morning your honour's says now xander on behalf of the employees retirement system of the state of hawaii this case involves dismissal at the pleading stage of securities claims related to the classic difference between whole foods public statements about transparency and the importance of their relationship of trust with their customers while on the other hand continually overcharging for prepackaged perishable goods by including the weight of the packaging and the weight of the air in the price that was charged at the in the check up price over five years in two of the whole foods largest market california and new york after repeatedly being caught and after signing court documents agreeing to change their practices okayed this suit under the exchanges right now yes it is and  most straightforward way to reverse on falsity because those financial statements on revenues and earnings included those over charged prices in violation of gap well let me then let me ask what is the evidence i'm what gap requires in this situation sure i'm sophists give you an example let's assume that that the whole foods sold chicken at ten dollars for the package ok and they should have only charge nine so they overcharged one dollar and let's say that happens you know quite a few times in california new york ok so what what does the record reflect generally accepted accounting principles would tell you about how that problem should be recorded and reported in the financial state absolutely accounting standards codification six zero five dash ten dash twenty five dash one this is a paragraph one twenty seven of the complaint that accounting standard says that revenues are earned once the entity that's whole foods has substantially accomplished what it must do to be entitled to the benefits represented by the revenues so in your example if the package of chicken says chicken is x dollars per pound and there's enough weight in here for us to charge you ten dollars but actually there's only nine dollars worth of chicken in the package and you should have only recorded nine dollars correct ok so now but this is after the fact and all these customers pay the ten dollars that's the problem the problem what is the generally accepted accounting principles that relate to what happens when you record ten dollars and for some number of people you you have offered to pay them and maybe even over them out of that dollar back so what is that what does gap require on this record now always talking about this record right what does the gap require and this record about what you do when you've reported ten and you should have only reported what you do is you only recognize revenues on the nine they've already recognized revenues and the ten so now that you do that well haven't though that's i mean that that's where the problem is they may have collected the ten dollars but the decision wholefoods decision about what to state as earned revenues that's what's governed by gap so it's not that they took in the ten dollars it's what they're allowed to recognize as revenue those two let's assume that they would probably agree with you we should never board that dollar but what this gap required in that situation we've record reflect the generally accepted accounting principles would require them to do and they have situations having reported right in there your honor i think you're a step ahead of where this complaint is so i think you might be talking about are there procedures under gap for a restatement which is not required in order for us to state a claim our claim isn't about what to do to fix the problem our complaint is about the fact that their revenue and earnings statements over the entire class period each quarter and each year were materially false because they were in violation of gap and what is your evidence in this record that their financial statements reporting it ten dollars right were materially false right so it's paragraphs one twenty four to one twenty seven of the complaint there's the accounting standards codification  citation six zero five ten twenty five one that i gave you and there's also well when it came to whole foods attention that this thing was whatever the average people were when it came to their attention that this had happened  and they still they did not restrict their financials what evidence is there that this was not in accordance with the statements that came out and by the way all these statements are generally historical i mean you report this year in my year are great at so now i think you're talking about two different things so i just want to separate it under the p s l array and it's a heightened pleading requirement i get that but for falsity all we're required to do is identify the statements with particularities and identify why they're false with particularly so we have identified each of the quarterly queues in each of the annual ten k s that made false statements about revenues and earnings that doesn't have anything to do with intentionality that's just identifying the statements with particularity and we've identified why false because we've identified the gap rules that say those revenues can't be recognized as far as they whole foods designate he's the global litigation counsel he was whole foods designit throughout the california investigation which started before the class period and continued through the class period i still don't i still do not have an answer about what generally accepted accounting principles would have required whole foods to do when they finally you know the light bulb flashed up or reaches and and also in their accounting  what were they supposed to do at their point they did not restate their revenues why why was that what a generally accepted accounting principles require them to do it right so i want to be really clear about the