.” Id., 4138. It is not clear to the court that these optimistic
business projections rise to the level of actual misrepresentations as required under 15 U.S.C. §
78u-4(b)(1), (2). Setting that issue aside, however, Plaintiffs have also alleged that Sara Lee
stated that it missed its earning targets in 2003 because of various market factors, including
“challenging market conditions in the foodservice sector and weakness among some retail
customers.” Id., 174. Given the “tangle of factors affecting price,” it is insufficient for
Plaintiffs to allege that Sara Lee’s optimistic earnings projections “touch{ed] upon” Plaintiffs’
economic losses. Sce Dura, 544 U.S. at 343. Plaintiffs are required to plead a specific causal
link between actual misstatements or fraudulent conduct relating to Defendants’ Reshaping
program and Plaintiffs’ economic losses, and Plaintiffs have failed to do so. Sce id. at 345-46,
Compuware, 386 F. Supp. 2d at 918.

Plaintiffs further allege that Sara Lee cngaged in improper “channel stuffing”
(overloading retailers with goods prior to the end of a reporting period), improperly deferred
expenses for self-insurance, improperly failed to account for liability incurred as a result of a

consent deerce entered into with the EPA, improperly granted credit to certain customers, and

12



of proximate causation or economic loss.”). A complaint in a securities fraud action, however,

must allege actual misrepresentations or other fraudulent conduct on the part of the defendants,
and describe how it is that defendants’ alleged misrepresentations or fraudulent conduct caused
the plaintiffs’ economic losses. Id. at 345-46.

Plaintiffs in this case first allege that Sara Lee’s acquisition of Earthgrains was conducted
without due diligence. “According to a number of formcr employees . . . the Earthgrains
acquisition, despite being the largest acquisition by far that Sara Lee had ever undertaken, was
hastily conceived, negotiated, and completed,” Compl. 7 33. Plaintiffs make numerous
allegations that Defendants, in various press releases, expressed optimism regarding the
profitability of its Bakery operations after the Earthgrains acquisitions. Id., $9 117, 124, 142,
145, and 155. However, Plaintiffs do not allege that any of these press releases contain
misstatements regarding Sara Lee’s alleged lack of due diligence regarding this acquisition.
Moreover, Plaintiffs allege that de Kool admitted, in a conference call, that the Earthgrains
acquisition was presently a “disappointment,” and that the returns on this acquisition “arc not in
line with expectations.” Id., 7 161. The court therefore finds that Plaintiffs have failed to allege,
as regards the Earthgrains acquisition, any false and or misleading statement that has a direct
causal relationship to Plaintiff's economic losses. See Dura, 544 U.S. at 345-46; Compuware,
386 F. Supp, 2d at 918.

Plaintiffs also allege that Sara Lee’s corporate Reshaping program was “unsuccessful and
plagued with operational difficulties.” Compl, ff 54-59. Plaintiffs allege that Sara Lec was
overly optimistic, in various press releases and conference calls with stock analysts, in regards to

the bencfits it expected to reap from this program, “We began to see the benefits of the

11


Id, at 346. The Supreme Court therefore held that a plaintiff in a private securities fraud action

must allege and prove “that the defendant’s mistepresentation (or other fraudulent conduct)
proximately caused the plaintiff's economic loss.” Id. In the casc before il, the Supreme Court
ruled that the plaintiffs had failed to properly plead loss causation, as plaintiffs had only pled that
the stock price was artificially inflated, and had not pled any specific causal connection between
the artificial price inflation and that economic loss. [d. at 347. The Supreme Court therefore
reversed and remanded. Id. at 348.

