Construction Laborers Pension Trust of Greater St. Louis v. Funko, Inc.

• Court: District Court, W.D. Washington
• Decided: May 16, 2024
• Docket: 2:23-cv-00824
• Status: Unknown

Opinion

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3 4 5 6 7 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON 8 AT SEATTLE 9 10 JONATHAN STUDEN, CASE NO. C23-0824JLR 11 Plaintiff, ORDER v. 12 FUNKO, INC., et al., 13 Defendants. 14 15 I. INTRODUCTION 16 Before the court is Defendants Funko, Inc. (“Funko”), Andrew Perlmutter, and 17 Jennifer Fall Jung’s (Mr. Perlmutter and Ms. Jung together, the “Executive Defendants,” 18 and collectively, “Defendants”) motion to dismiss the amended complaint. (MTD (Dkt. 19 # 39); MTD Reply (Dkt. # 50); Request (Dkt. # 41); Request Reply (Dkt. # 51); see also 20 Am. Compl. (Dkt. # 38).) Lead plaintiff Construction Laborers Pension Trust of Greater 21 St. Louis (the “Pension Trust”) and named plaintiff Paul Haddock (together, “Plaintiffs”) 22 oppose the motion. (MTD Resp. (Dkt. # 47); see also Request Resp. (Dkt. # 46).) The 1 court has considered the motion, the parties’ submissions in support of and in opposition 2 to the motion, the applicable law, and the relevant portions of the record. Being fully

3 advised,1 the court GRANTS Defendants’ motion to dismiss. 4 II. BACKGROUND 5 Plaintiffs bring this putative securities fraud class action on behalf of investors 6 who purchased or otherwise acquired shares of Funko Class A common stock between 7 March 3, 2022, through March 1, 2023, inclusive (the “Proposed Class Period”). (See 8 Am. Compl. ¶¶ 1-2.) Plaintiffs allege that, during the Proposed Class Period, two of

9 Funko’s former executive officers, Mr. Perlmutter (Chief Executive Officer (“CEO”)) 10 and Ms. Jung (Chief Financial Officer (“CFO”)), made “reckless and materially false and 11 misleading statements [and omissions] to investors concerning Funko’s abysmal 12 execution of two highly touted infrastructure projects and its accumulation of excess and 13 obsolete inventory.” (Id. ¶ 2.) Plaintiffs further allege that Defendants’ conduct

14 artificially inflated the price of Funko’s Class A stock, and when the true extent of 15 Funko’s floundering business initiatives came to light, “the price of Funko Class A stock 16 significantly dropped,” causing substantial losses to the putative class. (Id. ¶¶ 159-60.) 17 Below, the court sets forth the factual background as pleaded by Plaintiffs before 18 turning to the relevant procedural history.2

19 1 No party requests oral argument (see MTD at 1; MTD Resp. at 1), and the court 20 determines that oral argument would not aid in its disposition of the motion. See Local Rules W.D. Wash. LCR 7(b)(4). 21 2 Defendants request judicial notice of certain exhibits pursuant to Federal Rule of Evidence 201 and the incorporation by reference doctrine. (See generally Request.) Plaintiffs 22 1 A. Funko and its Business 2 Funko3 is a publicly-traded company headquartered in Everett, Washington that

3 designs, produces, and sells consumer pop culture products, “including vinyl figures, 4 apparel and accessories, board games,” and more, “using licensed pop culture content 5 related to movies, TV shows, video games, musicians and sports teams.” (Id. ¶ 27.) 6 Funko is particularly well-known for its flagship collectible “FunkoPop!” vinyl figures, 7 which depict stylized pop culture characters based on licensed content from various 8 media companies like Disney, Marvel, and HBO, among others. (Id. ¶¶ 3, 32-33.)

9 Funko has an “extensive licensing portfolio” that “is critical to its business 10 model.” (Id. ¶ 37.) Some Funko products—like Star Wars Classic and Harry Potter—are 11 “not tied to a new or current release” and thus “do not have a defined duration of market 12 demand.” (Id. ¶ 35.) Meanwhile, other Funko products “are intended to ‘capitalize on 13 the excitement of fans surrounding the launch of new content’ and have a limited

14 duration of market demand depending on how popular the content ultimately proves.” 15 (Id.) During the Proposed Class Period, Funko’s licensing agreements typically granted 16 it rights to use the licensor’s intellectual property for a discrete time period in exchange 17

18 dispute only Exhibits 10 and 15. (See Request Resp. at 1.) The court agrees with the parties that Defendants’ Exhibits 2 through 9, 11 through 14, and 16 through 18, are properly subject to judicial notice for the reasons explained in Defendants’ briefing, and the court therefore takes 19 judicial notice of these exhibits. (See generally McDonough Decl. (Dkt. # 40) ¶¶ 3-10, 12-15, 17-19 & Exs. 2-9, 11-14, 16-18.) The court addresses the disputed Exhibits 10 and 15 infra. 20 3 Funko, Inc. is a holding company that was incorporated in 2017 for the purpose of completing an initial public offering in connection with Funko Acquisition Holdings LLC and its 21 subsidiaries. (Am. Compl. ¶ 27.) Funko Acquisition Holdings LLC owns 100% of Funko, LLC, Funko’s operating entity. (Id.) The court refers to these entities collectively as “Funko” for 22 purposes of the instant motion. 1 for guaranteed minimum royalty payments. (Id. ¶ 37.) The contracts also provided “that 2 the licensors owned the intellectual property rights in the products Funko designed and

3 sold under the license, such that upon termination of those licenses, Funko no longer had 4 the right to sell those products.” (Id. ¶ 38.) Funko refers to products that it cannot sell 5 due to expired licenses or lack of consumer demand as “dead” inventory. (Id.) In 6 general, Funko’s business model requires an ability “to quickly design, manufacture and 7 ship” products, as well as “accurate demand forecasting and inventory management” to 8 achieve optimal financial outcomes. (Id. ¶¶ 40-41.) Otherwise, the accumulation of

9 excess dead inventory can cause Funko to lose revenue and miss financial targets. (Id. 10 ¶ 42.) In 2019, for example, Funko was forced to write down $16.8 million in unsellable 11 inventory that had accumulated in its Washington warehouses, leading to a stock price 12 drop and subsequent securities fraud litigation that ultimately settled for $7 million. (Id. 13 ¶¶ 42, 155.)

14 In recent years, Funko has “invest[ed] significantly in upgraded infrastructure” to 15 facilitate the company’s “impressive growth trajectory.” (Id. ¶¶ 3-4.) Two such projects 16 lie at the core of Plaintiffs’ claims in this case: (1) the upgrade of Funko’s enterprise 17 resource planning (“ERP”) software to Oracle, a more sophisticated platform (the “Oracle 18 Project”); and (2) the relocation and consolidation of Funko’s five Washington

19 warehouses into a single “state-of-the-art” distribution center (“DC”) in Buckeye, 20 Arizona (the “Buckeye Project”). (See id. ¶¶ 4-21.) 21 // 22 // 1 B. The Projects and the Alleged Fraud 2 In 2020, Funko decided to upgrade its ERP software from Microsoft NAV to

3 Oracle. (Id. ¶ 47.) Funko’s ERP system is the central information system and database 4 that allows Funko to track its inventory and operations. (See id. ¶¶ 4, 6, 45.) Launching 5 a new ERP system was a “massive endeavor” that was “manually intensive,” and took 6 longer than anticipated. (Id. ¶¶ 48, 51.) As Plaintiffs explain, “[i]n order for Oracle to be 7 effective, Funko needed to ‘clean’ the Company’s existing data so that it could be 8 transferred to Oracle properly.” (Id. ¶ 50.) But “Funko’s data was a mess” due in large

9 part to a lack of data governance, i.e., the “controls and processes for who creates certain 10 data and how it should be entered into the system.” (Id. ¶ 51.) Other issues hindered 11 progress, too, including “deep rifts among Funko senior leadership,” who “could not get 12 ‘aligned’” on “critical systems architecture decisions.” (Id. ¶ 53.) By spring 2021, Chief 13 Operating Officer (“COO”) Joe Sansone stepped in, overseeing the project himself. (Id.

14 ¶ 48.) By early 2022, however, “it was clear to employees across the Company’s various 15 departments that the Oracle project was far from being able to launch by” the targeted 16 deadline of either “end of 2Q22 or early 3Q22.” (Id. ¶¶ 8, 54.) 17 Against this backdrop, Funko also endeavored to launch the Buckeye DC—a 18 brand new 860,000 square foot facility that would house Funko’s retail operations in the

19 United States. (Id. ¶¶ 55-57.) Funko signed the Buckeye lease in September 2021 and 20 began the lease term in April 2022. (Id. ¶¶ 7, 57.) “Funko planned for the Buckeye DC 21 to operate on its new Oracle platform’s warehouse management software” (“WMS”), 22 which would employ “analytics and various inventory tracking tools to greatly enhance 1 the efficiency and productivity of Funko’s order fulfillment and distribution operations.” 2 (Id. ¶ 6.) The Buckeye warehouse, however, was “a largely blank slate,” requiring Funko

3 “to build out the needed storage racks, office space, loading bays, and even bathrooms.” 4 (Id. ¶ 7.) Funko would also have to ship the “substantial” amount of “inventory in its 5 Washington warehouses down to Buckeye,” where the products would be processed, 6 organized, and stored. (Id.) In short, the Buckeye DC would require significant planning 7 and preparation to launch, and because it was intended to run on Oracle, its success was 8 intertwined with that of the Oracle Project.

