2012 07-30 Horowitz V Green Mountain Coffee Omnibus Opposition To Defendant's Motion To Dismiss

Case 2:10-cv-00227-wks Document 82
Filed 07/30/12 Page 1 of 61
UNITED STATES DISTRICT COURT DISTRICT OF VERMONT DAN M. HOROWITZ, Individually and on Behalf of All Others Similarly Situated, Plaintiff, vs. GREEN MOUNTAIN COFFEE ROASTERS, INC., et al., Defendants. ) ) ) ) ) ) ) ) ) ) ) ) No. 2:10-cv-00227-wks (Consolidated) CLASS ACTION
LEAD PLAINTIFFS OMNIBUS OPPOSITION TO DEFENDANTS GREEN MOUNTAIN COFFEE ROASTERS, INC.S, LAWRENCE J. BLANFORDS AND FRANCES G. RATHKES MOTIONS TO DISMISS THE SECOND CONSOLIDATED AMENDED CLASS ACTION COMPLAINT
TABLE OF CONTENTS Page I. II. III. PRELIMINARY STATEMENT .........................................................................................1 INTRODUCTION ...............................................................................................................4 STATEMENT OF FACTS ................................................................................................10 A. B. Senior Management Chose Acquisitions Over Accounting Infrastructure and Reporting Accuracy ........................................................................................10 GMCR Used MBlock to Engage in an Inventory Shell Game to Boost Financial Results....................................................................................................13 1. 2. IV. Defendants Used MBlock to Facilitate Premature Revenue Recognition ................................................................................................14 Defendants Used MBlock to Store the Excess Inventory That Was Produced to Improve GMCRs Operating Margins...................................16
ARGUMENT.....................................................................................................................20 A. The SAC Adequately Alleges a Violation of 10(b) .............................................20 1. 2. 3. Applicable Standards on a Motion to Dismiss a 10(b) Claim .................20 The SAC Adequately Alleges Numerous False Statements ......................22 Defendants Material Misstatements Were Made with Scienter ...............27 a. b. c. Applicable Standards for Alleging Scienter ..................................27 Defendants Scienter Standard Is Either Incorrect or Incorrectly Applied ........................................................................28 Allegations Pertaining to the Core Operations Doctrine Adequately Supplement the SACs Well-Pled Scienter Allegations .....................................................................................33 Defendants Were Motivated by an Acquisition for the Company and their Own Personal Financial Gain.........................37 Plaintiffs Have Established Defendants Recklessness .................38 (i) (ii) Knowledge of Excess Inventory that Should Have Been Written off ...........................................38 Inadequate Accounting Infrastructure/Internal Controls .............................41 -i-
d. e.
Page f. The Scienter of Other Senior Officers Is Imputed to GMCR ........45 (i) The Intentional and Reckless Conduct of GMCRs Vice President of Operations and Its Vice President of Finance Are Imputed to the Company ..........................................................46 The Insider Sales of Division Presidents Stacy and McCreary May Be Attributed to the Company ..........................................................47
(ii)
B. V.
The SAC Adequately Alleges Control Person Liability Under 20(a)..................49
CONCLUSION..................................................................................................................50
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TABLE OF AUTHORITIES Page CASES Aldridge v. A.T. Cross Corp., 284 F.3d 72 (1st Cir. 2002)......................................................................................................26 Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009).............................................................................................................21 ATSI Commcns., Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2001).......................................................................................................21 Barrie v. InterVoice-Brite, 409 F.3d 653 (5th Cir. 2005) ...................................................................................................39 Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007)...........................................................................................................20, 21 Burstyn v. Worldwide Xceed Grp., Inc., No. 01 CIV. 1125 (GEL), 2002 WL 31191741 (S.D.N.Y. Sept. 30, 2002)........................................................................................................33 Campo v. Sears Holdings Corp., 371 F. Appx 212 (2d Cir. 2010) .............................................................................................37 Chill v. Gen. Elec. Co., 101 F.3d 263 (2d Cir. 1996).....................................................................................................32 City of Brockton Ret. Sys. v. Shaw Grp. Inc., 540 F. Supp. 2d 464 (S.D.N.Y. 2008)......................................................................................32 City of Monroe Emps. Ret. Sys. v. Bridgestone Corp., 399 F.3d 651 (6th Cir. 2005) ...................................................................................................45 Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42 (2d Cir. 1991).......................................................................................................50 Cosmas v. Hassett, 886 F.2d 8 (2d Cir. 1989) ............................................................................................33, 34, 35 Dura Pharms., Inc. v. Broudo, 544 U.S. 336 (2005).................................................................................................................21 ECA v. J.P. Morgan Chase Co., 553 F.3d 187 (2d Cir. 2009)...............................................................................................21, 27
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Page Edison Fund v. Cogent Inv. Strategies Fund, Ltd., 551 F. Supp. 2d 210 (S.D.N.Y. 2008)......................................................................................49 Frank v. Dana Corp., 646 F.3d 954 (6th Cir. 2011) ...................................................................................................43 Frederick v. Mechel OAO, No. 11-3666-CV, 2012 WL 1193724 (2d Cir. Apr. 11, 2012).......................................................................................................33, 35 Ganino v. Citizens Utils. Co., 228 F.3d 154 (2d Cir. 2000).........................................................................................21, 27, 44 Gissin v. Endres, 739 F. Supp. 2d 488 (S.D.N.Y. 2010)......................................................................................21 Hart v. Internet Wire, Inc., 163 F. Supp. 2d 316 (S.D.N.Y. 2001)......................................................................................32 In re Am. Bank Note Holographics Sec. Litig., 93 F. Supp. 2d 424 (S.D.N.Y. 2000)..................................................................................34, 44 In re Am. Intl Grp., Inc., 741 F. Supp. 2d 511 (S.D.N.Y. 2010)......................................................................................27 In re Ambac Fin. Group, Inc. Sec. Litig., 693 F. Supp. 2d 241 (S.D.N.Y. 2010), cert. denied (Apr. 29, 2010).......................................41 In re Ashanti Goldfields Sec. Litig., No. CV 00-0717, 2004 WL 626810 (E.D.N.Y. Mar. 30, 2004) ..............................................38 In re Atlas Air Worldwide Holdings, Inc. Sec. Litig., 324 F. Supp. 2d 474 (S.D.N.Y. 2004)..........................................................................35, 42, 44 In re Bausch & Lomb, Inc. Securities Litigation, 592 F. Supp. 2d 323 (W.D.N.Y. 2008) ....................................................................................37 In re Bayou Hedge Fund Litig., 534 F. Supp. 2d 405 (S.D.N.Y. 2007), affd sub nom. S. Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98 (2d Cir. 2009) .....................................................................................28 In re Bear Stearns Cos., Inc. Sec., Deriv. & ERISA Litig., 763 F. Supp. 2d 423 (S.D.N.Y. 2011)......................................................................................21 In re BISYS Sec. Litig., 397 F. Supp. 2d 430 (S.D.N.Y. 2005)......................................................................................45 - iv -
Page In re Celestica Inc., Sec. Litig., No. 07 Civ 312, 2010 WL 4159587 (S.D.N.Y. Oct. 14, 2010) .........................................................................................................39 In re eSpeed, Inc. Sec. Litig., 457 F. Supp. 2d 266 (S.D.N.Y. 2006)................................................................................35, 42 In re Gen. Elec. Co. Sec. Litig., No. 09 Civ. 1951, 2012 WL 90191 (S.D.N.Y. Jan. 11, 2012)..........................................................................................................27 In re IPO Sec. Litig., 544 F. Supp. 2d 277 (S.D.N.Y. 2008)......................................................................................27 In re JP Morgan Chase Sec. Litig., 363 F. Supp. 2d 595 (S.D.N.Y. 2005)......................................................................................46 In re Lehman Bros. Sec. & ERISA Litig., 799 F. Supp. 2d 258 (S.D.N.Y. 2011)......................................................................................49 In re Marsh & Mclennan, 501 F. Supp.2d .........................................................................................................................45 In re Network Assocs., Inc. Sec. Litig., No. C 99-1729, 2000 WL 33376577 (N.D. Cal. Sept. 5, 2000) .........................................................................................................21 In re Nortel Networks Corp. Sec. Litig., 238 F. Supp. 2d 613 (S.D.N.Y. 2003)......................................................................................22 In re NUI Sec. Litig., 314 F. Supp. 2d 388 (D.N.J. 2004) ..........................................................................................46 In re Oxford Health Plans, Inc. Sec. Litig., 51 F. Supp. 2d 290 (S.D.N.Y. 1999)........................................................................................42 In Re Paracelsus Corp. Sec. Litig., 61 F.Supp.2d 591 (S.D. Tex.1998) ..........................................................................................43 In re Peoplesoft, Inc. Sec. Litig., No. C 99-00472, 2000 WL 1737936 (N.D. Cal. May 25, 2000) ........................................................................................................22 In re ProQuest Sec. Litig., 527 F. Supp. 2d 728 (E.D. Mich. 2007).............................................................................23, 38 -v-
Page In re PXRE Group, Ltd. Sec. Litig., 600 F. Supp. 2d 510 (S.D.N.Y. 2009)..........................................................................22, 29, 30 In re Scholastic Corp. Sec. Litig., 252 F.3d 63 (2d Cir. 2001).................................................................................................27, 38 In re Smith Barney Transfer Agent Litig., 765 F. Supp. 2d 391 (S.D.N.Y. 2011)......................................................................................21 In re Sonus Networks, Inc. Sec. Litig., No. Civ. A. 04-10294-DPW, 2006 WL 1308165 (D. Mass. May 10, 2006) .........................................................................................................45 In re St. Jude Med., Inc. Sec. Litig., 836 F. Supp. 2d 878 (D. Minn. 2011)................................................................................29, 45 In re Take-Two Interactive Sec. Litig., 551 F. Supp. 2d 247 (S.D.N.Y. 2008)......................................................................................45 In re Veeco Instruments Sec. Litig., 235 F.R.D. 220 (S.D.N.Y. 2006) .................................................................................27, 35, 42 In re Wash. Mut., Inc. Sec., Deriv. & ERISA Litig., 694 F. Supp. 2d 1192 (W.D. Wash. 2009)...............................................................................37 In re Winstar Commcns, No. 01 CV 3014, 2006 WL 473885 (S.D.N.Y. Feb. 27, 2006) ...................................................................................................35, 42 In re WorldCom, Inc. Sec. Litig., 352 F.Supp.2d 472 (S.D.N.Y.2005).........................................................................................45 Janus Capital Grp. v. First Derivative Traders, 131 S. Ct. 2296 (2011)..................................................................................................... passim Johnson v. Siemens AG, No. 09-CV-5310 JG RER, 2011 WL 1304267 (E.D.N.Y. Mar. 31, 2011) ........................................................................................................25 Kalnit v. Eichler, 264 F.3d 131 (2d Cir. 2001).....................................................................................................32 La. Sch. Emps. Ret. Sys. v. Ernst & Young, LLP, 622 F.3d 471,479 (6th Cir. 2010) ............................................................................................49
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Page Local No. 38 IBEW Pension Fund v. American Express Co., 724 F. Supp. 2d 447 (S.D.N.Y. 2010)................................................................................29, 30 Lormand v. U.S. Unwired, Inc., 565 F.3d 228 (5th Cir. 2009) ...............................................................................................2, 49 Matrix Cap. Mgmt. Fund, LP v. BearingPoint, Inc., 576 F.3d 172 (4th Cir. 2009) ...................................................................................................48 Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309 (2011).............................................................................................................48 Middlesex Ret. Sys. v. Quest Software Inc., 527 F. Supp. 2d 1164 (C.D. Cal. 2007) ...................................................................................23 Mills v. Polar Molecular Corp., 12 F.3d 1170 (2d Cir. 1993).....................................................................................................25 New Orleans Employees Retirement System v. Celestica, Inc., 455 F. Appx 10 (2d Cir. 2011) ...................................................................................35, 36, 49 New Orleans Emps. Ret. Sys. v. Celestica, Inc., 455 Fed. Appx. 10 (2d Cir. 2011).................................................................................... passim Norfolk County Ret. Sys. v. Ustian, No. 07 C 7014, 2009 WL 2386156 (N.D. Ill. July 28, 2009)...........................................................................................................37 Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000)...................................................................................27, 33, 37, 43 Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004)...............................................................................................22, 25 Rothman v. Gregor, 220 F.3d 81 (2d Cir. 2000)...................................................................................................1, 41 Ruggerio v. Warner-Lambert Co., 424 F.3d 249 (2d Cir. 2005).....................................................................................................22 Schottenfeld Qualified Assocs., LP v. Workstream, Inc., No. 05 Civ 7092, 2006 WL 4472318 (S.D.N.Y. May 4, 2006)...........................................................................................................37 SEC v. First Jersey Secs., Inc., 101 F.3d 1450 (2d Cir. 1996)...................................................................................................49 - vii -
Page Sgalambo v. McKenzie, 739 F. Supp. 2d 453 (S.D.N.Y. 2010)......................................................................................45 Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124 (2d Cir. 1994).....................................................................................................43 Steinberg v. Ericsson LM Tel. Co., No. 07 CV. 9615 (RPP), 2008 WL 5170640 (S.D.N.Y. Dec. 10, 2008) ........................................................................................................25 Suez Equity Investors, L.P. v. TorontoDominion Bank, 250 F.3d 87 (2d Cir.2001)........................................................................................................45 Teachers Ret. Sys. of La. v. A.C.L.N., Ltd., No. 01-11814, 2003 WL 21058090 (S.D.N.Y. May 15, 2003).........................................................................................................20 Teamsters Local 445 Freight Div. Pension Fund v. Bombardier, Inc., No. 05 Civ. 1898, 2005 WL 2148919 (S.D.N.Y. Sept. 6, 2005)..........................................................................................................34 Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital, Inc., 531 F.3d 190 (2d Cir. 2008)...............................................................................................28, 45 Tellabs, Inc. v. Makor Issues & Rights Ltd., 551 U.S. 308 and 322-24 (2007)...................................................................................... passim Tyler v. Liz Claiborne, 814 F. Supp. 2d 323 (S.D.N.Y. 2011)......................................................................................31 Verdi v. Potter, No. 08 Civ 2687, 2010 WL 502959 (E.D.N.Y. Feb. 9, 2010)...........................................................................................................43 Winslow v. BancorpSouth, Inc., No. 3:10-463, 2011 WL 7090820 (M.D. Tenn. Apr. 26, 2011) .....................................................................................................37 STATUTES, RULES AND REGULATIONS 15 U.S.C. 78j(b)......................................................................................................................................21 78u4......................................................................................................................................43 78u-4(b)(2).............................................................................................................................21
26 V.S.A. 14 ............................................................................................................................................. 24
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Filed 07/30/12 Page 10 of 61
Page Securities Exchange Act of 1934 10(b)............................................................................................................................... passim 20(a) .......................................................................................................................................49 Federal Rules of Civil Procedure Rule 8(a)...................................................................................................................................22 Rule 9(b) ..................................................................................................................................22 Rule 10b-5................................................................................................................................21 Rule 10b5-1......................................................................................................................3, 4, 13 Rule 12(b)(6)............................................................................................................................22 Rule 15(a).................................................................................................................................50 Rule 501 ...................................................................................................................................24 SECONDARY AUTHORITIES 3rd Update Margin Calls Cost Green Mountain Chairman, Director, THE WALL STREET JOURNAL (May 8, 2012) .............................................................................................................3 B. Strubel, Green Mountain Coffee Roasters Butchered Its Acquisitions, SEEKINGALPHA.COM (June 8, 2012) ...........................................................................................5 F.E. Ryerson III, Improper Capitalization and the Management of Earnings, 16 ASBBS Annual Conference, No. 1 (Feb. 2009)......................................................................................9 Green Mountains Margin of Error, THE WALL STREET JOURNAL (May 14, 2012) ........................4 J. Merriam Bitter Beans at Green Mountain Coffee, SEEKINGALPHA.COM (Sept. 30, 2010) ........................................................................................................................................20 REUTERS, Court Papers Show SECs Green Mountain Probe Isnt Over (May 30, 2012)..............2 Mulford and E.E. Comiskey, THE FINANCIAL NUMBERS GAME: DETECTING CREATIVE ACCOUNTING PRACTICES 136 (ed. 2011)....................................................................................8 P. Eavis, Digging Deeper Into Green Mountains Profits, THE NEW YORK TIMES (May 4, 2012) ..........................................................................................................................................9 S. Antar Green Mountain Coffees Numbers Submitted to SEC Examiners Dont Add Up, SEEKINGALPHA.COM (July 12, 2012) ..................................................................................3 S. Antar, Is Green Mountains Inventory Approaching Toxic Levels? SEEKINGALPHA.COM (May 1, 2012)...........................................................................................5 S. Roychowdhury, Earnings Management Through Real Activities Manipulation, 42 J. OF ACCOUNTING AND ECON. 335-372 (2006) ..................................................................8 - ix -
Filed 07/30/12 Page 11 of 61
Lead Plaintiffs Mike Shanley, Jerzy Warchol, Robert Nichols, Jennifer Nichols, and Loren Marc Schmerler (plaintiffs) respectfully respond to the motions to dismiss filed by Green Mountain Coffee Roasters, Inc. (GMCR or the Company), its CEO, Lawrence Blanford (Blanford), and its CFO, Frances Rathke (Rathke) (collectively defendants), as follows: I. PRELIMINARY STATEMENT In the last round of pleading, the operative complaint almost survived defendants motions to dismiss. Challenging plaintiffs Consolidated Class Action Complaint (CAC), defendants had contested only two of the six elements of the Section 10(b) claim falsity and scienter. With respect to falsity, the Court ruled in plaintiffs favor, finding that the CAC adequately alleged that GMCR, Blanford and Rathke had each made misstatements of fact in GMCRs public statements and SEC filings during the Class Period, i.e., July 28, 2010 to September 28, 2010.1 With respect to scienter, although it found an innocent reading of events to be, on balance, more compelling than one inferring fraud, see Order at *40, the Court was troubled by an undocumented, 150-truck shipment to MBlock2 and by the insider selling of GMCRs two unit presidents. See id. (neither are conclusively explain[ed] by a benign explanation). The SAC adds detail to plaintiffs claims in specific areas the Court found weak, as well as events which occurred since the CAC was filed, both of which shed light on defendants Class Period misconduct.3 As the new allegations weigh heavily to tip the balance in plaintiffs favor, defendants motions should be denied. 4
See Opinion and Order (Order), dated January 27, 2012 (Dkt. No. 57), at *11-*14.