restatement and again i think you're at step two and our complaint is about step why are no i'm interested in your complying ok our complaint is about their false statement in the first instance what they do to correct it or do choose not to do is within their hands and the isn't it well it is because the reason that the first circuit in aldridge held that we do not have to plead a restatement by a company in order to to plead that their statements were false in the first instance is because  do have to plead why these statements were materially fall and the reason they were not materially false is in paragraphs one twenty four and one twenty seven of the complaint it's two different gap provisions that say where they have not where the the money they collected is it based on the specific nature and terms of the agreed upon transaction so it doesn't weigh what they said it weighed or where the money does not doesn't entitle them to the benefits represented then those then those dollars are not earned and they cannot be recognized as revenue so the statements recognizing them as revenue are false what they do about it later is  the statements are not all on less the amount by which you know the gross revenues were overstated is somehow material perhaps perhaps the answer is i don't know i mean i'm only suggesting just asking sure well ok so we should we had a dollar that we really owed this woman back for the chicken ok and there are x number of it's always women buying chicken x and x number of women representing y number of dollars who are entitled to get that y number of dollars back how what is  gap requiring and situation for instance yeah i can understand that you might say well you have to set up a reserve so if you if you owe these women a dollar apiece or times whatever they pay then you have to create a reserve but apparently that's not that's not the claim that is not what i'm saying no and so there's sort of two questions one is you're asking was it a material  amount we know these financials where the false financial statements materially false we know they were because whole foods talked about the importance to the company of their transparency and their accuracy and their relationship of trust with their customers they said that pricing accuracy no year was material ends up on those statements it does not on the financial statement it does not have the time the glorious statements that the company made about about how we are the case does not depend on that we assert that those show that they are false in and of themselves and they show the materiality of the financial statements but the financial statements are false and of themselves i still  to establish what i mean you know in this world that we live in the accountants and generally accepted accounting principles will tell you what you have to do in that situation and you the plight of you have to be able to say we established that under gas provided an affidavit or whatever that under gap they should have recorded their financial statements which reported x amount of revenues should have include which they received this isn't a case where they didn't get the money they have the cash so the question is we should have booked a reserve or something it's not is in here it's not about a reserve what they should have done what whole foods should have is this is an issue that was pursued in california for more than two years and resulted in a consent decree and a requirement that whole foods change its practices it was pursued in new york again for two years with the c e c e o rob's involvement and global litigation counsel him flings involvement for admittedly at least six months before the consent decree was filed and again and an admission of overcharging and an agreement to make company wide changes so there's really not an issue about materiality here the issue on fast city areas about the financial state you you've set this case up in part and i recognize it's only in the financial statements were materially misleading ok and you the burden is on you to establish that under these financial statements were materially misleading right i don't i still don't understand why because they recognized revenues beyond our per package times x number of packages the one dollar is your hypothetical the actual facts show that they were charging significantly more for packages and what we have is we have defendants own documents i mean for color for an example of where discovery will lead in this case we have defendants own declarations in the southern district of new york where they demonstrated just in new york city that this amounted to a nuff for a jurisdiction to establish jurisdiction for the consumer claimed their right so they they submitted conservative declarations based on the most conservative estimates that totaled nine million dollars for new york city extrapolating from matt in california which is a much bigger market for whole foods and new york and that's only those two states alone in those two states the extra gets to one hundred twenty seven million dollars so materiality isn't is and what were the gross revenues during that period i don't have gross revenues they were significantly more the map but this was material the other reason that it's material and it doesn't make the case dependent on the falsity of those statements but defendants admitted that their price accuracy their transparency their their trust relationship with their customers was material to customers trust in exactly the same way that this court in a medicine said that where medicare violations had been previously disclosed but the financial impact had not yet been revealed revelation of the financial impact is proximately caused enough for lost cause ation when it's planted or rule eight notice pleadings and it's fairly minimal fines