Smith v. The Gap, Inc.

25-1130
Smith v. The Gap, Inc.
United States Court of Appeals
for the Second Circuit
August Term 2025
Argued: March 9, 2026
Decided: May 28, 2026
No. 25-1130
MICHAEL SMITH, J EFFREY W ILLIAMS,
Plaintiffs-Appellants,
v.
THE GAP, INC., S ONIA S YNGAL , KATRINA O’C ONNELL ,
Defendants-Appellees.*
On Appeal from the United States District Court
for the Eastern District of New York
No. 22-cv-7371
Diane Gujarati, Judge.
Before: PARK , N ATHAN, and KAHN, Circuit Judges.
In August 2021, Gap launched BODEQUALITY, an initiative to
increase plus-size clothing options in Old Navy stores. Gap
overestimated the demand for plus-sized clothes, so it had to sell
surplus inventory at steep discounts. In early 2022, Gap rolled back
* The Clerk of Court is respectfully directed to amend the caption
accordingly.

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plus-sized offerings in stores, and in May, it disclosed that its financial
results for the first quarter of 2022 had been negatively impacted by
missteps related to BODEQUALITY.
Plaintiffs brought this putative securities class action on behalf
of investors who purchased Gap stock between November 24, 2021,
and July 11, 2022. They alleged that Defendants—Gap and two of its
senior executives during the class period—violated the Securities
Exchange Act by failing to disclose problems with BODEQUALITY in
statements to investors. The United States District Court for the
Eastern District of New York (Gujarati, J.) dismissed the Complaint in
its entirety under Federal Rule of Civil Procedure 12(b)(6). We
AFFIRM because the challenged statements were not false or
misleading, and Plaintiffs failed to plead scienter with particularity.
JONATHAN STERN, The Rosen Law Firm, P.A., New York,
NY (Jacob A. Goldberg, The Rosen Law Firm, P.A.,
Jenkintown, PA, on the brief), for Plaintiffs-Appellants.
PAUL ALESSIO MEZZINA, King & Spalding LLP,
Washington, DC (Samantha J. Kavanaugh, King &
Spalding LLP, Miami, FL; Israel Dahan, King & Spalding
LLP, New York, NY, on the brief), for Defendants-Appellees.
PARK , Circuit Judge:
In August 2021, Gap launched BODEQUALITY, an initiative to
increase plus-size clothing options in Old Navy stores. Gap
overestimated the demand for plus-sized clothes, so it had to sell
surplus inventory at steep discounts. In early 2022, Gap rolled back

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plus-sized offerings in stores, and in May, it disclosed that its financial
results for the first quarter of 2022 had been negatively impacted by
missteps related to BODEQUALITY.
Plaintiffs brought this putative securities class action on behalf
of investors who purchased Gap stock between November 24, 2021,
and July 11, 2022. They alleged that Defendants—Gap and two of its
senior executives during the class period—violated the Securities
Exchange Act by failing to disclose problems with BODEQUALITY in
statements to investors. The United States District Court for the
Eastern District of New York dismissed the Complaint in its entirety
under Federal Rule of Civil Procedure 12(b)(6). We affirm because
the challenged statements were not false or misleading, and Plaintiffs
failed to plead scienter with particularity.
I. BACKGROUND
A. Factual Background
The Gap, Inc. (“Gap”) is a clothing retailer and one of its brands
is Old Navy, which operates over 1,200 stores worldwide. In August
2021, Gap launched BODEQUALITY, an initiative to increase plus-
size clothing options in Old Navy stores. Old Navy previously
carried a limited selection of plus-size clothes in stores, but
BODEQUALITY required stores to carry every item in the women’s
lineup in every size. Stores reduced inventory in the sizes they
already carried to make room for the additional offerings.
A few weeks after BODEQUALITY launched, some Old Navy
stores sold out of their medium sizes but not the larger sizes. They
began to move plus-size clothes to the clearance section, selling them
at reduced prices to move inventory. Some stores also faced

