14‐199‐cv Employeesʹ Retirement System, et al. v. Green Mountain Coffee Roasters, et al.
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
August Term 2014
(Argued: December 1, 2014 Decided: July 24, 2015)
Docket No. 14‐199‐cv
EMPLOYEESʹ RETIREMENT SYSTEM OF GOVERNMENT OF THE VIRGIN ISLANDS, LEAD PLAINTIFF, on behalf of itself and all others similarly situated, LOUISIANA MUNICIPAL POLICE EMPLOYEESʹ RETIREMENT SYSTEM, LEAD PLAINTIFF, on behalf of itself and all others similarly situated, BOARD OF TRUSTEES OF THE CITY OF FORT LAUDERDALE GENERAL EMPLOYEESʹ RETIREMENT SYSTEM, LEAD PLAINTIFF, on behalf of itself and all others similarly situated, PUBLIC EMPLOYEESʹ RETIREMENT SYSTEM OF MISSISSIPPI, LEAD PLAINTIFF, on behalf of itself and all others similarly situated, SJUNDE AP‐FONDEN, LEAD PLAINTIFF, on behalf of itself and all others similarly situated,
Plaintiffs‐Appellants,
v.
LAWRENCE J. BLANFORD, GREEN MOUNTAIN COFFEE ROASTERS, INC., FRANCES G. RATHKE,
Defendants‐Appellees,
BARBARA D. CARLINI, ROBERT P. STILLER, WILLIAM D. DAVIS, HINDA MILLER, JULES A. DEL VECCHIO, MICHAEL J. MARDY, DAVID E. MORAN, MERRILL LYNCH, PIERCE, FENNER & SMITH INC., SUNTRUST ROBINSON HUMPHREY, INC., WILLIAM BLAIR & COMPANY, L.L.C., CANACCORD GENUITY INC., JANNEY MONTGOMERY SCOTT LLC, WELLS FARGO SECURITIES, LLC, PIPER JAFFRAY & CO., RABO SECURITIES USA, INC., RBC CAPITAL MARKETS, LLC, SANTANDER INVESTMENT SECURITIES INC.,
Defendants.
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF VERMONT
Before: CHIN and CARNEY, Circuit Judges, and SWEET, District Judge.*
Appeal from a judgment of the United States District Court for the
District of Vermont (Sessions, J.) dismissing plaintiffs‐appellantsʹ securities fraud
claims. The district court granted defendants‐appelleesʹ motions to dismiss,
holding that plaintiffs‐appellants failed to adequately allege a misleading
statement or omission of material fact and scienter.
VACATED AND REMANDED.
* The Honorable Robert W. Sweet, of the United States District Court for the Southern District of New York, sitting by designation.
‐ 2 ‐
MARK R. ROSEN (Daniel E. Bacine, Jeffrey A. Barrack, and Lisa M. Lamb, on the brief), Barrack, Rodos & Bacine, Philadelphia, Pennsylvania; Michael K. Yarnoff, Matthew L. Mustokoff, and Joshua E. DʹAncona, Kessler Topaz Meltzer & Check, LLP, Radnor, Pennsylvania; and John C. Browne and Laura H. Gundersheim, Bernstein Litowitz Berger & Grossmann LLP, New York, New York, for Plaintiffs‐Appellants.
RANDALL W. BODNER (Anne Johnson Palmer, Mark D. Vaughn, and Douglas H. Hallward‐Driemeier, on the brief), Ropes & Gray LLP, Boston, Massachusetts, and Washington, DC, for Defendant‐Appellee Green Mountain Coffee Roasters, Inc.
MATTHEW B. BYRNE (Robert B. Hemley, on the brief), Gravel & Shea PC, Burlington, Vermont, for Defendants‐Appellees Lawrence J. Blanford and Frances G. Rathke.
CHIN, Circuit Judge:
In this putative securities class action, plaintiffs‐appellants are five
employee retirement systems (ʺPlaintiffsʺ) that purchased or otherwise acquired
common stock in Green Mountain Coffee Roasters, Inc. (ʺGreen Mountainʺ), the
manufacturer of the Keurig single‐cup brewing system. Plaintiffs allege that
‐ 3 ‐ Green Mountain and certain of its executives (ʺDefendantsʺ) made fraudulent
misrepresentations about Green Mountainʹs inventory, business performance,
and growth prospects in a manner designed to mislead investors about the
strength of Green Mountainʹs business, in violation of federal securities law.
The district court (Sessions, J.) granted Defendantsʹ motions to
dismiss Plaintiffsʹ Corrected Consolidated Class Action Complaint (the
ʺComplaintʺ) for failure to 1) allege a misleading statement or omission of
material fact, and 2) plead a compelling inference of scienter. Plaintiffs appeal.