The Dura case has been followed numerous times by various district courts throughout

the United States. The court will briefly analyze a small sampling of these cases. In DH2, Inc.,

the court determined that the plaintiff had properly pled loss causation where it had sufficiently
alleged a claim of market manipulation “based on Defendant's alleged use of DH2's stolen trade
secrets.” 404 F. Supp. 2d at 1097. A Southern District of California court, in In re Immune
Response Sec. Litigation, held that where plaintiffs alleged that defendants’ wrongful actions
caused stock prices to become artificially inflated, and that (he stock price dropped sharply when
defendants’ actions became public, plaintiffs had alleged cnough of a causal connection to
survive a motion to dismiss. 375 F. Supp. 2d 983, 1025 (S.D, Cal. 2005). In In re Odyssey
Healthcare, Inc. Sec. Litigation, the court found that the following allegations were sufficient to
plead loss causation: (1) Odyssey’s 2004 earnings per share would be substantially less than
initially predicted, (2) the President and CEO of Odyssey resigned due to “operational
challenges,” and (3) the Department of Justice had begun an investigation into Odyssey under the
False Claims Act, and (4) Odyssey’s stock price “collapsed.” 424 F. Supp. 2d 880, 885 (N.D.

Tex. 2005) (dismissing on other grounds). A Northern District of California court, in Plumbers


behavior and Plaintiff's economic loss. Plaintiffs filed their Response to this Motion on

November 11, 2005, Defendants filed thcir Reply on November 22, 2005. The Motion is fully
briefed and before the court.
IL DISCUSSION

A, Standard of Decision

The court reviews a motion for a judgment on the pleadings “using the standard
applicable to dismissals under [FRCP] 12(b)(6) for failure to state a claim on which relief can be
granted.” Guise v. BMW Mortg., LLC, 377 F.3d 795, 798 (7th Cir. 2004). “Rule 12(c) permits a
party to move for judgment after the parties have filed the complaint and answer.” N. Ind. Gun
& Outdoors Shows, Inc. v. City of South Bend, 163 F.3d 449, 452 (7th Cir. 1998). In
considering a 12(c) motion, the court “‘accept{s] the facts alleged in the complaint in the light
most favorable to the . . . non-moving party.” Guise, 377 F.3d at 798. The court will grant
Defendants’ Motion only if “it appears beyond a doubt that [Plaintiffs] cannot prove any facts to
support a claim for relief and [Defendants] demonstrate that there are no material issues of fact to
be resolved.” Brunt v, SEIU, 284 F.3d 715, 718-19 (7th Cir. 2002).
B. Defendants’ Motion for Judgment on the Pleadings

1. The pleading requirements and elements of a securities fraud complaint

Private lawsuits for securities fraud “are based upon federal securities statutes and their

implementing regulations.” Dura, 544 U.S. at 341. Section 10(b) of the Act prohibits (1) the

“ase or employ[ment] . . . of any deceptive device,” (2) “in connection with the purchase or sale
of any security,” and (3) “in contravention of’ SEC “rules and regulations.” Id. (quoting 15

U.S.C. § 78j(b)). SEC rule 10(b) prohibits the making of any “untrue statement of material fact”


B. Procedural History

Lead Plaintiffs filed their Consolidated Amended Class Action Complaint for Violations
of Federal Securities Laws (the “Complaint”)} on January 20, 2004. In Count I of the Complaint,
Plaintiffs allege (hat Defendants carried out a scheme to deceive the investing public by
artificially inflating the market price of Sara Lee’s securities, thereby causing Plaintiffs to
purchase Sara Lee's securities at those artificially inflated prices, in violation of Section 10(b)of
the Securities and Exchange Act (the Act”), 15 U.S.C. § 78j(b), and Securities Exchange
Commission (“SEC”) Rule 10b-5, 17 C.F.R. § 240.10b-5. In Count IL, Plaintiffs allege that the
individual Defendants acted as controlling persons of Sara Lee within the meaning of Section
20(a) of the Act, 15 U.S.C. § 78t(a), and are therefore individually liable to Plaintiffs.

Defendants filed a Motion to dismiss on March 5, 2004. The court denied this Motion on
December 21, 2004, On January 10, 2005, Defendants moved the court to certify an
interlocutory appeal of its denial of the Motion to Dismiss. The court denied this Motion on May
20, 2005.

The Supreme Court of the United States issued its Opinion in Dura Pharms., Inc. v.