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declining sales as customers were unable to find clothes in the sizes
they wanted.
In December 2021, Sonia Syngal—who was Gap’s CEO at the
time—and other high-level executives visited two Old Navy stores in
Sacramento, California, as part of Gap’s annual “Jet Trip,” during
which executives visit stores in a selected market to troubleshoot
strategy for the holiday season. During this visit, the general
managers of the two stores told Syngal about their shortages in
medium sizes and over-supply in plus-sizes. Afterwards, Old Navy
management asked other stores in Northern California to report their
inventory by size for specific styles.
In January 2022, Gap removed its extended plus-size offerings
from about 75 stores. And by February or March 2022, it decided to
offer extended sizing online only, not in stores. On May 20, 2022,
The Wall Street Journal published an article stating that
BODEQUALITY had contributed to declining sales in Old Navy
stores. And on May 27, 2022, Gap filed a Form 10-Q with the SEC
disclosing that its results for the first quarter of 2022 were negatively
impacted in part “by execution missteps in size and assortment at Old
Navy related to BODEQUALITY.” App’x at 45.
B. Procedural History
On December 5, 2022, Plaintiffs filed this lawsuit, claiming
violations of § 10(b) and § 20(a) of the Securities Exchange Act of 1934
(“Exchange Act”) and Rule 10b-5. They alleged that Defendants
made false or misleading statements in risk-disclosure statements,
earnings calls, and press releases between November 2021 and March
2022 by failing to disclose problems with BODEQUALITY.

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On March 31, 2025, the district court granted Defendants’
motion to dismiss. See Diaz v. Gap, Inc., No. 22-cv-07371, 2025 WL
1293308 (E.D.N.Y. Mar. 31, 2025). The district court concluded that
Plaintiffs failed to identify any false or misleading statement or to
plead that Defendants acted with scienter. Id. at *18-19. In light of
the failure to plead a primary violation, the district court also
dismissed Plaintiffs’ remaining § 20(a) claim. Id. at *22.
II. DISCUSSION
A. Legal Framework
“We review a district court’s grant of a motion to dismiss de
novo, accepting as true all factual claims in the complaint and drawing
all reasonable inferences in the plaintiff[s]’ favor.” City of Hialeah
Emps.’ Ret. Sys. v. Peloton Interactive, Inc., 153 F.4th 288, 293 (2d Cir.
2025) (citation omitted).
Section 10(b) of the Exchange Act makes it unlawful “[t]o use
or employ, in connection with the purchase or sale of any security
registered on a national securities exchange . . . any manipulative or
deceptive device or contrivance in contravention of such rules and
regulations as the [SEC] may prescribe.” 15 U.S.C. § 78j(b). Rule
10b-5 implements this prohibition by making it unlawful for issuers
of registered securities “[t]o make any untrue statement of a material
fact or to omit to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they
were made, not misleading.” 17 C.F.R. § 240.10b-5(b). “To state a
claim for relief under § 10(b) and Rule 10b-5, a plaintiff must allege
that the defendant (1) made misstatements or omissions of material
fact, (2) with scienter, (3) in connection with the purchase or sale of
securities, (4) upon which the plaintiff relied, and (5) that the

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plaintiff’s reliance was the proximate cause of its injury.” Peloton
Interactive, 153 F.4th at 295 (quotation marks omitted).
Section 20(a) of the Exchange Act provides that every person
“who, directly or indirectly, controls any person liable under any
provision of this chapter or of any rule or regulation thereunder shall
also be liable jointly and severally with and to the same extent as such
controlled person to any person to whom such controlled person is
liable . . . unless the controlling person acted in good faith and did not
directly or indirectly induce the . . . violation.” 15 U.S.C. § 78t(a).
Section 20(a) thus “provides that individual executives, as controlling
persons of a company, are secondarily liable for their company’s
violations of the Exchange Act.” Altimeo Asset Mgmt. v. Qihoo 360
Tech. Co., 19 F.4th 145, 152 (2d Cir. 2021) (cleaned up).
B. Materially False or Misleading Statements
The district court concluded that Plaintiffs failed to allege any
actionable misstatement or omission. “The test for whether a
statement is materially misleading . . . is whether the defendants’
representations, taken together and in context, would have misled a
reasonable investor.” Rombach v. Chang, 355 F.3d 164, 172 n.7 (2d Cir.
2004) (quotation marks omitted). And a reasonable investor “reads
each statement . . . whether of fact or of opinion, in light of all its
surrounding text, including hedges, disclaimers, and apparently
conflicting information.” Omnicare, Inc. v. Laborers Dist. Council
Constr. Indus. Pension Fund, 575 U.S. 175, 190 (2015). Omissions are
material when “there is a substantial likelihood that the disclosure of
the omitted fact would have been viewed by the reasonable investor
as having significantly altered the total mix of information made
available.” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 38 (2011)
(quotation marks omitted).

