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,
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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.
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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,
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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
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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.
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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.   
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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
‐ 17 ‐ 

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).
‐ 18 ‐ 

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).
‐ 19 ‐ 

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.  
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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.
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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.   
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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
‐ 23 ‐ 

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.   
‐ 24 ‐ 

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 
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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
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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.  
‐ 27 ‐ 

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
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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
‐ 29 ‐ 

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.   
‐ 30 ‐ 

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.   
‐ 31 ‐ 

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.