## Facts

- Burlington Coat Factory Warehouse Corp. (BCF) made public statements in late 1993 expressing “comfort” with analysts’ earnings estimates for fiscal year 1994 and made other optimistic performance-related statements.
- During fiscal 1994, BCF made disclosures about its results and business conditions; plaintiffs later alleged these communications omitted adverse developments and overstated performance.
- On September 20, 1994, BCF announced results that were below market expectations; the stock price dropped sharply (about 30% in one day) and declined further after follow-up disclosures.
- Investors who purchased BCF common stock between October 4, 1993 and September 23, 1994 brought a putative class action under §§ 10(b) and 20(a), alleging the market price was artificially inflated by misstatements and omissions.
- The complaint alleged, among other theories: (i) overstated earnings and improper accounting/inventory practices, (ii) failure to disclose reduced vendor discounts affecting margins, (iii) misleading statements about the impact of a “53rd week” in fiscal 1993, (iv) misleading “comfort” with analysts’ forecasts, and (v) an allegedly misleading prediction that earnings would grow faster than revenues.
- The district court dismissed under Rule 12(b)(6) and Rule 9(b) and denied leave to amend; plaintiffs appealed as to certain dismissed claims and the denial of leave to amend.

## Issues

1. Whether the complaint pleaded actionable misstatements or omissions under § 10(b) and Rule 10b-5 with the specificity required by Rule 9(b) (and consistent with heightened securities-fraud pleading principles).
2. Whether allegations of GAAP/accounting errors and earnings overstatements, without particularized facts supporting scienter, state a § 10(b) claim.
3. Whether BCF had a duty to disclose alleged reductions in vendor discounts to avoid making prior statements misleading.
4. Whether BCF’s statements about the fiscal 1993 “53rd week” were materially false or misleading rather than nonactionable disagreement over characterization.
5. Whether BCF’s “comfort” with analysts’ forecasts created a duty to correct or a continuing duty to update projections as later events affected the likelihood of meeting them.
6. Whether the district court abused its discretion by denying further leave to amend after dismissal for failure to plead fraud with particularity.

## Decision

- The Third Circuit affirmed dismissal of the challenged § 10(b)/Rule 10b-5 theories for failure to plead fraud with sufficient particularity and for failure to allege facts supporting a strong inference of scienter.
- The court held that alleged GAAP violations or accounting mistakes, standing alone, do not establish securities fraud; plaintiffs must plead particularized facts showing deliberate or reckless misconduct.
- The court rejected the omission theory regarding vendor discounts because the complaint did not plead with specificity how nondisclosure made particular identified public statements misleading, including when the discount changes occurred and how they rendered statements false.
- The court concluded that the “53rd week” allegations did not identify a concrete false statement; they reflected disagreement with management’s description and comparison of results.
- The court refused to recognize a broad duty to update ordinary earnings projections or “comfort” statements and found no adequately pleaded basis for a duty to correct; the “comfort” statement did not create a continuing obligation to revise forecasts as circumstances changed.
- The court treated the statement that earnings would grow faster than revenues as nonactionable, generalized optimism (puffery).
- The court affirmed denial of leave to amend, finding no abuse of discretion given prior opportunities to replead and substantive deficiencies not likely curable by further amendment consistent with Rule 11.

## Legal Principles

- Rule 9(b) requires a securities-fraud complaint to plead the circumstances of the alleged fraud with particularity, including identifying the specific statements, the speaker, when and where they were made, and why they were misleading.
- Under § 10(b) and Rule 10b-5, plaintiffs must plead facts supporting scienter; allegations consistent with negligence or mistaken judgment are insufficient.
- GAAP or accounting violations do not, by themselves, establish securities fraud; the complaint must allege particularized facts showing the accounting choices were fraudulent rather than merely incorrect.
- There is no general duty to disclose all material information; a duty to disclose arises when necessary to make a prior statement not misleading.
- A “duty to correct” concerns statements that were false when made; a “duty to update” concerns forward-looking statements that later become misleading due to intervening events, and courts should not impose an open-ended obligation to continually revise ordinary earnings projections.
- Vague, generalized statements of optimism about future performance are typically immaterial puffery and not actionable misrepresentations.
- Denial of leave to amend after repeated failure to plead fraud with required specificity may be affirmed where deficiencies are substantive and further amendment would likely be futile.

## Conclusion

The Third Circuit affirmed dismissal of investors’ Exchange Act claims because the complaint did not plead specific, materially false or misleading statements or omissions and did not allege scienter with the particularity required in securities-fraud litigation; it also rejected a broad duty to update earnings guidance and upheld denial of further leave to amend.


In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410 (3d Cir. 1997)