We hold that the Complaint pled sufficient facts to state a securities law
violation. Accordingly, we vacate and remand for further proceedings consistent
with this opinion.
STATEMENT OF THE CASE
A. The Facts
The facts alleged in the Complaint are assumed to be true. They
may be summarized as follows:
1. Green Mountainʹs False ʺGrowth Storyʺ
Green Mountain manufactures the Keurig single‐cup brewing
system, many varieties of the associated ʺK‐Cupʺ portion packs to brew single
‐ 4 ‐ servings of coffee and other beverages, and other coffee‐related products.
Between February 2, 2011 and November 9, 2011 (the ʺClass Periodʺ), Plaintiffs
purchased or otherwise acquired Green Mountain common stock. During the
Class Period, Defendants represented to investors, including Plaintiffs, that it
was straining to meet consumer demand for its Keurig and
K‐Cup products and that the company was ramping up production without
accumulating excess inventory. Accordingly, Green Mountainʹs stock price
soared to record highs during the Class Period, from $32.96 per share on
February 2, 2011 to a high of $111.62 per share on September 19, 2011.
Throughout the Class Period, Defendants continuously reassured
investors that its business was booming. Green Mountain had weathered public
financial problems months before the start of the Class Period. In September
2010, Green Mountain disclosed that it was the subject of an SEC inquiry
concerning its revenue recognition practices and its relationship with its primary
order fulfillment company, M.Block & Sons, Inc. (ʺM.Blockʺ). After an internal
investigation, Green Mountain announced a restatement of its past financial
statements that reduced its net income by $6.1 million for fiscal years 2006 to
2009 and the first three quarters of 2010, but it assured investors that ʺnone of the
‐ 5 ‐ financial statement[] errors are related to [Green Mountainʹs] relationship with
M.Block.ʺ App. at 41. Following this incident, and throughout the Class Period,
Green Mountain executives repeatedly reassured investors that business was
booming and it was maintaining inventory at appropriate levels.
For example, Green Mountain held a conference call with investors
on February 2, 2011 to discuss first quarter 2011 results. Green Mountain stated
that ʺwe remain focused on increasing production to fulfill unmet demand and
achieving and maintaining optimum inventory levels.ʺ Id. at 42. Defendant
Lawrence Blanford ‐‐ President, Chief Executive Officer, and Director of Green
Mountain ‐‐ further stated that ʺdemand is definitely stretching our ability to
supply. And weʹve not quite caught up with that demand curve yet.ʺ Id. During
its second quarter conference call on May 3, 2011, Green Mountain stated ʺwe are
not building any excess inventories at all at retail.ʺ Id. at 43 (emphasis omitted).
In prepared remarks filed with the SEC the same day, Green Mountain
elaborated: ʺ[W]e continue to add capacity across all of our production
locations[,] . . . though we continue to experience some spot outages. We expect
to continue to install equipment and capacity over the remainder of the year to
enable us to meet demand.ʺ Id.
‐ 6 ‐ Green Mountain held another conference call with investors on July
27, 2011 to discuss third quarter 2011 results. Defendant Frances Rathke ‐‐ Chief
Financial Officer, Secretary, and Treasurer of Green Mountain ‐‐ stated that
during the third quarter, ʺwe got back into a place where we knew we had
appropriate inventory levels.ʺ Id. at 45. Blanford emphasized a need to increase
production capacity at a ʺrapid clipʺ because ʺ[a]s a result of the growth weʹve
experienced thus far this year . . . we will need to deploy more portion pack
production capacity in 2012 than previously anticipated to support consumer
demand.ʺ Id. When investors expressed concern about over‐producing,
Blanford reiterated that ʺweʹre at appropriate inventory levels.ʺ Id.
2. Green Mountainʹs Production and Inventory Levels
In fact, during the Class Period, Green Mountain was accumulating
a significant overstock of expiring and unsold product. The Complaint includes
observations from numerous confidential witnesses (ʺCWsʺ) ‐‐ Green Mountain
employees from different tiers of the company ‐‐ detailing the companyʹs
increasing inventory buildup.
For example, CW1 ‐‐ a machine operator responsible for generating
new product, packaging, and roasting in a Green Mountain facility from 2006 to
‐ 7 ‐ 2012 ‐‐ reported that production increased dramatically in 2010 after Green
Mountain bought new machinery. Inventory accumulated ʺup to the rafters,ʺ
became ʺbacked up into various departments,ʺ and was even being stored in
operatorsʹ work spaces. Id. at 48. Similarly, CW3 ‐‐ a maintenance technician
from 2009 to 2011 ‐‐ stated that the warehouse was crowded with rows of
outdated coffee, and much of it was simply discarded when the ʺbest‐by‐dateʺ
passed. Id. CW4 ‐‐ a machine operator for K‐cup production from 2009 to mid‐
2012 ‐‐ emphasized that there was ʺno questionʺ that Green Mountain had excess
K‐cup inventory, as warehouse workers were throwing away ʺpallet after pallet
after pallet.ʺ Id.