9 On March 3, 2022—the first day of Plaintiffs’ Proposed Class Period— 10 Defendants touted Funko’s “exceptional revenue growth” in 2021 and offered optimistic 11 revenue projections for 2022, despite “higher-than-normal” Selling, General and 12 Administrative (“SG&A”) expenses “due to the Oracle implementation and Buckeye DC 13 opening during the first half of the year.” (Id. ¶ 61.) Meanwhile, Plaintiffs allege “it was

14 clear that the Company’s infrastructure projects were nowhere close to being completed 15 (or their costs accrued) by the deadlines” that Defendants promised. (Id. ¶ 64.) Indeed, 16 the Buckeye DC was neither fully built nor fully staffed, and the Oracle WMS was not 17 yet ready for use. (Id. ¶¶ 65-67.) 18 Nevertheless, Buckeye “opened” on April 4, 2022, and new employee training

19 started in late April. (Id. ¶ 66.) Trucks began arriving from Washington, though 20 Buckeye was “wholly unprepared for the onslaught of inventory”—including large 21 quantities of dead inventory that Funko’s Vice President (“VP”) of Operations had opted 22 to ship to Buckeye rather than discard. (Id. ¶¶ 68-70, 76.) Issues quickly ensued. For 1 example, “none of the product was scanned in electronically so that its location [could] 2 be tracked within the enormous DC” (id. ¶ 70), and it became apparent that “trailers were

3 missing product, had extra product, or contained entirely different product” than expected 4 (id. ¶ 71). As storage racks filled up, inventory was strewn about the DC “without any 5 particular organization or identification.” (Id. ¶ 75.) That Buckeye was operating on 6 Microsoft NAV rather than Oracle was also “causing major disruption,” as “the 7 antiquated NAV system couldn’t handle the workload of the new consolidated 8 warehouse” and “frequently experienced system errors.” (Id. ¶¶ 73-74.) Consequently,

9 “order fulfillment began to get backed up.” (Id. ¶ 75.) 10 On May 5, 2022, Defendants announced Funko’s first quarter financial results. 11 (Id. ¶ 79.) Inventory levels were “up 160.8% over the prior year,” which Defendants 12 explained was due in part to “pandemic-related supply chain disruptions.” (Id.) Funko’s 13 anticipated revenue margins remained consistent with the previous quarter, reflecting

14 “one-time project spend associated with” the Projects. (Id.) On an earnings call that day, 15 Ms. Jung remained optimistic about year-end financial projections, noting that SG&A 16 costs would be concentrated in the first half of the year as Buckeye had just launched and 17 Oracle was “set” to launch “at the end of the quarter.” (Id. ¶ 80.) 18 Despite this sunny forecast, “[b]y June, the chaos at the Buckeye warehouse had

19 only increased.” (Id. ¶ 84.) Oracle still had not launched, and Buckeye still was not fully 20 built out or properly staffed. (Id.) Mr. Sansone “began appearing at Buckeye regularly, 21 spending at least one or two weeks per month at the warehouse,” having meetings with 22 senior management “about the DC and walking the floor speaking with warehouse 1 employees trying to solve immediate problems.” (Id. ¶ 84.) “The chaos increased 2 exponentially at the end of the month, when shipping containers that had been held up in

3 transit during the COVID-19-related freight slowdowns and port delays . . . finally started 4 to arrive with additional inventory.” (Id. ¶ 85.) Funko incurred rental charges and late 5 penalties for hundreds of shipping containers that began accumulating in the parking lot, 6 where they sat until space inside the DC became available to store the inventory. (Id.) 7 On August 4, 2022, Defendants announced Funko’s second quarter financial 8 results. (Id. ¶ 86.) This included increased SG&A expenses and inventory levels

9 compared to the same quarter in 2021, reflecting Project-related costs and receipt of 10 delayed inventory at Buckeye. (Id.) Anticipated revenue margins remained steady, 11 though Funko also expected “personnel and related costs to remain elevated” through the 12 end of the year in connection with “the final transitions of our U.S. distribution 13 warehouses,” as well as “elevated costs related to our [ERP] implementation” which

14 would be “finalize[d] in early 2023.” (Id. ¶ 87.) On an earnings call the same day, Ms. 15 Jung confirmed that Funko had “recently made the difficult decision to delay” Oracle 16 implementation until 2023, so as not to impair existing “momentum.” (Id. ¶ 88.) 17 Regarding inventory, Ms. Jung stated her belief that inventory was “generally high 18 quality” and that Funko was “well positioned to meet our consumer demand and support

19 our strong second half growth forecast.” (Id. ¶ 89.) Following the earnings call, Funko’s 20 Class A share price declined by $4.88, closing at $21.81 on August 5, 2022. (Id. ¶ 90.) 21 Back at Buckeye, the situation continued to devolve. By August, the DC was 22 more than 50 days behind in fulfilling backlogged orders. (Id. ¶ 91.) The DC was not 1 operating efficiently, with disorganized and overflowing inventory clogging the 2 warehouse, conveyer belt systems still under construction, and “constant battle[s]

3 between warehouse departments” to use what little equipment was available to reach 4 product on the top shelves. (Id. ¶ 92.) The lack of order fulfillment capabilities began 5 impacting forward sales. (Id. ¶ 91.) Sales team members struggled to meet quotas due to 6 missing product, “artificial product shortages arising from the inability to unload 7 containers,” and order cancellations prompted by extreme shipping delays. (Id. ¶ 93.) 8 On September 13, 2022, Defendants held a Funko Investor Day. (Id. ¶ 94.) Ms.

9 Jung touted Funko’s strategy to meet optimistic revenue targets for 2026, representing 10 that the new DC and forthcoming Oracle launch would “provide increased operational 11 efficiencies.” (Id.) When asked about future investments, Ms. Jung responded that 12 “more distribution capabilities” would be necessary to support continuing growth, but 13 that was “more of a future down the road within the 5-year plan, but not directly related

14 within the next, call it, 12 months or so.” (Id.) Within weeks of Investor Day, however, 15 Funko hired a third-party logistics company to store slow-moving and dead inventory in a 16 warehouse. (Id. ¶ 95.) That warehouse filled to capacity within months, prompting 17 Funko to rent a second warehouse. (Id.) 18 On November 3, 2022, Funko announced disappointing third quarter results,

19 revising its financial guidance for 2022 in stark contrast to the optimistic projections 20 made on Investor Day. (Id. ¶ 97.) Sales were up, but SG&A expenses remained elevated 21 and would grow even more in the fourth quarter, contributing to significantly reduced 22 revenue margins. (Id. ¶¶ 97, 99.) SG&A expenses reflected considerable labor costs and 1 costs related to third-party warehouse storage. (Id. ¶ 99.) Mr. Perlmutter admitted on the 2 ensuing earnings call that Buckeye had been designed to run on Oracle and that the

3 facility opened before it was ready. (Id.) Although inventory levels were high, Ms. Jung 4 remained steadfast that “inventory ‘was generally high quality.’” (Id. ¶ 100.) 5 Following the third quarter announcement, one analyst stated it felt “like we were 6 hit with a bomb.” (Id. ¶ 102.) Funko’s stock dropped 59%—closing at $7.92 per share 7 on November 4, 2022. (Id. ¶ 103.) On December 5, 2022, Funko announced leadership 8 changes. (Id. ¶ 104.) Mr. Perlmutter was demoted from CEO to President, and Ms. Jung

9 “stepp[ed] down” as CFO, effective immediately. (Id.) 10 On March 1, 2023—the last day of the Proposed Class Period—Funko announced 11 its fourth quarter and year-end results for 2022. (Id. ¶ 105.) Net income and adjusted 12 revenue margins decreased substantially compared to the prior year. (Id. ¶ 106.) Funko 13 disclosed the decision to abandon the Oracle Project entirely, taking a $32.5 million write

14 down of associated costs. (Id.) Funko also disclosed its intention to eliminate and write 15 down between $30 million and $36 million in inventory in the first half of 2023. (Id.) 16 Funko’s Class A stock price closed at $9.94 per share on March 2, 2023, down from a 17 prior day close of $10.70. 18 C. Procedural History

19 Former named plaintiff Jonathan Studen filed the original putative class action 20 complaint in this matter on June 2, 2023. (See generally Compl. (Dkt. # 1).) Mr. Studen 21 issued notice to the putative class pursuant to the Private Securities Litigation Reform 22 Act of 1995 (“PSLRA”), 15 U.S.C. § 78u-4 et seq. (6/27/23 Order (Dkt. # 5) at 2.) On 1 August 1, 2023, Mr. Studen, the Pension Trust, and Mr. Haddock filed motions seeking 2 appointment as lead plaintiff. (See generally Studen Mot. (Dkt. # 20); Pension Mot.

3 (Dkt. # 22); Haddock Mot. (Dkt. # 24).) Mr. Studen and Mr. Haddock are individual 4 class members, and the Pension Trust “is a multi-employer defined pension plan with 5 approximately $1 billion in assets under management,” including Funko Class A stock. 6 (Am. Compl. ¶¶ 25-26; Compl. ¶ 18.) The court granted the Pension Trust’s motion and 7 appointed it as lead plaintiff on August 17, 2023. (8/17/23 Order (Dkt. # 29).) 8 The Pension Trust timely filed the amended complaint on October 19, 2023,

9 asserting claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act 10 of 1934 (the “1934 Exchange Act”), 15 U.S.C. §§ 78j(b), 78t(a), and Rule 10b-5, 17 11 C.F.R. § 240.10b-5.4 (Am. Compl. ¶¶ 190-204.) In the amended complaint, Plaintiffs 12 allege the Executive Defendants were deeply involved in the Projects; knew, or were at 13 least deliberately reckless, about the flailing infrastructure initiatives; and fraudulently

14 concealed the truth from investors. (See id. ¶ 2.) Specifically, Plaintiffs identify 28 15 allegedly false or misleading statements made by Defendants throughout the Proposed 16 Class Period, claiming these statements misled investors about the extent of the chaos 17 unfolding at Buckeye, the health of Funko’s inventory, the status of the Oracle Project, 18 and Funko’s overall financial outlook. (See id. ¶¶ 114-146.) Defendants timely moved to

19 // 20

21 4 The amended complaint does not name Mr. Studen. (See generally Am. Compl.) Therefore, the court directs the parties to state whether they object to amending the caption of 22 this matter to name the Pension Trust and Mr. Haddock as Plaintiffs. (See infra Part IV.) 1 dismiss the amended complaint, and the motion is now ripe for decision. (See generally 2 MTD.)

3 III. ANALYSIS 4 The court sets forth the relevant legal standard before addressing certain threshold 5 procedural matters and then, the merits. 6 A. Legal Standard 7 To survive a motion to dismiss, a plaintiff must plead “enough facts to state a 8 claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S.

9 544, 570 (2007); see also Fed. R. Civ. P. 8(a)(2) (requiring “a short and plain statement 10 of the claim showing that the pleader is entitled to relief”). The court must accept all 11 factual allegations in the complaint as true and construe the pleadings in the light most 12 favorable to the plaintiff, but it need not “accept as true allegations that contradict matters 13 properly subject to judicial notice or by exhibit,” or “allegations that are merely

14 conclusory, unwarranted deductions of fact, or unreasonable inferences.” In re Gilead 15 Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008). 16 Securities fraud claims must also meet the more “exacting” pleading requirements 17 of Federal Rule of Civil Procedure 9(b) and the PSLRA. Or. Pub. Emps. Ret. Fund v. 18 Apollo Grp. Inc., 774 F.3d 598, 604 (9th Cir. 2014). Rule 9(b) requires a plaintiff to

19 “state with particularity the circumstances constituting fraud.” Fed. R. Civ. P. 9(b). 20 “That is, the complaint must allege the ‘who, what, when, where, and how’ of the fraud.” 21 Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 1008 (9th Cir. 2018) (quoting Vess 22 v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003)). Under the PSLRA, a 1 complaint must “specify each statement alleged to have been misleading, the reason or 2 reasons why the statement is misleading, and, if an allegation regarding the statement or

3 omission is made on information and belief, the complaint shall state with particularity all 4 facts on which that belief is formed,” 15 U.S.C. § 78u-4(b)(1)(B), and the complaint must 5 also “state with particularity facts giving rise to a strong inference that the defendant 6 acted with the required state of mind,” id. § 78u-4(b)(2)(A). See id. § 78u-4(b)(3)(A) 7 (mandating dismissal on defendant’s motion where the complaint fails to meet these 8 requirements).

