Lematta v. Casper Sleep, Inc.

• Decision Date: 30 September 2022
• Docket Number: 20-CV-2744 (MKB)
• Court: U.S. District Court — Eastern District of New York
• Parties: ROBERT LEMATTA, individually and on behalf of all others similarly situated, Plaintiff, v. CASPER SLEEP, INC., PHILIP KRIM, GREGORY MACFARLANE, NEIL PARIKH, DIANE IRVINE, ANTHONY FLORENCE, JACK LAZAR, BENJAMIN LERER, KAREN KATZ, DANI REISS, MORGAN STANLEY & CO. LLC, GOLDMAN SACHS & CO. LLC, JEFFERIES LLC, BOFA SECURITIES, INC., UBS SECURITIES LLC, CITIGROUP GLOBAL MARKETS INC., PIPER SANDLER & CO., and GUGGENHEIM SECURITIES, LLC, Defendants.

ROBERT LEMATTA, individually and on behalf of all others similarly situated, Plaintiff,
v.
CASPER SLEEP, INC., PHILIP KRIM, GREGORY MACFARLANE, NEIL PARIKH, DIANE IRVINE, ANTHONY FLORENCE, JACK LAZAR, BENJAMIN LERER, KAREN KATZ, DANI REISS, MORGAN STANLEY & CO. LLC, GOLDMAN SACHS & CO. LLC, JEFFERIES LLC, BOFA SECURITIES, INC., UBS SECURITIES LLC, CITIGROUP GLOBAL MARKETS INC., PIPER SANDLER & CO., and GUGGENHEIM SECURITIES, LLC, Defendants.

No. 20-CV-2744 (MKB)

United States District Court, E.D. New York

September 30, 2022

MEMORANDUM & ORDER

MARGO K. BRODIE, UNITED STATES DISTRICT JUDGE

Robert Lematta commenced this securities class action on June 19, 2020, on behalf of himself and other similarly situated investors who purchased or otherwise acquired Casper Sleep (“Casper”) securities traceable to Casper's initial public offering conducted on or around February 7, 2020 (the “IPO”) against Casper Sleep, Inc.; Officer Defendants: Philip Krim, Gregory Macfarlane, Neil Parikh; Individual Defendants: Diane Irvine, Anthony Florence, Jack Lazar, Benjamin Lerer, Karen Katz, and Dani Reiss; and Underwriter Defendants: Morgan Stanley & Co. LLC, Goldman Sachs & Co. LLC, Jefferies LLC, Bof A Securities, Inc., UBS Securities LLC, Citigroup Global Markets Inc., Piper Sandler & Co., and Guggenheim Securities, LLC. (Compl. ¶¶ 1, 6-26, Docket Entry No. 1.) Lematta alleged that Defendants violated the federal securities laws under the Securities Act of 1933 (the “Securities Act”).

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(Compl. ¶ 1.) On October 27, 2020, Saleh Doron Gahtan (“Plaintiff”),^[1] amended the Complaint and added violations of the Securities Exchange Act of 1934 (the “Exchange Act”). (Am. Compl. ¶ 1, Docket Entry No. 16.) On June 30, 2021, Gahtan filed a Second Amended Complaint (the “SAC”) alleging that Defendants made several false and misleading statements and omissions to investors, including by misrepresenting that Casper's business was experiencing significant growth and would generate substantial profits, in violation of Sections 11 and 15 of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act. (SAC ¶¶ 1-10, Docket Entry No. 29.)

Defendants move to dismiss the SAC for failure to state a claim pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure and Plaintiff opposes the motion.^[2] For the reasons explained below, the Court grants the motion in part and denies it in part.

I. Background

The Court assumes the truth of the factual allegations in the SAC for the purpose of deciding Defendants' motion.

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a. Casper's business model

Casper is a mattress and sleep aid company that has “brick-and-mortar” locations. (SAC ¶ 35.) Casper “purports to implement a ‘cutting-edge' and data-driven omni-channel sales platform and marketing strategy in order to target and match potential customers with innovative sleep products tailored to their specific needs, optimize product price points, and maximize operating efficiencies.” (Id.) “Between its founding and 2019, Casper expanded from its first product - the Casper mattress - to offer soft goods, bedroom furniture and products that promote ambience for sleep such as lighting, sound, scents, temperature, and humidity; sleep technology, such as tracking devices, medical machines, bedside clocks, and connected devices; sleep supplements, such as sprays, pills and vitamins; and sleep services, such as digital apps, meditation, sleep programming, and counseling.” (Id. ¶ 36.) “Casper has also stated its intention to grow internationally and claimed to be building towards an international presence in more than twenty countries.” (Id. ¶ 37.) The mattress and sleep aid markets are highly saturated, and Casper's success depends heavily on customers' brand awareness. (Id. ¶ 38.) “In 2019, [Casper] spent approximately $155 million on sales and marketing activities, the most significant component of its operating expenses and an indication of the high cash flow needed for Casper to grow revenues and increase its market share.” (Id. ¶ 39.) As of September 30, 2019, Casper had only $54.6 million in cash and cash equivalents on hand, yet every quarter generated over $20 million in negative cash flows on average. (Id. ¶ 42.)

