Best Buy May Be Liable for Misleading Remarks

(CN) - Best Buy shareholders can advance claims that the retailer misrepresented its earnings as "in line" with expectations, a federal judge ruled.

A class of consumers led by the IBEW Local 98 Pension Fund had sued the consumer electronics giant in 2011, claiming Best Buy executives lied about the state of the company and inflated stock prices before a 14 percent decline over two days the previous December.

The complaint in Minneapolis revolves around four allegedly false statements, three of which were made on Sept. 14, 2010.

U.S. District Judge Donovan Frank summarized those three September statements on Monday as the "(1) Best Buy's Fiscal Year 2011 earnings per share (EPS) guidance of $3.55-$3.70 per share; (2) that Best Buy was 'on track to deliver and exceed [the] annual EPS guidance'; and (3) that Best Buy's earnings were 'essentially in line with [Best Buy's] original expectations for the year.'"

The fourth statement came in November 2010 from Mike Vitelli, Best Buy's enterprise executive vice president and president of Best Buy for the Americas. He said: "Flat-screens are doing well at different levels ... We are doing really well at Magnolia at the high end with 3-D. And the entry-level pieces are going really strong."

Best Buy moved to dismiss the first amended complaint, arguing that the safe-harbor clause of the Private Securities Litigation Reform Act (PSLRA) protects all of the statements.

Judge Frank defined the clause as stating that, "in any private action that is based on an untrue statement of material fact or omission of a material fact, a defendant will not be liable for making a 'forward-looking statement' that is: (1) 'identified as a forward-looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement'; (2) immaterial; or (3) made without actual knowledge that the statement was false or misleading."

It does not cover Best Buy for making "on track" and "in line" statements despite known negative trends, Frank found.

The judge did agree, however, that Best Buy's statement regarding EPS guidance qualifies for safe harbor.

"In the report, defendants describe risks, including: economic conditions in the U.S. and key international markets; a decline in consumer discretionary spending; changing consumer preferences; failure to attract, develop and retain qualified employees; ... failure to control costs; ... [and] statutory, regulatory and legal developments," Frank wrote.

"The cautionary statements that accompanied the forward-looking projected increase of 'FY 2011 diluted EPS guidance ... to $3.55-$3.70' are sufficient to bring defendants' statements under the safe harbor provision of the PSLRA," he added. "In particular, the risk factors explained in the cautionary statements ... mirror Best Buy's failures in accurately predicting demand and consumer preferences that precipitated the lowering of the forecast."

The claim against Vitelli's statement - made during an interview with Neil Cavuto of Fox News - also cannot stand, according to the ruling.

"Vitelli's statements are not material enough so as to be actionable ... [as the] November 24, 2010 interview was given before the Black Friday weekend and is hyperbole," Frank wrote.

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