9 B. Preliminary Matters 10 Before examining the merits, the court must address threshold procedural matters. 11 First, Plaintiffs move to strike Defendants’ Appendix A, asserting it is 12 argumentative and an improper attempt to bypass applicable word limits. (MTD Resp. at 13 7; see also McDonough Decl. ¶ 2, Ex. 1 (“Appendix A”)); Local Rules W.D. Wash. LCR

14 7(e)(3) (imposing 8,400-word limit on motions to dismiss). Appendix A is a chart 15 created by Defendants that identifies (1) the 28 allegedly fraudulent statements at issue, 16 (2) additional text “denot[ing] surrounding context that is omitted from the [amended 17 complaint],” and (3) citations to Defendants’ arguments, as set forth in their motion to 18 dismiss, with respect to each challenged statement. (Appendix A at 1.) Plaintiffs ask the

19 court to consider their responsive chart should it decline to strike Appendix A. (MTD 20 Resp. at 7; see also id. at Ex. A (“Responsive Chart”).) The court agrees with Defendants 21 that Appendix A comprises “organizational work that the Court would otherwise have to 22 take upon itself,” and therefore declines to strike it. (MTD Reply at 2 (quoting Waswick 1 v. Torrid Holdings, Inc., No. 2:22-cv-08375-JLS-AS, 2023 WL 9197563, at *3 (C.D. Cal. 2 Dec. 1, 2023)).) The court will consider both Defendants’ Appendix A and Plaintiffs’

3 Responsive Chart. 4 Second, Defendants ask the court to judicially notice their Exhibits 10 and 15 5 pursuant to Federal Rule of Evidence 201. (Request at 3); see also Fed. R. Evid. 6 201(b)(1)-(2) (authorizing judicial notice of adjudicative facts that are “not subject to 7 reasonable dispute” and (1) are generally known within the court’s jurisdiction, or 8 (2) “can be accurately and readily determined from sources whose accuracy cannot

9 reasonably be questioned”). Exhibit 10 is Funko’s Form 8-K, filed with the Securities 10 and Exchange Commission (“SEC”) on December 5, 2022. (See generally McDonough 11 Decl. ¶ 11, Ex. 10.) Exhibit 15 “is a PowerPoint slide deck that Defendants displayed 12 and referred to during a September 13, 2022 ‘Analyst/Investor Day’ conference,” and “is 13 publicly available on Funko’s website.” (Request at 4. See generally McDonough Decl.

14 ¶ 16, Ex. 15 (“Investor Day Deck”).) Plaintiffs oppose Defendants’ request, arguing the 15 exhibits at issue “are subject to reasonable dispute” and that it would be improper to 16 accept their contents as true. (Request Resp. at 4.) 17 Under Federal Rule of Evidence 201(b), courts may take judicial notice of 18 publicly available documents “introduced to ‘indicate what was in the public realm at the

19 time, not whether the contents of those [documents] were in fact true.’” Von Saher v. 20 Norton Simon Museum of Art at Pasadena, 592 F.3d 954, 960 (9th Cir. 2010) (quoting 21 Premier Growth Fund v. All. Cap. Mgmt., 435 F.3d 396, 401 n.15 (3d Cir. 2006)). 22 Accordingly, the court will take judicial notice of Exhibits 10 and 15 not for the truth of 1 their contents, but for the narrow purpose of considering the representations made and 2 information available to investors during the Proposed Class Period. See, e.g., In re

3 Zillow Grp., Inc. Sec. Litig., No. C17-1387JCC, 2018 WL 4735711, at *3 (W.D. Wash. 4 Oct. 2, 2018) (taking “judicial notice of the fact that Zillow filed the June 2018 Form 5 8-K, as well as of that document’s contents,” but declining to accept the form’s contents 6 as true); Kipling v. Flex Ltd., No. 18-CV-02706-LHK, 2020 WL 7261314, at *7 (N.D. 7 Cal. Dec. 10, 2020) (taking judicial notice of public documents including “transcripts 8 from earnings calls, investor and analyst conferences, and related presentations . . . ‘for

9 the sole purpose of determining what representations [Defendants] made to the market’” 10 (quoting Wochos v. Tesla, Inc., No. 17-cv-05828-CRB, 2018 WL 4076437, at *2 (N.D. 11 Cal. Aug. 27, 2018))). 12 The court now turns to the merits. 13 C. Plaintiffs’ Claims Under Section 10(b)

14 Section 10(b) of the 1934 Exchange Act makes it unlawful for “any person . . . [t]o 15 use or employ, in connection with the purchase or sale of any security registered on a 16 national securities exchange . . . any manipulative or deceptive device or contrivance in 17 contravention of such rules and regulations as the [SEC] may prescribe as necessary or 18 appropriate in the public interest or for the protection of investors.” 15 U.S.C.

19 § 78j(b). “Rule 10b-5 implements Section 10(b) by making it unlawful ‘[t]o make any 20 untrue statement of a material fact or to omit to state a material fact necessary in order to 21 make the statements made, in the light of the circumstances under which they were made, 22 not misleading.’” Glazer Cap. Mgmt., L.P. v. Forescout Techs., Inc., 63 F.4th 747, 764 1 (9th Cir. 2023) (quoting 17 C.F.R. § 240.10b-5(b)). To state a claim for securities fraud 2 under Section 10(b) and Rule 10b-5, a plaintiff must allege: (1) a material

3 misrepresentation or omission in connection with the purchase or sale of a security (i.e., 4 falsity); (2) scienter; (3) a connection between the misrepresentation or omission and the 5 purchase or sale of a security; (4) reliance upon the misrepresentation or omission; 6 (5) economic loss; and (6) loss causation. Id. 7 Here, the parties dispute only falsity and scienter. The court addresses each 8 element in turn, explaining why neither is met.

9 1. Falsity 10 Section 10(b) and Rule 10b-5 require a plaintiff to show that the defendant made a 11 statement that was false or misleading as to a material fact. Basic Inc. v. Levinson, 485 12 U.S. 224, 238 (1988). A statement is false or misleading if it directly contradicts what 13 the defendant knew at the time or omits material information. Weston Fam. P’ship LLLP

14 v. Twitter, Inc., 29 F.4th 611, 619 (9th Cir. 2022). Plaintiffs “may rely on either an 15 affirmative misrepresentation theory or an omission theory.” Wochos v. Tesla, 985 F.3d 16 1180, 1188 (9th Cir. 2021). “‘[A]n affirmative misrepresentation is an untrue statement 17 of a material fact,’ and a fraudulent omission is a failure to ‘state a material fact 18 necessary in order to make the statements made, in light of the circumstances under

19 which they were made, not misleading.’” Id. (quoting 17 C.F.R. § 240.10b-5(b)). 20 “Courts apply the objective standard of a ‘reasonable investor’ to determine whether a 21 statement is misleading.” In re Splunk Inc. Sec. Litig., 592 F. Supp. 3d 919, 932 (N.D. 22 Cal. 2022) (citing In re VeriFone Sec. Litig., 11 F.3d 865, 869 (9th Cir. 1993)). A 1 “statement is misleading if it would give a reasonable investor the impression of a state of 2 affairs that differs in a material way from the one that actually exists.” In re Cutera Sec.

3 Litig., 610 F.3d 1103, 1109 (9th Cir. 2010) (quoting Berson v. Applied Signal Tech., Inc., 4 527 F.3d 982, 985 (9th Cir. 2008)). 5 Certain types of statements are not actionable for securities fraud. Relevant here, 6 the PSLRA carves out a “safe harbor for forward-looking statements.” 15 U.S.C. 7 § 78u-5; see also id. § 78u-5(i)(1) (defining “forward-looking” statements as including 8 those that concern financial projections, future economic performance, and the plans and

9 objectives of management for future operations). The safe harbor “‘is designed to protect 10 companies and their officials’ when they merely fall short of their ‘optimistic 11 projections.’” Wochos, 985 F.3d at 1189 (quoting In re Quality Sys., Inc. Sec. Litig., 865 12 F.3d 1130, 1142 (9th Cir. 2017)). The safe harbor shields two types of forward-looking 13 statements. It first protects forward-looking statements that are (1) identified as such, and

14 (2) “accompanied by meaningful cautionary statements identifying important factors that 15 could cause actual results to differ materially from those in the forward-looking 16 statement.” 15 U.S.C. § 78u-5(c)(1)(A)(i). The safe harbor also protects 17 forward-looking statements “not identified and not accompanied by cautionary language, 18 unless they were ‘made with actual knowledge . . . that [they were] false or misleading.’”

19 Cutera, 610 F.3d at 1108 (quoting 15 U.S.C. § 78u-5(c)(1)(B)(i)-(ii)). 20 In general, pure statements of honest opinion also are not actionable. Wochos, 985 21 F.3d at 1189. There are only three circumstances in which an opinion statement may be 22 actionable: where (1) the speaker did not actually hold the stated belief, (2) the opinion 1 contains an embedded statement of untrue fact, or (3) a reasonable investor would 2 “understand an opinion statement to convey facts . . . about the speaker’s basis for

3 holding that view,” but those facts are untrue. Id. (quoting Omnicare, Inc. v. Laborers 4 Dist. Council Const. Indus. Pension Fund, 575 U.S. 175, 188 (2015)). The third category 5 captures opinions that are “misleading by omission.” In re Atossa Genetics Inc. Sec. 6 Litig., 868 F.3d 784, 802 (9th Cir. 2017). “[F]or an opinion to be misleading by 7 omission, (1) the ‘statement [must] omit[] material facts about the [defendant’s] inquiry 8 into or knowledge concerning a statement of opinion,’ and (2) ‘those facts [must] conflict

9 with what a reasonable investor would take from the statement itself.’” Id. (quoting City 10 of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605, 11 615 (9th Cir. 2017)). 12 “Puffery” statements likewise are not actionable. Macomb Cnty. Emps.’ Ret. Sys. 13 v. Align Tech., Inc., 39 F.4th 1092, 1098 (9th Cir. 2022). “Corporate ‘puffing’ involves

14 ‘expressing an opinion’ that is not ‘capable of objective verification.’” Id. at 1098-99 15 (quoting Retail Wholesale & Dep’t Store Union Loc. 338 Ret. Fund v. Hewlett-Packard 16 Co., 845 F.3d 1268, 1275 (9th Cir. 2017)). “These ‘vague statements of optimism like 17 “good,” “well-regarded,” or other feel good monikers, are not actionable because 18 professional investors, and most amateur investors as well, know how to devalue the

19 optimism of corporate executives.’” Id. at 1099 (quoting Police Ret. Sys. of St. Louis v. 20 Intuitive Surgical, Inc., 759 F.3d 1051, 1060 (9th Cir. 2014)). Puffery “statements rise to 21 the level of materially misleading statements,” and thus may be actionable, “only if they 22 provide ‘concrete description of the past and present’ that affirmatively create a plausibly 1 misleading impression of a ‘state of affairs that differed in a material way from the one 2 that actually existed.’” In re Alphabet, Inc. Sec. Litig., 1 F.4th 687, 700 (9th Cir. 2021)

3 (quoting Quality Sys., 865 F.3d at 1144). 4 With these principles in mind, the court now turns to the challenged statements, 5 addressing them in groups. Defendants argue that Plaintiffs fail to establish falsity 6 because the challenged statements either are not false or misleading, or are protected 7 forward-looking statements, opinions, or puffery. Although Defendants are not correct 8 on every account, the court generally agrees.