Capitalized terms used herein are as defined in the Second Consolidated Amended Class Action Complaint (SAC), filed on April 30, 2012 and cited herein as _.
Moreover, in the few months since the SACs filing, additional revelations of the fraud caused GMCRs share price to fall from $48.73 (when the SAC was filed), to below $20. See infra at 2-3.
4
Events occurring after the Class Period can be used to show defendants state of mind during the Class Period, thereby demonstrating scienter. See, e.g., Rothman v. Gregor, 220 F.3d 81, 92 (2d Cir. 2000); see
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GMCR has been under the public cloud of an SEC probe for almost two years.5 The SEC has likely not concluded its work, in part, because the hits just keep on coming. At the end of the Class Period, in conjunction with a financing deal, GMCR was forced to disclose both that it had overstated income for several years (up to and including the Class Period) and that the SEC was inquiring into GMCRs relationship with vendor MBlock and the recognition of revenue associated therewith.6 The repercussions of this fraud have reverberated long thereafter: In October 2011, one year after the initial disclosure, Greenlight Capitals David Einhorn gave a 110-slide presentation on the Company entitled GAAP-uccino (the Einhorn Report). The Einhorn Report included confirmation that Class Period inventory shenanigans described in the earlier-filed CAC had not only occurred, but continued unabated. 84-92. GMCRs share price fell sharply in response.7 On May 2, 2012, Blanford shockingly claimed that the Companys inability to adequately gauge demand caused GMCR to badly miss revenue estimates and to writeoff a significant amount of obsolete inventory a material write-down for the first time ever, according to Rathke contributing to decreased gross margins.8 After a brief
also Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 254 (5th Cir. 2009) (partial reliance on alleged facts dating from the post-class period does not amount to fraud by hindsight) (citation omitted).
5
The March 2012 manual issued by the Division of Enforcement indicates that an informal inquiry should become an investigation if it is not resolved in 60 days. See http://www.sec.gov/divisions/enforce/enforcementmanual.pdf. A May 30, 2012, REUTERS article, Court Papers Show SECs Green Mountain Probe Isnt Over, reported that the matter had not died on the vine, as suggested by GMCRs counsel at oral argument. To the contrary, [s]ources close to the SEC investigation told Reuters the SEC had four people working on the case, including two forensic accountants. See Ex. A to the Declaration of Coby M. Turner in Support of Lead Plaintiffs Omnibus Opposition to Defendants Green Mountain Coffee Roasters, Inc.s, Lawrence J. Blanfords and Frances G. Rathkes Motions to Dismiss the Second Consolidated Amended Class Action Complaint (Turner Decl.), served and filed herewith. The Form 8-K states that these disclosures were made pursuant to Regulation Fair Disclosure (Reg. FD), as the information was disclosed privately in conjunction with a debt offering to fund the Van Houtte acquisition. 112. Identifying the disclosures as Reg. FD-related suggests that the public was informed of these facts by happenstance. See, e.g., Jason Merriams October 21, 2011 article at SEEKINGALPHA.COM, Green Mountain Coffees Bear Attack Was Overdue, describing a 30% price drop in the days after Einhorns presentation and noting Einhorns bearish thesis reiterated many concerns previously discussed . . . . (Turner Decl., Ex. B).
See GMCR Q2 2012 Final Earnings Call Transcript at 11 (Blanford: [W]eve just got a lot of moving parts. And I think we continue to increase our capability, but its gotten even more difficult to put our arms around [demand].); at 3 (Rathke: margins decreased [a]pproximately 150 basis points due to a higher writedown of finished product and anticipated obsolescence of raw material inventory due to lower-thananticipated sales of seasonal and certain coffee products); and 12 (Rathke: Again . . . weve never really had
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trading halt, on a reported volume of more than 87 million shares, GMCR stock lost half of its value in a single day.9 On May 8, 2012, the Company abruptly removed GMCRs founder and Chairman (and former defendant), Robert Stiller, and Lead Director, William Davis, from their respective positions on the Companys Board of Directors for selling 5.55 million shares of GMCR stock several days earlier, during a period in which they were forbidden to trade.10 On July 9, 2012, correspondence with the SEC concerning the 2011 Form 10-K was released. Commentators noted that GMCRs explanations did not match reported figures in several respects: profit margins could not be reconciled with GMCRs repeated disclosure that it makes no profit on brewer sales; and Timothys Coffee income exceeded its gross profits for a five-quarter period (including the Class Period).11 For the week, shares dove 19.6%, from the July 6, 2012 close of $24.50 to just $19.70 one week later.12
Adding together the items in the CAC that already troubled the Court (see Order at *40), the new allegations in the SAC,13 and the events which occurred since the SACs filing, there can be no doubt
any kind of significant issue with ABSO [ph]. I think this is the first quarter that weve really had a purely [ph] significant amount.) (Turner Decl., Ex. C).
9
See Yahoo! Historical Price Chart (Turner Decl., Ex. D) (shares tumbled from $49.52 to $25.87).
Lead Director Davis committed an additional violation, pledging shares as collateral for a loan in 2012, after the Company expressly forbade this practice as of January 1, 2012. See 3rd Update Margin Calls Cost Green Mountain Chairman, Director, THE WALL STREET JOURNAL (May 8, 2012) (Turner Decl., Ex. E). Also, Starbucks indicated that it informed GMCR of its plan to introduce a single-cup brewer before it was publicly announced on March 8, 2012; GMCR does not deny that. Thus, Stillers other 2012 sales, for $66.3 million in late February not pursuant to a Rule 10b5-1 trading plan could have been improperly made on material, non-public information. See id.
11
10
Green Mountain Coffee Roasters Profits: Overstated or Misunderstood, THELONGSHORTTRADER.COM (July 10, 2012) (quoting July 9, 2012 comments by Herb Greenberg); S. Antar Green Mountain Coffees Numbers Submitted to SEC Examiners Dont Add Up, SEEKINGALPHA.COM (July 12, 2012) (Turner Decl., Exs. F and G). See Yahoo! Historical Price Chart (Turner Decl., Ex. D).
12
13
E.g., additional details about the SEC inquiry in early 2010 (67-70); personal profit motive drove overproduction of inventory because bonuses were tied to operating income margins (75-77, 80); Rathke and other members of senior management decided not to spend the money to make necessary upgrades to computer systems (later revealed as a material weakness), and excess inventory was hidden from auditors, shipped needlessly from warehouse to warehouse, counted twice, and/or destroyed in vast quantities (80, 89, 91, 103-04).
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that Class Period misstatements were the result of the reckless and self-interested misbehavior of GMCR and its top personnel. Accordingly, defendants motions to dismiss should be denied in their entirety. II. INTRODUCTION Despite repeated materializations of the risks of defendants fraud, and concurrent price declines, in their motions to dismiss, defendants steadfastly cling to their story: GMCRs rapid growth simply outpaced the development of the Companys accounting structure14Green Mountain was experiencing a period of unprecedented growth, and as a result, some lapses occurred in the accounting department.15 For several reasons, this facile explanation does not hold water. First, while it may have grown rapidly in recent years, GMCR has been a public company since 1993 and is well-versed in SEC rules and regulations. There have been repeated misstatements in its SEC filings that have nothing to do with GMCRs recent growth spurt: Not until after commentator Sam Antar exposed blatant insider trading did the Company amend some of division president Michelle Stacys Forms 4 to state that her August and September 2010 stock sales the last two of which were made the day after the SEC issued a document request to GMCR, but a week before GMCR publicly disclosed the SECs request and ongoing inquiry were made pursuant to a Rule 10b5-1 plan purportedly adopted in August 2010. 127-28; For many years, GMCRs SEC filings the accuracy of which was certified by CFO Rathke herself falsely represented that Rathke held a CPA license. 18; Turner Decl. Ex. CC; and GMCR claimed to have made an inadvertent clerical error when it forgot to mention in its February 2012 proxy statement that 770,000 shares of the Companys stock had been pledged as collateral for a loan by former Lead Director Davis.16
14
Memorandum in Support of GMCR Motion to Dismiss, filed June 14, 2012 (GMCR MTD) (Dkt. No. 77-1) at 37-38.
15
Blanford and Rathkes Memorandum in Support of Motion to Dismiss (Mgt. MTD) (Dkt. No. 76-1) at 2. They also argue that even GMCRs outside auditors failed to initially catch these less than obvious errors. Id. at 19. However, the auditors failure to also uncover material weaknesses calls their audits into question. See n.28 & Turner Decl., Ex. U, infra. See Green Mountains Margin of Error, THE WALL STREET JOURNAL (May 14, 2012) (Turner Decl., Ex. H).
16
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Second, one commentator recently demonstrated that GMCRs benign story lacks factual support: prior to their acquisitions, Van Houtte and Diedrich had utilized their resources far more efficiently than GMCR. Thus, the acquisitions should have resulted in economies of scale and greater manufacturing efficiency for GMCR, not less.17 Moreover, the failure to quickly integrate acquisitions also meant that acquirees superior inventory control systems remained in place which should have resulted in an overall improvement of GMCRs poorer inventory turnover. Instead, GMCRs inventories rose at an alarming rate, while turnover slowed.18 Although the Court expressly held that the sufficiency of the MBlock allegations with respect to pleading either falsity or scienter is not essential to a ruling on the adequacy of plaintiffs claims herein, see Order at *12, *30, *37-*38,19 a single explanation does account for the restatement, the SECs MBlock investigation, and the events which have unfolded thereafter. However, it is by no means a benign one: Blanford, Rathke and other senior executives manipulated GMCRs reported net sales and operating income for a number of years by intentionally overproducing product well in excess of actual demand to, inter alia, earn bonuses equal to or greater than their annual salaries.20
See B. Strubel, Green Mountain Coffee Roasters Butchered Its Acquisitions, SEEKINGALPHA.COM (June 8, 2012) (comparing revenue to fixed assets, revenue to capital expenditure, and inventory ratios of GMCR, Van Houtte and Diedrich and finding the other two companies superior to GMCR on each metric) (Turner Decl., Ex. I).
18
17
Id.; see also S. Antar, Is Green Mountains Inventory Approaching Toxic Levels? SEEKINGALPHA.COM (May 1, 2012). Antar reasoned that because quarterly sales figures almost always exceeded guidance, inventory turns should have improved as the unexpected additional sales pulled products out of inventory. However, GMCRs turn rate has consistently declined since late 2010, with inventory levels rising rather significantly. (Turner Decl., Ex. J).
19
Almost as tenaciously as they cling to their growing pains story, defendants continue to misperceive the entire action as revolving around improper revenue recognition for shipments to MBlock. See, e.g., GMCR MTD at 1, 2, 8-10, 12-15, 25-29. Although that is a part of plaintiffs allegations, as the Court noted, the MBlock allegations are as relevant to the element of scienter as they are to falsity. See Order at *12 (The parties spar vigorously over MBlock, which this opinion takes up in detail in relation to scienter. However, there is little debate that the Q3 Statements, regardless of the MBlock practices, were false GMCR admitted as much in restating them.). All but one of the items restated on December 9, 2010 had the effect of overstating GMCRs net sales and/or operating income for each restated year. See 2010 Form 10-K at iii (Turner Decl., Ex. K).
20
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Manipulation of Net Sales: GMCR revealed after the Class Period, by an addition to Keurigs royalty income policy (which GMCR moved, from page 1 of its Forms 10-K for 2007, 2008 and 2009, to page F-9 of the 2010 Form 10-K), that it recognized royalty income on sales by licensees to Keurig. 53-58. Thus, not only did the restatement first reveal that GMCR manipulated income by simply ordering K-Cups in excess of actual demand, plaintiffs allege (see 64(c), 80) but that it resulted in, at least, a $1 million income overstatement. 58, 114. With respect to MBlock revenue recognition, defendants continue to cite to a policy adopted after the Class Period to argue that all of plaintiffs MBlock allegations are irrelevant because revenue is only recognized on sales to MBlock at the time the product is shipped out to an end-user. See GMCR MTD at 1, 8 (quoting 2010 Form 10-K at 43); Mgt. MTD at 3. However, the relevant revenue recognition policy in effect during the Class Period, set forth in the 2009 Form 10-K at 32, was completely silent on when revenue is recognized on sales of brewers and K-Cups to MBlock.21 Despite GMCRs self-serving claim that its internal investigation found no connection between the restatement and MBlock,22 its 2010 Form 10-K warned that a possible outcome of the SECs probe of GMCRs dealings with MBlock could be another restatement. 116. Thus, any connection the market drew on September 28, 2010 between the two pieces of news disclosed a multi-year income overstatement and the SECs MBlock inquiry is, in fact, accurate. Until the SECs investigation concludes in GMCRs favor, i.e., with no additional restatement of net sales and operating income, the bright line defendants seek to draw between the restatement and the SEC inquiry simply does not exist.
See 2009 Form 10-K at 12: We sell a significant number of brewers and K-Cups to [MBlock] for re-sale to certain retailers. Receivables from this company were approximately 51% of our consolidated accounts receivable balance at September 26, 2009, and 32: Sales of single-cup coffee brewers are recognized net of an estimated allowance for returns. The Company estimates the allowance for returns using an average return rate based on historical experience. Royalty revenue is recognized upon shipment of K-Cups by roasters as set forth under the terms and conditions of various licensing agreements. (Turner Decl., Ex. L).
22
21
While the Court indicated this was PricewaterhouseCoopers LLPs (PwC) finding, see Order at *35, it appears from the Form 8-K issued on November 19, 2010 that this was the conclusion of the audit committees internal investigation, not PwC. (Turner Decl., Ex. M).
