2011 07-12 Horowitz v Green Mountain Coffee Plaintiff's Opposition

8/6/2019 2011 07-12 Horowitz v Green Mountain Coffee Plaintiff's Opposition

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UNITED STATES DISTRICT COURT

DISTRICT OF VERMONT

DAN M. HOROWITZ, Individually and onBehalf of All Others Similarly Situated,

Plaintiff,

vs.

GREEN MOUNTAIN COFFEE ROASTERS,

INC., et al.,

Defendants.

)))))))

)))))

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

CLASS ACTION

LEAD PLAINTIFFS OMNIBUS OPPOSITION TO DEFENDANTS

GREEN MOUNTAIN COFFEE ROASTERS, INC.S, LAWRENCE J. BLANFORDS,

FRANCES G. RATHKES, AND ROBERT P. STILLERS MOTIONS TO DISMISS THE

CONSOLIDATED CLASS ACTION COMPLAINT

Case 2:10-cv-00227-wks Document 43 Filed 07/12/11 Page 1 of 60


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TABLE OF CONTENTS

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

II. STATEMENT OF FACTS ..................................................................................................6

III. ARGUMENT.....................................................................................................................11

A. The Complaint Adequately Alleges a Violation of 10(b)....................................11

1. Applicable Standards on a Motion to Dismiss a 10(b) Claim .................11

2. The Complaint Adequately Alleges Material False StatementsRegarding Improper Revenue Recognition on Shipments toMBlock ......................................................................................................13

3. Board Chairman Stiller Can Be Held Liable for Class PeriodMisstatements ............................................................................................17

4. The Complaint Adequately Alleges Scienter.............................................19

a. The Complaint Has Pled with Particularity Motive andOpportunity....................................................................................21

(1) The Disclosure of the SEC Inquiry on the Day ofthe Lavazza Closing Was Highly Suspicious ....................21

(2) The Scienter of the Senior Executives WhoEngaged in Highly-Suspicious Stock Sales May BeImputed to GMCR .............................................................23

b. The Complaint Adequately Alleges Conscious Misbehavioror Recklessness ..............................................................................29

(1) Improperly-Recognized MBlock RevenuesImplicate GMCRs Core Operations .................................30

(2) The Complaint Alleges Scienter with Respect to the

Misrepresentations in and Omissions from the ThirdQuarter 2010 Form 10-Q ...................................................34

c. Confidential Witnesses Support Defendants ActualKnowledge or Recklessness...........................................................37

d. A Strong Inference of Scienter Is at Least as Compelling asAny Other.......................................................................................44



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B. The Complaint Adequately Alleges Control Person Liability UnderSection 20(a) ..........................................................................................................45

IV. CONCLUSION..................................................................................................................47



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TABLE OF AUTHORITIES

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CASES

Acito v. IMCERA Group, Inc.,47 F.3d 47 (2d Cir. 1995) ........................................................................................................28

Aldridge v. A.T. Cross Corp.,284 F.3d 72 (1st Cir. 2002)......................................................................................................16

Ashcroft v. Iqbal,129 S. Ct. 1937 (2009).............................................................................................................11

Basic, Inc. v. Levinson,485 U.S. 224 (1988).................................................................................................................14

Bell Atl. Corp. v. Twombly,550 U.S. 544 (2007).................................................................................................................11

Boguslavsky v. Kaplan,159 F.3d 715 (2d Cir. 1998).....................................................................................................45

Campo v. Sears Holding Corp.,371 Fed. Appx. 212 (2d Cir. 2010)...................................................................................33, 39

Cent. Laborers Pension Fund v. Integrated Elec. Servs. Inc.,497 F.3d 546 (5th Cir. 2007) ...................................................................................................24

City of Brockton Retirement Systems v. Shaw Group Inc.,540 F. Supp. 2d 464 (S.D.N.Y. 2008)......................................................................................31

Cornwell v. Credit Suisse Group,689 F. Supp. 2d 629 (S.D.N.Y. 2010)................................................................................38, 42

Cortec Indus., Inc. v. Sum Holding L.P.,949 F.2d 42 (2d Cir. 1991).......................................................................................................47

Cosmas v. Hassett,

886 F.2d 8 (2d Cir. 1989) ........................................................................................................30

Croker v. Carrier Access Corp.,No. Civ. 05CV01011, 2006 WL 2035366(D. Colo. July 18, 2006).....................................................................................................42, 43

Dresner v. Utility.com, Inc.,371 F. Supp. 2d 476 (S.D.N.Y. 2005)......................................................................................19



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Page

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ECA v. J.P. Morgan Chase Co.,553 F.3d 187 (2d Cir. 2009).........................................................................................12, 21, 36

Edison Fund v. Cogent Inv. Strategies Fund,Ltd.,551 F. Supp. 2d 210 (S.D.N.Y. 2008)......................................................................................45

Frank v. Dana Corp.,547 F.3d 564 (6th Cir. 2008) ...................................................................................................37

Frank v. Dana Corp.,No. 09-4233, 2011 WL 2020717(6th Cir. May 25, 2011) .....................................................................................................36, 37

Freudenberg v. E*Trade Fin. Corp.,712 F. Supp. 2d 171 (S.D.N.Y. 2010)................................................................................24, 26

Ganino v. Citizens Utilities Co.,228 F.3d 154 (2d Cir. 2000).....................................................................................................14

Glickman v. Alexander & Alexander Services, Inc.,No. 93-7594, 1996 WL 88570(S.D.N.Y. Feb. 29, 1996).........................................................................................................31

Hall v. Childrens Place Retail Stores, Inc.,580 F. Supp. 2d 212 (S.D.N.Y. 2008)................................................................................39, 41

Hart v. Internet Wire, Inc.,163 F. Supp. 2d 316 (S.D.N.Y. 2001)......................................................................................31

Heller v. Goldin Restructuring Fund, L.P.,590 F. Supp. 2d 603 (S.D.N.Y. 2008)................................................................................12, 20

