On February 4, 2020, Judge James Donato of the United States
District Court for the Northern District of California partially
dismissed a putative class action asserting claims under Section
10(b) of the Securities Exchange Act of 1934 against a food
supplement company and certain of its former executives.
In Re TerraVia Holdings, Inc. Sec. Litig., No.
16-CV-06633-JD, 2020 WL 553939 (N.D. Cal. Feb. 4, 2020).
Plaintiffs alleged that the company made misrepresentations
regarding the health benefits and commercial viability of certain
ingredients it created and sourced for its food manufacturing
partners, based on the company having received reports that these
ingredients were causing illnesses, ultimately leading to product
recalls. The Court held that certain of the alleged
misstatements were non-actionable, but that plaintiffs’
allegations respecting certain other alleged misstatements were
sufficient to state a claim.
Plaintiffs alleged that the company had an affirmative duty to
disclose reports that its products had caused illnesses, and that
its failure to do so rendered its public statements
misleading. The Court explained, however, that the federal
securities laws “prohibit only misleading and untrue
statements, not statements that are incomplete.”
Id. at *3. The Court held the company’s
failure to disclose reports that its products had caused illnesses,
without more, did not support a claim under the Exchange Act, but
that “these omissions provide context” that rendered
certain challenged statements misleading. Id.
Indeed, the Court rejected the company’s argument that
plaintiffs should be required to plead facts sufficient to show
that the company’s products were the actual cause of the
reported illnesses. Id. at *4. Rather,
“the existence of [the] reports, and the fact that [the
company’s] partners attributed consumers’ adverse
reactions to [the company’s] products” were enough to
constitute allegations that statements were misleading.
Id. In particular, because the company had disclosed
that its products were used by the food manufacturers, but not that
the manufacturers linked the company’s products to illnesses,
the Court held that the company’s statements about those
relationships were misleading. Id. The Court
similarly found that a statement on the company’s website
that its products have “high protein digestibility”
were also undermined by reports of customer illnesses following
consumption of foods made with their product. Id. at
*5.
The Court concluded, however, that the remaining alleged
misrepresentations were not actionable because they were either too
generalized or because plaintiffs failed to plead specific facts to
support a claim that the statements were misleading.
Id. at *5-7. This included statements about the
company’s general mission (such as to “create products
that are truly better for people”), and statements about the
safety of the ingredients in question (such as that the products
provided “an array of benefits” and contained no
“known allergens”). Id. at *6. The
Court also held that certain statements by executives expressing
optimism (such as “we’re making strong progress
commercially in food and nutrition”) were non-actionable
statements of opinion, and plaintiffs did not allege that the
opinions were not actually held or that particular facts underlying
the statements were untrue. Id. at *6-7.
With respect to scienter, plaintiffs argued that a holistic reading
of the complaint established scienter because the company and the
individual defendants withheld knowledge of the reports of adverse
health reactions and related recalls during their quarterly
earnings calls. Id. at *7. The Court
agreed, holding that the complaint in its entirety sufficiently
alleged scienter, and that a failure to disclose “even
statistically insignificant reports of adverse effects” is
properly considered under a holistic analysis of scienter.
Id.
The Court also rejected the company’s argument that
plaintiffs failed to adequately allege loss causation because they
relied on a news article that revealed the company had been
notified by its manufacturing partners that its ingredients were
causing illnesses but did not itself reveal a fraud.
Id. at *8. The Court concluded that the article was
“not akin to the mere announcement” of an investigation
or complaint, but rather disclosed previously omitted information
about the company’s products and associated recalls, which
plaintiffs alleged caused a stock price decline; the article was
therefore sufficient to plead loss causation.
Id.
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