In re TerraVia Holdings, Inc.

• Court: District Court, N.D. California
• Decided: February 4, 2020
• Docket: 3:16-cv-06633
• Status: Unknown

Opinion

1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6

7 IN RE TERRAVIA HOLDINGS, INC. Case No. 16-cv-06633-JD SECURITIES LITIGATION 8 ORDER RE MOTION TO DISMISS 9 Re: Dkt. No. 67 10 11

12 13 This is a securities class action against TerraVia Holdings, Inc. (“TerraVia” or 14 “Company”), its former CEOs Jonathan S. Wolfson and Apurva S. Mody, and former CFO and 15 COO Tyler W. Painter. Plaintiffs, the TerraVia Investor Group, brought suit on behalf of all 16 persons or entities who purchased or otherwise acquired TerraVia’s publicly traded securities 17 between May 4, 2016 and November 6, 2016, under Sections 10(b) and 20(a) of the Securities 18 Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and Securities and Exchange Commission 19 Rule 10b-5. Dkt. No. 39 ¶¶ 1, 20. Plaintiffs allege in the consolidated complaint that defendants 20 made public statements about the commercial viability of its algae-based food products with 21 knowledge of non-public information that rendered those statements false and misleading. See id. 22 ¶¶ 7-11, 19. 23 After TerraVia filed for bankruptcy in August 2017, the case proceeded against Wolfson, 24 Mody and Painter. Dkt. Nos. 49, 57. A motion to dismiss filed on behalf of both TerraVia and the 25 individual defendants, Dkt. No. 41, was terminated without prejudice to refiling on behalf of the 26 individual defendants only. Dkt. No. 64. Defendants moved to dismiss for failure to state a claim, 27 citing the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u-4, and 1 complaint should be dismissed because it fails to adequately plead (1) falsity, (2) scienter, and 2 (3) loss causation. 3 Dismissal is warranted for several claims, but defendants’ statements about the commercial 4 viability of their algae food ingredients while they were in possession of adverse non-public 5 knowledge are actionable. The heightened pleading requirements under Federal Rule of Civil 6 Procedure 9(b) and the PSLRA are satisfied for those statements. Consequently, the motion to 7 dismiss is granted and denied in part, and plaintiffs will have an opportunity to amend the 8 dismissed claims. 9 BACKGROUND 10 As alleged in the complaint, TerraVia produced and sold food, nutrition and specialty 11 products developed from algae. Dkt. No. 39 ¶ 2. The company began in 2003 as a biofuel startup 12 seeking to develop an algae-based oil that could replace traditional fuel. Id. ¶¶ 3-4, 41-42. 13 Despite initial success, the biofuel market “soured,” and the company pivoted to other algae-based 14 products in the cosmetics and nutrition industries. Id. ¶¶ 48, 54-55, 58. As early as 2014, the 15 company began commercializing its AlgaVia and AlgaWise food ingredient products consisting of 16 algae powders and algae-based food oils. Id. ¶¶ 58-61. These ingredients were touted as 17 “healthier alternative” sources of protein and lipids, and sold to food manufacturers. Id. ¶ 59. In 18 March 2016, the company rebranded as TerraVia and focused primarily on its food and nutrition 19 products. Id. ¶¶ 5, 62-66. On August 2, 2017, while this lawsuit was pending, TerraVia filed for 20 bankruptcy. Dkt. No. 48. 21 Central to the complaint are TerraVia’s partnerships with two food manufacturers that used 22 TerraVia’s algae-based products as ingredients: Honey Stinger and Soylent. Honey Stinger used 23 TerraVia’s products in its protein chewable tablets. Dkt. No. 39 ¶ 68. In April 2016, Honey 24 Stinger recalled its tablets “after customers reported becoming violently ill.” Id. Honey Stinger 25 and its third-party manufacturer, Santa Cruz Nutritionals of California (“Santa Cruz”), 26 investigated the cause of the illnesses and, by process of elimination, “reached a finding of near- 27 certainty that TerraVia’s algae product was the problem.” Id. ¶¶ 72-74, 82. Plaintiffs include 1 Cruz, Honey Stinger, and Honey Stinger’s parent corporation. Id. ¶¶ 70-81, 85-89. One of the 2 confidential witnesses reported that by May 2016, Honey Stinger had notified TerraVia that its 3 “algae ingredient was the cause of the sick customers.” Id. ¶ 82. On June 27, 2016, TerraVia 4 responded to Honey Stinger’s notification with a letter acknowledging that “[t]here have been a 5 modest number of reports of adverse gastrointestinal (GI) reactions to products containing 6 AlgaVia® Protein-Rich Whole Algae, but given all available data on usage they represent a very 7 low incidence rate for the total amount of product consumed by the population.” Id. ¶ 83. 