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505 F.Supp.2d 662

United States District Court, D. Colorado.

André ANDROPOLIS, On Behalf of Himself and All Others Similarly Situated, Plaintiff,

v.

RED ROBIN GOURMET BURGERS, INC., Michael J. Snyder, James P. McCloskey, Lisa A. Dahl, Katherine L. Scherping, and Dennis B. Mullen, Defendants.

Civil Action Nos. 05–cv–01563–EWN–BNB, 05–cv–01903, 05–cv–01707.

Jan. 2, 2007.

Synopsis

Background: Investor brought class action against corporation, former chief executive officer (CEO), former and current chief financial officers (CFO), controller, and audit committee member to recover for securities fraud by making material misstatements and omissions regarding corporation's financial health, making material omissions in proxy statement, and exercising authority to cause employees to engage in improper conduct. Defendants filed motions to dismiss.

Holdings: The District Court, Nottingham, J., held that:

1  corporation's forward-looking statements of earnings guidance were protected under the Private Securities Litigation Reform Act's (PSLRA) safe harbor provision;

2  investor's allegation of misrepresentations that management had evaluated corporation's disclosure and financial reporting controls and found them to be effective was claim of corporate mismanagement, not actionable as securities fraud;

3  corporation was not required to disclose CEO's improper use of corporation's chartered jet;

4  alleged failure to disclose violations of newly adopted code of ethics was not securities fraud;

5  failure to disclose reasons for replacing officers was not securities fraud; and

6  prompt disclosure of termination of controller was not required.

Motions granted.

Attorneys and Law Firms

*666  Kip Brian Shuman, Shuman & Berens, LLP, Gerald L. Bader, Jr., Renee Beth Taylor, Bader & Associates, P.C. Denver, CO, Russell D. Paul, Sherrie R. Savett, Berger & Montague, P.C., Philadelphia, PA, F. James Donnelly, F. James Donnelly, the Law Offices of, P.C., Greenwood Village, CO, Marc M. Umeda, Robbins Umeda & Fink, LLP, San Diego, CA, Charles Walter Lilley, Jessica Lee Hoff, Karen Jean Cody–Hopkins, Charles Lilley & Associates, P.C., Denver, CO, for Plaintiff.

Andrew Ryan Shoemaker, Hogan & Hartson, LLP–Boulder, Boulder, CO, Judith M. Krieg, Red Robin International, Inc., Greenwood Village, CO, Thomas Lee Strickland, Coates Lear, Hogan & Hartson, LLP, Jeffrey Alan Springer, Springer & Steinberg, P.C., Denver, CO, Michael S. Weisman, Pamela G. Smith, Rachel M. Vorbeck, Katten Muchin Rosenman, LLP, Chicago, IL, James E. Nesland, Jeffrey Allen Smith, Paul Howard Schwartz, Cooley Godward Kronish, LLP, Broomfield CO, for Defendants.

ORDER AND MEMORANDUM OF DECISION

NOTTINGHAM, District Judge.

