Jeffrey W. Herrmann 

COHN LIFLAND PEARLMAN & 

KNOPF LLP 

Park 80 West-Plaza One 

250 Pehle Avenue, Suite 401 

Saddle Brook, New Jersey 

Telephone: (201) 845-9600 

Facsimile: (201) 845-9423 

Liaison Counsel for the Class 

Kim E. Miller 

KAHN SWICK & FOTI, LLC 

500 Fifth Avenue, Ste. 1810 

New York, New York 10110 

Telephone: (212) 696-3730 

Facsimile: (504) 455-1498 

Lead Counsel for Lead Plaintiff and the 

Class 

UNITED STATES DISTRICT COURT 

 DISTRICT OF NEW JERSEY 

SHAH RAHMAN, Individually and 

on Behalf of All Others Similarly 

Situated, 

 Plaintiff, 

vs. 

KID BRANDS, INC., et al. 

Defendants. 

)

) 

) 

) 

) 

) 

) 

) 

) 

) 

)

NO. 2:1 1-CV-1624-JLL-CCC

LEAD PLAINTIFF’S 

OPPOSITION TO 

DEFENDANTS’ MOTIONS 

TO DISMISS AMENDED 

COMPLAINT

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TABLE OF CONTENTS

I. PRELIMINARY STATEMENT......................................................1 

II. FACTUAL BACKGROUND..........................................................6 

III. ARGUMENT............................................................................9 

A. Applicable Pleading Standards.................................................9 

B. The Complaint Adequately Alleges Scienter...............................10 

1. The Scienter Standard.......................................................10 

2. Plaintiff’s Detailed Allegations of Scienter...............................12 

3. Plaintiff’s Confidential Witnesses Support Scienter.....................22 

4. The Core Operations Doctrine Applies....................................24 

5. The Doctrines of Corporate or Collective Scienter Support a 

Strong Inference of Scienter Against Kid Brands........................28 

C. Defendants’ Materiality Challenges Must Fail..............................31 

1. Defendendants Had a Duty to Disclose ................................32 

2. Defendants’ Statements Cannot Be Dismissed As Puffery..............37 

IV. CONCLUSION.........................................................................40 

i

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TABLE OF AUTHORITIES

CASES

ABN AMRO, Inc. v. Capital Int’l Ltd., 

595 F. Supp. 2d 805 (N.D. Ill. 2008)......................................................12 

In re Advanta Corp. Sec. Litig., 

180 F.3d 525 (3d Cir. 1999)................................................................11 

In re Aetna Inc. Sec. Litig., 

34 F.Supp.2d 935 (E.D. Pa. 1999).......................................................... 27 

In re Alliance Pharm. Corp. Sec. Litig., 

279 F. Supp. 2d 171 (S.D.N.Y. 2003) ....................................................34 

In re Alpharma Inc. Sec. Litig., 

372 F.3d 137 (3d Cir. 2004)................................................................14 

In re Anadigics, Inc., Sec. Litig., 

CIV.A. 08-5572 MLC, 2011 WL 4594845 (D.N.J. Sept. 30, 2011)................. 22 

Angres v. Smallworldwide, 

*326 PLC, 94 F.Supp.2d 1167 (D. Colo.)............................................... 27 

In re Atlas Air Worldwide Holdings, Inc. Sec. Litig., 

 324 F.Supp. 2d 474 (S.D.N.Y. 2004)................................................ 25, 28 

Basic Inc. v. Levinson, 

485 U.S. 224 (1988).........................................................................36 

Brumbaugh v. Wave Sys. Corp., 

416 F. Supp. 2d 239 (D. Mass. 2006)......................................................37 

California Public Employees’ Ret. Sys. v. Chubb Corp., 

394 F.3d 126 (3d Cir. 2004)................................................................23 

City of Roseville emps.’ Ret. Sys. v. Horizon Lines, Inc., 

Nos. 10-2788, 10-3815, 2011 WL 3695897 (3d Cir. Aug. 24, 2011).................30 

ii

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In re Complete Mgmt. Inc. Sec. Litig., 

153 F. Supp. 2d 314 (S.D.N.Y. 2001).....................................................26 

DeBenedictis v. Merrill Lynch & Co., 

492 F.3d 209 (3d Cir. 2007)................................................................10 

Freudenberg v. E*Trade Fin. Corp., 

712 F. Supp. 2d 171 (S.D.N.Y. 2010).....................................................25 

Galati v. Commerce Bancorp, Inc., 

No. Civ. 04-3252 (RBK), 2005 WL 3797764 (D.N.J. Nov. 7, 2005)................ 35 

Glazer Capital Mgmt., L.P. v. Magistri, 

549 F.3d 736 (9th Cir. 2008)...........................................................29, 30 

Gordon v. Wawa, Inc., 

388 F.3d 78 (3d Cir. 2004).................................................................10 

Hughes v. Huron Consulting Group, Inc., 

 733 F.Supp.2d 943 (N.D. Ill. 2010)...................................................... 17 

Institutional Investors Grp. v. Avaya, Inc., 

563 F.3d 242 (3d Cir. 2009)..................................................10, 12, 24, 28 

In re Lowen Group, Inc., 

2004 WL 1853137(E.D. Pa. Aug. 18, 2004)............................................ 24 

Local 731 I.B. of T. Excavators and Pavers Pension Trust Fund v. Swanson, No. 

09-799, 2011 WL 2444675 (D. Del. June 14, 2011)...............................36, 40 

Makor Issues & Rights, Ltd. v. Tellabs, Inc., 

513 F.3d 702 (7th Cir. 2008)......................................................26, 29, 30 

In re Marsh & McLennan Co. Sec. Litig., 

501 F. Supp. 2d 452 (S.D.N.Y. 2006).....................................................37 

Matrixx Initiatives Inc. v. Siracusano, 

131 S.Ct. 1309 (2011)................................................................. passim 

In re McKesson HBOC, Inc. Sec. Litig., 

iii

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126 F.Supp.2d 1248 (N.D. Cal. 2000)................................................... 17 

McMahan & Co. v. Wherehouse Entm’t., Inc., 

900 F.2d 576, 579 (2d Cir. 1990).....................................................33, 35 

In re Meta Fin. Group, Inc., 

C 10-4108-MWB, 2011 WL 2893625 (N.D. Iowa July 18, 2011)....................16 

Morgan v. AXT, Inc., 

No. C 04-4362 MJJ, 2005 U.S. Dist. LEXIS 42346, (N.D. Cal. Sept. 23, 

2005)...........................................................................................38 

Novak v. Kasaks, 

216 F.3d 300 (2d Cir. 2000)............................................................12, 13 

In re Party City Sec. Litig., 

147 F. Supp. 2d 282 (D.N.J. 2001)....................................................11, 13 

In re PDI Sec. Litig., 

No. 02-CV-0211, 2005 WL 2009892 (D.N.J. Aug. 17, 2005)........................ 31 

Rosen v. Textron, 

321 F.Supp. 2d 308 (D.R.I. 2004).........................................................37 

Shapiro v. UJB Financial Corp., 

964 F.2d 272 (3d Cir. 1992)............................................................... 31 

South Ferry LP, No. 2 v. Killinger, 

542 F.3d 776 (9th Cir. 2010)................................................................28 

In re Suprema Specialties, Inc. Sec. Litig., 

438 F. 3d 256 (3d. Cir. 2006).............................................................................40 

Teamsters Local 445 Freight Division Pension Fund v. Dynex Capital, Inc., 531 

F.3d 190 (2d Cir. 2008).....................................................................29 

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 

551 U.S. 308 (2007) ............................................................6, 11, 12, 24 

In re Tel–Save Sec. Litig., 

iv

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v

1999 WL 999427 (E.D. Pa. Oct. 19, 1999)...............................................24 

In re Worldcom Sec. Litig., 

352 F. Supp. 2d 472 (S.D.N.Y. 2005).....................................................29 

In re Xerox Corp. ERISA Litig., 

483 F. Supp. 2d 206 (D. Conn. 2007)......................................................10 

Zavolta v. Lord, Abbett & Co., 

No. 08-cv-04546, 2011 WL 686546 (D.N.J. Feb. 24, 2010)........................... 29

RULES

Fed. R. Civ. P. 15.............................................................................40 

