Motion to dismiss - Horowitz v. GMCR

7/31/2019 Motion to dismiss - Horowitz v. GMCR

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UNITED STATES DISTRICT COURT

DISTRICT OF VERMONT

DAN M. HOROWITZ, individually on behalfof all others similarly situated,

Plaintiff,

vs.

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

Defendants.

)))

))))))))

No. 2:10-CV-00227-WKS(Consolidated)

DEFENDANT GREEN MOUNTAIN COFFEE ROASTERS, INC.S

MEMORANDUM OF LAW IN SUPPORT OF ITS MOTION TO DISMISSTHE SECOND CONSOLIDATED AMENDED CLASS ACTION COMPLAINT

WITH PREJUDICE


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TABLE OF CONTENTS

Page

PRELIMINARY STATEMENT .........................................................................................1

BACKGROUND .................................................................................................................3

I. GREEN MOUNTAINS SUCCESS AND RAPID GROWTH .................................4

II. GREEN MOUNTAINS ANNOUNCEMENT OF AN SEC INQUIRYAND THE COMPANYS RESTATEMENT ............................................................5

III. PLAINTIFFS AMENDED COMPLAINT ...............................................................7

A. Allegations of Improper Revenue Recognition on Shipments IntoM. Block ..........................................................................................................8

B. Allegations of Inventory Shifting and Expired Product; theEinhorn Presentation .........................................................................................9

ARGUMENT .....................................................................................................................11

I. THE AMENDED COMPLAINT FAILS TO ALLEGE FALSESTATEMENTS REGARDING M. BLOCK REVENUERECOGNITION PRACTICES ................................................................................11

A. The Amended Complaint Still Fails to Identify a False StatementRegarding Green Mountains M. Block Revenue RecognitionPractices .........................................................................................................12

B. Likewise, The Amended Complaint Fails to Identify a FalseStatement Regarding Overproduction and Expired Product ..................15

II. THE AMENDED COMPLAINT FAILS TO PLEAD A STRONG ANDCOMPELLING INFERENCE OF SCIENTER .......................................................18

A. Plaintiffs Generalized Allegations of Conscious RecklessnessShould Be Rejected .........................................................................................21

B. The Confidential Witnesses Do Not Raise A Strong, Cogent, andCompelling Inference of Scienter ...................................................................23

1. CW1s and CW6s Claims of Improper Revenue Recognitionon M. Block Shipments Fail to Raise Any Inference of Scienter ........25

2. The Allegations of Inventory Shifting and Expired ProductDo Not Raise a Strong, Cogent and Compelling Inference ofScienter ..................................................................................................29

C. The Opposing Inference of Innocent Conduct Is Far More Cogentand Compelling ...............................................................................................37


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ii

TABLE OF AUTHORITIES

Page(s)

CASES

380544 Canada, Inc. v. Aspen Tech., Inc.,544 F. Supp. 2d 199 (S.D.N.Y. 2008)........................................................................ 38

ATSI Commcn, Inc. v. Shaar Fund, Ltd.,493 F.3d 87 (2d Cir. 2007)................................................................................... 11, 18

Bird v. Stephens, P.C.,No. 10-CV-1091(DMC)(JAD), 2011 WL 2600721 (D.N.J. June 29, 2011) ............. 33

Brodsky v. Yahoo! Inc.,630 F. Supp. 2d 1104 (N.D. Cal. 2009) ............................................................... 24, 26

Caiafa v. Sea Containers Ltd.,

525 F. Supp. 2d 398 (S.D.N.Y. 2007)........................................................................ 13

Cal. Pub. Employees Ret. Sys. v. Chubb Corp.,394 F.3d 126 (3d Cir. 2004)....................................................................................... 24

Campo v. Sears Holdings Corp.,371 Fed. Appx 212 (2d Cir. 2010)............................................................................ 25

Campo v. Sears Holdings Corp.,635 F. Supp. 2d 323 (S.D.N.Y. 2009)........................................................................ 30

City of Brockton Ret. Sys. v. Shaw Group, Inc.,540 F. Supp. 2d 464 (S.D.N.Y. 2008).................................................................. 22, 38

Coronel v. Quanta Capital Holdings Ltd.,No. 07 Civ. 1405(RPP), 2009 WL 174656 (S.D.N.Y. Jan. 26, 2009) ....................... 22

Curry v. Hansen Med., Inc.,No. 5:09-cv-05094-JF (HRL), 2011 WL 3741238 (N.D. Cal. Aug. 25, 2011) ......... 23

Decker v. MasseyFerguson, Ltd.,681 F.2d 111 (2d Cir. 1982)....................................................................................... 12

ECA & Local 134 IBEW Jt. Pension Trust of Chi. v. JP Morgan Chase Co.,553 F3d 187 (2d Cir. 2009)........................................................................................ 21

Gavish v. Revlon, Inc.,No. 00 Civ. 7291(SHS), 2004 WL 2210269 (S.D.N.Y.Sept. 30, 2004) ......................................................................................... 12, 14, 15, 28


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Glaser v. The9, Ltd.,772 F. Supp. 2d 573 (S.D.N.Y. 2011).................................................................. 29, 30

Glickman v. Alexander & Alexander Serv., Inc.No. 93 Civ. 7594 (LAP), 1996 WL 88570 (S.D.N.Y. 1996) ..................................... 21

Hart v. Internet Wire, Inc.,163 F. Supp. 2d 316 (S.D.N.Y. 2001)........................................................................ 19

Hershfang v. Citicorp,767 F. Supp. 1251 (S.D.N.Y. 1991) ........................................................................... 36

In re Accuray Secs. Litig.,757 F. Supp. 2d 936 (N.D. Cal. 2010) ....................................................................... 24

In re Alcatel Secs. Litig.,382 F. Supp. 2d 513 (S.D.N.Y. 2005)........................................................................ 17

In re Am. Express Co. Sec. Litig.,No. 02 Civ. 5533(WHP), 2008 WL 4501928 (S.D.N.Y. Sept. 26, 2008) ................. 25

In re Bausch & Lomb, Inc. Secs. Litig.,592 F. Supp. 2d 323 (W.D.N.Y. 2008) ...................................................................... 32

In re Bristol-Myers Squibb Sec. Litig.,312 F. Supp. 2d 549 (S.D.N.Y. 2004)........................................................................ 28

In re Crude Oil Commodity Litig.,No. 06 Civ. 6677(NRB), 2007 WL 1946553 (S.D.N.Y. June 28, 2007) ................... 35

In re Doral Fin. Corp. Sec. Litig.,563 F. Supp. 2d 461 (S.D.N.Y. 2008)........................................................................ 29

In re Gilat Satellite Networks, Ltd.,No. CV-02-1510 (CPS), 2005 WL 2277476 (E.D.N.Y Sept. 19, 2005).................... 33

In re MSC Indus. Direct Co., Inc.,283 F. Supp. 2d 838 (E.D.N.Y. 2003) ....................................................................... 38

In re Nokia Corp. Secs. Litig.,

423 F. Supp. 2d 364 (S.D.N.Y. 2006)........................................................................ 15

In re Optionable Sec. Litig.,577 F. Supp. 2d 681 (S.D.N.Y. 2008)........................................................................ 11

In re Pfizer, Inc. Secs. Litig.,538 F. Supp. 2d 621 (S.D.N.Y. 2008)........................................................................ 36


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In re Sec. Capital Assur. Ltd. Secs. Litig.,729 F. Supp. 2d 569 (S.D.N.Y. 2010)........................................................................ 22

In re Sierra Wireless, Inc. Sec. Litig.,482 F. Supp. 2d 365 (S.D.N.Y. 2007)........................................................................ 34

In re U.S. Aggregates, Inc. Sec. Litig.,235 F. Supp. 2d 1063 (N.D. Cal. 2002) ..................................................................... 28

Janbay v. Canadian Solar, Inc.,2012 WL 1080306 (S.D.N.Y. March 30, 2012) .................................................passim

Janus Capital Group, Inc. v. First Derivative Traders,131 S. Ct. 2296 (2011) ................................................................................... 20, 21, 32

Johnson v. Siemens AG,No. 09 Civ. 5310(JG)(RER), 2011 WL 1304267 (E.D.N.Y. March 31, 2011) ......... 38

Karpov v. Insight Enters.,No. CV 09-856-PHX-SRB, 2010 WL 4867634 (D.Ariz. Nov. 16, 2010) ................. 25

Malin v. XL Capital Ltd.,499 F. Supp. 2d 117 (D.Conn. 2007) ................................................................... 18, 23

McKenna v. Smart Techs,11 Civ. 7673 (KBF), 2012 U.S. Dist. LEXIS 47134 (S.D.N.Y. April 3, 2012) ........ 26

Novak v. Kasaks,216 F.3d 300 (2d Cir. 2000)................................................................................passim

Rombach v. Chang,355 F.3d 164 (2d Cir. 2004)................................................................................. 12, 17

Ross v. Walton,668 F. Supp. 2d 32 (D.D.C. 2009) ............................................................................. 34

S.E.C. v. Credit Bancorp, Ltd.,386 F.3d 438 (2d Cir. 2004)....................................................................................... 10

