Miyahira v. Vitacost.Com, Inc.

• Decision Date: 06 May 2013
• Docket Number: No. 12–14065.,12–14065.
• Citation: 715 F.3d 1257
• Parties: Andrea MIYAHIRA, et al., individually and on behalf of all others similarly situated, Plaintiffs, Montgomery County Employees' Retirement Fund, Plaintiff–Appellant, v. VITACOST.COM, INC., Ira P. Kerker, Richard P. Smith, Stewart Gitler, Allen S. Josephs, et al., Defendants–Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

715 F.3d 1257

Andrea MIYAHIRA, et al., individually and on behalf of all others similarly situated, Plaintiffs,Montgomery County Employees' Retirement Fund, Plaintiff–Appellant,

v.VITACOST.COM, INC., Ira P. Kerker, Richard P. Smith, Stewart Gitler, Allen S. Josephs, et al., Defendants–Appellees.

No. 12–14065.

United States Court of Appeals,Eleventh Circuit.

May 6, 2013.

Timothy N. Mathews, Kimberly Donaldson, Chimicles & Tikellis, LLP, Haverford, PA, Kim E. Miller, Bruce W. Dona, Kahn, Swick & Foti, New York City, Julie Prag Vianale, Vianale & Vianale, LLP, Boca Raton, FL, Joseph Clay Coates, III, Greenberg Traurig, LLP, West Palm Beach, FL, Craig J. Geraci, Lewis S. Kahn, Kahn, Swick & Foti, LLC, Madisonville, LA, for Plaintiff–Appellant.

Paul R. Bessette, Michael John Biles, Royale Pence Price, King & Spalding, LLP, Sandra D. Gonzalez, Greenberg Traurig, LLP, Austin, TX, Robin A. Henry, Jack A. Wilson, Boies, Schiller & Flexner, LLP, Armonk, NY, Sigrid Stone McCawley, Boies, Schiller & Flexner, LLP, Fort Lauderdale, FL, Tracy A. Nichols, Monica Vila, Holland & Knight, LLP, Miami, FL, for Defendants–Appellees.

Appeal from the United States District Court for the Southern District of Florida.

Before DUBINA, Chief Judge, and BARKETT and KLEINFELD,^* Circuit Judges.

DUBINA, Chief Judge:

This is a securities case. Appellants allege Appellees made material misstatements and omissions in an IPO Registration Statement and prospectus (collectively “the prospectus”) for a September 2009 public offering of stock in violation of §§ 11, 12(a)(2), and 15 of the Securities Act of 1933 (the “Securities Act”). Appellants are persons who purchased the stock. Appellees are the company that issued the stock, Vitacost.com, Inc. (“Vitacost”), the underwriters for the offering, Jeffries & Co., Inc., Oppenheimer & Co., Inc., Needham & Co., LLC, and Roth Capital Partners LLC (collectively “underwriters”), as well as certain officers and directors of Vitacost, Ira P. Kerker (“Kerker”), Allen S. Josephs, Lawrence A. Pabst, Richard P. Smith, and Robert G. Trapp (collectively “individual Appellees”). The district court granted Appellees' motion to dismiss for failure to state a claim under the Securities Act. After reviewing the record, reading the parties' briefs, and having the benefit of oral argument, we affirm the judgment of the district court.

I. BACKGROUND

A. Pre–IPO Facts

According to the second amended complaint, in 1993, Wayne Gorsek (“Gorsek”) founded Vitacost, a manufacturer and internet retailer of vitamins and nutritional supplements.¹ By 2006, Vitacost had been one of the fastest growing, privately-held companies for five consecutive years. As a result, Gorsek began exploring the possibility of taking Vitacost public. NASDAQ indicated it would not permit a public offering of Vitacost's stock with Gorsek as CEO because of a 1999 SEC civil action involving an unrelated public relations firm Gorsek owned. As a result, in January 2007, Gorsek resigned as CEO and handed the position to Kerker, Vitacost's general counsel. After resigning, Gorsek became Vitacost's Chief Operations Architect. This position carried no policy-making authority, but Gorsek continued to attend management meetings, advise the board of directors, and develop new proprietary products.

In order to boost interest in a public offering, Vitacost decided to begin manufacturing its proprietary products. Historically, Vitacost had sold some proprietary formulations of supplements—most of which Gorsek developed—but the supplements were manufactured by third parties, which limited Vitacost's profit margin. Transitioning to manufacturing would yield higher profit margins and make the company more attractive to investors. Accordingly, Vitacost began construction of a manufacturing facility in Lexington, North Carolina. The facility was operational by April 2008 and dually served as Vitacost's east coast distribution center. Vitacost also maintained a west coast distribution center in Las Vegas, Nevada. Several months prior to the IPO, Vitacost decided to relocate the Las Vegas facility and began searching for new space for the relocation. [ See R. 87 ¶ 72 (stating that “[Confidential Witness] #10² confirmed that [Vitacost] had been searching for a new space to relocate the Las Vegas distribution facility,” and “the decision to relocate the Las Vegas distribution center had been made prior to the IPO”).]³