3. Green Mountainʹs Efforts to Deceive
Faced with overflowing inventory, Defendants took steps to conceal
the overstock of inventory and overproduction of products. Various former
employees reported that throughout the Class Period, Green Mountain, in
partnership with M.Block, ʺintentionally concealed from both investors
and . . . auditorsʺ that its warehouses were ʺstuffed to the raftersʺ with ʺunused
and expiring coffee products that were not being sold to consumers,ʺ and it was
discarding ʺpallet after pallet after pallet.ʺ Id. at 33. As part of its efforts to
‐ 8 ‐ deceive investors, Green Mountain orchestrated ʺphony shipment[s]ʺ to
temporarily conceal excess products during inventory audits and utilized non‐
mainstream accounting practices to track its inventory. Id. at 34.
The Complaint detailed statements from CWs regarding Green
Mountainʹs inventory practices. CW2 ‐‐ a production planning manager for
M.Block from 2010 to 2011 ‐‐ recalled that Green Mountain opened a new facility
in Tennessee because the company ʺneeded more spaceʺ to store inventory. Id. at
48. CW2 also reported that Green Mountain made repeated phantom shipments
to QVC (the home shopping network), one of M.Blockʹs biggest customers and a
frequent purchaser of Keurig machines. According to CW2, nearly every QVC
order came through right before an audit and each time 30‐40% of the QVC order
would be returned to M.Block after the audit. Id. at 61. He recalled a specific
second quarter 2011 QVC order for 500,000 brewers right before an audit: After
packing, ʺmost of the brewers never even left the dock,ʺ and instead they were
ʺtaped off, not to inventory.ʺ Id. at 62. After the auditors left, the entire order
was ʺput back in stock.ʺ Id. Similarly, CW4 reported that on numerous occasions
before an inventory count or audit, ʺbags and bags of coffee would be loaded
onto trucksʺ that would either leave temporarily or just sit behind the facility
‐ 9 ‐ filled with product. Id. at 53. When employees escorted auditors through the
facility, they were not permitted ʺbeyond a point blocked off by black plastic,ʺ
where inventory was hidden. Id. at 54. CW9 ‐‐ Green Mountainʹs Production
and Maintenance Manager in Knoxville from 2009 to 2011 ‐‐ confirmed that
Green Mountainʹs plan was to ʺshop stuff close to expiration to our outside
vendors [including M.Block] just so we could book the orders prior to quarter‐
end.ʺ Id. at 52, 62.
Other CWs stated that Green Mountainʹs senior managers
discouraged questions from employees about these suspicious practices. CW4 ‐‐
a member of Green Mountainʹs ʺinventory control panelʺ in 2009 ‐‐ was told that
Green Mountain did not want employees to keep track of the amount of product
being discarded. CW4 reported that the Vice President of Vermont Operations
visited the plant several times and told the crew to just ʺfollow the lead with
your supervisorsʺ and do whatever the managers said when calculating
inventory. Id. at 54.
The Complaint details similar reports from mid‐level managers.
CW8 ‐‐ a North America Distribution Resource Planning Manager from 2009 to
2010 ‐‐ expressed concerns to his senior managers about Green Mountainʹs
‐ 10 ‐ overproduction of K‐cups and its improper method of inventory counting, all to
no avail. According to CW8, Green Mountainʹs management was consciously
using ʺmethods for counting obsolete and excess inventory that were unheard of
in the food industry.ʺ Id. at 83. Similarly, CW9 was concerned that the
companyʹs demand models and forecasts had ʺno rhyme or reasonʺ and were
ʺout of whackʺ with sales orders. Id. at 51. CW9 discussed his concerns
repeatedly on weekly conference calls with Green Mountainʹs Director of
Operations and Vice President of General Operations, but the problems
persisted.
4. Defendantsʹ Stock Sales
Immediately following the quarterly investor calls and throughout
the Class Period, senior executives capitalized on their own pronouncements of
Green Mountainʹs financial strength by selling their shares of company stock at
peak stock prices, reaping a total of over $49 million in personal gain. The stock
sales began after May 4, 2011, when Rathke and Blanford entered into new
10b5‐1 trading plans governing their sales of company stock.