8 TerraVia did not publicly disclose the letter or any other information about the reports of adverse 9 gastrointestinal reactions to its products. Id. ¶¶ 11, 84. 10 A similar series of events occurred with Soylent, which manufactures a popular “on-the-go 11 food substitute” made from nutrient-rich powder mixes. Id. ¶¶ 90-91. In June 2016, Soylent 12 introduced new versions of two of its products using TerraVia’s “whole algal flour and high oleic 13 algal oil.” Id. ¶¶ 92-93. In October 2016, Soylent recalled its reformulated Soylent Bar after 14 customers reported “a variety of gastrointestinal problems,” including nausea, vomiting, and 15 diarrhea. Id. ¶¶ 94-95. On October 27, 2016, Soylent stopped selling its powder drink product 16 made from the same formula. Id. ¶ 97. Soylent determined that only customers who consumed its 17 products formulated with TerraVia’s algal flour had suffered adverse consequences. Id. ¶¶ 98-99. 18 On November 7, 2016, Bloomberg published an article announcing that Soylent had identified 19 TerraVia’s algal flour as the cause of the recall, and that it “would be removing algal flour 20 altogether from its product formulations.” Id. ¶¶ 13, 125. The same day, TerraVia’s share price 21 fell $0.15 per share to close at $1.70, and another $0.20 to close at $1.50 on November 10. Id. 22 ¶¶ 126-27. 23 Plaintiffs allege that, beginning in May 2016, defendants made false or misleading 24 statements, and that the revelation of those statements’ falsity in the Bloomberg article caused the 25 subsequent stock drop. Id. ¶ 19. Plaintiffs identify eleven allegedly false or misleading 26 statements. Dkt. No. 39-1. Ten of these statements were made during TerraVia’s quarterly 27 earnings calls in May, August and November 2016, and in corresponding press releases and SEC 1 Defendants say that the consolidated complaint does not satisfy the heightened pleading 2 standards required in a securities fraud action. Specifically, defendants contend that (1) there was 3 no duty to disclose any of the omitted information that plaintiffs allege rendered defendants’ 4 statements misleading; (2) many of the challenged statements are nonactionable; (3) plaintiffs fail 5 to allege with particularity facts giving rise to a strong inference of scienter; and (4) the 6 Bloomberg article published on November 7, 2016, cannot support plaintiffs’ theory of loss 7 causation because it did not reveal a fraud. Dkt. No. 67. 8 DISCUSSION 9 I. Legal Standards 10 Well-established standards govern this motion to dismiss. To comply with the pleading 11 requirements of Federal Rule of Civil Procedure 8(a)(2) and survive a Rule 12(b)(6) motion to 12 dismiss, a plaintiff must allege “enough facts to state a claim to relief that is plausible on its face.” 13 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim has facial plausibility when the 14 pleaded “factual content that allows the court to draw the reasonable inference that the defendant 15 is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing 16 Twombly, 550 U.S. at 556). In evaluating a motion to dismiss, the Court assumes that the 17 plaintiffs’ allegations are true and draws all reasonable inferences in their favor. Usher v. City of 18 Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). However, the Court need not “accept as true 19 allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable 20 inferences.” In re Gilead Sciences Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008) (internal 21 quotation marks omitted) (quoting Sprewell v. Golden State Warriors, 226 F.3d 979, 988 (9th 22 Cir.), amended on other grounds, 275 F.3d 1187 (9th Cir. 2001)). 