Gamm v. Sanderson Farms, Inc., 944 F.3d 455 (2d Cir. 2019)

Second Circuit holds that if a securities class action is based on claim that public statements were misleading because defendant did not disclose illegal activity, plaintiffs are required to plead the underlying illegal activity with particularity.

The complaint alleged that Sanderson Farms and several other large chicken producers began colluding to inflate the price of chicken by coordinating supply reductions and manipulating a chicken price index. Sanderson Farms allegedly planned the antitrust conspiracy with its competitors during industry meetings and conferences. The conspiracy was also supposedly facilitated at investor conferences organized by Wall Street analysts and attended by Sanderson Farms and its competitors. Plaintiffs, on behalf of themselves and a putative class of purchasers of Sanderson Farms shares, alleged that the failure to disclose this antitrust conspiracy rendered various statements issued by Sanderson Farms during the class period false and misleading.

On appeal, plaintiffs acknowledged that allegations of misstatements and omissions in support of a securities fraud claim must be pleaded with particularity, but argued that the allegations of the facts of the underlying antitrust conspiracy must merely meet the Rule 8 plausibility standard. The Second Circuit disagreed, holding that because plaintiffs were required to plead with particularity sufficient facts to support their contention that Sanderson Farms’ financial disclosures were misleading, they necessarily were required to state the facts of the underlying anticompetitive conduct with particularity. Applying this standard, the Second Circuit found that, while the complaint alleged Sanderson engaged in anticompetitive conduct, there was “virtually no explanation as to how the collusive conduct occurred, and whether and how it affected trade.” Accordingly, the Second Circuit affirmed dismissal.

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