Slayton v. Am. Express Co.,

604 F.3d 758 (2d Cir. 2010)....................................................................................... 38

Sorkin LLC v. Fischer Imaging Corp.,No. Civ. A. 03-CV-00631-R, 2005 WL 1459735 (D.Colo. June 21, 2005) ........ 30, 31

South Cherry Street LLC v. Hennessee Group, LLC,573 F.3d 98 (2d Cir. 2009)......................................................................................... 19


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Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital,531 F.3d 190 (2d Cir. 2008)....................................................................................... 20

Tellabs, Inc. v. Makor Issues & Rights, Ltd.,551 U.S. 308 (2007) ............................................................................................passim

Warchol v. Green Mountain Coffee Roasters, Inc.,No. 2:10-cv-227, 2012 WL 256099 (D.Vt. Jan. 27, 2012) .................................passim

STATUTES

15 U.S.C. 78u-4(b) .................................................................................................. 11, 12

OTHER AUTHORITIES

17 C.F.R. 211 ................................................................................................................ 23

Fed. R. Civ. P. 9(b) .................................................................................................... 11, 24

Fed. R. Civ. P. 12(b)(6).................................................................................................... 11


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Defendant Green Mountain Coffee Roasters, Inc. (Green Mountain or the Company)

respectfully submits this memorandum in support of its motion to dismiss with prejudice the

Plaintiffs Second Consolidated Amended Class Action Complaint.1

PRELIMINARY STATEMENT

Like its predecessor, the centerpiece of Plaintiffs amended complaint is their allegation

that Green Mountain improperly recognized revenue on shipments made using a fulfillment

vendor, M. Block & Sons (M. Block), notthe Companys restatement in 2010. In dismissing

the prior complaint, the Court emphasized that Plaintiffs confidential witnesses lacked any

relevant insight into or job responsibility for Green Mountains accounting and, further, that they

failed to show the Defendants awareness of any supposed accounting fraud. During the hearing

on Defendants last motion to dismiss, the Court pressed on these very allegations and asked

whether Plaintiffs could be more precise as to how [Plaintiffs] knew that the shipments in

question were considered revenue when they headed toward M. Block. Jan. 5, 2012 Tr. at

77:1-3.

Plaintiffs amended complaint does nothing to cure this fatal defect. As before, the

complaint fails to plead the first element of a securities fraud claim (i.e., a false statement).

Plaintiffs do not even identify a single misstatement by the Company on their core claim that

Green Mountain improperly recognized revenue on shipments made through M. Block, let alone

explain with particularity how any such statement was false or misleading when made. As

before, Plaintiffs fail to plead with factual support how Green Mountain supposedly violated its

revenue recognition policy applicable to M. Block. This holds true notwithstanding the addition

1 The other defendants in this action, Lawrence J. Blanford and Frances G. Rathke (together, theIndividual Defendants), are Green Mountains chief executive officer and chief financial officer,respectively. (Green Mountains former chairman and chief executive officer, Robert Stiller, wasdropped as a defendant.) The Individual Defendants have filed a brief in support of their own motion todismiss and Green Mountain incorporates by reference the arguments set forth in that brief.


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of further CW accounts, including that the Company was shifting inventory at M. Block and

deliberately overproducing product. Plaintiffs confidential witness accounts lack the most basic

of factual details; to the extent they provide any substance, the anonymous witnesses allegations

regarding shipments into M. Block are, in fact, completely consistent with the Companys

disclosed and proper revenue recognition policy.

Additionally, the complaint fails to raise the strong, cogent and compelling inference of

scienter mandated by the Supreme Courts decision in Tellabs, Inc. v. Makor Issues & Rights,

Ltd., 551 U.S. 308, 314 (2007). None of Plaintiffs unnamed sources is identified in a manner

that would support the probability that the source would possess information about the

Companys accounting practices, as required by Novak v. Kasaks, 216 F.3d 300, 314 (2d Cir.

2000). Of the 14 confidential witnesses identified in the complaint, only three (CW1, CW6 and

CW10) are alleged to have had any passing familiarity with accounting principles. None of these

CWs is identified to have had any responsibility for or direct contact with the Companys

accounting for revenue recognition. Further, their accounts do nothing to advance Plaintiffs

theory that Green Mountain prematurely recognized revenue on shipments of product into M.

Block. None of the witnesses attests to when revenue actually was recognized on the shipments

alleged in the complaint. Nor do any of the witnesses specify information known to the

Individual Defendants that contradicted the Companys public statements.

In recognition of the need to shore up their last pleading, Plaintiffs resort to recapitulating

allegations made by David Einhorn, an infamous short seller who made a presentation about

Green Mountain at an investor conference in October 2011, after Plaintiffs class period.

Einhorn had an admitted and substantial short position in the Companys stock and had (and

likely still has) a vested interest in depressing Green Mountains stock price. His presentation


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suggested that Green Mountain engaged in accounting shenanigans with its fulfillment

vendors, an allegation based solely on field interviews with former Green Mountain and M.

Block workers who are neither identified nor described in any meaningful way. None of these

workers is described with any of the facts required to permit the Court to consider whether the

individual would be in a position to have any information about Green Mountains accounting or

external reporting practices. The presentation does not identify the company for which these

anonymous sources worked, when they worked there, or the nature of their job responsibilities.

Also absent are essential details about the supposed accounting shenanigans, including when

and where the alleged events occurred, how much product supposedly was at issue, and even

who might be involved. In fact, because the presentation does not say when the conduct alleged

by these former employees purportedly occurred, it is impossible to tell whether the allegations

even implicate Plaintiffs class period in 2010. Plaintiffs reliance on these unsubstantiated

hearsay allegations does nothing to advance Plaintiffs case. Moreover, any inference raised by

Einhorns unidentified workers or Plaintiffs own confidential witnesses is overcome by the

more compelling, nonculpable inference that Green Mountains accounting errors were the

unintended product of the Companys rapid growth.

In short, Plaintiffs amended complaint fails to plead any false statement made with

scienter. The complaint should be dismissed, this time with prejudice.

BACKGROUND

In this action, Plaintiffs assert claims against the Company and two of its executives

under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Like the prior

complaint, the Second Consolidated Amended Class Action Complaint (the Amended

Complaint) seeks to proceed on behalf of all purchasers of the Companys stock between July


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28, 2010 and September 28, 2010 (the purported Class Period).2 Am. Compl. (AC) 1.

As reflected in the Courts decision granting Defendants earlier motions to dismiss, the

Court is familiar with Green Mountain and its business. Here, the Company focuses on the key

facts and allegations relevant to the Courts consideration of this motion, as well as the few areas

where the Plaintiffs have attempted to rehabilitate their allegations.

I. GREEN MOUNTAINS SUCCESS AND RAPID GROWTHGreen Mountain is a Vermont-based leader in the specialty coffee and coffee maker

businesses, known for its popular Keurig single-cup brewing system and K-Cup portion packs.

The Company has grown tremendously in recent years. As just one illustration of its growth,

Green Mountains net income for the third quarterof 2010 was four times that of its net income

for the entire fiscal year of 2007. See Declaration of Anne Johnson Palmer, filed herewith

(Declaration or Decl.), Ex. A (Form 10-K filed on Dec. 9, 2010) at iii. In August 2010,

Green Mountain was recognized by Fortune magazineas number two on a list of the nations top

100 fastest growing companies. AC 108.

During the Class Period, Green Mountain managed its operations through two business

units or divisions: the Specialty Coffee Business Unit (SCBU) and the Keurig business unit

(Keurig). AC 31-33. To further its strategy of driving the adoption of the Keurig brewing

system and K-Cup packs, beginning in 2009 Green Mountain undertook three substantial

acquisitions in the span of little more than a year to acquire roasters that had previously licensed

its K-Cup technology. See Decl. Ex. A at 5-6 (describing acquisitions of Tullys Coffee

2 Separately pending before this Court are two subsequently-filed securities fraud class actions that assertdifferent class periods than Plaintiffs allege here, La. Mun. Police Employees Ret. Sys. v. GreenMountain Coffee Roasters, Inc., et al., Civ. No. 2:11-cv-00289, and Fifield v. Green Mountain CoffeeRoasters, Inc., et al., Civ. No. 2:12-cv-00091. Also pending before the Court is a tag-along consolidatedshareholder derivative action against the Company and certain of its directors and officers, Himmel v.Stiller, et al., Civ. No. 2:10-cv-233-WKS.


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Corporation and Timothys Coffees of the World Inc. in March and November 2009, as well as

the May 2010 acquisition of Diedrich Coffee, Inc.). Also during the Class Period, Green

Mountain announced a strategic relationship with the Italian coffee company Lavazza, as well as

its fourth acquisition of a licensed roaster in a two-year period. On August 10, 2010, Green

Mountain announced that it had entered into a stock purchase agreement whereby at a later

closing Lavazza would purchase $250 million worth of Green Mountain shares. Id.; AC 106.

And on September 14, 2010, the Company stated that it had entered into an agreement to acquire

LJVH Holdings, Inc., owner of Van Houtte and other beverage brands, to further Green

Mountains expansion in Canada.

3

Decl. Ex. A at 5; AC 109.

