Warchol v. Green Mountain Coffee Roasters, Inc., Case No. 2:10-cv-227

• Court: U.S. District Court — District of Vermont
• Writing for the Court: William K. Sessions III
• Decision Date: 27 January 2012
• Docket Number: Case No. 2:10-cv-227
• Citation: Warchol v. Green Mountain Coffee Roasters, Inc., Case No. 2:10-cv-227 (D. Vt. Jan 27, 2012)
• Parties: JERZY WARCHOL et al, Individually and on Behalf of all Others Similarly Situated, Plaintiffs, v. GREEN MOUNTAIN COFFEE ROASTERS, INC., et al., Defendants.

JERZY WARCHOL et al, Individually and on Behalf of all Others Similarly Situated, Plaintiffs,

v.GREEN MOUNTAIN COFFEE ROASTERS, INC., et al., Defendants.

Case No. 2:10-cv-227

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF VERMONT

Dated: January 27, 2012

(Consolidated)

Opinion and Order:

Defendants' Motions to Dismiss

This suit is a securities fraud class action brought against Green Mountain Coffee Roasters, Inc. ("GMCR" or the "Company"), its CEO, Lawrence Blanford, its CFO, Frances Rathke, and its founder and current Chairman of the Board of Directors, Robert Stiller (collectively, the "Defendants").¹ Before the Court are motions to dismiss filed by each of the Defendants, ECF Nos. 33-35, which came before the Court on a January 5, 2012 hearing, see Mots. to Dismiss Hr'g Tr. ("Tr."), ECF No. 56. After considering the parties' extensive written and oral argument, the Court concludes Plaintiffs do not allege material misstatements attributable to Stiller. Nor do they allege factsthat collectively give rise to a "strong inference" of scienter on the part of any of the other Defendants, a pleading requirement imposed by The Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(b)(2)(A). As a consequence, the Court grants each of the motions to dismiss without prejudice to Plaintiffs to move to amend their complaint within 30 days of this order.

Background

In setting out the facts below, the Court generally assumes the truth of the factual allegations in the complaint, Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007), but not if they conflict with "the plain language of the publicly filed disclosure documents." In re Optionable Sec. Litig. , 577 F. Supp. 2d 681, 692 (S.D.N.Y. 2008) (internal citation and quotation omitted). The Court may also consider, "documents incorporated into the complaint by reference, and matters of which a court may take judicial notice." Tellabs, 551 U.S. at 322. This includes public disclosure documents filed with the SEC as required by law, as well as documents "possessed by or known to the plaintiff and upon which it relied in bringing the suit." ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007). The Court is also permitted to take judicial notice of stock prices. Ganino v. Citizens Utils. Co., 228 F.3d 154, 167 n.8 (2d Cir. 2000).

I. The Parties and Legal Claims

Plaintiffs are a putative class of purchasers of GMCR stock between July 28, 2010 and September 28, 2010 (the "Class Period") who principally allege violations of § 10(b) of the Exchange Act of 1934, 15 U.S.C. § 78j(b).² They also allege the Individual Defendants were "controlling persons," under § 20(a) of the Exchange Act of 1934, 15 U.S.C. § 78t(a). That provision holds jointly and severally liable those defendants who "directly or indirectly, control[ ]" persons who have violated the securities laws, except "if the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action." Id.Plaintiffs charge Defendants with making misrepresentations that led them to purchase GMCR shares at inflated prices during the Class Period. Consol. Class Action Compl. ("Compl.") ¶ 116, Feb. 23, 2011, ECF No. 26.

GMCR is a Delaware corporation headquartered in Vermont that sells specialty coffee, coffee makers, and related beverage products. It roughly divides its operations into two departments, Keurig, which it acquired in 2006, and the Specialty Coffee Business Unit ("SCBU"). Keurig concentrates in selling a patented brewing device of the same name that produces ready-to-drink beverages from K-Cups—single serving portions of dried coffee, tea, or other products. SCBU sells coffee in K-Cups as well as in other packaging. In recent years, the Company has experienced rapid growth, with its stock price rising from a low of $5.41 per share in Fiscal Year ("FY") 2008 to a high of more than $37 in FY 2010, just prior to the end of the Class Period. GMCR 2010 10-K, GMCR Mem. in Supp. Mot. to Dismiss Ex. 1 ("2010 10-K"), at 29, ECF No. 35-3. In FY 2010, it made $1.36 B in net sales. 2010 10-K at 31. In August 2010, Fortune magazine recognized GMCR as number two on its list of the nation's hundred fastest growing companies. Compl. ¶86.