Casper represented that its third-party manufacturing and distribution relationships conferred a competitive advantage by allowing the company to minimize overhead and control inventory flow. (Id. ¶ 41.) Casper highlighted these “significant long-term investments” in developing its distribution capabilities as a key component of its growth plan. (Id.)

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b. Casper's IPO

In January of 2020, Casper filed its Registration Statement with the Securities and Exchange Commission (“SEC”). (Id. ¶ 84.) The Registration Statement was effective as of February 5, 2020. (Id.) The Registration Statement reassured investors that Casper's profitability metrics were improving. (Id. ¶ 42.) Plaintiff contends that “[t]he Registration Statement contained untrue statements of material fact, omitted material facts necessary to make the statements contained therein not misleading, and failed to make necessary disclosures required under the rules and regulations governing its preparation.” (Id. ¶ 85.) For example, it (1) highlighted Casper's purported core profitability, (id. ¶ 87); (2) stated that Casper's retail stores were generating . . . [sufficient revenue] to cover the costs of new store builds over an eighteen- to twenty-four-month period, (id. ¶ 88); (3) represented that Casper's e-commerce operations were profitable in the lead-up to the IPO, (id. ¶ 89); (4) “stated that [Casper's] multichannel marketing and new retail store strategy had offered complementary revenue growth and ‘“first purchase profitable” e-commerce economics,'” (id. ¶ 90 (quoting the Registration Statement, annexed to Defs.' Mot. as Ex. 1, Docket Entry No. 33-3)); (5) represented that Casper had implemented several strategic initiatives designed to improve the company's profit margins, (id. ¶ 91); (6) “indicated that favorable year-over-year revenue and margin trends were sustainable and continuing,” (id. ¶ 92); (7) emphasized Casper's global operations and intention to expand into several new international markets (id. ¶ 93); and (8) claimed that Casper's operations and growth were “supported by a highly qualified supply chain and distribution network,” (id. ¶ 94).

Plaintiff alleges that these statements were inaccurate statements of material fact because they failed to disclose the following adverse facts that existed at the time of the IPO:

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(a) that Casper's profit margins were actually declining, rather than growing; (b) that Casper was changing an important distribution partner, costing it 130 basis points of gross margin in the first quarter of 2020 alone; (c) that Casper was holding a glut of old and outdated mattress inventory that it was selling at steeply discounted clearance prices, further impairing the Company's profitability; (d) that Casper was suffering accelerating losses, further placing its ability to achieve positive cash flows and profitability out of reach; (e) that Casper's core operations were not profitable, but were causing the Company to suffer over $40 million in negative cash flows during the first quarter of 2020 alone and doubling its quarterly net loss year over year; (f) that, as a result of (a)-(e) above, Casper's ability to achieve profitability, implement its growth initiatives, and expand internationally had been misrepresented in the Registration Statement, as the Company needed to shutter its European operations, halt all international expansion, jettison over one fifth of its global corporate workforce, and significantly curtail new store openings in order to avoid an imminent cash and liquidity crisis, let alone achieve positive operating cash flows; and (g) that, as a result of (a)-(f) above, Casper's revenue growth rate was not sustainable and had not positioned the Company to achieve profitability.

(Id. ¶ 95.) In addition, Plaintiff contends that Items 303 and 105 of SEC Regulation S-K, 17 C.F.R. §§ 229.303 and 229.105 required Casper to disclose these adverse facts because they had caused, or were reasonably likely to cause, Casper's disclosed financial information not to be indicative of future results and made the IPO risky or speculative.^[3] (Id. ¶¶ 96-97.) In addition, the purported risk factors that Defendants provided in the Registration Statement were themselves materially misleading. (Id. ¶ 98.) For example, the Registration Statement stated that a “‘failure to increase [Casper's] revenue sufficiently to keep pace with [its] investments and other expenses could prevent [it] from achieving or maintaining profitability or positive cash

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flow on a consistent basis,' but failed to disclose that [Casper] was already suffering widening deficits and materially impaired margins at the time of the IPO, or the reasons for those impairments.” (Id.) “Similarly, while the Registration Statement stated that promotions were ‘occasionally offered' by [Casper], it stated that these promotions were highly seasonal and occurred in connection with increased sales during Casper's second and third fiscal quarters and failed to mention the deep discounting that was then occurring in the midst of [Casper]'s first fiscal quarter and the IPO, as it had been forced to unload a glut of old and outdated inventory.” (Id.) Plaintiff contends that Defendants utilized “boilerplate, generic expressions of future contingent risk [that] failed to apprise investors of the specific and imminent threats facing [Casper] and the occurrence of adverse events that were already impacting [Casper's] business, operations, financial results and prospects at the time.” (Id.)

In the IPO, Defendants sold 8.35 million shares of Casper common stock at $12 per share, generating over $100 million in gross proceeds. (Id. ¶ 84.) On...