Higginbotham v. Baxter Intl., Inc.,495 F.3d 753 (7th Cir. 2007) .............................................................................................38, 39

Holmes v. Baker,

166 F. Supp. 2d 1362 (S.D. Fla. 2001) ....................................................................................29

In re Alstom SA Sec. Litig.,454 F. Supp. 2d 187 (S.D.N.Y. 2006)......................................................................................33

In re Am. Bank Note Holographics Sec. Litig.,93 F. Supp. 2d 424 (S.D.N.Y. 2000)........................................................................................31

In re Am. Intl Group, Inc.,741 F. Supp. 2d 511 (S.D.N.Y. 2010)......................................................................................21



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In re Ambac Fin. Group, Inc. Sec. Litig.,693 F. Supp. 2d 241 (S.D.N.Y. 2010)......................................................................................39

In re ArthroCare Corp. Sec. Litig.,726 F. Supp. 2d 696 (W.D. Tex. 2010)....................................................................................24

In re ATI Techs. Inc., Sec. Litig.,216 F. Supp. 2d 418 (E.D. Pa. 2002) .......................................................................................21

In re Atlas Air Worldwide Holdings, Inc. Sec. Litig.,324 F. Supp. 2d 474 (S.D.N.Y. 2004)..........................................................................15, 30, 38

In re Bausch & Lomb, Inc. Securities Litigation,

592 F. Supp. 2d 323 (W.D.N.Y. 2008)....................................................................................26

In re BISYS Sec. Litig.,397 F. Supp. 2d 430 (S.D.N.Y. 2005)................................................................................15, 17

In re Cabletron Sys., Inc.,311 F.3d 11 (1st Cir. 2002)..............................................................................................passim

In re Cardinal Health Inc. Sec. Litig.,426 F. Supp. 2d 688 (S.D. Ohio 2006) ....................................................................................24

In re CINAR Corp. Sec. Litig.,186 F. Supp. 2d 279 (E.D.N.Y. 2002) .....................................................................................31

In re CitiGroup Inc. Bond Litig.,723 F. Supp. 2d 568 (S.D.N.Y. 2010)......................................................................................15

In re Dynex Capital, Inc. Sec. Litig.,No. 05 Civ. 1897(HB), slip op., 2009 WL 3380621(S.D.N.Y. Oct. 19, 2009) .........................................................................................................38

In re eSpeed, Inc. Sec. Litig.,457 F. Supp. 2d 266 (S.D.N.Y. 2006)......................................................................................30

In re Fed. Natl. Mortg. Assn. Sec., Deriv., and ERISA Litig. ,503 F. Supp. 2d 25 (D.D.C. 2007)...........................................................................................24

In re Focus Enhancements, Inc. Sec. Litig.,309 F. Supp. 2d 134 (D. Mass. 2001) ......................................................................................43

In re Immucor Inc. Sec. Litig.,No. 05-CV-2276, 2006 WL 3000133(N.D. Ga. Oct. 4, 2006)............................................................................................................26



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In re Indep. Energy Holdings PLC Sec. Litig.,154 F. Supp. 2d 741 (S.D.N.Y. 2001)......................................................................................18

In re IPO Sec. Litig.,241 F. Supp. 2d 281 (S.D.N.Y. 2003)......................................................................................18

In re IPO Sec. Litig.,544 F. Supp. 2d 277 (S.D.N.Y. 2008)......................................................................................20

In re KeySpan Corp. Securities Litigation,383 F. Supp. 2d 358 (E.D.N.Y. 2003) .....................................................................................27

In re Marsh & McLennan Cos., Inc. Sec. Litig.,

501 F. Supp. 2d 452 (S.D.N.Y. 2006)................................................................................13, 20

In re MBIA, Inc. Securities Litigation,700 F. Supp. 2d 566 (S.D.N.Y. 2010)......................................................................................33

In re MCI Worldcom, Inc. Sec. Litig.,93 F. Supp. 2d 276 (E.D.N.Y. 2000) .........................................................................................4

In re MRU Holdings, Securities Litigation,No. 09-3807, 2011 WL 650792(S.D.N.Y. Feb. 17, 2011).........................................................................................................38

In re MSC Indus. Direct Co., Inc.,283 F. Supp. 2d 838 (E.D.N.Y. 2003) .....................................................................................42

In re Musicmaker.com Sec. Litig.,No. 00-2018, 2001 WL 34062431(C.D. Cal. June 4, 2001) ..........................................................................................................46

In re Nortel Networks Corp. Sec. Litig.,238 F. Supp. 2d 613 (S.D.N.Y. 2003)................................................................................12, 29

In re NovaGold Resources Inc. Sec. Litig.,

629 F. Supp. 2d 272 (S.D.N.Y. 2009)......................................................................................38

In re Oxford Health Plans, Inc. Sec. Litig.,51 F. Supp. 2d 290 (S.D.N.Y. 1999)........................................................................................36

In re Oxford Health Plans Sec. Litig.,187 F.R.D. 133 (S.D.N.Y. 1999) .............................................................................................28

In re Par Pharm., Inc. Sec. Litig.,733 F. Supp. 668 (S.D.N.Y. 1990)...........................................................................................13



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In re WorldCom, Inc. Sec. Litig.,352 F. Supp. 2d 472 (S.D.N.Y. 2005)......................................................................................20

Kalnit v. Eichler,264 F.3d 131 (2d Cir. 2001).....................................................................................................29

King County, WA v. IKB Deutsche Industriebank AG,751 F. Supp. 2d 652 (S.D.N.Y. 2010)......................................................................................17

Lefkoe v. Jos. A. Bank Clothiers,No. WMN-06-1892, 2008 WL 7275126(D. Md. May 13, 2008)............................................................................................................24

Lentell v. Merrill Lynch & Co., Inc.,396 F.3d 161 (2d Cir. 2005).....................................................................................................12