This is a class action securities fraud case. Lead Plaintiff, the City of Philadelphia Board of Pensions and Retirement (“Plaintiff”), alleges that Defendants Red Robin Gourmet Burgers, Inc. (hereinafter “Red Robin” or the “Company”), Michael J. Snyder, James P. McCloskey, Lisa A. Dahl, Katherine L. Scherping, and Dennis B. Mullen (collectively “Defendants”) violated the Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq. (2006) (hereinafter the “1934 Act”), by knowingly or recklessly making material misstatements or omissions, on which investors from Plaintiff's class reasonably relied, and which resulted in significant economic losses by investors. Specifically, Plaintiff asserts: (1) Defendants violated Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b) (2006) (hereinafter “Section 10(b)”), and Rule 10b–5, 17 C.F.R. § 240.10b–5 (2006) (hereinafter “Rule 10b–5”), by making material misstatements and omissions regarding Red Robin's operational and financial health; (2) Red Robin, McCloskey, Mullen, and Dahl violated Section 14(a) of the 1934 Act, 15 U.S.C. § 78n(a) (2006) (hereinafter “Section 14(a)”), and Rules 14a–3 and 14a–9, 17 C.F.R. §§ 240.14a–3, 240.14a–9 (2006), by making material omissions in the Company's proxy statement; and (3) Snyder, McCloskey, Dahl, Scherping, and Mullen (collectively “Individual Defendants”) violated Section 20(a) of the 1934 Act, 15 U.S.C. § 78t(a) (2006) (hereinafter “Section 20(a)”), by exercising their authority to cause Red Robin employees to engage in securities violations. This matter is before the court on: (1) “Motion to Dismiss on Behalf of Defendants Red Robin Gourmet Burgers, Inc., Lisa A. Dahl, Katherine L. Scherping, and Dennis B. Mullen,” filed May 1, 2006; (2) “Defendant James P. McCloskey's Motion to Dismiss Consolidated Complaint,” filed May 1, 2006; and (3) “Defendant Michael J. Snyder's Memorandum of Law in Support of His Motion to Dismiss,” filed May 1, 2006. Jurisdiction is premised upon 28 U.S.C. § 1331 (2006).

*667  FACTS

1. Factual Background

Most of the following facts are taken from Plaintiff's Consolidated Complaint. (See Consolid. Compl. ¶ 2 [filed Feb. 28, 2006] [hereinafter “Consolid. Compl.”].) I also consider documents central to Plaintiff's claims that are incorporated by reference or partially quoted in the Consolidated Complaint.  GFF Corp. v. Associated Wholesale Grocers, 130 F.3d 1381, 1384 (10th Cir.1997).

This is a securities class action on behalf of all persons who purchased the common stock of Red Robin between August 13, 2004 and January 9, 2006 (“the Class Period”). (Consolid.Compl.¶ 2.) Plaintiff purchased shares of Red Robin common stock during the Class Period and held the stock through at least January 10, 2006. (Id. ¶ 26.)

a. The Defendants

Red Robin is a Delaware corporation with its headquarters in Greenwood Village, Colorado. (Id. ¶ 27.) Red Robin became a publicly traded company in July 2002, and its common stock is listed on the NASDAQ National Market under the symbol RRGB. (Id. ¶¶ 4, 27.) Red Robin is a causal dining restaurant chain that operates company-owned restaurants and sells franchises from which the Company receives royalties. (Id. ¶ 27.) As of December 25, 2005, there were two hundred ninety-nine Red Robin restaurants in thirty-three states and two Canadian provinces. (Id.)

Snyder, who had previously been Red Robin's President, Chief Operating Officer, and Director, was elected as Chief Executive Officer (“CEO”) in March 1997 and Chairman of Red Robin's Board of Directors (“the Board”) in May 2000. (Id. ¶ 28.) He retired from this post on August 10, 2005 and remains a consultant to the Company. (Id.) McCloskey served as Red Robin's Chief Financial Officer (“CFO”) from June 1996 until June 20, 2005. (Id. ¶ 29.) McCloskey served as an Executive Vice President until his resignation on August 10, 2005. (Id.) Scherping was hired to replace McCloskey as CFO in June 2005. (Id. ¶ 32.) Dahl served as Red Robin's Controller from 1997 and Vice President from 2003 until she was terminated during the second quarter of 2005. (Id. ¶¶ 30, 132.) Mullen was a member of the Board's Audit Committee and replaced Snyder as Chairman in August 2005. (Id. ¶ 31.)

b. Background

During Snyder's tenure with Red Robin, he transformed the Company into a profitable, fast-growing restaurant chain. (Id. ¶ 3.) Between the Company's July 2002 initial public offering and early August 2005, the value of Red Robin's stock price increased five-fold, and from 2003 through 2005, Red Robin added forty-eight company-owned restaurants and supported the opening of thirty-three franchised restaurants. (Id. ¶¶ 4–5.)

