UNITED STATES DISTRICT COURT DISTRICT OF VERMONT DAN M.

HOROWITZ, individually on behalf of all others similarly situated, Plaintiff, vs. GREEN MOUNTAIN COFFEE ROASTERS, INC., et al., Defendants. ) ) ) ) ) ) ) ) ) ) ) No. 2:10-CV-00227-WKS (Consolidated)

DEFENDANT GREEN MOUNTAIN COFFEE ROASTERS, INC.S MEMORANDUM OF LAW IN SUPPORT OF ITS MOTION TO DISMISS THE SECOND CONSOLIDATED AMENDED CLASS ACTION COMPLAINT WITH PREJUDICE

TABLE OF CONTENTS Page PRELIMINARY STATEMENT .........................................................................................1 BACKGROUND .................................................................................................................3 I. II. III. GREEN MOUNTAINS SUCCESS AND RAPID GROWTH .................................4 GREEN MOUNTAINS ANNOUNCEMENT OF AN SEC INQUIRY AND THE COMPANYS RESTATEMENT ............................................................5 PLAINTIFFS AMENDED COMPLAINT ...............................................................7 A. B. Allegations of Improper Revenue Recognition on Shipments Into M. Block ..........................................................................................................8 Allegations of Inventory Shifting and Expired Product; the Einhorn Presentation .........................................................................................9

ARGUMENT .....................................................................................................................11 I. THE AMENDED COMPLAINT FAILS TO ALLEGE FALSE STATEMENTS REGARDING M. BLOCK REVENUE RECOGNITION PRACTICES ................................................................................11 A. The Amended Complaint Still Fails to Identify a False Statement Regarding Green Mountains M. Block Revenue Recognition Practices .........................................................................................................12 Likewise, The Amended Complaint Fails to Identify a False Statement Regarding Overproduction and Expired Product ..................15

B. II.

THE AMENDED COMPLAINT FAILS TO PLEAD A STRONG AND COMPELLING INFERENCE OF SCIENTER .......................................................18 A. B. Plaintiffs Generalized Allegations of Conscious Recklessness Should Be Rejected.........................................................................................21 The Confidential Witnesses Do Not Raise A Strong, Cogent, and Compelling Inference of Scienter ...................................................................23 1. 2. CW1s and CW6s Claims of Improper Revenue Recognition on M. Block Shipments Fail to Raise Any Inference of Scienter ........25 The Allegations of Inventory Shifting and Expired Product Do Not Raise a Strong, Cogent and Compelling Inference of Scienter..................................................................................................29

C.

The Opposing Inference of Innocent Conduct Is Far More Cogent and Compelling...............................................................................................37

TABLE OF AUTHORITIES Page(s) CASES 380544 Canada, Inc. v. Aspen Tech., Inc., 544 F. Supp. 2d 199 (S.D.N.Y. 2008)........................................................................ 38 ATSI Commcn, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007)................................................................................... 11, 18 Bird v. Stephens, P.C., No. 10-CV-1091(DMC)(JAD), 2011 WL 2600721 (D.N.J. June 29, 2011) ............. 33 Brodsky v. Yahoo! Inc., 630 F. Supp. 2d 1104 (N.D. Cal. 2009) ............................................................... 24, 26 Caiafa v. Sea Containers Ltd., 525 F. Supp. 2d 398 (S.D.N.Y. 2007)........................................................................ 13 Cal. Pub. Employees Ret. Sys. v. Chubb Corp., 394 F.3d 126 (3d Cir. 2004)....................................................................................... 24 Campo v. Sears Holdings Corp., 371 Fed. Appx 212 (2d Cir. 2010)............................................................................ 25 Campo v. Sears Holdings Corp., 635 F. Supp. 2d 323 (S.D.N.Y. 2009)........................................................................ 30 City of Brockton Ret. Sys. v. Shaw Group, Inc., 540 F. Supp. 2d 464 (S.D.N.Y. 2008).................................................................. 22, 38 Coronel v. Quanta Capital Holdings Ltd., No. 07 Civ. 1405(RPP), 2009 WL 174656 (S.D.N.Y. Jan. 26, 2009) ....................... 22 Curry v. Hansen Med., Inc., No. 5:09-cv-05094-JF (HRL), 2011 WL 3741238 (N.D. Cal. Aug. 25, 2011) ......... 23 Decker v. MasseyFerguson, Ltd., 681 F.2d 111 (2d Cir. 1982)....................................................................................... 12 ECA & Local 134 IBEW Jt. Pension Trust of Chi. v. JP Morgan Chase Co., 553 F3d 187 (2d Cir. 2009)........................................................................................ 21 Gavish v. Revlon, Inc., No. 00 Civ. 7291(SHS), 2004 WL 2210269 (S.D.N.Y. Sept. 30, 2004) ......................................................................................... 12, 14, 15, 28

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Glaser v. The9, Ltd., 772 F. Supp. 2d 573 (S.D.N.Y. 2011).................................................................. 29, 30 Glickman v. Alexander & Alexander Serv., Inc. No. 93 Civ. 7594 (LAP), 1996 WL 88570 (S.D.N.Y. 1996) ..................................... 21 Hart v. Internet Wire, Inc., 163 F. Supp. 2d 316 (S.D.N.Y. 2001)........................................................................ 19 Hershfang v. Citicorp, 767 F. Supp. 1251 (S.D.N.Y. 1991)........................................................................... 36 In re Accuray Secs. Litig., 757 F. Supp. 2d 936 (N.D. Cal. 2010) ....................................................................... 24 In re Alcatel Secs. Litig., 382 F. Supp. 2d 513 (S.D.N.Y. 2005)........................................................................ 17 In re Am. Express Co. Sec. Litig., No. 02 Civ. 5533(WHP), 2008 WL 4501928 (S.D.N.Y. Sept. 26, 2008) ................. 25 In re Bausch & Lomb, Inc. Secs. Litig., 592 F. Supp. 2d 323 (W.D.N.Y. 2008) ...................................................................... 32 In re Bristol-Myers Squibb Sec. Litig., 312 F. Supp. 2d 549 (S.D.N.Y. 2004)........................................................................ 28 In re Crude Oil Commodity Litig., No. 06 Civ. 6677(NRB), 2007 WL 1946553 (S.D.N.Y. June 28, 2007) ................... 35 In re Doral Fin. Corp. Sec. Litig., 563 F. Supp. 2d 461 (S.D.N.Y. 2008)........................................................................ 29 In re Gilat Satellite Networks, Ltd., No. CV-02-1510 (CPS), 2005 WL 2277476 (E.D.N.Y Sept. 19, 2005).................... 33 In re MSC Indus. Direct Co., Inc., 283 F. Supp. 2d 838 (E.D.N.Y. 2003) ....................................................................... 38 In re Nokia Corp. Secs. Litig., 423 F. Supp. 2d 364 (S.D.N.Y. 2006)........................................................................ 15 In re Optionable Sec. Litig., 577 F. Supp. 2d 681 (S.D.N.Y. 2008)........................................................................ 11 In re Pfizer, Inc. Secs. Litig., 538 F. Supp. 2d 621 (S.D.N.Y. 2008)........................................................................ 36

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In re Sec. Capital Assur. Ltd. Secs. Litig., 729 F. Supp. 2d 569 (S.D.N.Y. 2010)........................................................................ 22 In re Sierra Wireless, Inc. Sec. Litig., 482 F. Supp. 2d 365 (S.D.N.Y. 2007)........................................................................ 34 In re U.S. Aggregates, Inc. Sec. Litig., 235 F. Supp. 2d 1063 (N.D. Cal. 2002) ..................................................................... 28 Janbay v. Canadian Solar, Inc., 2012 WL 1080306 (S.D.N.Y. March 30, 2012) ................................................. passim Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011) ................................................................................... 20, 21, 32 Johnson v. Siemens AG, No. 09 Civ. 5310(JG)(RER), 2011 WL 1304267 (E.D.N.Y. March 31, 2011) ......... 38 Karpov v. Insight Enters., No. CV 09-856-PHX-SRB, 2010 WL 4867634 (D.Ariz. Nov. 16, 2010) ................. 25 Malin v. XL Capital Ltd., 499 F. Supp. 2d 117 (D.Conn. 2007) ................................................................... 18, 23 McKenna v. Smart Techs, 11 Civ. 7673 (KBF), 2012 U.S. Dist. LEXIS 47134 (S.D.N.Y. April 3, 2012) ........ 26 Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000)................................................................................ passim Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004)................................................................................. 12, 17 Ross v. Walton, 668 F. Supp. 2d 32 (D.D.C. 2009) ............................................................................. 34 S.E.C. v. Credit Bancorp, Ltd., 386 F.3d 438 (2d Cir. 2004)....................................................................................... 10 Slayton v. Am. Express Co., 604 F.3d 758 (2d Cir. 2010)....................................................................................... 38 Sorkin LLC v. Fischer Imaging Corp., No. Civ. A. 03-CV-00631-R, 2005 WL 1459735 (D.Colo. June 21, 2005) ........ 30, 31 South Cherry Street LLC v. Hennessee Group, LLC, 573 F.3d 98 (2d Cir. 2009)......................................................................................... 19

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Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital, 531 F.3d 190 (2d Cir. 2008)....................................................................................... 20 Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) ............................................................................................ passim Warchol v. Green Mountain Coffee Roasters, Inc., No. 2:10-cv-227, 2012 WL 256099 (D.Vt. Jan. 27, 2012) ................................. passim STATUTES 15 U.S.C. 78u-4(b) .................................................................................................. 11, 12 OTHER AUTHORITIES 17 C.F.R. 211 ................................................................................................................ 23 Fed. R. Civ. P. 9(b) .................................................................................................... 11, 24 Fed. R. Civ. P. 12(b)(6).................................................................................................... 11