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But it is not enough for Plaintiffs to show that an omission was
material because Ҥ 10(b) and Rule 10b-5 do not create an affirmative
duty to disclose any and all material information.” In re Vivendi, S.A.
Sec. Litig., 838 F.3d 223, 239 (2d Cir. 2016) (citation omitted). Instead,
disclosure “is required when necessary to make statements made, in
light of the circumstances under which they were made, not
misleading.” Meyer v. Jinkosolar Holdings Co., 761 F.3d 245, 250 (2d
Cir. 2014) (cleaned up).
1. Risk-Disclosure Statements
We first address the challenged risk-disclosure statements.
Gap’s 2020 Annual Report, filed with the SEC on March 16, 2021,
warned that “[w]e must successfully gauge apparel trends and
changing consumer preferences to succeed,” and “[t]o the extent we
misjudge the market for our merchandise . . . the markdowns
required to move the resulting excess inventory will adversely affect
our operating results.” App’x at 73. It also warned that “[i]f we are
unable to manage our inventory effectively, our gross margins could
be adversely affected,” and if “key strategic initiatives designed to
optimize our inventory levels” are not implemented successfully, “we
may not realize the return on our investments that we anticipate, and
our operating results could be adversely affected.” Id. at 75.
Plaintiffs do not challenge the 2020 Annual Report itself, which
predates BODEQUALITY. Instead, they challenge statements made
in press releases and during earnings calls on November 23, 2021 and
March 3, 2022 directing investors to “refer to” the 2020 Annual Report
for “information on factors that could cause our actual results to differ
materially from any forward-looking statements.” Id. at 23, 26, 31,
33. They also challenge two other statements related to the 2020
Annual Report: a disclosure in Gap’s November 2021 Form 10-Q
stating that there had been “no material changes in [Gap’s] risk
factors” from the 2020 Annual Report, and a disclosure in Gap’s 2021

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Annual Report, filed with the SEC on March 15, 2022, repeating the
risk disclosures from the year before. Id. at 28-30, 35-37. Plaintiffs
argue that it was misleading to incorporate or to reiterate these risk
disclosures without also disclosing that the risks they warned against
had materialized.
Whether a warning about a future risk is misleading when it
fails to disclose that the risk already materialized depends on how a
reasonable investor would understand the statements “taken together
and in context.” Rombach, 355 F.3d at 172 n.7. A risk disclosure
may be misleading if it leads a reasonable investor to believe that the
risk has not yet materialized. This inquiry depends on context, and
courts must “keep in mind that a complaint fails to state a claim of
securities fraud if no reasonable investor could have been misled about
the nature of the risk when he invested.” Halperin v. eBanker
USA.com, Inc., 295 F.3d 352, 359 (2d Cir. 2002).
We reject Plaintiffs’ proposed rule that a risk disclosure is
actionable whenever a company fails to disclose that the risk already
materialized in some way. Plaintiffs’ argument misreads our
precedent. In Set Capital, we concluded that risk disclosures were
actionable because the defendants assured investors that they “had
‘no reason to believe’” that the risks they warned against would
materialize, even though they knew it was “virtually certain” that
they would. Set Cap. LLC v. Credit Suisse Grp. AG, 996 F.3d 64, 85-86
(2d Cir. 2021). Similarly, in Peloton Interactive, the defendants’
presentation of the risk of inventory write-downs and discounted
sales as hypothetical was misleading because over 91% of Peloton’s
inventory remained unsold, making it inevitable that the company
would have to offer substantial discounts to sell excess inventory.
153 F.4th at 301. Meanwhile, the defendants falsely claimed that
discounts were “an offensive move to expand market share rather
than a defensive attempt to mitigate the losses.” Id. at 300 (citation