that they have to have to pay any consumers anything now as far as i know ok so the financial impact has been more the twitter shaming results than the actual like now we've got a packed payback the chicken no it's not twitter shaming it's a it's a read the financial impact is what they had to admit on the on july twenty ninth twenty fifteen reduced revenues and earnings because of produce traffic for exactly the reason that they always said this was going to be material because that's twitter shaming in other words if the world didn't care if they go well i mean i enjoyed the chicken i bought for ten dollars now i'm will get it for now i am that sounds good me i'm going to bob some more if instead people go wow i don't want to go to whole foods anymore that is the twitter shaming impact it's not that these consumers that were owed the money that we're talking about  exchange with judge king about are coming and saying i want my dollars this isn't about refunding money this is not a consumer action this is about the fact that they used inflated you know they understand you are consumers and that that would be the right plaintiff in the case no because what they don't know you all are the owners you benefit are part of the overcharging it's the consumers who lost why is it that some were not they were not the owners yes you are the shareholders where holders own the company ok i'm sorry maybe i missed something ok college that's what i learned you're absolutely right ok my politics are the ones who were ripped off not the owners of the company well the owners of the company were were given false information about the value of the company based on inflated revenues and inflated earnings that they haven't had to pay back it's not a payback it's that the value of the company was adjusted once the truth about those inflated revenues and earnings so they would have held onto it in their portfolio i'm sorry they would have held onto it in their portfolio had way known that this and they know not true value of that  that's the injury to your client they have this in their profile for their retirement people right correct and the company was incorrectly valued based on false revenues and false or can you answer questions about why enter pleas how is their scienter here and if the scienter falls then all the case falls right because the twenty fifth the tin be false yeah right ok so there are two important points there so one is the most straightforward was the company's designit throughout the california negotiations that led to a consent decree and requirement to change practices and throughout the new york investigation that also lent to lead to a consent decree and a requirement to change practices he was the company's agent and he was the company's lawyer his knowledge is directly imputed to whole foods what he knew whole foods knows right so whole foods whether or not  overcharging was intentional and this is important whether or not the overcharging whether or not whole foods knows that the overcharging was intentional wholefoods knows that there's overcharging which means that gap says those dollars cannot be recognized as revenues and earnings so his see enter finds the company with respect to the officers we know that c e o s mackey and rob and c f o flannigan signed s certifications saying that the financial statements accurately reflected wholefoods financial condition and also saying that they were given they were designed their internal control were designed to give them material make sure they knew about material information and to make sure that they had there was reliability of the financial reporting so there's fat on the internal controls and then we have this c e o committee this is unusual but we have this c f o flanagan saying this group of people operate as a c e o committee and her quote is it's extremely rare for any of us to make a decision of any consequence without consulting the full team so at a minimum even if the court doesn't find that those facts i mean our position is those facts are sufficient to plead c enter as to that c e o team but at a minimum they plead control person liability of that team that's the team that is controlling whole foods ok i think you've answered my question thank you page nine twenty eight of the record with regard to the dismissal of the first minute complaint and then again on page thirteen ninety three of the record with regard to the dismissal of the second amended complaint plentiful only makes allegations of these large scale and  wangs but the plaintiff needed to but presented no particularized factual allegations from which it could draw the inference that wholefoods statements of financial performance were false plain it does not assert that whole food sales net income or gross revenues were factually different from what was actually reported or other so if i go and i'm by the chicken is represented to be nine dollars a pound project and represented to be one point one pounds whatever the math are i paid ten dollars but really it was only a pound and i should have only nine dollars but i take it home i eat chicken have a nice day and never do anything further has whole foods earned that ten dollars or not whole foods has earned the ten dollars you paid for the the chicken that you actually purchased the issue becomes your honor under under the gap analysis is that one dollar material that would require the financial statements to be restated in some way shape or form we have no evidence that that one dollar was material we have no evidence that any of the transactions that we're talking about here because plaintiff has not played any particular transactions that there's any materiality here that would require the restatement of this is there any evidence of massive coming back and saying you know i've been buying