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I. PRELIMINARY STATEMENT 

Despite having no opportunity to conduct discovery, Plaintiff has conducted 

a rigorous informal investigation and the Amended Class Action Complaint (the 

“Complaint”) meets all of the requirements of the Private Securities Litigation 

Reform Act (“PSLRA”) and Rule 9(b). In support of his allegations, Plaintiff cites, 

inter alia: the Company’s conceded violations of U.S. Customs laws which 

resulted in millions of dollars of customs duties owed and additional monetary 

penalties imposed by the U.S. Government on the Company relating to 

wrongdoing at multiple subsidiaries; well-placed confidential witnesses – 

including former employees and consultants of the Company with knowledge of 

the allegations set forth in the Complaint; and the Company’s own admissions 

regarding misconduct by the Company during the Class Period. See, e.g., ¶¶9, 10, 

16, 57, 94, 95.1

The Complaint alleges in detail the devastating first partial disclosure by the 

Company on March 15, 2011. ¶¶19, 76-77. Among other shocking revelations of 

the true, previously-concealed facts that resulted in a stock drop so significant that 

Defendants do not challenge causation stemming from that disclosure or the 

additional revelations between March 15, 2011 and the end of the Class Period, the 

March 15, 2011, release belatedly admits: the Board of Directors had previously 

1 

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initiated an investigation into potential violations of U.S. law; the Board had 

previously appointed a special committee that had hired the Skadden Arps firm, 

counsel for the Company in this litigation; the investigation had already reached 

the conclusion that there was “misconduct on the part of certain [Kid Brands, Inc. 

subsidiary] LaJobi employees in connection with the incorrect payment of duties;”

and the Company had already reached the decision to terminate two high-level 

executives –Larry Bivona, the former LaJobi president, and its Managing Director 

of Operations.2

 ¶¶18, 20.

Tellingly, Defendants seek to paint the March 15, 2011, partial disclosure as 

evidence of their “Good Faith Actions Upon Discovering Issues At LaJobi.” Co. 

Br. at 6. In that release, Defendants congratulate themselves for setting up a 

Special Committee and hiring Skadden Arps, and for firing the two purportedly 

rogue employees whom they claim engaged in the wrongdoing and violations of 

law at the LaJobi subsidiary and seek to wipe their hands of the matter. 

Unfortunately for Defendants, the well-pleaded allegations of the Complaint 

strongly support a countervailing inference that is a far cry from this convenient 

storyline: namely, Defendants engaged in a pattern and practice of customs 

violations at multiple subsidiaries in order to materially improve their financial 

2

 

1

 All “¶__” references are to the Complaint. 

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bottom line. ¶9. These violations were directed from the top and predate by two 

years Kid Brands’ acquisition of LaJobi and the hiring of the very key rogue 

employee (Mr. Bivona) upon whom Defendants seek to pin the blame for the entire 

fraud. Indeed, the Company has since admitted that customs violations occurred at 

at least two other subsidiaries – Kids Line and CoCaLo – which violations go back 

at least to 2006 – approximately two years before LaJobi was acquired and Mr. 

Bivona was hired and had any dealings with the Company. ¶¶9, 90, 91. 

Since the filing of the Amended Complaint on September 26, 2011, the facts 

of this case have become still more compelling as additional highly damaging 

information has been disclosed regarding the Company’s misconduct and 

additional investigations relating thereto, which add further strong support to 

Plaintiff’s well-pleaded Complaint. Of course, as Defendants themselves concede, 

the Court may take judicial notice of such information, contained in the 

Company’s own public filing—see November 8, 2011, 10Q, attached to the 

accompanying Declaration of Jeffrey Herrmann (“Herrmann Decl.”) as Exhibit A. 

Interestingly, by seeking to pin the blame on Mr. Bivona, Defendants now 

claim to have a basis to refuse to pay Mr. Bivona up to $15 million in earnout 

consideration related to his employment contract. As disclosed in the Company’s 

November 11, 2011, 10Q, which Defendants do not attach to their own 

3

 

2 Though unidentified by Defendants, Lead Plaintiff’s investigation has determined 

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declarations in support of their motions despite including other documents that 

post-date the filing of the Amended Complaint:

On July 25, 2011, the Company received a letter from counsel to 

Lawrence Bivona demanding payment of the LaJobi Earnout 

Consideration to Mr. Bivona in the amount of $15 million. In 

addition, on July 25, 2011, the Company received a letter from 

counsel to Mr. Bivona alleging that Mr. Bivona’s termination by 

LaJobi “for cause”, effective March 14, 2011, violated his 

employment agreement and demanding payment to Mr. Bivona of 

amounts purportedly due under such employment agreement. The 

Company does not intend to pay the LaJobi Earnout Consideration to 

Mr. Bivona and believes that Mr. Bivona was properly terminated “for 

cause” pursuant to his employment agreement, and the Company has 

so advised counsel for Mr. Bivona. 

Mr. Bivona’s above-referenced demand letter regarding his claim that he was 

wrongfully terminated and is entitled to $15 million in earnout consideration 

further supports Plaintiff’s allegations that Mr. Bivona was nothing but a 

convenient scapegoat who followed orders from Company management. ¶¶20-21. 

The November 8, 2011, 10Q further discloses that both the Securities 

Exchange Commission and the United States Attorney’s Office (“USAO”) for the 

District of New Jersey are both currently conducting “investigations” of the 

Company, which commenced after this lawsuit was filed. See Herrmann Decl. at 

Ex. A. The Company has provided to the SEC “the findings of its internal 

 

4

that the fired LaJobi Managing Director of Operations was John Sandiford. ¶20. 

Case 2:11-cv-01624-JLL-MAH Document 39 Filed 01/09/12 Page 10 of 47 PageID: 605
investigation of LaJobi’s customs and Asia staffing practices.” See id. The USAO 

has requested “information relating to LaJobi...and additional documents.” See id. 

By the start of the Class Period, the Complaint alleges that Defendants were 

aware of or recklessly disregarded the routine customs and other legal violations 

which enabled the Company to materially inflate its financial results and posed the 

very real risk of liability (a prospect that became reality). ¶9. These facts constitute 

material information and had to be disclosed under Section 10(b), Rule 10b-5, and 

Item 303 of SEC Regulation S-K (“Item 303”) thus rendering statements made 

during the Class Period materially false and misleading for failure to disclose these 

facts. 

In an analogous recent case, Matrixx Initiatives Inc. v. Siracusano, 131 S.Ct. 

1309, 1311 (2011), the United States Supreme Court unanimously ruled that a drug 

company that “failed to disclose reports of a possible link between its leading 

product, Zicam Cold Remedy, and loss of smell” in a small number of patients 

violated Section 10(b) and Rule 10(b)(5). The Court rejected claims by defendant 

that the incidents need not be disclosed because they were “anecdotal” and not 

“statistically significant.” Id. at 1319. The Court found that the risk of loss was 

material and needed to be disclosed even though it could not be quantified and the 

connection between their product and the alleged injury was not established 

scientifically. Id. at 1319-20. Here, as in Matrixx, Defendants failed to disclose it 

5

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had engaged in a pattern and practice of violating customs requirements throughout 

the Class Period, thereby artificially inflating the Company’s revenues. ¶9. The 

failure to disclose rendered the Company’s Class Period positive statements about 

its business, its results, and its outlook materially false and misleading when made. 

Somewhat bizarrely, in a parting shot in the final pages of the motion to 

dismiss at pp. 30-31, Defendants take issue with the allegation in the Complaint 

relating to a November 4, 2010, disclosure, arguing that Plaintiff engaged in 

“tortured efforts” to “incorrectly insinuate[e]” that “Kid Brands was under 

investigation for a safety issue.” Co. Br. at 31. This argument is nothing short of 

extraordinary in light of Defendants’ admissions in the November 8, 2011, 10Q 

that the Company is under investigation by not one but two federal agencies whose 

findings may well directly impact, and may even stem from, Plaintiff’s Complaint. 

Plaintiff has alleged a strong case, and Defendants, unable to articulate legal 

insufficiencies with Plaintiff’s allegations, instead attack the factual credibility of 

the Complaint’s content. Of course, Plaintiff’s well-pleaded allegations –

corroborated by well-placed sources -- must be accepted as true. Tellabs, Inc. v. 

Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). For these reasons, 

discussed in detail below, the motion to dismiss should be denied. 

II. FACTUAL BACKGROUND 

Kid Brands, Inc. (“Kid Brands” or the “Company”) designs, imports, 

6

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markets and distributes branded infant and juvenile consumer products through 

various subsidiaries, including Kids Line, LLC (“Kids Line”), Sassy, Inc. 

(“Sassy”), LaJobi Industries, Inc. (“LaJobi”), and CoCaLo, Inc (“CoCaLo”). ¶4. 

Kid Brands’ business focuses largely on baby furniture and other products, which 

are imported from China at bargain prices and sold in Western markets for profit. 

