Opinion ID: 2820089
Heading Depth: 3
Heading Rank: 2

Heading: Why the Statements were Fraudulent

Text: The Complaint also explains why these statements were fraudulent by detailing numerous CWsʹ observations that Green Mountainʹs inventory was decidedly not at ʺappropriate levels.ʺ These witnesses are former employees of Green Mountain and M.Block, and the Complaint specifies each witnessʹs position, length of employment, and job responsibilities. Many witnesses described the buildup of inventory ʺup to the raftersʺ and their need to throw away ʺpallet after pallet after palletʺ as the coffee products expired. App. at 48. CW1 stated that inventory was ʺbacked up into various departmentsʺ and even stored in operatorsʹ work spaces. Id. ‐ 23 ‐ Specifically, CW2 recalled a second quarter QVC order where 500,000 brewers were loaded onto trucks right before an audit, and ʺput back in stockʺ immediately after the auditors left the facility. Id. at 62. The Einhorn report also discussed this specific transaction. This was the same quarter during which Green Mountain assured investors ʺwe are not building any excess inventories at all at retail.ʺ Id. at 43. CW4 corroborated this story, stating that inventory was often temporarily loaded onto trucks or hidden behind black plastic in roped off areas during the quarterly auditor visits. Additionally, the Complaint details statements from CWs in management positions with a broader knowledge of the companyʹs inventory and accounting practices. These managers reported to Green Mountain executives who discouraged questions about the inventory practices and ignored their repeated complaints. Hence, the Complaint pleads sufficient particularity to support the probability that the witnesses possessed the information alleged. See Novak, 216 F.3d at 314. Green Mountain argues that confidential witnessesʹ statements must be linked to specific quarters to meet the pleading standard; yet the Second Circuit has held that allegations concerning activity in one period can support an inference of similar circumstances in a subsequent period. See Iowa Pub. Emps.ʹ ‐ 24 ‐ Ret. Sys. v. MF Global, Ltd., 620 F.3d 137, 143 n.13 (2d Cir. 2010); In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 72 (2d Cir. 2001). Even if more specificity is required under our law, CW2ʹs account of the fraudulent second quarter QVC order is closely linked to Green Mountainʹs misleading statements during the second quarter investor call. Because the Complaint states with particularity the statements it alleges are misleading and the reasons why these statements are fraudulent, we hold that the Complaint adequately alleges false statements of material fact. 2. The Complaint Alleges Scienter The Complaintʹs allegations, taken together, are also sufficient to show that Green Mountain had the requisite scienter. Plaintiffs plead strong circumstantial evidence of Green Mountainʹs intent to deceive or defraud Plaintiffs by detailing both (1) Defendantsʹ efforts to deceive auditors and investors and conceal the true facts about Green Mountainʹs excess inventory, and (2) Defendantsʹ significant personal gain from these efforts. Specifically, the CWsʹ statements about their supervisorsʹ efforts to disguise inventory and the size and timing of Rathke and Blanfordʹs stock sales pursuant to their May 2011 10b5‐1 trading plans support an inference of scienter. The facts in the Complaint ‐ 25 ‐ are thus sufficient to plausibly allege Defendantsʹ motive and opportunity to commit fraud, as well as their recklessness. a. Defendantsʹ Efforts to Deceive As pleaded, Defendantsʹ efforts to conceal inventory from auditors demonstrate their intent to deceive or defraud. The Complaint alleges that inventory was ʺstuffed to the raftersʺ and workers were discarding ʺpallet after pallet after pallet.ʺ App. at 33. CW2 and CW4 reported that shortly before audits, Defendants made phantom shipments to hide excess inventory, loading trucks with brewers and bags of coffee that either left the facility temporarily or just sat in the dock loaded with product. Defendants would also hide overstocked inventory behind black plastic, and employees escorting auditors through the facility did not permit auditors beyond the areas blocked by these barriers. The Complaint also details CWsʹ observations that high level managers discouraged questions about unorthodox inventory practices. CW4 was told that Green Mountain did not want employees keeping track of the amount of discarded product and reported that a senior vice president told the crew to just ʺfollow the lead with your supervisorsʺ when calculating inventory. ‐ 26 ‐ Id. at 54. Mid‐level managers CW8 and CW9 expressed concern to senior managers about improper inventory practices that were ʺunheard of in the food industry,ʺ but their complaints fell on deaf