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Manipulation of Operating Income: The Court held that the restatement is an admission of a material misstatement of GMCRs earlier-reported earnings. See Order at *13-*14. Two items, including the largest, a $7.6 million income overstatement, resulted from incorrect standard cost figures being used to eliminate inter-company inventory balances. 112, 114. The SAC alleges, in significant detail, defendants reckless disregard for the fact that GMCRs unconnected, inadequate accounting systems (since the Keurig acquisition in 2006, the first year of the restatement) produced completely unreliable figures. This was particularly true with respect to GMCRs inability to track and value inventory, much of which was stored at MBlock, an entity with poor tracking systems of its own that allowed GMCRs employees to manage inventory movements at its warehouses. 64-66, 79, 103-04. During the Class Period, senior management was aware of the later-admitted material weakness concerning the completeness and accuracy of the accounting for intercompany transactions and the need to automate certain aspects of the intercompany accounting (117), but nonetheless refused to upgrade GMCRs systems. Even in the restatement, management only committed to an evaluation of possible methods to remedy the problem. Id. Auditor PwC expressed no opinion on the merit of this remediation plan. 118. As plaintiffs have repeatedly alleged, defendants unreasonably grew GMCRs Class Period inventories despite a slowdown in projected sales growth. 53-54; see also CAC 54-55. As explained in the SAC, there was a financial motive to do so, as employee bonuses were tied to production (64(c), 80), since increased production meant a lower Cost of Goods Sold (COGS) per unit and allowed GMCR to have the appearance of higher operating margins (see p. 19, infra), and hence, higher operating income. Unnecessary overproduction was especially attractive for senior management, i.e., Blanford, Rathke, and unit presidents McCreary and Stacy, who could practically double their 2010
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salaries (or more than double it, in Blanfords case) by achieving the higher net sales and operating income targets. Id.23 Linking bonuses to these very metrics is a well-known cause of earnings management:24 Top officers of GMCR intentionally increased production regardless of demand to improve operating margins. 80. During the Class Period, as vast quantities of intentionally overproduced inventory became obsolete, stale coffee was taken away from warehouses, hidden from GMCRs auditors, and then either given away to farmers, destroyed, or dumped in landfills. 64(c), 74-77, 80.25 Highly suspect shifting of inventory between GMCR, MBlock and their facilities, including significant amounts of inventory past its expiration date, was confirmed by the Einhorn Report. 89, 91. However, GMCR disclosed a write-off of only 0.75% of finished inventory during the Class Period.26
23
See DEF 14A, filed January 24, 2011, at 25 (Consistent with prior years [i.e., 2007-2009], the Compensation Committee again chose net sales and operating income as the financial targets against which to measure any annual incentive compensation payable to the named executive officers.). Based upon achieving various targets, Rathke, McCreary and Stacy were thus eligible for bonuses of up to 82.5% of their base salaries; Blanford could have received as much as 150% of his base salary in bonus. Id. at 26-27. (Turner Decl., Ex. N).
See S. Roychowdhury, Earnings Management Through Real Activities Manipulation, 42 J. OF ACCOUNTING AND ECON. 335-372 (2006) (so finding); see also C.W. Mulford and E.E. Comiskey, THE FINANCIAL NUMBERS GAME: DETECTING CREATIVE ACCOUNTING PRACTICES 136 (ed. 2011) (Financial professionals were asked to discuss various earnings management scenarios, one of which perfectly described the facts of this case: Production is expanded beyond current requirements in order to capitalize more overhead into inventory and by so doing increase incentive compensation for company officers. This activity was judged to be pushing the limits of GAAP flexibility because [a]n inventory buildup absorbs cash flow and could raise the possibility of the need for a future inventory write-down. The practice, which resulted in misleading and fraudulent reporting, was also described as being contrary to codes of business conduct and/or a corporations ethics policies.) (Turner Decl., Exs. O and P).
25
24
See also Green Mountains coffee distributor brews controversy, a July 2, 2012 article in REUTERS, recounting past inventory frauds by other companies that warehoused inventory at MBlock. With respect to GMCRs excess inventories, the article explained: Several former M. Block employees confirmed [the CACs allegations] that the companys warehouses sometimes were overstocked with expired Green Mountain coffee, which led the distributor to encourage periodic giveaways . . . [E]very few months M. Block would give out industrial-sized, 44-gallon garbage bags for its employees to fill with single-cup Green Mountain coffee pods.) (Turner Decl., Ex. Q).
26
See Form 10-Q, filed August 5, 2010, Unaudited Consolidated Financial Statements, Note 5 ($147.4 million finished goods inventory is net of obsolescence allowance[] of $1,121,000 . . . at June 26, 2010[.]) (Turner Decl., Ex. R).
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How was the obsolete inventory accounted for? The Einhorn Report questioned the meteoric increase of GMCRs purported capital expenditures year-over-year: From $48 million in FY 2009, to $118 million in FY 2010, to $325-350 million in 2011, and a projected whopping $700-780 million for FY 2012.27 In an attempt to reconstitute these figures, as later described by Peter Eavis in THE NEW
YORK TIMES, Einhorn estimated how much extra capital expenditure would be needed to produce extra
coffee pods.28 The Einhorn Report found that there was a tremendous gap between the CapEx required to satisfy actual and projected K-Cup demand and the midpoint of GMCRs projected CapEx $103.1 million for just-ended FY 2011 and an astonishing $426.6 million for FY 2012. See Einhorn Report at 69. Eavis similarly compared the CapEx figures publicly announced for the expansion of buildings at three plant locations with GMCRs projected CapEx for buildings; the discrepancy was $115 million ($50 million versus $165 million). Both the Einhorn Report and Eavis suggested that GMCR was improperly capitalizing expenses.29 Whereas both GMCR and MBlock employees described the periodic need to remove significant amounts of expired coffee from inventory, at a time GMCRs obsolescence write-offs were miniscule, there is a strong inference that most inventory write-offs were being classified as capital expenditures during the Class Period, so that they could be taken over time, rather than hitting the income statement all at once. After the Einhorn Report, the SEC investigation, and commentators embarrassed GMCR into
27
See Einhorn Report at 68. (Turner Decl., Ex. S).
28
P. Eavis, Digging Deeper Into Green Mountains Profits, THE NEW YORK TIMES (May 4, 2012) (Turner Decl., Ex. T). See Einhorn Report at 72: The gap is so large and insufficiently explained that it raises questions about what is being capitalized . . . ; Eavis: While capital expenditures are a cost for a company, they dont show up all at once in the income statement. A company that wants to make itself look more profitable can take expenses that should be immediately counted in the income statement and classify them as capital expenditures. This type of earnings manipulation is so common that auditors can be held liable for not uncovering it. See F.E. Ryerson III, Improper Capitalization and the Management of Earnings, 16 ASBBS Annual Conference, No. 1 (Feb. 2009) (citing 16 SEC Accounting and Auditing Enforcement Releases where accountants knew or should have known that management was improperly capitalizing expenses). (Turner Decl., Ex. U).
29
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substantially lowering its CapEx projections for 2012,30 following a Q2 2012 sales miss, defendants were forced to take a significant inventory write-off. III. STATEMENT OF FACTS31 A. Senior Management Chose Acquisitions Over Accounting Infrastructure and Reporting Accuracy
During the Class Period, defendants assured investors in GMCRs SEC filings that the Companys financial statements were presented in conformance with GAAP and that the Company maintained a sound system of internal controls over its financial reporting. 101. In the Companys Q3 2010 Form 10-Q, filed August 5, 2010, Blanford and Rathke certified that they designed and evaluated these systems and that there were no material weaknesses that could lead to inaccurate reporting. 105. Not even two months after these certifications were made, a multi-year income overstatement was first reported. 112. Less than two months after that, investors were told that they could not rely upon four years of financial reporting. 114. Several weeks later, GMCRs 2010 Form 10-K reported an even broader restatement than was previously announced and two material weaknesses in internal controls over financial reporting. 116-17. The SACs allegations demonstrate that senior management was aware of GMCRs woefully deficient accounting infrastructure when Blanford and Rathke made their false certifications. In the years leading up to the expiration of Keurigs patented, single-cup technology, defendants devised a business plan to address that eventuality. Defendants decided that GMCR would purchase a
30
The Q3 2011 earnings release, filed on Form 8-K on July 27, 2011, indicated that GMCRs CapEx forecast of $650-$720 million might increase to $700-780 million. (Turner Decl., Ex. V). On May 2, 2012, having already been lowered to $630-700 million, Rathke announced that CapEx would be $525-575 million. See Turner Decl., Ex. C at 4. Rather than summarize all facts alleged, this section focuses upon the facts added to those in the CAC to enhance allegations found to be insufficient by the Court. Although relied upon, plaintiffs will not discuss the insider trading and Lavazza and Van Houtte transactions, the details of the three announcements concerning the MBlock inquiry and the (ever-increasing scope of the) restatement, or the revelations of GMCRs material weaknesses over internal control of financial reporting all of which are repeated in the SAC largely unchanged.
31
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number of prominent coffee roasters, e.g., Van Houtte, Timothys and Diedrich, to secure brand loyalty well in advance of 2012, and to make deals with potential competitors, e.g., Starbucks and Dunkin Donuts. 35-36.32 The downside of this strategy was explained in the SAC by CW1, a distribution planning manager who initially came to the Company in 2009 to work on IT projects. At that time, CW1 observed that there was no enterprise resource planning, and no systems in place for warehouse, transportation, or supply chain management or for inventory control (indeed, none of the warehouses were linked). 64(a). When CW1 brought this to the attention of her/his superior, Director of Operations Don Holly, he told CW1 that instead of installing these systems, GMCR would focus upon growth through acquisition. Devoting the Companys financial resources to the acquisition of various roasters, to the exclusion of ensuring that a proper infrastructure was in place to support growth, only served to exacerbate an inter-company communications problem that existed since GMCR purchased Keurig in 2006. In the SAC, several witnesses explained that because GMCR used PeopleSoft software while Keurig used Great Plains software, and maintained its own accounting team, Keurig operated somewhat separately from the rest of the Company. See 103(a)-(c) (CW8, CW9 and CW10). Further complicating matters, Diedrich had been using Sage MAS-500 software at the time of its acquisition. CW10, who moved from Diedrich to GMCR and was employed during the Class Period, indicated that problems with inter-company transfers could arise because of the use of different systems. 103(c). Newly-located witnesses confirm CW1s assessment that GMCRs computer system deficiencies and difficulties were far more extensive than just the use of incompatible software by the two divisions.
32
After the submission of the 2011 Form 10-K, the SEC asked GMCR whether patent expirations would have a material impact on GMCRs financial condition and operations. On May 4, 2012, GMCR responded: The Company believes that it has competitive strengths, aside from its intellectual property portfolio, that enhance its business and mitigate the potential material impact on its financial position and results of operations in the future arising from the patent expirations. First, the Company believes that its first mover advantage allows it efficiencies and scale to support increasing consumer demand at a lower cost than its competitors. Additionally, the Company exclusively offers over 200 varieties of K-Cup portion packs, including from a broad variety of meaningful brands. (Turner Decl., Ex. W) (emphasis added).
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These witnesses described SCBUs complete inability to accurately account for both its raw and finished inventory. According to a buyer who worked at GMCRs Knoxville facility for 18 months (CW12), there were as many as five different computer systems Microsoft Excel, Microsoft Access, PeopleSoft, Oracle and Scolari keeping track of inventory. There was no way to prevent inventory from being double counted,33 and this occurred constantly. Items were removed from inventory without recordation. As a result, there were repeated reconciliations, but inventory counts were way off. 104(b). These problems were well-known throughout the Company and many people worked to reconcile the figures from the separate systems. Id. Controller Patricia Bell, Operations Director Jane Payne and Distribution Manager Dale Pearson were responsible for informing SCBU President McCreary of the problems and the revised inventory figures. Id. One of the people responsible for reconciling figures was CW13, a contract employee who worked in GMCRs Knoxville warehouse during the Class Period, and created and reviewed inventory reports for both raw and finished products on a daily basis. Like CW12, CW13 stated that inventory reports were irreconcilable and products that were supposed to be in inventory were missing. It was also common for system errors to contribute to the need to recount inventory. An employee who reported to defendant Rathke told CW13 that senior management was aware of the computer problems but refused to pay for better computer systems. 104(c). (This is exactly what CW1 had been told). Following interviews with employees of both GMCR and MBlock, the Einhorn Report (Turner Decl., Ex. S at 93) confirmed and corroborated the accounts of these CWs, stating: Both GMCR and MBlock use substandard IT systems. Important functions, including inventory management are performed in Excel spreadsheets which are easy to change, provide non-standardized analysis, and are prone to material error. Suggestions to improve operations through the use of technology are met with resistance inside both organizations.
33
CW11, a marketing manager and MBA who worked for the Company for a year, up to the start of the Class Period, confirmed that there was an inventory double counting problem. 104(a).
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Further evidence that defendants showed a reckless disregard for accounting accuracy is the number of commentators who constantly pointed out blatant inconsistencies in GMCRs financial filings. 3, 95-97; see also Turner Decl., Exs. B, F, G, I, J, S, and Z. They are neither loons nor conspiracy theorists, as suggested by defendants. See GMCR MTD at 36 n.17. To the contrary, comments made on CNBC spurred the SEC into action. Compare 96 with S. Antar, To the Securities and Exchange Commission: Green Mountain Coffee Roasters selectively spills the beans and its numbers still dont add up, WHITE COLLAR FRAUD (June 6, 2011) (Turner Decl., Ex. X) (a month after Herb Greenburg questioned whether an apparent reserve reversal allowed GMCR to meet analysts expectations, the SEC asked about the same anomaly in GMCRs filings). Indeed, GMCR amended the Forms 4 on some of Michelle Stacys suspicious stock sales to make reference a Rule 10b5-1 plan only after Sam Antar called her on the carpet for insider trading. 128. Moreover, journalists without a profit motive or an axe to grind have been muckraking as well. See, e.g., Turner Decl., Ex. Q (REUTERS article about MBlock); Turner Decl., Ex. T (Peter Eaviss expos in THE NEW YORK TIMES replicated the Einhorn Reports method of uncovering grossly overstated CapEx figures using public documents). While these articles do not establish scienter, per se, they most certainly weigh heavily in favor of rejecting defendants benign explanation of events. B. GMCR Used MBlock to Engage in an Inventory Shell Game to Boost Financial Results
One witness (CW11) described MBlock as a catch all for customers [GMCR] didnt ship to directly. 104(a). Because MBlock played the role of catch all, CW11 indicated that a reason for the inventory double counting problem was that GMCRs employees could not determine whether shipments sent to MBlock were sent there for storage or had actually been sold to MBlock. Id. The CAC initially described in detail how MBlock became a captive warehouse for GMCR.34 As the SAC
34
See, e.g., CAC at 63 (MBlock initially became Keurigs distributor in 2003); 67 (MBlocks business with GMCR grew from 20% to 75% with the execution of a new national contract in mid-2009); 65(a) (GMCR invested in MBlocks infrastructure, with distribution centers opening in 2009 and 2010); 66 (a
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explains, as had others in the past,35 defendants used shipments to MBlock as a catch all to manipulate both revenues and operating margins. 1. Defendants Used MBlock to Facilitate Premature Revenue Recognition
The bulk of the allegations in the CAC regarding MBlock concerned a single 150-truck shipment to MBlock on which plaintiffs allege GMCR improperly recognized revenues. CAC 70-71. The Court found the allegations adequately pled the mechanics of the shipment. However, the Court found insufficient evidence of both revenue recognition on this shipment and that the named defendants were aware of the shipment. See Order at *33-*36. New details from CW1 and corroboration from other witnesses strengthen plaintiffs claim in the SAC. First, the Court noted that plaintiffs failed to allege that CW1s duties included accounting or that CW1 had an accounting background. See Order at *33. The SAC alleges that CW1 worked with accountants for 15 years and was well-versed in the rules concerning revenue recognition. Accounting responsibilities within CW1s role as a distribution planning manager included profit and loss determinations, cost allocation and accrual accounting, preparation of accounting timelines and decisionmaking concerning returns on investment. 64. Second, the Court found CW1s account insufficient to allege that revenue had been improperly recognized on the 150-truck shipment. See Order at *33-*34. In the SAC, CW1 added details that support such a conclusion: (1) despite CW1s and two managers inability to locate proper paperwork for the shipment, MBlock picked up 150 truckloads of product at quarter-end in December 2009 (72) a
former GMCR employee indicated that MBlock is known as GMCRs captive company, and would do as GMCR instructed). In the recent REUTERS article focused on MBlock, the author confirmed plaintiffs allegations that MBlock gave up most of its other business to accommodate GMCR. Compare SAC at 64(b)-66 with Turner Decl., Ex. Q (Interviews with a dozen former M. Block employees revealed a quick transition in 2008 from a business that mainly moved small appliances to grocery stores to an increased focus on distributing Green Mountain products.).