For example, following its second quarter results call with investors
on May 3, Green Mountainʹs stock price rose from $64.07 on May 3 to $75.98 per
‐ 11 ‐ share on May 4. Green Mountain announced that it would sell 7.1 million shares
of common stock at $71.00 per share in its May offering, and when it closed on
May 11, the offering had increased to 9.5 million shares, raising a total of $680
million from investors. During this offering, Blanford and three other directors
sold 410,456 shares for gross proceeds of $29 million. Blanford sold an additional
51,573 of his personal shares, reaping a personal profit of $3.6 million.
Similarly, on July 27, the same day it held its third quarter investor
call, Green Mountain issued a press release announcing triple‐digit growth in net
sales, operating income, and net income. Shortly thereafter, on August 3, Green
Mountainʹs stock price reached $110.96 per share. On August 5, Rathke ‐‐ who
had assured investors of ʺappropriate inventory levelsʺ during the third quarter
call ‐‐ made her first and only sale of Green Mountain stock in the nine years she
had been with the company, selling 337,500 shares for gross personal proceeds of
nearly $32.7 million. On August 16, Blanford sold another 45,000 shares for total
proceeds of nearly $4.5 million.
These fortuitously timed stock sales continued throughout the Class
Period. On September 19, Green Mountainʹs stock price reached its Class Period
high at $111.62 per share. The next day, Blanford sold another 45,000 shares,
‐ 12 ‐ reaping over $5 million in proceeds. Finally, on October 18, Blanford made a
final sale of 45,000 shares, for a profit of $3.6 million. In sum, Rathke and
Blanfordʹs sales of stock throughout the Class Period totaled over $49 million in
personal proceeds.
5. Green Mountainʹs ʺGrowth Storyʺ Unravels
As evidenced by its rising stock price, Green Mountainʹs purported
growth story led to an initially positive market response. Canaccord Genuityʹs
July 28, 2011 analyst report stated that Green Mountainʹs ʺstock chart . . . would
probably intimidate the best rock climbers from Utah to Vermont.ʺ App. at 45.
Dougherty & Company LLCʹs report from the same day stated:
ʺWow! . . . Demand for [Green Mountain] products exploded.ʺ Id. at 46.
According to SunTrust Robinson Humphrey, Green Mountainʹs ʺ[m]anagement
indicated that it has been racing to meet retailer demand since the 2010 holidays.ʺ
Id.
Green Mountainʹs growth story began to unravel, however,
following a presentation by an investor, David Einhorn, to analysts at the Value
Investing Conference on October 17, 2011 (the ʺEinhorn Reportʺ). The Einhorn
Report stated that Green Mountain was engaged in a ʺvariety of shenanigans that
‐ 13 ‐ appear designed to mislead auditors and to inflate financial results,ʺ including
systematic excess production leading to inventory and spoilage problems. Id. at
34. Among the specific allegations detailed in the Einhorn Report, Einhorn
corroborated CW2ʹs allegations that Green Mountain had inventoried 500,000
Keurig machines for a QVC order in the second quarter of 2011, right before an
audit, but the machines were never actually shipped.
As news of the Einhorn Report leaked into the market, Green
Mountainʹs stock price fell from $92.09 to $82.50 per share. The day after
Einhornʹs presentation, Blanford made his final sale of Green Mountain stock,
reaping proceeds of $3.6 million. On October 19, 2011, the Wall Street Journal
published an article disseminating the Einhorn Report, and Green Mountainʹs
stock declined an additional 15%, from approximately $80.21 to $69.80 per share.
Finally, on November 9, 2011, Green Mountain publicly announced
that it had failed to meet sales and revenue expectations for the first time in eight
quarters, falling $50 million short of analyst estimates. Green Mountain
admitted that, despite prior statements that year that it was ʺmaintaining
optimum inventory levels,ʺ its total inventory and obsolete inventory levels had
skyrocketed 61% and 47%, respectively, from the prior quarter. Id. at 35.
‐ 14 ‐ B. Proceedings Below
This putative class action was commenced on November 29, 2011.
After their appointment as lead plaintiffs, Plaintiffs filed the Complaint on
November 5, 2012. Plaintiffs asserted claims for violations of Sections 10(b) and
20(a) of the Exchange Act, 15 U.S.C. §§ 78j(b), 78t(a), and SEC Rule 10b‐5, 17
C.F.R. § 240.10b‐5. On March 1, 2013, Defendants moved pursuant to Federal
Rules of Civil Procedure 9(b) and 12(b)(6) and the Private Securities Litigation
Reform Act of 1995 (the ʺPSLRAʺ), 15 U.S.C. § 78u‐4, to dismiss the Complaint
for failure to state a claim upon which relief could be granted, arguing that
Plaintiffs failed to 1) allege a false statement of material fact, and 2) plead a
compelling inference of scienter. On December 20, 2013, the district court
granted Defendantsʹ motions to dismiss, entering judgment the same day. La.
