LOUISIANA MUNICIPAL POLICE EMPLOYEES' RETIREMENT SYSTEM, SJUNDE AP-FONDEN, BOARD OF TRUSTEES OF THE CITY OF FORT LAUDERDALE GENERAL EMPLOYEES' RETIREMENT SYSTEM, EMPLOYEES' RETIREMENT SYSTEM OF THE GOVERNMENT OF THE VIRGIN ISLANDS, AND PUBLIC EMPLOYEES' RETIREMENT SYSTEM OF MISSISSIPPI on behalf of themselves and all others similarly situated, Plaintiffs,
GREEN MOUNTAIN COFFEE ROASTERS, INC., LAWRENCE BLANFORD and FRANCES G. RATHKE, Defendants.
OPINION AND ORDER
WILLIAM K. SESSIONS, III, District Judge.
Five employee retirement systems ("Plaintiffs") bring this putative securities fraud class action on behalf of themselves and all similarly situated persons and entities. The Plaintiffs seek damages from Green Mountain Coffee Roasters ("GMCR" or "the Company") and two of its executives, Lawrence Blanford and Frances Rathke (the "Individual Defendants"), for representations about GMCR's inventory that they claim were fraudulent. The Plaintiffs bring suit against all of the Defendants under Section 10(b) of the Exchange Act and SEC Rule 10b-5(b), and against the Individual Defendants under Section 20(a) of the Exchange Act, which creates separate liability for "controlling persons." This action focuses on the time between February 2, 2011, and November 9, 2011 (the "Class Period"). Before the Court are motions by both GMCR and the Individual Defendants to dismiss the Corrected Consolidated Class Action Complaint. The Defendants seek dismissal of the complaint on two grounds. First, Defendants argue that the Plaintiffs have failed to allege a false statement or omission of material fact. Second, Defendants argue the Plaintiffs failed to plead a strong and compelling inference of scienter, either under a motive to defraud or a "conscious misbehavior or recklessness" theory. For the reasons stated below, the Court grants the Defendants' motions to dismiss, ECF Nos. 79 and 80.
GMCR is a Delaware corporation headquartered in Waterbury, Vermont, that sells specialty coffee, coffee brewers, and related beverage products. It encompasses three departments: Keurig, which it acquired in 2006; the Specialty Coffee Business Unit ("SCBU"); and the Canadian Business Unit. Keurig sells a patented "Keurig" brewing device that uses "K-Cups, " single-serving portions of coffee, tea, and related products, to make ready-to-drink beverages. The SCBU produces and sells over two hundred types of beverages in K-Cup and non-K-Cup formats. In recent years, the Company has experienced rapid growth, with its annual net sales nearly doubling between Fiscal Year ("FY") 2011 and FY 2012, from $1.36 billion to $2.65 billion. GMCR drastically expanded its scale of operations in response to this growth; by 2011, the Company was operating twenty-three different manufacturing and distribution facilities.
Plaintiffs' suit is premised on the allegation that throughout the Class Period the Defendants created a false "growth story" by telling investors that GMCR's production capacity was straining to meet demand and that it was ramping up production without building excess inventories. At the same time, GMCR's stock soared. From February 2, 2011, to September 19, 2011, GMCR's stock price nearly quadrupled from approximately $33 per share to a peak of $111 per share; during the same period, the NASDAQ declined by 2.4 percent. Compl. ¶ 2. While GMCR's share prices were inflated, both of the Individual Defendants sold stock options, but in the fall of 2011, GMCR's position in the market began to unravel. On October 17, 2011, David Einhorn, an investor and stock analyst, made a presentation suggesting that GMCR had been engaging in a scheme to mislead auditors and to inflate financial results. Immediately following Einhorn's presentation, there was a sharp drop in GMCR's share price from $92.09 to $82.50 per share and the price continued to fall as the report received more publicity. Id. ¶ 11. On November 9, 2011, GMCR announced that its inventory levels had increased 61 percent from the prior quarter and 156 year over year and that it was increasing its reserve for obsolete inventory to $5.6 million, up 47 percent from the prior quarter and 186 percent year over year. Id. ¶ 8.
GMCR also announced that it had failed to meet sales and revenue expectations for the first time in eight quarters: revenues were up 91% year over year instead of the projected 100-105%. At the Motion to Dismiss hearing, Defendants indicated that revenue growth actually exceeded expectations in Q1 of FY 2012.
I. Statements by the Defendants During the Class Period
Plaintiffs allege that statements pertaining to GMCR's Q1, Q2, and Q3 performance in 2011 were fraudulent. The statements are from conference calls in which GMCR representatives discussed consumer demand, GMCR's inventory, and GMCR's plans to increase production, as well as GMCR's quarterly statement of its obsolescence reserves on the Form 10-Qs it filed at the end of each quarter.