Red Robin's Code of Ethics, adopted during the Class Period, expressly prohibited all employees—senior officers and executives included—from using Red Robin's property for personal benefit or other improper uses. (Id. ¶ 41.) Further, the Code limited employees to spending Company funds for Company business and required that Red Robin receive fair value in property and services in exchange for its funds. (Id.) Also during the Class Period, Red Robin's travel and entertainment expense reimbursement policy required that: (1) employees be reimbursed only for business-related expenses set forth on an expense report and supported with a receipt; (2) for business-related air travel expenses, employees were to submit ticket stubs as well as receipts; (3) credit card statements   *668  did not satisfy the receipt requirement; and (4) managers' and officers' expense reports were to be approved by a senior manager or officer. (Id. ¶ 42.) Snyder's May 11, 2002 Employment Agreement required that he comply with Company expense reimbursement procedures. (Id. ¶ 49.)

c. Confidential Witness Reports

A former Red Robin staff-accountant who worked at the Company's headquarters from 2004 to 2005 (hereinafter “CW2”) saw “abuse of travel and entertainment expenses from Red Robin's officers” and claims the “reimbursement system was a joke.” (Id. ¶¶ 1, 43.) A former Red Robin senior executive at the Company's headquarters prior to the Class Period (hereinafter “CW4”), states “the worst abuser was [Snyder] who would charge virtually everything, including personal expenses, to his Red Robin Corporate American Express card and approve nonbusiness related charges of other senior executives.” (Id.) Further, according to both CW2 and a confidential witness who was a Red Robin staff accountant at the Company's headquarters prior to the Class Period (hereinafter “CW1”), it was common knowledge in the accounting department that Snyder would only rarely submit an expense report. (Id.) In 2000, according to a former Red Robin senior officer who worked at the Company's headquarters prior to the Class Period (hereinafter “CW3”), Red Robin's accountants discovered Snyder regularly paid for his and family members' personal expenses, including travel on private jets, with corporate funds. (Id. ¶ 45.)

CW3 claims Snyder sought to have Red Robin pay for his purchase of a $15,000 Rolex watch for fellow Red Robin officer, Bob Merullo. (Id. ¶ 18.) The Company's Assistant Controller, however, directed that the $15,000 be booked as additional compensation for Merullo. (Id.) Snyder, in turn, increased Merullo's compensation to cover all income taxes he would incur as a result of the Rolex. (Id.) CW2 claims Nancy Cornell, Snyder's secretary during the Class Period, would regularly approved payment of Snyder's American Express bill and then directed the accounts payable specialist to pay the bill in its entirety. (Id.) With respect to Snyder's use of Red Robin's chartered jet, CW1 received invoices related to Snyder's travel, which she was directed by her superiors to pay. (Id. ¶ 44.) According to CW1, Snyder would never submitted an expensereport that corresponded to the invoiced trips, and the invoices submitted by Snyder were uninformative as to passengers and destinations, preventing anyone from confirming whether the jet was used for business purposes. (Id.) CW3 and CW4 allege Snyder was confronted about his travel expense abuses. (Id.)

CW4 reports that the misappropriation of Red Robin funds extended to other officers, including Merullo, Red Robin's Senior Vice President of Restaurant Operations, and Michael Woods, Red Robin's Senior Vice President of Franchise Development. (Id. ¶ 50.) For instance, according to CW4, Merullo, Woods, Snyder, and their families would charge dinner to Red Robin at least twice a week at an upscale steakhouse. (Id.) Further, “[w]hen those three traveled, sometimes on business, sometimes not, they would use the private jet, stay at the finest hotels, eat at the finest restaurants, and rent the most expensive cars, all of which was paid for by Red Robin.” (Id.)

According to CW2, then Vice President of Restaurant Operations, Eric Houseman, also submitted expense reports with just his Red Robin Corporate American Express bill; yet, Houseman's expense report was always approved for payment by another officer. (Id. ¶ 51.) CW1 and CW2   *669  state that there were numerous charges for golf and country club memberships on expense reports from lower level management as well, and, as a result of non-enforcement of the Company's travel and

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