II. Class Period Events

The start of the Class Period, July 28, 2010, coincides with Defendants' release of the Company's third quarter 2010earnings figures. The market reacted positively to the reports: the following day, the Company's share price rose nine percent, from $28.67 to $31.36. Compl. ¶ 79. On August 5, GMCR filed its 10-Q quarterly financial statement with the SEC (the "Q3 10-Q"), signed by CEO Blanford and CFO Rathke. The Q3 10-Q represented that the Company's management, including the CEO and CFO, had reviewed GMCR's "disclosure controls and procedures" and that the CEO and CFO found them "effective." Compl. ¶¶ 80, 83. It reported that so far that fiscal year, GMCR's pre-tax income was nearly $99 MM, up from about $67 MM the year prior.

On August 10, 2010, GMCR announced a stock purchase agreement with Italian coffeemaker Luigi Lavazza S.p.A ("Lavazza"), in which Lavazza would buy $250 MM worth of GMCR shares, valued based on the sixty-day weighted average closing price of the stock. The deal closed on the final day of the Class Period, September 28, 2010. On September 14, GMCR announced another transaction, in which it would purchase all outstanding shares of a Canadian competitor, Van Houtte, for C$915 million, financed in part by a $1.35 B credit facility. The deal closed December 17, 2010.

On August 13, Michelle Stacy, President of Keurig, made the first of several Class Period stock trades, selling 30,000 shares for $30.95 each. Stacy also sold 10,000 total shares on September 13 and 21, yielding a Class Period total of $1.3 MM.As further outlined below, the September 21 sale came one day after GMCR reported learning it was under investigation by the SEC. Although Stacy disclosed in an October correction to her previous Form 4 stock sale filing that at least some of the transactions had been pursuant to a Rule 10b5-1 trading plan,³ she did not note the plan when making the trades initially. On August 18, Scott McCreary, President of SCBU, sold 200,000 shares at a price of $33.08 each, realizing more than $6.6 MM. The complaint alleges these were the first significant insider trades made by Company officers since June 2009. As GMCR points out and Plaintiffs do not contest, both sets of sales involved the exercise and sale of options, amounting to approximately 20 percent of the two presidents' total holdings. GMCR Mem. 21-22.

Bookending the Class Period, on September 28, 2010, GMCR issued a Form 8-K announcing that "management [had] discoveredan immaterial accounting error" while preparing GMCR's fourth quarter financial statements. Compl. ¶ 90. The 8-K also revealed that on September 20, 2010 the SEC had requested evidence from the Company in connection with an investigation GMCR believed to relate to "certain revenue recognition practices and the Company's relationship with one of its fulfillment vendors." Compl. ¶ 90.⁴ GMCR's stock price dropped from $37.55 on September 27, its highest level during the Class Period, to $31.06 one day after the announcement. Compl. ¶¶ 106-08. It reached a post-announcement nadir of $26.87 on October 11, 2010 before returning to its steady growth. GMCR Historic Stock Prices: July 28, 2010 – Apr. 21, 2011, GMCR Mem. Ex. 3, at 4, ECF No. 35-5.⁵

On November 19, GMCR issued a press release warning investors that, based on the recommendation of an internalaudit, the Company would restate its earnings for FYs 2007-09 and the first three quarters of FY 2010. For that reason, it told investors they should no longer rely upon the Company's previous reports for those periods. It noted that GMCR "expects to report a material weakness in the Company's internal controls over financial reporting." Compl. ¶ 92. It advised, however, that none of the irregularities implicated management or employee misconduct or related to GMCR's relationship with MBlock & Sons, Inc. ("MBlock"), an Illinois third party fulfillment entity for Keurig that presumably was the vendor under review by the SEC.

On December 9, 2010, GMCR filed its FY 2010 10-K, signed by Rathke, CEO Blanford, Chairman Stiller, and the Board of Directors. The report revealed the Company's conclusions as to the extent of the accounting errors and the revisions required in response. It announced GMCR had restated its financial statements from FYs 2006-10. GMCR repeated its assertion that no errors were due to misconduct by management or employees or related to MBlock. It noted that GMCR was continuing to cooperate with the SEC. As relevant to this litigation, it corrected the following errors revealed by the internal audit: a $7.4 million pre-tax income overstatement due to the method for calculating K-Cup inventory; a $0.7 million pre-tax income overstatement related to inter-company brewer inventory; and$1.0 million overstatement of pre-tax income because Keurig had recognized royalty payments as income when it purchased K-Cups from licensed third party brewers for re-sale. 2010 10-K at 4-5. It revealed the Company's Q3 10-Q had overstated 39-week earnings by approximately 6.2 percent. Compl. ¶ 94. Since the restatement also uncovered some understatements in past financials, it yielded a net overstatement of cumulative income from FY 2006 – FY 2010 of $6.06 MM. 2010 10-K at 5.

As it predicted in November, GMCR announced it had "identified certain material weaknesses in its internal control over financial reporting," and that its CEO and CFO had determined "the Company's disclosure controls and procedures were not effective as of September 25, 2010." Compl. ¶ 95.⁶ It elaborated that those shortcomings included failures to account for transactions between the Company's...