9 a. Risk Disclosures 10 First, Plaintiffs challenge six “Risk Factors” contained within public SEC filings 11 that Funko issued throughout 2022. (See Am. Compl. ¶¶ 114, 122-23, 128-29, 143.) The 12 court concludes that none are actionable. 13 Four of the challenged risk disclosures identify potential risks in connection with

14 inventory management. (See id. ¶¶ 114, 123, 128, 143.) These disclosures are identical 15 to one another and were issued on March 3, 2022, May 5, 2022, August 4, 2022, and 16 November 3, 2022. They state as follows: 17 Our success depends, in part, on our ability to successfully manage our inventories. . . . If demand or future sales do not reach forecasted levels, we 18 could have excess inventory that we may need to hold for a long period of time, write down, sell at prices lower than expected or discard. . . . If we are 19 not successful in managing our inventory, our business, financial condition and results of operations could be adversely affected. 20 (McDonough Decl. ¶ 14, Ex. 13 (“21 Form 10-K”) at 27; id. ¶ 17, Ex. 16 (“1Q22 Form 21 10-Q”) at 42; id. ¶ 18, Ex. 17 (“2Q22 Form 10-Q”) at 49; id. ¶ 19, Ex. 18 (“3Q22 Form 22 1 10-Q”) at 46.) Two additional disclosures concern Funko’s ERP systems. (See Am. 2 Compl. ¶¶ 122, 129.) These disclosures are largely identical to one another and were

3 issued on May 5, 2022, and August 4, 2022. They state as follows: 4 The failure of these information systems to perform as designed, our failure to operate them effectively, or a security breach or disruption in operation of 5 our information systems could disrupt our business . . . . If the potential upgrades are not successful or result in [further5] delays, our business could 6 be disrupted or harmed. 7 (1Q22 Form 10-Q at 57; 2Q22 Form 10-Q at 64.) 8 Defendants argue these risk disclosures receive safe harbor protection under 15 9 U.S.C. § 78u-5(c)(1)(A)(i) because they are forward-looking, identified as such, and 10 accompanied by meaningful cautionary language. (MTD at 8-9.) The court agrees with 11 Defendants that the risk disclosures are forward-looking “to the extent that they describe 12 the future challenges [Funko] might confront.” Wochos, 985 F.3d at 1195. But the 13 disclosures are not identified as forward-looking. On this point, Funko’s public SEC 14 filings contradict Defendants’ argument because the filings identify the challenged risk 15 disclosures separately from Funko’s forward-looking statements concerning financial or 16 operational projections. (See, e.g., 1Q22 Form 10-Q at 1 (“These forward-looking 17 statements are subject to a number of risks, uncertainties, and assumptions, 18 including . . . ‘Risk Factors’ . . . that may cause our actual results, performance or

19 achievements to differ materially and adversely from those expressed or implied by the 20 // 21

5 The word “further” appears in the second quarter disclosure issued on August 4, 2022, 22 but not the first quarter disclosure issued on May 5, 2022. 1 forward-looking statements.”).) Accordingly, the risk disclosures are not protected by the 2 PSLRA safe harbor under 15 U.S.C. § 78u-5(c)(1)(A)(i).

3 Plaintiffs argue that the disclosures are false or misleading because they describe 4 risks that “had already materialized.” (E.g., Am. Compl. ¶ 138(a). See also MTD Resp. 5 at 16-17.) Plaintiffs are correct that in some instances, falsity allegations respecting risk 6 disclosures may suffice where “a company’s SEC filings warned that risks ‘could’ occur 7 when, in fact, those risks had already materialized.” In re Facebook, Inc. Sec. Litig., 87 8 F.4th 934, 948-49 (9th Cir. 2023); Alphabet, 1 F.4th at 703-04; see also Glazer, 63 F.4th

9 at 780-81 (stating that the risk need not have become an absolute certainty to mislead, 10 and that defendants’ awareness “of a significant likelihood that the risk would 11 materialize” suffices). Importantly, Facebook and Alphabet instruct that plaintiffs 12 challenging risk disclosures can successfully plead falsity only where their allegations 13 show the defendants “knew that those risks had materialized.” Alphabet, 1 F.4th at 704

14 (emphasis added) (holding plaintiffs adequately pled falsity with respect to disclosures 15 identifying potential security risks, because the disclosures failed to mention an existing 16 privacy bug of which Google executives were allegedly aware as they had “received and 17 read” a legal memo detailing the issue); see also Facebook, 87 F.4th at 948 (holding 18 plaintiffs adequately pled falsity with respect to disclosures concerning potential security

19 risks, based on numerous particularized allegations that Facebook executives knew of 20 existing data violations by Cambridge Analytica). Conversely, where “the plaintiff fails 21 to prove” forward-looking statements were “made with actual knowledge that [they were] 22 // 1 false or misleading,” those statements are entitled to safe harbor protection under the 2 PSLRA. See 15 U.S.C. § 78u-5(c)(1)(B); (see also MTD at 11-13.)

3 Having determined that the challenged risk disclosures are forward-looking, see 4 supra, the court’s analysis thus turns on Defendants’ knowledge: Plaintiffs meet the 5 falsity requirement if they plausibly allege Defendants knew the stated risks had already 6 transpired or were substantially likely to occur at the time they disclosed those risks as 7 possibilities, e.g., Alphabet, 1 F.4th at 704, but the disclosures receive safe harbor 8 protection if Plaintiffs fail to plausibly allege Defendants’ actual knowledge of the same,

9 15 U.S.C. § 78u-5(c)(1)(B). For the reasons explained below, Plaintiffs’ challenges to 10 Defendants’ risk disclosures fail. 11 i. Inventory-Related Disclosures 12 As noted, four challenged risk disclosures warned of possible risks in connection 13 with inventory management—specifically, that Funko “could have excess inventory that

14 [it] may need to hold for a long period of time, write down, sell at prices lower than 15 expected or discard.” (E.g., Am. Compl. ¶ 114.) Plaintiffs, however, fail to offer 16 particularized allegations demonstrating the Executive Defendants knew at the time of 17 the disclosures that the stated risks had materialized or were substantially likely to occur. 18 Plaintiffs come somewhat close by alleging that Mr. Sansone, Funko’s COO,

19 “began appearing at Buckeye regularly” in June 2022, “spending at least one or two 20 weeks per month at the warehouse, having meetings . . . about the DC and walking the 21 floor speaking with warehouse employees trying to solve immediate problems.” (Id. 22 ¶¶ 84, 149.) At this time, the Buckeye DC was allegedly in “chaos” due to staffing 1 issues, significant quantities of missing or misplaced inventory “with no Oracle system to 2 assist with keeping track of” it, a “substantial amount of non-moving and dead

3 inventory,” and an influx of additional inventory “arriving en masse” with nowhere to 4 store it, as “the existing racks in the Buckeye DC were already full.” (Id. ¶¶ 84-85.) As 5 many as 300 to 500 shipping containers sat unloaded in the parking lot on any given day, 6 accruing rental charges and late penalties. (Id. ¶ 85.) Plaintiffs assert that as a result, 7 “[e]ven a casual observer at Buckeye could tell that the DC was over capacity and not 8 able to operate with even close to the necessary productivity.” (Id. ¶ 152.) Viewing

9 these allegations in the light most favorable to Plaintiffs leads to an inference that Mr. 10 Sansone knew of excess inventory issues that were openly escalating at Buckeye. But 11 Plaintiffs fail to connect the dots. Absent from the amended complaint are particularized 12 allegations showing the Executive Defendants had regular conversations, debates, and 13 meetings with Mr. Sansone that specifically concerned these excess inventory issues.

14 Plaintiffs also fail to allege the specific contents of any such conversation. Instead, 15 Plaintiffs allege in conclusory fashion that “[u]ndoubtedly, Sansone reported back to 16 Perlmutter, and most likely to Fall Jung, what he was seeing” at Buckeye. (Id. ¶ 152.) 17 That falls short of the demanding PSLRA standard. 18 Plaintiffs also suggest the Executive Defendants knew about excess inventory

19 issues at Buckeye because (1) they participated in regular meetings “to discuss Sales 20 forecasts and available inventory, as well as what inventory was not selling,” (2) Ms. 21 “Jung’s group had responsibility for accounting for Funko’s inventory levels,” 22 (3) Defendants stated they were “constantly” and “always” looking at inventory health, 1 and (4) Mr. “Perlmutter himself visited the Buckeye DC” some unidentified time “during 2 3Q22.” (Id. ¶¶ 148, 152.) These allegations are not sufficiently particular to plead the

3 Executive Defendants’ actual knowledge under the heightened standards imposed by the 4 PSLRA. For example, Plaintiffs do not specify when or how often the sales meetings 5 took place—“regular” could mean once per week, month, year, or anywhere in between. 6 Vague allegations that these meetings addressed “forecasts,” “available inventory,” and 7 “inventory [that] was not selling” do not demonstrate whether the Executive Defendants 8 received specific details about the precise quantity and value of inventory that was

9 obsolete, or how long Funko had been holding obsolete inventory. Nor does the amended 10 complaint reveal the date or length of Mr. Perlmutter’s visit, the purpose of the visit, 11 whether he interacted with employees during that visit, or any other alleged facts that 12 would tend to show Mr. Perlmutter witnessed and appreciated the extent of excess 13 inventory issues at Buckeye.

14 On the whole, Plaintiffs’ generalized allegations fail to plausibly show the 15 Executive Defendants knew that Funko was holding excess product for a long period of 16 time, writing down excess product, or discarding excess product—the specific risks that 17 the inventory-related disclosures warned of. See Ferreira v. Funko Inc., No. 18 2:20-cv-02139-VAP (PJWx), 2021 WL 8820650, at *15-20 (C.D. Cal. Oct. 22, 2021)

19 (holding, in prior securities fraud action against Funko, that identical inventory risk 20 disclosure dated August 8, 2019, was not misleading because plaintiffs failed to plead 21 particularized facts showing it was issued with actual knowledge of falsity). Cf. id. at 22 *20-22 (holding, in same case, that identical inventory risk disclosure dated October 31, 1 2019 was misleading because defendants allegedly issued it after (1) discussing 2 approximately 13 weekly “aged inventory report[s]” that “set forth exactly what

3 inventory Funko held, including how much was obsolete and slated for destruction, as 4 well as its monetary value”; (2) repeatedly discussing an “Open to Buy plan” that detailed 5 “the present amount of inventory, excess inventory, the estimated cost of sale of the 6 inventory, and . . . a line item called ‘write-down,’ indicating how much of the inventory 7 was obsolete,” and (3) being told that Funko had leased a warehouse to store dead 8 inventory that would be destroyed). Thus, these four disclosures come within the PSLRA

9 safe harbor, 15 U.S.C. § 78u-5(c)(1)(B), and are not actionable. (See Am. Compl. 10 ¶¶ 114, 123, 128, 143.) 11 ii. ERP-Related Disclosures 12 The remaining two disclosures warned of possible risks in connection with ERP 13 implementation. Consistent with Plaintiffs’ briefing, the court focuses its inquiry on the

14 specific risk of “delays in the ERP system upgrades” and whether the Executive 15 Defendants actually knew a delay was certain or substantially likely to occur when they 16 disclosed it as a mere possibility on May 5, 2022, and August 4, 2022. (MTD Resp. at 17 17.) 18 To begin, the court notes a critical difference between these two disclosures.