¶6. Anti-dumping laws place high duties on certain countries, including China, and 

on specific manufacturers within countries in an effort to prevent unfair trade 

practices. ¶7. Many importers and manufacturers attempt to circumvent these laws 

by disguising the Country or manufacturer of origin of their products. ¶¶7-8. 

Companies found in violations of these laws can incur charges for unpaid duties 

and hefty fines and penalties. ¶8. 

From March 26, 2010 through August 16, 2011 (the “Class Period”), Kid 

Brands published a series of statements that emphasized the purported accuracy 

and effectiveness of the Company’s internal disclosure controls and also touted the 

earnings of its subsidiaries while downplaying liabilities. ¶1. During this time, 

Defendants knew or recklessly disregarded that these statements were materially 

false and misleading because three out of Kid Brands’ four subsidiaries were 

engaging in illegal conduct and improper staffing practices, upon which the 

inflated earnings relied upon. ¶9. The Complaint further shows that three former 

employees of the Company attested to a pattern of violations of customs laws, non7

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compliance with Sarbanes Oxley Act requirements, and inaccurate data, that 

pervaded the Company’s entire business practice and resulted in favorable, but 

inaccurate profit data. ¶¶10, 16, 57. As a result of the Companies’ illegal and 

improper business practices, the stock price of Kid Brands’ securities traded at 

artificially inflated levels. See, eg., ¶¶9, 27, 70, 82, 94. 

 It was not until March 15, 2011 that Kid Brands began disclosing the truth 

about its operations. ¶76. On March 15, 2011, Defendants announced the 

termination of two high-level executives at LaJobi, including President Larry 

Bivona, and admitted to violations of customs laws which would result in costs of 

$7 million for customs duty owed, and a fine of up to 1 times the customs duties. 

Id. They announced that the findings of violations were the result of an 

investigation initiated by the Board of Directors and that the investigation would 

be ongoing. Id. Upon disclosing the improper practices of LaJobi, Kid Brands 

terminated Mr. Bivona in the final weeks of his consulting contract with the 

Company. Id. In addition to his termination, the Company determined that the 

Company did not owe Mr. Bivona the $12-$15 million Earn out Consideration that 

was about to become due to him, as a result of 3 years of meeting the performance 

goals set by the company at the time of the purchase of JaJobi in 2008. Id. On July 

25, 2011, Mr. Bivona sent two letters to the Company, one from himself and the 

other from his attorney, arguing that his “termination for cause” violated his 

8

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employment contract and demanding payment of his $15 million Earnout 

Compensation. ¶18. 

Over the next five months, Defendants continued to mislead investors 

regarding the extent of their violations, until August 15, 2011, when Kid Brand’s 

10-Q disclosed that Kids Line and CoCaLo had also been engaging in the same 

illegal conduct as LaJobi. ¶90. These companies would also be facing additional 

costs of $2.4 million for customs duty owed, with the possibility of additional costs 

and fines being levied against the Company for violations that occurred from 2006 

to 2010. Id. On September 12, 2011, Kid Brands disclosed that Defendant Crain 

had resigned and had been replaced by Raphael Benaroya. See Herrmann Decl. at 

Ex. B.

 The revelations of the true, previously-concealed facts between March 15, 

2011 and August 15, 2011 caused the Kid Brands stock price to fall precipitously 

on exceptionally high trade volume on the days following the disclosures. ¶¶77, 92. 

All told, the price of the share plummeted from a closing price of $9.24 on March 

14, 2011 to $6.91 on March 15, 2011, and then to $3.65 on August 16, 2011. Id. 

III. ARGUMENT 

A. Applicable Pleading Standards 

To state a claim under § 10(b) of the Exchange Act and Rule 10b-5 

promulgated thereunder, a plaintiff must allege that defendant, in connection with 

9

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the purchase or sale of a security, made a false statement or an omission of a 

material fact, with scienter, and that reliance on defendant’s action caused injury to 

the plaintiff. Institutional Investors Grp. v. Avaya, Inc., 563 F.3d 242, 251 (3d Cir. 

2009). When analyzing a complaint for failure to state a claim pursuant to Rule 

12(b)(6), the Court must “accept as true all allegations in the complaint and all 

reasonable inferences that can be drawn therefrom, and view them in the light most 

favorable to the non-moving party.” DeBenedictis v. Merrill Lynch & Co., 492 

F.3d 209, 215 (3d Cir. 2007) (citation omitted). “Dismissal under Rule 12(b)(6) is 

inappropriate ‘unless it appears beyond doubt that the plaintiff can prove no set of 

facts in support of his claim which would entitle him to relief.’” Gordon v. Wawa, 

Inc., 388 F.3d 78, 80-81 (3d Cir. 2004) (citation omitted). The Court’s inquiry is 

not whether the plaintiff will prevail, but whether the plaintiff is entitled to offer 

evidence to support his claims.” In re Xerox Corp. ERISA Litig., 483 F. Supp. 2d 

206, 211 (D. Conn. 2007) (citations omitted). 

B. The Complaint Adequately Alleges Scienter 

1. The Scienter Standard 

In this Circuit, scienter can be pled by alleging facts giving rise to a “strong 

inference” of “either reckless or conscious behavior.” Avaya, Inc., 564 F.3d at 269 

(citation omitted). In Tellabs, the Supreme Court articulated the calculus for 

determining whether the inference of scienter has been adequately pled, holding: 

10

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“[a] complaint will survive . . . if a reasonable person would deem the inference of 

scienter cogent and at least as compelling as any opposing inference one could 

draw from the facts alleged.” Tellabs, 551 U.S. at 324. It need only be “at least as 

compelling” (i.e., in “equipoise”) as any opposing inference of scienter. Id. The 

Court cautioned that “[t]he inference that the defendant acted with scienter need 

not be irrefutable, i.e., of the ‘smoking-gun’ genre, or even the ‘most plausible of 

competing inferences.’” Id. (citations omitted). Therefore, the Court should 

“assess all the allegations holistically,” and even “vague or ambiguous” allegations 

must be considered. Id. 

The allegations here support a strong inference of recklessness or knowledge 

by Defendants, which inference is far more plausible than any competing 

exculpatory inference. A reckless statement is defined as “an extreme departure 

from the standards of ordinary care, and which presents a danger of misleading 

buyers or sellers that is either known to the defendant or is so obvious that the 

actor must have been aware of it.’” In re Advanta Corp. Sec. Litig., 180 F.3d 525, 

535 (3d Cir. 1999). The Complaint cogently alleges Defendants’ (i) “knowledge of 

facts or access to information contradicting their public statements,” In re Party 

City Sec. Litig., 147 F. Supp. 2d 282, 315 (D.N.J. 2001); (ii) “[a]n egregious 

refusal to see the obvious, or to investigate the doubtful,” In re Party City Sec. 

Litig., 147 F. Supp. 2d at 315; or (iii) failure “to review or check information they 

11

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had a duty to monitor, Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir. 2000).3

Defendants attempt to isolate each scienter allegation and dismiss it as 

insufficient. Co. Br. at 14-26. This approach of considering individualized 

allegations in isolation does not comport with Tellabs. See Avaya, 564 F.3d at 272 

(“Given this instruction [from Tellabs], we are hesitant to formulate categorical 

rules about the sufficiency of different types of allegations in the abstract.”). “Each 

case will present a different configuration of factual allegations, and it is the 

composite picture, not the isolated components, that judges must evaluate in the 

last instance.” Id. at 273. 

2. Plaintiff’s Detailed Allegations of Scienter 

The Complaint alleges numerous indicia of Defendants’ scienter, including, 

but not limited to: the violations of U.S. Customs laws by the Company and related 

fines; reports from well-placed witnesses with knowledge of Kid Brands’ 

operations; Kid Brands’ own statements and admissions regarding senior 

management’s direct involvement with all of its subsidiaries; Kid Brands’ admitted 

own investigation into importing and staffing practices; the legal dispute between 

the Company and Mr. Bivona; and LaJobi, CoCaLo, and Kids Line (three of four 

12

 

3

 The Court need not reach the conclusion that the defendants were reckless, for the 

plaintiff will prevail if “the Court finds it cannot determine, as a matter of law, that 

Defendants were not reckless.” ABN AMRO, Inc. v. Capital Int’l Ltd., 595 F. Supp. 

2d 805, 842 (N.D. Ill. 2008). 

Case 2:11-cv-01624-JLL-MAH Document 39 Filed 01/09/12 Page 18 of 47 PageID: 613
wholly-owned Kid Brands’ subsidiaries) as Kid Brands’ core business operations. 

