Court Opinion

ID: 4235770
Source: CourtListenerOpinion
Date Created: 2018-01-10 21:00:27.044449+00
Date Added: 2024-06-11T14:15:53.468913
License: Public Domain

FILED
                           NOT FOR PUBLICATION
                                                                            JAN 10 2018
                    UNITED STATES COURT OF APPEALS                      MOLLY C. DWYER, CLERK
                                                                          U.S. COURT OF APPEALS

                           FOR THE NINTH CIRCUIT

SHERIF E. EL DABE, Individually and on           No.   16-55426
Behalf of All Others Similarly Situated
(Calavo Investor Group); JOHN                    D.C. No.
O’HANLON, (Calavo Investor Group);               2:15-cv-00400-GW-AS
ELLIOT C. NELMS, (Calavo Investor
Group),
                                                 MEMORANDUM*
              Plaintiffs-Appellants,

 v.

CALAVO GROWERS, INC.; LECIL D.
COLE; ARTHUR BRUNO; EGIDIO
CARBONE; GEORGE H. BARNES;
MICHAEL A. DIGREGORIO; STEVEN
HOLLISTER; JOHN M. HUNT,

              Defendants-Appellees.

                    Appeal from the United States District Court
                       for the Central District of California
                     George H. Wu, District Judge, Presiding

                     Argued and Submitted December 6, 2017
                              Pasadena, California

      *
        This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
Before: CANBY and REINHARDT, Circuit Judges, and BLOCK,** District Judge.

      Sherif E. El Dabe, John O’Hanlon, and Elliot C. Nelms (“Plaintiffs”) appeal

the district court’s order dismissing their Second Amended Complaint pursuant to

Federal Rule of Civil Procedure 12(b)(6). We have jurisdiction under 28 U.S.C. §

1291, and review the district court’s order de novo. Lloyd v. CVB Fin. Corp., 811

F.3d 1200, 1205 (9th Cir. 2016). We affirm.

      Plaintiffs allege that Calavo Growers, Inc. (“Calavo”), two executive officers

at Calavo, and five audit committee members at the company (collectively

“Defendants”) filed false and misleading financial statements in violation of §

10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated by

the Securities and Exchange Commission. See 15 U.S.C. § 78j(b); 17 C.F.R. §

240.10b-5. To plead a claim under § 10(b) and Rule 10b-5, a complaint must

“state with particularity facts giving rise to a strong inference” of scienter. 15

U.S.C. § 78u-4(b)(2)(A); Or. Pub. Emps. Ret. Fund v. Apollo Group Inc., 774 F.3d

598, 603–04 (9th Cir. 2014). A defendant acts with scienter when he makes false

or misleading statements “either intentionally or with deliberate recklessness.” In

re Daou Sys., Inc., 411 F.3d 1006, 1015 (9th Cir. 2005).

      **
         The Honorable Frederic Block, United States District Judge for the
Eastern District of New York, sitting by designation.
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      In 2011, Calavo acquired Renaissance Food Group, LLC (“RFG”). It paid

$16 million in cash and shares at closing and agreed, as contingent consideration,

to pay up to $84 million more in cash and shares of Calavo stock if RFG’s

operations met certain financial goals within five years after the acquisition.

These terms were disclosed to investors. During fiscal years 2011 through 2013,

Calavo erroneously classified the contingent consideration as equity, instead of

liability, in its financial statements, resulting in a large overstatement of Calavo’s

earnings. RFG exceeded the target goals within three years, requiring Calavo to

make the full contingent payment. In 2015, Calavo reported its error and

announced corrections and non-cash charges made to its 2012, 2013, and 2014

financial statements.

      These facts, along with the others alleged in the Complaint or contained in

public financial filings subject to judicial notice, do not state a plausible case that

these named Defendants acted with knowledge of falsity of their statements or with

deliberate recklessness in issuing them. There is no allegation that the Defendants

were alerted to any possible defect in the original treatment of the contingent

liability and Calavo’s auditor, Ernst and Young LLP, issued “clean audit reports”

for fiscal years 2011 through 2013. Plaintiffs set forth the conclusion of an

accounting expert that the erroneous treatment of the contingent liability

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“unquestionably” violated Generally Accepted Accounting Principles, but that

conclusion does not support a plausible and strong inference that the Defendants

knew or should have known that their accountants had erred and that their resulting

financial statements were misleading investors. Cf. In re Software Toolworks Inc.,

50 F.3d 615, 628 (9th Cir. 1994); In re Worlds of Wonder Sec. Litig., 35 F.3d 1407,

1426 (9th Cir. 1994).

      It is true that the overstatements of Calavo’s earnings were huge. For 2014,

for example, Calavo’s restatement eliminated approximately $40 million of

reported earnings. Even so, the financial scope of Calavo’s mistake and the

company’s publication of a restatement do not create a strong inference of scienter.

See City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc.,

856 F.3d 605, 622 (9th Cir. 2017); Zucco Partners, LLC v. Digimarc Corp., 552

F.3d 981, 1000 (9th Cir. 2009).

      Finally, Plaintiffs claim that Defendants were motivated to treat contingent

consideration as equity in order to inflate Calavo’s financial results and be eligible

for bonuses, minimize the financial toll of the California drought on avocado

production, and meet analysts’ expectations. “[G]eneralized assertions of motive,

without more, are inadequate” to show that Defendants disseminated misleading

financial statements either intentionally or with deliberate recklessness. See Zucco

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Partners, 552 F.3d at 1004 (providing that if “simple allegations of pecuniary

motive were enough to establish scienter, virtually every company . . . could be

forced to defend securities fraud actions”) (internal quotation marks and citations

omitted)). Moreover, there is no allegation that the Defendants engaged in any

suspicious stock transactions. Absent facts giving rise to a “strong inference” of

scienter, Plaintiffs do not adequately state a cause of action under § 10(b) and Rule

10b-5. We therefore affirm the dismissal of those claims.

      The Plaintiffs’ claim under § 20(a) of the Exchange Act was derivative, see

15 U.S.C. § 78t(a), and was properly dismissed in light of their failure to state

claims under § 10(b) and Rule 10b-5. See Zucco Partners, 552 F.3d at 990.

      AFFIRMED.

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