19 Defendants revised the latter disclosure to inform shareholders of Funko’s decision to 20 “delay[] the remaining steps for implementation of our enterprise resource planning 21 software to 2023.” (2Q22 Form 10-Q at 64 (warning of possible risks in connection with 22 “further” delays); see also 2Q22 Call Tr. at 6 (Ms. Jung advising on same day earnings 1 call that “[r]egarding our ERP, we recently made the difficult decision to delay the 2 remaining steps until 2023”).) The court cannot draw the inference that the August 4,

3 2022 disclosure was misleading when it expressly advised that certain risks related to the 4 Oracle Project had indeed come to pass. Rather than creating “the impression of a state 5 of affairs that differ[ed] in a material way from the one that actually exist[ed],” the 6 disclosure candidly informed investors that Oracle would not timely launch. Cutera, 610 7 F.3d at 1109. Cf. Glazer, 63 F.4th at 780-81 (holding disclosure with mere “boilerplate 8 listing of generic risks” was misleading where defendants “did not meaningfully update

9 the risk disclosure” after learning new information that made the risk significantly more 10 likely to occur). Plaintiffs therefore fail to plausibly allege falsity as to the ERP-related 11 risk disclosure issued on August 4, 2022. (See Am. Compl. ¶ 129.) 12 Turning now to the first quarter disclosure, the court concludes Plaintiffs fare no 13 better because they fail to plausibly allege the Executive Defendants actually knew by

14 May 5, 2022, that a delay of the Oracle launch was certain or substantially likely to 15 occur. 16 According to Plaintiffs, the new ERP system could not have possibly launched by 17 “by the end of 2Q22 or early 3Q22” as planned, for two principal reasons: (1) Funko’s 18 data was a “mess” without “data governance” controls, resulting in a “manually

19 intensive” implementation process that required significant institutional resources and 20 knowledge, both of which were lacking; and (2) corporate infighting hindered progress 21 because “[t]he C-Suite simply could not get ‘aligned’ as to . . . critical systems 22 architecture decisions.” (Id. ¶¶ 8, 51-53.) As a result of these problems, “[b]y early 1 2022, it was clear to employees across [Funko]’s various departments that the Oracle 2 project was far from being able to launch by [Funko]’s targeted” deadline. (Id. ¶ 54.)

3 Plaintiffs argue the Executive Defendants must have known this, too, as they were 4 personally involved in the Oracle Project. (See MTD Resp. at 2, 21.) Specifically, both 5 Ms. Jung and Mr. Perlmutter participated in “bi-weekly ‘Steering Committee’ leadership 6 meetings” in which “all of the C-Suite individuals” discussed critical “decisions as to 7 how the [ERP] system should be set up.” (Id. ¶ 53.) Mr. Sansone—who personally 8 oversaw the Oracle Project—also attended these meetings, which had been ongoing since

9 2021. (Id. ¶¶ 48, 53, 149.) Ms. Jung in particular “debated various aspects of the Oracle 10 project” with Mr. Sansone at the biweekly meetings, and the two were “constantly at 11 odds with one another” like “oil and water.” (Id. ¶¶ 53, 149.) In addition, “status reports 12 about the project [were] emailed to executives following” each biweekly meeting (id.), 13 and these reports “discuss[ed] the ongoing problems that needed to be dealt with (but

14 weren’t being dealt with) prior to” the targeted launch deadline (id. ¶ 64). Mr. 15 Perlmutter, for his part, “had conversations with the Oracle implementation team 16 regarding the difficulty they were having obtaining necessary information and decisions, 17 as well as the lack of leadership alignment on the project.” (Id. ¶ 149.) 18 These allegations suggest the Executive Defendants likely should have known that

19 the targeted launch date was not feasible, but they do not allege with particularity that the 20 Executive Defendants actually knew that a delay was certain or substantially likely to 21 occur. Plaintiffs speak only in generalities, failing to explain “the who, what, when, 22 where, and how of the fraud.” Khoja, 899 F.3d at 1008 (internal quotation marks 1 omitted). The vague allegation, for example, that the C-Suite “could not get ‘aligned’” as 2 to “critical systems architecture decisions” (Am. Compl. ¶ 53) does not reveal what those

3 decisions were, how many were outstanding, how they were critical, or by when they 4 needed to be made to ensure a timely ERP launch. Without more, it is difficult to 5 understand the significance of these decisions, how they allegedly affected the project 6 timeline, or whether certain outstanding decisions would have signaled to the Executive 7 Defendants by May 5, 2022, that Oracle could not timely launch. Moreover, general 8 allegations that the Executive Defendants attended biweekly meetings and received status

9 reports about unspecified “ongoing problems” (id. ¶ 64) do not establish with 10 particularity that the Executive Defendants received information about the specific 11 reasons that made the target launch date impossible or highly improbable. At no point do 12 Plaintiffs allege the Executive Defendants received status reports that specifically 13 concerned data-related problems, or the overall progress of Funko’s data transfer, for

14 instance. (See generally id.) Similarly, although Mr. Perlmutter allegedly “had 15 conversations with the Oracle implementation team” about “difficult[ies] they were 16 having” (id. ¶ 149), Plaintiffs do not specify the date(s) or number of conversations, the 17 participants, nor the specific contents of any such conversation. Even when taking the 18 allegations all together in the light most favorable to Plaintiffs, Plaintiffs fail to plead the

19 Executive Defendants’ actual knowledge with the particularity required by the PSLRA. 20 In sum, Plaintiffs’ challenges to Defendants’ risk disclosures fail. With respect to 21 the revised August 4, 2022 risk disclosure that expressly informed shareholders of the 22 Oracle delay, the court concludes that Plaintiffs fail to plead falsity. (See Am. Compl. 1 ¶ 129.) With respect to the remaining risk disclosures, the amended complaint lacks 2 particularized allegations showing the Executive Defendants knew the stated risks had

3 materialized or were substantially likely to occur when the disclosures were made. The 4 disclosures are entitled to safe harbor protection under 15 U.S.C. § 78u-5(c)(1)(b).6 (Id. 5 ¶¶ 114, 122-23, 128, 143.) Plaintiffs’ claims as to all of the challenged risk disclosures 6 are therefore dismissed. 7 b. Forward-Looking Statements 8 Next, ten more of the challenged statements are not actionable because they come

9 within the PSLRA safe harbor for forward-looking statements that are identified as such 10 and accompanied by meaningful cautionary language, 15 U.S.C. § 78u-5(c)(1)(A)(i). 11 (See Am. Compl. ¶¶ 115, 117-18, 120-21, 124-26, 130, 141.) 12 These statements are forward-looking because they concern financial projections 13 or the plans and objectives for future operations, or because they state assumptions

14 underlying the same. 15 U.S.C. § 78u-5(i)(1)(A)-(B), (D). For example, Plaintiffs 15 challenge mere predictions that “SG&A as a percent of sales is [] expected to be slightly 16 higher in the first half of” 2022 (Am. Compl. ¶ 115 (quoting McDonough Decl. ¶ 4, Ex. 3 17 (“4Q21 Form 8-K”) at 8)); that Funko’s “full year 2022 financial results” would reflect 18 “[a]djusted EBITDA margin of approximately 14.6% at the midpoint of our revenue

19 20 6 For the reasons explained infra § III(C)(2)(a), Plaintiffs’ scienter allegations— including those concerning the core operations doctrine—do not aid in plausibly alleging the 21 Executive Defendants’ actual knowledge. See Glazer, 63 F.4th at 766 (stating that, although falsity and scienter are separate inquiries subject to different standards of plausibility, “some 22 facts might be used to support both an inference of scienter and an inference of falsity”). 1 range” due to “approximately 80 bps of headwind from one-time project spend” (id. 2 ¶ 120 (quoting McDonough Decl. ¶ 15, Ex. 14 (“1Q22 Form 8-K”) at 8)); and that “down

3 the road,” Funko would need “more distribution capabilities to continue [to] support the 4 growth, but that’s more of a future down the road within the 5-year plan, but not directly 5 related within the next, call it, 12 months or so” (id. ¶ 141 (quoting McDonough Decl. 6 ¶ 8, Ex. 7 (“Investor Day Tr.”) at 28)). These statements plainly are forward-looking in 7 that they describe financial and operational expectations for the future. In addition, all 8 ten of these forward-looking statements are identified as such, 15 U.S.C.

9 § 78u-5(i)(1)(A)(i). (See, e.g., 4Q21 Form 8-K at 9; Investor Day Deck at 2; 1Q22 Form 10 8-K at 9.) 11 To the extent Plaintiffs argue that some of these forward-looking statements 12 address “current fact” (see MTD Resp. at 13, 15), this “mixed”-statement argument fails 13 under Wochos. A “mixed” statement may be actionable only where the allegations “show

14 that the statement goes beyond the articulation of ‘plans,’ ‘objectives,’ and ‘assumptions’ 15 and instead contains an express or implied ‘concrete’ assertion concerning a specific 16 ‘current or past fact[].’” Wochos, 985 F.3d at 1191 (quoting Quality Sys., 865 F.3d at 17 1142, 1144). By contrast, mere “assumptions incorporated into a projection” and 18 “statements reaffirming an objective are themselves forward-looking under the PSLRA.”

19 (MTD Reply at 2-3 (citing Wochos, 985 F.3d at 1192).) Defendants’ May 5, 2022 20 statements that “[w]e remain on track to deliver full year adjusted EBITDA margins,” 21 (Am. Compl. ¶ 124 (quoting McDonough Decl. ¶ 5, Ex. 4 (“1Q22 Call Tr.”) at 8)), and 22 that “ERP is set to come out at the end of the quarter,” (id. ¶ 125 (quoting McDonough 1 Decl. ¶ 5, Ex. 4 (“1Q22 Call Tr.”) at 9)), are protected as mere “‘assumptions’ about 2 future events on which” Defendants’ financial and operational projections are based.