See, e.g., ¶¶9, 10, 16, 57, 94, 95.4

The Complaint is replete with allegations that Defendants knew or recklessly 

disregarded that three out of Kid Brands’ four business entities posted inflated 

earnings on the basis of illegal conduct and that Kid Brands had engaged in 

improper staffing practices across Asia. See, e.g., ¶¶9, 10, 16, 57, 94, 95. Yet 

Defendants continuously touted, inter alia, the purported accuracy and 

effectiveness of the Company’s internal disclosure controls and also touted the 

earnings of its subsidiaries while downplaying liabilities. See, e.g., ¶¶9, 44, 46, 48, 

50, 52, 54, 58, 60, 64, 75, 76, 79, 85. Such statements were made in the 

Company’s public filings during the Class Period, which were signed by 

Defendants Crain and Paglinco, respectively the Chief Executive Officer and Chief 

Accounting Officer of Kid Brands. As such, the Complaint contains numerous 

allegations of Defendants’ “conscious misbehavior or recklessness” — that the 

Defendants “engaged in deliberately illegal behavior,” “knew facts or had access to 

information suggesting that their public statements were not accurate” or “failed to 

check information they had a duty to monitor.” E.g., ¶¶ 9-10, 12-15, 17-21; In re 

Party City Sec. Litig., 147 F. Supp. 2d at 315; Novak, 216 F.3d at 308, 311. 

13

 

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Defendants incorrectly argue that a pre-Tellabs and pre-Matrixx case 

controls this matter. Co. Br. at 19. (citing In re Alpharma Inc. Sec. Litig., 372 F.3d 

137 (3d Cir. 2004)) (“[T]he Third Circuit’s decision in Alpharma is determinative 

here.”). The case is easily distinguishable and actually supports Plaintiff’s 

inference of scienter. In Alpharma, the Third Circuit found that plaintiffs failed to 

link members of Alpharma’s management to wrongdoing at one of Alpharma’s 

Brazilian subsidiaries or that they had any knowledge of wrongdoing. 372 F.3d 

150-51. The Third Circuit found that “the Complaint simply alleges that a sales 

manager in AHD's Brazil division notified employees in New Jersey of the 

accounting irregularities in Brazil. There was no investigation of these 

allegations...” Id. at 151. More importantly, the Court held that “the Complaint is 

devoid of any allegations which would establish that AHD's Brazil division was so 

central to Alpharma's business that its increased revenue figures should have 

received particular attention from company executives.” Id. In sum, only one small 

subsidiary was alleged to wrongdoing. 

Here, by contrast, the Complaint alleges that at least three of four Kid 

Brands’ subsidiaries were participating in the same pattern of illegal conduct to 

inflate the Company’s revenues. It would strain credulity to argue that this far14

 4

 The Court can take judicial notice of additional indicia of scienter, including the 

abrupt resignation of Defendant Crain and the multiple investigations of the 

Company by the SEC and USAO. See Herrmann Decl. Exs. A-B. 

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reaching practice would not have been known by the Company’s senior executives 

or at minimum recklessly disregarded by them. Additionally, the Company’s 

November 2011 10Q, Defendants revealed that LaJobi was selected by U.S. 

Customs in late December 2010 for a Focus Assessment of its import practices and 

procedures. The Focus Assessment commenced on January 19, 2011. Defendants 

also disclosed that “[i]n preparing for the Focused Assessment, the Company 

found certain potential issues with respect to LaJobi’s import practices.” Unlike in 

Alpharma, the Company was sufficiently concerned enough about the “potential 

issues” that it retained the Skadden Arps firm to conduct an investigation. ¶76. 

These “potential issues” were not disclosed until March 15, 2011, despite 

Defendants’ knowledge of these issues in or around December of 2010. More 

disturbingly, although the Company had been specifically selected by the U.S. 

Government for a Focused Assessment in December 2010, Defendants concealed 

this specific fact until November 2011, despite making various announcements and 

filings in the interim (including the March 15, 2011 disclosure and the other partial 

disclosures during the Class Period), all of which required disclosure. 

While Defendants may argue that these facts do not support that they acted 

recklessly or knowingly because these were only “potential issues,” the Supreme 

Court has dismissed this very type of argument. See Matrixx, 131 S. Ct. at 1324. In 

Matrixx, the Supreme Court rejected the defendant’s argument that “the most 

15

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obvious inference is that petitioners did not disclose the [adverse] [reports] simply 

because petitioners believed they were far too few ... to indicate anything 

meaningful about adverse reactions to use of Zicam.” Id. Conversely, the Supreme 

Court found that “[t]he inference that Matrixx acted recklessly (or intentionally, for 

that matter) is at least as compelling, if not more compelling, than the inference 

that it simply thought the reports did not indicate anything meaningful about 

adverse reactions.” Id. Supporting its finding of scienter, the Supreme Court held, 

“Matrixx was sufficiently concerned about the information it received that it 

informed Linschoten that it had hired a consultant to review the product...” Id. 

Similar to Matrixx, Kid Brands was also sufficiently concerned about the 

information it found regarding “potential [LaJobi import] issues” that it hired 

Skadden Arps to conduct an investigation. ¶76. See Matrixx, 131 S. Ct. at 1324.5 

The fact that Crain resigned his position as CEO and his membership on the 

Board of Directors, effective immediately, on September 12, 2011, less than one 

16

 

5 In In re Meta Fin. Group, Inc., C 10-4108-MWB, 2011 WL 2893625 (N.D. Iowa 

July 18, 2011), the plaintiffs made similar allegations as here: “the plaintiffs 

allege[d] that because the defendants knew that the [Office of Thrift Supervision] 

investigation was occurring and that OTS had indicated that there were problems, 

the defendants knew of or recklessly disregarded the material falsity of their 

statements or knowingly or recklessly omitted material information from them.” 

Thus, findings from a known government investigation helped support the 

inference of scienter. In denying the defendants’ motion to dismiss in full, the court 

in Meta found, “a reasonable person would deem the inference of scienter cogent 

and at least as compelling as any opposing inference.” Id. 

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month after the August 15, 2011 disclosure is also probative of scienter. See 

Herrmann Decl. Ex. B.; In re McKesson HBOC, Inc. Sec. Litig., 126 F.Supp.2d 

1248, 1274 (N.D. Cal. 2000) (termination of key personnel supports a finding of 

scienter); Hughes v. Huron Consulting Group, Inc., 733 F.Supp.2d 943, 949 (N.D. 

Ill. 2010) (“To the extent the particular factual allegations not expressly addressed 

here—... the individual defendants' resignations—may further contribute to a 

“strong inference” of scienter, these allegations are merely icing on the cake, and I 

need not linger on whether they are sufficient, alone or in combination, to plead 

scienter.”). 

Defendants argue that “any inference of fraudulent intent on the part of Kid 

Brands is simply not cogent and is less compelling than the competing nonfraudulent inference. Co. Br. at 25. They even go as far as portraying Kid Brands 

as the quintessential promoter of corporate diligence. Co. Br. at 25 (“Kid Brands 

itself identified the subsidiary violations at issue here, took immediate steps to 

remedy the situation and promptly disclosed these facts to the investing public. 

These facts demonstrate a company that acted diligently, not with fraudulent 

intent”). Not so. 

LaJobi, CoCaLo, and Kids Line violations of customs laws saved Kid 

Brands millions of dollars. ¶11. Kid Brands’ 10-K filing for the year ended 

17

 

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December 31, 2010, estimated custom charges from anti-dumping violations at 

$6.9 million. Moreover, Kid Brands filed an 8-K on August 16, 2010 that 

estimated an additional $.3 million in customs charges from LaJobi violations and 

$2.2 million in anticipated customs charges arising from violations by CoCaLo and 

Kids Line dating back to August 2006. In total, Kid Brands saved nearly $10 

million from its bottom line by skirting U.S. customs laws, which it now must pay 

back with interest. ¶11. In fact, one way in which Kid Brands was able to 

accomplish such subterfuge was through a company called L&J Industries in Asia. 

¶12. Mr. Bivona, the former President of LaJobi, along with his family members, 

established L&J Industries (“L&J”) in Asia to facilitate the shipment of goods 

from Asian ports to the United States. ¶12. In connection with the acquisition of 

LaJobi, Kid Brands entered into a services agreement through which Kid Brands 

utilized the full time services of approximately 28 individuals working with L&J. 

¶12. Eventually, Kid Brands paid for the services of all or nearly all of the L&J 

employees based in Hong Kong, China, Vietnam and Thailand. ¶12. 