II. GREEN MOUNTAINS ANNOUNCEMENT OF AN SEC INQUIRY AND THECOMPANYS RESTATEMENT

Plaintiffs filed this action almost immediately after Green Mountain announced on

September 28, 2010, that it had identified an immaterial accounting error and that it was

cooperating with an inquiry being conducted by the Securities and Exchange Commission (the

SEC).4 See Decl. Ex. B (Form 8-K filed Sept. 28, 2010) at 3. Green Mountain advised that it

believed the focus of the SEC inquiry concerned certain revenue recognition practices and the

Companys relationship with one of its fulfillment vendors. Id. The Companys Keurig

division uses a third-party fulfillment vendor, M. Block, to process, pack, and ship the majority

of its sales orders to retailers in the United States. Decl. Ex. A at 4; AC 60. After the SEC

3

The Lavazza investment transaction closed on September 28, 2010, and the Van Houtte acquisitionclosed on December 17, 2010. Decl. Ex. A at 6; Decl. Ex. C (Form 8-K filed Dec. 17, 2010) at 2.4 The immaterial error related to the accounting for Green Mountains K-Cup inventory in consolidatingthe Companys financial statements. See Decl. Ex. B at 2; AC 40-41. When consolidating therespective financial statements of its SCBU and Keurig divisions for external reporting purposes, theCompany is required under the relevant accounting rules to eliminate any margin on intercompany salesincluded in the standard cost used for Keurigs K-Cup inventory. The Company discovered that it hadused a lower gross margin than it should have to make this calculation, with the result that it inadvertentlyoverstated net income by a cumulative $7.64 million over the restated periods.


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contacted Green Mountain, the audit committee of the Companys board of directors (which is

comprised of independent outside directors) initiated an internal investigation, with the

assistance of outside legal counsel and a forensic accounting team. See Decl. Ex. A at i, 21.

During the course of that investigation and in preparing the Companys year-end financials, the

Company identified certain other accounting errors. On November 19, 2010, Green Mountain

announced that it would restate its financial statements for the previous three fiscal years. See

Decl. Ex. D (Form 8-K filed Nov. 19, 2010) at 2-3; AC 41.

The Company presented its restated financial statements on its Form 10-K filed on

December 9, 2010. See Decl. Ex. A. According to Plaintiffs, Green Mountains restated

financial statements include a cumulative overstatement of undistributed earnings retained from

its inception through June 26, 2010 of roughly 3%. See AC 44. The restatement consisted of

six errors resulting in both over and understatements of income, each of which was immaterial

on a stand-alone basis. The errors addressed by the restatement related to intercompany

eliminations, changes in the revenue recognition for royalties from third-party roasters, the

accrual of marketing and customer incentive expenses, and certain other immaterial

adjustments.5

Decl. Ex. A at i-iii.

5Specifically, the restatement corrected the following errors, see Decl. Ex. A at i-iii: A $7.4 million overstatement of pre-tax income due to the K-Cup inventory adjustment error

the Company reported on September 28, 2010. This error represented 2.68% of the Companyspre-tax income over the restated periods.

A $700,000 overstatement of pre-tax income, cumulative over the restated periods, due toapplying an incorrect standard cost to intercompany brewer inventory balances in consolidation.This error represented 0.003% of the Companys pre-tax income over the restated periods.

A $1.4 million overstatement of pre-tax income due to the under-accrual of certain marketing andcustomer incentive program expenses. This error represented 0.51% of the Companys pre-taxincome over the restated periods.

A $1.0 million overstatement of pre-tax income resulting from changes in the treatment of theCompanys revenue recognition of royalties from third party licensed roasters. This errorrepresented 0.36% of the Companys pre-tax income over the restated periods.


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Green Mountain explained that the errors identified in the restatement arose due to the

Companys rapid growth, both organically and through acquisitions, outpacing the development

of the Companys accounting infrastructure. Id. at 50. In the Form 10-K setting forth the

restated financials, Green Mountain and its audit committee confirmed that none of the

accounting errors implicated misconduct by the Company or its management or employees, and

the Company outlined a plan developed by its management to improve its internal financial

controls. Id. at 49-51. The Company also confirmed that the errors were unrelated to Green

Mountains business dealings with M. Block. Id. at i. The Companys outside auditor,

PricewaterhouseCoopers, LLP (PwC), provided an unqualified audit opinion in connection

with the restatement. Id. at F-2-3.

III. PLAINTIFFS AMENDED COMPLAINTPlaintiffs stated Class Period is July 28, 2010 to September 28, 2010. In the Amended

Complaint, Plaintiffs claim that certain public statements Green Mountain made in connection

with announcing its financial results for the third quarter of fiscal year 2010 are false. Plaintiffs

point, in part, to the fact that Green Mountain subsequently restated its financial statements and

has acknowledged certain deficiencies in its internal controls during that period. See AC 111

(citing 98-99, 101, 105-107).

But, as before, Plaintiffs do not challenge the adequacy of the Companys internal

investigation or the accuracy of the corrections made in the restatement. Instead, the principal

theory Plaintiffs advance is that, notwithstanding the Companys disclosures that the restatement

A $700,000 overstatement of pre-tax income due to applying an incorrect standard cost tointercompany brewer inventory balances in consolidation. This error represented 0.003% of theCompanys pre-tax income over the restated periods.

A $700,000 understatementof pre-tax income for the SCBU, due primarily to a failure to reversean accrual related to certain customer incentive programs in Q2 of fiscal 2010. This errorrepresented -0.003% of the Companys pre-tax income over the restated periods.


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had nothing to do with M. Block, Green Mountain improperly recorded revenue on shipments

into M. Block. See, e.g., AC 4. In an attempt to support their M. Block theory and to salvage

their claims, Plaintiffs rely on allegations of inventory movements supposedly made to

manipulate the Companys accounting records, as well as allegations made in an October 2011

presentation by an infamous short seller, David Einhorn. As outlined below, all of these

allegations rest at their core on statements supposedly from anonymous, confidential witnesses

(CWs) who are not alleged to have any knowledge of Green Mountains revenue recognition

practices, let alone contact with either of the Individual Defendants.6

A.

Allegations of Improper Revenue Recognition on Shipments Into M. Block

As set forth in the Companys Form 10-K for the 2010 fiscal year, Green Mountains

policy for recognizing revenue on shipments made via fulfillment vendors is as follows:

The Company recognizes revenue when the fulfillment entities[e.g., M. Block] ship the product based on the contractual shippingterms, which generally are upon product shipment, and when allother revenue recognition criteria are met.

Decl. Ex. A at 43; AC 82. As the Companys policy underscores, [a]ll inventories maintained

at the third party fulfillment locations are owned by the Company until the fulfillment entity

processes the orders and ships the product to the retailer. Decl. Ex. A at 43. Accordingly,

shipments of product into M. Block are irrelevant from a revenue recognition perspective,

because the Companys policy provides that revenue is only recognized upon product shipment

by M. Blockoutof the facility to the retailer.7

The CW accounts in the Amended Complaint regarding shipments into M. Block closely

track those made in the prior complaint. Plaintiffs allege that, according to CW1, there was a

6 For the Courts convenience, appended to the Declaration as Exhibit E is a chart identifying thePlaintiffs CW allegations by witness.7 Appended as Exhibit F to the Declaration is a graphical depiction presenting the language from theCompanys policy from the 2010 Form 10-K.


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and is known for his public critiques of companies in order to drive down a companys stock

price and therefore profit as a short seller of that companys stock.8 See AC 84, 92.

Einhorns presentation admitted that Greenlight had an economic interest in the price movement

of [Green Mountain] securities. Decl. Ex. G at 2. In the Amended Complaint, Plaintiffs cobble

together bits and pieces of Einhorns field research, which purports to be based on interviews

with anonymous former GMCR and MBlock workers. Id. at 92. The presentation referred to

these workers collectively. Einhorn did not describe who these anonymous workers were with

any detail, including the company for which they worked, the time period of their employment,

or what position they held and what their job responsibilities entailed. The statements attributed

to these unnamed workers include generalized assertions about Green Mountains supposed

control over M. Block, claims that the Company deliberately overproduced K-Cups, and

statements about supposed irregularities in product movements between facilities. See id. at 94-

96; AC 87, 89. The only example of a product movement described with anything more than

generalities is a supposed shipment of 500,000 brewers that Green Mountain processed as an

order for QVC but never shipped, which allegedly occurred before an audit at M. Block. AC

90-91; Decl. Ex. G at 97. Like all of the allegations in Einhorns presentation, this statement is

not attributed to a particular worker, the presentation does not say anything about where the

individual worked or what he or she did there, and it does not identify when this alleged

shipment occurred. And, as with Plaintiffs own confidential witness accounts, Einhorns

presentation does not indicate what impact any of these alleged events had on the Companys

8 As the Second Circuit has explained, a short seller is an investor [who] sells stock that he does not yetown by borrowing that stock from a broker and warranting that he will cover the sale by purchasing thatstock at a later date. In this speculative investment, the investor will earn money if the stock price islower at the time of purchase than at the time of sale and the investor will lose money if the purchaseprice is higher than was the sale price. S.E.C. v. Credit Bancorp, Ltd., 386 F.3d 438, 445 n.9 (2d Cir.2004).