35
Turner Decl., Ex. Q (noting that MBlocks warehouses were also used by Sunbeam and iGo Corp. to perpetrate securities fraud).
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tell-tale sign of revenue recognition fraud; and (2) no payment was ever made and the shipment was on GMCRs books as an account receivable. Id. Third, the SAC also addresses the Courts concern that CW1 did not link the highly-unusual shipment, and the revenue recognized for it, to the individual defendants. See Order at *36. CW1 has now provided details concerning weekly operations meetings at which CW1 was asked to sometimes make presentations (and for which CW1 prepared reports and pivot tables for Operations VP Jonathan Wettstein to present): (1) meetings were held weekly, or more frequently due to constant inventory adjustments; (2) defendants Blanford and Rathke were in attendance, as well as SCBU President McCreary, VP of Finance Tina Bissonette, Vermont Operations Manager Dave Tilgner and Multi-Site Scheduling Manager Dan Redding; and (3) decisions were made with respect to: (a) which products would be made and where they would be made, (b) locations where product was to be stored, (c) the way inventory would be transported from facility to facility, and (d) the disposal of excess inventory. 74. It is reasonable to infer that the 150-truckload shipment would have been discussed at one of these weekly meetings, given: (a) the tight control over all production and inventory exercised by the participants in the meetings; and (b) the fact that several participants, to wit, Operations VP Wettstein, SCBU president McCreary, and Finance VP Bissonette, were all aware of the shipment. 73. Finally, CW1 previously noted that GMCR ultimately changed its stated revenue recognition policy because the auditors had found discrepancies. 83; see also CAC 74.36 (Such a change cannot occur without the knowledge of senior management, in particular Blanford and Rathke, who executed GMCRs periodic SEC filings.) CW1 additionally recalled that in November and December 2009 the month of the 150-truck shipment and the month just prior thereto the Companys revenue recognition
36
As explained above, at p.6 & n.20, the Companys stated revenue policy (up to and including the 2009 Form 10-K filed in November 2009) was silent on when revenues were recognized on products shipped through MBlock, i.e., brewer and K-Cup sales other than wholesale and consumer direct sales.
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practices and policies had been discussed at the weekly (bi-weekly) meetings attended by Blanford and Rathke. 74. Although GMCRs internal investigation found no link between the 2010 restatement and sales through MBlock (114), GMCR admitted that resolution of the SEC probe may still require a restatement of revenues from MBlock transactions. 116. The Einhorn Report highlighted the lack of transparency in GMCRs dealings with MBlock: on the one hand, GMCR describes MBlock as a fulfillment entity performing a purely administrative function, yet it refuses to disclose its MBlock agreements as material contracts, as required by SEC regulation. On the other hand, 51% of year-end 2009 accounts receivable (AR) were on sales to MBlock, and GMCR warned that MBlocks creditworthiness thus exposed GMCR to significant credit risk. See Turner Decl., Ex. S at 87-88. Forty-seven percent of 2010 yearend AR was attributed to MBlock. See Turner Decl., Ex. K at 14. Accordingly, plaintiffs argument that MBlock was used to facilitate premature revenue recognition has been sufficiently plead in the SAC. 2. Defendants Used MBlock to Store the Excess Inventory That Was Produced to Improve GMCRs Operating Margins
At the start of the Class Period, during its Q3 2010 earnings call, GMCR indicated it was ramping up inventories to prepare for demand, in the fall and thereafter, exceeding expectations. 53. As two charts in the SAC demonstrate, there was little evidence to support that statement: Year-over-year sales guidance showed a significant slowing during the last three quarters of FY 2010, while inventories sharply increased in the quarters just prior to the Class Period. 53-54. Despite the complete disconnect between GMCRs sales and inventory trends, GMCRs management did not slow down its production. To the contrary, as the CAC initially explained, VP of Operations Wettstein and Director of Operations Don Holly did not set production levels based upon customer ordering history or demand. As a result (according to CW1 and CW2), inventory piled up to the rafters at MBlocks facilities and large quantities of product were stored beyond their expiration dates, much of which had to be destroyed.
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Because of GMCRs control over MBlock and the latters poor inventory control capability (later confirmed in the Einhorn Report), defendants were able to use MBlock to move around inventory at will. CAC 65(b)-(d). The SAC contains additional witness accounts of the extent of overproduction, waste and destruction of excess inventory. See, e.g., 80 (coffee given to farmers for use as silage or to acidize their fields, or secretly dumped in land-fills near the Knoxville plant); 89 (deliberate overproduction of K-Cups); 91 & Turner Decl., Ex. S at 96 (truckloads of expired coffee were shipped from GMCR to MBlock; at least one third of MBlocks warehouse held expired coffee; emails from GMCRs manager of demand planning consistently discussed how far over the demand forecast actual production was). The SAC also adds new witness accounts describing frequent, unexplained transfers among various GMCR and MBlock sites so many that they outnumbered shipments to customers. For example, CW7, a Class Period shipping employee in Knoxville, witnessed constant transfers from plant to plant that were made for no apparent reason e.g., every other month, skids of product were sent to Vermont only to be returned untouched one to four weeks later and improper movements to MBlock outside the order management system, by means of material shipping requests. 79; see also 89 (Einhorns corroborating witness interviews: We would do more transferring of inventory than we physically did shipping; the refusal to ship from multiple locations gave cover for a shell game that Green Mountain was playing across all its facilities). In addition to the details set forth below concerning defendants knowledge of and control over this massive inventory shell game (74), the SAC alleges that efforts to get senior management to improve inventory tracking capabilities failed because a personal financial motive drove the overproduction of unneeded inventory. For example, CW1 described attending weekly production meetings among 20 employees (some attending by webcam), including someone from finance, product schedulers, site schedulers, site managers, procurement personnel, operations representatives, the transportation manager, line managers from the roasters, coffee expert Lindsey Bolger, Vermont
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operations manager David Tilgner, Director of Operations Don Holly and Operations VP Wettstein. The group discussed forecasted demand, inventory levels and what had been sold by SCBU to Keurig and MBlock. CW1 indicated that Holly, following Wettsteins orders, ignored the information exchanged at these meetings and did not set production levels based upon ordering history or inventory levels. Instead, the Company overproduced products and GMCR in particular, the Keurig division (whose Director of Logistics and Transportation, Mike Neyhus, had the Companys initial relationship with MBlock) sent MBlock more product than it could immediately ship. 64(c). On numerous occasions, CW1 confronted Holly and Wettstein about their inventory practices. In October 2009, they instructed CW1 to use a different inventory calculation method than the one they knew was standard in the industry, to wit, the ABC method which took into account fast-, mediumand slow-moving items. Instead, they insisted that inventory be replaced when it fell below a standard deviation plus three days of working inventory. CW1 told both of them this would result in skewed overproduction of expensive products that would be carried over into another period and then dumped when their shelf life expired. 75. Wettstein merely replied that his methodology best met our needs. CW1 took this to mean that Holly and Wettstein were knowingly manipulating inventory. 76. CW1 had a production employee prepare a report demonstrating why Wettsteins method was flawed. Although Wettstein and Holly reviewed the report and discussed it with CW1, they refused to use the correct method. Id. (As indicated at p. 12, supra, the Einhorn Report also found resistance to reforming inventory processes.) The SAC also adds details concerning GMCRs efforts to hide the overproduced inventory from the auditors. CW1 stated that expired coffee was temporarily loaded onto trucks and parked a few blocks away from the warehouse, to be returned to inventory after the auditors left. CW1 witnessed this on many occasions, so often that he/she would overhear inventory control employees commenting: Oh, we must be having an audit. CW1 stated that VP Wettstein was fully aware of these practices, designed to manipulate the Companys accounting. The Einhorn Report contains corroborating reports from other
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employees, describing product loaded onto trailer trucks to nowhere and odd material movements and irregularities that occurred around the time of the MBlock inventory audits. 89. (According to CW7, GMCRs own employees were involved in shifting and managing the inventory at MBlock). One recalled a phantom shipment of 500,000 brewers, purportedly for a QVC order, immediately prior to an audit, that was restocked right after the audit. 90. The SAC also reveals the motivation for the massive overproduction and orchestrated movements of excess inventory to and fro all employee bonuses were tied to production. 64(c), 80. For lower level employees, this could range from 25-50% of their annual compensation. Id.37 For senior management, hitting operating margin targets (often accomplished by inventory overproduction to lower the cost of goods sold per unit), could mean an even greater reward in FY 2010 up to 82.5% of base pay for Rathke, McCreary and Stacy and up to 150% for Blanford.38 Thus, although they sold no shares of their stock during the Class Period, leading the Court to question the motivation of defendants Blanford and Rathke, see Order at *22, GMCRs CEO and CFOs actions and statements were still driven by personal profit motives. Ultimately, in the wake of the September 28, 2010 announcement of the SECs probe of GMCRs key relationship with MBlock and the need to restate millions of dollars of income due to poor intercompany transaction accounting, GMCR stock lost nearly $6 a share. 113. Investors realized that
One commentator found this allegation to be evidence of systemic fraud. In GMCR Production Bonuses Leading to Overstated Revenue? SEEKINGALPHA.COM (April 9, 2012), Ben Strubel wrote: The big question in our mind was just how far the problems extended in the company . . . [I]t would be nave to think GMCRs problems didnt go deeper than just some outdated accounting systems and the pressure of fast growth. [But, I] want a little more evidence that the problems at GMCR are systemic . . . I believe that significant proof comes from the testimony of several confidential witnesses in the Horowitz class action suit. The witness testified that GMCR instituted a system of bonuses for employees that was based on making production numbers and that these bonuses sometimes made up to 50% of employees pay. Citing the work of a criminologist, Strubel explained how managers who embark down a path of fraud to inflate financial results use production bonuses to elicit the behavior they want without having to explicitly ask employees to themselves break the rules. (Turner Decl., Ex. Y) (emphasis added).
38
37
See pp. 7-8, supra.
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GMCRs growth figures were too good to be true and one commentator noticed certain line items where GMCRs numbers just did not add up: [C]hanges in income producing assets dont jibe with changes in revenues. A 69.4% jump in June 2010 inventories on a -4% drop in sales catches our eye. The build-up in PPE versus sales during review periods also brought a groan. Sure, GMCR has been in acquisition mode lately, but, the added capacity and a build-up of inventory (against declining sales) tells us theyre not getting a decent return from these assets.39 As explained above, this same thesis that CapEx figures were highly questionable in light of the corresponding level of sales was to be repeated again and again. See, e.g., Turner Decl., Exs. I, S and T (Einhorn Report, Eaviss expose in THE NEW YORK TIMES, and Strubels discussion of GMCRs very poor return on investment compared to the acquired roasters). Again, although GMCR asks the Court to give little weight to commentators and journalists, see GMCR MTD at 36 n.17, the unanimity of their conclusions over time weighs against any innocent explanations defendants now seek to provide for GMCRs false financial reporting. IV. ARGUMENT A. The SAC Adequately Alleges a Violation of 10(b) 1. Applicable Standards on a Motion to Dismiss a 10(b) Claim
Motions to dismiss are generally viewed with disfavor. See Teachers Ret. Sys. of La. v. A.C.L.N., Ltd., No. 01-11814, 2003 WL 21058090, at *10 (S.D.N.Y. May 15, 2003). When considering a motion to dismiss, a court must accept all well-pleaded, non-conclusory allegations in the complaint as true and drawing all reasonable inferences in plaintiffs favor. New Orleans Emps. Ret. Sys. v. Celestica, Inc., 455 Fed. Appx. 10, 12 (2d Cir. 2011). A complaint need only allege enough factual matter (taken as true) to suggest that a violation occurred, and a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable . . . Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007) (citation omitted). The pleading need only contain [f]actual
39
J. Merriam Bitter Beans at Green Mountain Coffee, SEEKINGALPHA.COM (Sept. 30, 2010) (Turner Decl., Ex. Z).
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allegations . . . [sufficient] to raise a right to relief above the speculative level. Id. When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief. Ashcroft v. Iqbal, 129 S. Ct. 1937, 1940-41 (2009).40 Section 10(b) of the Securities Exchange Act of 1934 provides that it is unlawful to employ any manipulative or deceptive device in violation of the rules and regulations of the SEC in connection with the purchase or sale of any security. 15 U.S.C. 78j(b). The elements of a claim under 10(b) and Rule 10b-5 are: (1) a material misrepresentation or omission; (2) scienter; (3) a connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation. See Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005). With respect to pleading scienter, the Private Securities Litigation Reform Act of 1995 (PSLRA) raised the bar of notice pleading and requires that, when considered together, all of the facts alleged must give rise to a cogent and compelling inference that defendants acted recklessly. See Tellabs, Inc. v. Makor Issues & Rights Ltd., 551 U.S. 308, 314, 319 n.3 and 322-24 (2007); ECA v. J.P. Morgan Chase Co., 553 F.3d 187, 198 (2d Cir. 2009); 15 U.S.C. 78u-4(b)(2). The required state of mind, however, can be proven and pled through circumstantial evidence. It will be rare that a wrongdoer will admit to the required state of mind. The PSLRA calls for a strong inference, not an outright confession or an airtight case at the pleading stage. In re Network Assocs., Inc. Sec. Litig., No. C 99-
40
As the Court previously noted, in evaluating the sufficiency of the SAC, in addition to materials cited in the SAC itself, e.g., the Einhorn Report (Turner Decl., Ex. S), a court may consider matters of which a court may take judicial notice. Order at *2. Such items include: documents filed with the SEC (ATSI Commcns., Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2001) (Turner Decl., Exs. K, L, M, N, R, V, W and X); stock prices (Ganino v. Citizens Utils. Co., 228 F.3d 154, 166, n.8 (2d Cir. 2000) (Turner Decl., Ex. D), earnings call transcripts (Gissin v. Endres, 739 F. Supp. 2d 488, 497, n.20 (S.D.N.Y. 2010) (Turner Decl., Ex. C); as well as articles discussing the conduct raised in the complaint. In re Smith Barney Transfer Agent Litig., 765 F. Supp. 2d 391, 397 (S.D.N.Y. 2011) (Turner Decl., Exs. A, B, E-J, Q, T, Y and Z). Plaintiffs also ask the Court to take judicial notice of a conference proceedings publication and two scholarly articles. (Turner Decl., Exs. O, P, and U). The Court has the authority to consider these items. See In re Bear Stearns Cos., Inc. Sec., Deriv. & ERISA Litig., 763 F. Supp. 2d 423, 582 (S.D.N.Y. 2011) (considering, on a motion to dismiss, inter alia, journals, industry reports, Congressional testimony and speeches); see also GMCR MTD at 32-36 & nn.15-17 (citing articles, websites, and a letter sent to Greenlight Capitals investors to attack the credibility of the Einhorn Report).