Makor Issues & Rights, Ltd. v. Tellabs, Inc.,513 F.3d 702 (7th Cir. 2008) .............................................................................................20, 39

Malin v. XL Capital Ltd.,499 F. Supp. 2d 117 (D. Conn. 2007)................................................................................24, 42

Matrix Cap. Mgt. Fund, LP v. BearingPoint, Inc.,576 F.3d 172 (4th Cir. 2009) ...................................................................................................37

McMahan & Co. v. Wherehouse Ent., Inc.,900 F.2d 576 (2d Cir. 1990).....................................................................................................14

Middlesex Retirement Sys. v. Quest Software Inc.,527 F. Supp. 2d 1164 (C.D. Cal. 2007) ...................................................................................15

Mills v. Polar Molecular Corp.,12 F.3d 1170 (2d Cir. 1993)...............................................................................................12, 16

Miss. Pub. Emps. Ret. Sys. v. Boston Scientific Corp.,523 F.3d 75 (1st Cir. 2008)......................................................................................................24

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

Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC,440 F. Supp. 2d 163 (S.D.N.Y. 2006)......................................................................................18

Rombach v. Chang,355 F.3d 164 (2d Cir. 2004)...............................................................................................12, 16



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Rothman v. Gregor,220 F.3d 81 (2d Cir. 2000).......................................................................................................28

Schnall v. Annuity and Life Re (Holdings) Ltd.,No. 3:02 CV 2133, 2004 WL 231439(D. Conn. Feb. 4, 2004) ...........................................................................................................18

SEC v. Espuelas,579 F. Supp. 2d 461 (S.D.N.Y. 2008)......................................................................................31

SEC v. Kelly,663 F. Supp. 2d 276 (S.D.N.Y. 2009)......................................................................................15

Senn v. Hickey,No. 03-CV-4372, 2005 WL 3465657(D.N.J. Dec. 19, 2005) .............................................................................................................28

Sgalambo v. McKenzie,739 F. Supp. 2d 453 (S.D.N.Y. 2010)......................................................................................20

Shaw v. Digital Equip. Corp.,82 F.3d 1194 (1st Cir. 1996)....................................................................................................23

Skydell v. Ares-Serono S.A.,892 F. Supp. 498 (S.D.N.Y. 1995)...........................................................................................12

Sloman v. Presstek, Inc.,No. 06 CV 377, 2007 WL 2740047(D.N.H. Sept. 18, 2007) ...........................................................................................................20

Suez Equity Investors, L.P. v. Toronto-Dominion Bank,250 F.3d 87 (2d Cir. 2001).......................................................................................................20

Teachers Ret. Sys. of La. v. A.C.L.N., Ltd.,No. 01-11814, 2003 WL 21058090(S.D.N.Y. May 12, 2003).........................................................................................................11

Teamsters Allied Benefit Funds v. McGraw,No. 09 Civ. 140, 2010 WL 882883(S.D.N.Y. Mar. 11, 2010) ........................................................................................................32

Teamsters Local 445 Freight Div. Pension Fund v. Bombardier, Inc.,No. 05 Civ. 1898, 2005 WL 2148919(S.D.N.Y. Sept. 6, 2005)....................................................................................................21, 32



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

Tellabs, Inc. v. Makor Issues & Rights Ltd.,551 U.S. 308 and 322-24 (2007)......................................................................................passim

Va. Bankshares, Inc. v. Sandberg,501 U.S. 1083 (1991).........................................................................................................13, 14

STATUTES, RULES AND REGULATIONS

15 U.S.C.

78j(b).............................................................................................................................. passim78u-4(b)(2).............................................................................................................................1278u-4(e)(2) ...............................................................................................................................4

Federal Rules of Civil ProcedureRule 8(a)...................................................................................................................................12Rule 9(b) ..............................................................................................................................4, 12Rule 15(a).................................................................................................................................47

17 C.F.R.230.405...................................................................................................................................46

240.10b-5 ...............................................................................................................................13249.308...................................................................................................................................23



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I. PRELIMINARY STATEMENT

For at least the past ten months, Defendant Green Mountain Coffee Roasters, Inc. (GMCR

or the Company) has been under the cloud of an investigation by the Securities and Exchange

Commission (SEC) concerning aggressive revenue recognition practices suggested by some to

be a form of earnings management arising from GMCRs relationship with its primary fulfillment

company, M. Block & Sons (MBlock).

Although the SEC investigation has not yet concluded or its findings been made public,

witnesses have provided Plaintiffs with alarming details of the Companys accounting improprieties

and reckless conduct and how, before the Class Period, these facts were known to GMCR

executives. For example, one witness explained that GMCR used sales to MBlock to manipulate

the Companys financial reporting. Indeed, shortly before the end of the Companys financial

quarter ended December 26, 2009, GMCR sent a 150-truckload shipment of product to MBlock for

which no documentation exists to evidence that the shipment was actually made in response to any

customer orders. Since GMCR recorded revenue for these types of deliveries upon shipment,

GMCR was able to report millions of dollars in revenue for this transaction. This witness

indicated that senior officers, including VP of Operations, Jonathan Wettstein (Wettstein) (who

made regular reports to Defendant Lawrence J. Blanford (Blanford)), as well as SCBU President

R. Scott McCreary (McCreary) and VP of Finance, Tina Bissonette (Bissonette) were well

aware of the suspicious shipment. 65, 70-71, 74.1

Investors were kept in the dark about the Companys actions and were shocked when, at the

end of the Class Period, GMCR not only disclosed the SECs inquiry into GMCRs relationship with

MBlock, but also that it would be making a negative financial adjustment to its previously-reported

1References to __ are to paragraphs of the Consolidated Class Action Complaint, dated

February 18, 2011, Dkt. No. 26.