Further, Kid Brands acknowledged in its Form 10-Q for the quarter ending 

June 30, 2011 that Kid Brands’ staffing and payment practices at L&J likely 

violated the civil, criminal and regulatory laws of some, if not all of these countries 

due to, amongst other things, foreign regulations requiring disclosure in connection 

with wire transfers. ¶13. Because the inspectors in China received instructions 

18

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from a Kid Brands quality control department based in the United States, 

Defendants knew or recklessly disregarded its staffing arrangements with 

employees working abroad, specifically China. ¶14. Another way Kid Brands was 

able to circumvent U.S. and foreign laws for such a long period of time without 

detection was by shirking its duties under U.S. law to disclose the true financial 

condition of the Company. ¶16. Kid Brands’ own employees found that the 

Company’s disclosures missed the mark. ¶16. 

Strong evidence of scienter is provided by the fact that both the SEC and the 

USAO are now investigating the Company. Kid Brands received a letter from the 

SEC on June 20, 2011 notifying the Company that the SEC initiated an 

investigation into Kid Brands and requesting various documents. ¶17. 

Additionally, per the November 8, 2011, 10Q, on August 19, 2011, the United 

States Attorney's Office for the District of New Jersey contacted Company 

counsel, requesting information relating to LaJobi previously provided by the 

Company to U.S. Customs and the SEC, as well as additional documents. 

The firings of Mssrs. Bivona and Sandiford, the Managing Director of 

Operations at LaJobi, were a superficial attempt by Kid Brands to hold someone 

accountable for the customs misconduct. ¶20. When LaJobi co-founders Larry and 

Joe Bivona sold the company to Kid Brands in 2008, Joe retired, but Larry wanted 

to work for a few more years. ¶20. As a result, Kid Brands offered him a three-year 

19

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contract to remain as LaJobi President. ¶20. Kid Brands’ firing of Bivona in March 

of 2011 was therefore of little consequence because his contract was set to expire 

in 2011 anyway. ¶20. Likewise, Sandiford’s firing had little effect. ¶20. Kid 

Brands did not publicly disclose the name of its fired Managing Director of 

Operations, and Plaintiff was only able to discover this information after 

significant investigation efforts. ¶20. Kid Brands portrayed the terminations of 

Bivona and Sandiford as the Company’s swift reaction to the aberrant acts of two 

vigilante executives. ¶20. Tellingly, two of Kid Brands’ other subsidiaries, Kids 

Line and CoCaLo—with which Bivona and Sandiford had no connection—were 

concurrently engaging in the exact same pattern of conduct as LaJobi. ¶20. In fact, 

as noted in Kid Brands’ 10-Q for the quarter ended June 30, 2011, Kids Line and 

CoCaLo had been incorrectly classifying and describing products imported from 

Asia to avoid paying import duties since as early as 2006. ¶20. 

Further providing evidence of scienter, Kid Brands’ accusations against 

Bivona allowed the Company to save millions of dollars in “Earnout 

Consideration.” ¶21. A portion of acquisition of LaJobi included contingent 

consideration based on the achievement of performance milestones. ¶21. This 

“Earnout Consideration” factored in annual growth and equated to a percentage of 

the “Agreed Enterprise Value” as of the “Measurement Date.” ¶21. Based on these 

numbers, Kid Brands determined that it owed the LaJobi sellers (the Bivonas) $12-

20

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15 million, and owed the financial institution responsible for facilitating the 

acquisition 1% of the Agreed Enterprise Value. ¶21. In light of the misconduct 

purportedly by Bivona and Sandiford that gave rise to customs fees attributable to 

LaJobi, Kid Brands determined that it owes not a penny of the $12-15 million. ¶21. 

 Accordingly, the cogent and compelling inference is that once it was 

discovered that Defendants were violating anti-dumping laws by avoiding duties 

on the products LaJobi, CoCaLo, and Kids Line imported from China and 

elsewhere, as well as Kid Brands’ illegal staffing practices overseas, Bivona and 

Sandiford were set up as the scapegoats to take the fall and were terminated under 

the guise of a Company acting swiftly and diligently. Further evidencing this 

inference is that Defendants refused to pay Bivona up to $15 million in Earnout 

Consideration and Bivona is currently demanding payment for same. ¶21. 

Moreover, it would be absurd to suggest that the same customs violations that had 

been occurring at CoCaLo and Kids Line since 2006—two years before Bivona 

was in the picture or LaJobi was even acquired—were the result of two rogue 

executives at LaJobi and not done at the direction of or with the knowledge of 

Defendants. ¶5 (LaJobi was acquired by Kid Brands in 2008); ¶¶20, 23 (Customs 

violations were occurring at CoCaLo and Kids Line since 2006). Defendants 

would have this Court believe that Bivona and Sandiford, two rogue LaJobi 

employees, independently concocted the exact same customs scheme that had been 

21

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occurring at CoCaLo and Kids Line since 2006. Most importantly, although the 

Company alleged Bivona and Sandiford were terminated swiftly and diligently 

upon discovery of their rogue, illegal activities at LaJobi, no one from CoCaLo or 

Kids Line was terminated as result of the same illegal conduct occurring at these 

two Kid Brands’ subsidiaries. 

3. Plaintiffs’ Confidential Witnesses Support Scienter 

Plaintiff’s allegations are supported by detailed reports from three wellplaced Confidential Witnesses (“CWs”). See ¶¶10, 16, 57. These CWs provide a 

cogent inside view into Defendants’ actions and operations during the Class 

Period. 

A “plaintiff may provide factual support for a complaint through 

confidential sources... when the confidential sources are described in the 

complaint with sufficient particularity to support the probability that a person in 

the position occupied by the [confidential] source would possess the information 

alleged.” In re Anadigics, Inc., Sec. Litig., CIV.A. 08-5572 MLC, 2011 WL 

4594845 (D.N.J. Sept. 30, 2011). “The Novak approach to assessing the 

particularity of allegations made on information and belief necessarily entails an 

examination of the detail provided by the confidential sources, the sources' basis of 

knowledge, the reliability of the sources, the corroborative nature of other facts 

alleged, including from other sources, the coherence and plausibility of the 

22

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allegations, and similar indicia.” California Public Employees’ Ret. Sys. v. Chubb 

Corp., 394 F.3d 126, 147-48 (3d Cir. 2004). 

Plaintiff’s description of his sources readily meets the Third Circuit standard 

for identification of witnesses. See, e.g., Chubb Corp., 394 F.3d at 147-48 

(adopting the Second Circuit standard that an unnamed source must be “described 

in the complaint with sufficient particularity to support the probability that a 

person in the position occupied by the source would possess the information 

alleged”). CW1 is described as a former Distribution Manager at LaJobi from May 

2000 through November 2010 who consistently handled shipments from both 

Chinese and Vietnamese vendors—thus supporting the allegation that CW1 was 

extremely well-placed and in a position to know and in fact knew the information 

alleged. ¶10. Additionally, CW1 alleged, inter alia, that the “air of wrongdoing 

was so pervasive at the LaJobi distribution department that the customs violations 

did not surprise [him/her] at all.” ¶10. 

CW2, a Sarbanes-Oxley Compliance Consultant, also addressed how Kid 

Brands was able to circumvent U.S. and foreign laws for such a long period of time 

without detection. ¶16. Despite attesting to the accuracy of Kid Brands’ financial 

statements and the viability of Kid Brands’ internal controls in their Sarbanes 

Oxley certifications, LaJobi had been “singularly uncooperative in complying with 

Sarbanes Oxley requirements,” the key provisions of which require strict internal 

23

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disclosure controls and procedures, and the systems put in place did not produce 

accurate data, as described by CW3. ¶¶16, 57. CW2 was hired to prevent the exact 

type of wrongful conduct alleged herein. Because the customs violations saved the 

Company millions of dollars in unpaid import duties and the non-disclosure of 

such illegal savings made the Kid Brands’ financial position look much more 

favorable to investors, Defendants failed to establish an effective system of 

disclosure controls and procedures as of March 31, 2010. ¶57. 6

4. The Core Operations Doctrine Applies 

Under the “core operations” doctrine, knowledge of the falsity of a 

company's statements can be imputed to key officers who should have known of 

facts relating to the core operations of their company that would have led them to 

the realization that the company's statements were false when issued. See In re 

Lowen Group, Inc., 2004 WL 1853137, at *22 (E.D. Pa. Aug. 18, 2004); In re Tel–

Save Sec. Litig., 1999 WL 999427, at *5 (E.D. Pa. Oct. 19, 1999)) (“if a plaintiff 

24

 

6

 The Third Circuit has noted in Avaya that scienter may be adequately alleged 

where “[i]t is true that Shareholders do not point to any particular document or 

conversation that would have informed Peterson or McGuire of unusual 

discounting during the class period. The existence of such a direct link would 

fortify Shareholders' allegations that defendants' statements about discounting were 

knowingly or recklessly false. But the Supreme Court has made clear that 

plaintiffs' allegations of scienter ‘need not be irrefutable, i.e., of the “smoking-gun” 

genre.’” Tellabs, 127 S.Ct. at 2510. Instead, our inquiry is ‘whether all of the facts 

alleged, taken collectively, give rise to a strong inference of scienter.’ Id. at 2509.” 