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1729, 2000 WL 33376577, at *8 (N.D. Cal. Sept. 5, 2000) (citing In re Peoplesoft, Inc. Sec. Litig., No. C 99-00472, 2000 WL 1737936, at *3 (N.D. Cal. May 25, 2000)). All other elements of a 10(b) claim are still governed by traditional pleading standards under Fed. R. Civ. P. 8(a) and 9(b). See In re PXRE Group, Ltd. Sec. Litig., 600 F. Supp. 2d 510, 528-29 (S.D.N.Y. 2009).41 Rule 9(b) requires plaintiffs alleging fraud to (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent. Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004). GMCRs arguments are once again limited: the Company challenges the SAC only on the basis of falsity and scienter conceding materiality, nexus, loss causation and damages. 42 Acknowledging the Courts earlier ruling against them, defendants Blanford and Rathke mainly contest scienter. See Mgt. MTD at 6-20. Because the SAC adds the necessary factual details that the Court previously found lacking, with respect to both motive and recklessness, defendants targeted attacks fail. 2. The SAC Adequately Alleges Numerous False Statements
Defendants made three categories of materially false and/or misleading statements during the Class Period: (1) an earnings release, conference call and Form 10-Q filing, containing, inter alia, misstated financial information for both a 13-week and 39-week period that was eventually restated; (2) the CEOs and CFOs false Sarbanes-Oxley Act (SOX) certifications of the Form 10-Qs accuracy and the adequacy of GMCRs internal controls over financial disclosure; and (3) sales figures that were inflated by improper sales to MBlock.
41
The PSLRA did not alter the time-honored tenets, under Fed. R. Civ. P. 12(b)(6), that motions to dismiss are disfavored (see In re Nortel Networks Corp. Sec. Litig., 238 F. Supp. 2d 613, 621 (S.D.N.Y. 2003)) and that the Court must accept all factual allegations in the complaint as true, drawing all reasonable inferences in the plaintiffs favor. See Tellabs, 551 U.S. at 322. If any other element of plaintiffs claim is suddenly challenged on reply, plaintiffs should be given an opportunity to respond. See Ruggerio v. Warner-Lambert Co., 424 F.3d 249, 252 & n.4 (2d Cir. 2005) (so holding).
42
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With respect to the first category, because GMCRs past financial results were restated, as a matter of law and under GAAP, they were materially false when initially made. See Order at *11-*12. Defendants claim that there is no connection between the restatement and the misconduct alleged. See GMCR MTD at 15-18. Not so. GMCRs woefully inadequate accounting and inventory systems were the cause of two inter-company consolidation errors reversed in the restatement. 114. No more is needed to prevail on this element of the 10(b) claim; with or without the MBlock allegations, falsity is adequately alleged. See Order at *12. The same holds true for Blanfords and Rathkes certification of the accuracy of the Form 10-Qs financial reporting.43 As for Blanfords and Rathkes SOX certifications concerning GMCRs internal controls, rather than their being effective, as each attested on August 5, 2010, GMCR soon thereafter admitted that there was (at least) one material weakness such that its internal controls were not effective. 114. The Court already held that the systemic flaws revealed by this admission were material misstatements. Order at *14. Moreover, from 2003 to 2008, GMCRs Forms 10-K stated that defendant Rathke, GMCRs CFO, was a certified public accountant. Defendant Rathke personally attested to the accuracy of those statements in the 10-Ks by executing the SOX certifications incorporated in the 10-Ks. Moreover, through December 2011, GMCRs public filings listed defendant Rathke as a CPA. 18. This was entirely false and misleading as defendant Rathkes CPA license expired 10 years prior to her hiring in 2003.44 Defendants attempt to temper their false and misleading misstatements by labeling them as an oversight and by arguing in their motion that Ms. Rathke was originally a licensed certified public
43
False SOX certifications are themselves actionable misstatements. See In re ProQuest Sec. Litig., 527 F. Supp. 2d 728, 745-46 (E.D. Mich. 2007). Indeed, [f]or these certifications to have any substance, signatories to the certifications must be held accountable for the statements. Middlesex Ret. Sys. v. Quest Software Inc., 527 F. Supp. 2d 1164, 1189 (C.D. Cal. 2007). See Massachusetts Public Accountancy Licensing Boards webpage concerning Frances G. Rathkes CPA license (Turner Decl., Ex. CC).
44
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accountant, her license expired. Mgt. MTD at 7. This is not a mere oversight; rather, these misstatements are more akin to perjury since defendants fail to mention that Rathke has been posing as a CPA since being hired by GMCR in 2003. Besides being illegal45 and unethical,46 defendants misstatements concerning defendant Rathke posing as a CPA throughout the Class Period further serve as yet another example of defendants egregious misconduct. With respect to sales to MBlock which were recorded under the revenue recognition policy disclosed in the 2009 Form 10-K plaintiffs allege that the 39-week figures reported at the end of the third quarter 2010 for the first three quarters of fiscal 2010 were materially false and misleading because they included, inter alia, revenues from the first quarter that were the result of a substantial and undocumented delivery to MBlock. 64, 71-77. The Court previously found the CACs allegations of the mechanics of this delivery sufficiently detailed. See Order at *31-*33. As explained above, the SAC adequately addressed the Courts prior concerns by including additional details that were missing from the CAC: (1) CW1, who came to GMCR with extensive accounting experience (in particular, with respect to revenue recognition rules), had various accounting responsibilities while at GMCR (64); (2) the suspicious MBlock shipment occurred at quarter-end (December 2009) (72); (3) CW1 and the transportation and scheduling managers could find no purchase order or materials requisition for the shipment (id.); (4) the transaction was on GMCRs books as an
45
No individual person may use the title certified public accountant, CPA, registered public accountant, RPA, or auditor or any other title tending to indicate that he is a public accountant, unless he is licensed as a public accountant under this chapter or is an individual with practice privileges set forth under section 74c of this title. 26 V.S.A. 14. Prohibitions.
46
See American Institute of CPAs, Code of Professional Conduct, ET 501-10 Acts Discreditable False, Misleading, or Deceptive Acts in Promoting or Marketing Professional Services. A member in business who promotes or markets his or her abilities to provide professional services or makes claims about his or her experience or qualifications in a manner that is false, misleading, or deceptive will be considered to have committed an act discreditable to the profession, in violation of Rule 501. A false, misleading, or deceptive promotion includes any claim or representation that would be likely to cause a reasonable person to be misled or deceived. This includes any representation about CPA licensure or any other professional certification or accreditation that is not in compliance with the requirements of the relevant licensing authority or designating body [effective November 30, 2011].
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account receivable (id.); (5) VP of Operations Jonathan Wettstein held weekly meetings with Blanford, Rathke, division presidents McCreary and Stacy, VP of Finance Tina Bissonette, Operations Manager David Tilgner, and Multi-Site Scheduling Manager Dan Redding, at which Wettstein provided regular business updates (including charts and tables prepared by CW1, who also sometimes presented at these meetings)47 (74); (6) at these weekly meetings, it was decided which products were to be made, where they were to be made and stored, how product would be transported from facility to facility, and how to dispose of excess inventory (id.); and (7) the Companys revenue recognition policy was under discussion at these meetings in November 2009 and December 2009. Id. Adding these allegations to those previously set forth in the CAC, plaintiffs have set forth in detail why GMCRs 39-week revenue figures were inflated by $7.5-$15 million. These allegations readily satisfy the Second Circuits standard for pleading fraud with specificity because they (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent. Rombach, 355 F.3d at 170 (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)). Defendants repeated claims that the restatement had nothing to do with the SECs MBlock inquiry, e.g., GMCR MTD at 1 & 7, are simply beside the point. Just because the improperly-recognized sale was not part of the revenues removed in the restatement announced on December 9, 2010, in conjunction with the filing of GMCRs 2010 Form 10-K, does not mean that it was a valid sale. A restatement requires the consent of management; it is thus within defendants discretion to determine
47
Defendants citations to Johnson v. Siemens AG, No. 09-CV-5310 JG RER, 2011 WL 1304267 (E.D.N.Y. Mar. 31, 2011), and Steinberg v. Ericsson LM Tel. Co., No. 07 CV. 9615 (RPP), 2008 WL 5170640 (S.D.N.Y. Dec. 10, 2008), are out of context. See Mgt. MTD at 15-16 and GMCR MTD at 38. As in Steinberg, the Johnson court stated that plaintiffs allegations accepted as true, establishes that Siemens senior management were not routinely presented with the daily reports and other metrics detailed in the amended complaint. They therefore cannot be charged with knowledge of the reports contents. 2011 WL 1304267, at *16 (citations omitted). Here, by contrast, the SAC adequately alleges that both defendants were routinely presented with the adverse information outlined in the SAC. 64, 74, 75. In fact, as detailed by CW1, both defendants attended weekly/bi-weekly meetings where they received reports and other metrics, mainly with respect to the status of inventory management across GMCR. 74.
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when and if a restatement will be made for this transaction. See Aldridge v. A.T. Cross Corp., 284 F.3d 72, 83 (1st Cir. 2002). Defendants are waiting for the SEC to conclude its MBlock inquiry and have already warned investors that additional restatements might be necessary at that time.48 Even if the unusual 150-truck shipment was not booked as a sale to MBlock, it is still evidence of defendants improper over-production of K-Cups to boost inventory levels, thereby improving operating margins by lowering the COGS per unit. As part of an all-too-common manipulation of inventory to boost reported earnings and achieve bonus targets, VP Wettstein intentionally ordered overproduction of K-Cups, far beyond reported demand levels and customer order history. 64(c), 80; see also Turner Decl., Ex. S at 96 (manager of demand plannings emails discussed how far over the demand forecast actual production was). This was done even after VP Wettstein was presented with reports
demonstrating that his process resulted in the overproduction of expensive products that had to be destroyed after too much time in inventory. 75-77, 80. As described by both GMCR employees and MBlock employees, shipments such as this one for which there was no purchase order or materials requisition occurred quite frequently as part of a shell game by which GMCR transported inventory from location to location. 79, 89 and 91. Defendants claim that because there was no significant inventory write-off associated with the December 2010 restatement, plaintiffs have not demonstrated how the 150-truck shipment of coffee sent to MBlock could be nefarious. See GMCR MTD at 16-17. Untrue. First, the other shoe has yet to drop on past financial statements as the SEC continues to investigate the GMCR-MBlock relationship; this shipment could be part of a later revenue reversal. Second, plaintiffs alleged that GMCR shipped coffee to MBlock to boost inventory and, thus, manage earnings: an undocumented, quarter-end, 150-truck shipment is evidence of this practice.
48
In light of the fact that, at fiscal year-end 2010, the outstanding account receivable from MBlock was $81.6 million (Turner Decl., Ex. K at 45), it is entirely possible that the SEC will find that the revenue for this sale was prematurely booked and will need to be restated.
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3.
Defendants Material Misstatements Were Made with Scienter a. Applicable Standards for Alleging Scienter
Plaintiffs must only plead facts giving rise to a strong inference of scienter: The inference that the defendant acted with scienter need not be irrefutable, i.e., of the smoking-gun genre. Tellabs, 551 U.S. at 324. Rather, the standard is met where a plaintiff alleges facts that, when accepted as true and taken collectively, would [have] a reasonable person deem the inference of scienter at least as strong as any opposing inference[.] Id. at 310, 322. The inference is strong if it is cogent and compelling and at least as likely as any plausible opposing inference. Id. at 324, 328 (emphasis in original). Where competing inferences are in equipoise, a tie goes to the plaintiff. See id. at 324; see also In re Gen. Elec. Co. Sec. Litig., No. 09 Civ. 1951, 2012 WL 90191, at *29 (S.D.N.Y. Jan. 11, 2012) (motion denied where inference that defendant acted with scienter was at least as compelling as the inference that he did not). Defendants here are required to come forward with a competing inference of nonfraudulent intent that is stronger than the inference of fraud alleged in the SAC. In this Circuit, the scienter requirement can be satisfied by alleging facts constituting strong circumstantial evidence of: (1) a motive and opportunity to commit fraud; or (2) conscious misbehavior or recklessness. See In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 74 (2d Cir. 2001) (citing Novak v. Kasaks, 216 F.3d 300, 311 (2d Cir. 2000)); In re IPO Sec. Litig., 544 F. Supp. 2d 277, 286 (S.D.N.Y. 2008). Allegations that may give rise to a strong inference of recklessness include that the defendants knew facts or had access to information suggesting that their public statements were not accurate or that they failed to check information they had a duty to monitor. ECA, 553 F.3d at 199 (citing Novak, 216 F.3d at 311). To satisfy either prong, great specificity is not required, provided the plaintiff alleges enough facts. See Ganino, 228 F.3d at 169; In re Veeco Instruments Sec. Litig., 235 F.R.D. 220, 231 (S.D.N.Y. 2006) (plaintiffs must minimally allege that the defendants conduct falls within the definition for recklessness); In re Am. Intl Grp., Inc., 741 F. Supp. 2d 511, 532 (S.D.N.Y. 2010) (multiple facts may complement each other to create an inference of sufficient strength to satisfy the PSLRA); cf. Tellabs, - 27 -
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551 U.S. at 322-23 (allegations contributing to strong inference are considered together, not individually). b. Defendants Scienter Standard Is Either Incorrect or Incorrectly Applied
After giving lip service to various iterations of these applicable standards, see GMCR MTD at 18-20, defendants ask the Court to apply a standard with respect to evaluating the confidential witness accounts that is wrong in four respects. In this regard, GMCR asserts: Plaintiffs do not allege as they must to withstand dismissal that these accounts show that the individual defendants or any other member of the Companys management made a public statement known to be false or misleading at the time it was made. GMCR MTD at 24-25. First, plaintiffs need not allege actual knowledge of falsity, but rather than defendants made the statements at issue recklessly.49 Second, as explained below, in this Circuit, to allege GMCRs scienter, plaintiffs do not have to allege that either a named defendant or another member of corporate management made a false statement with scienter. Rather, it is wellestablished that a pleader may raise a strong inference of corporate scienter without being able to name the individual who concocted and disseminated the fraud. Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital, Inc., 531 F.3d 190, 195-96 (2d Cir. 2008) (Dynex).50
49
The individual defendants challenge the SACs well-pled allegations pertaining to recklessness by incorrectly citing to In re Bayou Hedge Fund Litig., 534 F. Supp. 2d 405, 416 (S.D.N.Y. 2007), affd sub nom. S. Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98 (2d Cir. 2009). The Bayou case is distinguishable for several reasons. First, the Bayou court refused to substantiate a strong inference of conscious recklessness on promises of a uniquely comprehensive brand of due diligence, or self-imposed standards by the defendant there. Id. Second, the Bayou court specifically noted that a substantial competing inference this court may draw from these alleged facts is that due diligence would not have uncovered the fraud. Id. In stark contrast, here, even the most basic of due diligence by defendants could have uncovered the gross manipulation of inventory. 50, 71, 72, 75, 79, 80, 88, 90. Defendants baldly assert that Janus Capital Grp. v. First Derivative Traders, 131 S. Ct. 2296 (2011), radically changed the pleading of corporate scienter by limiting it to an agent with scienter who had ultimate authority over a misstatement. GMCR MTD at 20 n.12. The issue decided in Janus was whether an investment adviser could be deemed the maker of a statement in an investment funds prospectus. (Indeed, the footnote cited by GMCR discusses the distinction between primary and secondary liability (e.g., aiding and abetting)). See 131 S. Ct. at 2302 n.6. Here, there is no dispute that GMCR made the false financial statements in the Q3 2010 press release and Form 10-Q. The question here is fundamentally different from
50
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Third, GMCR asks the Court to apply a smoking gun standard to witness accounts requiring each witness to be a magic silver bullet. See GMCR MTD at 28-29 (faulting CW1 for not stating that improper revenue recognition practices were specifically discussed at the November 2009 and December 2009 management operations meetings); 30-31 (witnesses who provide on-the-ground details concerning suspicious inventory shipments are maligned for having no accounting responsibilities). As explained in In re St. Jude Med., Inc. Sec. Litig., 836 F. Supp. 2d 878, 899-900 (D. Minn. 2011), that is not the law: Defendants argue that the individual statements attributed to such witnesses lack the requisite details of scienter, concluding that the Complaint is simply bereft of any allegation by any Confidential Witness that any Individual Defendant knew or recklessly disregarded any material false statement in St. Judes reported financial results. (Citation omitted.) But no such requirement exists. Rather, the requisite inference of scienter is drawn from all of the plausible allegations and weighed against any competing inference of non-culpable conduct. (Emphasis in original). Lastly, relying on In re PXRE Grp., Ltd. Sec. Litig., 600 F. Supp. 2d 510, 539-40 (S.D.N.Y. 2009), affd sub nom. Condra v. PXRE Grp. Ltd., 357 F. Appx 393 (2d Cir. 2009), defendants attempt to trivialize the SACs allegations by contending that, as in PXRE, here there was just one employee . . . questioning or one employee with expression of concern. Mgt. MTD at 17, n.9.51 PXRE is
Janus who within the Company can provide the mental state for corporate scienter with respect to GMCRs false statements. Although plaintiffs allege with particularity allegations based on information obtained from confidential witnesses, defendants ask this Court to rely on Local No. 38 IBEW Pension Fund v. American Express Co., 724 F. Supp. 2d 447 (S.D.N.Y. 2010), which reject[ed] confidential witness allegations that did not establish what specific contradictory information the Individual defendants received and when they received it. Mgt. MTD at 8. This invitation should be rejected, since defendants selectively pick and choose a quotation most favorable to their case, while omitting a number of additional factors, which taken as a whole, led to the dismissal of Local 38s complaint. In Local 38, the court considered several factors in deciding that the CWs statements failed to allege recklessness. For example, the Court emphasized that the CWs were employed in rank-and-file positions or by outside contractors[,] none of the CWs [was able to] identify a report demonstrating that the individual defendants were aware . . . [of data that] contradict[ed] their public statements and the CWs did not testify that such data had been presented to management around the time of the defendants allegedly misleading statements. 724 F. Supp. 2d at 460-61. In contrast, the CWs in this case held high level positions, some even have advanced education in their area of expertise, and are thus
51
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inapposite because the basis for the Courts refusal to credit the CW was not because he was a single witness, but rather because there were no allegations: (i) that the concerns raised by the CW were ever brought to the attention of the individual Defendants, or anyone else at PXRE (id. at 537); (ii) there was no timeframe for when the CW expressed his concern (see id. at 539); and (iii) there was not any concern about the processes by which PXREs loss estimates were prepared. Id. (emphasis added). Here, however, CW1 describes how he/she provided his/her concerns to Holly and Wettstein (the direct representatives of the individual defendants), that these concerns were conveyed in October 2009 and that they concerned specific deficient processes at GMCR: that there was no warehouse management system, no enterprise resource planning system, no transportation system, no supply chain management system, no inventory control systems, how none of GMCRs warehouses were linked, how revenue was improperly recorded on sales to MBlock, the use of rudimentary spreadsheets to track orders and delivery, and the burying of inventory. 64, 75. Moreover, as distribution planning manager, CW1 would present at weekly/bi-weekly meetings where a group of senior officials, including the individual defendants, would discuss forecast demand, inventory levels, and production goals. 64, 74. Defendants further argue that the individual defendants presence at meetings held by Wettstein (in which he updated defendants, as well as other high level officers, on the Company) does not give rise
significantly different than the low level employees in Local 38. Id. at 460. For example, here, CW1 was a distribution planning manager who had both a strong background in accounting and reported directly to Don Holly, GMCRs Director of Operations, and Jonathan Wettstein, GMCRs Vice President of Operations (64), CW4 worked for MBlock and had direct contact with MBlocks owners in its Chicago headquarters (66), CW6 was a former Vice President of Operations at one of the Companys roasters and a Certified Public Accountant, and CW11 was a marketing manager for GMCR who also has an MBA (104(a)). In addition, CW1 was able to describe weekly production meetings and smaller meetings conducted twice a week which were attended by high level GMCR officers, including Wettstein, at which various aspects of GMCR were discussed, including forecasted demand, inventory levels, production goals and what had been sold to Keurig and MBlock. 64(c). Wettstein also conducted weekly, sometimes bi-weekly meetings, in which he would provide updates to high level GMCR officers. 74. CW1, who attended and even presented at some of these meetings, testified that defendants Blanford and Rathke also attended these meetings. 74. Thus, CW1 was able to specify how and by whom defendants likely received information on GMCR that contradicted defendants public statements, as often as weekly, during the Class Period. 74. Therefore, the CWs in this case are dramatically different from the CWs in Local 38, and plaintiffs have adequately alleged with particularity defendants recklessness by relying on the statements of CWs.