A. Q1 Statements
The beginning of the Class Period coincides with a February 2, 2011, Conference Call held by GMCR to discuss its Q1 2011 results. During the discussion, Blanford stated that demand for GMCR's Keurig and K-Cup products was so strong that the Company's production capacity was constrained. In Blanford's words,
... in the first quarter and so far in our second quarter of our fiscal [year], we are definitely being stretched. We are setting production records, it seems pretty frequently at individual plants and in total but demand is definitely stretching our ability to supply. And we've not quite caught up with that demand curve yet. We are hoping to build a little bit of a cushion going forward, supply versus demand...
Id. ¶ 105. GMCR also released a set of prepared remarks on February 2, which stated in part,
As we mentioned last quarter, despite our efforts to ensure adequate capacity ahead of the holiday season, we experienced and continue to see some spot portion pack shortages. We remain focused on increasing production to fulfill unmet demand and on achieving and maintaining optimum inventory levels to provide better customer service.
Id. ¶ 106. Additionally, GMCR disclosed on its first quarter 2011 Form 10-Q that its obsolescence reserve for the quarter ending December 25, 2010, totaled $3.2 million. Id. ¶ 108.
B. Q2 Statements
On May 3, 2011, GMCR hosted a conference call in which Blanford gave the following update:
We have already begun working with our contract manufacturer to ensure we will have manufacturing capacity to support anticipated brewer demand.... In terms of our K-Cup portion pack production capacity, on shelf product availability [h]as improved though we continued to experience some spot outages. We continued to install equipment and capacity to meet demand including ramping production for our new relationships. In fact in recent weeks we have repeatedly hit new records of portion pack production.
Id. ¶ 109. Blanford then introduced Scott McCreary, GMCR's Chief Operating Officer, who added, "We have made good progress over this last quarter on catching up on our customers' demand so we are feeling good about our preparation going into the fall and that is where the significant portion of that capital will go to continue to prepare us for another good holiday season." Id.
Michelle Stacy, Keurig's President, rejected an analyst's suggestion that brewer sales had been "pulled forward":
We did not pull forward any sales at all. The general demand is what we see. We fill our customers' orders as they come in, and they were not building any excessive inventories at all at retail....
Id. ¶ 110. When asked by Stacy to elaborate, Keurig General Manager John Whoriskey stated that GMCR's "performance... is indicative of our shipment results." Id. Whoriskey added, "the nature of the acceleration of adoption of the product is really with what we are seeing, there is no pulling forward of shipments to do anything, other than react to the demand and make sure we have adequate inventories in place to meet the demand for the period." Whoriskey also denied the suggestion that GMCR had been creating the impression that retailers would be carrying more inventory. Id. ¶ 111. Stacy added color to that comment by explaining that retailers "are keeping a consistent week's supply or week's forward coverage on the business. Obviously as our business grows retailers are continuing to grow their inventory to keep about the same number of weeks['] forward coverage." Id. But, she concluded, "[w]e don't see a substantial increase in the weeks forward." Id. Finally, GMCR reported in its Q2 2011 Form 10-Q that its obsolescence reserve for the quarter ending March 26, 2011, was $2.3 million. Id. ¶ 113.
C. Q3 Statements
On July 27, 2011, GMCR held another conference call, this one to discuss the Company's third quarter 2011 results. An analyst again asked about the possibility of "channel fill" by the company, but Rathke denied that suggestion, stating, "On portion packs, [and] also brewers... we got a lot of space, demos, advertising.... [I]t wasn't necessarily channel fill, ... it was to support an advertising campaign and demos...." Id. ¶ 115. Rathke then provided additional assurances:
I think coming off of Q2 we definitely had shortages or outages of certain products. So I do know we had a backlog that we fulfilled in Q3 on-so that was a piece of it. So I feel what we've been seeing and hearing from all of our accounts is that during Q3 we got back into a place where we knew we had appropriate inventory levels, and they felt comfortable they were getting appropriate inventory levels for the products. So I think we're in good shape.
Id. On its third quarter 2011 Form 10-Q/A, GMCR reported an obsolescence reserve of $3.8 million. Id. ¶ 117.
D. Q4 Statements
On November 9, 2011, GMCR disclosed that the Company had missed sales targets and had failed to beat profit targets for the first time in eight quarters. Id. ¶ 96. Revenues were up 91% year over year rather than 100-105% as projected. GMCR also disclosed that inventory levels had increased to $672.2 million, up $254.7 million from the prior quarter and nearly $410 million above the year before. Id. Finally, GMCR announced that it had increased its reserve for obsolete inventory by 47 percent to $5.6 million, and that K-Cup portion back demand had dropped. Id. ¶¶ 96-98.
II. Allegations of Scienter
Plaintiffs advance two theories of scienter. First, they argue that stock sales by the Individual Defendants and a May 2011 secondary stock offering provided a motive for the fraudulent behavior. Second, Plaintiffs allege that the Defendants engaged in conscious recklessness by issuing the aforementioned statements because in actuality, GMCR was producing far more product than was necessary to meet demand and inventory levels were skyrocketing. Plaintiffs also allege that GMCR's obsolescence reserve ...