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financial results a $7.6 million cumulative reduction of past earnings. The discovery of this error

spurred GMCR to conduct an internal inquiry, ultimately resulting in the Companys announcement

that it had identified and uncovered a multitude of accounting problems. While the Company

deemed the half dozen adjustments it chose to explain (from among all of those that were made) to

be immaterial, despite the fact that these adjustments spanned many years and concerned a number

of different line items2 the widespread nature of these problems ultimately led GMCR to announce

the existence of material weaknesses in its internal controls over financial reporting. 95. These

weaknesses, as confirmed by witness accounts, are what allowed GMCR to manipulate shipments to,

and inventory stored by, MBlock. Witnesses also described a reckless lack of accounting

coordination between GMCRs business units. See, e.g.,65-76, 82.

Although Defendants3

seek to undermine the Complaint by arguing that the restatement

issued in December 2010 ultimately had nothing to do with shipments to MBlock,4 the first of the

restated items (inventory and cost of sales) and the SECs investigation of GMCRs relationship with

MBlock were announced the same day. 90. Investors were, understandably, concerned that

2On his blog White Collar Fraud, a former CFO convicted of fraud, Sam Antar, explained,

on January 4, 2011, why one of the errors, the K-Cup margin error, was, in fact, a material errorunder SEC Staff Accounting Bulletin No. 99. See Declaration of David A. Rosenfeld in Support ofLead Plaintiffs Omnibus Opposition to Defendants Green Mountain Coffee Roasters, Inc.s,Lawrence J. Blanfords, Frances G. Rathkes, and Robert P. Stillers Motions to Dismiss theConsolidated Class Action Complaint (Rosenfeld Decl.), dated July 12, 2011 and submittedherewith, Exhibit A Sam E. Antar, Green Mountain Coffee Roasters: Calling a Bean a Bean, White

Collar Fraud (Jan. 4, 2011), http://whitecollarfraud.blogspot.com/2011/01/green-mountain-coffee-roasters-calling.html.)

3 Blanford, Robert P. Stiller (Stiller) and Frances G. Rathke (Rathke) (collectively, theIndividual Defendants) and GMCR are, together, referred to as Defendants.

4See, e.g., Dkt. No. 35-1, Defendant Green Mountain Coffee Roasters, Inc.s Memorandum of

Law in Support of Its Motion to Dismiss the Consolidated Class Action Complaint, filed April 25,2011 (GMCR Br.) at 15-16.



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additional restatements might be necessary as a result of the SECs inquiry.5 Rather than err on the

side of transparency while under SEC scrutiny, Defendants continued to issue financial reports

with figures that do not add up from one reporting period to the next.6

A number of analysts

have questioned the legitimacy of GMCRs financial reporting, noting the continuation of the SEC

probe.7

Defendants point to the Companys past record of social responsibility8 and recent success in

5 GMCRs 2010 Form 10-K, filed December 9, 2010 (the 2010 10-K), at 16-17 (attached tothe Rosenfeld Decl. as Exhibit B), concedes this point (the resolution of the SEC inquiry could

require the filing of additional restatements of our prior financial statements, and/or our restatedfinancial statements).

6See Rosenfeld Decl., Exhibit C Sam E. Antar, Green Mountain Coffee Roasters: Murky

Financial Disclosures, White Collar Fraud (Feb. 13, 2011), http://whitecollarfraud.blogspot.com/2011/02/green-mountain-coffee-roasters-murky.html (article wherein Antar notes potentialstealth restatements during the Class Period revising, in a later SEC filing, the reporting of totalassets and income before taxes for the 39-week period ended June 27, 2009, and the Keurigsegments profits).

7See, e.g., 3; see also Rosenfeld Decl., Exhibit D Jason Merriman, Green Mountain

Coffee: Only Thing Brewing Is Trouble, Seeking Alpha (Feb. 13, 2011), http://seekingalpha.com/article/252486-green-mountain-coffee-only-thing-brewing-is-trouble (article calling GMCRsaccounting practices downright ludicrous). The article notes: the SEC investigation on GMCR isin fact still ongoing, contrary to rumors that it had ended. When CNBC questioned a $22 millionreserve reversal that appeared to allow GMCR to meet analyst estimates, GMCR explained it as achange in reporting method in a private email sent to a handful of people rather than to allinvestors. After being accused of selectively disseminating material information, GMCR posted theexplanation on its website but the figures did not add up. See May 5, 2011 CNBC video report,available at http://ori.cnbc.com/ id/15840232?video=3000020386&play=1; andRosenfeld Decl.,Exhibit E Roddy Boyd, GMCR: From Small Beans Big Trouble One Day Brews, The FinancialInvestigator (June 6, 2011) http://www.thefinancialinvestigator.com/?p=382 (article revealing thatInvestor Relations director Suzanne DeLong refuted the CNBC story in an email to some hedgefunds and brokerage analysts, providing non-public information); andRosenfeld Decl., Exhibit F Sam E. Antar, To the Securities and Exchange Commission; Green Mountain Coffee Roastersselectively spills the beans and its numbers still dont add up, White Collar Fraud (June 6, 2011),http://whitecollarfraud.blogspot.com/2011/06/to-securities-and-exchange-commission.html (findingan $847,000 discrepancy using DeLongs figures).