Defendant Green Mountain Coffee Roasters, Inc. (Green Mountain or the Company) respectfully submits this memorandum in support of its motion to dismiss with prejudice the Plaintiffs Second Consolidated Amended Class Action Complaint.1 PRELIMINARY STATEMENT Like its predecessor, the centerpiece of Plaintiffs amended complaint is their allegation that Green Mountain improperly recognized revenue on shipments made using a fulfillment vendor, M. Block & Sons (M. Block), not the Companys restatement in 2010. In dismissing the prior complaint, the Court emphasized that Plaintiffs confidential witnesses lacked any relevant insight into or job responsibility for Green Mountains accounting and, further, that they failed to show the Defendants awareness of any supposed accounting fraud. During the hearing on Defendants last motion to dismiss, the Court pressed on these very allegations and asked whether Plaintiffs could be more precise as to how [Plaintiffs] knew that the shipments in question were considered revenue when they headed toward M. Block. Jan. 5, 2012 Tr. at 77:1-3. Plaintiffs amended complaint does nothing to cure this fatal defect. As before, the complaint fails to plead the first element of a securities fraud claim (i.e., a false statement). Plaintiffs do not even identify a single misstatement by the Company on their core claim that Green Mountain improperly recognized revenue on shipments made through M. Block, let alone explain with particularity how any such statement was false or misleading when made. As before, Plaintiffs fail to plead with factual support how Green Mountain supposedly violated its revenue recognition policy applicable to M. Block. This holds true notwithstanding the addition
1

The other defendants in this action, Lawrence J. Blanford and Frances G. Rathke (together, the Individual Defendants), are Green Mountains chief executive officer and chief financial officer, respectively. (Green Mountains former chairman and chief executive officer, Robert Stiller, was dropped as a defendant.) The Individual Defendants have filed a brief in support of their own motion to dismiss and Green Mountain incorporates by reference the arguments set forth in that brief.

of further CW accounts, including that the Company was shifting inventory at M. Block and deliberately overproducing product. Plaintiffs confidential witness accounts lack the most basic of factual details; to the extent they provide any substance, the anonymous witnesses allegations regarding shipments into M. Block are, in fact, completely consistent with the Companys disclosed and proper revenue recognition policy. Additionally, the complaint fails to raise the strong, cogent and compelling inference of scienter mandated by the Supreme Courts decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007). None of Plaintiffs unnamed sources is identified in a manner that would support the probability that the source would possess information about the Companys accounting practices, as required by Novak v. Kasaks, 216 F.3d 300, 314 (2d Cir. 2000). Of the 14 confidential witnesses identified in the complaint, only three (CW1, CW6 and CW10) are alleged to have had any passing familiarity with accounting principles. None of these CWs is identified to have had any responsibility for or direct contact with the Companys accounting for revenue recognition. Further, their accounts do nothing to advance Plaintiffs theory that Green Mountain prematurely recognized revenue on shipments of product into M. Block. None of the witnesses attests to when revenue actually was recognized on the shipments alleged in the complaint. Nor do any of the witnesses specify information known to the

Individual Defendants that contradicted the Companys public statements. In recognition of the need to shore up their last pleading, Plaintiffs resort to recapitulating allegations made by David Einhorn, an infamous short seller who made a presentation about Green Mountain at an investor conference in October 2011, after Plaintiffs class period. Einhorn had an admitted and substantial short position in the Companys stock and had (and likely still has) a vested interest in depressing Green Mountains stock price. His presentation

suggested that Green Mountain engaged in accounting shenanigans with its fulfillment vendors, an allegation based solely on field interviews with former Green Mountain and M. Block workers who are neither identified nor described in any meaningful way. None of these workers is described with any of the facts required to permit the Court to consider whether the individual would be in a position to have any information about Green Mountains accounting or external reporting practices. The presentation does not identify the company for which these anonymous sources worked, when they worked there, or the nature of their job responsibilities. Also absent are essential details about the supposed accounting shenanigans, including when and where the alleged events occurred, how much product supposedly was at issue, and even who might be involved. In fact, because the presentation does not say when the conduct alleged by these former employees purportedly occurred, it is impossible to tell whether the allegations even implicate Plaintiffs class period in 2010. Plaintiffs reliance on these unsubstantiated hearsay allegations does nothing to advance Plaintiffs case. Moreover, any inference raised by Einhorns unidentified workers or Plaintiffs own confidential witnesses is overcome by the more compelling, nonculpable inference that Green Mountains accounting errors were the unintended product of the Companys rapid growth. In short, Plaintiffs amended complaint fails to plead any false statement made with scienter. The complaint should be dismissed, this time with prejudice. BACKGROUND In this action, Plaintiffs assert claims against the Company and two of its executives under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Like the prior

complaint, the Second Consolidated Amended Class Action Complaint (the Amended Complaint) seeks to proceed on behalf of all purchasers of the Companys stock between July

28, 2010 and September 28, 2010 (the purported Class Period).2 Am. Compl. (AC) 1. As reflected in the Courts decision granting Defendants earlier motions to dismiss, the Court is familiar with Green Mountain and its business. Here, the Company focuses on the key facts and allegations relevant to the Courts consideration of this motion, as well as the few areas where the Plaintiffs have attempted to rehabilitate their allegations. I. GREEN MOUNTAINS SUCCESS AND RAPID GROWTH Green Mountain is a Vermont-based leader in the specialty coffee and coffee maker businesses, known for its popular Keurig single-cup brewing system and K-Cup portion packs. The Company has grown tremendously in recent years. As just one illustration of its growth, Green Mountains net income for the third quarter of 2010 was four times that of its net income for the entire fiscal year of 2007. See Declaration of Anne Johnson Palmer, filed herewith (Declaration or Decl.), Ex. A (Form 10-K filed on Dec. 9, 2010) at iii. In August 2010, Green Mountain was recognized by Fortune magazine as number two on a list of the nations top 100 fastest growing companies. AC 108. During the Class Period, Green Mountain managed its operations through two business units or divisions: the Specialty Coffee Business Unit (SCBU) and the Keurig business unit (Keurig). AC 31-33. To further its strategy of driving the adoption of the Keurig brewing system and K-Cup packs, beginning in 2009 Green Mountain undertook three substantial acquisitions in the span of little more than a year to acquire roasters that had previously licensed its K-Cup technology. See Decl. Ex. A at 5-6 (describing acquisitions of Tullys Coffee

Separately pending before this Court are two subsequently-filed securities fraud class actions that assert different class periods than Plaintiffs allege here, La. Mun. Police Employees Ret. Sys. v. Green Mountain Coffee Roasters, Inc., et al., Civ. No. 2:11-cv-00289, and Fifield v. Green Mountain Coffee Roasters, Inc., et al., Civ. No. 2:12-cv-00091. Also pending before the Court is a tag-along consolidated shareholder derivative action against the Company and certain of its directors and officers, Himmel v. Stiller, et al., Civ. No. 2:10-cv-233-WKS.

Corporation and Timothys Coffees of the World Inc. in March and November 2009, as well as the May 2010 acquisition of Diedrich Coffee, Inc.). Also during the Class Period, Green Mountain announced a strategic relationship with the Italian coffee company Lavazza, as well as its fourth acquisition of a licensed roaster in a two-year period. On August 10, 2010, Green Mountain announced that it had entered into a stock purchase agreement whereby at a later closing Lavazza would purchase $250 million worth of Green Mountain shares. Id.; AC 106. And on September 14, 2010, the Company stated that it had entered into an agreement to acquire LJVH Holdings, Inc., owner of Van Houtte and other beverage brands, to further Green Mountains expansion in Canada.3 Decl. Ex. A at 5; AC 109. II. GREEN MOUNTAINS ANNOUNCEMENT OF AN SEC INQUIRY AND THE COMPANYS RESTATEMENT Plaintiffs filed this action almost immediately after Green Mountain announced on September 28, 2010, that it had identified an immaterial accounting error and that it was cooperating with an inquiry being conducted by the Securities and Exchange Commission (the SEC).4 See Decl. Ex. B (Form 8-K filed Sept. 28, 2010) at 3. Green Mountain advised that it believed the focus of the SEC inquiry concerned certain revenue recognition practices and the Companys relationship with one of its fulfillment vendors. Id. The Companys Keurig

division uses a third-party fulfillment vendor, M. Block, to process, pack, and ship the majority of its sales orders to retailers in the United States. Decl. Ex. A at 4; AC 60. After the SEC

The Lavazza investment transaction closed on September 28, 2010, and the Van Houtte acquisition closed on December 17, 2010. Decl. Ex. A at 6; Decl. Ex. C (Form 8-K filed Dec. 17, 2010) at 2. 4 The immaterial error related to the accounting for Green Mountains K-Cup inventory in consolidating the Companys financial statements. See Decl. Ex. B at 2; AC 40-41. When consolidating the respective financial statements of its SCBU and Keurig divisions for external reporting purposes, the Company is required under the relevant accounting rules to eliminate any margin on intercompany sales included in the standard cost used for Keurigs K-Cup inventory. The Company discovered that it had used a lower gross margin than it should have to make this calculation, with the result that it inadvertently overstated net income by a cumulative $7.64 million over the restated periods.

contacted Green Mountain, the audit committee of the Companys board of directors (which is comprised of independent outside directors) initiated an internal investigation, with the assistance of outside legal counsel and a forensic accounting team. See Decl. Ex. A at i, 21. During the course of that investigation and in preparing the Companys year-end financials, the Company identified certain other accounting errors. On November 19, 2010, Green Mountain announced that it would restate its financial statements for the previous three fiscal years. See Decl. Ex. D (Form 8-K filed Nov. 19, 2010) at 2-3; AC 41. The Company presented its restated financial statements on its Form 10-K filed on December 9, 2010. See Decl. Ex. A. According to Plaintiffs, Green Mountains restated financial statements include a cumulative overstatement of undistributed earnings retained from its inception through June 26, 2010 of roughly 3%. See AC 44. The restatement consisted of six errors resulting in both over and understatements of income, each of which was immaterial on a stand-alone basis. The errors addressed by the restatement related to intercompany

eliminations, changes in the revenue recognition for royalties from third-party roasters, the accrual of marketing and customer incentive expenses, and certain other immaterial adjustments.5 Decl. Ex. A at i-iii.

Specifically, the restatement corrected the following errors, see Decl. Ex. A at i-iii: A $7.4 million overstatement of pre-tax income due to the K-Cup inventory adjustment error the Company reported on September 28, 2010. This error represented 2.68% of the Companys pre-tax income over the restated periods. A $700,000 overstatement of pre-tax income, cumulative over the restated periods, due to applying an incorrect standard cost to intercompany brewer inventory balances in consolidation. This error represented 0.003% of the Companys pre-tax income over the restated periods. A $1.4 million overstatement of pre-tax income due to the under-accrual of certain marketing and customer incentive program expenses. This error represented 0.51% of the Companys pre-tax income over the restated periods. A $1.0 million overstatement of pre-tax income resulting from changes in the treatment of the Companys revenue recognition of royalties from third party licensed roasters. This error represented 0.36% of the Companys pre-tax income over the restated periods.