3 Wochos, 985 F.3d at 1192 (“Like the goal itself, such projected timelines are 4 forward-looking statements.”); see also 15 U.S.C. § 78u-5(i)(1)(D).7 5 The next, more difficult question is whether these forward-looking statements are 6 accompanied by meaningful cautionary language. Defendants point to several 7 paragraphs of cautionary language that they assert is meaningful, including the risk 8 disclosures discussed supra. (See generally Appendix A.) Plaintiffs argue this language

9 is not meaningful because it warns of risks that had already materialized. (See MTD 10 Resp. at 17.) The court agrees with Defendants. 11 “To be ‘meaningful,’ the cautionary language must ‘identify[] important factors 12 that could cause actual results to differ.’” Glazer, 63 F.4th at 780 (quoting 15 U.S.C. 13 § 78u-5(c)(1)(A)(i)). Relevant here, the Ninth Circuit has extended the logic of Alphabet

14 to the instant “context of the safe harbor,” holding that “cautionary language is not 15 ‘meaningful’ if it discusses as a mere possibility a risk that has already materialized.” 16

7 With specific respect to Ms. Jung’s May 5, 2022 statement that “Q2 is where we’re 17 seeing the pressure from the net SG&A perspective” (Am. Compl. ¶ 126 (quoting 1Q22 Call. Tr. at 10)), the court disagrees with Plaintiffs’ framing of this statement as “mixed.” (See MTD 18 Resp. at 15.) Wochos is instructive. There, the Ninth Circuit addressed an “August 2 statement [] made in response to a question about anticipated gross margins for the third quarter of 2017, 19 which still had nearly two months left to go.” 985 F.3d at 1198. The court upheld the district court’s conclusion “that it was a ‘projection, rather than a statement about then-current 20 production levels,’” because when read in context, the remark could “only be understood only as contrasting overall third-quarter expectations with the year-end goal.” Id. The same reasoning applies here: the remark was made with nearly two months remaining in the second quarter, in 21 response to a question about how anticipated second quarter margins might affect year-end goals. (See 1Q22 Call Tr. at 10.) Thus, this statement is properly understood as a forward-looking 22 projection. 1 Glazer, 63 F.4th at 780-81 (holding “boilerplate listing of generic risks” was not 2 meaningful where it failed to “mention the specific risk to which [the defendant] had

3 been alerted”). Similarly critical to this inquiry is whether the Executive Defendants 4 knew that hypothetical risks had come to pass or were substantially likely to occur. See 5 id. at 781 (rejecting safe harbor argument where defendant “was aware of a significant 6 likelihood that the risk would materialize”). For the reasons explained supra, however, 7 Plaintiffs fail to plausibly allege the Executive Defendants actually knew that the risks 8 identified in the disclosures had transpired or were substantially likely to occur at the

9 time the disclosures were made. (See supra § III(C)(1)(a)(i)-(ii).) And, as noted, 10 Defendants meaningfully revised the ERP-related disclosure issued on August 5, 2022, to 11 inform shareholders of the Oracle delay. (See id. § III(C)(1)(a)(ii).) The court therefore 12 concludes that all ten forward-looking statements are accompanied by meaningful 13 cautionary language, 15 U.S.C. § 78u-5(i)(1)(A)(i), and these statements meet the

14 requirements for safe harbor protection. 15 Because ten of the challenged statements are subject to safe harbor protection 16 under 15 U.S.C. § 78u-5(c)(1)(A)(i), the court dismisses Plaintiffs’ claims as to these 17 statements. (See Am. Compl. ¶¶ 115, 117-18, 120-21, 124-26, 130, 141.) 18 c. Opinion and Puffery Statements

19 Next, several challenged statements are not actionable because they amount to 20 puffery and/or opinion. (See Am. Compl. ¶¶ 116, 133-36, 139, 144-45.) 21 Two statements unquestionably constitute puffery because they reflect nothing 22 more than “vague statements of optimism” that are “not capable of objective 1 verification.” In re Arrowhead Pharms., Inc. Sec. Litig., No. CV 16-08505 PSG-PJW, 2 2017 WL 5635422, at *4 (C.D. Cal. Sept. 20, 2017) (“Puffing language includes vague

3 statements of optimism like ‘business couldn’t be better’ and ‘industry-leading,’ as well 4 as words like ‘strong,’ ‘robust,’ ‘well positioned,’ ‘solid,’ and ‘improved.’”). This 5 includes Mr. Perlmutter’s statement that “we’ve proven our ability to deliver in difficult 6 environments, and I’m very confident we are well positioned to meet our objectives for 7 the year” (Am. Compl. ¶ 116 (quoting McDonough Decl. ¶ 3, Ex. 2 (“1Q22 Call Tr.”) at 8 7)), and Ms. Jung’s statement that “ultimately, we did not want to impair the momentum

9 that we have today” (id. ¶ 133 (quoting McDonough Decl. ¶ 7, Ex. 6 (“2Q22 Call Tr.”) at 10 6)). Neither statement provides a “‘concrete description of the past and present’ that 11 affirmatively create[s] a plausibly misleading impression of a ‘state of affairs that 12 differed in a material way from the one that actually existed.’” Alphabet, 1 F.4th at 700 13 (quoting Quality Sys., 865 F.3d at 1144). Accordingly, these puffery statements are not

14 actionable. 15 Two other statements reflect pure opinion regarding the Oracle delay or the health 16 of Funko’s inventory. (See id. ¶¶ 136 (quoting 2Q22 Call Tr. at 9 (regarding the Oracle 17 delay, “we don’t see it as a major headwind in 2022 so far, but we feel good we made the 18 right decision for the business to not have business interruption as we go into the holiday

19 season”)), 144 (quoting McDonough Decl. ¶ 10, Ex. 9 (“3Q22 Call Tr.”) at 7 (“We 20 believe that our inventory is generally high quality . . . .”)).) Even if these opinions 21 reflected facts that later proved untrue, “an investor cannot state a claim by alleging only 22 that an opinion was wrong.” Omnicare, 575 U.S. at 194; see also id. at 184 (“[A]lthough 1 a plaintiff could later prove [an] opinion erroneous, the words ‘I believe’ themselves 2 admit[] that possibility, thus precluding liability for an untrue statement of fact.”).

3 Moreover, neither of these statements is actionable under the three-part Omnicare test 4 because (1) Plaintiffs fail to allege the speakers did not actually hold the stated beliefs, 5 (2) neither statement contains an embedded statement of untrue fact, and (3) neither 6 opinion statement was misleading by omission. See Wochos, 985 F.3d at 1188-89 (citing 7 Omnicare, 575 U.S. at 183-85, 188). With specific respect to the third “misleading by 8 omission” category, Plaintiffs argue Ms. Jung’s opinion statement regarding inventory

9 quality misleadingly conveyed that “Funko’s inventory consisted of salable products— 10 both legally and because customers would want them.” (MTD Resp. at 11.) Plaintiffs 11 argue Ms. Jung omitted the fact that “Funko’s inventory was bloated with millions of 12 dollars of obsolete and aged inventory.” (Id.) But, as discussed, Plaintiffs fall short of 13 pleading Ms. Jung’s actual knowledge of the purportedly omitted fact. (See supra

14 § III(C)(1)(a)(i).) This omissions theory of liability therefore fails in the absence of a 15 showing that the opinion statement “did not ‘fairly align[] with the information in [Ms. 16 Jung’s] possession at the time.’” Glazer, 63 F.4th at 779 (quoting Omnicare, 575 U.S. at 17 189); see also Atossa, 868 F.3d at 802 (explaining that “for an opinion to be misleading 18 by omission,” it must “omit[] material facts about the [defendant’s] inquiry into or

19 knowledge concerning a statement of opinion” (quoting City of Dearborn Heights, 856 20 F.3d at 615)). 21 Two more statements reflect both opinion and puffery. (See Am. Compl. ¶¶ 134 22 (quoting 2Q22 Call Tr. at 7 (expressing opinion that “we believe that inventory is 1 generally high quality,” and puffing that Funko was “well positioned to meet our 2 consumer demand and support our strong second half growth forecast”)), 145 (quoting

3 3Q22 Call Tr. at 8 (expressing opinion that “we think [inventory quality] generally is 4 very healthy right now,” and puffing that “in the event where we have seen a pullback a 5 little bit in Q4, we have been making the right edits to our inventory”)).) Thus, neither 6 statement is actionable. 7 Finally, two more challenged statements reflect either opinion or puffery, and lack 8 sufficient allegations of falsity. When asked on the second quarter earnings call about

9 inventory levels, Ms. Jung responded that although “we’re now looking into the back half 10 of the year, we feel the inventory is in a really good healthy position, and we’re poised to 11 deliver on our back half results,” before stating “[i]t was really about just managing 12 through the congestion that we saw so far. . . . So there is a large portion of the 13 [inventory] in-transit, but we’re working to get that into the DC and get that out to our

14 customers.” (Id. ¶ 135 (quoting 2Q22 Call Tr. at 8).) The first portion of the sentence 15 reflects protected opinion.8 The second portion of the sentence is not false, as Plaintiffs’ 16 own allegations confirm that in or around August 4, 2022, “congestion” existed due to 17 large quantities of inventory “in-transit” that was still getting “into the DC.” (See id. 18 ¶¶ 85 (alleging that “[b]y July 2022, the [shipping] containers were arriving [to Buckeye]

20 8 In addition, “poised to deliver on back half results” constitutes a forward-looking projection entitled to safe harbor protection under 15 U.S.C. § 78u-5(c)(1)(A)(i). (See 2Q22 Call 21 Tr. at 4 (identified as forward-looking and accompanied by meaningful cautionary language); 2Q22 Form 10-Q at 49-50 (additional meaningful cautionary language incorporated by 22 reference).) 1 en masse, along with the remaining trailers from Washington”), 138(i) (acknowledging 2 that inventory in shipping containers “simply sitting in the parking lot” at Buckeye was

3 “considered ‘in-transit’”).) And rather than misleading investors by omitting material 4 information, the statement candidly discloses ongoing, significant congestion at Buckeye. 5 Similarly, Mr. Perlmutter stated on Funko’s Investor Day that “last, but certainly 6 not least, is the unlock of technology to help us get where we’re going faster and better,” 7 and “that’s some of the investments that we’ve made this year.” (Id. ¶ 139 (quoting 8 Investor Day Tr. at 8).) The first portion of this sentence is a “vague statement[] of

9 optimism” “not capable of objective verification” and therefore constitutes puffery. 10 Arrowhead Pharms., 2017 WL 5635422, at *4. To the extent the second portion of this 11 sentence contains representations about current or past fact, it is neither false nor 12 misleading, as Funko indeed invested in technology in 2022. (See id. ¶¶ 47-52, 82 13 (describing the Oracle project and related SG&A costs in 2022)); see also Wochos, 985

14 F.3d at 1198 (holding Tesla’s remark “that ‘great progress’ was being made on battery 15 production would potentially be an actionable false statement only if . . . Tesla had been 16 ‘making no progress at all’”). 17 In total, eight challenged statements reflect opinion and/or puffery and thus are not 18 actionable. (See Am. Compl. ¶¶ 116, 133-36, 139, 144-45.) The court therefore

19 dismisses Plaintiffs’ claims as to these statements. 20 d. Statements that Are Not False or Misleading 21 Finally, as to the four remaining challenged statements (see Am. Compl. 22 ¶¶ 131-32, 137, 140), Plaintiffs fail to plausibly allege they were false when made or that 1 they created an “impression of a state of affairs that differ[ed] in a material way from the 2 one that actually exist[ed].” Cutera, 610 F.3d at 1109. For example, Plaintiffs challenge

3 Ms. Jung’s August 4, 2022 statement that inventory levels were “up 170.9% compared to 4 a year ago, reflecting receipt of delayed inventory.” (Am. Compl. ¶ 132 (quoting 5 McDonough Decl. ¶ 6, Ex. 5 (“2Q22 Form 8-K”) at 7).) Plaintiffs argue this statement 6 “attribut[ed] the increase in Funko’s inventory solely to ‘receipt of delayed inventory,’” 7 omitting that the increase stemmed from other factors too, like the receipt of dead 8 inventory from Washington warehouses. (Id. ¶ 138(a) (emphasis added).) But as

9 Defendants explain, Ms. Jung never said “that delayed inventory was the only factor 10 contributing to the increase,” and the amended complaint shows that “the receipt of 11 delayed inventory did contribute to the increases.” (MTD at 16 (citing Am. Compl. 12 ¶ 138(a)).) The court is not persuaded by Plaintiffs’ attempt to “rewrite” Ms. Jung’s 13 statement. Wochos, 985 F.3d at 1193.

