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Rahman v. Kid Brands, Inc.

United States Court of Appeals, Third Circuit

November 15, 2013

SHAH RAHMAN, Individually and On Behalf of All Others Similarly Situated, Appellant

Submitted under Third Circuit LAR 34.1(a) October 8, 2013.

On Appeal from the United States District Court for the District of New Jersey (D.C. Civ. No. 2-11-cv-01624) Honorable Jose L. Linares, District Judge.

David A.P. Brower Brower Piven, Jeffrey W. Hermann Cohn, Lifland, Pearlman, Herrman & Knopf, Lewis S. Kahn, Kim E. Miller Kahn Swick & Foti, Attorneys for Appellant.

Robert J. Del Tufo Skadden, Arps, Slate, Meagher & Flom One Newark Center, Jay B. Kasner Christopher R. Gette Rachel J. Barnett Matthew S. Barkan Andrew Muscato Skadden, Arps, Slater, Meagher & Flom, Attorneys for Appellees Kid Brands, Inc. and Raphael Benaroya.

Eric B. Fisher Dickstein Shapiro, Jeffrey Rhodes Dickstein Shapiro, Stefano V. Calogero Wildels, Marx, Lane & Mittendorf One Giralda Farms, Attorneys for Appellee Bruce G. Crain.

Rebecca Brazzano C. Dennis Southard, IV David A. Wilson Thompson Hine, Attorneys for Appellee Guy A. Paglinco



GREENBERG, Circuit Judge.


Shah Rahman, now the appellant, brought this federal securities class action on March 22, 2011, against defendant Kid Brands, Inc., a New Jersey corporation, and against the individual defendants, Bruce G. Crain, Guy A. Paglinco, and Raphael Benaroya, officers of Kid Brands (collectively with Kid Brands "appellees"). Kid Brands is in the business of importing inexpensive infant furniture and products for the purpose of ultimate resale to consumers. The complaint alleged that defendants, now appellees, violated (1) Section 10(b) of the Securities Exchange Act (the "Exchange Act") and SEC Rule 10b-5 and (2) and Section 20(a) of the Exchange Act. In particular, the complaint alleged that defendants misled investors by artificially inflating Kid Brands stock price by issuing deceptive public financial reports and press releases dealing with Kid Brands' compliance with customs laws and overall financial performance. The putative class included Rahman and all others similarly situated who purchased or obtained Kid Brands common stock between March 26, 2010, and August 16, 2011, inclusive (the "class period").

Subsequently, Rahman filed a first amended complaint ("FAC") which the District Court dismissed without prejudice on defendants' motion, on March 8, 2012, in an order that permitted Rahman to file an amended complaint within 60 days. Rahman v. Kid Brands, Inc., Civ. No. 11-1624, 2012 WL 762311 (D.N.J. Mar. 8, 2012). On May 7, 2012, Rahman timely filed a second amended complaint ("SAC") alleging that, in addition to customs violations, defendants failed to disclose product recalls, safety violations, and illegal staffing practices affecting Kid Brands. Nevertheless, Rahman's brief focuses almost exclusively on the customs violations and makes only passing reference to the other issues. On October 17, 2012, on defendants' motion the District Court dismissed the SAC with prejudice because it did not satisfy the heightened scienter pleading standard required by the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4(b)(2). In its opinion the Court explained that "upon a holistic consideration of the re-labeling allegations contained in the SAC, the Court finds that a reasonable person would not deem the inference of scienter at least as strong as any opposing inference." J.A. at 28. On November 14, 2012, Rahman filed a timely notice of appeal.

Kid Brands operates through four wholly owned subsidiaries: Kids Line, LLC, Sassy, Inc., LaJobi, Inc., and CoCaLo, Inc.[1] Kid Brands primarily imports the inexpensive furniture in which it deals from China for ultimate resale to the public. Kid Brands is a substantial business as its net sales in 2010 were $276, 000, 000. Under "anti-dumping" laws, Kid Brands is subject to duties that the United States imposes beyond those ordinarily assessed to discourage the importation of some products at very low cost. During the class period, Crain was the president and chief executive officer of Kid Brands and served on its board of directors, and Paglinco was its vice president and chief financial officer. Paglinco retained both positions after the close of the class period. In September 2011, after the close of the class period, Benaroya, previously an outside director, was appointed interim chief executive officer.

The SAC alleges that Kid Brands obscured the origin of its Chinese-manufactured products to reduce import duties and increase profits, and then made misleading statements regarding its financial health. Rahman supported the SAC with statements from six confidential witnesses who had been employees of Kid Brands or its subsidiaries.[2] Rahman believes that the statements support his contention that defendants engaged in repeated violations of customs laws. He described the witnesses in the SAC as follows:

• CW1: A former LaJobi employee who worked in the outbound shipping department from March 2010–March 2012 and dealt with the products ...

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