Past Cases

Plumbers & Pipefitters National Pension Fund v. Davis

Status Past Case

Practice area Securities Litigation & Investor Protection

Court U.S. District Court, Southern District of New York

Case number 1:16-cv-03591


On November 22, 2022, Judge Gregory H. Woods of the U.S. District Court for the Southern District of New York granted final approval of a $13 million settlement.

This settlement is in addition to the $1.15 million settlement Plaintiff obtained in Performance Sports Group’s bankruptcy in 2016 through the prior approval of the U.S. Bankruptcy Court for the District of Delaware and the Ontario Superior Court in Canada.

Cohen Milstein represents the United Association National Pension Fund, formerly known as the Plumbers & Pipefitters National Pension Fund, (the “Fund” or “Plaintiff”) in the Fund’s role as Lead Plaintiff in a securities fraud class action lawsuit against two former executives, Kevin Davis and Amir Rosenthal (the “Defendants”), of the now-bankrupt sports equipment and apparel company Performance Sports Group (“PSG”).

The Fund, in an amended complaint filed in September 2019, alleged that Defendants drove PSG to engage in sales tactics designed to create a false appearance of growth, concealed the negative trend of diminishing sales and brand reputation and the risks associated with those tactics, and consciously failed to maintain adequate internal controls and accurate financial reporting. The Plaintiff further alleged that Defendants’ statements painting as hypothetical the risk that the company’s practice of pushing excess inventory into the marketplace would harm future sales were false and misleading, as those risks had already transpired. Because Defendants never fulsomely disclosed the truth about their deception to the market, but rather, investors learned of their fraud over a series of events culminating in PSG’s bankruptcy, Plaintiff’s claims also are premised on the “materialization of risk” loss causation theory.

Important Rulings

On April 14, 2020, Judge Gregory H. Woods of the U.S. District Court for the Southern District of New York issued an opinion and order denying Defendants’ motion to dismiss the amended complaint with respect to all but a few alleged misstatements, finding that the Fund had “plausibly alleged that Defendants failed to disclose an adverse material trend, made misleading statements regarding the nature and sources of PSG’s sales growth, and failed to make adequate risk disclosures in documents filed with the SEC.”

This decision creates strong precedent for other cases where plaintiffs seek to successfully allege that defendants have misrepresented the strength and sustainability of a company’s growth; have hidden negative trends and occurrences of risks from investors; and have not been truthful about the adequacy of a company’s internal controls in SOX certifications. The Court’s holding that, as pleaded in the amended complaint, Defendants’ risk disclosures did not shield them from liability, since the risks had already transpired, also constitutes an important refutation of corporate defendants’ all-too-predictable attempts to hide behind cautionary language. Furthermore, the decision advances the “materialization of risk” theory, which provides another avenue of relief for investors in cases lacking a corrective disclosure.

Case Background

During the Class Period (January 15, 2015 through October 28, 2016), PSG was a developer and manufacturer of sports equipment and apparel that it sold to retailers in the United States and internationally. The company owned and operated under the well-known brand names Bauer, Easton, Maverik, Combat, Mission, Maverik, Cascade, and Inaria.

The initial complaint was filed on May 16, 2016; on June 7, 2016, the Court appointed the Fund as Lead Plaintiff and Cohen Milstein as sole Lead Counsel. The Fund filed the first amended complaint in August 2016. In October 2016, PSG filed for bankruptcy in Delaware and Canada, and shortly thereafter, in November 2016, the Fund filed a second amended complaint. After extensive briefing in the U.S. Bankruptcy Court for the District of Delaware and the Ontario Superior Court, PSG and the Fund (acting on behalf of itself and the class), entered into a settlement agreement (subsequently approved by the Delaware and Canadian courts), by which the Fund obtained over 20.4 million pages of documents from PSG. In addition, the Fund obtained a cash payment of $1.15 million, less reimbursement of the Trustee expenses, as part of the settlement. In September 2019, the Fund filed a third amended complaint against remaining Defendants Davis and Rosenthal. The amended complaint charged Defendants with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), and Rule 10b-5 thereunder.