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public disclosures or its financial statements.

ARGUMENT

To state a claim for liability under Section 10(b) and Rule 10b-5, Plaintiffs must allege

five elements: (1) a material misrepresentation; (2) made with scienter; (3) in connection with the

sale or purchase of a security; (4) upon which the Plaintiffs relied; and (5) that their reliance was

the proximate cause of their injury. ATSI Commcn, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 105

(2d Cir. 2007), vacated in part on other grounds, 579 F.3d 143 (2d Cir. 2009). As the Court

outlined in its ruling on the prior motions to dismiss, the Amended Complaint is subject to

heightened pleading requirements, which are imposed by Rule 9(b), the PSLRA, and the

Supreme Courts decision in Tellabs.9 See Warchol v. Green Mountain Coffee Roasters, Inc.,

No. 2:10-cv-227, 2012 WL 256099, at *4 (D.Vt. Jan. 27, 2012). In particular, the PSLRA

requires a securities plaintiff to plead with particularity facts giving rise to a strong inference

of scienter. 15 U.S.C. 78u-4(b)(2).

I. THE AMENDED COMPLAINT FAILS TO ALLEGE FALSE STATEMENTSREGARDING M. BLOCK REVENUE RECOGNITION PRACTICES

Pleading a claim for securities fraud requires Plaintiffs to allege a false statement or

omission. Significantly, Green Mountains restatement is not the focus of the Amended

Complaint: Plaintiffs do not center their claims on the few, relatively minor accounting errors

that were addressed and corrected by the Companys restatement. Rather, Plaintiffs suggest the

Companys third quarter disclosures were false for reasons entirely unrelated to the errors

9 In considering a motion to dismiss a securities fraud complaint, courts must consider the complaint inits entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions todismiss, in particular, documents incorporated into the complaint by reference, and matters of which acourt may take judicial notice. Tellabs, 551 U.S. at 322. Courts also may consider legally requiredpublic disclosure documents filed with the SEC. ATSI Commcn, 493 F.3d at 98. Where a complaintsallegations of securities fraud conflict with the plain language of the publicly filed disclosure documents,the disclosure documents control, and the court need not accept the allegations as true. See In reOptionable Sec. Litig., 577 F. Supp. 2d 681, 692 (S.D.N.Y. 2008).


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addressed in the restatement, namely that Green Mountain somehow violated its stated revenue

recognition policy for sales into M. Block. See AC 82. Here, the Amended Complaint fails to

satisfy the first and most basic element of a Rule 10b-5 securities fraud claim, that Plaintiffs

specify each statement alleged to have been misleading and set forth the reasons why the

statement is misleading, as required by the PSLRA. 15 U.S.C. 78u-4(b)(1); see also Rombach

v. Chang, 355 F.3d 164, 170 (2d Cir. 2004) (complaint must (1) specify the statements that the

plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the

statements were made, and (4) explain why the statements were fraudulent.) (internal citation

omitted).

A. The Amended Complaint Still Fails to Identify a False Statement RegardingGreen Mountains M. Block Revenue Recognition Practices

Where revenue recognition practices are concerned, pleading a false statement requires

plaintiffs to state facts with a degree of particularity sufficient to support a reasonable belief that

[the defendant] was in fact overstating sales through improper accounting. Gavish v. Revlon,

Inc., No. 00 Civ. 7291(SHS), 2004 WL 2210269, at *12 (S.D.N.Y. Sept. 30, 2004). The

complaint must plead specific facts about each one of [the] transactions. Janbay v.

Canadian Solar, Inc., 2012 WL 1080306, at *4-5 (S.D.N.Y. March 30, 2012) (collecting

authorities). In particular, Plaintiffs must put forward at the very least some level of detail

about the improper accounting alleged to underlie misleading statements, such as the date of

the transaction at issue [and] the amount of the allegedly overstated revenue. Gavish, 2004 WL

2210269, at *13; see alsoDecker v. MasseyFerguson, Ltd., 681 F.2d 111, 116 (2d Cir.1982)

(rejecting claim based on inadequate write downs of obsolete facilities where the plaintiff failed

to identify the facilities, their recorded value, or the values that should have been recorded).

Like before, Plaintiffs supply no facts, as they must, to establish that Green Mountain violated its


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stated policy for recognizing revenue on shipments made through M. Block. This omission is

particularly glaring in light of the Companys confirmation in the restatement that none of the

accounting errors related to M. Block, not to mention the fact that the restatement followed the

audit committees investigation and PwCs audit of the year-end financials, neither of which

Plaintiff challenge in the Amended Complaint.

Plaintiffs again rely heavily on CW1 to advance the theory that Green Mountain

prematurely recognized revenue on a 150-truckload shipment without paperwork in the first

quarter of fiscal 2010. See AC 64(d), 71-73. Critically, the Amended Complaint is devoid of

any explanation as to how, and indeed whether, the Company recognized revenue on the alleged

shipment. As the Court has recognized, CW1s statements that CW1 was unable to locate the

150 truckload shipment on a forecast schedule or to identify associated paperwork do not,

without more, provide insight into how GMCR accountants recorded the shipments on the

Companys balance sheet. Warchol, 2012 WL 256099, at *12. Further, CW1s account can be

readily squared with Green Mountains disclosed revenue recognition practices. According to

the Amended Complaint, CW1 believed the Company improperly recognized revenue on a

150 truckload shipment of K-Cup portion packs during the quarter ended December 26, 2009

because the shipment went to an M. Block warehouse that was in essence under GMCRs

control. AC 72. Yet Green Mountains revenue recognition policy specifically contemplates

that inventory will remain in the Companys control at M. Blocks facilities and that revenue will

be recognized only upon shipment of the product by M. Block to an end retailer. Decl. Ex. A at

43. In any event, speculative conclusions based on CW1s belief do not plead a false

statement with the particularity required in this Circuit under the PSLRA. See, e.g.,Novak v.

Kasaks, 216 F.3d 300, 314 (2d Cir. 2000) (allegations attributed to confidential sources must


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provide an adequate basis for believing that the defendants statements were false); Caiafa v.

Sea Containers Ltd., 525 F. Supp. 2d 398, 411 n.11 (S.D.N.Y. 2007) (rejecting plaintiffs

reliance on confidential source who made contingent statements that defendant may have

been overstating the value of its assets, concluding that such allegations did not plead a false

statement).

Plaintiffs fare no better with CW6, who claims that product from Green Mountains

Castroville, California plant was shipped to M. Block and, as far as CW6 knew, was booked as

a sale, supposedly on instruction of the accounting department in Vermont. AC 78. CW6

does not state when any supposed shipments even occurred, making it impossible to determine

whether any such shipments implicate Class Period financials. And CW6 does not state one way

or another when or how revenue was recognized on these shipments and in what amount. A

generalized and unsupported implication that the Companys revenues were inflated due to

these alleged shipments does not satisfy the particularity required by the PLSRA by identifying

the statement Plaintiffs contend is misleading and then explaining the reasons why the statement

is misleading. The Amended Complaint fails to identify the amount of revenue associated with

the shipment, nor do Plaintiffs provide any basis for concluding how or when Green Mountain

recognized that revenue. SeeJanbay, 2012 WL 1080306 at *5 (rejecting complaint where

plaintiffs failed to establish the timing and manner in which the defendant recognized revenue

on the shipment in question); Gavish, 2004 WL 2210269, at *13-14 (same where confidential

witnesses alleged suspicious shipments but did not establish company recognized revenue in

an improper manner).

Plaintiffs try to compensate for the thinness of these CW accounts by suggesting that the

Company took steps to manipulate its accounting by shifting inventory within M. Block.


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See AC 66, 79, 80. For example, apparently according to CW7 (a former operations

employee), material was moved improperly to MBlock . . . not through the ordinary order

management system, and CW7 also allegedly witnessed 10-12 occasions when product was

shipped to Williston, Vermont [and] returned untouched within one week to one month from

the date of shipment. Id. 79. Such statements are fully consistent with the Companys stated

revenue recognition policy: shipments into M. Block, as well as shipments within M. Blocks

facilities, are not revenue recognition events because revenue is only recognized upon shipment

out of the fulfillment facility to a retail customer. See supra at 8. The same holds true for

movements between Green Mountains own facilities, including shipments from Knoxville to

Williston.

Because none of these witnesses supplies facts to show when, how, or even whether

revenue was recognized on these alleged shipments or inventory movements, their statements do

nothing to call into question the Companys adherence to its stated revenue recognition policy, as

Plaintiffs must to plead a false statement under the PSLRAs pleading requirements. SeeGavish,

2004 WL 2210269, at *12-13; Janbay, 2012 WL 1080306, at *4-5; see alsoIn re Nokia Corp.

Secs. Litig., 423 F. Supp. 2d 364, 408 (S.D.N.Y. 2006) (complaint failed to plead false statement

on revenue recognition practices when plaintiffs alleged with little support that millions of

dollars worth of product was improperly shipped and the complaint failed to specify the

magnitude or degree of these shipments to the defendants total financial picture). For all of

these reasons, the Amended Complaint fails to plead a false statement regarding Green

Mountains revenue recognition practices relating to M. Block.

