On September 7, 2021, Judge Charles Ronald Norgle of the United States District Court for the Northern District of Illinois denied a motion to dismiss a putative class action asserting claims under the Securities Exchange Act of 1934 against an online food delivery company and certain of its executives. Azar v. Grubhub, Inc., No. 1:19-CV-07665, 2021 WL 4077327 (N.D. Ill. Sept. 7, 2021). Plaintiff alleged that the company made misrepresentations regarding the success of its marketing and expansion initiatives. The Court held that plaintiff adequately alleged actionable misrepresentations and scienter.
With respect to the alleged misrepresentations, the Court rejected defendants' argument that the allegations amounted to impermissible "fraud by hindsight" based on statements that ultimately turned out to be incorrect. To the contrary, the Court determined that alleged statements regarding how often new customers placed orders-such as "we've been able to acquire high-quality new diners in ... newer markets" and "diners in [new] markets are behaving a lot like diners do in other markets"-reflected statements of present fact, which were "bolster[ed]" by plaintiff's allegations that the company closely monitored customer metrics. Id. at *4. The Court further held that statements regarding the company's restaurant partners-including that the company had a "broad and deep restaurant network" and grew "primarily [because of] better restaurant choices"-were plausibly misleading in the face of allegations that the company had failed to establish sufficient restaurant density in new markets. Id. Moreover, because plaintiff alleged that the company used data to track customer "quality" and restaurant density, the Court held that the alleged misstatements "could reasonably be interpreted as a factual claim" rather than subjective statements of opinion. Id. at *5.
With respect to scienter, the Court held that the "totality of [p]laintiff's allegations supports a strong inference that [d]efendants knew about negative financial trends and spoke with an intent to deceive." Id. The Court noted that seven sets of allegations, taken together, supported an inference of scienter: (i) new customer quality was low in the period before the challenged statements were made, and the company closely analyzed such data; (ii) the company never achieved adequate restaurant density or customer quality; (iii) even before the challenged statements were made, the company had begun to change its business model for working with restaurants to match that of its competitors and refinanced its debt; (iv) the company's CEO and CFO controlled all aspects of the company, had access to proprietary information, were directly involved in the company's expansion, and made numerous statements regarding customer quality; (v) customer and restaurant quality were important to the company's investors, (vi) the issues the company eventually disclosed were so severe the company became unprofitable and changed its business model; and (vii) defendants were motivated to increase the company's stock price, including because they could then more cheaply acquire companies and increase payouts to defendants. Id. While the Court agreed with defendants that certain allegations "in isolation" were not sufficient to establish scienter, the Court concluded that, considering all the allegations together, plaintiff's inference of deceptive intent was "cogent" and "at least as compelling as [d]efendants' opposing inference." Id.
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