United States District Court, N.D. California, San Jose Division
ORDER GRANTING MOTION TO DISMISS WITH LEAVE TO AMEND; AND GRANTING MOTION TO STRIKE [Re: ECF 37, 49]
BETH LABSON FREEMAN, District Judge.
Before the Court are (1) Defendants' motion to dismiss Plaintiffs' consolidated class action complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) and (2) Plaintiffs' motion to strike the supplemental declaration of Meaghan Banks-Innes filed in support of Defendants' reply to Plaintiffs' opposition to the motion to dismiss. The Court has considered the briefing and the oral argument presented at the hearing on March 26, 2015. For the reasons discussed below, the motion to dismiss is GRANTED WITH LEAVE TO AMEND and the motion to strike is GRANTED.
Lead Plaintiffs Vladislav Kandinov and Enhanced Life Partnership bring this securities fraud class action on behalf of those who purchased stock in Defendant Annie's, Inc. ("the Company") between June 10, 2013 and June 3, 2014 ("the Class Period"). Consol. Compl. ¶ 1. The Company manufactures, markets, and distributes organic food products. Id. ¶ 2. It became publicly listed on the New York Stock Exchange on March 28, 2012 and traded under the ticker symbol "BNNY." Defendant John Foraker ("Foraker") was the Chief Executive Officer ("CEO") and a director of the Company during the Class Period; Defendant Kelly Kennedy ("Kennedy") was the Chief Financial Officer ("CFO") until November 12, 2013; and Defendant Zahir Ibrahim ("Ibrahim") was the CFO from November 13, 2013 through the end of the Class Period. Id. ¶¶ 16-19.
Plaintiffs claim that Defendants' public statements and filings with the Securities and Exchange Commission ("SEC") contained false and misleading statements of material fact and omitted other material facts relating to (1) the Company's accounting practices regarding promotional incentives and (2) the adequacy of its internal controls over financial reporting. Consol. Compl. ¶ 22. Those claims are based upon the following allegations: the Company used promotional programs, targeted around the back-to-school and spring seasons, in which the Company offered its customers incentives such as price discounts, consumer coupons, volume rebates, cooperative marketing programs, slotting fees, and in-store displays. Id. ¶ 29. In its quarterly and annual financial reports filed with the SEC, the Company represented that it accounted for the cost of its promotional programs by estimating those costs and recording them as a reduction of sales. Id. ¶ 31. In fact, the Company's methodology failed to capture all trade promotion costs. Id. ¶ 32. As a result, the Company's financial statements were false and misleading because they failed to provide the Company's true net income. Id. ¶¶ 50, 56, 59, 65, 68, 74, 77, 83. The financial statements also were false and misleading because they represented that the Company's internal controls over financial reporting were reliable when in fact they were not. Id. ¶¶ 56, 65, 74, 83. The Company's accounting practices with respect to recognizing trade promotion costs violated generally accepted accounting principles (GAAP"). Id. ¶ 3.
The Company's misstatements and omissions were made public in a press release issued May 29, 2014, an earnings conference call later in the day on May 29, 2014, and SEC filings submitted between June 2, 2014 and June 14, 2014. Consol. Compl. ¶¶ 84-104. In particular, Plaintiffs point to the Company's statements that: its historical methodology for estimating certain trade expenses had not taken into account trade promotional activities conducted by customers after quarter end but related to sales activities occurring prior to quarter end; the methodology had been revised; and the revision of the methodology had resulted in higher trade expenses that were reflected as a reduction in net sales. Id. ¶¶ 84-85, 88, 91. The Company stated that it did not consider the financial impact of the change in methodology to be material to any prior financial statements under accounting guidelines, but that the change in methodology resulted in audit adjustments and immaterial revisions to the Company's quarterly and year-end financial statements for 2012, 2013, and 2014. Id. The Company acknowledged that there was a "material weakness" in its internal control over financial reporting, and stated that it had taken remedial steps to address the issues that gave rise to the material weakness classification, including engaging an external audit firm to assist with the Company's internal audit and internal controls function, and establishing a controls committee that would include board members and senior management. Id. The Company also stated that its outside auditor, PricewaterhouseCoopers ("PwC"), would be resigning effective August 11, 2014 or upon completion of the Company's filing of its Form 10-Q for the period ending June 30, 2014, whichever was earlier. Id. ¶ 103.
This class action was filed on June 11, 2014 and the operative Consolidated Complaint was filed on October 22, 2014. Plaintiffs assert claims for (1) securities fraud under § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 of the Securities and Exchange Commission ("SEC") and (2) controlling person liability under § 20(a) of the Exchange Act.
II. LEGAL STANDARD
A. Rule 12(b)(6)
"A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted tests the legal sufficiency of a claim.'" Conservation Force v. Salazar, 646 F.3d 1240, 1241-42 (9th Cir. 2011) (quoting Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001)). When determining whether a claim has been stated, the Court accepts as true all well-pled factual allegations and construes them in the light most favorable to the plaintiff. Reese v. BP Exploration (Alaska) Inc., 643 F.3d 681, 690 (9th Cir. 2011). However, the Court need not "accept as true allegations that contradict matters properly subject to judicial notice" or "allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences." In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008) (internal quotation marks and citations omitted). While a complaint need not contain detailed factual allegations, it "must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is facially plausible when it "allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id.
B. Rule 9(b) and PSLRA
In addition to the pleading standards discussed above, a plaintiff asserting a private securities fraud action must meet the heightened pleading requirements imposed by Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA"). In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 701 (9th Cir. 2012). Rule 9(b) requires a plaintiff to "state with particularity the circumstances constituting fraud...." Fed.R.Civ.P. 9(b); see also In re VeriFone Holdings, 704 F.3d at 701. The PSLRA requires that "the complaint shall specify each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading...." 15 U.S.C. § 78u-4(b)(1)(B). The PSLRA further requires that the complaint "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2)(A). "To satisfy the requisite state of mind element, a complaint must allege that the defendant[ ] made false or misleading statements either intentionally or with deliberate recklessness." In re VeriFone Holdings, 704 F.3d at 701 (internal quotation marks and citation omitted) (alteration in original). The scienter allegations must give rise not only to a plausible inference of scienter, but to an inference of scienter that is "cogent and at least as compelling as any opposing inference of nonfraudulent intent." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007).
Defendants move to dismiss the Consolidated Complaint for failure to meet the pleading requirements for both the § 10(b) claim and the § 20(a) claim. The Court indicated at the hearing that it would grant the motion to dismiss with leave to amend based upon the lack of adequate factual allegations on the key issue of scienter. The Court granted Plaintiffs until May 29, 2015 - approximately sixty days from the date of the hearing - within which to file an amended pleading. Plaintiffs' counsel indicated that he understood the Court's comments ...