23 Additional requirements apply because this is a securities fraud action. The circumstances 24 constituting the alleged fraud must be stated with particularity under Federal Rule of Civil 25 Procedure 9(b). See Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 604 (9th Cir. 26 2014). In addition, pursuant to the PSLRA, the complaint must “specify each statement alleged to 27 have been misleading, the reason or reasons why the statement is misleading, and, if an allegation 1 with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). For each 2 alleged misstatement or omission, the complaint must also “state with particularity facts giving 3 rise to a strong inference that the defendant acted with the required state of mind.” Id. 4 § 78u-4(b)(2)(A). 5 “To plead a claim under section 10(b) and Rule 10b-5, [plaintiffs] must allege: (1) a 6 material misrepresentation or omission; (2) scienter; (3) a connection between the 7 misrepresentation or omission and the purchase or sale of a security; (4) reliance; (5) economic 8 loss; and (6) loss causation.” Or. Pub. Emps. Ret. Fund, 774 F.3d at 603 (citing Stoneridge Inv. 9 Partners v. Scientific-Atlanta, Inc., 552 U.S. 148, 157 (2008)). Here, defendants do not contest 10 elements (3) through (5), and so the Court focuses on whether plaintiffs have adequately pled 11 falsity, scienter and loss causation. 12 II. Section 10(b) Claim 13 A. Misrepresentations or Omissions 14 Plaintiffs challenge eleven statements as materially false or misleading. Dkt. No. 39-1. 15 Plaintiffs rely primarily on an omissions theory of liability, arguing that TerraVia “failed to 16 disclose” that its “algal products caused gastrointestinal distress, including nausea and vomiting,” 17 and the failure to disclose these “aforementioned symptoms” rendered misleading all of 18 TerraVia’s statements about the health benefits and commercial viability of its products. See id. 19 Defendants argue that TerraVia did not have a duty to disclose any reports of gastrointestinal 20 distress, and that the challenged statements are not false because they are “accurate statements of 21 historical fact” or are otherwise not actionable because they amount to “inherently subjective 22 puffing.” Dkt. No. 67 at 6, 10. 23 1. Plaintiffs’ general omissions theory and TerraVia’s duty to disclose 24 Plaintiffs argue that all of TerraVia’s statements were rendered misleading because 25 TerraVia failed to disclose the reports that its products had caused gastrointestinal distress. Dkt. 26 No. 39-1; see also Dkt. No. 70 at 4 (“Defendants made a series of materially false and misleading 27 statements to conceal their then-existing knowledge that their algae products were known to cause 1 not create an affirmative duty to disclose any and all material information.” Matrixx Initiatives, 2 Inc. v. Siracusano, 563 U.S. 27, 44 (2011). Federal securities laws and regulations “prohibit only 3 misleading and untrue statements, not statements that are incomplete.” In re Rigel Pharms., Inc. 4 Sec. Litig., 697 F.3d 869, 880 n.8 (9th Cir. 2012). Statements “‘cannot be considered in isolation,’ 5 but must be viewed ‘in the context of their total presentation.’” See Casella v. Webb, 883 F.2d 6 805, 808 (9th Cir. 1989) (quoting Hughes v. Dempsey-Tegeler & Co., Inc., 534 F.2d 156, 176 (9th 7 Cir. 1976)); see also Huang v. Avalanche Biotechnologies, Inc., No. 15-CV-03185-JD, 2016 WL 8 6524401, at *4 (N.D. Cal. Nov. 3, 2016). TerraVia’s failure to disclose reports of adverse 9 gastrointestinal reactions and the associated recalls, without more, cannot sustain plaintiffs’ fraud 10 claims. But these omissions provide context that renders some of the other challenged statements 11 materially misleading. 12 2. Materially misleading omissions related to the recalled products 13 While defendants were not under an affirmative duty to disclose the status of TerraVia’s 14 partnerships with Honey Stinger and Soylent, once they chose to publicly tout those partnerships, 15 “they were bound to do so in a manner that wouldn’t mislead investors.” Berson v. Applied Signal 16 Tech., Inc., 527 F.3d 982, 987 (9th Cir. 2008); see also Matrixx, 563 U.S. at 45 (“[C]ompanies can 17 control what they have to disclose . . . by controlling what they say to the market.”). Treating 18 plaintiffs’ allegations as true for purposes of the motion to dismiss, the Court focuses on whether 19 the challenged statements were made misleading as a result of the failure to disclose the reports of 20 adverse gastrointestinal reactions related to the Honey Stinger recall and the Honey Stinger recall 21 itself. 