B. Likewise, The Amended Complaint Fails to Identify a False StatementRegarding Overproduction and Expired Product

New to the Amended Complaint are allegations that Green Mountain engaged in


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deliberate overproduction, which allegedly led to expired product that needed to be

conceal[ed]. See AC 64(c), 76, 80. The Amended Complaint does not identify a

misstatement by Green Mountain on this topic, much less plead with particularity the reason or

reasons why any such statement is false or misleading.

This new line of attack by Plaintiffs depends almost entirely on CW1. According to

Plaintiffs most recent complaint, CW1 now also alleges that the Company loaded dated or

expired coffee onto trucks parked outside warehouses to g[e]t rid of inventory . . . prior to the

arrival of Company auditors, and that expired coffee was given to pig farmers . . . or to local

farmers to acidize their fields. AC 80. In addition, CW1 believed that the Company

directed MBlock to hold more product than it could immediately ship and that, due to

overstocking at MBlock, product had to be destroyed when it remained in the warehouse past its

expiration date. Id. 64(c). CW1 does not identify the product at issue beyond a passing

reference to coffee, which Green Mountain produces in vast quantities and sells in a variety of

forms. CW1s allegations also lack the most basic supporting facts, including when any of this

conduct supposedly occurred and, notably, how much product purportedly was involved.

More importantly, the Amended Complaint fails to explain how these allegations of

overproduction and expired product made by CW1 demonstrate the falsity of any statement

made by the Company. The accounting errors addressed by Green Mountains restatement had

nothing to do with the Companys accounting for inventory, including any excess or expired

product. Instead, the errors had to do with entirely unrelated aspects of the Companys financial

statements, including intercompany eliminations, changes in the revenue recognition for royalties

from third-party roasters, and the accrual of marketing and customer incentive expenses. See

Decl. Ex. A at 3-4. Plaintiffs cannot rest on the mere fact of the restatement, but rather must


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connect CW1s allegations of overproduction and expired product to a specific statement made

by the Company and then explain how those allegations demonstrate the falsity of that statement

when it was made. See Rombach v. Chang, 355 F.3d 164, 174 (2d Cir. 2004) ([P]laintiffs must

do more than say that the statements in the press releases were false and misleading; they must

demonstrate with specificity how that is so.).

The Amended Complaint does not satisfy this burden. Plaintiffs do not tie CW1s

allegations to any aspect of the Companys financial statements, let alone explain with

supporting facts how any such statement or figure was false when made. To state the obvious,

each quarter Green Mountain produces and sells hundreds of millions of dollars worth of coffee,

tea, and other beverage products that are perishable. In this business, it is inevitable that some

product will expire and the Company will have some level of obsolescent inventory. As

explained in the Companys disclosures, and consistent with generally accepted accounting

principles, Green Mountain takes a reserve for inventory obsolescence by examining its

inventories on a quarterly basis to determine if there are indicators that the carrying values

exceed net realizable value. See Decl. Ex. A at 40; see also Decl. Ex. H (Form 10-Q filed Aug.

5, 2010) at 15 (setting forth obsolescence allowances). Plaintiffs nowhere challenge the

Companys inventory accounting. The Amended Complaint does not allege that the Companys

reserves for obsolescent product were understated or that the value of the Companys inventory

was misstated in any respect. Nor do Plaintiffs even allege that the Companys obsolescence

reserves somehow failed to reflect the expired product that CW1 suggests existed. Plaintiffs

inability to supply these requisite connections only further underscores the absence in the

Amended Complaint of any false statement on overproduction or expired product. See In re

Alcatel Secs. Litig., 382 F. Supp. 2d 513, 534 (S.D.N.Y. 2005) (dismissing complaint for failure


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to plead a false statement concerning increasing levels of unusable or obsolete inventory when

plaintiffs did not made clear why each statement is fraudulent); see alsoMalin v. XL Capital

Ltd., 499 F. Supp. 2d 117, 145-46 (D.Conn. 2007) (emphasizing that plaintiffs assertion that

because large reserve increases were necessary, the accounting practices described must not

have been followed did not set forth why the statements identified in the complaint were false).

II. THE AMENDED COMPLAINT FAILS TO PLEAD A STRONG ANDCOMPELLING INFERENCE OF SCIENTER

As the Supreme Court held in Tellabs, for an inference of scienter to qualify as strong

as required by the PSLRA, it must be more than merely plausible or reasonable it must be

cogent and at least as compelling as any opposing inference of nonfraudulent intent. Tellabs,

551 U.S. at 314. It is not enough that a reasonable factfinder plausibly could infer from the

complaints allegations the requisite state of mind. Id. The strength of the inference cannot be

decided in a vacuum, and the Court must weigh all nonculpable explanations for the

defendants conduct against the inferences urged by the plaintiff. Id. at 323-24, 314. Further,

the Court must conduct a comparative evaluation, and must consider not only inferences

urged by the plaintiff . . . but also competing inferences rationally drawn from the facts alleged.

Id. at 314. Omissions and ambiguities weigh against inferring scienter. Id. at 326.

In the Second Circuit, a strong inference of scienter can be established only by

adequately pleading (1) a motive and opportunity to defraud, or (2) conscious recklessness. See

ATSI Commcn, 493 F.3d at 99. The Amended Complaints allegations on motive and

opportunity are identical to those the Court previously rejected,10 and Green Mountain does not

re-argue at length here why those same allegations remain inadequate. As the Court has held, the

supposed insider trades by division presidents Scott McCreary and Michelle Stacy, neither of

10See D.E. # 65-2, 6-8, 123-127 (comparison of First and Second Consolidated Amended Complaintsshowing that relevant sections are identical).


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whom are named as Individual Defendants, fail to raise a strong inference of scienter when no

other Green Mountain insiders sold stock during the class period and certain insiders actually

purchased stock.11 See Warchol, 2012 WL 256099, at *8. Likewise, the allegations about the

Companys Class Period transactions with Lavazza and Van Houtte are of the type routinely

rejected by courts as too generalized absent compelling circumstances that remain absent here.

See id. at *9.

Because Plaintiffs fail to sufficiently allege any motive, the Amended Complaint can

only survive dismissal if it identifies circumstances leading to a strong inference of conscious

misbehavior or recklessness. Importantly, where a complaint fails to plead a motive to commit

fraud, it must make a correspondingly greater showing of strong circumstantial evidence of

recklessness. Warchol, 2012 WL 256099, at *10 (citing ECA & Local 134 IBEW Jt. Pension

Trust of Chi. v. JP Morgan Chase Co., 553 F.3d 187, 198-99 (2d Cir. 2009)) (internal quotations

omitted). The Second Circuit has held that conscious recklessness is a state of mind

approximating actual intent, and not merely a heightened form of negligence. South Cherry

Street LLC v. Hennessee Group, LLC, 573 F.3d 98, 109 (2d Cir. 2009) (internal citation and

emphasis omitted). Specifically, recklessness is conduct which represents an extreme departure

from the standards of ordinary care to the extent that the danger was either known to the

defendant or so obvious that the defendant must have been aware of it. Novak, 216 F.3d at 308

(internal citation and quotations omitted). It is not enough to allege that a defendant merely

ought to have known. Hart v. Internet Wire, Inc., 163 F. Supp. 2d 316, 321 (S.D.N.Y. 2001)

(internal quotation marks omitted), affd, 50 F. Appx 464 (2d Cir. 2002). Rather, to show that

Defendants conduct was reckless, Plaintiffs must adequately plead that Defendants had access

11 Plaintiffs additional citation of a March 14, 2011 blog post questioning the timing of Ms. Stacys sales,see AC 128-29, adds nothing to change the Courts prior analysis.


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to contrary facts and specifically identify the reports or statements containing this information.

Warchol, 2012 WL 256099, at *10 (citing Teamsters Local 445 Freight Div. Pension Fund v.

Dynex Capital, 531 F.3d 190, 196 (2d Cir. 2008)) (internal quotations omitted).

Importantly, scienter cannot be pled generally against Defendants as a group. See

Warchol, 2012 WL 256099, at *7 (rejecting applicability of the group pleading doctrine for

scienter, citing Teamsters Allied Benefit Funds v. McGraw,No. 09-140, 2010 WL 882883, at

*11 n.6 (S.D.N.Y. March 11, 2010)). To plead scienter as to Green Mountain, Plaintiffs must

sufficiently allege that an agent of the corporation committed a culpable act with the requisite

scienter, and that the act (and accompanying mental state) are attributable to the corporation.

12

See Dynex Capital, 531 F.3d at 195.