chicken here for a year and found out it was under you know it was overpriced and i want my hundred dollars back for the hundred chickens i bought that were missed way you know you're out of the record only relates to the new york city department consumer affairs press release the consent order under that pressure under the new york city department consumer affairs investigation and then the settlement document that was filed in california there is no particular reason information with regard to those are all futuristic in those fines in my view are extremely low by comparison to the overall revenue wholefood drop in the bucket so to speak but as far as the consumer the person who's actually been harmed by this contact has there been any kind of mass of the money back by these consumers coming in on  clear as to what amount of revenues wholefoods improperly recognized there's nothing specific in this record that describes exactly what it is that whole foods might have allegedly improperly recognized the model affidavits the counsel referred to earlier  million dollars worth of improperly recognize revenue on their face the mala day which were nothing more than a discussion of aggregate sales and inventory data across very broad categories of product lines based upon these broad categories hypothetical set forth in the district  removes is not saying i owes the plaintiffs seventy five thousand dollars of the defendant is saying the plaintiff is old making allegations that are seventy five thousand or more and that's what they say in removal right that is you're on a very typical so it's not conceding weighing like you the president have said we will miss where this is how you're going to do it you get the ten dollars on the chicken you thought you made the ten dollars you report the ten dollars now you found out it should have been nine what is your answer to the gap question that  financial statements would have to be restated would be is if there's a material difference between the revenue that was actually earned and what actually transpired at the store level there is nothing in the record here that shows that there is a material impact year on on the revenues judge james asked earlier about the the earnings in this particular two years when these fines were alleged in california you have one hundred thousand dollars in fines in new york city you have five hundred thousand dollars in fines on the face sure that's a large amount of money but the revenue each year of that shows exactly how much we're talking about as far as the revenue that's related to the eighty nine transactions that might exist in one hundred transactions we have no idea how many transactions we're talking about here because there's nothing in the record that specifically shows because otherwise there is no violation here if there is nothing wrong with the financial statements from a curiosity perspective  have to turn and look at ok what is it that he actually knew and what he knew was exactly that he knew that there was an investigation in new york he knew there was an investigation in california he knew there were mis weighings and he knew that there was a change of whole foods programming in policy as a result of california new york but you can't conflate knowledge into see enter in this court spoken to that in the rosen is weak opinion at three thirty two a second that what cliff seems to be doing here is trying to x post facto in to see enter and the d o d s case from twenty sixteen at fifth circuit a ten to thirty nine fifty one prevents that you can't look back and say oh because that happened what we now believe that there was the enter one one talks that as well the fact that something turned out badly does not mean that a defendant knew earlier that it would lead or turn out badly so just because these statements with regard to  all these different financial statements and cute in twenty twenty thirteen twenty fourteen twenty fifteen suddenly you can't look back and say oh there was an investigation so therefore they're see enter now that i knew that those statements are false and i made them you can't just jump to that conclusion and that's what  definitely ron i believe that with one in three be good enough on their own each one of them i believe that because you have multi problems with regard to a claim of a plausible claim of the p s other and there's four or five different things you must plead properly in order to get past the motion to dismiss stage if you don't meet any one of them then then you're out and with regard to loss causation for example there was another issue that was raised by by planners planners council last causation here is important they're putting too much on the statements of mr gallo who talked about the negative publicity during the july twenty ninth twenty fifteen analyst call the analysts call simply was the disclosure of the fact that a risk factor that had been disclosed had actually occurred wholefoods is ten k s and other financial statements that are fall with the f c c all talk about the fact that our revenues could be impacted by negative publicity and negative complicity could mean any whole not whole other issues with regard to mr gallo said that there was any new information with regard to following disclosing a falsity there was never he did not say that we have to restate our financial statement because they never did and never had to at most he provided information led to speculation by investors and that caused the drop in price and a plan of cannot hide from the fact that and that's kind of become an increasing risk with companies in general their c e o makes a remark that's inappropriate and their stock falls somebody high up in the company is charged with sex harassment the stock and what you said that's what you're warning about in your filings is