22 A statement or omission is actionably false if it creates “an impression of a state of affairs 23 that differs in a material way from the one that actually exists.” Brody v. Transitional Hosps. 24 Corp., 280 F.3d 997, 1006 (9th Cir. 2002). Even if not objectively false, a statement “may be 25 misleading if it omits material information.” Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 26 1008-09 (9th Cir. 2018), cert. denied, 139 S.Ct. 2615 (2019). In these circumstances, disclosure is 27 required when necessary to make “statements made, in light of the circumstances under which 1 563 U.S. at 44). An omission renders a statement materially false “when there is ‘a substantial 2 likelihood that the disclosure of the omitted fact would have been viewed by the reasonable 3 investor as having significantly altered the “total mix” of information made available.’” Matrixx, 4 563 U.S. at 38 (some internal quotation marks omitted) (quoting Basic Inc. v. Levinson, 485 U.S. 5 224, 231-32 (1988)). 6 Defendants contest the falsity of all challenged statements and omissions by arguing that 7 plaintiffs fail to plead facts sufficient to show that ingestion of TerraVia’s algae products was the 8 true cause of the reported adverse gastrointestinal reactions. But the misleading nature of the 9 challenged statements or omissions does not turn on whether TerraVia’s algae products were 10 correctly blamed for customers’ gastrointestinal distress. Whether or not TerraVia’s algae 11 products were in fact to blame, the existence of such reports, and the fact that TerraVia’s partners 12 attributed their consumers’ adverse reactions to TerraVia’s algae products, was the sort of 13 information that could render TerraVia’s statements regarding the health benefits and commercial 14 viability of its algae-based food products misleading. 15 A statement made by former CEO Wolfson during the May 4, 2016 quarterly earnings call 16 illustrates this point. Wolfson stated that “AlgaVia Whole Algae Protein continues to gain traction 17 with producers of protein-rich beverages and snacks like Soylent and Honey Stinger” and “food 18 industry innovators, established food leaders, and established personal care leaders are all 19 embracing our products.” Dkt. No. 39 ¶ 105 (emphasis modified). Defendants say this statement 20 was not contemporaneously false because it was made “before the two incidents that . . . triggered 21 a duty to disclose.” Dkt. No. 73 at 5. The complaint alleges otherwise. Honey Stinger was 22 recalled in April 2016 and TerraVia was notified “as of May 2016” that Honey Stinger had 23 identified the algae ingredient as the cause. Dkt. No. 39 ¶ 82. Because defendants failed to 24 disclose the Honey Stinger recall and the reports of adverse gastrointestinal reactions, both the 25 explicit reference to TerraVia’s partnership with Honey Stinger and the claim that “all” food 26 industry innovators and established food leaders were “embracing” its algae-based products were 27 materially misleading. Whether Honey Stinger was correct to identify TerraVia’s algae ingredient 1 failure to disclose the adverse reports and related recalls had on the total mix of information 2 available to investors. 3 Defendants suggest that TerraVia made adequate disclosures to investors in its Form 10-Q, 4 pointing to the warning that TerraVia faced “an inherent risk of product liability claims and the 5 associated adverse publicity.” Dkt. No. 67 at 2, 9; see also Dkt. No. 68-1 at 40. This disclaimer 6 does not render the challenged statements regarding TerraVia’s partnerships with the manufacturer 7 of Honey Stinger less misleading. The relevant risk regarding the reports of adverse 8 gastrointestinal reactions and resulting recalls was not limited to the potential for product liability 9 lawsuits. 