The Amended Complaint does not plead a strong inference of scienter, either as to the

Individual Defendants or as to Green Mountain. As set forth more fully below, despite the

benefit of the Courts order identifying multiple failures in the prior complaint, the Amended

Complaint again falls far short of alleging the requisite strong and compelling inference of

scienter. Moreover, it cannot withstand the comparative analysis required by Tellabs. As before,

Plaintiffs allegations give rise to an obvious nonculpable explanation that is far more

compelling than their claim of fraud: that Green Mountains lapses in disclosure controls and

faulty accounting were unintended consequences of the Companys rapid growth. Warchol,

12 In June 2011, the Supreme Court held that only those who have ultimate authority over a statement

can be held primarily liable for securities fraud (and thus liable in a private suit) for making a publicstatement. Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296, 2302 n.6 (2011). TheSupreme Courts holding in Janus, combined with the Second Circuits holding in Dynex Capital, 531F.3d 190 (2d Cir. 2008), strongly suggests that Plaintiffs must identify not only an agent of thecorporation with a culpable mental state, but an agent with scienter who had ultimate authority over amisstatement. Indeed, consistent with Janus logic, the Second Circuit held in Dynex Capital that thecomplaint at issue there could not survive a motion to dismiss because plaintiffs failed to sufficientlyallege that someone whose scienter is imputable to the corporate defendants and who was responsiblefor the statements made was at least reckless. SeeDynex Capital, 531 F.3d at 197 (emphasis added).


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Defendants must have known about accounting errors and control deficiencies due to the

Individual Defendants access to information as senior executives. See AC 20, 122.

Boilerplate allegations regarding a defendants executive position or access to information do

not suffice to plead a strong inference of scienter under the PSLRA. See, e.g., In re Sec. Capital

Assur. Ltd. Secs. Litig., 729 F. Supp. 2d 569, 595 (S.D.N.Y. 2010). Moreover, a defendants

presumed receipt of information about the companys financial performance does not give rise to

a strong inference of scienter as to an accounting error. See City of Brockton Ret. Sys. v. Shaw

Group, Inc., 540 F. Supp. 2d 464, 473-74 (S.D.N.Y. 2008) (It is not enough for . . . plaintiff to

allege that, because executives . . . were closely involved in [the corporations] business, one can

strongly infer that they were furnished with financial data which contained the errors that later

required restatement.) (internal quotations omitted).

Third, alleging that the Sarbanes-Oxley certifications in the Companys disclosures have

been rendered false by the restated financials does not, without more, give rise to any inference

of scienter. See AC 105. Plaintiffs cannot allege conscious recklessness simply by suggesting

that a failure to identify control deficiencies resulted in a restatement.13 SeeCoronel v. Quanta

Capital Holdings Ltd., No. 07 Civ. 1405(RPP), 2009 WL 174656, at *30 (S.D.N.Y. Jan. 26,

2009) (allegation of a broad link, with no supportive facts, between the signing of SOX

13 The Court rightfully rejected Plaintiffs argument that the original complaint pled scienter inconnection with the Individual Defendants certification of the Companys controls in the third-quarterForm 10-Q. See Warchol, 2012 WL 256099, at *11 n.3. The Amended Complaint again suggests that,because the third quarter Sarbanes-Oxley certifications were followed by a restatement, Green Mountainmust have lacked internal controls. Plaintiffs paint with too broad a brush. Green Mountains restatement

acknowledged weaknesses in the Companys controls in only two areas, relating to: (1) the financialstatement consolidation process and (2) accruals related to marketing and customer incentiveprograms. AC 117. Nowhere in either the prior complaint or the Amended Complaint do Plaintiffspresent any allegations, let alone particularized ones, of any fraud relating to these two areas. Likewise,the Amended Complaint presents no allegations identifying any fraud associated with any other materialweakness, least of all the Companys inventory controls. As discussed below, to the contrary, the CWsassociated with Plaintiffs inventory allegations suggest the Company made good faith efforts to reconcileany supposed discrepancies as it sought to integrate various software systems and platforms. See infra at36-37.


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certifications, the disclosure five months later of internal control problems, and allegedly false

financialsrel[ied] entirely on conjecture and was not indicative of fraudulent intent.).

B. The Confidential Witnesses Do Not Raise A Strong, Cogent, and CompellingInference of Scienter

Plaintiffs rely almost exclusively in the Amended Complaint on confidential witness

accounts in their attempt to plead scienter. When plaintiffs rely on confidential sources, the

Second Circuit has held that under the PSLRA the complaint must provide enough information

to support the probability that a person in the position occupied by the source would possess the

information alleged. Novak, 216 F.3d at 314. Further, where, as here, the allegations hinge on

accounting errors, Plaintiffs must allege facts that support a probability that the confidential

sources had a basis for attesting to the companys accounting practices. See, e.g.,Malin, 499 F.

Supp. at 141 (Also problematic is the fact that none of the CWs are alleged to have been

involved in or to have any familiarity with the process of setting or estimating loss reserves.).

Courts, including this one, have recognized that the absence of such supporting factual

allegations is particularly fatal where complex accounting judgments are at issue, including

revenue recognition practices.14

SeeWarchol, 2012 WL 256099, at *12 (Nonetheless, CW1s

disclosed characteristics provide less reason to believe that the 150 truckloads were wrongly

marked as revenues. Plaintiffs did not allege that accounting was part of CW1s job description

or that he or she had any background in the subject); see also Curry v. Hansen Med., Inc., No.

5:09-cv-05094-JF (HRL), 2011 WL 3741238, at *5 (N.D. Cal. Aug. 25, 2011) (dismissing

complaint for failure to plead a strong inference of scienter where none of the witnesses [was]

alleged to have worked directly with revenue recognition); In re Accuray Secs. Litig., 757 F.

14 Revenue recognition considerations are amongst the most complex of accounting issues. In recognitionof this fact, SEC Staff Accounting Bulletin No. 101 provides 25 pages worth of interpretive guidelines toassist public companies with navigating the nuances involved. 17 C.F.R. 211.


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Supp. 2d 936, 945 (N.D. Cal. 2010) (None of the CWs held financing or accounting positions,

so none was in a position to know when or if revenue was recognized . . . ); Brodsky v. Yahoo!

Inc., 630 F. Supp. 2d 1104, 1115 (N.D. Cal. 2009) (For [CW] statements to carry any weight at

the pleadings stage . . . [p]laintiffs must describe with particularity the CWs personal knowledge

of [the companys] revenue recognition process.).

As discussed further below, the Amended Complaint presents CW accounts on two

topics: (1) shipments to M. Block attributed to CW1 and CW6 on which Plaintiffs contend the

Company improperly recognized revenue and (2) allegations made by other CWs and by short-

seller Einhorn about purportedly illegitimate inventory movements and deliberate

overproduction leading to expired product. Plaintiffs insertion of additional CWs in the

Amended Complaint does not compensate for inadequate factual particularity. See Cal. Pub.

Employees Ret. Sys. v. Chubb Corp., 394 F.3d 126, 155 (3d Cir. 2004) (Cobbling together a

litany of inadequate allegations does not render those allegations particularized in accordance

with Rule 9(b) or the PSLRA.). As to both of these topics, the Amended Complaint does not

clear the threshold pleading requirement set forth in Novak. None of the CWs is identified with

factual allegations that would support a probability that the witness had any responsibility for,

insight about, or direct knowledge of the accounting treatments that Plaintiffs challenge,

including Green Mountains revenue recognition on shipments made into or at M. Block.

Indeed, given the sparseness of Plaintiffs allegations and their conclusory nature, a far more

compelling inference is that the Company did not improperly recognize revenue on shipments to

M. Block or engage in any other improper accounting practices.

Moreover, the confidential witness statements do not give rise to any inference of scienter

because Plaintiffs do not allege as they must to withstand dismissal that these accounts show


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that the Individual Defendants or any other member of the Companys management made a

public statement known to be false or misleading at the time it was made. Confidential witness

allegations are insufficient to establish a strong inference of scienter where, as here, there are no

facts alleged to establish that the information supposedly contrary to the Companys public

statements was communicated contemporaneously to senior executives. See, e.g., Campo v.

Sears Holdings Corp., 371 Fed. Appx 212, 217 (2d Cir. 2010) (rejecting scienter allegations

based on confidential witnesses who did not have any direct contact with or personal

knowledge of the individual defendants conduct with regard to accounting treatment at issue);

In re Am. Express Co. Sec. Litig., No. 02 Civ. 5533(WHP), 2008 WL 4501928, at *8 (S.D.N.Y.

Sept. 26, 2008) (allegations based on confidential sources were insufficient where plaintiff failed

to show that the sources had any contact with [defendants] or would have knowledge of what

they knew or should have known during the Class Period.).

1. CW1s and CW6s Claims of Improper Revenue Recognition on M. BlockShipments Fail to Raise Any Inference of Scienter

(a) CW1 and CW6 Do Not SatisfyNovaks Requirements forConfidential Sources

Plaintiffs again depend heavily on accounts made by CW1 and CW6, whose statements

they claim support the conclusion that Green Mountain was prematurely recognizing revenue on

shipments into M. Block, the Companys principal fulfillment agent. See AC 71-72, 78. For

all of the reasons discussed above, the Amended Complaint fails to plead a strong inference of

scienter because neither CW presents the necessary supporting details about the alleged

shipments. See supra at 13-14; see alsoKarpov v. Insight Enters., No. CV 09-856-PHX-SRB,

2010 WL 4867634, at *9 (D.Ariz. Nov. 16, 2010), affd2012 WL 699058 (9th Cir. Mar. 6, 2012)

(concluding that channel stuffing allegations failed to raise strong inference of scienter where

plaintiffs did not contain any specific details regarding particular sales or shipments, such as


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dates, customers, volume, dollar amounts, or the impact on [the companys] financial records,

besides stating that they created artificial inflation.).