Broudo, 544 U.S. 336 (2005), on April 19, 2005. In that Opinion, the Supreme Court held that

plaintiffs in private securities fraud actions must adequately plead and prove that any
misrepresentation or fraudulent conduct by defendants “proximately caused plaintiff's economic
loss.” Id. at 346. In a status hearing on July 29, 2005, the court brought Dura to the attention of
the parties. On October 19, 2005, Defendants filed their Motion for Judgment on the Pleadings.
In this Motion, Defendants cite Dura extensively, and assert that Plaintiffs have failed to

adequately plead a causal relation between Defendant's alleged misrepresentations or fraudulent



Defendants fraudulently failed to disclose the following seven factors regarding Sara Lee’s
business: (1) that Sara Lee allegedly acquired the Earthgrains Company without adequate due
diligence, (2) that a corporate reorganization plan called the “Reshaping Program” was allegedly
plagued with problems, (3) that Sara Lee allegedly engaged in improper “channel stuffing,” or
overloading retailers with goods just prior to the end of reporting periods, (4) that Sara Lec
allegedly deforred sclf-insurance expenses, (5) that Sara Lee allegedly incurred contingent
liability related to an Environmental Protection Agency (“EPA”) investigation, (6) that Sara Lee
allegedly granted credit to high risk customers, and (7) that Sara Lee allegedly maintained
inadequate financial reporting systems and internal controls. This fraudulent and deceptive
course of conduct, Plaintiffs allege, covered up various missteps by Sara Lee’s executives, and
allowed Defendants to repeatedly and knowingly disseminate false earning forecasts to securities
analysts and the investing public. As a result of these allegedly deceptive practices, the price of
Sara Lee’s common stock rose as high as $23.84 per share on November 26, 2002.

Plaintiffs allege that five months after the stock peaked at $23.84, Sara Lee could
eventually no longer hide its business problems from the public, and issued a press release over
the Business Wire on April 24, 2003 announcing that earnings per share would be in the range of
$1.50 to $1.52, rather than (he projected estimate of $1.59 per share. By April 28, 2003,
Plaintiffs allege, the market had absorbed the impact of this damaging information, and the price
of Sara Lee’s common stock fell to as low as $16.25 per share. Plaintiffs allege that this drop

represented a loss of nearly $6 billion of market capitalization and sharcholder value.


had problems with its accounting infrastructure, Missing from these allcgations, however, is a

direct causal nexus between any misrepresentations connected to these events and Plaintiffs’
economic loss. Sec Dura, 544 U.S. at 345-46. At best, these allegations reveal questionable
business decisions by Sara Lee’s management. Plaintiffs have not explained how it is, given the
“tangle of factors affecting [stock] price,” that these alleged events caused their losses. See id. at
343; see also Summers v. State Street Bank & Trust Co. — F.3d -, slip op. at 8 (7th Cir. June 28,
2006) (“There is always risk, in the sense of variance of returns, to owning common stock,
because the fortunes of a company are uncertain and the stockholders, unlike bondholders and
other owners of the company’s debt, do not have a fixed entitlement; they are the residual risk
bearers.”).

For all of these reasons, the court determines that Plaintiffs have failed to properly plead
loss causation under Dura and its progeny. Plaintiffs have alleged that they purchased Sara Lee
stock at inflated prices. But the Supreme Court has indicated clearly that “an inflated purchase
price will not itself constitute or proximately cause the relevant economic loss.” Dura, 544 U.S.
at 342. Plaintiffs are required to plead a specific causal relation, or “nexus,” between Sara Lec’s
alleged misstatements and their losses, and they have failed to do so. See Compuware, 386 F.
Supp. 2d at 918 (“Wholly absent from its pleading, however, is a nexus between the
misrepresentation of which [Plaintiffs] complain and the losses they suffered.”).

i, CONCLUSION
The court acknowledges that it earlier denied Defendant’s Motion to Dismiss, finding that

under the ordinary pleading standards of Swierkiewicz v. Sorema N.A,, 534 U.S. 506 (1994), and

Leatherman y, Tarrant County, 507 U.S. 163 (1993), Plaintiff's claims were sufficient. Sec

13