14 In sum, Plaintiffs fail to plausibly allege falsity as to any of the 28 challenged 15 statements, and the complaint is therefore dismissed in its entirety. 16 2. Scienter 17 Beyond falsity problems, dismissal is warranted for the independent reason that 18 Plaintiffs fall short of plausibly alleging scienter.

19 Scienter “is a ‘mental state embracing intent to deceive, manipulate, or defraud.’” 20 Nguyen v. Endologix, Inc., 962 F.3d 405, 414 (9th Cir. 2020) (quoting Tellabs, Inc. v. 21 Makor Issues & Rights, Ltd., 551 U.S. 308, 319 (2007)). To adequately plead scienter, 22 the complaint must “state with particularity facts giving rise to a strong inference that the 1 defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). Specifically, 2 the defendants must have “made false or misleading statements either intentionally or

3 with deliberate recklessness.” Nguyen, 962 F.3d at 414 (quoting Zucco Partners, LLC v. 4 Digimarc Corp., 552 F.3d 981, 991 (9th Cir. 2009)). “[D]eliberate recklessness 5 represents an extreme departure from the standards of ordinary care . . . which presents a 6 danger of misleading buyers or sellers that is either known to the defendant or is so 7 obvious that the actor must have been aware of it.’” Espy v. J2 Glob., Inc., --- F.4th ----, 8 No. 22-55829, 2024 WL 1689091, at *4 (9th Cir. Apr. 19, 2024) (quoting Zucco, 552

9 F.3d at 991). The scienter element is met “[o]nly if a reasonable person would deem the 10 inference of scienter cogent and at least as compelling as any opposing inference one 11 could draw from the facts alleged.” Nguyen, 962 F.3d at 414 (quoting Tellabs, 551 U.S. 12 at 324). The “inquiry is inherently comparative,” requiring the court to consider 13 “plausible opposing inferences.” Id. (quoting Tellabs, 551 U.S. at 324). Although the

14 scienter inquiry must be performed “holistically,” the Ninth Circuit has directed that “it 15 would be folly to simply skirt the major allegations.” Webb v. Solarcity Corp., 884 F.3d 16 844, 851 (9th Cir. 2018) (quoting In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 17 704 (9th Cir. 2012)). 18 Here, as an initial matter, there appears to be no dispute that the amended

19 complaint lacks a coherent theory of motive to defraud. (See MTD at 17; MTD Resp. at 20 24 n.17; MTD Reply at 7.) “Generally, we expect that a financial motive for securities 21 fraud will be clear.” Prodnova v. H.C. Wainwright & Co., LLC, 993 F.3d 1097, 1108 22 (9th Cir. 2021) (“[F]or example, someone inside a company stands to gain a substantial 1 profit by engaging in deceptive behavior, such as selling shares before the company 2 discloses negative information.”). Although lack of a plausible motive is not fatal, it

3 “makes it much less likely that a plaintiff can show a strong inference of scienter.” Id. 4 “Only where a complaint otherwise asserts compelling and particularized facts showing 5 fraudulent intent or deliberate recklessness will we overlook the failure to allege a 6 plausible motive.” Id. The court therefore addresses Plaintiffs’ primary scienter theories 7 before evaluating the amended complaint holistically to determine whether “compelling 8 and particularized facts” give rise to a strong inference of scienter, despite the absence of

9 allegations demonstrating motive. Id. 10 a. Individual Scienter Theories 11 Plaintiffs raise several theories of scienter, including the core operations doctrine, 12 confidential witness accounts, prior litigation, and more. (MTD Resp. 17-24; see also 13 Am. Compl. ¶¶ 147-58.) The court addresses each in turn, below.

14 i. Core Operations Doctrine 15 The core operations doctrine is a “narrow” scienter theory, Zucco, 552 F.3d at 16 1000, that permits the court in limited circumstances to “infer[] that facts critical to a 17 business’s ‘core operations’ or an important transaction are known to a company’s key 18 officers.” S. Ferry LP, # 2 v. Killinger, 542 F.3d 776, 783 (9th Cir. 2008) (“South Ferry

19 I”). The doctrine may satisfy the PSLRA’s heightened pleading standard in two 20 situations. Zucco, 552 F.3d at 1000 (citing S. Ferry I, 542 F.3d at 785). First, “general 21 allegations about ‘management’s role in a corporate structure and the importance of the 22 corporate information about which management made false or misleading statements’” 1 may “create a strong inference of scienter when these allegations are buttressed with 2 ‘detailed and specific allegations about management’s exposure to factual information

3 within the company.’” Id. (quoting S. Ferry I, 542 F.3d at 785). Second, if the complaint 4 lacks additional detailed allegations about the defendants’ actual exposure to information, 5 generalized allegations about a company’s “core operations” standing alone may 6 nonetheless be indicative of scienter “where the falsity is patently obvious—where the 7 ‘facts [are] prominent enough that it would be “absurd to suggest” that top management 8 was unaware of them.’” Id. at 1001 (quoting Berson, 527 F.3d at 989). This second

9 category of cases is “exceedingly rare.” S. Ferry I, 542 F.3d at 785 n.3. 10 Here, Plaintiffs fail to allege facts that satisfy either situation. First, Plaintiffs fail 11 to set forth “detailed and specific allegations” showing how the Executive Defendants 12 were “expos[ed] to factual information within the company.” Id. at 785. As discussed 13 supra § III(C)(1)(a)(i)-(ii), Plaintiffs offer only “[g]eneral allegations of defendants’

14 hands-on management style, their interaction with other officers and employees, their 15 attendance at meetings, and their receipt of unspecified weekly or monthly reports,” all of 16 which is “insufficient” to plausibly allege scienter. In re Daou Sys., Inc., 411 F.3d 1006, 17 1022 (9th Cir. 2005) (internal quotation marks omitted), abrogated on other grounds as 18 recognized by Glazer, 63 F.4th at 766. Relying on South Ferry LP #2 v. Killinger, 687 F.

19 Supp. 2d 1248 (W.D. Wash. 2009) (“South Ferry II”), Plaintiffs argue the Executive 20 Defendants held themselves out as knowledgeable in response to direct questioning, 21 which is “sufficient to satisfy the actual knowledge analysis.” (MTD Resp. at 21 22 (quoting S. Ferry II, 687 F. Supp. 2d at 1259-60).) In South Ferry II, the district court on 1 remand found sufficiently particularized allegations regarding the defendant CEO’s 2 knowledge to establish scienter because the defendant’s public statements themselves

3 “represented that he had access to the information that underpinned his sunny 4 announcements about [the company’s] risk-management capabilities.” 687 F. Supp. 2d at 5 1259-60 (finding the defendant, “in the face of direct questioning,” “maintained that he 6 knew what he was talking about” and “displayed an intimate knowledge” of the relevant 7 topics, which he discussed “with a high degree of specificity on more than one 8 occasion”). The court concludes that in this case, the Executive Defendants’ public

9 statements do not evince such intimate, personal knowledge with a “high degree of 10 specificity.” Id. For example, the generalized statements that “we are constantly looking 11 at the quality of our inventory,” that Funko had experienced “supply chain challenges,” 12 and that inventory “generally is very healthy right now,” (Am. Compl. ¶ 154(e)), do not 13 rise to “specific admissions from top executives” that they personally were “involved in

14 every detail” of inventory monitoring or that they knew “exactly how much” inventory 15 was lost, slow-moving, dead, and would ultimately be written down, Zucco, 552 F.3d at 16 1000 (emphasis added) (quoting Daou, 411 F.3d at 1022-23). 17 Second, this is not the “exceedingly rare” and “unusual” case where the court can 18 impute knowledge to the Executive Defendants solely through their executive roles,

19 without particularized allegations regarding their actual exposure to information. S. 20 Ferry I, 542 F.3d at 785 & n.3. For example, that Funko was accumulating excess dead 21 inventory at the Buckeye DC would not have been patently obvious to senior executives 22 based on “granular details . . . such as the state of the storage racks, that certain machines 1 ‘could [not] reach the top several shelves,’” “that there were ‘pallets of partial orders’ on 2 the warehouse floor,’” or the presence of shipping containers in the parking lot. (MTD

3 Reply at 10 (quoting Am. Compl. ¶¶ 9, 11)); see also Ferreira, 2021 WL 8820650, at *20 4 (holding Plaintiffs failed to plausibly show defendants “were aware of the existence of 5 [shipping] containers” full of dead inventory in the Funko parking lot and the Port of 6 Seattle, or that defendants were “aware of their contents, how they obtained this 7 understanding, or even how long these containers were stored in these locations”). With 8 respect to the Oracle Project, the court is not persuaded that ongoing data issues would

9 have been so “prominent” that senior executives not personally involved in the intricacies 10 of the data transfer process must have known that “ERP system implementation would 11 not be possible by” the targeted date. (Am. Compl. ¶ 8.) And although the Executive 12 Defendants were involved in high-level “systems architecture decisions” (id. ¶ 53) related 13 to ERP implementation, Plaintiffs have not alleged particularized facts about what those

14 decisions were or their effect on the project timeline. (See supra § III(C)(1)(a)(ii).) 15 Absent these details, the court cannot draw the inference that the falsity of Defendants’ 16 statements concerning the Oracle Project timeline was “patently obvious.” Zucco, 552 17 F.3d at 1000. 18 Accordingly, the core operations doctrine does not give rise to a strong inference

19 of scienter in this case. 20 ii. Confidential Witnesses 21 Plaintiffs’ confidential witness (“CW”) allegations similarly fail. (See MTD Resp. 22 at 18-19.) CWs (1) “must be described with sufficient particularity to establish their 1 reliability and personal knowledge,” and (2) must offer accounts that are 2 “themselves . . . indicative of scienter.” Zucco, 552 F.3d at 995. Plaintiffs fail at both