10 Plaintiffs also challenge a statement from TerraVia’s website advertising that its products 11 have “[h]igh protein digestibility.” Dkt. No. 39 ¶ 123. At a minimum, this unqualified statement 12 is undermined by the reports that certain consumers suffered gastrointestinal distress and 13 digestibility-related symptoms as a result of the recalled Honey Stinger and Soylent products. The 14 complaint alleges that these statements appeared on TerraVia’s website throughout the class 15 period, including after both the Honey Stinger and Soylent recalls. Id. ¶ 124. As early as the date 16 TerraVia received notice of the Honey Stinger recall, and no later than when it received notice of 17 the Soylent recall in October 2016, TerraVia’s unqualified statement that its products had “[h]igh 18 protein digestibility” was materially misleading. 19 3. The remainder of plaintiffs’ challenged statements are inactionable 20 The remainder of the claims are dismissed with leave to amend. Plaintiffs lump together 21 many challenged statements covering a broad range of topics without stating with particularity 22 why each statement is false or misleading. “A litany of alleged false statements, unaccompanied 23 by the pleading of specific facts indicating why those statements were false, does not meet” the 24 PSLRA’s standard for pleading falsity. Metzler Inv. GMBH v. Corinthian Colleges, Inc., 540 F.3d 25 1049, 1070 (9th Cir. 2008) (discussing 15 U.S.C. § 78u-4(b)(1)). Additionally, a number of these 26 statements are accurate statements of historical fact related to TerraVia’s business and 27 development, while others are clearly opinion statements that are puffery. 1 General mission and descriptive statements: 2 Plaintiffs proffer a number of TerraVia’s general mission statements, which it repeated 3 throughout the class period in its quarterly earnings reports. For example, plaintiffs challenge 4 these statements from each of TerraVia’s quarterly press releases and SEC Form 10-Q filings: 5 • “[T]he Company is well positioned to help meet the growing need of consumer packaged goods and established and emerging food 6 manufacturers to improve the nutritional profile of foods without sacrificing taste . . . .” Dkt. No. 39 ¶ 101 (quoting Q1 2016 Press 7 Release); see also id. ¶ 110 (same from Q2 2016 Press Release); id. ¶ 117 (same from Q3 2016 Press Release). 8 • “[T]he Company’s mission is to create products that are truly better 9 for people and better for the planet.” Id. ¶ 101 (quoting Q1 2016 Press Release); see also id. ¶ 110 (same from Q2 2016 Press 10 Release); id. ¶ 117 (same from Q3 2016 Press Release). • “We are commercializing high-value oils and powder products to 11 companies that primarily use them as ingredients.” Id. ¶ 103 (quoting Q1 2016 Form 10-Q); see also id. ¶ 112 (same from Q2 12 2016 Form 10-Q); id. ¶ 121 (same from Q3 2016 Form 10-Q). 13 • “AlgaVia® Lipid Powder (commonly known as whole algae flour) and AlgaVia® Protein (commonly known as whole algae protein) are 14 whole algae ingredients that can improve the nutritional profile of foods and beverages.” Id. ¶ 103 (quoting Q1 2016 Form 10-Q); see 15 also id. ¶ 112 (same from Q2 2016 Form 10-Q); id. ¶ 121 (same from Q3 2016 Form 10-Q). 16 17 Plaintiffs say that because TerraVia’s products “caused gastrointestinal distress, including nausea 18 and vomiting,” they were not “truly better for people” and therefore the Company’s “business and 19 prospects were worse than represented.” Dkt. No. 39 ¶¶ 102, 111, 118. They also contend that 20 TerraVia’s “algal products were not ‘high-value’ in that they caused the aforementioned 21 symptoms, thus seriously diminishing their commercial viability.” Id. ¶¶ 104, 113, 122. 22 Plaintiffs do not allege particularized facts establishing that these generic mission 23 statements and product descriptions were false or misleading. A statement is false “when a 24 plaintiff points to defendant’s statements that directly contradict what the defendant knew at that 25 time.” Khoja, 899 F.3d at 1008. Further, misleading statements “must be capable of objective 26 verification.” Id. (internal quotation marks omitted) (quoting Retail Wholesale & Dep’t Store 27 Union Local 338 Ret. Fund v. Hewlett-Packard Co., 845 F.3d 1268, 1275 (9th Cir. 2017)). 