Mun. Police Emps.ʹ Ret. Sys. v. Green Mountain Coffee Roasters, Inc., No. 2:11‐cv‐289,
2013 WL 6728869 (D. Vt. Dec. 20, 2013).
This appeal followed.
‐ 15 ‐ DISCUSSION
A. Applicable Law
We review the district courtʹs grant of a motion to dismiss de novo.
ECA & Local 134 IBEW Joint Pension Trust of Chi. v. JP Morgan Chase Co., 553 F.3d
187, 196 (2d Cir. 2009).
1. Pleading Standards
a. Rule 12(b)(6)
ʺTo survive a motion to dismiss, a complaint must contain sufficient
factual matter, accepted as true, to ʹstate a claim to relief that is plausible on its
face.ʹʺ Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly,
550 U.S. 544, 570 (2007)); see ATSI Commcʹns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87,
98 (2d Cir. 2007) (applying plausibility standard to securities fraud claim).
b. The PSLRA and Rule 9(b)
ʺAny complaint alleging securities fraud must satisfy the heightened
pleading requirements of the PSLRA and Fed. R. Civ. P. 9(b) by stating with
particularity the circumstances constituting fraud.ʺ ECA, 553 F.3d at 196. Prior
to the enactment of the PSLRA, the sufficiency of a complaint for securities fraud
was governed only by Rule 9. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551
‐ 16 ‐ U.S. 308, 319 (2007). The PSLRA builds on Rule 9ʹs particularity requirement,
dictating the pleading standard for claims brought under the Exchange Act.
2. The Exchange Act
Section 10(b) of the Exchange Act makes it unlawful ʺ[t]o use or
employ, in connection with the purchase or sale of any security[,] . . . any
manipulative or deceptive device or contrivance in contravention of such rules
and regulations as the Commission may prescribe as necessary or appropriate in
the public interest or for the protection of investors.ʺ 15 U.S.C. § 78j(b). SEC Rule
10b‐5 implements this provision of the Exchange Act and explicitly prohibits
ʺmak[ing] any untrue statement of a material fact.ʺ 17 C.F.R. § 240.10b‐5(b). ʺTo
state a claim under Rule 10b‐5 for misrepresentations, a plaintiff must allege that
the defendant (1) made misstatements or omissions of material fact, (2) with
scienter, (3) in connection with the purchase or sale of securities, (4) upon which
the plaintiff relied, and (5) that the plaintiffʹs reliance was the proximate cause of
its injury.ʺ ATSI Commcʹns, 493 F.3d at 105. Section 20(a) of the Exchange Act
provides that individual executives, as ʺcontrolling person[s]ʺ of a company, are
secondarily liable for their companyʹs violations of the Exchange Act. 15 U.S.C.
§ 78t(a); see Rombach v. Chang, 355 F.3d 164, 169 (2d Cir. 2004).
‐ 17 ‐ As relevant here, the PSLRA specifically requires a complaint to
demonstrate that the defendant made ʺ[m]isleading statements and
omissions . . . of a material fact,ʺ 15 U.S.C. § 78u‐4(b)(1), and acted with the
ʺ[r]equired state of mindʺ (the ʺscienter requirementʺ), id. § 78u‐4(b)(2). See ATSI
Commcʹns, 493 F.3d at 99. The parties in this case contest whether the Complaint
adequately alleges these two elements.
a. Misleading Statements or Omissions of Material Fact
To satisfy the pleading standard for a misleading statement or
omission under Rule 9(b), a complaint must ʺ(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.ʺ Rombach, 355 F.3d at 170 (quoting Mills v. Polar Molecular Corp., 12
F.3d 1170, 1175 (2d Cir. 1993)) (internal quotation marks omitted). The PSLRAʹs
requirements are similar, stating that the complaint must specify ʺthe reason or
reasons why the statement is misleading, and, if an allegation regarding the
statement or omission is made on information and belief, the complaint shall
state with particularity all facts on which that belief is formed.ʺ 15 U.S.C. § 78u‐
4(b)(1)(B).
‐ 18 ‐ As a general matter, the PSLRA does not require confidential
sources to be named in the complaint. A complaint may rely on information
from confidential witnesses if ʺthey are described in the complaint with sufficient
particularity to support the probability that a person in the position occupied by
the source would possess the information alleged.ʺ Novak v. Kasaks, 216 F.3d 300,
314 (2d Cir. 2000).
b. Scienter
To meet the scienter requirement in a 10b‐5 action under the PSLRA,
a plaintiff must ʺstate with particularity facts giving rise to a strong inference that
the defendant acted with the required state of mind.ʺ 15 U.S.C. § 78u‐4(b)(2)(A).