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to a strong inference of scienter because the SAC does not specify what was said at these meetings. See Mgt. MTD at 10. In support of this argument, Defendants cite to Tyler v. Liz Claiborne, 814 F. Supp. 2d 323 (S.D.N.Y. 2011), which is materially different from this case. In Tyler, the complaint suffered from many infirmities, one of which was that the SAC [did] not even plead what was said at [the] meeting. Id. at 340. Here, by contrast CW1 states the frequency of the meetings (as often as bi-weekly 64,74) and who was present at these meetings (id.), and he/she also sets forth what was discussed at these meetings. 74 (stating that discussion at the meetings involved the type of products to be produced, the locations of these productions, the locations where the products would be stored, the way that inventory would be transported from facility to facility, and the disposal of excess inventory). Moreover, the individual defendants motion ignores the extensive details provided in the SAC regarding CW1: (i) not only did CW1 attend meetings with defendants Blanford and Rathke, but CW1 himself/herself would actually make presentations at those meetings, see 74 (In particular, Wettstein provided business updates to defendant Blanford and others by conducting regularly scheduled weekly, or sometimes bi-weekly, meetings . . . CWI, who attended a portion of some of these meetings and occasionally presented information at these meetings, stated that other Company officers and employees also attended these meetings, including: defendants Blanford and Rathke, McCreary (CFO and President of SCBU), Bissonette (VP of Finance), Dave Tildner (Operations Manager at Vermont facility) and Redding (Multi-Site Scheduling Manager)); (ii) CW1 testified that the individual defendants attended those meetings and that other prominent members of GMCRs senior management were also in attendance, some of whom spoke with, and regularly provided business updates to, the individual defendants; and (iii) the SAC describes in detail CW1s testimony concerning the agendas of those meetings and the topics and discussions covered in the meetings, including, but not limited to: the type of products the Company manufactured; production locations; product storage locations; means of transportation used to deliver product from one GMCR facility to another; and methods used by the Company to dispose of excess inventory. 74. Thus, unlike in Tyler, where the witness did not
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provide any information as to the substance of alleged meetings, here CW1 has not only provided the substance of the meetings, but has also advised how frequent the meetings were and who was present at the meetings.52 Defendants also attempt to cherry-pick statements made by CWs in an effort to limit their credibility. Taken collectively, however, the CWs statements overwhelmingly support the allegations in the SAC that defendants engaged in securities fraud with scienter. For example, defendants label one CWs statement as hazy, murky and vague, and further question which meetings Ms. Rathke attended . . . when the meetings occurred and how the timing related . . . what specific information was presented. Inexplicably, as defendants make this argument, they cite to one statement by CW1 that answers many of their very questions: in November 2009 and December 2009, the Companys revenue recognition practices were discussed at the weekly and/or bi-weekly meetings. See Mgt. MTD at 9 (emphasis added). Defendants also complain that the SAC should describe in minute detail the inner workings of the individual defendants state of minds; that, however, is simply not required in order to satisfy scienter, as under the PSLRA, the requisite intent of the alleged speaker of the fraud need not be alleged with great specificity[.] Chill v. Gen. Elec. Co., 101 F.3d 263, 267 (2d Cir. 1996) (emphasis added). This is consistent with the overarching purpose of the PSLRA since a plaintiff realistically
52
Not surprisingly, the facts in defendants cases differ greatly from the facts here, a multi-year restatement arising from a failure: (a) to properly account for every-day transactions between Keurig and SCBU; and (b) of basic communication to the accounting department of customer incentives provided by the sales force. See, e.g., 5, 39-52, 71-81. For example, in City of Brockton Ret. Sys. v. Shaw Grp. Inc., 540 F. Supp. 2d 464, 473 (S.D.N.Y. 2008), the restatement concerned an arithmetic error and the misinterpretation of complex accounting principles. Hart v. Internet Wire, Inc., 163 F. Supp. 2d 316, 318-19 (S.D.N.Y. 2001), is also inapposite as it involved a hoax by a former employee of a financial press wire service to disseminate a false press release about a company to lower its price so that he could avoid a margin call. The court dismissed fraud claims against Internet Wire and Bloomberg for issuing the release, based solely upon the allegation that they merely ought to have known the press release provided to them was false. Id. at 321. The well-pled allegations here, by contrast, allege much more intimate ties between the CWs and the individual defendants. Although some courts continue to cite Kalnit v. Eichler, 264 F.3d 131, 142 (2d Cir. 2001), for the proposition that allegations of circumstantial misconduct have to be stronger where there is no motive alleged, the viability of that formulation is called into question by Tellabs rejection of a motive requirement and its holistic approach to consideration of all facts alleged. In any event, since the SAC has adequately alleged motive, the Court should not hold the allegations of recklessness up to a higher standard as suggested by defendants. See Mgt. MTD at 18.
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cannot be expected to plead a defendants actual state of mind. Id. Additionally, a complaint may rely on confidential sources as long as the facts alleged provide an adequate basis for believing that the defendants statements were false. Novak, 216 F.3d at 314.53 This, plaintiffs have more than adequately done. c. Allegations Pertaining to the Core Operations Doctrine Adequately Supplement the SACs Well-Pled Scienter Allegations
Additionally, the SACs allegations of scienter are adequately supplemented through the wellestablished core operations doctrine. Contrary to defendants contentions that the doctrine is no longer good law, a recent Second Circuit decision, Frederick v. Mechel OAO, No. 11-3666-CV, 2012 WL 1193724 (2d Cir. Apr. 11, 2012), found that the core operations doctrine found in Novak still survive[s] as a viable theory of scienter. Id. at *2; see also Novak, 216 F.3d at 311 (When all is said and done, we believe that the enactment of [the PSLRA] did not change the basic pleading standard for scienter in this circuit . . . ). In Cosmas v. Hassett, 886 F.2d 8 (2d Cir. 1989), the Second Circuit held that it is reasonable for plaintiffs to allege that senior executives have knowledge of facts concerning a critical portion of their companys business. Plaintiffs there alleged that Inflight, a company that sold projection materials used in aircraft, made bullish projections when its executives knew of strict import restrictions imposed by China on its equipment. See id. at 10-11. Plaintiffs further alleged that Inflight was ultimately required to
It is important to note that defendants GAAP violations and other illegal actions are extremely similar to those taken by the defendants in Burstyn v. Worldwide Xceed Grp., Inc., No. 01 CIV. 1125 (GEL), 2002 WL 31191741 (S.D.N.Y. Sept. 30, 2002), as defendants Rathke and Blanford and the Company engaged in sleight-of-hand accounting by permitting GMCR to improperly: (i) record revenue on shipments of product; (ii) overstate royalty income; (iii) understate customer incentive and marketing expenses; (iv) account for inter-company transactions; and (v) overstate inventory and earnings. 3. Defendants accounting shenanigans were finally disclosed when they announced that investors should no longer rely upon all previously issued financial statements for 2007, 2008, 2009 and the first three quarters of 2010. The facts here closely track the facts in Burstyn, and, therefore, this Court (as the Burstyn court did) should sustain the SACs allegations and permit plaintiffs to proceed to discovery to determine whether substantial additional evidentiary support exists for the allegations set forth in the SAC. When its allegations are viewed holistically, as required by Tellabs (see Order at *39-*40), the SAC raises a compelling and cogent inference of scienter that rivals defendants claims of innocent errors due to the Companys rapid growth.
53
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take a large inventory write-down since the company improperly booked close to $5 million of potential sales as actual sales despite knowing that these potential sales to Chinese customers would not be ultimately consummated. Previously, Inflights CEO had boasted to Forbes magazine that sales to China were an important source of new revenue. See id. at 10. Although plaintiffs had not alleged specific facts demonstrating the individual defendants knowledge of the import restrictions, the court concluded that because sales in China were such a large portion of current sales around 85% of Inflights backlog it could reasonably infer defendants knowledge of import restrictions. See id. at 13. Like the complaint in Cosmas, the SAC here alleges that defendants Blanford and Rathke were intimately involved in important issues affecting the Companys business and operations and had access to undisclosed information. 20-24. Their positions also allowed them to directly control the Companys revenue recognition and other accounting practices. See In re Am. Bank Note Holographics Sec. Litig., 93 F. Supp. 2d 424, 448 (S.D.N.Y. 2000) (finding scienter allegation sufficient as to CFO where, because of his position, he was uniquely situated to control the revenue recognition procedures of the company). GMCR ultimately changed its stated revenue recognition policy. 83. Such a change cannot occur without the knowledge of the individual defendants, who executed GMCRs periodic SEC filings. See Teamsters Local 445 Freight Div. Pension Fund v. Bombardier, Inc., No. 05 Civ. 1898, 2005 WL 2148919, at *13 (S.D.N.Y. Sept. 6, 2005) (In order to sign the 8-Ks, Peters had a duty to familiarize himself with the facts relevant to the core operations of BCI, and he should have been aware that the high delinquency rates stemmed from improper underwriting.). But, as alleged in the SAC, defendants Blanford and Rathke still signed off on the 10-Ks, the 10-Q issued by the Company during the Class Period, and the accompanying SOX certifications.54 101. The SAC also further indicated that
Defendants mistakenly contend that the change in the language of the 2006-2009 Form 10-K with respect to defendants participation in the assessment of the effectiveness of internal controls over financial reporting, and general control over public filings, is irrelevant. See Mgt. MTD at 7, n.3. In the 2009 Form 10-K Managements Report on Internal Control Over Financial Reporting section, defendants Blanford and Rathke were expressly listed as participating in the assessment of the effectiveness of GMCRs internal controls over financial reporting. This language was deleted in the March 11, 2010 Form 10-K/A. In fact,
54
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the individual defendants were present at bi-weekly meetings where discussions included, but were not limited to: (i) the type of products the Company manufactured; (ii) production locations; (iii) product storage locations; (iv) means of transportation use to deliver product from one GMCR facility to another; and (v) methods used by the Company to dispose of excess inventory. Like Cosmas, the SAC here further alleges facts from which one can reasonably infer that inventory management was to represent a significant part of GMCRs business. See Frederick, 2012 WL 1193724, at *2. These facts give rise to a strong inference that the defendants, who the . . . complaint alleges were directors had or should have had knowledge of the gross manipulation inventory, since the inventory, mainly the K-Cups, are a potentially significant source of income for the company. Id. Because of the importance of accurate reporting of financial and operating results to investors evaluations of public companies, even in the absence of specific information contradicting defendants public statements, knowledge of the falsity of a companys financial statements can be imputed to key officers who should have known of facts relating to the core operations of their company that would have led them to the realization that the companys financial statements were false when issued. In re Atlas Air Worldwide Holdings, Inc. Sec. Litig., 324 F. Supp. 2d 474, 489-490 (S.D.N.Y. 2004); see also In re Winstar Commcns, No. 01 CV 3014, 2006 WL 473885, at *7 (S.D.N.Y. Feb. 27, 2006); Veeco, 235 F.R.D. at 232-233 (so holding); In re eSpeed, Inc. Sec. Litig., 457 F. Supp. 2d 266, 293 (S.D.N.Y. 2006) (imputing knowledge of contrary facts where statements concern matters of sufficient significance to the company). In the recent Second Circuit decision of New Orleans Emps. Ret. Sys. v. Celestica, Inc., 455 F. Appx 10, 14 (2d Cir. 2011) (Celestica), plaintiff alleged that the CEO and CFO defendants recklessly manipulated Celesticas inventory. In the complaint, the plaintiff relied on statements from former
defendants point to an equally implicating statement in the March 11, 2010 Form 10-K/A, stating that [t]he Companys management, under the supervision and with the participation of the Companys Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Companys disclosure controls and procedures as of September 26, 2009. See Mgt. MTD at 7, n.3.