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omitted). Under the totality of the circumstances in these cases, the
failure to disclose that the risks warned against had actually
materialized rendered the seemingly hypothetical disclosures
misleading.
By contrast, the challenged risk disclosures here would not
have misled a reasonable investor about BODEQUALITY. To start,
Gap’s disclosures concerned ubiquitous risks in the industry, as
opposed to more discrete, context-dependent, or event-driven risks.
Clothing retailers regularly “misjudge the market” for merchandise
and must discount prices “to move the resulting excess inventory.”
App’x at 24. No reasonable investor would have understood Gap’s
acknowledgment of this risk to mean that it had not misjudged the
market for certain clothes or was not discounting excess inventory at
the time. The fact that identical, generic disclosures were issued
both before and after BODEQUALITY, and made no mention of the
initiative, makes it more likely that a reasonable investor would have
understood the warnings to be about general risks in the clothing
industry, not BODEQUALITY in particular. Moreover, the
challenged risk disclosures did not present “the risk of inventory
write-downs and discounted sales as merely hypothetical,” Peloton
Interactive, 153 F.4th at 301, or assure investors that Gap had “no
reason to believe” that the risks it warned about would materialize,
Set Cap. LLC, 996 F.3d at 72. Instead, Gap disclosed that it is
“vulnerable to demand and pricing shifts and to suboptimal
selection,” and it admitted that it had “not always predicted [its]
customers’ preferences . . . with accuracy.” App’x at 24.
In light of the generic nature of the challenged risk disclosures,
the absence of any specific connection to BODEQUALITY, and Gap’s
admission that the risks were not merely hypothetical but had
materialized in the past and would reoccur, we agree with the district

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court that the challenged statements would not have misled a
reasonable investor about the nature of the risks disclosed.
2. Earnings-Call Statements
We next turn to the challenged statements that Defendants
made during an earnings call to investors. On November 23, 2021,
Syngal told investors that:
BODEQUALITY, Old Navy’s inclusive sizing integration
launched successfully in August. The brand more than
doubled its extended size customer file[s] since launch.
15% of customers who shop extended sizes are new to
the brand and more than a third have shopped Old Navy
before that are new to the category. We are seeing
strong extended size demand across fashion categories,
a clear signal that our customer is craving trend choice
lacking in the market.
App’x at 25.
Plaintiffs contend that these statements were “misleading for
claiming that Old Navy was seeing ‘strong extended size demand’
and that this was ‘a clear signal that our customer is craving trend
choice lacking in the market’ because, as a result of poor sales in
extended sizes, Old Navy was conducting deeper than normal
discounting.” Id. at 25-26.
The district court properly rejected this argument and
concluded that the November 2021 earnings-call statements were not
misleading. First, Syngal’s characterization of demand as “strong”
and her optimistic prediction that customers are “craving trend
choice” were unactionable puffery. See Abramson v. Newlink Genetics
Corp., 965 F.3d 165, 174 (2d Cir. 2020) (statements characterizing
results as “encouraging” and “an improvement” were unactionable
puffery where plaintiffs failed to show that defendants believed them