Green Mountain explained that the errors identified in the restatement arose due to the Companys rapid growth, both organically and through acquisitions, outpacing the development of the Companys accounting infrastructure. Id. at 50. In the Form 10-K setting forth the restated financials, Green Mountain and its audit committee confirmed that none of the accounting errors implicated misconduct by the Company or its management or employees, and the Company outlined a plan developed by its management to improve its internal financial controls. Id. at 49-51. The Company also confirmed that the errors were unrelated to Green Mountains business dealings with M. Block. Id. at i. The Companys outside auditor,

PricewaterhouseCoopers, LLP (PwC), provided an unqualified audit opinion in connection with the restatement. Id. at F-2-3. III. PLAINTIFFS AMENDED COMPLAINT Plaintiffs stated Class Period is July 28, 2010 to September 28, 2010. In the Amended Complaint, Plaintiffs claim that certain public statements Green Mountain made in connection with announcing its financial results for the third quarter of fiscal year 2010 are false. Plaintiffs point, in part, to the fact that Green Mountain subsequently restated its financial statements and has acknowledged certain deficiencies in its internal controls during that period. See AC 111 (citing 98-99, 101, 105-107). But, as before, Plaintiffs do not challenge the adequacy of the Companys internal investigation or the accuracy of the corrections made in the restatement. Instead, the principal theory Plaintiffs advance is that, notwithstanding the Companys disclosures that the restatement

A $700,000 overstatement of pre-tax income due to applying an incorrect standard cost to intercompany brewer inventory balances in consolidation. This error represented 0.003% of the Companys pre-tax income over the restated periods. A $700,000 understatement of pre-tax income for the SCBU, due primarily to a failure to reverse an accrual related to certain customer incentive programs in Q2 of fiscal 2010. This error represented -0.003% of the Companys pre-tax income over the restated periods.

had nothing to do with M. Block, Green Mountain improperly recorded revenue on shipments into M. Block. See, e.g., AC 4. In an attempt to support their M. Block theory and to salvage their claims, Plaintiffs rely on allegations of inventory movements supposedly made to manipulate the Companys accounting records, as well as allegations made in an October 2011 presentation by an infamous short seller, David Einhorn. As outlined below, all of these

allegations rest at their core on statements supposedly from anonymous, confidential witnesses (CWs) who are not alleged to have any knowledge of Green Mountains revenue recognition practices, let alone contact with either of the Individual Defendants.6 A. Allegations of Improper Revenue Recognition on Shipments Into M. Block

As set forth in the Companys Form 10-K for the 2010 fiscal year, Green Mountains policy for recognizing revenue on shipments made via fulfillment vendors is as follows: The Company recognizes revenue when the fulfillment entities [e.g., M. Block] ship the product based on the contractual shipping terms, which generally are upon product shipment, and when all other revenue recognition criteria are met. Decl. Ex. A at 43; AC 82. As the Companys policy underscores, [a]ll inventories maintained at the third party fulfillment locations are owned by the Company until the fulfillment entity processes the orders and ships the product to the retailer. Decl. Ex. A at 43. Accordingly, shipments of product into M. Block are irrelevant from a revenue recognition perspective, because the Companys policy provides that revenue is only recognized upon product shipment by M. Block out of the facility to the retailer.7 The CW accounts in the Amended Complaint regarding shipments into M. Block closely track those made in the prior complaint. Plaintiffs allege that, according to CW1, there was a
6

For the Courts convenience, appended to the Declaration as Exhibit E is a chart identifying the Plaintiffs CW allegations by witness. 7 Appended as Exhibit F to the Declaration is a graphical depiction presenting the language from the Companys policy from the 2010 Form 10-K.

150-truckload shipment that supposedly lacked paperwork during the first quarter of fiscal 2010 and, according to CW6, Green Mountains shipments to M. Block were booked as a sale upon supposed instructions by the accounting department in Vermont. AC 71-72, 78. On this basis, Plaintiffs suggest that the Company prematurely recognized revenue upon shipment into M. Block, instead of when M. Block later shipped product to the retail customer. AC 82. However, and again, neither CW1 nor CW6 are alleged to have had any actual knowledge of, or involvement in, Green Mountains actual accounting practices with regard to shipments into M. Block. B. Allegations of Inventory Shifting and Expired Product; the Einhorn Presentation

In an attempt to revive the M. Block allegations that this Court previously rejected, Plaintiffs have added to the Amended Complaint certain allegations about supposed inventory movements and expired product. First, Plaintiffs contend that the Company shifted inventory within M. Blocks facilities in advance of audits, supposedly to manipulate accounting records. See AC 79-80. Second, Plaintiffs claim that Green Mountain deliberately overproduced product, which allegedly resulted in expired product that needed to be destroyed through transfers to landfills or to local farmers. See id. 64(c), 66, 80. As to both of these claims, the Amended Complaint does not allege any facts or specifics as to when or how these product movements purportedly occurred or how much product supposedly was at issue. Nor do

Plaintiffs explain what impact these alleged events had on the Companys public disclosures or its financial statements. In addition, Plaintiffs recite certain portions of a presentation made by David Einhorn at an investor conference on October 17, 2011. AC 84-92; see Decl. Ex. G (GAAP-uccino Presentation). Einhorn runs a group of hedge funds called Greenlight Capital (Greenlight),

and is known for his public critiques of companies in order to drive down a companys stock price and therefore profit as a short seller of that companys stock.8 See AC 84, 92.

Einhorns presentation admitted that Greenlight had an economic interest in the price movement of [Green Mountain] securities. Decl. Ex. G at 2. In the Amended Complaint, Plaintiffs cobble together bits and pieces of Einhorns field research, which purports to be based on interviews with anonymous former GMCR and MBlock workers. Id. at 92. The presentation referred to these workers collectively. Einhorn did not describe who these anonymous workers were with any detail, including the company for which they worked, the time period of their employment, or what position they held and what their job responsibilities entailed. The statements attributed to these unnamed workers include generalized assertions about Green Mountains supposed control over M. Block, claims that the Company deliberately overproduced K-Cups, and statements about supposed irregularities in product movements between facilities. See id. at 9496; AC 87, 89. The only example of a product movement described with anything more than generalities is a supposed shipment of 500,000 brewers that Green Mountain processed as an order for QVC but never shipped, which allegedly occurred before an audit at M. Block. AC 90-91; Decl. Ex. G at 97. Like all of the allegations in Einhorns presentation, this statement is not attributed to a particular worker, the presentation does not say anything about where the individual worked or what he or she did there, and it does not identify when this alleged shipment occurred. And, as with Plaintiffs own confidential witness accounts, Einhorns

presentation does not indicate what impact any of these alleged events had on the Companys

As the Second Circuit has explained, a short seller is an investor [who] sells stock that he does not yet own by borrowing that stock from a broker and warranting that he will cover the sale by purchasing that stock at a later date. In this speculative investment, the investor will earn money if the stock price is lower at the time of purchase than at the time of sale and the investor will lose money if the purchase price is higher than was the sale price. S.E.C. v. Credit Bancorp, Ltd., 386 F.3d 438, 445 n.9 (2d Cir. 2004).

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public disclosures or its financial statements. ARGUMENT To state a claim for liability under Section 10(b) and Rule 10b-5, Plaintiffs must allege five elements: (1) a material misrepresentation; (2) made with scienter; (3) in connection with the sale or purchase of a security; (4) upon which the Plaintiffs relied; and (5) that their reliance was the proximate cause of their injury. ATSI Commcn, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 105 (2d Cir. 2007), vacated in part on other grounds, 579 F.3d 143 (2d Cir. 2009). As the Court outlined in its ruling on the prior motions to dismiss, the Amended Complaint is subject to heightened pleading requirements, which are imposed by Rule 9(b), the PSLRA, and the Supreme Courts decision in Tellabs.9 See Warchol v. Green Mountain Coffee Roasters, Inc., No. 2:10-cv-227, 2012 WL 256099, at *4 (D.Vt. Jan. 27, 2012). In particular, the PSLRA requires a securities plaintiff to plead with particularity facts giving rise to a strong inference of scienter. 15 U.S.C. 78u-4(b)(2). I. THE AMENDED COMPLAINT FAILS TO ALLEGE FALSE STATEMENTS REGARDING M. BLOCK REVENUE RECOGNITION PRACTICES Pleading a claim for securities fraud requires Plaintiffs to allege a false statement or omission. Significantly, Green Mountains restatement is not the focus of the Amended

Complaint: Plaintiffs do not center their claims on the few, relatively minor accounting errors that were addressed and corrected by the Companys restatement. Rather, Plaintiffs suggest the Companys third quarter disclosures were false for reasons entirely unrelated to the errors
In considering a motion to dismiss a securities fraud complaint, courts must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice. Tellabs, 551 U.S. at 322. Courts also may consider legally required public disclosure documents filed with the SEC. ATSI Commcn, 493 F.3d at 98. Where a complaints allegations of securities fraud conflict with the plain language of the publicly filed disclosure documents, the disclosure documents control, and the court need not accept the allegations as true. See In re Optionable Sec. Litig., 577 F. Supp. 2d 681, 692 (S.D.N.Y. 2008).
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addressed in the restatement, namely that Green Mountain somehow violated its stated revenue recognition policy for sales into M. Block. See AC 82. Here, the Amended Complaint fails to satisfy the first and most basic element of a Rule 10b-5 securities fraud claim, that Plaintiffs specify each statement alleged to have been misleading and set forth the reasons why the statement is misleading, as required by the PSLRA. 15 U.S.C. 78u-4(b)(1); see also Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004) (complaint must (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.) (internal citation omitted). A. The Amended Complaint Still Fails to Identify a False Statement Regarding Green Mountains M. Block Revenue Recognition Practices

Where revenue recognition practices are concerned, pleading a false statement requires plaintiffs to state facts with a degree of particularity sufficient to support a reasonable belief that [the defendant] was in fact overstating sales through improper accounting. Gavish v. Revlon, Inc., No. 00 Civ. 7291(SHS), 2004 WL 2210269, at *12 (S.D.N.Y. Sept. 30, 2004). The complaint must plead specific facts about each one of [the] transactions. Janbay v.

