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From Securities Regulation Daily, January 28, 2015

Complaint against furniture company doesn't have a leg to stand on

By Rodney F. Tonkovic, J.D.

A district court dismissed a fraud complaint against a furniture company after finding that it failed to plead a cause of action under the Exchange Act. The complaint alleged that Furniture Brands International, Inc. misrepresented its year-over-year net sales and trade-name impairment charge, leading the plaintiffs to purchase stock at inflated prices. The plaintiffs alleged further that Furniture Brands' CEO and CFO manipulated this data so they could receive bonuses before the company filed for bankruptcy. The court dismissed the complaint after finding that it failed to adequately plead falsity and scienter (Carter v. Furniture Brands International, Inc., January 27, 2015, Autrey, H.).

Background. Furniture Brands designs, manufactures, and markets home furnishings. In the majority of quarters between 2006 and 2012, the company reported declining year-over-year net sales. As a result, Furniture Brands' executives received neither raises nor bonuses from 2008 onward. In 2012, however, the threshold for receiving bonuses was lowered, allegedly at the urging of the CEO.

In early 2013, Furniture Brands announced its financial results for the fourth quarter of 2012. The company reported increased year-over-year net sales and a trade-name impairment charge that was a significant improvement over the previous year. In addition, the company's sales beat the incentive threshold by $6 million, for which the CEO and CFO received bonuses.

In the first and second quarters of 2013, however, Furniture Brands reported declining year-over-year net sales and an increased trade-name impairment charge. In September 2013, Furniture Brands filed for Chapter 11 bankruptcy.

Misrepresentations. The plaintiffs claimed that Furniture Brands misrepresented material facts as part of a scheme to prematurely recognize revenue and to sell furniture for "pennies on the dollar." Sales data was manipulated, the plaintiffs asserted, to halt a downward trend and allow the defendants to project higher sales, resulting in an understated impairment charge and lower losses. The disclosure of a significantly higher trade-name impairment charge just two quarters later showed just how much the charge taken in the fourth quarter of 2012 was understated, the plaintiffs maintained.

Regarding the alleged premature revenue recognition, a confidential witness said that Furniture Brands would load trailers, which were not attached to trucks with inventory, and then count that inventory as shipped. The court found that this witness was unreliable because there was no indication that the witness, a logistics manager, had any connection with or insight into the company's accounting practices.

The plaintiffs then alleged that Furniture Brands sold furniture at undisclosed deep discounts in order to meet the sales threshold for the executives to receive bonuses. The court found that the company adequately disclosed its discounting and inventory clearance in press releases, conference calls, and SEC filings. Moreover, while the inventory was discounted, the plaintiffs alleged no facts to show that the discounts were in any way unusually low. The court found that allegations of channel stuffing similarly lacked factual support.

In sum, the court said, the complaint's allegations of falsity, aside from the unreliable confidential witness statements, amounted to fraud by hindsight. The plaintiffs asserted, in essence, that a higher trade-name impairment charge in 2013 demonstrated the falsity of the reported sales and lower impairment charge in the fourth quarter of 2012. These allegations, the court said, could not survive a motion to dismiss.

Scienter. Finally, the court found that the complaint's scienter allegations failed to meet the motive and opportunity standard. According to the court, the plaintiffs failed to plead the requisite "unusual circumstances" that led to what were relatively small bonuses. The inference of scienter, the court said, was not as compelling as the opposing inference that the defendants  were unsuccessful in preventing a company that had been performing poorly for six years from having to declare bankruptcy.

The case is No. 4:13CV1600 HEA.

Attorneys: James J. Rosemergy (Carey Danis & Lowe) for Keith Carter. Alan I. Ellman (Robbins Geller Rudman & Dowd LLP) for Lassman Family Limited Partnership. Laura A. Jarrett (Latham & Watkins LLP) and Scott K.G. Kozak (Armstrong Teasdale LLP) for Furniture Brands International, Inc.

Companies: Lassman Family Limited Partnership; Furniture Brands International, Inc.

MainStory: TopStory FraudManipulation MissouriNews

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