In addition, Plaintiffs again fail to provide any basis to support the probability required

byNovakthat CW1 and CW6 were in a position to attest to the Companys revenue recognition

accounting. As to CW1, the Court emphasized in dismissing Plaintiffs prior complaint that

CW1s alleged role as a distribution planning manager provides some basis to believe he or she

could have witnessed deliveries sent to M. Block, but failed to show that accounting was part

of CW1s job description or that he or she had a background in the subject. Warchol, 2012 WL

256099, at *12. In response, Plaintiffs now allege in a conclusory manner that CW1, who was

hired to work on IT projects, had supposed accounting duties, such as profit and loss

responsibilities and preparing accounting timelines (whatever either of those mean). AC

64. None of CW1s newly purported duties have anything to do with revenue recognition or the

Companys enterprise accounting function. Further, generalized allegations regarding CW1s

purported understanding of accounting principles do not, as they must, support a probability that

CW1 was in a position to understand how Green Mountain recorded revenue. See Brodsky, 630

F. Supp. 2d at 1115 (Plaintiffs must describe with particularity the CWs knowledge of the

[companys] revenue recognition process); see alsoMcKenna v. Smart Techs, 11 Civ. 7673

(KBF), 2012 U.S. Dist. LEXIS 47134, *32 (S.D.N.Y. April 3, 2012) (holding that a confidential

witness who was an information systems employee was not in a position to understand sales

volume without further allegations to support why the witness would have that knowledge).

Similarly, CW6 is described in the complaint as a Certified Public Accountant, but

Plaintiffs allege CW6s work at the Company was entirely in operations. AC 78. There are no

facts pled that would indicate CW6 had insight into or responsibility for accounting, much less


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Mountains enterprise financial statements and are not recognized as revenue for external

reporting purposes. Significantly, the Amended Complaint lacks any allegation that CW1 and

CW6 participated in or had any knowledge of the processes by which the Company eliminates

sales between the business units in the financial statement consolidation process. See In re U.S.

Aggregates, Inc. Sec. Litig., 235 F. Supp. 2d 1063, 1074-75 (N.D. Cal. 2002) (holding that

allegations made by confidential witnesses at subsidiaries must show knowledge or participation

in enterprise-level accounting decisions to support a probability that such witnesses had

sufficient knowledge of the companys financial statements) (citations omitted).

(b)

Neither CW1s Nor CW6s Accounts are Linkedto the Individual Defendants

Also absent from the accounts of CW1 and CW6 is any allegation that either of the

Individual Defendants knew of any purported fraud. Where allegations of improper revenue

recognition are at issue, plaintiffs must sufficiently allege that the defendants knew or should

have known that the revenue from those sales should have been treated differently and, thus, that

the contemporaneous financials were incorrect. Gavish, 2004 WL 2210269, at *15; see also In

re Bristol-Myers Squibb Sec. Litig., 312 F. Supp. 2d 549, 566-68 (S.D.N.Y. 2004) (dismissing

complaint where plaintiffs allegations did not create a strong inference that defendants knew the

sales in question should have been treated differently). Conclusory assertions that members of

SCBU management were aware that a 150 truckload shipment occurred do not support scienter

without evidence that the Individual Defendants were alerted to information contradicting the

Q3 statements. Warchol, 2012 WL 256099, at *13; AC 73. Moreover, allegations regarding

the existence of regularly scheduled meetings to discuss inventory management that may have

been attended by Defendants Blanford and Rathke do not allege with particularity their

knowledge of improper revenue recognition practices or any other supposed impropriety. See


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Glaser v. The9, Ltd., 772 F. Supp. 2d 573, 591 (S.D.N.Y. 2011) ([A]s with all allegations going

to scienter, confidential source allegations must show that individual defendants actually

possessed the knowledge highlighting the falsity of public statements; conclusory statements that

defendants were aware of certain information, and mere allegations that defendants would

have or should have had such knowledge [are] insufficient.). Plaintiffs have not alleged that

improper revenue recognition practices were discussed at any of the meetings. Instead, they rely

on CW1s generic statement that Green Mountains revenue recognition practices and policies

were discussed during the months of November and December 2009, well before the Class

Period alleged in this action. AC 74. Such an allegation is so vague as to be meaningless

without additional context regarding the temporal connection between the purported 150

truckload shipment and facts about how extensively or in what manner [revenue recognition

practices] were discussed. In re Doral Fin. Corp. Sec. Litig., 563 F. Supp. 2d 461, 466

(S.D.N.Y. 2008).

2. The Allegations of Inventory Shifting and Expired Product Do NotRaise a Strong, Cogent and Compelling Inference of Scienter

(a) Plaintiffs New-Found Confidential Witness Accounts LikewiseLack Particularity and Fail to SatisfyNovak

In an attempt to recast their M. Block allegations, Plaintiffs suggest that the Company

engaged in illegitimate inventory movements to manipulate its accounting by shifting

inventory within M. Block, and that Green Mountain deliberately overproduced product,

which supposedly resulted in obsolete inventory that then needed to be conceal[ed]. See AC

66, 79, 80 (citing statements purportedly made by CW1, CW4, and CW7).

CW4 and CW7 are not described with any level of particularity that would permit the

Court to consider their statements, and their accounts are so vague that they do not raise any

inference of scienter, much less a strong and compelling one. CW4, for example, is described as


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a former employee of MBlock from 2001 through early 2009, who worked in direct contact

with MBlocks owners in MBlocks Chicago headquarters. AC 66. This witness worked

for M. Block, not Green Mountain, was not even employed there during the Class Period, and the

complaint fails to allege any basis for believing CW4 had insight into Green Mountains

accounting. See Campo v. Sears Holdings Corp., 635 F. Supp. 2d 323, 335-36 (S.D.N.Y. 2009)

(rejecting scienter allegations based on confidential witnesses who departed the company prior to

the class period); see alsoGlaser, 772 F. Supp. 2d at 594 (rejecting allegations attributed to CWs

who did not work for the company and there was no allegation that they ever had any contact

with anyone [at the company], much less with the Individual Defendants). Indeed, the only

statements attributed to CW4 are the innocuous claims that physical inventory was taken once a

year and was an all hands project and that Green Mountain was a significant customer for M.

Block. AC 66.

Likewise, CW7 is identified as a lower-level employee at Green Mountains shipping

department in Knoxville, Tennessee from August 2009 through August 2011. AC 79. CW7s

allegations of inventory shifting and product shipped to Williston, Vermont and then returned

do not raise any inference of scienter. As discussed above, such movements are meaningless

under the Companys stated revenue recognition policy. See supra at 14-15. Compounding this

failing is the fact that CW7 is, by Plaintiffs own admission, a lower-level shipping employee

with no responsibility for or knowledge of the Companys accounting practices. Plaintiffs

supply no basis upon which the Court could infer that a shipping clerk would be in a position to

attest to the Companys revenue recognition policy. See Sorkin LLC v. Fischer Imaging Corp.,

No. Civ. A. 03-CV-00631-R, 2005 WL 1459735, at *7 (D.Colo. June 21, 2005) (rejecting CW

allegation of improper revenue recognition where there were no facts . . . provided to show how


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a shipping and receiving clerk would have known how, when, or why the Company booked

revenue).

Equivalent defects undermine the allegations of overproduction and expired product

attributed to CW1. According to CW1, Green Mountain loaded dated or expired coffee onto

trucks parked outside warehouses prior to the arrival of Company auditors, and expired coffee

was given to pig farmers . . . or to local farmers to acidize their fields. AC 80. CW1 also

purportedly believed that the Company directed MBlock to hold more product than it could

immediately ship and that, due to overstocking at MBlock, product had to be destroyed when it

remained in the warehouse past its expiration date. Id. 64(c). As discussed above, CW1 fails

to provide any facts about this supposedly obsolescent product: the allegations nowhere state

when any of this conduct purportedly occurred, what type of product was supposed to be

involved (other than a nonspecific reference to coffee), and the quantity of product CW1

claims had expired. Nor does the Amended Complaint connect these allegations to the

Companys financial statements. To the contrary, Plaintiffs do not challenge inventory-related

accounting including Green Mountains reserves for obsolescent product in any way. And as

with CW1s other claims, the Court cannot credit these allegations because CW1 is not identified

in a manner that would show she or he had knowledge of the Companys enterprise-level

accounting practices. See supra at 26-28.

Beyond these shortcomings, the accounts of CW1, CW4, and CW7 fail to present any

allegation that the Individual Defendants or any other members of management were aware

of any improper accounting practices. Neither CW4 nor CW7 is alleged to have had any contact

with any member of the Companys management. As to CW1, the sole interaction alleged is that

s/he attended meetings with unnamed members of senior management where production levels


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were discussed. AC 80. These CW allegations do not give rise to any inference of scienter

because Plaintiffs fail to show Defendants were alerted to information contradicting the Q3

statements. Warchol, 2012 WL 256099, at *13; see also In re Bausch & Lomb, Inc. Secs. Litig. ,

592 F. Supp. 2d 323, 342 (W.D.N.Y. 2008) (dismissing amended complaint with prejudice

where neither of the two confidential sources specifically state that any Individual Defendant

had direct information or access to information of BLIOs illegal practices or that it was

violating GAAP, or that it contradicted the companys financial statements.).