ears. Id. at 83. b. Defendantsʹ Personal Gain Rathke and Blanfordʹs sales of Green Mountain stock at opportune moments throughout the Class Period at significant personal gain further evinces Defendantʹs intent to deceive or defraud. These stock sales occurred shortly after the quarterly investor calls during which Rathke and Blanford reassured investors of the strength and continued growth of Green Mountainʹs business. Green Mountain held its second quarter investor call on May 3, and the next day, Green Mountainʹs stock price rose from $64.07 to $75.98 per share and Rathke and Blanford entered into new 10b5‐1 trading plans governing the sales of their personal stock. During Green Mountainʹs share offering the following week, Blanford and three other directors sold 410,456 shares for $29 million, and Blanford sold an additional 51,573 of his personal shares, in accordance with his new trading plan, for a personal profit of $3.6 million. The Complaint details similar executive stock sales following the third quarter investor call on July 27. On August 3, Green Mountainʹs stock price ‐ 27 ‐ reached $110.96 per share, and on August 5, Rathke made her first and only sale of Green Mountain stock in the nine years she had been with the company. That day Rathke sold 337,500 shares for a personal profit of nearly $32.7 million. On August 16, Blanford sold another 45,000 shares for a personal profit of nearly $4.5 million. These patterns continued throughout the Class Period. Green Mountainʹs stock price peaked at $111.62 per share on September 19, and the following day, Blanford sold 45,000 shares for a personal profit of $3.6 million. Finally, on October 18, the day after the Einhorn report was released, Blanford made one last sale of 45,000 shares for a personal profit of $3.6 million. In sum, Rathke and Blanford reaped a total of over $49 million from the sales of their personal stock during the Class Period. Green Mountain argues that these trades do not support an inference of scienter because they were made pursuant to the pre‐determined 10b5‐1 trading plans. This argument, however, ignores that Rathke and Blanford entered this trading plan in May after the second quarter investor call, long after the Complaint alleges that Green Mountainʹs fraudulent growth scheme began. When executives enter into a trading plan during the Class Period and the ‐ 28 ‐ Complaint sufficiently alleges that the purpose of the plan was to take advantage of an inflated stock price, the plan provides no defense to scienter allegations. See Yates v. Mun. Mortg. & Equity, LLC, 744 F.3d 874, 891 (4th Cir. 2014) (noting that a ʺ10b5‐1 plan does less to shield [a defendant] from suspicion [when] he instituted the plan . . . after the start of the class periodʺ); George v. China Auto. Sys., Inc., No. 11‐CV‐7533, 2012 WL 3205062, at  (S.D.N.Y. Aug. 8, 2012) (ʺ[W]here (as here) 10b5‐1 trading plans are entered into during the class period, they are not a cognizable defense to scienter allegations on a motion to dismiss.ʺ (internal quotation marks omitted)). The Complaint alleges that Rathke and Blanford made positive public statements about Green Mountainʹs growth that drove up its stock price immediately before the scheduled sales in February, May, and July. While these sales were made pursuant to their 10b5‐1 trading plans, Rathke and Blanford knew the dates of their scheduled sales where imminent when they made allegedly misleading statements to investors. This behavior remains suspicious even if we discount the September and October stock sales ‐‐ which immediately followed the stock price peaking and the release of the Einhorn Report ‐‐ as coincidence. ‐ 29 ‐ c. The Complaint Supports a Strong Inference of Scienter Taken together, and even in light of opposing inferences, the Complaintʹs allegations articulate Defendantsʹ intent to craft a false growth story and the extraordinary opportunities for personal gain this ʺgrowthʺ created for Green Mountainʹs executives. The Supreme Court dictates that the standard on a motion to dismiss is ʺwhether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard.ʺ Tellabs, 551 U.S. at 323. We have held that motive for scienter can ʺbe shown by pointing to the concrete benefits that could be realized from one or more of the allegedly misleading statements or nondisclosures; opportunity could be shown by alleging the means used and the likely prospect of achieving concrete benefits by the means alleged.ʺ S. Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98, 108 (2d Cir. 2009) (internal quotation marks omitted). Plaintiffs meet this standard. Accordingly, we hold that the Complaint plausibly alleges motive and opportunity for Defendants to commit fraud and conscious misbehavior or recklessness on the part of Green Mountainʹs executives. ATSI Commcʹns, 493 F.3d at 99. ‐ 30 ‐