This ʺstate of mindʺ requires a showing ʺof intent to deceive, manipulate, or
defraud,ʺ Ernst & Ernst v. Hochfelder, 425 U.S. 185, 188 (1976), or recklessness, In
re Carter‐Wallace, Inc., Sec. Litig., 220 F.3d 36, 39 (2d Cir. 2000). The Supreme
Court has interpreted the PSLRAʹs ʺstrong inferenceʺ requirement to involve
ʺtak[ing] into account plausible opposing inferencesʺ and considering ʺplausible,
nonculpable explanations for the defendantʹs conduct, as well as inferences
favoring the plaintiff.ʺ Tellabs, 551 U.S. at 323‐24. A court, however, must assess
the complaint in its entirety, and not scrutinize each allegation. Id. at 326.
‐ 19 ‐ We have held that the scienter requirement is met where the
complaint alleges facts showing either: 1) a ʺmotive and opportunity to commit
the fraudʺ; or 2) ʺstrong circumstantial evidence of conscious misbehavior or
recklessness.ʺ ATSI Commcʹns, 493 F.3d at 99. Circumstantial evidence can
support an inference of scienter in a variety of ways, including where defendants
ʺ(1) benefitted in a concrete and personal way from the purported fraud; (2)
engaged in deliberately illegal behavior; (3) knew facts or had access to
information suggesting that their public statements were not accurate; or (4)
failed to check information they had a duty to monitor.ʺ ECA, 553 F.3d at 199
(quoting Novak, 216 F.3d at 311) (internal quotation marks omitted).
A complaint will survive ʺif a reasonable person would deem the
inference of scienter cogent and at least as compelling as any opposing inference
one could draw from the facts alleged.ʺ Tellabs, 551 U.S. at 324. While robust,
this pleading standard does not involve applying the more probing test used at
the summary judgment or judgment as a matter of law stage of litigation, as the
court is ʺunaided by discoveryʺ at the motion to dismiss stage. Id. at 324 n.5.
‐ 20 ‐ B. Application
We conclude that Plaintiffs adequately pled both false statements of
material fact and a compelling inference of scienter.
1. The Complaint Alleges Misleading Statements of Material Fact
Plaintiffs allege that Green Mountain was hiding stockpiled and
expiring coffee products from its auditors while it fraudulently continued to
assure investors that it was straining to meet an increasing demand for its
products, all in an effort to drive up its stock price. The Complaint alleges (1)
specific misleading statements by Defendants about the status of Green
Mountainʹs inventory during the Class Period, the identity of the speakers, and
where and when the statements were made, and (2) explains why these
statements were fraudulent. Specifically, Defendantsʹ statements during the
February 2, May 3, and July 27 quarterly results calls with investors about Green
Mountainʹs growth contradict observations by CWs regarding Green Mountainʹs
efforts to disguise increasing inventory buildup from auditors during the Class
Period, particularly CW2ʹs account of the second quarter QVC order.
‐ 21 ‐ a. Specific Misleading Statements
The Complaint quotes several statements by Rathke, Blanford, and
other Green Mountain spokesmen, made on specific dates, indicating that Green
Mountain was struggling to meet demand and had no excess inventory. During
the February 2 first quarter investor call, the Complaint quotes an executive
reiterating Green Mountainʹs desire to ʺfulfill unmet demand.ʺ App. at 42.
Similarly, during the May 3 second quarter investor call, the Complaint quotes a
spokesperson as saying ʺwe are not building any excess inventories.ʺ Id. at 43.
During the July 27 third quarter investor call, the Complaint quotes Rathke and
Blanford as stating that Green Mountain was at ʺappropriate inventory levels.ʺ
Id. at 45. The Complaint is replete with statements from various top executives
that Green Mountain was struggling to meet demand and business was booming
throughout the Class Period.
The Complaint further alleges that Green Mountainʹs fourth quarter
revenue gap is indicative of a ʺfalse growth story.ʺ Green Mountain argues that
it can explain its $50 million revenue gap and corresponding inventory spike
from the end of November as a mere sales miss. But a significant gap in fourth
quarter sales tends to support Plaintiffsʹ claim that inventory was misleadingly
‐ 22 ‐ characterized throughout the Class Period. Cf. Novak, 216 F.3d at 312‐13.
Moreover, the explanation for the revenue gap and inventory spike that Green
Mountain offers is entitled to little weight at this stage of litigation, when we
must ʺaccept all factual claims in the complaint as true and draw all reasonable
inferences in the plaintiffʹs favor.ʺ Simon v. KeySpan Corp., 694 F.3d 196, 198 (2d
Cir. 2012). We therefore conclude that Plaintiffs sufficiently allege the materially
misleading nature of Green Mountainʹs statements regarding its inventory.
b. Why the Statements were Fraudulent
The Complaint also explains why these statements were fraudulent
by detailing numerous CWsʹ observations that Green Mountainʹs inventory was
decidedly not at ʺappropriate levels.ʺ These witnesses are former employees of
Green Mountain and M.Block, and the Complaint specifies each witnessʹs
position, length of employment, and job responsibilities. Many witnesses
described the buildup of inventory ʺup to the raftersʺ and their need to throw
away ʺpallet after pallet after palletʺ as the coffee products expired. App. at 48.