1 complaint does not allege facts showing that TerraVia’s products lacked nutritional value or the 2 advertised levels of proteins, lipids or other nutrients. In addition, phrases like “truly better” and 3 “high value” are not objectively verifiable statements and are more akin to “inherently subjective 4 ‘puffing,’” which cannot provide the basis for a securities violation. Or. Pub. Emps. Ret. Fund, 5 774 F.3d at 606. Unlike the challenged statements regarding the recalled Honey Stinger products, 6 none of these statements are made materially misleading by failing to disclose the reports of 7 adverse gastrointestinal reactions or the resulting recall. 8 For much the same reason, the challenged statements describing TerraVia’s products as 9 delivering “true and much-needed innovation,” Dkt. No. 39 ¶ 100; “healthier,” id. ¶¶ 105, 119; or 10 providing “enhanced nutrition,” id. ¶ 114, are also dismissed. These statements are 11 generalizations that provide “nothing concrete upon which a plaintiff could reasonably rely.” Or. 12 Pub. Emps. Ret. Fund, 774 F.3d at 606. 13 Safety related statements: 14 Plaintiffs challenge several statements declaring that TerraVia’s products are safe to 15 consume. For example, each of TerraVia’s quarterly SEC filings included a statement that its 16 products “received an FDA generally recognized as safe (GRAS) ‘No Questions’ letter.” Dkt. No. 17 39 ¶ 103 (Q1 2016 Form 10-Q). See also id. ¶ 112 (Q2 2016 Form 10-Q); id. ¶ 121 (Q3 2016 18 Form 10-Q). Plaintiffs acknowledge that TerraVia did receive an FDA “No Questions” letter, but 19 argue that it was nevertheless misleading for TerraVia to describe its products as safe at a time 20 when there were “known reports of GI distress.” Dkt. No. 70 at 7. That is an internally 21 inconsistent claim, and no other allegations demonstrate falsity. Consequently, it cannot go 22 forward. 23 So too for the statements from TerraVia’s website that described its products as providing 24 “an array of benefits” and as being “free of known allergens.” Dkt. No. 39 ¶ 123. Plaintiffs 25 suggest that such statements are materially false and misleading because “the Company’s algal 26 products created allergic reactions in consumers, including the aforementioned symptoms.” 27 Id. ¶ 124. But plaintiffs do not allege any facts establishing that the reported incidents of 1 potential health benefits. Plaintiffs have not adequately pleaded falsity with respect to these 2 statements. 3 CEO opinion statements: 4 Plaintiffs challenge several statements made by TerraVia executives in quarterly press 5 releases and during earnings calls, including: 6 • “We’re excited about the momentum we’re building at a time when consumer demand for healthier alternatives is on the rise.” Dkt. No. 7 39 ¶ 100 (TerraVia CEO Wolfson, Q1 2016 Press Release). 8 • “[W]e believe we have all the pieces in place to deliver on this opportunity, anchor partnerships, commercial food grade 9 manufacturing and operation and a portfolio of products that significantly enhance taste and texture, deliver an improved 10 nutritional profile and economic sustainability.” Id. ¶ 107 (TerraVia CFO and COO Painter, Q1 2016 Earnings Call) 11 • “We are excited about the opportunities we see to serve demand for 12 healthier and more sustainable food and ingredient alternatives that are better for the people and the planet.” Id. ¶ 109 (Wolfson, Q2 13 2016 Press Release). • “Overall, we’re making strong progress commercially in food and 14 nutrition.” Id. ¶ 114 (Wolfson, Q2 2016 Earnings Call). 15 • “Based on what I’ve seen in a very short time, we have the capability to deliver innovation to the food and nutrition industry for 16 many years to come.” Id. ¶ 116 (TerraVia CEO Mody, Q3 2016 Press Release). 17 18 Plaintiffs argue that these statements were materially false and misleading because “ingestion of 19 the Company’s algal products caused gastrointestinal distress, including nausea and vomiting,” id. 20 ¶¶ 102, 108, 111, 115, 118; and because TerraVia had “overstated the commercial viability of its 21 algal products, and was therefore not making strong progress commercially in food and nutrition,” 22 id. ¶ 115. 