this kind of thing it's just become much more common because  it's just much more out there maybe than it was when i was growing up i think that's right your honor and for example when whole foods discussed the california settlement in a letter to its investors and its customers the stock price did not drop  after the new york city department consumer affairs issued its press release the stock price did not drop when walter robin john mackey got on you tube and presented a video that explained that there had been mistakes and they admitted those mistakes the stock price drop the stock price dropped when there was it's the discussion of a risk factor negative publicity if you look at the in rio mccrone case out of the second circuit five ninety seven f thirty five a one the court focuses on the fact that loss causation is not adequately alleged where the stock price only declines in response to a later negative characterization of previously disclosed news and that's what we have here there was no new information that was provided with regard to the investigations or the funds on that analyst call it was simply a discussion of the fact that there was negative publicity and a negative impact has i understand the aldridge case which is just because you haven't invested restage or financials doesn't mean you but has any account that  should restate their financials i'm not aware of anything and there's nothing in the record that says that you're on do you have anything else one other point your honor very briefly counsel replenished reference the fact that there were as the settlements and there was admissions of overcharging that might be with regard to paying of a fine but those at the consent decree in new york and the i'm sorry the consent decree in california and the consent order in new york whole foods specifically denied liability and based on the law those the novels of viability have to be taken as true and they cannot be used against whole foods in this kind of a proceeding thank you counsel thank you just quickly on falsity and then see enter and lost cause aish and so on falsity the quotas on pages twenty one to twenty two of the reply brief the point being exactly as chains explain that a company doesn't have to admit their conduct in order for us to plead falsity falsity the clearest path to reversing on falsity here is the gap violations this court in central labors said that identifying a statement with particularities and plaque and so th has the same thing identifying the who what where and why of a statement pleads falsity central labors says that identifying a gap violation pleads falsity and i heard counsel talk about the fact that  in the hypothetical the ten dollars was earned that is not what gap says gap says the money isn't earned in the first place and this court's decision in barry says that where defendant disagree with the accounting violation or want to claim that they properly accounted for something in contradiction to what's alleged in the complaint that has to await summary judgment that is not properly considered at the pleading stage so collected ten we only sure to collect on it's not gap requires us to report that this way they got a reported someway right we did we've played it at paragraphs one twenty four to one twenty seven of the complaint the what whole foods in order to comply with gap wholefoods couldn't just say this is the amount of money we managed to get whole foods had to say these are dollars that we earned too in order to recognize them as revenues they had to say they were earned i understand the the court seems to not agree with the gap rule and certainly defense counsel is great listen my whole  shouldn't have so how do you account for that under gap it's your bird right and you know that under gap there are rules about the timing of when dollars can be recognized and about which dollars can be recognized and specifically says that you say what you say and this record gap requires out of the what i would require this transaction multiplied by however many there were be report  cross california across new york what gap says is they could only recognize dollars that were earned but if they they took the money again they have that's collected that's not spam so there's a they should not have been reported more than i'm what how do they report the dollars there is a liability they create a research what are they what is the gap required you got to account for it some now if it was taken and they either should have recorded this gross revenues or in and perhaps recorded a live bullet or what you're the place i am the plaintiff and i have met my burden by pleading that the ten dollars were not earned in your hypothetical only nine dollars were and ten dollars were collected but only nine dollars were earned and so when i go to the public as whole foods if i as whole foods if i say  recognize ten dollars as revenue that is a false statement because gap the gap rules in those paragraphs of the complaint say i only earned nine i collected ten but i only earned nine and that's why it's a false statement alleged particularly under this court's decisions in central labors and bury and plaque can the easiest patters thank you the easiest path to see enter is through the knowledge of john was the company's lawyer what he knew over five years and investigations in whole foods to largest to a whole foods largest markets what he knew is attributed to the company it doesn't matter if the overturning was intentional he knew that there was overcharging they admitted it in fact c e o rob admitted it after the california consent decree they admitted it and agreed to company wide changes after the new york consent decree that knowledge is attributed to whole foods so i will now see if you have your argument thank you very much thank you your hon