8In addition to the environmental effects of disposal of single-use plastic and foil K-Cups,

those opting specifically for socially responsible investments (SRI) are beginning to weigh moreheavily the negatives of GMCRs questionable accounting practices against the positives of its



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securing lucrative partnerships to insulate themselves from Lead Plaintiffs9 claims of securities

fraud. GMCR Br. at 6 & n.4. However, such obfuscation does not detract from the fact that many

investors lost significant amounts of money in the days after the SEC investigation and the initial

items to be restated were announced. Alarmed investors sold their stocken masse, with over

30 million shares exchanging hands and GMCRs share price falling more than 16%.10

Lead Plaintiffs have more than adequately alleged that Defendants made materially false and

misleading statements during the Class Period,11 with scienter, that caused significant financial losses

to the Class. The requirements of the PSLRA and Fed. R. Civ. P. 9(b) are met where the

[c]omplaint alleges the specific statement, the reasons why [plaintiffs] believe the statement is

misleading, and the facts on which that belief is formed. In re MCI Worldcom, Inc. Sec. Litig. , 93

F. Supp. 2d 276, 280 (E.D.N.Y. 2000);see also Novak v. Kasaks, 216 F.3d 300, 314 (2d Cir. 2000)

(The primary purpose of Rule 9(b) is to afford defendant fair notice of the plaintiffs claim and the

factual ground upon which it is based.) (internal citation omitted). However, plaintiffs are not

required to plead with particularity every single fact upon which their beliefs concerning the false

or misleading statements are based. Id. at 313.

societal contributions. See Rosenfeld Decl., Exhibit G Green Mountain Coffee: The Dr. Jekyll &Mr. Hyde of SRI, Socially Responsible Investing (Feb. 15, 2011) http://socialresponsibleinvest.blogspot.com/2011/02/green-mountain-coffee-dr.html (article noting that in late 2010, the firm AuditIntegrity gave GMCR a score of 6 (very aggressive), indicat[ing] it had higher accounting andgovernance risk than 94% of companies).

9 Lead Plaintiffs herein are Jerry Warchol, Robert M. and Jennifer M. Nichols, Loren Marc

Schmerler, and Mike Shanley. See Dkt. No. 20 (Order appointing Lead Plaintiffs).

10 While Class members may be subject to a damages limitation, under the Private SecuritiesLitigation Reform Acts (PSLRA) 90-day bounce-back provision, a general rise in the stock price thereafter does not deprive Class members who sold immediately or shortly after theCompanys announcement of their right to recover their damages. See 15 U.S.C. 78u-4(e)(2).

11 The Class Period includes those who purchased GMCR common stock between July 28,2010 and September 28, 2010, inclusive. 1.



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The Complaint puts Defendants on more than fair notice of Lead Plaintiffs claims in this

litigation and the factual grounds upon which the allegations are based. Lead Plaintiffs allege in

detail Defendants misrepresentations regarding: (i) improper revenue recognition on shipments of

product to GMCRs primary fulfillment vendor, MBlock; (ii) improper accounting for inter-

company transactions, which caused inventory and earnings to be overstated; (iii) improper

understatement of customer incentive and marketing expenses; (iv) the dissemination of financial

statements that were in violation of Generally Accepted Accounting Principles (GAAP); and

(v) Defendants false statements regarding GMCRs internal controls over financial reporting.

See 4.

Evidence of scienter abounds. One witness (CW1) indicated that GMCR knew of an SEC

investigation no later than early May 2010 (when the witness was contacted by GMCR employees to

ask if he/she was the whistleblower). 68. Without disclosing this fact, GMCRs unit Presidents

exercised options years before they were to expire to sell more than $7.9 million worth of stock

in the six-week period before the SEC inquiry was revealed. While GMCR claims it was first

informed of the SEC inquiry and an accompanying document request on September 20, 2010, it

withheld this information from investors for more than a week. In the interim, Keurig President

Michelle Stacy (Stacy) sold 5,000 shares on September 21, 2010 her third set of transactions in

five weeks.12

12See 102. Stacy belatedly filed an Amended Form 4, claiming she established a Rule 10b5-1

trading plan on August 13, 2010. 104. While Defendants argue that the plan is exculpatory (seeGMCR Br. at 19-20 and n.9), on March 14, 2011, Antar devoted two articles to the uncanny luckStacy has had with respect to her trading. See Rosenfeld Decl., Exhibit H Sam E. Antar, GreenMountain Coffee Roasters: The Foul Aroma of Michelle Stacys Stock Sales, White Collar Fraud(Mar. 14, 2011), http://whitecollarfraud.blogspot.com/2011/03/green-mountain-coffee-roasters-foul.html; andRosenfeld Decl., Exhibit I Sam E. Antar, Is Michelle Stacy a shrewd insider, a psychic or just plain lucky?, White Collar Fraud (Mar. 14, 2011), http://whitecollarfraud.blogspot.com/2011/03/is-michelle-stacy-shrewd-insider.html.



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Witnesses also indicated that senior management was aware of problems with revenue

recognition, inventory control, and accounting, particularly as related to MBlock, and simply ignored

these problems. See, e.g., 65-66, 70-71, 75-76, 82. Thus, despite protestations that the timing of

the exercise of stock options by unit Presidents Stacy and McCreary was innocent and coincidental,

it appears to have been quite calculated.

While these GMCR executives took full advantage of their inside knowledge by exercising

options and unloading their stock prior to an official announcement of bad news, the investing public

did not fare as well: Defendants egregious mistakes and their reckless behavior resulted in an

inquiry by the SEC, substantial and material accounting misstatements requiring the restatement of

five years of financial reporting, a loss of investor confidence, and a precipitous price decline. 48.

In sum, using Class Period and post-Class Period admissions, SEC filings, confidential

witnesses, press releases, and conference calls to detail their claims, Lead Plaintiffs have more than

adequately satisfied their pleading burden on these motions. Accordingly, it is respectfully

submitted that Defendants motions13

should be denied in their entirety.

II. STATEMENT OF FACTS

Defendant GMCR is engaged in the specialty coffee and coffee maker business, selling a

variety of coffees, cocoa, and teas under more than a dozen brand names. 2. The Companys

business is largely concentrated in the manufacturing and marketing of gourmet single-cup coffee

and tea brewing systems under the Keurig brand name. Id. The Keurig brewing system, acquired

by GMCR in 2006, consists primarily of single-cup brewing packages known as K-Cups and

special brewers in which K-Cups are inserted. During fiscal 2010, these two items respectively

accounted for approximately 62% and 24% of the Companys total revenue. Id. The Companys

13See Dkt. Nos. 33-35, Motions to Dismiss filed by Defendants Blanford and Rathke, jointly

(B&R Br.), Stiller (Stiller Br.), and GMCR, respectively.