23 All of these statements are opinions or opinions with embedded facts. An opinion 24 statement is actionably false only: “(1) if the speaker did not in fact hold the stated belief; or (2) if 25 the speaker omitted facts going to the basis for one’s opinion that would make the opinion 26 statement misleading to a reasonable person.” West v. Ehealth, Inc., No. 3:15-CV-00360-JD, 27 2016 WL 948116, at *8 (N.D. Cal. Mar. 14, 2016) (citing Omnicare, Inc. v. Laborers Dist. 1 Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605, 615-16 (9th 2 Cir. 2017). For an opinion with an embedded statement of fact to be actionable, plaintiffs must 3 allege that the supporting fact the speaker supplied is untrue. City of Dearborn Heights, 856 F.3d 4 at 616. Plaintiffs do not allege that any of the speakers did not subjectively believe their 5 statements and, to the extent the speakers relied on any embedded factual statements, plaintiffs 6 have not pleaded particular facts showing that any such statement of fact is untrue. 7 B. Scienter 8 For each actionable statement or omission, a plaintiff must “state with particularity facts 9 giving rise to a strong inference that the defendant acted with the required state of mind.” 15 10 U.S.C. § 78u-4(b)(2)(A); see also West, 2016 WL 948116, at *9. The required state of mind is 11 “scienter, ‘a mental state embracing intent to deceive, manipulate, or defraud.’” Tellabs, Inc. v. 12 Makor Issues & Rights, Ltd., 551 U.S. 308, 319 (2007) (quoting Ernst & Ernst v. Hochfelder, 425 13 U.S. 185, 193-94 & n.12 (1976)). To constitute a “strong inference” of scienter, the inference 14 raised by the facts alleged “must be more than merely ‘reasonable’ or ‘permissible,’” it must be 15 “cogent and at least as compelling as any opposing inference one could draw.” Id. at 324. The 16 relevant inquiry is “whether all of the facts alleged, taken collectively, give rise to a strong 17 inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that 18 standard.” Id. at 323 (emphasis in original). 19 Plaintiffs say that a holistic reading of the complaint establishes scienter because TerraVia 20 and the individual defendants withheld knowledge of the reports of adverse gastrointestinal 21 reactions and related recalls during their quarterly earnings calls. Dkt. No. 70 at 2, 13. 22 Defendants say that plaintiffs fail to allege facts related to the individual defendants’ states of 23 mind on the dates of the challenged statements. Dkt. No. 67 at 11. Defendants also contend that 24 plaintiffs have not pleaded facts establishing whether and when defendants learned that Honey 25 Stinger’s manufacturer believed TerraVia’s product caused its customers’ gastrointestinal distress. 26 Id. at 11-12. Defendants argue that, even when viewed holistically, the allegations in the 27 complaint show only “that, at worst, TerraVia may have faced a problem.” Id. at 13. 1 The complaint in its entirety sufficiently alleges scienter. After the Honey Stinger recall, 2 TerraVia was notified “as of May 2016” that its algae ingredient had been identified by Honey 3 Stinger’s manufacturer as the cause of its customers’ gastrointestinal distress. Dkt. No. 39 ¶ 82. 4 While defendants contest whether Wolfson was notified of the cause of the recall before the May 5 4, 2016 earnings call, Dkt. No. 79 (June 21, 2019 H’rg Tr.) at 6:8-14, it appears undisputed that 6 defendants would have been notified of such no later than June 27, 2016, when TerraVia issued 7 the letter to Honey Stinger stating that it was aware of a “modest number of reports of adverse 8 gastrointestinal (GI) reactions to products containing AlgaVia® Protein-Rich Whole Algae.” Dkt. 9 No. 39 ¶ 83. Defendants’ failure to disclose even statistically insignificant reports of adverse 10 effects is properly considered under a holistic analysis of scienter. Matrixx, 563 U.S. at 48-49. 11 Those reports, coupled with two major product recalls, were more than just “a problem” for 12 TerraVia. 