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company employees whose past positions provided them with direct knowledge of Celesticas inventory buildup during the class period. Id. at 13. Moreover, confidential witnesses described their
participation in monthly operational reviews, during which inventory management problems were discussed and the confidential witnesses were charged with prepar[ing] spreadsheets for senior management for use in the meetings. In Celestica, after concluding that the plaintiffs there sufficiently pled scienter, the Second Circuit noted the following: Because we conclude that plaintiffs have adequately pleaded scienter on the basis of the confidential witnesses statements, we need not address defendants arguments that plaintiffs allegations regarding Celesticas core operations, violations of generally accepted accounting principles (GAAP), and public admission of its inventory buildup immediately following Delaneys and Puppis departures from the company are insufficient by themselves to establish scienter. Both parties, however, appear to agree that allegations of a companys core operations, GAAP violations, and removal of its executives can provide supplemental support for allegations of scienter, even if they cannot establish scienter independently. That view finds support in decisions by this court and district courts within this circuit. Id. at n.3. Celestica shows that independent CWs statements, in conjunction with allegations related to a companys core operation are sufficient to plead scienter. Thus, plaintiffs allegations here in the SAC regarding defendants reckless inventory manipulation, which are supported by the CWs, should, standing alone be independently sufficient to establish scienter and, at the very least, when taken together, make it as likely as not that the individual defendants acted with scienter. See Celestica, 455 F. Appx at 14. Specifically, the SAC alleges that: (i) the alleged fraud allowed the individual defendants to give the illusion of continued growth to shareholders and to receive bonuses, which were based upon production (64, 80); (ii) defendant Rathke held her position as the Companys CFO, despite fraudulently misrepresenting to investors that she was a CPA (18); (iii) defendants Blanford and Rathke attended and were active participants in
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regularly scheduled meetings attended by CW1,55 where key decisions were made about inventory control and revenue policies (74); and (iv) defendant Rathkes failure to fix known compatibility issues with the Companys computer systems were a major cause of the accounting problems alleged (104(c)). All allegations are adequately supported by detailed CWs accounts with sufficient particularly to support the probability to show that these witnesses knew the information alleged, Novak, 216 F.3d at 314, and further details the CWs employment positions and sources of their knowledge. See, e.g., 6465. d. Defendants Were Motivated by an Acquisition for the Company56 and their Own Personal Financial Gain
Simple greed is a powerful motivator, as evidenced by recent events in the marketplace. Norfolk County Ret. Sys. v. Ustian, No. 07 C 7014, 2009 WL 2386156, at *10 (N.D. Ill. July 28, 2009). Personal profit, coupled with professional motives to hide internal weaknesses and paint a rosy picture . . . lend weight not only to a cogent inference of scienter, but a compelling one. Id. As part of the Courts holistic scienter inquiry, Blanfords and Rathkes motive to overstate net sales and operating income to achieve bonuses of up to 150% and 82.5% of their 2010 base salaries stand out.57 Id.58
55
The individual defendants cite to Campo v. Sears Holdings Corp., 371 F. Appx 212 (2d Cir. 2010), and In re Bausch & Lomb, Inc. Sec. Litig., 592 F. Supp. 2d 323 (W.D.N.Y. 2008), to argue that the musings of confidential witnesses who had no contact with the individual defendants cannot create an inference of scienter. Mgt. MTD at 8, n.5. In those cases, however, and as defendants admit, the CWs had absolutely no contact with the individual defendants. Here, the SAC adequately alleges that there was contact between CW1 and Blanford and Rathke, as CW1 not only attended meetings with them, but also presented information to them at the meetings. 74. Plaintiffs stand on their argument that the Van Houtte acquisition, announced during the Class Period, was one of the factors motivating defendants actions. As the deal terms were ultimately changed when the transaction closed following the restatement, defendants original motive was to obtain better terms. 109 & Dkt. No. 43 at 22, n.27.
56
57
Even after being moderated by the restatement, Blanfords bonus payment was $571,000, 84% of his base salary. Rathke, Stacy and McCreary each received a bonus of 46.2% of their base salaries. See Turner Decl., Ex. N at 26. See also Winslow v. BancorpSouth, Inc., No. 3:10-463, 2011 WL 7090820, at *23 (M.D. Tenn. Apr. 26, 2011) (bonuses of 40% to 87% relevant to scienter analysis); In re Wash. Mut., Inc. Sec., Deriv. & ERISA Litig., 694 F. Supp. 2d 1192, 1218 (W.D. Wash. 2009) (bonuses are part of scienter inquiry); cf. Schottenfeld
58
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Indeed, GMCRs later-assurances to investors that a recalculation of executives bonuses after the restatement would not diminish the amounts originally paid (and that these executives were sufficiently motivated to increase the Companys financial results), evidences that these bonuses are a powerful motivator.59 Defendants also argue that the SAC should fail because a lack of insider trading by the individual defendants somehow negates any finding of scienter. See Mgt. MTD at 14-15. This is simply not true. When the claim is based on conscious misbehavior or recklessness net purchases of stock by defendants do not necessarily negate an inference of scienter on a motion to dismiss. In re Ashanti Goldfields Sec. Litig., No. CV 00-0717, 2004 WL 626810, at *5 (E.D.N.Y. Mar. 30, 2004); see also ProQuest, 527 F. Supp. 2d at 741 (There is no legal requirement that an individual alleged to have committed securities fraud have personally profited by his own conduct.). Thus, defendants argument fails as a matter of law because a lack of insider trading does not automatically negate a finding of scienter. e. Plaintiffs Have Established Defendants Recklessness (i) Knowledge of Excess Inventory that Should Have Been Written off
In Celestica, a decision reversing a finding that scienter had not been adequately pled, the Second Circuit held that defendants could be held liable for recklessly misstating a companys financial condition by misrepresenting the rising volume of inventory. See 455 Fed. Appx. at 13. The Celestica court found that scienter could be alleged based upon the fact that the companys CEO and CFO were informed about inventory build-up and subpar inventory management. Id. at 14. Citing Scholastic, 232 F.3d at 76-77, the Second Circuit held that where plaintiffs allege facts tying inventory levels to
Qualified Assocs., LP v. Workstream, Inc., No. 05 Civ 7092, 2006 WL 4472318, at *4 (S.D.N.Y. May 4, 2006) (corporate acquisition spree motivated by bonus being tied only to sales not expenses).
59
See 2011 Form DEF 14A at 26 (Turner Decl., Ex. N).
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financial performance, the inference of scienter is reinforced. 60 Celestica is controlling and the SAC easily meets its standards. On July 28, 2010, responding to a number of analyst questions concerning inventories, defendants represented that GMCR would be building its inventories with the expectation of exceeding brewer sales expectations in the fall and strong growth in Q1 2011.61 53.62 As explained in detail above, each defendant knew this statement was false because inventories were growing out-of-control they were intentionally manipulated to achieve production bonuses for employees at all levels and were not tied to prior customer history or projected demand growth (which was falling). 53, 54, 64(c), 74, 75-77, 80, 89-91. In addition, GMCRs Q3 2010 inventory figures were likely understated because senior management manipulated the Companys inventories, moved products around, hid excess inventory from auditors, and secretly disposed of expired coffee in landfills and as gifts to farmers. 74, 79, 89-91. Moreover, this shell game was facilitated by GMCRs and MBlocks wholly
60
As do plaintiffs here, plaintiffs in Celestica alleged, inter alia, that defendants overstated the companys success by having: (i) manipulated Celesticas inventory resulting in the overstatement of earnings; (ii) understated operating expenses through the manipulation of Celesticas books; (iii) overstated revenues by booking phony sales. In re Celestica Inc., Sec. Litig., No. 07 Civ 312, 2010 WL 4159587, at *2 (S.D.N.Y. Oct. 14, 2010). Whereas GMCR operates on a razor-razor-blade model, increased brewer sales require both brewers and coffee.
61
The SAC incorrectly attributes the first part of the statement to Blanford; it was made, however, by John Whoriskey, a Keurig VP. See Turner Decl., Ex. BB (July 28, 2010 earnings call transcript). Blanford and Rathke, also present on the call, did not correct this statement and may therefore be held responsible for it. See Barrie v. InterVoice-Brite, 409 F.3d 653, 656 (5th Cir. 2005) ([A] high ranking company official cannot sit quietly at a conference with analysts, knowing that another official is making false statements and hope to escape liability for those statements. If nothing else, the former official is at fault for a material omission in failing to correct such statements in that context.). Moreover, Blanford falsely stated that to take advantage of strong growth opportunity the Company would be making an investment to ramp [up] capacity and inventory. Turner Decl., Ex. BB at 3. As indicated above, p.9 & n.30, defendants manipulated CapEx to hide obsolete inventory.
62
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inadequate inventory management systems, and MBlocks ceding of inventory control movement in its warehouses to GMCR, its primary customer. 64-66, 71-74, 78-80, 87, 103-04.63 In Celestica, the court relied on the accounts of three CWs, whose positions afforded them an opportunity to have direct knowledge of Celesticas inventory build-up. See 455 Fed. Appx. at 13. Akin to CW1 here, the witnesses either provided information about rising inventory levels to [the CEO and CFO] directly or participated in meetings where they heard [the CEO and CFO] informed by others about the companys inventory management problems. Id. The key meeting alleged was a monthly operational review conference call with Celesticas senior management, including Homer (who reported directly to Delaney), wherein defendants, senior management, and plant managers discussed all of the operational metrics for their facilities. Id. Obsolete inventory was also specifically addressed. See id. Here, managements weekly operations meeting in which VP Wettstein and sometimes CW1 presented, described in detail in the SAC (74) in which Blanford, Rathke, Stacy, McCreary, Bissonette and the Operations and Multi-Site Scheduling managers participated covered the same exact topics, i.e., production, inventory levels, storage, the transport of inventory and the disposal of excess inventory. While GMCR addresses the allegations of inventory manipulation in its motion (albeit unsuccessfully), the individual defendants casually disregard it. See Mgt. MTD at 3. As discussed above, the inventory manipulation is an issue that is adequately alleged in the SAC, confirmed by the CWs testimony and that received a large amount of negative press.64 Despite defendants decision to gloss over this issue, inventory mishaps, such as the ones alleged here and subsequent GAAP violations
63
These facts, as demonstrated above, come from the overlapping and corroborating accounts of more than a dozen CWs, the witness accounts in the Einhorn Report, and the witnesses cited in the attached news articles.
For example, an article published on July 2, 2012 by REUTERS, entitled Insight: Green Mountains Coffee Distributor Brew Controversy, describes the unrelenting regulatory scrutiny that GMCR has recently faced as a result of the inventory control issues at MBlock. See Turner Decl., Ex. Q. Specifically, the article outlines the accounting fraud allegedly perpetrated by GMCR through its inappropriate use of MBlock to record revenues ahead of schedule. Additionally, consistent with the SACs allegations that inventory would be hidden or destroyed, 80, the article interviewed Patrick McCoy, a former loss prevention manager at MBlock, who stated that every few months M. Block would give out industrial-sized, 44-gallon garbage bags for its employees to fill with single-cup Green Mountain coffee pods.
64
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are key indicators of fraud. See In re Ambac Fin. Grp., Inc. Sec. Litig., 693 F. Supp. 2d 241, 273 (S.D.N.Y. 2010), cert. denied (Apr. 29, 2010) (GAAP violation can weigh in favor of scienter based on the number, size, timing, nature, frequency, and context of the violation . . . GAAP violations supported finding scienter because the accounting violations alleged are on such a repeated and pervasive scale that, if proven, they could provide strong circumstantial evidence of recklessness[]) (citations omitted); see also Rothman, 220 F.3d at 93 (sufficient evidence to support jury finding of defendants fraudulent intent to overstate inventory, including, among other evidence, that company benefitted from overstated inventory because stock price followed rising reported earnings, enabling [the company] to make numerous acquisitions after a five-for-one split) (citations omitted). In addition to alleging that the Companys 2010 39-week revenue figures were inflated and overstated, the SAC also alleges that the inflation was due, in part, to the 150-truckload sale of product to MBlock in the first quarter 2010 that was improperly accounted for. 10 (The 2010 Form 10-K also revealed that GMCRs net income for the 39 weeks ended June 26, 2010 had been overstated by approximately 6.2% and its accrued expenses at June 26, 2010 were understated by more than 5%.); 71 (CW1 noted that GMCR improperly recognized revenue on 150 truck loads of coffee K-Cups that were shipped to MBlock during the quarter ended December 26, 2009.). The SAC further alleges that the purported 150-truckload sale was done without the requisite paperwork, including purchase orders, material requisition orders, or product shipment authorizations, traditionally used by GMCR to validate the sale. 71 (CW1 calculated that, at the time of the shipment, based on the size of the trucks, the number of pallets that would fit in the truck and the type of the K-Cup, the conservative value of this shipment was between $7.5 million and $15 million.). Through the improper accounting, defendants not only violated internal GMCR policies, but GAAP provisions as well.
(ii)
Inadequate Accounting Infrastructure/Internal Controls
In addition to inventory, the Court indicated that it was possible that accounting systems and revenue recognition policies were also core operations. Order at *28-*29. Case law supports this
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conclusion. Because of the critical importance of accurate reporting of financial and operating results to investors evaluating public companies, even in the absence of specific information contradicting defendants public statements, knowledge of the falsity of a companys financial statements can be imputed to key officers who should have known of facts relating to the core operations of their company that would have led them to the realization that the companys financial statements were false when issued. Atlas Air, 324 F. Supp. 2d at 489-490; Winstar Commcns, 2006 WL 473885, at *7; Veeco, 235 F.R.D. at 232-233 (so holding); see also eSpeed, 457 F. Supp. 2d at 293 (imputing knowledge of contrary facts where statements concern matters of sufficient significance to company). In particular, [a] failure to maintain sufficient internal controls to avoid fraud is sufficiently indicative of scienter. See Veeco, 235 F.R.D. at 232 (citing In re Oxford Health Plans, Inc. Sec. Litig., 51 F. Supp. 2d 290, 294 (S.D.N.Y. 1999)).65 As set forth above, the SAC discusses at length the well-known severe inadequacy of GMCRs accounting infrastructure. See, e.g., 71-83. In addition to GMCRs complete inability to track inventory, which occasioned more frequent operations meetings (74), the number of different computer systems used by the two divisions made intercompany reconciliations a nightmare, especially since they were not automated. 103-04. Two CWs, CW1 and CW13, both stated that senior management knew about these problems but decided to not spend the money needed to upgrade GMCRs accounting systems.66 The largest restatement item was attributed to incorrect intercompany adjustments arising from these material weaknesses. 114, 117. 67
In Veeco, as here, following an acquisition, insufficient accounting staff resulted in a loosening of accounting control, [which] constitutes strong circumstantial evidence of recklessness (if not conscious misbehavior) . . . . 235 F.R.D. at 232.
66
65
This failing is particularly egregious in light of the sharp increases in CapEx each year, described at p. 9, supra. Linkage of the $7.6 million income overstatement of K-Cup inventory to inter-company balance consolidation problems addresses this Courts concern, see Order at *40, that the largest item restated was not connected to the fraud.
67
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Blanfords and Rathkes recklessness is additionally alleged through facts demonstrating that they failed to review or check information that they had a duty to monitor. See Novak, 216 F.3d at 308. Blanford and Rathke failed to adequately monitor GMCRs financial processes and controls to ensure their sufficiency and the accuracy of GMCRs financial reporting prior to the filing of GMCRs 3Q 2010 Form 10-Q with the SEC certifying that they had. See Frank v. Dana Corp., 646 F.3d 954, 960 (6th Cir. 2011) (scienter found where defendants inflated net income through their announcement of second quarter 2005 before slashing earnings projections two months later). Defendants attempt to trivialize the SACs well-pled allegations pertaining to the individual defendants duty to familiarize themselves with the Companys accounting practices and financial reporting by arguing that these allegations are so broad and conclusory as to be meaningless. See Mgt. MTD at 7, n.4. Defendants are wrong.