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to be false). Second, Syngal’s assessment that plus-size demand was
“strong” was based on quantifiable metrics about new customers,
which she disclosed to investors. Plaintiffs disagree with Syngal’s
assessment, but characterizing the plus-size demand as strong in
November 2021 was consistent with the data at the time. See Novak
v. Kasaks, 216 F.3d 300, 309 (2d Cir. 2000) (“[A]s long as the public
statements are consistent with reasonably available data, corporate
officials need not present an overly gloomy or cautious picture of
current performance and future prospects.”).
Plaintiffs have thus failed to show that Syngal’s statements in
the November 23, 2021 earnings call were actionably false or
misleading.1
3. Press Releases
Plaintiffs allege that two of Gap’s press releases in late 2021 and
early 2022 also misled investors by attributing inventory problems to
supply-chain issues resulting from COVID-19. Specifically, on
November 23, 2021, Gap issued a press release disclosing that
“[c]omparable sales were down 9% year-over-year and increased 6%
versus 2019. Sales in the quarter outpaced available inventory as the
brand was disproportionately impacted by supply chain delays,
particularly within the women’s assortment.” App’x at 23. And on
March 3, 2022, Gap issued a press release stating that “Fourth quarter
net sales were muted in part due to supply chain impacts, up 2%
1 Plaintiffs also suggest on appeal that it was misleading for Syngal
to say that BODEQUALITY “launched successfully.” But they identify no
problems with BODEQUALITY’s launch and thus fail to “demonstrate with
specificity why and how” the challenged statement was misleading. IWA
Forest Indus. Pension Plan v. Textron Inc., 14 F.4th 141, 145 (2d Cir. 2021)
(quoting Rombach, 355 F.3d at 174).

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versus 2019 with comparable sales flat versus 2019.” Id. at 31.
Plaintiffs contend that these press releases were misleading because
they failed to disclose that sales were down in part due to problems
with BODEQUALITY.
Plaintiffs have not plausibly alleged that these statements were
misleading. A company’s decision to speak about one aspect of sales
does not necessarily require it to address other issues. Plaintiffs’
theory that “if a registrant discloses sales or inventory,” then it must
disclose all circumstances “that are materially impacting sales and
inventory,” Appellants’ Br. at 33, is untenably overbroad and
foreclosed by precedent, see, e.g., Matrixx Initiatives, 563 U.S. at 44 (“[I]t
bears emphasis that § 10(b) and Rule 10b-5(b) do not create an
affirmative duty to disclose any and all material information.”).
Defendants’ statements about quarterly sales and supply-chain issues
due to COVID-19 did not, on their own, give rise to a duty to disclose
inventory issues caused by BODEQUALITY.
4. Item 303 Omissions
Lastly, Plaintiffs argue that Defendants violated Item 303 of
SEC Regulation S-K, 17 C.F.R. § 229.303, by failing to disclose
problems with BODEQUALITY in their November 2021 Form 10-Q.
Item 303 requires that certain SEC filings describe “any known trends
or uncertainties that have had or that are reasonably likely to have a
material favorable or unfavorable impact on net sales or revenues.”
Id. § 229.303(b)(2)(ii). Plaintiffs thus argue that “Item 303 imposed
the obligation to disclose that BODEQUALITY was a material
failure.” Appellants’ Br. at 41.
We reject this argument because “the failure to disclose
information required by Item 303 can[not] support a private action

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under Rule 10b-5(b)” unless the failure renders any “statements
made” misleading. Macquarie Infrastructure Corp. v. Moab Partners,
L.P., 601 U.S. 257, 260 (2024). Plaintiffs try on appeal to tie their Item
303 allegations to a statement in Gap’s November 2021 Form 10-Q
describing “key initiatives” designed to “expand customer reach”—
BODEQUALITY among them. Appellants’ Br. at 40 (quoting App’x
at 101). That is, Plaintiffs argue that BODEQUALITY was having an
“unfavorable impact on net sales or revenues,” so Gap’s failure to
disclose that impact (the alleged Item 303 violation) made its
statement that BODEQUALITY was a “key initiative” materially
misleading. But this statement, which was first attached as an
exhibit to Defendants’ motion to dismiss, appears nowhere in the
Complaint. See 15 U.S.C. § 78u-4(b)(1) (requiring that a securities
fraud “complaint . . . specify each statement alleged to have been
misleading [and] the reason or reasons why the statement is
misleading”). And regardless, even if there were problems with
BODEQUALITY in November 2021, that would have no bearing on
whether BODEQUALITY was a “key initiative” intended to “expand
customer reach,” so its omission would not render the statements
made misleading. Plaintiffs’ Item 303 allegations thus fail to state a
claim. See Macquarie, 601 U.S. at 260, 264.
C. Scienter
The district court also correctly concluded that the Complaint
fails to allege that Defendants acted with scienter. The Private
Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u-4(b),
requires that securities fraud plaintiffs “state with particularity facts
giving rise to a strong inference that the defendant acted with the
required state of mind.” Id. § 78u-4(b)(2)(A). Plaintiffs may satisfy
this requirement by “alleging facts (1) showing that the defendants