CW1 stated that inventory was ʺbacked up into various departmentsʺ and even
stored in operatorsʹ work spaces. Id.
‐ 23 ‐ Specifically, CW2 recalled a second quarter QVC order where
500,000 brewers were loaded onto trucks right before an audit, and ʺput back in
stockʺ immediately after the auditors left the facility. Id. at 62. The Einhorn
report also discussed this specific transaction. This was the same quarter during
which Green Mountain assured investors ʺwe are not building any excess
inventories at all at retail.ʺ Id. at 43. CW4 corroborated this story, stating that
inventory was often temporarily loaded onto trucks or hidden behind black
plastic in roped off areas during the quarterly auditor visits. Additionally, the
Complaint details statements from CWs in management positions with a broader
knowledge of the companyʹs inventory and accounting practices. These
managers reported to Green Mountain executives who discouraged questions
about the inventory practices and ignored their repeated complaints. Hence, the
Complaint pleads sufficient particularity to support the probability that the
witnesses possessed the information alleged. See Novak, 216 F.3d at 314.
Green Mountain argues that confidential witnessesʹ statements must
be linked to specific quarters to meet the pleading standard; yet the Second
Circuit has held that allegations concerning activity in one period can support an
inference of similar circumstances in a subsequent period. See Iowa Pub. Emps.ʹ
‐ 24 ‐ Ret. Sys. v. MF Global, Ltd., 620 F.3d 137, 143 n.13 (2d Cir. 2010); In re Scholastic
Corp. Sec. Litig., 252 F.3d 63, 72 (2d Cir. 2001). Even if more specificity is required
under our law, CW2ʹs account of the fraudulent second quarter QVC order is
closely linked to Green Mountainʹs misleading statements during the second
quarter investor call.
Because the Complaint states with particularity the statements it
alleges are misleading and the reasons why these statements are fraudulent, we
hold that the Complaint adequately alleges false statements of material fact.
2. The Complaint Alleges Scienter
The Complaintʹs allegations, taken together, are also sufficient to
show that Green Mountain had the requisite scienter. Plaintiffs plead strong
circumstantial evidence of Green Mountainʹs intent to deceive or defraud
Plaintiffs by detailing both (1) Defendantsʹ efforts to deceive auditors and
investors and conceal the true facts about Green Mountainʹs excess inventory,
and (2) Defendantsʹ significant personal gain from these efforts. Specifically, the
CWsʹ statements about their supervisorsʹ efforts to disguise inventory and the
size and timing of Rathke and Blanfordʹs stock sales pursuant to their May 2011
10b5‐1 trading plans support an inference of scienter. The facts in the Complaint
‐ 25 ‐ are thus sufficient to plausibly allege Defendantsʹ motive and opportunity to
commit fraud, as well as their recklessness.
a. Defendantsʹ Efforts to Deceive
As pleaded, Defendantsʹ efforts to conceal inventory from auditors
demonstrate their intent to deceive or defraud. The Complaint alleges that
inventory was ʺstuffed to the raftersʺ and workers were discarding ʺpallet after
pallet after pallet.ʺ App. at 33. CW2 and CW4 reported that shortly before
audits, Defendants made phantom shipments to hide excess inventory, loading
trucks with brewers and bags of coffee that either left the facility temporarily or
just sat in the dock loaded with product. Defendants would also hide
overstocked inventory behind black plastic, and employees escorting auditors
through the facility did not permit auditors beyond the areas blocked by these
barriers.
The Complaint also details CWsʹ observations that high level
managers discouraged questions about unorthodox inventory practices. CW4
was told that Green Mountain did not want employees keeping track of the
amount of discarded product and reported that a senior vice president told the
crew to just ʺfollow the lead with your supervisorsʺ when calculating inventory.
‐ 26 ‐ Id. at 54. Mid‐level managers CW8 and CW9 expressed concern to senior
managers about improper inventory practices that were ʺunheard of in the food
industry,ʺ but their complaints fell on deaf ears. Id. at 83.
b. Defendantsʹ Personal Gain
Rathke and Blanfordʹs sales of Green Mountain stock at opportune
moments throughout the Class Period at significant personal gain further evinces
Defendantʹs intent to deceive or defraud. These stock sales occurred shortly after
the quarterly investor calls during which Rathke and Blanford reassured
investors of the strength and continued growth of Green Mountainʹs business.