Avaya, 564 F.3d at 268-69. 

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pleads alleged fraud concerning the corporation's core business and the defendant 

held a position from which he would have been aware of the true facts and 

misleading disclosures, scienter is pleaded sufficiently.”); see also In re Atlas Air 

Worldwide Holdings, Inc. Sec. Litig., 324 F.Supp. 2d 474, 489-92 (S.D.N.Y. 

2004); Freudenberg v. E*Trade Fin. Corp., 712 F. Supp. 2d 171, 199 (S.D.N.Y. 

2010). 

Here, Individual Defendants Crain and Paglinco were the highest-level 

officers of Kid Brands. ¶¶34-35. “Accordingly, if a plaintiff can plead that a 

defendant made false or misleading statements when contradictory facts of critical 

importance to the company either were apparent, or should have been apparent, an 

inference arises that high-level officers and directors had knowledge of those facts 

by virtue of their positions with the company.” Atlas Air, 324 F. Supp. 2d at 489. 

 Moreover, the Complaint satisfies the “core operations” doctrine 

requirements. LaJobi, CoCaLo, and Kids Line were three of only four subsidiaries 

of the Company—all of which are in the Company’s core business of infant and 

juvenile consumer products and were engaged in the same type of illegal conduct. 

¶¶5, 8, 13, 15, 18, 20. Kid Brands is a leading designer, importer, marketer and 

distributor of infant and juvenile consumer products. ¶6; see also March 31, 2010 

Form 10-Q. The Seventh Circuit’s decision on remand in Tellabs found that 

because the allegations concerned the company’s most important products, the 

25

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court found it “very hard to credit” the assertion “[t]hat no member of [Tellabs’] 

senior management who was involved in authorizing or making public statements 

about the demand for the key products knew that they were false” and noted that 

“no plausible story has yet been told by the defendants that might dispel our 

incredulity.” Makor Issues & Rights, Ltd. v. Tellabs, Inc., 513 F.3d 702, 709 (7th 

Cir. 2008) (emphasis added). 

Further, in In re Complete Mgmt. Inc. Sec. Litig., 153 F. Supp. 2d 314, 325-

26 (S.D.N.Y. 2001), plaintiffs alleged that defendant (CMI) was aware that a large 

percentage of CMI's receivables were ultimately uncollectible because CMI was 

substantially relying on revenues from GMMS, an organization egregiously issuing 

self-referrals to run up fees that, and that these claims, when arbitrated, would 

yield cents on the dollar. Id. The plaintiffs averred that the high-level officers, 

including, inter alia, the CEO, CFO, and Vice-Chair of the Board, were aware of 

the problem with receivables, but concealed this information from investors. Id. 

Judge Buchwald, finding the complaint alleged a strong inference of scienter, held: 

It thoroughly strains credulity to imagine that the individual 

defendants, by virtue of their positions at CMI and the interactions 

with GMMS that those positions demanded, were ignorant of the 

practices of GMMS. As a practical matter, the individual defendants 

were the top management of CMI and it is inconceivable that they 

would have no conception of how GMMS, CMI's largest client-whose 

medical practice CMI contracted to manage-operated its business. For 

precisely this reason, other courts facing similar issues have held that 

on a motion to dismiss, making all reasonable assumptions in favor of 

the plaintiff includes assuming that principal managers of a 

26

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corporation are aware of matters central to that business's operation. 

See, e.g., Angres v. Smallworldwide *326 PLC, 94 F.Supp.2d 1167, 

1175-76 (D. Colo.) (citing In re Aetna Inc. Sec. Litig., 34 F.Supp.2d 

935, 953-54 (E.D. Pa. 1999). 

Id. (emphasis added). 

Here, Plaintiff has similarly alleged that Defendants Crain (CEO) and 

Paglinco (Chief Accounting Officer) knew or recklessly disregarded that three out 

of Kid Brands’ four business entities posted inflated earnings on the basis of illegal 

conduct and that Kid Brands had engaged in improper staffing practices across 

Asia. See, e.g., ¶¶9, 10, 16, 57, 94, 95. Yet despite Defendants’ knowledge or 

recklessness, Defendants continuously touted the purported accuracy and 

effectiveness of the Company’s internal disclosure controls and also touted the 

earnings of its subsidiaries while downplaying liabilities. See, e.g., ¶¶9, 44, 46, 48, 

50, 52, 54, 58, 60, 64, 75, 76, 79, 85. Moreover, Defendants either knew or 

recklessly disregarded the illegal business practices of its subsidiaries because Kid 

Brands’ own corporate filings—including but not limited to the Form 10-K for the 

year ending December 31, 2009 —boast the Company’s internal cooperation and 

transparency, “[S]enior corporate management, together with senior management 

of our subsidiaries, coordinates the operations of all our businesses and seeks to 

identify cross-marketing, procurement and other complementary business 

opportunities.” ¶15. If this statement is true, then Defendants knew or should have 

known about the illegal conduct by Kids Line, CoCaLo and LaJobi well before the 

27

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dates of disclosure. ¶15. 

Additionally, the same illegal conduct occurring at LaJobi—allegedly only 

as a result of Bivona and Sandiford’s unilateral conduct—had also been occurring 

at CoCaLo and Kids Line for approximately two years prior to the acquisition of 

LaJobi. Put simply, the pattern of illegal conduct at Kid Brands, i.e., the customs 

violations and illegal staffing practices, preceded the hiring of Mr. Bivona and 

therefore could not have started with him. At most, Mr. Bivona merely continued 

the pattern of illegal conduct initiated at CoCaLo and Kids Line. 

A strong inference arises that the Individual Defendants, by virtue of their 

high-level positions, the Company’s statements about management’s close 

involvement with and supervision of the subsidiaries, and the pattern and practice 

of illegal conduct at multiple subsidiaries aimed at artificially inflating the 

Company’s bottom line, had knowledge of or recklessly disregarded those 

concealed adverse facts. See Atlas Air, 324 F. Supp. 2d at 489; see also Avaya, 564 

F.3d at 272-73 (citing South Ferry, 542 F.3d at 784). Also, the fact that the pattern 

of illegal conduct had also been occurring at CoCaLo and Kids Line for 

approximately two years prior to the acquisition of LaJobi supports the inference 

this was not the unilateral actions of two rogue employees as Defendants claim, but 

instead was being directed at the highest levels of the Company. 

5. The Doctrines of Corporate or Collective Scienter Support a 

Strong Inference of Scienter Against Kid Brands 

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Alternatively, even if the allegations of the Individual Defendants’ scienter 

are somehow deemed insufficient, Kid Brands is not entitled to dismissal on 

scienter grounds. It is well settled that a corporation may be found liable if there is 

collective scienter on the part of its employees. See In re Worldcom Sec. Litig., 352 

F. Supp. 2d 472, 497 (S.D.N.Y. 2005) (“[P]laintiffs in securities fraud cases need 

not prove that any one individual employee of a corporate defendant also acted 

with scienter). Although the Third Circuit has not ruled expressly on the 

applicability of the “collective scienter” theory, many other Circuits have found it 

to be applicable. See Glazer Capital Mgmt., L.P. v. Magistri, 549 F.3d 736, 744-45 

(9th Cir. 2008) (citing Tellabs, 513 F.3d at 710 (7th Cir. 2008) (“[I]t is possible to 

draw a strong inference of corporate scienter without being able to name the 

individuals who concocted and disseminated the fraud.”)); see also Teamsters 

Local 445 Freight Division Pension Fund v. Dynex Capital, Inc., 531 F.3d 190, 

195 (2d Cir. 2008) (same). In fact, in upholding the denial of the motion to dismiss 

in Matrixx, a case which involved omissions in corporate statements, the Supreme 

Court did not even find it necessary to distinguish between the company and its 

officers. Matrixx, 131 S.Ct. at 1309. 

First, Defendants argue that the collective scienter doctrine is likely not 

applicable in the Third Circuit and cite Zavolta v. Lord, Abbett & Co., No. 08-cv04546, 2011 WL 686546 at *7 (D.N.J. Feb. 24, 2010), in support. Co. Br. at 19 

29

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citing id. (“[a]rguably, [the collective scienter] doctrine does not survive the Third 

Circuit’s bar against group pleading in securities cases.”). This conclusion does not 

follow. Indeed, the Seventh Circuit has barred the group pleading doctrine and still 

holds the collective scienter doctrine to be compatible in securities cases. See

Makor v. Tellabs, 437 F.3d 588 (7th Cir. 2006). Further, a majority of district 

courts in the Ninth Circuit have held that the group pleading doctrine is no longer 

viable yet the Ninth Circuit still applies the collective scienter doctrine. See Glazer 

Capital Mgmt., L.P., 549 F.3d at 744-45 (applying collective scienter doctrine). 