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business is conducted in two main segments: (i) the Specialty Coffee Business Unit (SCBU),

which sources, produces and sells coffee, tea and cocoa in traditional packages and in single-serving

K-Cups; and (ii) the Keurig unit, which sells brewers and accessories as well as coffee, tea and cocoa

in K-Cups that are produced by SCBU and other licensed roasters. 33-34.

After a number of years of steadily-increasing organic growth, Defendants saw the pace of

sales increases declining just as the 2012 expiration of the patented Keurig technology appeared on

the horizon. 37, 55 (chart). Thus, over the past few years, GMCR shifted its business strategy,

and acquired several roasting companies which had previously licensed its K-Cup technology. The

Companys recent acquisitions and rapid revenue growth put GMCR on the map as a high-growth

company, and sparked the interest of the investing community.

During the Class Period, GMCR assured investors in its SEC filings that the Companys

financial statements were being presented in conformance with GAAP and that the Company

maintained a sound system of internal controls over its financial reporting. 38.14

However, starting

in 2006, the year it purchased the Keurig technology, and continuing throughout its acquisition

spree, GMCR recklessly failed to integrate its corporate accounting e.g., Keurig and SCBU not

only maintained separate accounting departments, but used entirely different software systems

(82(a)-(d)) or to hire employees with the accounting expertise necessary to produce the accurate

14GMCR amended its 2009 Form 10-Ks Managements Report on Internal Control Over

Financial Reporting. Although the 2009 Form 10-K, filed November 25, 2009 (the 2009 10-K;Rosenfeld Decl., Exhibit J), at 37, had, as did the 2006-2008 Form 10-Ks, expressly stated thatGMCRs CEO and CFO participated in the assessment of the effectiveness of GMCRs internalcontrol over financial reporting, the Form 10-K/A deleted references to their participation in theprocess. Compare Form 10-K/A, filed March 11, 2010 (Rosenfeld Decl., Exhibit K), with 2006Form 10-K, filed December 14, 2006 (Rosenfeld Decl., Exhibit L), at 37 (under CEOs and CFOssupervision and with their participation); 2007 Form 10-K, filed December 13, 2007 (the 200710-K; Rosenfeld Decl., Exhibit M), at 39 (same); 2008 Form 10-K, filed December 11, 2008 (the2008 10-K; Rosenfeld Decl., Exhibit N), at 36 (same). In light of what has transpired since, theintentional deletion is rather telling.



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reporting required of a public company that was growing quickly through acquisitions. Instead of

consolidating the financial statements and operations of its acquisitions, GMCR failed to adjust its

inter-company inventory valuations and miscalculated income on royalties from third-party K-Cup

sales. (Prior to GMCRs acquisition of several licensee roasters, GMCR managed earnings by

recording royalty revenues on sales from the licensees to Keurig, which resold K-Cups with its

brewers. 51-53 & n.3.)15 Aside from consolidation and inter-company elimination errors, GMCR

had very basic internal control problems as well, failing to adequately account for marketing and

incentive programs, because the sales force did not properly communicate incentives provided to

customers to the Companys accounting department. 49, 92-95.

Separate and apart from Defendants reckless reporting of GMCRs financial information

arising from, inter alia, GMCRs integration of acquired companies, Defendants also managed the

Companys revenues, on an as-needed basis, by using GMCRs primary fulfillment vendor, MBlock,

as a captive warehouse to park its products.

Former employees of both GMCR and MBlock described the one-sided nature of the

relationship: the close relationship between the two companies resulted in MBlock whose business

with GMCR grew from 20% to 75% of its overall business with the execution of a new contract in

mid-2009 (67) agreeing to accept shipments from GMCR for which there were no retail orders.

15GMCR contends that Plaintiffs have not sufficiently alleged scienter with respect to the

restatement of $1 million of such royalty payments. See GMCR Br. at 28-29. However, noadjustments to royalty revenues were announced at the end of the Class Period on September 28,2010; moreover, the 2010 10-Ks restated financial statements for the entire year show an increaseto royalty payments in 2010 providing no indication that royalties from licensees were overstatedin the third quarter of 2010. See Rosenfeld Decl., Exhibit B 2010 10-K at ii. Thus, one couldreasonably infer that the reason that Defendants made a large investment in MBlock upon thesigning of a new contract in mid-2009, allowing MBlock to open two new facilities at a time whenGMCR was growing to become 75% of its business (65(a)-(d), 67), is that upcoming acquisitionsof third-party licensees would mean an end to the ability to use royalty payments for earningsmanagement and a new method was needed. 51-53.



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64-66. Indeed, CW1 indicated that VP of Operations Wettstein and Director of Operations Don

Holly did not set production levels based upon customer ordering history or inventory levels, but,

instead, production was simply increased to give the illusion of continued growth to shareholders.

As a result, according to CW1 and CW2, inventory piled up at MBlocks facilities; so much so that

large quantities of product were stored beyond their expiration dates and had to be destroyed.

65(b). This practice enabled GMCRs management to knowingly boost reported sales because

GMCR recognized revenues upon shipments to MBlock, telling employees to book revenues upon

shipment even though the requisite paperwork to validate the sales as proper could not be located.

See70-71, 76. In other words, GMCR was able to ship its products to MBlock whether these

products were ordered or not as a way to increase reported revenues and give the impression to

investors that there was strong customer demand for its products.

This practice was able to occur because, prior to the SEC inquiry, GMCRs revenue

recognition policy allowed for revenue to be recognized upon shipment to MBlock.16

Because the

SEC raised significant questions about the parties relationship, GMCR recently revised its revenue

recognition policy to now provide that revenue is not booked until MBlock ships the product out to

its customers. 73.