Canadian Solar, Inc., 2012 WL 1080306, at *4-5 (S.D.N.Y. March 30, 2012) (collecting authorities). In particular, Plaintiffs must put forward at the very least some level of detail about the improper accounting alleged to underlie misleading statements, such as the date of the transaction at issue [and] the amount of the allegedly overstated revenue. Gavish, 2004 WL 2210269, at *13; see also Decker v. MasseyFerguson, Ltd., 681 F.2d 111, 116 (2d Cir.1982) (rejecting claim based on inadequate write downs of obsolete facilities where the plaintiff failed to identify the facilities, their recorded value, or the values that should have been recorded). Like before, Plaintiffs supply no facts, as they must, to establish that Green Mountain violated its

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stated policy for recognizing revenue on shipments made through M. Block. This omission is particularly glaring in light of the Companys confirmation in the restatement that none of the accounting errors related to M. Block, not to mention the fact that the restatement followed the audit committees investigation and PwCs audit of the year-end financials, neither of which Plaintiff challenge in the Amended Complaint. Plaintiffs again rely heavily on CW1 to advance the theory that Green Mountain prematurely recognized revenue on a 150-truckload shipment without paperwork in the first quarter of fiscal 2010. See AC 64(d), 71-73. Critically, the Amended Complaint is devoid of any explanation as to how, and indeed whether, the Company recognized revenue on the alleged shipment. As the Court has recognized, CW1s statements that CW1 was unable to locate the 150 truckload shipment on a forecast schedule or to identify associated paperwork do not, without more, provide insight into how GMCR accountants recorded the shipments on the Companys balance sheet. Warchol, 2012 WL 256099, at *12. Further, CW1s account can be readily squared with Green Mountains disclosed revenue recognition practices. According to the Amended Complaint, CW1 believed the Company improperly recognized revenue on a 150 truckload shipment of K-Cup portion packs during the quarter ended December 26, 2009 because the shipment went to an M. Block warehouse that was in essence under GMCRs control. AC 72. Yet Green Mountains revenue recognition policy specifically contemplates that inventory will remain in the Companys control at M. Blocks facilities and that revenue will be recognized only upon shipment of the product by M. Block to an end retailer. Decl. Ex. A at 43. In any event, speculative conclusions based on CW1s belief do not plead a false

statement with the particularity required in this Circuit under the PSLRA. See, e.g., Novak v. Kasaks, 216 F.3d 300, 314 (2d Cir. 2000) (allegations attributed to confidential sources must

13

provide an adequate basis for believing that the defendants statements were false); Caiafa v. Sea Containers Ltd., 525 F. Supp. 2d 398, 411 n.11 (S.D.N.Y. 2007) (rejecting plaintiffs reliance on confidential source who made contingent statements that defendant may have been overstating the value of its assets, concluding that such allegations did not plead a false statement). Plaintiffs fare no better with CW6, who claims that product from Green Mountains Castroville, California plant was shipped to M. Block and, as far as CW6 knew, was booked as a sale, supposedly on instruction of the accounting department in Vermont. AC 78. CW6 does not state when any supposed shipments even occurred, making it impossible to determine whether any such shipments implicate Class Period financials. And CW6 does not state one way or another when or how revenue was recognized on these shipments and in what amount. A generalized and unsupported implication that the Companys revenues were inflated due to these alleged shipments does not satisfy the particularity required by the PLSRA by identifying the statement Plaintiffs contend is misleading and then explaining the reasons why the statement is misleading. The Amended Complaint fails to identify the amount of revenue associated with the shipment, nor do Plaintiffs provide any basis for concluding how or when Green Mountain recognized that revenue. See Janbay, 2012 WL 1080306 at *5 (rejecting complaint where plaintiffs failed to establish the timing and manner in which the defendant recognized revenue on the shipment in question); Gavish, 2004 WL 2210269, at *13-14 (same where confidential witnesses alleged suspicious shipments but did not establish company recognized revenue in an improper manner). Plaintiffs try to compensate for the thinness of these CW accounts by suggesting that the Company took steps to manipulate its accounting by shifting inventory within M. Block.

14

See AC 66, 79, 80.

For example, apparently according to CW7 (a former operations

employee), material was moved improperly to MBlock . . . not through the ordinary order management system, and CW7 also allegedly witnessed 10-12 occasions when product was shipped to Williston, Vermont [and] returned untouched within one week to one month from the date of shipment. Id. 79. Such statements are fully consistent with the Companys stated revenue recognition policy: shipments into M. Block, as well as shipments within M. Blocks facilities, are not revenue recognition events because revenue is only recognized upon shipment out of the fulfillment facility to a retail customer. See supra at 8. The same holds true for movements between Green Mountains own facilities, including shipments from Knoxville to Williston. Because none of these witnesses supplies facts to show when, how, or even whether revenue was recognized on these alleged shipments or inventory movements, their statements do nothing to call into question the Companys adherence to its stated revenue recognition policy, as Plaintiffs must to plead a false statement under the PSLRAs pleading requirements. See Gavish, 2004 WL 2210269, at *12-13; Janbay, 2012 WL 1080306, at *4-5; see also In re Nokia Corp. Secs. Litig., 423 F. Supp. 2d 364, 408 (S.D.N.Y. 2006) (complaint failed to plead false statement on revenue recognition practices when plaintiffs alleged with little support that millions of dollars worth of product was improperly shipped and the complaint failed to specify the magnitude or degree of these shipments to the defendants total financial picture). For all of these reasons, the Amended Complaint fails to plead a false statement regarding Green Mountains revenue recognition practices relating to M. Block. B. Likewise, The Amended Complaint Fails to Identify a False Statement Regarding Overproduction and Expired Product

New to the Amended Complaint are allegations that Green Mountain engaged in

15

deliberate overproduction, which allegedly led to expired product that needed to be conceal[ed]. See AC 64(c), 76, 80. The Amended Complaint does not identify a

misstatement by Green Mountain on this topic, much less plead with particularity the reason or reasons why any such statement is false or misleading. This new line of attack by Plaintiffs depends almost entirely on CW1. According to Plaintiffs most recent complaint, CW1 now also alleges that the Company loaded dated or expired coffee onto trucks parked outside warehouses to g[e]t rid of inventory . . . prior to the arrival of Company auditors, and that expired coffee was given to pig farmers . . . or to local farmers to acidize their fields. AC 80. In addition, CW1 believed that the Company directed MBlock to hold more product than it could immediately ship and that, due to overstocking at MBlock, product had to be destroyed when it remained in the warehouse past its expiration date. Id. 64(c). CW1 does not identify the product at issue beyond a passing reference to coffee, which Green Mountain produces in vast quantities and sells in a variety of forms. CW1s allegations also lack the most basic supporting facts, including when any of this conduct supposedly occurred and, notably, how much product purportedly was involved. More importantly, the Amended Complaint fails to explain how these allegations of overproduction and expired product made by CW1 demonstrate the falsity of any statement made by the Company. The accounting errors addressed by Green Mountains restatement had nothing to do with the Companys accounting for inventory, including any excess or expired product. Instead, the errors had to do with entirely unrelated aspects of the Companys financial statements, including intercompany eliminations, changes in the revenue recognition for royalties from third-party roasters, and the accrual of marketing and customer incentive expenses. See Decl. Ex. A at 3-4. Plaintiffs cannot rest on the mere fact of the restatement, but rather must

16

connect CW1s allegations of overproduction and expired product to a specific statement made by the Company and then explain how those allegations demonstrate the falsity of that statement when it was made. See Rombach v. Chang, 355 F.3d 164, 174 (2d Cir. 2004) ([P]laintiffs must do more than say that the statements in the press releases were false and misleading; they must demonstrate with specificity how that is so.). The Amended Complaint does not satisfy this burden. Plaintiffs do not tie CW1s allegations to any aspect of the Companys financial statements, let alone explain with supporting facts how any such statement or figure was false when made. To state the obvious, each quarter Green Mountain produces and sells hundreds of millions of dollars worth of coffee, tea, and other beverage products that are perishable. In this business, it is inevitable that some product will expire and the Company will have some level of obsolescent inventory. As

explained in the Companys disclosures, and consistent with generally accepted accounting principles, Green Mountain takes a reserve for inventory obsolescence by examining its inventories on a quarterly basis to determine if there are indicators that the carrying values exceed net realizable value. See Decl. Ex. A at 40; see also Decl. Ex. H (Form 10-Q filed Aug. 5, 2010) at 15 (setting forth obsolescence allowances). Plaintiffs nowhere challenge the

Companys inventory accounting. The Amended Complaint does not allege that the Companys reserves for obsolescent product were understated or that the value of the Companys inventory was misstated in any respect. Nor do Plaintiffs even allege that the Companys obsolescence reserves somehow failed to reflect the expired product that CW1 suggests existed. Plaintiffs inability to supply these requisite connections only further underscores the absence in the Amended Complaint of any false statement on overproduction or expired product. See In re Alcatel Secs. Litig., 382 F. Supp. 2d 513, 534 (S.D.N.Y. 2005) (dismissing complaint for failure

17

to plead a false statement concerning increasing levels of unusable or obsolete inventory when plaintiffs did not made clear why each statement is fraudulent); see also Malin v. XL Capital Ltd., 499 F. Supp. 2d 117, 145-46 (D.Conn. 2007) (emphasizing that plaintiffs assertion that because large reserve increases were necessary, the accounting practices described must not have been followed did not set forth why the statements identified in the complaint were false). II. THE AMENDED COMPLAINT FAILS TO PLEAD A STRONG AND COMPELLING INFERENCE OF SCIENTER As the Supreme Court held in Tellabs, for an inference of scienter to qualify as strong as required by the PSLRA, it must be more than merely plausible or reasonable it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent. Tellabs, 551 U.S. at 314. It is not enough that a reasonable factfinder plausibly could infer from the complaints allegations the requisite state of mind. Id. The strength of the inference cannot be decided in a vacuum, and the Court must weigh all nonculpable explanations for the defendants conduct against the inferences urged by the plaintiff. Id. at 323-24, 314. Further, the Court must conduct a comparative evaluation, and must consider not only inferences urged by the plaintiff . . . but also competing inferences rationally drawn from the facts alleged. Id. at 314. Omissions and ambiguities weigh against inferring scienter. Id. at 326. In the Second Circuit, a strong inference of scienter can be established only by adequately pleading (1) a motive and opportunity to defraud, or (2) conscious recklessness. See ATSI Commcn, 493 F.3d at 99. The Amended Complaints allegations on motive and

opportunity are identical to those the Court previously rejected,10 and Green Mountain does not re-argue at length here why those same allegations remain inadequate. As the Court has held, the supposed insider trades by division presidents Scott McCreary and Michelle Stacy, neither of
10

See D.E. # 65-2, 6-8, 123-127 (comparison of First and Second Consolidated Amended Complaints showing that relevant sections are identical).

