United States District Court for the District of Arizona
Case No. CV-23-01887-PHX-SHD
Judge Diane J. Humetewa
Summary
On July 14, 2025, the District of Arizona dismissed the Consolidated Complaint in West Palm Beach Police Pension Fund v. Leslie’s, Inc., a securities class action brought by the Treasurer of the State of North Carolina for Leslie’s, Inc. shareholders. The Court found the complaint failed to meet the Private Securities Litigation Reform Act’s (PSLRA) pleading standards for falsity, granting Defendants’ Motion to Dismiss with leave to amend within 30 days.
Underlying Lawsuit
The Treasurer’s February 2024 complaint alleged violations of Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5, plus Section 20(a) for control person liability. It claimed Leslie’s, Inc., CEO Michael Egeck, and former CFO Steven Weddell misled investors from February 3, 2022, to July 13, 2023, by concealing excess chlorine-based product inventory and customer stockpiling, which reduced demand and triggered a stock price drop after a July 2023 disclosure.
Defendants’ Motion to Dismiss Arguments
Defendants sought dismissal under Rule 12(b)(6), asserting:
1. Falsity: The complaint lacked specificity under Rule 9(b) and the PSLRA, failing to clarify why 32 statements were false or misleading relative to four omitted facts about inventory and demand.
2. Scienter: No facts supported a strong inference of intent or recklessness, bolstered by Defendants’ stock purchases and absence of fraudulent motive.
3. Loss Causation: The complaint did not tie the stock price decline to the alleged misstatements, which focused on inventory rather than sales or profits.
Defendants submitted SEC filings, call transcripts, and a press release, claiming these were judicially noticeable or incorporated by reference.
Plaintiffs’ Opposition
The Treasurer argued the complaint met Rule 9(b) and PSLRA standards, alleging Defendants knowingly overstocked chlorine products, pushed customers to stockpile, and misrepresented demand, causing losses when disclosed. Scienter was supported by compensation incentives, former employee accounts, and Weddell’s exit. The Treasurer claimed the July 2023 disclosure of inventory issues and reduced demand caused the stock price drop.
Court’s Ruling
The Court granted dismissal with leave to amend by August 13, 2025. The Section 20(a) claim was dismissed due to the failure to plead a Section 10(b) violation.
Court’s Rationale
Falsity. The complaint did not satisfy the PSLRA’s rigorous pleading requirements. It failed to pinpoint which parts of the 32 statements were false or how four omitted facts (e.g., excess inventory, customer stockpiling) made them misleading. For instance, a statement about an “always-on procurement strategy” was not clearly tied to falsity, requiring specific connections to omitted facts. The Court deferred ruling on whether statements were non-actionable opinions or protected by the PSLRA safe harbor, pending potential amendments.
Scienter. Though not required, the Court addressed scienter to guide future filings:
- Motive: Defendants’ stock purchases weakened scienter inferences, but motive was not evaluated holistically, awaiting amendment.
- Confidential Witnesses: Statements from former employees (e.g., allocations analyst, district manager) lacked detail on how they knew of management’s goals or inventory issues, undermining reliability.
- Core Operations: Defendants’ statements on Trichlor demand suggested access to relevant data, but Trichlor’s 15% sales share (versus 45% for all chemicals) did not clearly establish it as a core operation.
- SOX Certifications: These were insufficient alone but could contribute to a holistic scienter analysis.
- Weddell’s Departure: His exit alongside poor Q3 2023 results did not raise a strong scienter inference without evidence of suspicious circumstances.
Loss Causation. The Court did not rule on loss causation, as unclear falsity allegations made it impossible to link the July 2023 disclosure to the stock price decline.
Final Disposition and Next Steps
The complaint is dismissed with leave to amend by August 13, 2025. The Treasurer must file a notice per LRCiv 15.1, detailing changes. Defendants have 30 days to respond. If no amendment is filed, the Clerk will enter judgment for Defendants and close the case.