In support of this argument, defendants rely entirely on Shields v. Citytrust Bancorp, Inc., 25
F.3d 1124, 1130 (2d Cir. 1994), to support their mistaken contention. This case, however, was decided prior to the PSLRA and has since been overturned. See Verdi v. Potter, No. 08 Civ 2687, 2010 WL 502959 (E.D.N.Y. Feb. 9, 2010) (The Shields decision was superseded by statute on other grounds, Private Securities Litigation Reform Act, 15 U.S.C. 78u4, as recognized in In Re Paracelsus Corp. Sec. Litig., 61 F.Supp.2d 591, 595 (S.D. Tex.1998).). In any event, defendants citation to Shields is completely out of context. In Shields, the court would not accept the plaintiffs strategy of coupling several factual statements with conclusory allegations of fraudulent intent, without any supporting facts. The same can hardly be said of the SAC in this case. Indeed, the SAC provides several specific examples of how both individual defendants ignore[d] reasonably available data that would have alerted them to GMCRs accounting and inventory manipulations. See, e.g., 71-83. Moreover, defendants argument is simply incorrect because courts have recognized defendants Blanford and Rathkes duties to familiarize themselves with GMCRs accounting practice and financial
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reporting (which they ignored), especially where, as here, these defendants proactively issued false and misleading statements concerning the Companys accounting and internal controls: As signatories to the SEC filings that contained the companys financials, each individual defendant who served as a high-level officer had a duty to familiarize himself with the facts relevant to the core operations of the company and the financial reporting of those operations. See Howard, 228 F.3d at 1062 (Key corporate officers should not be allowed to make important false financial statements knowingly or recklessly, yet still shield themselves from liability to investors simply by failing to be involved in the preparation of those statements.). The individual defendants were not entitled to make statements concerning the companys financial statements and ignore reasonably available data that would have indicated that those statements were materially false or misleading. Atlas Air, 324 F. Supp. 2d at 491 (emphasis added). Furthermore, the CEOs and CFOs positions also allowed them to directly control the Companys revenue recognition policies. See Am. Bank Note Holographics, 93 F. Supp. 2d at 448 (finding scienter allegation sufficient as to CFO where, because of his position, he was uniquely situated to control the revenue recognition procedures of the company). These policies were specifically discussed by Blanford and Rathke around the time of the unusual 150-truckload shipment to MBlock. 74. Also, sales to MBlock are an admittedly material portion of GMCRs revenues and account for half of GMCRs outstanding accounts receivable. It is presumed that the executives who execute the SEC filings, including certifications of the accuracy of the financial figures reported therein, and who also discuss inventory movements on a weekly basis, were cognizant of the improper recognition of revenue on the Q1 2010 shipment to MBlock. GMCRs attempt to reach for an innocent explanation for revenue recognition on shipments to MBlock only gets the Company into hotter water. GMCR suggests that employees at a single business unit did not see the Company-wide big picture: what looked to be shipments to MBlock without purchase orders specifying the customers to whom the products were ultimately sold were, in reality, innocent sales to Keurig. GMCR further suggests that such shipments to MBlock are accounted for as sales by the SCBU but eliminated in consolidation if they are sent to fulfill orders made by Keurig. See GMCR MTD at 27-28. This assertion ignores CW1s account of production meetings, where sales to
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both MBlock and Keurig were reviewed. 64(c). Moreover, as the restatement specifically dealt with the fact that inter-company eliminations were not accurately calculated as between business units, this is not a particularly exculpatory explanation. Furthermore, it does not account for the SEC investigation of GMCRs revenues on sales to MBlock or that half of GMCRs outstanding accounts receivable are for sales to MBlock. f. The Scienter of Other Senior Officers Is Imputed to GMCR
As demonstrated herein, CEO Blanford and CFO Rathke acted with scienter when they overstated GMCRs financial results and certified the sufficiency of the Companys internal controls over financial reporting. GMCR is therefore liable because [t]he knowledge and scienter of a corporate officer such as its CEO or CFO may of course be imputed to the corporate entity. St. Jude Med., 836 F. Supp. 2d at 896. However, while Blanfords and/or Rathkes scienter is sufficient to hold GMCR liable, it is not necessary: A corporations scienter necessarily derives from the state of mind of its employees. See In re Marsh & Mclennan, 501 F. Supp.2d at 481 (citing Suez Equity Investors, L.P. v. TorontoDominion Bank, 250 F.3d 87, 101 (2d Cir.2001)). Nevertheless, [t]o carry their burden of showing that a corporate defendant acted with scienter, plaintiffs in securities fraud cases need not prove that any one individual employee of a corporate defendant also acted with scienter. Proof of a corporations collective knowledge and intent is sufficient. In re WorldCom, Inc. Sec. Litig., 352 F.Supp.2d 472, 497 (S.D.N.Y.2005). In re Take-Two Interactive Sec. Litig., 551 F. Supp. 2d 247, 281 (S.D.N.Y. 2008). Because a complaint may adequately allege corporate scienter without alleging scienter as to any particular defendant, Sgalambo v. McKenzie, 739 F. Supp. 2d 453, 486 n. 205 (S.D.N.Y. 2010) (citing Dynex, 531 F.3d at 195), any number of senior corporate officials can provide the mental state for GMCRs scienter.68
68
See, e.g., City of Monroe Emps. Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 686-90 (6th Cir. 2005) (holding that scienter of executive vice president could be imputed to corporation, even though officer was not responsible for any of the alleged misstatements or omissions and thus had no individual liability); In re Sonus Networks, Inc. Sec. Litig., No. Civ. A. 04-10294-DPW, 2006 WL 1308165, at *23 (D. Mass. May 10, 2006) (holding that fraudulent intent of non-defendant controller who made no statements could be imputed to corporation); In re BISYS Sec. Litig., 397 F. Supp. 2d 430, 442-43 (S.D.N.Y. 2005) (inferring a corporations
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(i)
The Intentional and Reckless Conduct of GMCRs Vice President of Operations and Its Vice President of Finance Are Imputed to the Company
Here, in addition to defendants Blanford and Rathke, the SAC quite clearly alleges that the knowledge and intentional actions of Vice President of Operations Jonathan Wettstein supply the mental state for GMCRs false statements. Wettstein not only knew about the suspect 150-truck shipment to MBlock in Q1 2010 and how that shipment was accounted for (71-73), but he intentionally ordered the overproduction of coffee in excess of customer order history and inventory levels. 64(c). Even after repeatedly being told that his manner of replenishing inventory did not comport to industry standards and resulted in the over-production of items that sat on warehouse shelves past their expiration dates, Wettstein persisted in the overproduction. Not even a report that laid out facts showing his errors would dissuade him from employing the wrong method. 75-77; see also Celestica, 455 Fed. Appx. at 13 (scienter based, in part, upon receipt of spreadsheet detailing excess and obsolete inventory). The Einhorn Report confirmed that the manager of demand plannings emails consistently discussed how far over demand forecast actual production was. See Turner Decl., Ex. S at 96. Wettstein was motivated by a desire to give investors an illusion of growth and to earn a production bonus. 64(c). The SAC thus pleads both prongs of scienter with respect to Wettstein, personal profit motive and the intentional manipulation of inventory and sales to boost GMCRs financial results. Wettsteins scienter is imputed to the Company, which must be held liable to investors. Plaintiffs also allege that Vice President of Finance, Tina Bissonette, both knew about the highlysuspect 150-truck shipment in Q1 2010 (73) and attended managements weekly operations meetings with, inter alia, Blanford, Rathke, the division presidents and Wettstein, wherein decisions were made
scienter from the intentional misbehavior of its regional vice president and vice president of corporate finance); In re JP Morgan Chase Sec. Litig., 363 F. Supp. 2d 595, 627 (S.D.N.Y. 2005) (attributing the knowledge of a vice chairman, vice president, and managing director to the corporate defendant); In re NUI Sec. Litig., 314 F. Supp. 2d 388, 410-13 (D.N.J. 2004) (imputing to corporation knowledge of assistant general counsel who was not a named defendant accused of making misstatements or omissions).
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regarding which products would be produced, where they would be made, where they would be stored, how inventory would move from facility to facility, and how excess inventory was to be disposed of. 74. Additionally, whereas a representative from VP Bissonettes staff attended the weekly production meetings, Bissonette had access to information concerning actual customer demand, order history and current inventory. 64(c). As the SAC alleges that the amount of coffee produced was vastly in excess of actual demand and would have to be disposed of and adequately accounted for in GMCRs financial reporting Bissonette knew or should have known these facts given her presence and representation at these meetings. Bissonettes scienter is therefore imputed to GMCR as well. (ii) The Insider Sales of Division Presidents Stacy and McCreary May Be Attributed to the Company69
The Court previously determined that defendants innocent explanation to wit, that the Companys rapid growth caused accounting errors due to material weaknesses in internal controls over financial reporting did not explain why both division presidents exercised options for substantially more shares than they ever owned and sold them all for nearly $8 million during a one-month time period from August 18, 2010 through September 21, 2010. The Court was particularly leery of Stacys last sale, which came one day after the SEC formally requested documents in aid of its probe of GMCR, but a week before the public was informed of the inquiry. See Order at *20-*21, *40. However, the Court pointed to several deficiencies in the CACs pleading of motive. See id. at *21-*22. The SACs new allegations tip the balance of inferences in favor of a finding of suspicious trading on non-public information, the scienter for which may be attributed to GMCR. First, the SAC connects SCBU president McCreary to the fraud, alleging that he attended the weekly operations meetings where coffee production, storage, transporting and disposal of excess inventory was determined. 74. Additionally, McCreary was aware of the suspicious, quarter-end 150-
69
Plaintiffs stand on their earlier arguments concerning the highly-suspicious nature of McCrearys and Stacys sales and will not repeat them here. (Dkt. No. 43 at 23-29).
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truck shipment. 73. Next, the SAC strengthened the allegations that the SEC probe first became known to GMCR and its employees long before September 20, 2010: (a) CW1 provided the names of the employees who called CW1, no later than early May 2010, to find out if CW1 was a whistleblower in an SEC investigation and/or called to discuss the investigation (67);70 (b) CW1 specified that the investigation involved MBlock and inventory (id.); (c) CW1 recalled that the investigation had been discussed even earlier, in January 2010, when bonuses were given out, because employees were concerned about the effect of the SEC investigation on future bonuses (68);71 and (d) CW5, who left GMCR in 2010, also recalled SEC personnel speaking to Keurigs staff accountants. 69. See generally Matrix Cap. Mgmt. Fund, LP v. BearingPoint, Inc., 576 F.3d 172, 199 (4th Cir. 2009) (existence of SEC investigation can support an inference of scienter). Defendants assertion that a Tellabs analysis favors an inference towards defendants innocence is simply wrong. See GMCR MTD at 37; Mgt. MTD at 19-20. In Tellabs, the Supreme Court specifically stated that [t]he inquiry, as several Courts of Appeals have recognized, is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard. Tellabs, 551 U.S. at 322-23 (emphasis in original). When reviewing these allegations, the court must review all the allegations holistically. The absence of a motive allegation, though relevant, is not dispositive. Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309, 1324 (2011) (citing Tellabs, 551 U.S. at 326). Even if some credit were awarded to defendants arguments, courts have stated that [w]hen two equally compelling inferences can be drawn, one demonstrating scienter and the other supporting a
70
Multi-Site Scheduling Manager Dan Redding, Global Transportation Manager Jennifer Burkhardt, Production Manager Scott Russ and Demand Planning & Budget Manager David Hull. 67.
71
Because McCrearys sales, unlike Stacys, were not near the end of the short Class Period, the Court found that fact weighed against an inference that he cashed out just before the investigation was disclosed. See Order at *22. However, if the SEC began the early stages of its investigation of GMCR by January 2010, McCrearys mid-August sales came much closer to the mid-September date (as the investigation intensified) and the SEC formally requested documents.
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nonculpable explanation, Tellabs instructs that the complaint should be permitted to move forward. La. Sch. Emps. Ret. Sys. v. Ernst & Young, LLP, 622 F.3d 471,479 (6th Cir. 2010); Lormand, 565 F.3d at 254. While defendants nitpick at a few of the SACs allegations in isolation, they conveniently fail to discuss some and quickly disregard the various reckless actions taken by the individual defendants that are fully described in the SAC. See, e.g., 64. All of the allegations and proof provided, viewed holistically, overcome any inference that defendants innocently recorded revenues, royalty incomes, marketing expenses, inter-company transactions, inventories, earnings, and many other financial reporting incorrectly. See Celestica, 455 F. Appx at 13 (citing Tellabs, 551 U.S. at 323-24, to support the courts finding that it must take a holistic view of the allegations set forth in the complaint when ruling on a motion to dismiss). B. The SAC Adequately Alleges Control Person Liability Under 20(a)
Defendants Blanford and Rathke contend that the control person claim brought against them under 20(a) of the Exchange Act should be dismissed because the SAC fails to allege both: (i) an underlying violation of the securities laws; and (ii) their culpable participation in the violation. See Mgt. MTD at 20 (conceding that as CEO and CFO they control GMCR). With respect to the underlying 10(b) violation, as set forth above, the SAC states a claim. Regarding culpable participation, the law in this Circuit is unsettled. The procedural posture of SEC v. First Jersey Secs., Inc., 101 F.3d 1450 (2d Cir. 1996), on which Blanford and Rathke rely, was an appeal of a bench trial, not a pleading motion. For that reason, some courts in the Circuit do not interpret it as requiring a plaintiff to plead culpable participation. See, e.g., In re Lehman Bros. Sec. & ERISA Litig., 799 F. Supp. 2d 258, 307& n. 328 (S.D.N.Y. 2011) (so holding and citing cases similarly decided). In any event, as set forth above, the SAC meets the standard cited by Blanford and Rathke, to wit, that it alleges some level of culpable participation at least approximating recklessness in the section 10(b) context. Edison Fund v. Cogent Inv. Strategies Fund, Ltd., 551 F. Supp. 2d 210, 231 (S.D.N.Y. 2008). Therefore, a 20(a) claim has been adequately alleged against both Blanford and Rathke. - 49 -
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V.
CONCLUSION For all of the reasons stated above, plaintiffs respectfully request that the Court deny the motions
to dismiss in their entirety. However, in the event the Court determines the SAC is deficient in any respect, plaintiffs respectfully request an opportunity to amend in accordance with Fed. R. Civ. P. 15(a) (leave shall be freely given when justice so requires). See Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 48 (2d Cir. 1991) (It is the usual practice upon granting a motion to dismiss to allow leave to replead.). DATED: July 30, 2012 GLANCY BINKOW & GOLDBERG LLP LIONEL Z. GLANCY COBY M. TURNER /s/ Coby M. Turner COBY M. TURNER 1925 Century Park East, Suite 2100 Los Angeles, CA 90067 Telephone: 310/201-9150 310/201-9160 (fax) GLANCY BINKOW & GOLDBERG LLP ROBIN BRONZAFT HOWALD 30 Broad Street, Suite 1401 New York, NY 10004 Telephone: 212/382-2221 212/382-3944 (fax) ROBBINS GELLER RUDMAN & DOWD LLP SAMUEL H. RUDMAN DAVID A. ROSENFELD EDWARD Y. KROUB 58 South Service Road, Suite 200 Melville, NY 11747 Telephone: 631/367-7100 631/367-1173 (fax) Co-Lead Counsel for Lead Plaintiffs WOODWARD & KELLEY, PLLC PHILIP C. WOODWARD 1233 Shelburne Road, Suite D-3 South Burlington, VT 05403 Telephone: 802/652-9955 802/652-9922 (fax) Liaison Counsel for Lead Plaintiffs
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CERTIFICATE OF SERVICE I, Coby M. Turner, hereby certify that, on July 30, 2012, I caused a true and correct copy of the attached: LEAD PLAINTIFFS OMNIBUS OPPOSITION TO DEFENDANTS GREEN MOUNTAIN COFFEE ROASTERS, INC.S, LAWRENCE J. BLANFORDS AND FRANCES G. RATHKES MOTIONS TO DISMISS THE SECOND CONSOLIDATED AMENDED CLASS ACTION COMPLAINT to be served: (i) electronically on all counsel registered for electronic service for this case; and (ii) by first-class mail to any additional counsel.
/s/ Coby M. Turner Coby M. Turner
__
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2012 07-30 Horowitz V Green Mountain Coffee Omnibus Opposition To Defendant's Motion To Dismiss

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2012 07-30 Horowitz V Green Mountain Coffee Omnibus Opposition To Defendant's Motion To Dismiss

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The SAC Adequately Alleges Control Person Liability Under 20(a)..................49

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See Einhorn Report at 68. (Turner Decl., Ex. S).

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See pp. 7-8, supra.

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