18

whom are named as Individual Defendants, fail to raise a strong inference of scienter when no other Green Mountain insiders sold stock during the class period and certain insiders actually purchased stock.11 See Warchol, 2012 WL 256099, at *8. Likewise, the allegations about the Companys Class Period transactions with Lavazza and Van Houtte are of the type routinely rejected by courts as too generalized absent compelling circumstances that remain absent here. See id. at *9. Because Plaintiffs fail to sufficiently allege any motive, the Amended Complaint can only survive dismissal if it identifies circumstances leading to a strong inference of conscious misbehavior or recklessness. Importantly, where a complaint fails to plead a motive to commit fraud, it must make a correspondingly greater showing of strong circumstantial evidence of recklessness. Warchol, 2012 WL 256099, at *10 (citing ECA & Local 134 IBEW Jt. Pension Trust of Chi. v. JP Morgan Chase Co., 553 F.3d 187, 198-99 (2d Cir. 2009)) (internal quotations omitted). The Second Circuit has held that conscious recklessness is a state of mind South Cherry

approximating actual intent, and not merely a heightened form of negligence.

Street LLC v. Hennessee Group, LLC, 573 F.3d 98, 109 (2d Cir. 2009) (internal citation and emphasis omitted). Specifically, recklessness is conduct which represents an extreme departure from the standards of ordinary care to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it. Novak, 216 F.3d at 308 (internal citation and quotations omitted). It is not enough to allege that a defendant merely ought to have known. Hart v. Internet Wire, Inc., 163 F. Supp. 2d 316, 321 (S.D.N.Y. 2001) (internal quotation marks omitted), affd, 50 F. Appx 464 (2d Cir. 2002). Rather, to show that Defendants conduct was reckless, Plaintiffs must adequately plead that Defendants had access
11

Plaintiffs additional citation of a March 14, 2011 blog post questioning the timing of Ms. Stacys sales, see AC 128-29, adds nothing to change the Courts prior analysis.

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to contrary facts and specifically identify the reports or statements containing this information. Warchol, 2012 WL 256099, at *10 (citing Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital, 531 F.3d 190, 196 (2d Cir. 2008)) (internal quotations omitted). Importantly, scienter cannot be pled generally against Defendants as a group. See Warchol, 2012 WL 256099, at *7 (rejecting applicability of the group pleading doctrine for scienter, citing Teamsters Allied Benefit Funds v. McGraw, No. 09-140, 2010 WL 882883, at *11 n.6 (S.D.N.Y. March 11, 2010)). To plead scienter as to Green Mountain, Plaintiffs must sufficiently allege that an agent of the corporation committed a culpable act with the requisite scienter, and that the act (and accompanying mental state) are attributable to the corporation.12 See Dynex Capital, 531 F.3d at 195. The Amended Complaint does not plead a strong inference of scienter, either as to the Individual Defendants or as to Green Mountain. As set forth more fully below, despite the benefit of the Courts order identifying multiple failures in the prior complaint, the Amended Complaint again falls far short of alleging the requisite strong and compelling inference of scienter. Moreover, it cannot withstand the comparative analysis required by Tellabs. As before, Plaintiffs allegations give rise to an obvious nonculpable explanation that is far more compelling than their claim of fraud: that Green Mountains lapses in disclosure controls and faulty accounting were unintended consequences of the Companys rapid growth. Warchol,

12

In June 2011, the Supreme Court held that only those who have ultimate authority over a statement can be held primarily liable for securities fraud (and thus liable in a private suit) for making a public statement. Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296, 2302 n.6 (2011). The Supreme Courts holding in Janus, combined with the Second Circuits holding in Dynex Capital, 531 F.3d 190 (2d Cir. 2008), strongly suggests that Plaintiffs must identify not only an agent of the corporation with a culpable mental state, but an agent with scienter who had ultimate authority over a misstatement. Indeed, consistent with Janus logic, the Second Circuit held in Dynex Capital that the complaint at issue there could not survive a motion to dismiss because plaintiffs failed to sufficiently allege that someone whose scienter is imputable to the corporate defendants and who was responsible for the statements made was at least reckless. See Dynex Capital, 531 F.3d at 197 (emphasis added).

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2012 WL 256099, at *15. A. Plaintiffs Generalized Allegations of Conscious Recklessness Should Be Rejected

As an initial matter, decisions applying Tellabs in this Circuit make clear that Plaintiffs cannot rest on conclusory assertions regarding the mere fact of a restatement or an SEC inquiry, Defendants access to information, or allegedly false Sarbanes-Oxley certifications to raise a strong and compelling inference of scienter. Under the heightened pleading standards applicable here, Plaintiffs allegations must be rejected in those three respects: First, the mere fact of a restatement does not suffice to plead a strong and compelling inference of scienter, particularly where, as here, the restatement is comprised of a series of immaterial errors, involved both overstatements and understatements of income, and the cumulative impact of the errors is modest at best. See Warchol, 2012 WL 256099, at *15 ([t]he fact that the restatement was a collection of several small mistakes, rather than a single, large error, also minimizes any fraudulent reading); see also Glickman v. Alexander & Alexander Serv., Inc. No. 93 Civ. 7594 (LAP), 1996 WL 88570, at *15 (S.D.N.Y. 1996) (a restatement to correct revenue recognition errors may reflect negligence or mismanagement but it does not raise a strong inference of fraud.). As the Second Circuit has emphasized, [a]llegations of GAAP violations or accounting irregularities, standing alone, are insufficient to state a securities fraud claim . . . . Only where such allegations are coupled with evidence of corresponding fraudulent intent might they be sufficient. ECA & Local 134 IBEW Jt. Pension Trust of Chi. v. JP Morgan Chase Co., 553 F3d 187, 200 (2d Cir. 2009) (internal citation omitted). For similar reasons, the mere pendency of an SEC inquiry does not raise a strong inference of scienter either, as the Court has already recognized. See Warchol, 2012 WL 256099, at *14. Second, Plaintiffs cannot raise a strong scienter inference simply by claiming that

21

Defendants must have known about accounting errors and control deficiencies due to the Individual Defendants access to information as senior executives. See AC 20, 122.

Boilerplate allegations regarding a defendants executive position or access to information do not suffice to plead a strong inference of scienter under the PSLRA. See, e.g., In re Sec. Capital Assur. Ltd. Secs. Litig., 729 F. Supp. 2d 569, 595 (S.D.N.Y. 2010). Moreover, a defendants presumed receipt of information about the companys financial performance does not give rise to a strong inference of scienter as to an accounting error. See City of Brockton Ret. Sys. v. Shaw Group, Inc., 540 F. Supp. 2d 464, 473-74 (S.D.N.Y. 2008) (It is not enough for . . . plaintiff to allege that, because executives . . . were closely involved in [the corporations] business, one can strongly infer that they were furnished with financial data which contained the errors that later required restatement.) (internal quotations omitted). Third, alleging that the Sarbanes-Oxley certifications in the Companys disclosures have been rendered false by the restated financials does not, without more, give rise to any inference of scienter. See AC 105. Plaintiffs cannot allege conscious recklessness simply by suggesting that a failure to identify control deficiencies resulted in a restatement.13 See Coronel v. Quanta Capital Holdings Ltd., No. 07 Civ. 1405(RPP), 2009 WL 174656, at *30 (S.D.N.Y. Jan. 26, 2009) (allegation of a broad link, with no supportive facts, between the signing of SOX
The Court rightfully rejected Plaintiffs argument that the original complaint pled scienter in connection with the Individual Defendants certification of the Companys controls in the third-quarter Form 10-Q. See Warchol, 2012 WL 256099, at *11 n.3. The Amended Complaint again suggests that, because the third quarter Sarbanes-Oxley certifications were followed by a restatement, Green Mountain must have lacked internal controls. Plaintiffs paint with too broad a brush. Green Mountains restatement acknowledged weaknesses in the Companys controls in only two areas, relating to: (1) the financial statement consolidation process and (2) accruals related to marketing and customer incentive programs. AC 117. Nowhere in either the prior complaint or the Amended Complaint do Plaintiffs present any allegations, let alone particularized ones, of any fraud relating to these two areas. Likewise, the Amended Complaint presents no allegations identifying any fraud associated with any other material weakness, least of all the Companys inventory controls. As discussed below, to the contrary, the CWs associated with Plaintiffs inventory allegations suggest the Company made good faith efforts to reconcile any supposed discrepancies as it sought to integrate various software systems and platforms. See infra at 36-37.
13

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certifications, the disclosure five months later of internal control problems, and allegedly false financialsrel[ied] entirely on conjecture and was not indicative of fraudulent intent.). B. The Confidential Witnesses Do Not Raise A Strong, Cogent, and Compelling Inference of Scienter

Plaintiffs rely almost exclusively in the Amended Complaint on confidential witness accounts in their attempt to plead scienter. When plaintiffs rely on confidential sources, the Second Circuit has held that under the PSLRA the complaint must provide enough information to support the probability that a person in the position occupied by the source would possess the information alleged. Novak, 216 F.3d at 314. Further, where, as here, the allegations hinge on accounting errors, Plaintiffs must allege facts that support a probability that the confidential sources had a basis for attesting to the companys accounting practices. See, e.g., Malin, 499 F. Supp. at 141 (Also problematic is the fact that none of the CWs are alleged to have been involved in or to have any familiarity with the process of setting or estimating loss reserves.). Courts, including this one, have recognized that the absence of such supporting factual allegations is particularly fatal where complex accounting judgments are at issue, including revenue recognition practices.14 See Warchol, 2012 WL 256099, at *12 (Nonetheless, CW1s disclosed characteristics provide less reason to believe that the 150 truckloads were wrongly marked as revenues. Plaintiffs did not allege that accounting was part of CW1s job description or that he or she had any background in the subject); see also Curry v. Hansen Med., Inc., No. 5:09-cv-05094-JF (HRL), 2011 WL 3741238, at *5 (N.D. Cal. Aug. 25, 2011) (dismissing complaint for failure to plead a strong inference of scienter where none of the witnesses [was] alleged to have worked directly with revenue recognition); In re Accuray Secs. Litig., 757 F.