(b) The Einhorn Allegations are Unreliable and Fail to Pass MusterUnderNovak

In a further effort to salvage the complaint, Plaintiffs have copied and pasted portions of

Einhorns October 17, 2011 presentation claiming that Green Mountain engaged in some

fraudulent scheme involving M. Block. See AC 87-91. As noted above, Plaintiffs rely on

the field research portion of the presentation, which Einhorn claims was based on interviews

with several former GMCR and MBlock workers (but who are otherwise not identified or

described). See AC 87, 89-91; Decl. Ex. G at 92. Plaintiffs reliance on Einhorns

presentation fails to generate any inference of scienter for at least two reasons: First, Einhorn

placed enormous bets that Green Mountains stock price would fall (just before its stock price

experienced rapid increases) and thus he had an unusual and suspicious motive to manipulate

Green Mountains stock price downward. Accordingly, his self-serving accusations do not give

rise to the compelling inference of scienter necessary to satisfy Tellabs. Second, Einhorns so-

called field research is even more generic and vague than Plaintiffs own CW accounts, and

utterly fails to satisfy the pleading standards established inNovak.

In considering Einhorns allegations, the Court should first consider the source. That is

to say, the Court must review the reliability of the source of the information, including his


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credibility, in addition to assessing the information provided and its coherence. SeeJanbay,

2012 WL 1080306, at *6 ([P]articular facts that establish the basis of the witnesses knowledge

and reliability are required.); see alsoIn re Gilat Satellite Networks, Ltd., No. CV-02-1510

(CPS), 2005 WL 2277476, at *9 (E.D.N.Y Sept. 19, 2005) (Novakrequires an examination of

the detail provided by the confidential sources, the sources basis of knowledge, the reliability of

the sources, the corroborative nature of other facts alleged, including from other sources, the

coherence and plausibility of the allegations, and similar indicia.) (emphasis added). As

discussed above, Einhorn held a short position in Green Mountains stock and, judging by the

fall-off of Green Mountains stock price as a result of his October 17, 2011 presentation, he

profited handsomely as a result.15 As a short seller with a substantial profit motive directly linked

to driving down Green Mountains share price, Einhorns self-interest cannot be ignored, and he

lacks the reliability required for the Court to accord any meaningful weight to his allegations.

SeeJanbay, 2012 WL 1080306, at *6;In re Gilat Satellite Networks, Ltd., 2005 WL 2277476, at

*9; see also Bird v. Stephens, P.C., No. 10-CV-1091(DMC)(JAD), 2011 WL 2600721, at *6

(D.N.J. June 29, 2011) (dismissing Section 10(b) action against auditor on scienter grounds

where complaint failed to sufficiently allege auditor recklessly disregarded allegations made by a

short seller who had a vested personal interest in the decline of [the companys] stock price).

15 Einhorns presentation discloses that his funds had an interest in the movement of Green Mountainsstock price a fact reinforced by his quarterly investor letters, which suggest his losses during the firsthalf of 2011 were driven by a consumer cyclical short likely to have been Green Mountain. Decl. Ex.

G at 2; see also Decl. Ex. I (Letter from David Einhorn dated July 7, 2011) at 3. Greenlightsperformance was down 5% for the year in August 2011. See Reuters,An inside look at David Einhornsbig short, Dec. 20, 2011, available at http://www.reuters.com/article/2011/12/20/us-greenmountain-einhorn-idUSTRE7BJ1JT20111220. But mere weeks after Einhorns October 17, 2011 presentation, hisfunds were up about 5% for the year. Id. Unsurprisingly, this upswing in Greenlights performance hasbeen attributed to Einhorns profit on his short position in Green Mountain stock. Id. (When Einhornrevealed in October that he had been building a short position in shares of [Green Mountain] for weeks,the stock tanked and it effectively turned things around for his $8 billion Greenlight Capital fund thisyear.).


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Indeed, another court dismissed a securities fraud complaint filed against another company

targeted by Einhorn despite plaintiffs insistence that his (Einhorns) allegations gave rise to red

flags. See Ross v. Walton, 668 F. Supp. 2d 32, 39-40 (D.D.C. 2009) (concluding that Einhorns

allegations raise[d] neither a cogent nor compelling inference of scienter, and noting

defendants argument that Einhorn had a motive to drive down the share price).16

Not only is the source (Einhorn) neither trustworthy nor credible, the quality of his

allegations is lacking to say the least. As an initial matter, the Amended Complaint tries to make

much of the fact that Einhorn cites verbatim the allegations Plaintiffs made in their prior

complaint (which this Court dismissed). See AC 86, Decl. Ex. G at 91. To state the obvious,

the fact that Einhorn simply quoted passages from Plaintiffs since-dismissed complaint does not

magically transform meretricious allegations into meritorious ones. See In re Sierra Wireless,

Inc. Sec. Litig., 482 F. Supp. 2d 365, 376 (S.D.N.Y. 2007) (confidential sources cannot be used

to merely parrot conclusory allegations contained in the complaint.). Not even Mr. Einhorn

lays claim to such powers of alchemy.

Turning to Einhorns October 2010 presentation, Plaintiffs incorporation of his

allegations layers hearsay on top of hearsay, and Plaintiffs make no attempt to satisfy Novakin

recycling Einhorns general accusations. Einhorns presentation consists of paraphrased

allegations interspersed with statements attributed to sources collectively described as Former

GMCR / MBlock workers. Decl. Ex. G at 94-97. None of these sources is identified

individually, much less described with any supporting detail such as the period of his or her

16 Einhorn garnered further press coverage earlier this year after he and Greenlight were fined $11.2million by the U.K.s Financial Services Authority (the FSA), reportedly one of the largest penalties inthe FSAs history. The FSA levied the fine for insider trading based on a finding that Einhorn haddirected Greenlight to make trades while he was in possession of material non-public information about aU.K.-based company. Bloomberg,Einhorns Greenlight is Fined $11.2 Million by U.K. in Punch InsiderCase, Jan. 25, 2012, available at http://www.bloomberg.com/news/2012-01-25/einhorn-s-greenlight-fined-11-2-million-by-u-k-over-punch-tavern-trading.html.


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employment, for whom he or she worked (i.e., Green Mountain or M. Block), or what his or her

job responsibilities entailed. As such, there is no basis alleged to suggest any one of these

workers had responsibility for or any knowledge about the Companys accounting practices.

Take, as one example, the phantom shipment of 500,000 brewers destined for QVC that

Plaintiffs claim was made immediately prior to an audit at MBlock but never shipped . . . and

simply restocked. See AC 90, Decl. Ex. G at 97. Einhorns slide does not even identify a

source for this statement. There are no facts alleged to indicate how the (presumed) source

would know about this supposed brewer shipment or, notably, when it even allegedly occurred.

Also remarkably absent from the presentation is any allegation that Green Mountain recognized

any revenue on this supposed shipment, let alone how much or when.

Following Tellabs, courts in this Circuit have rejected attempts to piggyback on

unsubstantiated allegations made by third parties where the plaintiffs fail to prove to the court

that their complaint is backed by specific facts supporting a strong inference of fraud. In re

Crude Oil Commodity Litig., No. 06 Civ. 6677(NRB), 2007 WL 1946553, *89 (S.D.N.Y. June

28, 2007) (internal citation and quotations omitted) (rejecting plaintiffs reliance on allegations

made in other civil complaints, government settlements, and Wall Street Journal reports); see

alsoJanbay, 2012 WL 1080306, at *6 (similarly rejecting reliance on third party complaint).

Here, the fact that the third party (Einhorn) had his own agenda to profit by

encouraging the investing public to believe unsubstantiated and unsupported allegations of fraud

only heightens the need for facts that the Amended Complaint utterly fails to supply. Plaintiffs

do not allege any of the basic details missing from Einhorns presentation, let alone enough facts

to satisfy Novaks standard for confidential witness allegations. Further, Einhorn nowhere

alleges that any of his sources whoever they might be had any contact with the Individual


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Defendants. For all of these reasons, Einhorns allegations hardly give rise to any inference of

scienter, much less a cogent and compelling one strong enough to satisfy Tellabs and the

PSLRA.17

(c) Plaintiffs Other Inventory Allegations Do Not Create AnyInference of Scienter Either

Finally, Plaintiffs cursorily allege that Green Mountain experienced problems with

double-counting inventory. AC 104(b). The confidential witness allegations on this claim

do not specify relevant time periods, and these witnesses allegations are entirely speculative and

lend themselves to innocent interpretations. Without specifying when the alleged double-

counting occurred or which products it supposedly affected and by how much, these CWs claim

that the Company experienced problems with its computer systems and that it appeared there

was double-counting. Id. 104(a). At no point does any CW allege (let alone explain how)

these supposed problems had any impact on Green Mountains financial statements. Nor do

these anonymous sources identify any contrary reports or information that were

Documents

Motion to dismiss - Horowitz v. GMCR