Green Mountain held its second quarter investor call on May 3, and the next day,
Green Mountainʹs stock price rose from $64.07 to $75.98 per share and Rathke
and Blanford entered into new 10b5‐1 trading plans governing the sales of their
personal stock. During Green Mountainʹs share offering the following week,
Blanford and three other directors sold 410,456 shares for $29 million, and
Blanford sold an additional 51,573 of his personal shares, in accordance with his
new trading plan, for a personal profit of $3.6 million.
The Complaint details similar executive stock sales following the
third quarter investor call on July 27. On August 3, Green Mountainʹs stock price
‐ 27 ‐ reached $110.96 per share, and on August 5, Rathke made her first and only sale
of Green Mountain stock in the nine years she had been with the company. That
day Rathke sold 337,500 shares for a personal profit of nearly $32.7 million. On
August 16, Blanford sold another 45,000 shares for a personal profit of nearly
$4.5 million.
These patterns continued throughout the Class Period. Green
Mountainʹs stock price peaked at $111.62 per share on September 19, and the
following day, Blanford sold 45,000 shares for a personal profit of $3.6 million.
Finally, on October 18, the day after the Einhorn report was released, Blanford
made one last sale of 45,000 shares for a personal profit of $3.6 million. In sum,
Rathke and Blanford reaped a total of over $49 million from the sales of their
personal stock during the Class Period.
Green Mountain argues that these trades do not support an
inference of scienter because they were made pursuant to the pre‐determined
10b5‐1 trading plans. This argument, however, ignores that Rathke and Blanford
entered this trading plan in May after the second quarter investor call, long after
the Complaint alleges that Green Mountainʹs fraudulent growth scheme began.
When executives enter into a trading plan during the Class Period and the
‐ 28 ‐ Complaint sufficiently alleges that the purpose of the plan was to take advantage
of an inflated stock price, the plan provides no defense to scienter allegations.
See Yates v. Mun. Mortg. & Equity, LLC, 744 F.3d 874, 891 (4th Cir. 2014) (noting
that a ʺ10b5‐1 plan does less to shield [a defendant] from suspicion [when] he
instituted the plan . . . after the start of the class periodʺ); George v. China Auto.
Sys., Inc., No. 11‐CV‐7533, 2012 WL 3205062, at *9 (S.D.N.Y. Aug. 8, 2012)
(ʺ[W]here (as here) 10b5‐1 trading plans are entered into during the class period,
they are not a cognizable defense to scienter allegations on a motion to dismiss.ʺ
(internal quotation marks omitted)).
The Complaint alleges that Rathke and Blanford made positive
public statements about Green Mountainʹs growth that drove up its stock price
immediately before the scheduled sales in February, May, and July. While these
sales were made pursuant to their 10b5‐1 trading plans, Rathke and Blanford
knew the dates of their scheduled sales where imminent when they made
allegedly misleading statements to investors. This behavior remains suspicious
even if we discount the September and October stock sales ‐‐ which immediately
followed the stock price peaking and the release of the Einhorn Report ‐‐ as
coincidence.
‐ 29 ‐ c. The Complaint Supports a Strong Inference of Scienter
Taken together, and even in light of opposing inferences, the
Complaintʹs allegations articulate Defendantsʹ intent to craft a false growth story
and the extraordinary opportunities for personal gain this ʺgrowthʺ created for
Green Mountainʹs executives. The Supreme Court dictates that the standard on a
motion to dismiss is ʺwhether all of the facts alleged, taken collectively, give rise
to a strong inference of scienter, not whether any individual allegation,
scrutinized in isolation, meets that standard.ʺ Tellabs, 551 U.S. at 323. We have
held that motive for scienter can ʺbe shown by pointing to the concrete benefits
that could be realized from one or more of the allegedly misleading statements or
nondisclosures; opportunity could be shown by alleging the means used and the
likely prospect of achieving concrete benefits by the means alleged.ʺ S. Cherry
St., LLC v. Hennessee Grp. LLC, 573 F.3d 98, 108 (2d Cir. 2009) (internal quotation
marks omitted). Plaintiffs meet this standard. Accordingly, we hold that the
Complaint plausibly alleges motive and opportunity for Defendants to commit
fraud and conscious misbehavior or recklessness on the part of Green Mountainʹs
executives. ATSI Commcʹns, 493 F.3d at 99.
‐ 30 ‐ CONCLUSION
Accordingly, we conclude that the district court erred in granting
Green Mountainʹs motions to dismiss because the Complaint alleges misleading
statements of material fact and a compelling inference of scienter. For the
reasons stated above, we VACATE the district courtʹs judgment of dismissal and
REMAND.
‐ 31 ‐