3 steps. 4 First, Plaintiffs’ most direct (and perhaps strongest) CW allegation concerns an 5 employee who told Ms. Jung “in January or February 2022 during a one-on-one video 6 call that the employee could not see the Oracle program being completed on time and that 7 the project was not going well.” (Am. Compl. ¶ 54.) But Plaintiffs offer no details about 8 the CW’s personal knowledge of the matter beyond his or her “cleaning [of] one business

9 unit’s financial data” in preparation for the Oracle launch. (Id.) In fact, this CW account 10 pre-dates the Proposed Class Period and Plaintiffs make no allegation that Funko 11 employed the CW at all during the Proposed Class Period. (See id.) Without more, the 12 court cannot credit this CW as reliable and having the requisite personal knowledge. See 13 Zucco, 552 F.3d at 996-97 (concluding CWs were unreliable because they “were not

14 employed by [defendant] during the time period in question” and the court could “discern 15 no basis for” their claims absent more detail); see also Ferreira, 2021 WL 8820650, at 16 *32 (finding CWs unreliable where neither “were employed by Funko during the Class 17 Period”); In re Rackable Sys., Inc. Sec. Litig., No. C 09-0222 CW, 2010 WL 199703, at 18 *8 (N.D. Cal. Jan. 13, 2010) (“Four of the [CWs] . . . were not employed [by defendant]

19 during the Class Period, which makes it unlikely that they had personal knowledge of 20 Defendants’ relevant state of mind.”). 21 Second, assuming without deciding that Plaintiffs’ other CWs are reliable and 22 have personal knowledge, the remaining CW allegations are not themselves indicative of 1 scienter. In general, the CW accounts amount to vague allegations of internal 2 disagreement and concern that establish, at most, a serious disconnect between Funko’s

3 C-Suite and its operations on the ground. (See, e.g., Am. Compl. ¶¶ 44 (alleging 4 employee disagreed with “unrealistically optimistic” sales forecasts), 51 (alleging 5 employee voiced concerns to a VP and Manager about Funko’s “lack of data governance 6 controls during team meetings to discuss the Oracle project”), 64 (alleging “numerous 7 employees” stated “it was evident inside [Funko] that the ERP would not be operative by 8 July or August 2022”), 70-72 (alleging a “former Operations Lead” “wrote a heated letter

9 to an Operations Manager” complaining about inventory operations at Buckeye), 78 10 (alleging a warehouse supervisor discussed the accumulation of dead inventory at 11 Buckeye with the Senior Director of Fulfillment Operations and an Assistant General 12 Manager), 81 (alleging a warehouse supervisor thought Ms. Jung’s optimistic statement 13 about Oracle implementation “was a weird thing to say”).) None of these CW allegations

14 establish that the Executive Defendants personally knew the extent of Funko’s 15 ground-level problems and intentionally or with deliberate recklessness concealed that 16 information from investors. As the Ninth Circuit recently put it, “[d]issatisfaction with a 17 company’s strategy, management, and approach . . . coupled with a stock drop, make for 18 interesting reading but not an actionable securities fraud claim.” Espy, 2024 WL

19 1689091, at *1; see also id. at *5 (rejecting CW allegations that amounted to mere 20 “criticisms” and “negative opinions”); Zucco, 552 F.3d at 998 (rejecting finding of 21 deliberate recklessness based on CW accounts that showed only “some disagreement 22 within the corporation”); In re Medicis Pharm. Corp. Sec. Litig., 689 F. Supp. 2d 1192, 1 1211, 1213 (D. Ariz. 2009) (holding “[v]ague allegations of disagreement and concern” 2 did not establish defendants’ deliberate recklessness); In re Watchguard Sec. Litig., No.

3 C05-0678JLR, 2006 WL 2927663, at *7 (W.D. Wash. Oct. 12, 2006) (“Although each of 4 the [C]Ws was one or two ‘direct reports’ away from a Defendant, there is no indication 5 that any Defendant acquired any [C]Ws’ (or anyone else’s) knowledge of WatchGuard’s 6 ground-level problems.”). Cf. Ferreira, 2021 WL 8820650, at *33 (finding strong 7 inference of scienter based on CW’s “particularized allegations” that defendants “knew 8 specific details about” Funko’s accumulation of “obsolete inventory valued at several

9 million dollars,” including the “amount,” “value,” and “volume,” because defendants 10 received “aged inventory reports, the Open to Buy plan data, and emails summarizing the 11 discussion at every weekly sales meeting” over several months). 12 Accordingly, Plaintiffs’ confidential witness accounts do not, on their own, give 13 rise to a strong inference of scienter.

14 iii. Prior Litigation 15 Plaintiffs next raise scienter allegations related to the previous lawsuit against 16 Funko and its senior executives, which ensued following a write down of $16.8 million in 17 excess dead inventory that had accumulated in 2019. (Am. Compl. ¶ 155 & n.8 (citing 18 Ferreira, 2021 WL 8820650, at *15, *20-22 (denying motion to dismiss in part and

19 directing defendants to answer second amended complaint)); see also id. ¶ 155 (noting 20 the case settled following the court’s partial denial of the motion to dismiss).) Plaintiffs 21 argue Defendants’ involvement “in securities fraud litigation regarding some of the very 22 same conduct as alleged above within six months of the start of the Class Period further 1 supports a strong inference of scienter.” (Id.; see also MTD Resp. at 23-24.) This court, 2 however, is not persuaded that separate litigation involving a different time period and

3 different, now-settled claims “‘should have put the [defendants] on notice that” the 4 statements at issue here “were misleading.” (MTD Resp. at 23 (quoting In re Refco, Inc. 5 Sec. Litig., 503 F. Supp. 2d 611, 649 (S.D.N.Y. 2007))); see also Pugh v. Tribune Co., 6 521 F.3d 686, 695 (9th Cir. 2008) (“[A]ccusations of fraud” as opposed to “fraud itself” 7 do “not establish a strong inference of scienter.”). 8 iv. Remaining Scienter Allegations

9 Lastly, Plaintiffs argue the Executive Defendants’ Sarbanes-Oxley “(SOX”) 10 certifications, Mr. Perlmutter’s demotion, and Ms. Jung’s termination each raise a strong 11 inference of scienter. (MTD Resp. at 22-23.) But these factors alone “add nothing 12 substantial to the scienter calculus.” Zucco, 552 F.3d at 1003-04 (regarding SOX 13 certifications); see also Gammel v. Hewlett-Packard Co., 905 F. Supp. 2d 1052, 1078

14 (C.D. Cal. 2012) (“[N]otable departures are not in and of themselves evidence of 15 scienter.” (quoting In re Cornerstone Propane Partners, L.P., 355 F. Supp. 2d 1069, 16 1093 (N.D. Cal. 2005) (“Most major stock losses are often accompanied by management 17 departures, and it would be unwise for courts to penalize directors for these 18 decisions.”))). Accordingly, none of Plaintiffs’ individual scienter allegations are

19 sufficiently “compelling and particularized” to raise a strong inference of scienter. 20 b. Holistic Analysis 21 A holistic view of the amended complaint does not change the court’s conclusion. 22 Plaintiffs paint a dubious picture of fraud, alleging the Executive Defendants 1 intentionally inflated the value of Funko stock by concealing a “multi-million-dollar 2 stockpile” of dead inventory and the “disastrous consequences of two highly-touted

3 infrastructure upgrades” (MTD Resp. at 1), while also revealing the truth of the same in 4 “a series of partial disclosures” issued throughout the Proposed Class Period (Am. 5 Compl. ¶ 160). Having considered the factual allegations all together and in the light 6 most favorable to Plaintiffs, the court concludes the inference that the Executive 7 Defendants acted with scienter is less compelling than the contrary inference of 8 nonculpable conduct. Indeed, it is more plausible to infer that (1) the Executive

9 Defendants lacked specific details about the infrastructural problems unfolding on the 10 ground; (2) Funko promptly disclosed the delay once it became clear that the Oracle 11 Project would not launch on time; (3) Funko promptly disclosed (and continued to 12 disclose) rising operational costs once they became apparent; (4) the Executive 13 Defendants genuinely viewed those costs as temporary, stemming from short-term

14 congestion at Buckeye due to the DC launch and pandemic-related transit delays; (5) the 15 Executive Defendants sincerely believed that Funko’s inventory was healthy overall and 16 that Funko would meet its financial projections; (6) in hindsight, those projections proved 17 far too optimistic; and, (7) naturally, the Executive Defendants faced personal 18 consequences for their corporate failures.

19 Plaintiffs therefore fall short of pleading facts giving rise to a “strong” and 20 “cogent” inference of scienter that is “at least as compelling as any opposing inference 21 one could draw from the facts alleged.” Nguyen, 962 F.3d at 414. This conclusion 22 follows from “the lack of a plausible motive as well as the lack of particularized facts 1 showing any individual’s knowledge or deliberate recklessness” under the circumstances. 2 Prodanova v. H.C. Wainwright & Co., LLC, 993 F.3d 1097, 1113 (9th Cir. 2021).

3 D. Plaintiffs’ Claims Under Section 20(a) 4 A Section 20(a) claim requires underlying primary violations of the securities 5 laws. 15 U.S.C. § 78t(a); In re Rigel Pharms., Inc. Sec. Litig., 697 F.3d 869, 886 (9th 6 Cir. 2012). Because Plaintiffs have failed to plead an underlying violation of the federal 7 securities laws, their Section 20(a) claims must be dismissed. 8 E. Leave to Amend

9 This court must apply the Ninth Circuit’s policy favoring leave to amend with 10 “extreme liberality.” DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir. 1987) 11 (quoting United States v. Webb, 655 F.2d 977, 979 (9th Cir. 1981)). “Dismissal without 12 leave to amend is improper unless it is clear . . . that the complaint could not be saved by 13 any amendment.” Gompper v. VISX, Inc., 298 F.3d 893, 898 (9th Cir. 2002) (quoting

14 Polich v. Burlington N., Inc., 942 F.2d 1467, 1472 (9th Cir. 1991)). Because Plaintiffs 15 could plead facts that cure the deficiencies identified herein, the court will grant them 16 leave to amend. 17 IV. CONCLUSION 18 For the foregoing reasons, the court GRANTS Defendants’ motion to dismiss

19 (Dkt. # 39), and GRANTS Plaintiffs leave to file a second amended complaint. The court 20 ORDERS the parties to file, by no later than May 23, 2024, a joint statement that 21 (1) proposes a schedule for the filing of a second amended complaint, and any answer to 22 // 1 the amended complaint or motion to dismiss the same, and (2) informs the court whether 2 the parties object to amending the caption (see supra at 11 n.4).

3 Dated this 16th day of May, 2024. A 4 JAMES L. ROBART 5 United States District Judge 6 7 8 9 10 11 12 13 14 15 16 17 18

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