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Wednesday, May 22, 2024 | Back issues
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Shareholders seek to revive securities fraud class action against Tupperware

An attorney for investors argued a federal judge unfairly dismissed a lawsuit accusing employees at a Tupperware cosmetic sales division of providing bogus sales data to improve the subsidiary’s performance on paper.

ATLANTA (CN) — An attorney for a class of Tupperware shareholders asked an 11th Circuit panel on Wednesday to overturn a lower court’s decision to dismiss a securities fraud action claiming that a Mexico-based division of the corporation faked sales data to artificially inflate the stock.

The February 2020 lawsuit filed by lead plaintiff Srikalahasti Vagvala alleged that employees at Fuller Cosmetics, a Tupperware sales subsidiary, falsified 60% of its sales starting in 2017. Fuller’s management increased sales via the shipment of unordered products to independent sales representatives, according to the complaint.

The scheme led to misstatements in Tupperware’s financial disclosures with respect to Fuller’s value. Tupperware’s stock price declined when the misstatements were corrected in 2019.

The SEC opened an investigation into the practices at Fuller in August 2021. Tupperware announced in September that it had reached a settlement to resolve the inquiry and would pay a $900,000 civil penalty.

In Vagvala's case, a Florida federal judge ruled in favor of Tupperware Brands Corporation and five of its executives in February, prompting the appeal to the 11th Circuit.

Arguing on behalf of Vagvala on Wednesday, attorney Jacob Goldberg of the Rosen Law Firm told a three-judge panel of the Atlanta-based appeals court that the lower court wrongly decided a Fuller manager’s alleged knowledge of the scheme did not show Tupperware itself could be held liable.

Counsel for Vagvala argued in an appellate brief that Luciano Rangel, Tupperware’s former group president for Latin America, and Evaristo Hernandez, a Fuller manager, knew about the bogus sales and should be held responsible for misrepresenting Tupperware’s financials.

“If you’re working for a corporation, it’s a little bit like a chef poisoning an ingredient before it goes into a dish before a facilitator sends it to a waiter who furnishes it to a patron,” Goldberg explained. “The person who put the poison in the food is a proximate cause of the patron getting sick.”

In his decision dismissing the case, U.S. District Judge Gregory Presnell ruled that the class had not shown that either Rangel or Hernandez furnished the false data for inclusion in the misstatements or were responsible for the alleged misstatements.

Although Presnell’s order noted that an anonymous employee heard a Fuller officer claim that both Hernandez and Rangel directed the fake sales scheme, the judge ruled that neither executives’ state of mind can be ascribed to Tupperware.

But Goldberg urged the panel to rule differently.

“Mr. Hernandez created the scheme, he was fired for the scheme and therefore he is responsible for the false Fuller numbers," he told the judges.

Attorneys for Tupperware argued in legal briefs that the class is unfairly trying to marry “the purported knowledge of individuals at a foreign subsidiary… with public statements made on behalf of the parent company by an entirely different set of corporate officials.”

Arguing for the company, attorney James Ducayet of Sidley Austin said Presnell was right in finding there was “no strong inference of scienter” created by the class’s allegations. Scienter is a legal concept which refers to the intent or knowledge of wrongdoing.

“The plaintiffs are trying to take the scienter of the lower-level folks down at Fuller and combine them with the statements made by the [statement] makers and say because they all ultimately report up to the same parent it’s securities fraud,” Ducayet said.

Members of the panel questioned what the appropriate legal standard might be to determine who the “responsible” party is and what the word “responsible” could mean in the context of the case.

Senior U.S. District Judge Robert Hinkle, a Bill Clinton appointee sitting by designation from the Northern District of Florida, questioned where judges should draw the line to determine when someone is responsible for false statements.

“One place to draw the line would be… somebody who has something to do with putting out financials. Or somebody who isn’t involved with the statements but is involved in the fraud,” Hinkle said. “If I’ve got to give a jury a standard, what does that standard say?”

Noting that interpretations in the Sixth Circuit separate the liability of individuals who utter misrepresentations from those who furnish, prepare or review a statement in which a misrepresentation is made, Donald Trump-appointed U.S. Circuit Judge Britt Grant admitted, “Our precedent hasn’t been as specific as some other circuits in terms of who can be responsible.”

Grant and Hinkle were joined on the panel by U.S. Circuit Judge Elizabeth Branch, another Trump appointee. The panel did not indicate when it might issue a ruling in the case.

Follow @KaylaGoggin_CNS
Categories / Appeals, Business, Financial, Securities

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