Opinion ID: 769157
Heading Depth: 4
Heading Rank: 3

Heading: Strong Inference of Fraudulent Intent on the Part of the AnnTaylor Defendants

Text: 61 The district court concluded that the plaintiffs had failed to plead facts giving rise to a strong inference of the defendants' fraudulent intent, as required to state a claim under § 10(b). We disagree. 62 According to the complaint, the AnnTaylor defendants knew at all relevant times that the Company had serious inventory problems that they sought to disguise by adopting the Box and Hold scheme. By refusing to mark down inventory they knew to be worthless, obsolete, and unsalable, the defendants acted intentionally and deliberately to artificially inflate AnnTaylor's reported financial results. They discussed the need to mark down inventory but refused to do so because that would damage the Company's financial prospects. Further, in approving the inventory management practices of Box and Hold, the defendants knowingly sanctioned procedures that violated the Company's own markdown policy, as stated in the Company's public filings. In doing so, they caused those filings to be materially misleading in that the disclosed policy no longer reflected actual practice. Lastly, despite knowledge of the true reasons for rising inventory levels, the defendants made repeated statements to the investment community either offering false reassurances that inventory was under control or giving false explanations for its growth. In short, the Complaint alleges that the defendants engaged in conscious misstatements with the intent to deceive. There is no doubt that this pleading satisfies the standard for scienter under Hochfelder, and the requirement of the PSLRA that plaintiffs state facts with particularity that give rise to a strong inference of the required state of mind. 63 In the end, we believe that the district court applied the correct standard but erroneously found that this standard was not met on these pleadings. According to the district court, the scienter requirement can be satisfied by pleading either conscious recklessness -- i.e., a state of mind approximating actual intent, and not merely a heightened form of negligence -- or actual intent. Novak I, 997 F. Supp. at 430. This was an accurate statement of the law. However, the district court believed that the facts pleaded by the plaintiffs supported nothing more than an inference that the managers of AnnTaylor disagreed over matters of business judgment, such as the valuation of inventory and the timing of markdowns. See Novak II, 26 F. Supp. 2d at 660. This was incorrect as a matter of law. When managers deliberately make materially false statements concerning inventory with the intent to deceive the investment community, they have engaged in conduct actionable under the securities laws.