Before Defendants disclosed any of the Companys accounting malfeasance to the investing

public, unit Presidents Stacy and McCreary each sold a significant amount of GMCR stock between

August 13, 2010, and September 21, 2010. See GMCR Br. at 22; 6-7. Prior to these sales, there

had not been significant insider trading activity since June 2009. 6-7. These sales occurred during

16 CW1 indicated that GMCRs outside auditor forced senior management to change GMCRsstated revenue recognition policy once before, after discrepancies had been discovered. 74.Indeed, the 2007 10-K stated that revenue was only recognized upon product delivery; however, the2008 10-K adds that, in addition, revenue is recognized in some cases upon product shipment.Compare Rosenfeld Decl., Exhibit M 2007 10-K at 34, with Rosenfeld Decl., Exhibit N 2008 10-K at 30;see also Rosenfeld Decl., Exhibit J 2009 10-K at 32 (same).



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a time of Company expansion GMCR having announced a $250 million stock sale to Italian coffee

and coffee-maker giant Luigi Lavazza S.p.A. (Lavazza) on August 10, 2010 (6-8) and the

acquisition of GMCRs Canadian rival VanHoutte (LJVH Holdings, Inc.), for $915 million

(Canadian), and debt refinancing associated therewith, on September 14, 2010. 8.

On September 28, 2010, shortly after the flurry of insider trading and deal making, the

Company announced that the SECs Division of Enforcement was conducting an accounting inquiry

into the Companys financial statements, particularly as they related to revenue recognition practices

concerning GMCRs relationship with MBlock. GMCR also admitted to a $7.6 million cumulative

overstatement of pre-tax income due to errors in several line items of GMCRs financial statements

from 2007 forward. 5, 60. Immediately thereafter, GMCRs share price declined more than 16%,

on almost ten times the average trading volume. 5. Ultimately, on November 19, 2010, the

Company informed investors that its previously-issued financial statements for 2007 through the

third quarter of 2010 could no longer be relied upon, and would need to be restated. 9, 39, 42.17

A sweeping, multi-year restatement was finally disclosed in GMCRs 2010 10-K, filed

December 9, 2010, at which time GMCR also announced that the SECs inquiry could result in

additional restatements. Not surprisingly, due to the broad scope of items covered by the

restatement, and contrary to prior assurances of effective internal control over financial reporting,

GMCR also notified investors of two material weaknesses in its internal control over financial

reporting. 94-95. The weaknesses identified were failures in the consolidation process, causing

GMCR not [to] have effective controls to ensure the completeness and accuracy of the accounting

for inter-company transactions and, because of a lack of communication between accounting and

17 Although the November 19, 2010, press release only indicated a restatement of financialstatements from 2007-2010 would be necessary, the 2010 10-K added the Companys fiscal 2006financial statements to the list of GMCRs previously-issued, misstated financials. 48, n. 2.



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sales functions and inexperienced accounting staff, GMCR did not have effective controls to ensure

the completeness, accuracy and proper classification of certain marketing and customer incentive

programs and related accrued liabilities. The 2010 10-K listed a half dozen remedial measures to

be implemented to rectify the situation. 95.

III. ARGUMENT

A. The Complaint Adequately Alleges a Violation of 10(b)

1. Applicable Standards on a Motion to Dismiss a 10(b) Claim

Motions to dismiss are generally viewed with disfavor. See Teachers Ret. Sys. of La. v.

A.C.L.N., Ltd., No. 01-11814, 2003 WL 21058090, at *10 (S.D.N.Y. May 12, 2003). When

considering a motion to dismiss, the complaint is liberally construed, accepting all factual

allegations in the complaint as true, and drawing all reasonable inferences in the plaintiffs favor.

In re Tommy Hilfiger Sec. Litig., No. 04-civ-7678, 2007 WL 5581705, at *2 (S.D.N.Y. July 20,

2007) (citations omitted). A complaint need only allege enough factual matter (taken as true) to

suggest that a violation occurred, and a well-pleaded complaint may proceed even if it strikes a

savvy judge that actual proof of those facts is improbable . . . Bell Atl. Corp. v. Twombly , 550 U.S.

544, 556 (2007) (citation omitted). The pleading need only contain [f]actual allegations . . .

[sufficient] to raise a right to relief above the speculative level. Id. When there are well-pleaded

factual allegations, a court should assume their veracity and then determine whether they plausibly

give rise to an entitlement to relief. Ashcroft v. Iqbal, 129 S. Ct. 1937, 1940-41 (2009).

Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act) provides that it is

unlawful for a person to employ any manipulative or deceptive device in contravention of the rules

and regulations of the SEC in connection with the purchase or sale of any security. 15 U.S.C.

78j(b). To state a claim under 10(b) and SEC Rule 10b-5, one must allege: (1) a misrepresentation



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or omission of a material fact in connection with the purchase or sale of a security; (2) made by the

defendant with scienter;18 (3) reliance on the representation; and (4) damage resulting from the

representation. See Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161, 172 (2d Cir. 2005);Heller v.

Goldin Restructuring Fund, L.P., 590 F. Supp. 2d 603, 613 (S.D.N.Y. 2008) (citations omitted).

In 1995, Congress amended the Exchange Act by enacting the PSLRA. A new, heightened

pleading standard now applies to one of the elements of a 10(b) claim listed above, the mental state

requirement of scienter. 15 U.S.C. 78u-4(b)(2) requires that, when considered together, all of the

facts alleged must give rise to a cogent and compelling inference that defendants acted recklessly.

See Tellabs, Inc. v. Makor Issues & Rights Ltd., 551 U.S. 308, 314, 319 n. 3 and 322-24 (2007); ECA

v. J.P. Morgan Chase Co., 553 F.3d 187, 198 (2d Cir. 2009). All other elements of a 10(b) claim

are still governed by traditional pleading standards under Fed. R. Civ. P. 8(a) or 9(b). See In re

PXRE Group, Ltd. Sec. Litig., 600 F. Supp. 2d 510, 528-29 (S.D.N.Y. 2009).19 Rule 9(b), which

applies to all averments of fraud, requires that a complaint (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. Rombach v. Chang, 355 F.3d

164, 170 (2d Cir. 2004) (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir.