14

Revenue recognition considerations are amongst the most complex of accounting issues. In recognition of this fact, SEC Staff Accounting Bulletin No. 101 provides 25 pages worth of interpretive guidelines to assist public companies with navigating the nuances involved. 17 C.F.R. 211.

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Supp. 2d 936, 945 (N.D. Cal. 2010) (None of the CWs held financing or accounting positions, so none was in a position to know when or if revenue was recognized . . . ); Brodsky v. Yahoo! Inc., 630 F. Supp. 2d 1104, 1115 (N.D. Cal. 2009) (For [CW] statements to carry any weight at the pleadings stage . . . [p]laintiffs must describe with particularity the CWs personal knowledge of [the companys] revenue recognition process.). As discussed further below, the Amended Complaint presents CW accounts on two topics: (1) shipments to M. Block attributed to CW1 and CW6 on which Plaintiffs contend the Company improperly recognized revenue and (2) allegations made by other CWs and by shortseller Einhorn about purportedly illegitimate inventory movements and deliberate

overproduction leading to expired product.

Plaintiffs insertion of additional CWs in the

Amended Complaint does not compensate for inadequate factual particularity. See Cal. Pub. Employees Ret. Sys. v. Chubb Corp., 394 F.3d 126, 155 (3d Cir. 2004) (Cobbling together a litany of inadequate allegations does not render those allegations particularized in accordance with Rule 9(b) or the PSLRA.). As to both of these topics, the Amended Complaint does not clear the threshold pleading requirement set forth in Novak. None of the CWs is identified with factual allegations that would support a probability that the witness had any responsibility for, insight about, or direct knowledge of the accounting treatments that Plaintiffs challenge, including Green Mountains revenue recognition on shipments made into or at M. Block. Indeed, given the sparseness of Plaintiffs allegations and their conclusory nature, a far more compelling inference is that the Company did not improperly recognize revenue on shipments to M. Block or engage in any other improper accounting practices. Moreover, the confidential witness statements do not give rise to any inference of scienter because Plaintiffs do not allege as they must to withstand dismissal that these accounts show

24

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. Confidential witness allegations are insufficient to establish a strong inference of scienter where, as here, there are no facts alleged to establish that the information supposedly contrary to the Companys public statements was communicated contemporaneously to senior executives. See, e.g., Campo v. Sears Holdings Corp., 371 Fed. Appx 212, 217 (2d Cir. 2010) (rejecting scienter allegations based on confidential witnesses who did not have any direct contact with or personal knowledge of the individual defendants conduct with regard to accounting treatment at issue); In re Am. Express Co. Sec. Litig., No. 02 Civ. 5533(WHP), 2008 WL 4501928, at *8 (S.D.N.Y. Sept. 26, 2008) (allegations based on confidential sources were insufficient where plaintiff failed to show that the sources had any contact with [defendants] or would have knowledge of what they knew or should have known during the Class Period.). 1. CW1s and CW6s Claims of Improper Revenue Recognition on M. Block Shipments Fail to Raise Any Inference of Scienter (a) CW1 and CW6 Do Not Satisfy Novaks Requirements for Confidential Sources

Plaintiffs again depend heavily on accounts made by CW1 and CW6, whose statements they claim support the conclusion that Green Mountain was prematurely recognizing revenue on shipments into M. Block, the Companys principal fulfillment agent. See AC 71-72, 78. For all of the reasons discussed above, the Amended Complaint fails to plead a strong inference of scienter because neither CW presents the necessary supporting details about the alleged shipments. See supra at 13-14; see also Karpov v. Insight Enters., No. CV 09-856-PHX-SRB, 2010 WL 4867634, at *9 (D.Ariz. Nov. 16, 2010), affd 2012 WL 699058 (9th Cir. Mar. 6, 2012) (concluding that channel stuffing allegations failed to raise strong inference of scienter where plaintiffs did not contain any specific details regarding particular sales or shipments, such as 25

dates, customers, volume, dollar amounts, or the impact on [the companys] financial records, besides stating that they created artificial inflation.). In addition, Plaintiffs again fail to provide any basis to support the probability required by Novak that CW1 and CW6 were in a position to attest to the Companys revenue recognition accounting. As to CW1, the Court emphasized in dismissing Plaintiffs prior complaint that CW1s alleged role as a distribution planning manager provides some basis to believe he or she could have witnessed deliveries sent to M. Block, but failed to show that accounting was part of CW1s job description or that he or she had a background in the subject. Warchol, 2012 WL 256099, at *12. In response, Plaintiffs now allege in a conclusory manner that CW1, who was hired to work on IT projects, had supposed accounting duties, such as profit and loss responsibilities and preparing accounting timelines (whatever either of those mean). AC 64. None of CW1s newly purported duties have anything to do with revenue recognition or the Companys enterprise accounting function. Further, generalized allegations regarding CW1s purported understanding of accounting principles do not, as they must, support a probability that CW1 was in a position to understand how Green Mountain recorded revenue. See Brodsky, 630 F. Supp. 2d at 1115 (Plaintiffs must describe with particularity the CWs knowledge of the [companys] revenue recognition process); see also McKenna v. Smart Techs, 11 Civ. 7673 (KBF), 2012 U.S. Dist. LEXIS 47134, *32 (S.D.N.Y. April 3, 2012) (holding that a confidential witness who was an information systems employee was not in a position to understand sales volume without further allegations to support why the witness would have that knowledge). Similarly, CW6 is described in the complaint as a Certified Public Accountant, but Plaintiffs allege CW6s work at the Company was entirely in operations. AC 78. There are no facts pled that would indicate CW6 had insight into or responsibility for accounting, much less

26

knowledge as to how shipments from the Companys Castroville, California plant were treated in Green Mountains consolidated financial statements. Further, the Amended Complaint only underscores significant limitations in CW6s purported knowledge. Plaintiffs allege Castroville shipments were booked as sales as far as CW6 knew and even go so far as to again concede that CW6 did not know if M. Block ever owned the products shipped to it. AC 78. Absent are any allegations that would address (let alone alter) the Courts holding that the prior complaint did not specify whether CW6 believed M. Block or third party customers never paid for the product. Warchol, 2012 WL 256099, at *13. Further, both CW1 and CW6 are identified as employees at the SCBU business unit. AC 64, 78. As business-unit-level employees, CW1s and CW6s characterizations of shipments from Green Mountains SCBU division to M. Block as sales, without more, do not compel an inference of any accounting improprieties. Indeed, the allegations attributed to them are entirely consistent with Green Mountains disclosed revenue recognition practices. The Companys Form 10-K for fiscal year 2010 makes plain that its individual business units, such as the SCBU, engage in and account for intercompany transactions that are subsequently eliminated in consolidation for external SEC reporting purposes. Decl. Ex. A at 40. One obvious transaction of this type is when the Companys SCBU business unit, which manufactures K-Cup portion packs containing Green Mountain coffee products, ships that product to an M. Block warehouse to fulfill an order placed with SCBU by the Keurig business unit. Accordingly, Plaintiffs insistence that SCBU shipments to M. Block were treated as sales is meaningless for purposes of Green Mountains consolidated financial statements: shipments by SCBU to M. Block based on Keurig orders are certainly and logically accounted for internally as sales by one business unit to another, but such intra-corporate sales are eliminated in consolidating Green

27

Mountains enterprise financial statements and are not recognized as revenue for external reporting purposes. Significantly, the Amended Complaint lacks any allegation that CW1 and CW6 participated in or had any knowledge of the processes by which the Company eliminates sales between the business units in the financial statement consolidation process. See In re U.S. Aggregates, Inc. Sec. Litig., 235 F. Supp. 2d 1063, 1074-75 (N.D. Cal. 2002) (holding that allegations made by confidential witnesses at subsidiaries must show knowledge or participation in enterprise-level accounting decisions to support a probability that such witnesses had sufficient knowledge of the companys financial statements) (citations omitted). (b) Neither CW1s Nor CW6s Accounts are Linked to the Individual Defendants

Also absent from the accounts of CW1 and CW6 is any allegation that either of the Individual Defendants knew of any purported fraud. Where allegations of improper revenue recognition are at issue, plaintiffs must sufficiently allege that the defendants knew or should have known that the revenue from those sales should have been treated differently and, thus, that the contemporaneous financials were incorrect. Gavish, 2004 WL 2210269, at *15; see also In re Bristol-Myers Squibb Sec. Litig., 312 F. Supp. 2d 549, 566-68 (S.D.N.Y. 2004) (dismissing complaint where plaintiffs allegations did not create a strong inference that defendants knew the sales in question should have been treated differently). Conclusory assertions that members of SCBU management were aware that a 150 truckload shipment occurred do not support scienter without evidence that the Individual Defendants were alerted to information contradicting the Q3 statements. Warchol, 2012 WL 256099, at *13; AC 73. Moreover, allegations regarding the existence of regularly scheduled meetings to discuss inventory management that may have been attended by Defendants Blanford and Rathke do not allege with particularity their knowledge of improper revenue recognition practices or any other supposed impropriety. See