Alternatively, Defendants improperly argue that if the collective scienter 

theory is viable in the Third Circuit then it must “only [be] allowed in 

‘extraordinary’ circumstances where the magnitude of the alleged fraud was so 

dramatic that it must have been approved by corporate management.” Co. Br. at 

19, citing City of Roseville emps.’ Ret. Sys. v. Horizon Lines, Inc., Nos. 10-2788, 

10-3815, 2011 WL 3695897 (3d Cir. Aug. 24, 2011). However, no such 

“extraordinary circumstances” standard has been promulgated. See City of 

Roseville, 2011 WL 3695897, at *3 (“we need not decide whether we agree with 

either [collective scienter] approach.”). 

Nevertheless, the purported “extraordinary circumstances” standard 

referenced by Defendants has been met here. Although Defendants laud the fact 

that they acted swiftly and diligently in firing two rogue employees at LaJobi, three 

30

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of four Kid Brands’ wholly owned subsidiaries—two of which Bivona and 

Sandiford had no connection—were participating in the same type of illegal 

activities occurring at LaJobi. Tellingly, the illegal activities at CoCaLo and Kids 

Line preceded Bivona by approximately two years—thus dispelling Defendants’ 

argument that this was just the unilateral conduct of two rogue employees. 

Considering the sheer significance of LaJobi, CoCaLo, and Kids Line to Kid 

Brands’ success and viability, and the fact that illegal activities were occurring at 

three of four subsidiaries, the allegations at least raise a strong inference of 

corporate scienter as to Kid Brands that is at least as plausible as any opposing 

inference. 

C. Defendants’ Materiality Challenges Must Fail 

Materiality is a highly factual inquiry not properly suited for resolution on a 

motion to dismiss. Shapiro v. UJB Financial Corp., 964 F.2d 272, 281 (3d Cir. 

1992) (“Materiality is a mixed question of law and fact, and the delicate 

assessments of the inferences a reasonable shareholder would draw from a given 

set of facts are peculiarly for the trier of fact.”). “Only if the adequacy of the 

representation or the materiality of the statement is so obvious that reasonable 

minds could not differ, will the representation or omission be immaterial as a 

matter of law. In re PDI Sec. Litig., No. 02-CV-0211, 2005 WL 2009892 at *12 

(D.N.J. Aug. 17, 2005) (citations omitted). 

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Defendants effectively concede the materiality of the large majority of the 

Complaint’s alleged misleading statements and omissions and instead only 

challenge a select few statements on the basis that either: 1) they had no duty to 

disclose the statements, or 2) the statements are expressions of corporate “puffery.” 

Co. Br. at 27-30 (Part C of brief addressing materiality of statements reads “Many

of the Challenged Statements Are Non-Actionable As a Matter of Law”). After the 

recent controlling pronouncement on the materiality inquiry in Matrixx and recent 

cases criticizing the “puffery” defense, Defendants’ arguments to attack the 

materiality of the alleged misrepresentations and omissions fail as a matter of law. 

1. Defendants Had a Duty to Disclose 

The Supreme Court addressed the issue of materiality very recently in 

Matrixx, its controlling decision where it rejected claims that incidents need not 

be disclosed because they were "anecdotal" and not "statistically significant." 

131 S.Ct. at 1319. While "something more" than "the mere existence of 

reports of adverse events" is needed, "that something more is not limited to 

statistical significance," Id. Rather, the "something more" can come from "the 

source, content, and context of the reports." Id. Here, the source of the reports of 

the adverse events comes from the people in the best position to report the 

problems, Kid Brands' own former employees. The content of those reports 

revealed a Company experiencing, among other things, quality control 

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problems, importing and distribution issues, and regulatory compliance 

problem, including Sarbanes Oxley certifications. ¶¶ 10, 16. A contextual inquiry 

would almost certainly reveal that reasonable investors would have viewed reports 

of these adverse events as material even though the reports did not provide 

statistically significant evidence of a causal link. 131 S.Ct. at 1319. Thus, 

Defendants' contention that the certain statements in the Complaint are 

immaterial is incorrect.

Defendants argue that the challenged statements are true, therefore they are 

not actionable. Def Br. at 27-30. However, literally “true” but materially 

incomplete or misleading statements may be actionable under the securities laws. 

See McMahan & Co. v. Wherehouse Entm’t., Inc., 900 F.2d 576, 579 (2d Cir. 

1990) (“statements, although literally accurate, can become, through their context 

and manner of presentation, devices which mislead investors. For that reason, the 

disclosure required by the securities laws is measured not by literal truth, but by 

the ability of the material to accurately inform rather than mislead prospective 

buyers”). 

Defendants’ contention some of the alleged misleading statements either do 

not relate to customs duties or are not rendered untrue because of customs issues is 

disingenuous. Co. Br. at 27, 29. The statements relate to the Company’s quarterly 

or yearly growth, but omit material information regarding how Kid Brands and its 

33

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subsidiaries LaJobi, CoCaLo and Kids Line posted inflated earnings as a result of 

avoiding customs duties. ¶¶ 54, 66, 64, 72.

Defendants argue that statements concerning the Company’s legal exposure 

from its 2010 quarterly filings do not relate to customs duties or are not rendered 

untrue because of customs issues. Co. Br. at 27, 29. In its Form 10-Q filed on May 

5, 2010 and November 3, 2010, Defendants claimed that the amount of ultimate 

liability with respect to pending actions including, among other things, customs 

actions, will not materially adversely affect the operations of the Company. ¶¶54, 

68. This statement calls into question the Company’s exposure to liability relating 

to customs violations. Further, because three of Kid Brands’ four subsidiaries 

actively engaged in U.S. Customs violations at the time of the statement, the 

Company had a duty to disclose its exposure to upcoming actions related to such 

ongoing violations. In re Alliance Pharm. Corp. Sec. Litig., 279 F. Supp. 2d 171, 

182 (S.D.N.Y. 2003). 

 Next, Defendants claim that statements relating to Kid Brands’ strong 

financial position as a result of LaJobi sales during the Class Period somehow do 

not relate to customs duties. Clearly, all LaJobi sales during the Class Period were 

tainted with customs violations, and therefore the Company had a duty to disclose 

the wrongdoing that resulted in such substantial “cash flow” and higher net sales. 

¶¶66, 64. Defendants cite Galati v. Commerce Bancorp, Inc., No. Civ. 04-3252 

34

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(RBK), 2005 WL 3797764 (D.N.J. Nov. 7, 2005), for the proposition that Kid 

Brands’ disclosures concerning sales and revenues derived from illegal conduct 

were not misleading. Co. Br. at 29. In Galati, plaintiffs brought a securities fraud 

action against Commerce Bancorp, Inc. and several of its executives and board 

members resulting from indictments stemming from bid-rigging, bribes, and other 

unlawful practices to secure contracts. Galati at *1. Plaintiffs alleged that 

financial figures in the company’s balance sheet amounted to material misleading 

statements because the company secured contracts by engaging in illegal activity. 

Id. at *7. The Court in Galati disagreed, finding that empirical listings alone 

cannot create 10b-5 liability. Id. 

In this case, however, Defendants’ positive statements regarding Company 

growth directly attribute the success of the Company to LaJobi, while concealing 

that the Company’s high earnings were based on illegal conduct: “Net sales for Q2 

2010 increased 13.3% to $67.9 million, compared to $60.0 million for the three 

months ended June 30, 2009 (“Q2 2009”). This increase was primarily the result 

of strong growth at LaJobi.” [emphasis added]. ¶64. The Court’s focus should be 

on the ability of the material to accurately inform rather than mislead prospective 

buyers. McMahan & Co., 900 F.2d at 579; Matrixx, 131 S. Ct. at 1318 (“[T]he 

materiality requirement is satisfied when there is ‘a substantial likelihood that the 

disclosure of the omitted fact would have been viewed by the reasonable investor 

35

Case 2:11-cv-01624-JLL-MAH Document 39 Filed 01/09/12 Page 41 of 47 PageID: 636
as having significantly altered the ‘total mix’ of information made available.’” 

(citing Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); Local 731 I.B. of T. 