Plaintiff alleged that throughout the Class Period, Defendants Davis and Rosenthal repeatedly touted to investors PSG’s record of impressive sales growth, the reasons for that growth, and their successful integration of PSG’s various acquired brands. Plaintiff claims Davis and Rosenthal misled investors about the true drivers of PSG’s sales growth, the risks associated with the mechanisms they were using to achieve that growth, and the quality of the internal controls that were supposed to address those risks.

Specifically, Plaintiff claimed, Defendants’ sales growth tactics included employing high-risk and sometimes fraudulent sales practices, such as (1) threatening the loss of volume-based discounts as a penalty to force retailers to take on more inventory than they reasonably could (a practice that one retailer described as “jam[ming] orders down our throat”); (2) flooding the market with inventory, often at extreme, unprofitable discounts referred to within PSG as “closeouts”; (3) “pulling” orders into different quarters so as to meet certain short-term sales targets; (4) relying on wildly extended payment terms to convince customers to take more and more product and not pay for it until months or even quarters later; (5) routinely pushing sales to customers in violation of PSG’s own internal controls governing customer credit limits; and (6) entering into non-final sales agreements with “right of return” provisions and consignment arrangements that violated accounting rules governing revenue recognition. A major shareholder and former chair of PSG’s Board of Directors described the tactics, in an email sent to Defendants in June 2015, as a “Ponzi scheme of sorts.”

Moreover, Plaintiff alleged that Defendants concealed that PSG’s internal controls regarding the detection and management of these high-risk sales practices were shoddy or non-existent, regularly violated, and left to crumble by Davis and Rosenthal – even after they received multiple, specific written and oral warnings from, among others, PSG’s independent auditor, KPMG. Specifically, KPMG warned Defendants in August 2014 and August 2015 that PSG failed to properly implement or abide by a system of credit limits for PSG’s retail customers, leaving PSG with substantial risk of not being able to collect on tens of millions of dollars that it had effectively lent to retailers.

Plaintiff further alleged that Defendants knew early on that some of their biggest customers, such as Sports Authority, were in financial distress and considering bankruptcy, and that the industry slowdown was partly the consequence of PSG cannibalizing its future sales by consistently pumping inventory to retailers with little regard for customer demand or credit worthiness. Nevertheless, in the early part of 2016, as PSG’s revenue dropped, and its customers began to file for bankruptcy, Davis and Rosenthal publicly blamed industry factors and their customers’ bankruptcies, without acknowledging their own roles in PSG’s deteriorating financial outlook.

On March 14, 2016, the New York Post published an article entitled “Bauer’s Parent Company Questioned About Misdating Earnings,” stating that customers told the former PSG Chairman the company had asked them to misdate earnings, sending shares tumbling by over 10.35% to close at $3.55 per share on March 15, 2016, on an average two-day trading volume of approximately 2.29 million shares, damaging investors.

The revelations continued. By the end of the Class Period, among other things: (1) PSG had announced a non-cash total impairment of $210 million – triggered by the weakening sales cycle that had materialized in response to PSG’s high-risk sales practices – in April 2016; (2) the U.S. Securities and Exchange Commission had opened an investigation into PSG that looked into the same issues raised in this litigation; (3) the Canadian securities regulator (the Ontario Securities Commission) opened its own similar investigation into PSG; and (4) PSG’s Audit Committee had initiated an internal investigation into the Company’s financial statements that involved the same issues raised in this litigation and which ultimately put in motion the final cascade of events leading to PSG’s bankruptcy in October 2016.

By November 1, 2016, the first trading day after the formal announcement of PSG’s bankruptcy filing, the Company’s share price had cratered to $1.67 on a volume of 8.7 million trades. PSG’s share price during the Class Period had reached a high of $21.65.

The case was originally named: Nieves, et al. v. Davis, et al., No. 1:16-cv-03591 (S.D.N.Y.).

The operative case name is: The case is styled: Plumbers & Pipefitters National Pension Fund, et al. v. Davis, et al., No. 1:16-cv-03591 (S.D.N.Y.).