28

Glaser v. The9, Ltd., 772 F. Supp. 2d 573, 591 (S.D.N.Y. 2011) ([A]s with all allegations going to scienter, confidential source allegations must show that individual defendants actually possessed the knowledge highlighting the falsity of public statements; conclusory statements that defendants were aware of certain information, and mere allegations that defendants would have or should have had such knowledge [are] insufficient.). Plaintiffs have not alleged that improper revenue recognition practices were discussed at any of the meetings. Instead, they rely on CW1s generic statement that Green Mountains revenue recognition practices and policies were discussed during the months of November and December 2009, well before the Class Period alleged in this action. AC 74. Such an allegation is so vague as to be meaningless without additional context regarding the temporal connection between the purported 150 truckload shipment and facts about how extensively or in what manner [revenue recognition practices] were discussed. In re Doral Fin. Corp. Sec. Litig., 563 F. Supp. 2d 461, 466 (S.D.N.Y. 2008). 2. The Allegations of Inventory Shifting and Expired Product Do Not Raise a Strong, Cogent and Compelling Inference of Scienter (a) Plaintiffs New-Found Confidential Witness Accounts Likewise Lack Particularity and Fail to Satisfy Novak

In an attempt to recast their M. Block allegations, Plaintiffs suggest that the Company engaged in illegitimate inventory movements to manipulate its accounting by shifting inventory within M. Block, and that Green Mountain deliberately overproduced product, which supposedly resulted in obsolete inventory that then needed to be conceal[ed]. See AC 66, 79, 80 (citing statements purportedly made by CW1, CW4, and CW7). CW4 and CW7 are not described with any level of particularity that would permit the Court to consider their statements, and their accounts are so vague that they do not raise any inference of scienter, much less a strong and compelling one. CW4, for example, is described as 29

a former employee of MBlock from 2001 through early 2009, who worked in direct contact with MBlocks owners in MBlocks Chicago headquarters. AC 66. This witness worked for M. Block, not Green Mountain, was not even employed there during the Class Period, and the complaint fails to allege any basis for believing CW4 had insight into Green Mountains accounting. See Campo v. Sears Holdings Corp., 635 F. Supp. 2d 323, 335-36 (S.D.N.Y. 2009) (rejecting scienter allegations based on confidential witnesses who departed the company prior to the class period); see also Glaser, 772 F. Supp. 2d at 594 (rejecting allegations attributed to CWs who did not work for the company and there was no allegation that they ever had any contact with anyone [at the company], much less with the Individual Defendants). Indeed, the only statements attributed to CW4 are the innocuous claims that physical inventory was taken once a year and was an all hands project and that Green Mountain was a significant customer for M. Block. AC 66. Likewise, CW7 is identified as a lower-level employee at Green Mountains shipping department in Knoxville, Tennessee from August 2009 through August 2011. AC 79. CW7s allegations of inventory shifting and product shipped to Williston, Vermont and then returned do not raise any inference of scienter. As discussed above, such movements are meaningless under the Companys stated revenue recognition policy. See supra at 14-15. Compounding this failing is the fact that CW7 is, by Plaintiffs own admission, a lower-level shipping employee with no responsibility for or knowledge of the Companys accounting practices. Plaintiffs supply no basis upon which the Court could infer that a shipping clerk would be in a position to attest to the Companys revenue recognition policy. See Sorkin LLC v. Fischer Imaging Corp., No. Civ. A. 03-CV-00631-R, 2005 WL 1459735, at *7 (D.Colo. June 21, 2005) (rejecting CW allegation of improper revenue recognition where there were no facts . . . provided to show how

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a shipping and receiving clerk would have known how, when, or why the Company booked revenue). Equivalent defects undermine the allegations of overproduction and expired product attributed to CW1. According to CW1, Green Mountain loaded dated or expired coffee onto trucks parked outside warehouses prior to the arrival of Company auditors, and expired coffee was given to pig farmers . . . or to local farmers to acidize their fields. AC 80. CW1 also purportedly believed that the Company directed MBlock to hold more product than it could immediately ship and that, due to overstocking at MBlock, product had to be destroyed when it remained in the warehouse past its expiration date. Id. 64(c). As discussed above, CW1 fails to provide any facts about this supposedly obsolescent product: the allegations nowhere state when any of this conduct purportedly occurred, what type of product was supposed to be involved (other than a nonspecific reference to coffee), and the quantity of product CW1 claims had expired. Nor does the Amended Complaint connect these allegations to the

Companys financial statements. To the contrary, Plaintiffs do not challenge inventory-related accounting including Green Mountains reserves for obsolescent product in any way. And as with CW1s other claims, the Court cannot credit these allegations because CW1 is not identified in a manner that would show she or he had knowledge of the Companys enterprise-level accounting practices. See supra at 26-28. Beyond these shortcomings, the accounts of CW1, CW4, and CW7 fail to present any allegation that the Individual Defendants or any other members of management were aware of any improper accounting practices. Neither CW4 nor CW7 is alleged to have had any contact with any member of the Companys management. As to CW1, the sole interaction alleged is that s/he attended meetings with unnamed members of senior management where production levels

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were discussed. AC 80. These CW allegations do not give rise to any inference of scienter because Plaintiffs fail to show Defendants were alerted to information contradicting the Q3 statements. Warchol, 2012 WL 256099, at *13; see also In re Bausch & Lomb, Inc. Secs. Litig., 592 F. Supp. 2d 323, 342 (W.D.N.Y. 2008) (dismissing amended complaint with prejudice where neither of the two confidential sources specifically state that any Individual Defendant had direct information or access to information of BLIOs illegal practices or that it was violating GAAP, or that it contradicted the companys financial statements.). (b) The Einhorn Allegations are Unreliable and Fail to Pass Muster Under Novak

In a further effort to salvage the complaint, Plaintiffs have copied and pasted portions of Einhorns October 17, 2011 presentation claiming that Green Mountain engaged in some fraudulent scheme involving M. Block. See AC 87-91. As noted above, Plaintiffs rely on the field research portion of the presentation, which Einhorn claims was based on interviews with several former GMCR and MBlock workers (but who are otherwise not identified or described). See AC 87, 89-91; Decl. Ex. G at 92. Plaintiffs reliance on Einhorns

presentation fails to generate any inference of scienter for at least two reasons: First, Einhorn placed enormous bets that Green Mountains stock price would fall (just before its stock price experienced rapid increases) and thus he had an unusual and suspicious motive to manipulate Green Mountains stock price downward. Accordingly, his self-serving accusations do not give rise to the compelling inference of scienter necessary to satisfy Tellabs. Second, Einhorns socalled field research is even more generic and vague than Plaintiffs own CW accounts, and utterly fails to satisfy the pleading standards established in Novak. In considering Einhorns allegations, the Court should first consider the source. That is to say, the Court must review the reliability of the source of the information, including his

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credibility, in addition to assessing the information provided and its coherence. See Janbay, 2012 WL 1080306, at *6 ([P]articular facts that establish the basis of the witnesses knowledge and reliability are required.); see also In re Gilat Satellite Networks, Ltd., No. CV-02-1510 (CPS), 2005 WL 2277476, at *9 (E.D.N.Y Sept. 19, 2005) (Novak requires an examination of the detail provided by the confidential sources, the sources basis of knowledge, the reliability of the sources, the corroborative nature of other facts alleged, including from other sources, the coherence and plausibility of the allegations, and similar indicia.) (emphasis added). As

discussed above, Einhorn held a short position in Green Mountains stock and, judging by the fall-off of Green Mountains stock price as a result of his October 17, 2011 presentation, he profited handsomely as a result.15 As a short seller with a substantial profit motive directly linked to driving down Green Mountains share price, Einhorns self-interest cannot be ignored, and he lacks the reliability required for the Court to accord any meaningful weight to his allegations. See Janbay, 2012 WL 1080306, at *6; In re Gilat Satellite Networks, Ltd., 2005 WL 2277476, at *9; see also Bird v. Stephens, P.C., No. 10-CV-1091(DMC)(JAD), 2011 WL 2600721, at *6 (D.N.J. June 29, 2011) (dismissing Section 10(b) action against auditor on scienter grounds where complaint failed to sufficiently allege auditor recklessly disregarded allegations made by a short seller who had a vested personal interest in the decline of [the companys] stock price).

Einhorns presentation discloses that his funds had an interest in the movement of Green Mountains stock price a fact reinforced by his quarterly investor letters, which suggest his losses during the first half of 2011 were driven by a consumer cyclical short likely to have been Green Mountain. Decl. Ex. G at 2; see also Decl. Ex. I (Letter from David Einhorn dated July 7, 2011) at 3. Greenlights performance was down 5% for the year in August 2011. See Reuters, An inside look at David Einhorns big short, Dec. 20, 2011, available at http://www.reuters.com/article/2011/12/20/us-greenmountaineinhorn-idUSTRE7BJ1JT20111220. But mere weeks after Einhorns October 17, 2011 presentation, his funds were up about 5% for the year. Id. Unsurprisingly, this upswing in Greenlights performance has been attributed to Einhorns profit on his short position in Green Mountain stock. Id. (When Einhorn revealed in October that he had been building a short position in shares of [Green Mountain] for weeks, the stock tanked and it effectively turned things around for his $8 billion Greenlight Capital fund this year.).

