EMPLOYEES' RETIREMENT SYSTEM OF GOVERNMENT OF THE VIRGIN ISLANDS, LEAD PLAINTIFF, on behalf of itself and all others similarly situated, LOUISIANA MUNICIPAL POLICE EMPLOYEES' RETIREMENT SYSTEM, LEAD PLAINTIFF, on behalf of itself and all others similarly situated, BOARD OF TRUSTEES OF THE CITY OF FORT LAUDERDALE GENERAL EMPLOYEES' RETIREMENT SYSTEM, LEAD PLAINTIFF, on behalf of itself and all others similarly situated, PUBLIC EMPLOYEES' 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,
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, 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
Argued December 1, 2014
[Copyrighted Material Omitted]
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF VERMONT. Appeal from a judgment of the United States District Court for the District of Vermont (Sessions, J.) dismissing plaintiffs-appellants' securities fraud claims. The district court granted defendants-appellees' motions to dismiss, holding that plaintiffs-appellants failed to adequately allege a misleading statement or omission of material fact and scienter.
VACATED AND REMANDED.
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. D'Ancona, 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.
Before: CHIN and CARNEY, Circuit Judges, and SWEET, District Judge.[*]
Chin, Circuit Judge.
In this putative securities class action, plaintiffs-appellants are five employee retirement systems (" Plaintiffs" ) that purchased or otherwise acquired common stock in Green Mountain Coffee Roasters, Inc. (" Green Mountain" ), the manufacturer of the Keurig single-cup brewing system. Plaintiffs allege that Green Mountain and certain of its executives (" Defendants" ) made fraudulent misrepresentations about Green Mountain's inventory, business performance, and growth prospects in a manner designed to mislead investors about the strength of Green Mountain's business, in violation of federal securities law.
The district court (Sessions, J. ) granted Defendants' motions to dismiss Plaintiffs' Corrected Consolidated Class Action Complaint (the " Complaint" ) 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 Mountain's False " Growth Story"
Green Mountain manufactures the Keurig single-cup brewing system, many varieties of the associated " K-Cup" portion packs to brew single servings of coffee and other beverages, and other coffee-related products. Between February 2, 2011 and November 9, 2011 (the " Class Period" ), 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 Mountain's 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. (" M.Block" ). 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 " none of the financial statement errors are related to [Green Mountain's] relationship with M.Block." 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 " we remain focused on increasing production to
fulfill unmet demand and achieving and maintaining optimum inventory levels." Id. at 42. Defendant Lawrence Blanford -- President, Chief Executive Officer, and Director of Green Mountain -- further stated that " demand is definitely stretching our ability to supply. And we've not quite caught up with that demand curve yet." Id. During its second quarter conference call on May 3, 2011, Green Mountain stated " we are not building any excess inventories at all at retail." Id. at 43 (emphasis omitted). In prepared remarks filed with the SEC the same day, Green Mountain elaborated: " [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." Id.
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, " we got back into a place where we knew we had appropriate inventory levels." Id. at 45. Blanford emphasized a need to increase production capacity at a " rapid clip" because " [a]s a result of the growth we've experienced thus far this year . . . we will need to deploy more portion pack production capacity in 2012 than previously anticipated to support consumer demand." Id. When investors expressed concern about over-producing, Blanford reiterated that " we're at appropriate inventory levels." Id.
2. Green Mountain's 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 (" CWs" ) -- Green Mountain employees from different tiers of the company -- detailing the company's 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 2012 -- reported that production increased dramatically in 2010 after Green Mountain bought new machinery. Inventory accumulated " up to the rafters," became " backed up into various departments," and was even being stored in operators' 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 " best-by-date" passed. Id. CW4 -- a machine operator for K-cup production from 2009 to mid-2012 -- emphasized that there was " no question" that Green Mountain had excess K-cup inventory, as warehouse workers were throwing away " pallet after pallet after pallet." Id.
3. Green Mountain's 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, " intentionally concealed from both investors and . . . auditors" that its warehouses were " stuffed to the rafters" with " unused and expiring coffee products that were not being sold to consumers," and it was discarding " pallet after pallet after pallet." Id. at 33. As part of its efforts to deceive investors, Green Mountain orchestrated " phony shipment[s]" to temporarily conceal excess products during
inventory audits and utilized non-mainstream accounting practices to track its ...