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had both motive and opportunity to commit the fraud or (2)
constituting strong circumstantial evidence of conscious misbehavior
or recklessness.” New England Carpenters Guaranteed Annuity &
Pension Funds v. DeCarlo, 122 F.4th 28, 48 (2d Cir. 2024) (quotation
marks omitted). Plaintiffs do not allege “motive and opportunity,”
so “their circumstantial evidence of fraud must be correspondingly
greater.” Slayton v. Am. Express Co., 604 F.3d 758, 776 (2d Cir. 2010).
Plaintiffs allege that: (1) Defendants received reports about
BODEQUALITY; (2) Defendants regularly monitored inventory
levels; (3) confidential witnesses heard that other employees told
Defendants about problems with BODEQUALITY; and (4) managing
Old Navy’s inventory was one of Gap’s core operations. Taken
together, these allegations are insufficient to establish a strong
inference of scienter.
Plaintiffs’ allegations that Defendants received information
about BODEQUALITY and inventory levels generally are insufficient
to support a strong inference of scienter. See Novak, 216 F.3d at 309
(“Where plaintiffs contend defendants had access to contrary facts,
they must specifically identify the reports or statements containing
this information.”). The Complaint does not identify who prepared
these reports or when, nor does it describe their content. And there
is no allegation that these reports attributed declining sales or
inventory problems to BODEQUALITY. Instead, Plaintiffs rely on a
confidential witness’s secondhand account that two store managers
told Syngal that they had too many plus-sizes and not enough
medium sizes in stock. Such conversations might support the
inference that Defendants knew that certain stores were having
inventory problems, but not that BODEQUALITY was faltering
nationwide. So Plaintiffs’ allegations do not suggest that
Defendants “knew facts or had access to non-public information

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contradicting their public statements.” In re Scholastic Corp. Sec.
Litig., 252 F.3d 63, 76 (2d Cir. 2001). On the contrary, the fact that
Defendants rolled back BODEQUALITY in only 75 out of 1,200 stores
in January 2022 supports the contrary inference that Defendants
initially believed that issues with BODEQUALITY were confined to
certain stores. Cf. Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S.
308, 314 (2007) (explaining that a strong inference of scienter “must be
cogent and at least as compelling as any opposing inference of
nonfraudulent intent”).
Plaintiffs’ invocation of the “core operations doctrine” does not
salvage their insufficient scienter allegations. That doctrine posits
that “scienter may be imputed to key officers who should have known
facts relating to the core operations of their company.” Gimpel v.
Hain Celestial Grp., Inc., 156 F.4th 121, 148 n.19 (2d Cir. 2025)
(quotation marks omitted). We have not “clearly affirmed the
validity of the core-operations doctrine following the passage of the
PSLRA, although we have suggested that the doctrine can provide
supplemental support for allegations of scienter, even if they cannot
establish scienter independently.” Id. (cleaned up). In any event,
although Plaintiffs allege generally that inventory and Old Navy itself
constitute Gap’s “core operations,” they never attempt to quantify the
importance of BODEQUALITY to those operations. Plaintiffs thus
cannot establish scienter in light of their failure to allege evidence of
conscious misbehavior or recklessness.
D. Control-Person Liability
Finally, we affirm the dismissal of Plaintiffs’ § 20(a) claim in
light of their failure to state a claim for a primary violation under the
Exchange Act. See Altimeo Asset Mgmt., 19 F.4th at 152.

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III. CONCLUSION
For the foregoing reasons, the judgment of the district court is
affirmed.

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