15

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Indeed, another court dismissed a securities fraud complaint filed against another company targeted by Einhorn despite plaintiffs insistence that his (Einhorns) allegations gave rise to red flags. See Ross v. Walton, 668 F. Supp. 2d 32, 39-40 (D.D.C. 2009) (concluding that Einhorns allegations raise[d] neither a cogent nor compelling inference of scienter, and noting defendants argument that Einhorn had a motive to drive down the share price).16 Not only is the source (Einhorn) neither trustworthy nor credible, the quality of his allegations is lacking to say the least. As an initial matter, the Amended Complaint tries to make much of the fact that Einhorn cites verbatim the allegations Plaintiffs made in their prior complaint (which this Court dismissed). See AC 86, Decl. Ex. G at 91. To state the obvious, the fact that Einhorn simply quoted passages from Plaintiffs since-dismissed complaint does not magically transform meretricious allegations into meritorious ones. See In re Sierra Wireless, Inc. Sec. Litig., 482 F. Supp. 2d 365, 376 (S.D.N.Y. 2007) (confidential sources cannot be used to merely parrot conclusory allegations contained in the complaint.). Not even Mr. Einhorn lays claim to such powers of alchemy. Turning to Einhorns October 2010 presentation, Plaintiffs incorporation of his allegations layers hearsay on top of hearsay, and Plaintiffs make no attempt to satisfy Novak in recycling Einhorns general accusations. Einhorns presentation consists of paraphrased

allegations interspersed with statements attributed to sources collectively described as Former GMCR / MBlock workers. Decl. Ex. G at 94-97. None of these sources is identified

individually, much less described with any supporting detail such as the period of his or her
Einhorn garnered further press coverage earlier this year after he and Greenlight were fined $11.2 million by the U.K.s Financial Services Authority (the FSA), reportedly one of the largest penalties in the FSAs history. The FSA levied the fine for insider trading based on a finding that Einhorn had directed Greenlight to make trades while he was in possession of material non-public information about a U.K.-based company. Bloomberg, Einhorns Greenlight is Fined $11.2 Million by U.K. in Punch Insider Case, Jan. 25, 2012, available at http://www.bloomberg.com/news/2012-01-25/einhorn-s-greenlightfined-11-2-million-by-u-k-over-punch-tavern-trading.html.
16

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employment, for whom he or she worked (i.e., Green Mountain or M. Block), or what his or her job responsibilities entailed. As such, there is no basis alleged to suggest any one of these workers had responsibility for or any knowledge about the Companys accounting practices. Take, as one example, the phantom shipment of 500,000 brewers destined for QVC that Plaintiffs claim was made immediately prior to an audit at MBlock but never shipped . . . and simply restocked. See AC 90, Decl. Ex. G at 97. Einhorns slide does not even identify a source for this statement. There are no facts alleged to indicate how the (presumed) source would know about this supposed brewer shipment or, notably, when it even allegedly occurred. Also remarkably absent from the presentation is any allegation that Green Mountain recognized any revenue on this supposed shipment, let alone how much or when. Following Tellabs, courts in this Circuit have rejected attempts to piggyback on unsubstantiated allegations made by third parties where the plaintiffs fail to prove to the court that their complaint is backed by specific facts supporting a strong inference of fraud. In re Crude Oil Commodity Litig., No. 06 Civ. 6677(NRB), 2007 WL 1946553, *89 (S.D.N.Y. June 28, 2007) (internal citation and quotations omitted) (rejecting plaintiffs reliance on allegations made in other civil complaints, government settlements, and Wall Street Journal reports); see also Janbay, 2012 WL 1080306, at *6 (similarly rejecting reliance on third party complaint). Here, the fact that the third party (Einhorn) had his own agenda to profit by encouraging the investing public to believe unsubstantiated and unsupported allegations of fraud only heightens the need for facts that the Amended Complaint utterly fails to supply. Plaintiffs do not allege any of the basic details missing from Einhorns presentation, let alone enough facts to satisfy Novaks standard for confidential witness allegations. Further, Einhorn nowhere

alleges that any of his sources whoever they might be had any contact with the Individual

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Defendants. For all of these reasons, Einhorns allegations hardly give rise to any inference of scienter, much less a cogent and compelling one strong enough to satisfy Tellabs and the PSLRA.17 (c) Plaintiffs Other Inventory Allegations Do Not Create Any Inference of Scienter Either

Finally, Plaintiffs cursorily allege that Green Mountain experienced problems with double-counting inventory. AC 104(b). The confidential witness allegations on this claim do not specify relevant time periods, and these witnesses allegations are entirely speculative and lend themselves to innocent interpretations. Without specifying when the alleged double-

counting occurred or which products it supposedly affected and by how much, these CWs claim that the Company experienced problems with its computer systems and that it appeared there was double-counting. Id. 104(a). At no point does any CW allege (let alone explain how) these supposed problems had any impact on Green Mountains financial statements. Nor do these anonymous sources identify any contrary reports or information that were presented to the Individual Defendants. See Warchol, 2012 WL 256099, at *10. Moreover, far from a compelling inference of fraud, these allegations actually support a nonculpable conclusion that the Company and its management were working actively to address and resolve any computer system or software difficulties as they arose. CW12, for example, says
17

The Amended Complaint also cites a rogues gallery of blog postings, as well as a presentation authored by an anonymous blogger who goes by the pseudonym TheLongShortTrader. AC 18, 9397. One of the bloggers cited is Sam Antar, a former CFO convicted of fraud and whom Plaintiffs themselves characterize as being openly critical of Green Mountain. AC 18. These blog posts are rife with conclusory conspiracy theories, including claims that the Companys practices are downright ludicrous and that Green Mountain has engaged in stealth restatements. Id. 94-95. Such speculative commentary cannot overcome the absence of factual allegations that support a cogent and compelling inference of scienter. See Hershfang v. Citicorp, 767 F. Supp. 1251, 1255 (S.D.N.Y. 1991) (the gratuitous commentary of outsiders cannot substitute for scienter allegations); see also In re Pfizer, Inc. Secs. Litig., 538 F. Supp. 2d 621, 630-31 (S.D.N.Y. 2008) (In addition to identifying the source, the source must be shown to have been likely to know the relevant facts. There is no reason to believe that the author of this blog, identified only as RADmanZulu, is likely to have known the relevant facts.).

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that many people worked to reconcile the figures from the separate systems. AC 104(b). Likewise, CW13 claims to have created and reviewed inventory reports on a daily basis and suggests that inventory indeed was recount[ed] when system errors occurred. Id. 104(c). Such allegations suggest that Green Mountain was experiencing growing pains associated with an extraordinary demand for its products and a series of back-to-back acquisitions, not that its management was engaged in a deliberate scheme to create an illusion of success by concealing and manipulating inventory accounting. C. The Opposing Inference of Innocent Conduct Is Far More Cogent and Compelling

Finally, the Supreme Courts opinion in Tellabs makes clear that an inference of scienter is considered strong only if it is more than merely reasonable or permissible. Tellabs, 551 U.S. at 324 (emphasis added). It must be cogent and compelling and at least as Id. This

compelling as any opposing inference one could draw from the facts alleged.

heightened standard imposes a unique obligation on the Court, which is required to consider, not only inferences urged by the plaintiff but also competing inferences rationally drawn from the conduct alleged. Id. at 313 (emphasis added). Here, the innocent inference is simple, straightforward, and far more compelling. During 2010, Green Mountain was one of the nations fastest-growing companies, with the Companys net income for the third quarter of 2010 being four times that of its net income for the entire fiscal year of 2007. Decl. Ex. A at iii. The Company had undertaken four substantial

acquisitions and also worked to integrate Keurig, which had previously operated as a stand-alone company and, by Plaintiffs own allegations, continued to maintain a separate accounting department. See AC 103(b). As Green Mountain explained in the restatement itself, its rapid growth simply outpace[d] the development of the Companys accounting structure. Decl. Ex.

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A at 50. A restatement correcting an accumulation of independent, individually immaterial accounting errors establishes a compelling inference that the Company did not act with scienter, but instead made innocent mistakes consistent with its rapid growth. See City of Brockton, 540 F. Supp. 2d at 47273 (the mere fact of a restatement of earnings does not support a strong, or even a weak, inference of scienter.). That is particularly true where, as here, the corrections to the financial statements are of a modest size. See, e.g., 380544 Canada, Inc. v. Aspen Tech., Inc., 544 F. Supp. 2d 199, 226 (S.D.N.Y. 2008) (subtle 5.8% overstatement of operating income did not give rise to strong inference of scienter); In re MSC Indus. Direct Co., Inc., 283 F. Supp. 2d 838, 849 (E.D.N.Y. 2003) (restatement resulting in cumulative 6% reduction of net income over four year period did not support strong inference of scienter). Moreover, after the SEC contacted the Company, Green Mountains audit committee, which is comprised solely of independent outside directors, immediately undertook an inquiry to analyze and gather facts about the Companys financial statements as well as managements conduct. When the Company and its audit committee determined there were errors that merited a restatement of prior financial statements, Green Mountain promptly and publicly disclosed that fact in its Form 8-K on November 19, 2010. See Decl. Ex. D. As the Second Circuit has emphasized applying Tellabs, [o]rdering an investigation upon learning facts implicating the accuracy of a companys financial statements is a prudent course of action that weakens rather than strengthens an inference of scienter. Slayton v. Am. Express Co., 604 F.3d 758, 777 (2d Cir. 2010) (internal citation omitted); see also Johnson v. Siemens AG, No. 09 Civ. 5310(JG)(RER), 2011 WL 1304267, at *18 (E.D.N.Y. March 31, 2011) (initiating an exhaustive review to evaluate potential accounting irregularities must be counted against any inference of fraudulent intent.) (internal citation omitted). Further, as Green Mountain

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confirmed in the restatement, as well as the Form 8-K that preceded it, none of the accounting errors implicated any misconduct by management, and its outside auditor provided an unqualified audit opinion in connection with the restatement. In sum, the Amended Complaint fails to counter (as it must to survive) the compelling and completely innocent inference that the demand for Green Mountains products and various strategic acquisitions led to rapid (indeed extraordinary) growth; that growth outpaced the development and integration of the Companys accounting infrastructure, leading to certain accounting errors and the need for a relatively minor restatement. Though unfortunate, it is understandable, and it certainly is not fraud. CONCLUSION For the reasons set forth above, the Amended Complaint should be dismissed with prejudice. Dated at Burlington, Vermont this 14th day of June, 2012.

COUNSEL FOR DEFENDANT GREEN MOUNTAIN COFFEE ROASTERS, INC. Randall W. Bodner Anne Johnson Palmer Michael J. Vito (admitted pro hac vice) ROPES & GRAY LLP Prudential Tower 800 Boylston Street Boston, MA 02199-3600 Telephone: 617-951-7000 Facsimile: 617-951-7050 randall.bodner@ropesgray.com anne.johnsonpalmer@ropesgray.com michael.vito@ropesgray.com By: /s/ Matthew S. Borick Robert B. Luce Matthew S. Borick DOWNS RACHLIN MARTIN PLLC Courthouse Plaza 199 Main Street P.O. Box 190 Burlington, VT 05402-0190 Telephone: 802-863-2375 Facsimile: 802-862-7512 bluce@drm.com mborick@drm.com

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CERTIFICATE OF SERVICE I hereby certify that on June 14, 2012, I electronically filed with the Clerk of Court the foregoing document using the CM/ECF system. The CM/ECF system will provide service of such filing via Notice of Electronic Filing (NEF) to the following: Robert B. Hemley Philip C. Woodward Matthew B. Byrne David A. Rosenfeld Edward Y. Kroub Robin Bronzaft Howald

/s/ Matthew S. Borick Matthew S. Borick

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