13 Consequently, plaintiffs have sufficiently alleged scienter at the pleadings stage, and the 14 Court need not consider plaintiffs’ core operations or financing theories of scienter, see Dkt. No. 15 70 at 12-14, the latter of which is premised on factual allegations not found in the complaint. 16 C. Loss Causation 17 Defendants contend that the Bloomberg article fails to establish loss causation because it 18 does not constitute a corrective disclosure. Dkt. No. 67 at 14-15. To prove loss causation, 19 plaintiffs “must demonstrate a causal connection between the deceptive acts that form the basis for 20 the claim of securities fraud and the injury suffered” by plaintiffs. Or. Pub. Emps. Ret. Fund, 774 21 F.3d at 608 (internal quotation marks omitted) (quoting Ambassador Hotel Co. v. Wei-Chuan Inv., 22 189 F.3d 1017, 1027 (9th Cir. 1999)). Like other elements of a securities fraud action, Rule 9(b)’s 23 heightened pleading standards apply to loss causation. Id. at 605. As loss causation is “a variant 24 of proximate cause, the ultimate issue is whether” defendants’ statements or omissions, “as 25 opposed to some other fact, foreseeably caused” plaintiffs’ loss. Mineworkers’ Pension Scheme v. 26 First Solar Inc., 881 F.3d 750, 753 (9th Cir. 2018) (internal quotation marks omitted) (quoting 27 Lloyd v. CVB Fin. Corp., 811 F.3d 1200, 1210 (9th Cir. 2016)), cert. denied, 139 S.Ct. 2741 1 Plaintiffs have sufficiently alleged a causal connection between defendants’ alleged 2 misrepresentations and their loss. The Bloomberg article revealed that TerraVia’s algae 3 ingredients had been linked to the cause of the Soylent recall and that TerraVia had previously 4 sent a letter to Honey Stinger acknowledging reports of adverse gastrointestinal reactions to its 5 ingredients. Dkt. No. 39 ¶¶ 13-14. The article revealed that TerraVia had privately acknowledged 6 earlier that year that its ingredients may have caused gastrointestinal reactions such as those 7 responsible for the Honey Stinger recall, and that it had failed to disclose that information in its 8 public statements regarding the commercial prospects of its food products and its partnerships 9 with food manufacturers. Plaintiffs allege that TerraVia’s share prices fell due to these 10 disclosures. Id. ¶¶ 126-27. 11 Defendants say that the Bloomberg article did not reveal a fraud, or even a risk of or 12 potential for fraud. Dkt. No. 67 at 14-15. That goes too far. The Bloomberg article is not akin to 13 the mere announcement of an SEC investigation in Loos v. Immersion Corp., 762 F.3d 880, 890 & 14 n.3 (9th Cir. 2014), or the unsubstantiated consumer complaints in Curry v. Yelp Inc., 875 F.3d 15 1219, 1225-26 (9th Cir. 2017). Rather, the Bloomberg article disclosed a prior omission about the 16 Honey Stinger recall, along with the information that TerraVia’s products had been linked to a 17 second recall. Because the challenged omissions were directly related to TerraVia’s 18 representations regarding its relationship with Honey Stinger in particular and food manufacturers 19 generally, plaintiffs’ allegations about the Bloomberg article and subsequent stock price decline 20 are sufficient to plead loss causation. 21 III. Section 20(a) Claim 22 Defendants’ motion to dismiss the Section 20(a) claim rests entirely on the argument that 23 plaintiffs cannot establish liability under Section 10(b) and Rule 10b-5. Dkt. No. 67 at 15; cf. Or. 24 Pub. Emps. Ret. Fund, 774 F.3d at 610 (holding that plaintiffs cannot establish control person 25 liability under section 20(a) when “they have not adequately alleged violations of section 10(b) 26 and Rule 10b-5”). Because plaintiffs have adequately alleged violations of Section 10(b) and Rule 27 10b-5, defendants’ motion to dismiss the Section 20(a) control person liability claim is denied. 1 CONCLUSION 2 Defendants’ motion is granted and denied in part. Plaintiffs may amend their complaint, 3 || consistent with the findings of this order, by March 2, 2020. The parties are directed to jointly file 4 a proposed scheduling order by March 2, 2020. 5 IT IS SO ORDERED. 6 || Dated: February 4, 2020 7 8 JAMES PONATO 9 United tates District Judge 10 11 a 12

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