In March 2008, Eigerwand Bjornstad (“Bjornstad”) was hired as Vice President of Manufacturing after having served as a consultant to Vitacost in 2007. His main job was to build the manufacturing side of the business. He immediately helped boost Vitacost's manufacturing operation and earned an award for being the “Employee of the Year” in 2008. During his tenure, less than 1% of Vitacost's proprietary products were out of stock at any given time. Confidential Witnesses # 1, # 6, # 9, and # 10 confirmed that Bjornstad was “largely responsible for building Vitacost's manufacturing operation into a success.” [ Id. ¶¶ 44, 47.] Thus, Gorsek developed most of the proprietary products, up to 300 a year, and Bjornstad oversaw the manufacturing facility to ensure the concepts made it to the shelves. By June 30, 2009, just before the IPO, Vitacost's customer base had grown to 957,000 customers, up from 270,000 customers in 2005.

In July 2009, “Kerker told [Confidential Witness] # 3 that Gorsek and Bjornstad were ‘short timers' who would soon be gone from Vitacost.” [R. 87 ¶ 55.] However, “Gorsek had no intention of leaving Vitacost after the IPO. Gorsek spent 15 years building [Vitacost] and wanted to grow it into a billion dollar enterprise.” [ Id. ¶ 54.] Kerker also told Confidential Witness # 3 that “he planned to terminate Bjornstad as soon as Vitacost reported its 3Q:09 numbers.” [ Id. ¶ 56.]

B. The Prospectus

On September 24, 2009, in accordance with SEC regulations, Vitacost filed its prospectus. The document explained the company's business structure, products, future growth strategy, projected earnings, relevant key personnel, the impact of various government regulations, and variables that could adversely impact projected growth.

The prospectus described the roles of the officers and directors of Vitacost, such as Bjornstad, and it also described Gorsek's role in detail:

Wayne F. Gorsek is our founder and, since July 2008, has served as our Chief Operations Architect. As Chief Operations Architect, Mr. Gorsek works with our marketing, distribution, manufacturing, customer service and information technology departments to further our business plan. In June 2009, Mr. Gorsek's board-approved responsibilities were limited to assisting us with our marketing, distribution, manufacturing, customer service and information technology departments in an effort to further our business plan, and no longer include the exercise of policy-making authority. From January 2007 to July 2008, Mr. Gorsek served as a full time consultant pursuant to a consulting agreement. Since our inception in 1994 to January 2007, Mr. Gorsek served as our Chief Executive Officer and was a member of our board of directors. Mr. Gorsek founded Vitacost.com (originally named Nature's Wealth Company) in 1994. He has developed knowledge of the nutritional supplement business through reading of scientific literature and dialogue with our scientific advisory board and has conceptualized and implemented many of the products sold by us today.

[R. 65–1 at 34.]

The prospectus made clear that Gorsek did not exercise policy-making authority and that, in fact, if Vitacost permitted Gorsek “to act as one of [its] executive officers or directors without the consent of The NASDAQ Stock Market, including through the exercise of policy-making authority,” its shares could be delisted which could materially reduce the liquidity and price of its shares. [ Id. at 6.] The prospectus also warned that there was no assurance that Vitacost would “be able to operate as successfully as in the past without his management leadership, which could have a material adverse effect on our business, financial condition or results of operations.” [ Id.]

As to the role of Bjornstad, the prospectus stated:

Eigerwand Bjornstad has served as our Vice President Manufacturing since March 2008. From 2007 to 2008, Mr. Bjornstad served as a consultant of ours. From 1996 to 2007, Mr. Bjornstad served as an Operations Manager for Jarrow Industries where he provided management during the construction and implementation of a state of the art manufacturing facility and directed all aspects of manufacturing operations. Mr. Bjornstad has over 19 years of manufacturing leadership in the nutritional supplement industry.

[R. 87 ¶ 102.]

The prospectus warned that the departure of any key personnel could adversely impact Vitacost's business. Indeed, it stated:

Our success depends to a significant degree upon the continued contributions of our executive officers and other key personnel. Although we have employment agreements with our executive officers, we cannot guarantee that such persons will remain affiliated with us. If any of our key personnel were to cease their affiliation with us, our operating results could suffer.

[R. 65–1 at 6.] The prospectus did not disclose that any key personnel—including Gorsek and Bjornstad—would be leaving the company shortly after the IPO.

The prospectus also addressed the potential risks involved in its growth and expansion plan, which was geared toward eventually manufacturing all products that it sold and expanding its distribution to meet increased customer demand. Specifically, it explained that “[t]o the extent we continue to grow revenue it may be necessary and cost-effective to open a third distribution facility and/or expand the footprint of one or both of the current distribution facilities.” [ Id. at 18.] It also stated:

Within the next 12 to 18 months, we anticipate that we will require additional...