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In Re: Smith & Wesson Holding Corp. Sec. Litig. v. Smith & Wesson Holding Corp

February 17, 2012



The opinion of the court was delivered by: Boudin, Circuit Judge.

Before Boudin and Lipez, Circuit Judges, and Smith,*fn1 District Judge.

A class of plaintiffs representing purchasers of Smith & Wesson Holding Corporation securities sued the company ("Smith & Wesson") and two of its high-ranking officers, Michael Golden and John A. Kelly, alleging that the company issued false or misleading public statements about the demand for its products in violation of the Securities Exchange Act of 1934 and related regulations.*fn2 The district court granted summary judgment to Smith & Wesson, and the plaintiffs now appeal.

Smith & Wesson is the parent company of the well-known gun manufacturer; Golden was the President and Chief Executive Officer of Smith & Wesson during the period in question, and Kelly was the Chief Financial Officer. The lead plaintiff, Oklahoma Firefighters Pension and Retirement System, represents a class of all persons purportedly suffering damages as a result of the purchase of Smith & Wesson common stock on the open market between June 14, 2007, and December 6, 2007. It is common ground that the stock suffered precipitous declines starting with the company's release in late October 2007 of unfavorable preliminary second-quarter earnings data and downwardly revised earnings projections.

By contrast, for the two quarters prior to the decline, the company had provided investors with impressive sales numbers and optimistic future earnings projections. In plaintiffs' view, ballooning inventory and various internal reports indicated flagging business by the summer of 2007 and prompted the company to inflate artificially the sales numbers through unusual promotions and discounting that stripped revenues from future quarters. The chronology of press releases and public statements is as follows.

The first relevant announcement, issued on June 14, 2007, and titled "Smith & Wesson Holding Corporation Posts Record Annual Revenues and Earnings," reported strong performance in the final quarter of the company's fiscal year 2007 and the fiscal year overall--periods not coinciding with ordinary calendar quarters.*fn3 In addition to providing historical performance data, the company made several statements about its expectations for fiscal year 2008; in particular, it announced that it was "raising [its] sales expectations for fiscal 2008 from $320 million to $330 million, which would represent a 40.5% increase over fiscal 2007 sales"; it also upwardly revised earnings guidance from $0.60 per share to $0.62 per share, which the company pointed out was double the earnings guidance from the previous fiscal year.

The projections were accompanied by a clearly labeled "Safe Harbor Statement" warning that the press release contained "forward-looking statements," including statements regarding future sales, income, income per share, earnings, penetration rates for new and existing markets, strategies, and the demand for the company's products, and that those statements were "qualified by important factors [identified in the statements] that could cause actual results to differ materially from those reflected by such forward-looking statements."*fn4

Golden and Kelly participated in an investor conference call later that day, which began with a similar announcement that all forward-looking statements made during the call were necessarily subject to uncertainty. In response to a question about why the company raised its guidance, Kelly stated:

So as we look in the business, we ended the year with pretty good backlog. Demand has been strong, and that's--the Thompson, our capacity in Thompson, we've gotten our barrel output up by 20% in the first whatever it's been, five months, that we've had it. So we're putting all those together, and that's why we reacted confidently with our new guidance.

Kelly also noted that "[p]lanned capital expenditures for fiscal 2008 of $17.7 million represents [sic] a $1.7 million increase from our previous estimate and allows for an expansion of our polymer pistol manufacturing capacity due to increased demand." The company's stock price rose 8 percent the next trading day.

On September 6, 2007, following the close of the first quarter of fiscal 2008 (May-July 2007), Smith & Wesson issued a press release reporting record earnings for the quarter: "Smith & Wesson Holding Corporation Posts Record First Quarter Revenues and Profits." It quoted Golden as offering the following explanation:

Our results for the first quarter of fiscal 2008 demonstrate progress across many initiatives and reflect growth in our core handgun business as well as our newly established long gun business. Our sales growth was particularly strong given that the comparable quarter of the prior year included $5.2 million in U.S. government orders for Afghanistan that were not duplicated in the current quarter. Handgun sales into the retail channel increased by 41.0% for the quarter, driven by our direct sales force and a number of ongoing retail initiatives.

The company once again increased its fiscal 2008 earnings expectations, this time from the $0.62 per share amount announced in June to $0.63 per share. The release also stated that "[w]e expect second quarter revenue to increase by approximately 60% over revenue in second quarter of fiscal 2007, driven by continued expansion in our existing markets and the addition of revenue from Thompson/Center [acquired in January 2007]." The September press release, and the conference call that followed, contained "safe harbor" statements similar to those contained in the June 2007 communications.

In the conference call held later on the day of the release, Golden and Kelly made several statements characterizing the first-quarter results and offering some explanation for the upward revision to earnings guidance:

Th[e] increase in our annual earnings projection from our previously announced guidance reflects the stronger than anticipated first quarter performance.

[W]e continue to deliver double digit growth in year-over-year quarterly revenue, supported by strong sales into the retail channel and our ongoing penetration in law enforcement.

The results we delivered this quarter in the retail channel reflect growth in our core handgun business as well as the addition of and growth in ...

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