Excavators and Pavers Pension Trust Fund v. Swanson, No. 09-799, 2011 WL 

2444675 at *8 (D. Del. June 14, 2011) “The ‘total mix’ standard requires a 

‘contextual inquiry’ that is ‘fact-specific.’ (citing Matrixx at 1321). Furthermore, as 

distinguished from Galati, Kid Brands was forced to disgorge approximately $7 

million in earnings made as a result of skirting customs violations, therefore, 

Defendants’ statements including such earnings on LaJobi sales were decidedly 

not accurate. ¶90. In fact, Defendants also acknowledged in its Amended 10-K/A 

filed on May 2, 2011 that LaJobi and Kid Brands as a whole would have reached 

performance targets but for the approximately $7 million owed to the U.S. 

government as a result of anticipated antidumping duties. ¶83. Clearly, the large 

amount of duty repayment indicates a material omission that would have 

significantly altered the mix of information investors relied upon because the owed 

$7 million precluded Kid Brands and LaJobi from meeting their performance 

targets for 2010.7

 

36

 

7 Defendants also brazenly argue that the Complaint’s allegations regarding federal 

agency investigations into Kid Brands are fabricated because the Company merely 

received an issued release to the industry as a whole. Co. Br. at 30. Defendants 

cite a Form 8-K filed on August 16, 2011 that supposedly indicates that the entire 

industry received such notice. Id. at 30-31. The August 16, 2011 Form 8-K says no 

such thing, and merely notes that the Company incurred costs to bring LaJobi cribs 

into compliance with safety standards. Co. Ex. F. at 2.

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2. Defendants’ Statements Cannot Be Dismissed As Puffery 

 Defendants contend that alleged material misstatements regarding Kid 

Brands’ business model, brand strength, operational strengths, organizational 

synergy, stockholder benefits, working capital, and cost mitigation were mere 

puffery. Co. Br. at 27-28 (challenging statements in ¶¶52, 58, 74).8

 As an initial 

matter, “whether a particular statement is mere puffery or actionable misstatement 

must be determined by looking not only to the challenged language itself, but also 

the context in which the statement was made.” Rosen v. Textron, 321 F.Supp. 2d 

308, 320 (D.R.I. 2004). Accordingly, “factual disputes are not properly decided at 

this [motion to dismiss] stage of the proceedings.” In re Marsh & McLennan Co. 

Sec. Litig., 501 F. Supp. 2d 452, 474 (S.D.N.Y. 2006). Even at later stages, 

however, statements of corporate optimism are now viewed with disfavor and the 

“recent trend is to consider expressions of corporate optimism carefully.” See 

Brumbaugh v. Wave Sys. Corp., 416 F. Supp. 2d 239, 250 (D. Mass. 2006) (citing 

authority and noting that the puffing concept has “gone the way of the dodo”). 

 In executing their puffery attack, Defendants cherry-pick a handful of 

37

 

8

 Defendants make no attempt to argue specifically why the statements contained 

within the cited paragraphs of the Complaint constitute puffery, other than pointing 

to two phrases in ¶52—“extending [its] leadership position” and seeking 

“synergies”—calling them “general, optimistic puffing” and “vague positive 

remarks accompanying earnings releases.” Co. Br. at 28. But, such statements 

reflecting the overall economic health of the company are adequately pleaded as 

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statements wholly removed from the context in which they were made, and do not 

challenge the substantial majority of the statements in the allegedly offending 

paragraphs of the Complaint. However, as Defendants themselves concede, 

context is crucial for analysis of whether a statement is actionable. Co. Br. at 28. 

Indeed, when Defendants’ purported “puffed” statements are taken out of isolation, 

examined in their entirety, and placed in the context of a company boasting its 

success while concealing the illegal means by which it achieved such success, 

Defendants’ statements clearly actionable material misstatements. 

 Defendant Crain’s statements in the Company’s March 29, 2010 release, 

taken as a whole and in the context of the Company’s 2010 Growth Outlook, 

materially mislead investors regarding the operations and financial direction of Kid 

Brands. Defendants point to the phrases, “extending leadership position” and 

“delivering synergies” as per se non-actionable in an attempt to categorically 

extrapolate all positive language under the ambit of “puffery.” Co. Br. at 27. The 

language of the release, when viewed in its entirety, boasts year-over-year growth 

for Kid Brands and emphasizes strong cash flows without mention of the illegal 

conduct that contributed to such liquidity. In addition, the statement that Kid 

Brands “seek[s] to deliver synergies and benefits across the organization that 

should benefit all [its] stockholders” was plainly misleading because the 

38

 

material to an investor and are actionable. Morgan v. AXT, Inc., No. C 04-4362 

Case 2:11-cv-01624-JLL-MAH Document 39 Filed 01/09/12 Page 44 of 47 PageID: 639
synergistic platform used by Kid Brands to benefit the organization was a scheme 

whereby the subsidiaries boosted profits by circumventing customs duties. This 

approach clearly did not benefit Kid Brands stockholders. 

 The other statements Defendants brand as puffery are adequately alleged to 

have misled investors as they relate to customs violations and the means by which 

Defendants mitigated costs in their business. First, the Company stated that it 

“maintained discipline over variable costs and working capital while selectively 

investing in market share expansion.” ¶58. As alleged, Defendants drove down 

costs associated with its business, but did not exercise discipline in doing so. ¶11. 

As a result of the customs violations, Kid Brands saved millions of dollars in duty 

payments, which were later repaid to the government in addition to punitive costs. 

Id. Likewise, the statement that Kid Brands was “working closely with [its] vendor 

and retailer partners to mitigate rising costs of goods, and are maintaining tight 

controls on all discretionary expenses” also misled investors by not disclosing the 

illegal means by which the Company engaged in cost mitigation and expense 

control. ¶74. To that end, Defendants misled investors to “not anticipate 

meaningful additional debt repayment during the remainder of 2010,” because duty 

repayment for customs violations would amount to millions of dollars. ¶74. 

Defendants’ argument that these statements are the type of “vague positive 

39

 

MJJ, 2005 U.S. Dist. LEXIS 42346, at *30 (N.D. Cal. Sept. 23, 2005). 

Case 2:11-cv-01624-JLL-MAH Document 39 Filed 01/09/12 Page 45 of 47 PageID: 640
remarks that the Third Circuit has held to be non-actionable” is just not true. In 

Swanson, the court held as actionable statements made by defendants regarding the 

strength and stability of the yellow pages market and identified reasons for the 

temporary nature of declines in revenue. Swanson, 2011 WL 2444675 at *1. In that 

case, the court reasoned that the statements were distinguishable from the “vague 

and general statement of optimism” because they addressed the source of decline 

in business, and therefore were the types of statements the reasonable investor 

would want to know and would rely upon. Id. at *10-11. Similarly here, the 

statements directly bring into question the means by which Kid Brands was able to 

save money on expenses and drive profits, which was, namely, by skirting customs 

duties. ¶¶ 52, 58, 74, 83.9

IV. CONCLUSION 

For the foregoing reasons, Defendants’ motions to dismiss should be denied.10

Dated: January 9, 2012 /s/ Jeffrey W. Herrmann 

Jeffrey W. Herrmann 

COHN LIFLAND PEARLMAN 

HERRMANN & KNOPF LLP 

 

9

 Defendants argue that Plaintiffs have not adequately alleged Section 20(a) claims. 

If the primary violation of the securities law is pleaded with legal sufficiency, a 

plaintiff who pleads a §20(a) claim can withstand a motion to dismiss. In re 

Suprema Specialties, Inc. Sec. Litig., 438 F. 3d 256, 286 (3d. Cir. 2006). Here, as 

described in detail above, Plaintiffs have pleaded their § 10(b) claims with legal 

sufficiency and thus secondary liability under § 20(a) is adequately pleaded. 

40

10 In the event that any portion of Plaintiff’s complaint is dismissed, Plaintiff 

respectfully requests leave to amend pursuant to Fed. R. Civ. P. 15. 

Case 2:11-cv-01624-JLL-MAH Document 39 Filed 01/09/12 Page 46 of 47 PageID: 641
41

Park 80 West-Plaza One 

250 Pehle Avenue, Suite 401 

Saddle Brook, New Jersey 07663 

Telephone: (201) 845-9600 

Facsimile: (201) 845-9423 

 Liaison Counsel for the Class 

Kim E. Miller 

KAHN SWICK & FOTI, LLC 

500 Fifth Avenue, Ste. 1810 

New York, New York 10110 

Telephone: (212) 696-3730 

Facsimile: (504) 455-1498 

Email: kim.miller@ksfcounsel.com

Lead Counsel for Lead Plaintiff and the 

Class 

Case 2:11-cv-01624-JLL-MAH Document 39 Filed 01/09/12 Page 47 of 47 PageID: 642