1993)). Under neither Rule 9(b) nor the PSLRA is a plaintiff required to plead evidence. See

Skydell v. Ares-Serono S.A., 892 F. Supp. 498, 501 (S.D.N.Y. 1995).

18Scienter, which includes both intentional and reckless behavior, is defined as conduct

which is highly unreasonable and which represents an extreme departure from the standards ofordinary care . . . to the extent that the danger was either known to the defendant or so obvious thatthe defendant must have been aware of it. Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir. 2000)(citation omitted).

19Nor did the PSLRA alter the time-honored tenets, cited in the text, that motions to dismiss

are disfavored (see In re Nortel Networks Corp. Sec. Litig., 238 F. Supp. 2d 613, 621 (S.D.N.Y.2003)), and that the Court must accept all factual allegations in the complaint as true, drawing allreasonable inferences in the plaintiffs favor. See Tellabs, 551 U.S. at 322.



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Although Defendants filed three separate motions, spanning more than 75 pages, their

arguments are limited: they challenge the Complaint on the basis of the scienter allegations, the

falsity of the statements related to improper revenue recognition on shipments to MBlock, and

whether Defendant Stiller can be found liable if he did not make any explicit statements.

Importantly, Defendants do not dispute, nor can they, that Plaintiffs have adequately alleged the

material falsity of both the Class Period financial figures later restated and the Individual

Defendants certifications of the accuracy of GMCRs SEC filings, as well as the elements of

reliance, loss causation and damages. See, generally, Dkt. Nos. 33-35.

2. The Complaint Adequately Alleges Material False StatementsRegarding Improper Revenue Recognition on Shipments to

MBlock

Rule 10b-5(b) prohibits mak[ing] any untrue statement of material fact or . . . omit[ting] to

state a material fact necessary in order to make the statements made, in light of the circumstances

under which they were made, not misleading. 17 C.F.R. 240.10b-5. [O]nce corporate officers

undertake to make statements, they are obligated to speak truthfully and to make such additional

disclosures as are necessary to avoid rendering the statements made misleading. In re Par Pharm.,

Inc. Sec. Litig., 733 F. Supp. 668, 675 (S.D.N.Y. 1990);see also Va. Bankshares, Inc. v. Sandberg,

501 U.S. 1083, 1098 n.7 (1991) (when a company chooses to speak, there can be no question that

the statement [it] do[es] make carrie[s] with it no option to deceive); In re Marsh & McLennan

Cos., Inc. Sec. Litig., 501 F. Supp. 2d 452, 469 (S.D.N.Y. 2006) (corporations have a duty to

disclose all facts necessary to ensure the completeness and accuracy of their public statements). A

statement is misleading if a reasonable investor would have received a false impression from the

statement. See Par Pharm., 733 F. Supp. at 677. Moreover:

[S]tatements, although literally accurate, can become, through their context andmanner of presentation, devices which mislead investors. For that reason, thedisclosure required by the securities laws is measured not by literal truth, but by theability of the material to accurately inform rather than mislead . . .



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McMahan & Co. v. Wherehouse Ent., Inc., 900 F.2d 576, 579 (2d Cir. 1990) (citation omitted). The

purpose of the disclosure requirements is to inform, not to challenge the readers critical wits. Va.

Bankshares, 501 U.S. at 1097.

A misrepresentation or omission is material when a reasonable investor would attach

importance to it in making an investment decision. See Va. Bankshares, 501 U.S. at 1090 (citation

omitted);Basic, Inc. v. Levinson, 485 U.S. 224, 231 (1988) (there must be a substantial likelihood

that the disclosure of the omitted fact would have been viewed by the reasonable investor as having

significantly altered the total mix of information made available). The materiality requirement

poses a very low burden: [A] complaint may not properly be dismissed . . . on the ground that the

alleged misstatements or omissions are not material unless they are so obviously unimportant to a

reasonable investor that reasonable minds could not differ on the question of their importance.

Ganino v. Citizens Utilities Co., 228 F.3d 154, 162 (2d Cir. 2000). Thus, the trier of fact usually

decides the issue of materiality.

Here, Defendants made three categories of materially false and/or misleading statements

during the Class Period: (1) an earnings release and related disclosures, including a Form 10-Q

filing, containing misstated financial information that was eventually restated; (2) the CEOs and

CFOs false certifications of the Form 10-Qs accuracy and GMCRs internal and disclosure

controls; and (3) revenue figures that were inflated by improper sales to MBlock.20 As they must

20 GMCR makes the curious argument that the Complaint does not allege any false statementsconcerning revenue recognition in conjunction with sales to MBlock. See GMCR Br. at 14-16. Inaddition to alleging that the third quarter 2010 39-week revenue figure is inflated because of suchsales (80), the Complaint explains the inflation was due, in part, to a highly-suspect 150-truckloadsale to MBlock in the first quarter 2010 (70-71), because sales for which there are no purchaseorders violate GAAP because, inter alia, there is no evidence that the price to the buyer is fixed ordeterminable. 72. For this reason, the lack of purchase orders, material requisition forms andproduct shipment authorizations violated internal GMCR policies used to validate sales as legitimate.71.



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when a restatement is made, Defendants concede the sufficiency of the pleading of material

misstatements in the first two categories.21

Defendants contend that they do not know which statements the Complaint alleges to be

materially false and misleading with respect to the relationship between GMCR and MBlock. See

GMCR Br. at 13-15. They understand that the gravamen of the allegations is that the Companys

financial reporting for the third quarter of 2010 was false, but then jump to the conclusion that the

false statements contained therein were limited to the restated items, none of which were (ultimately)

connected to the SEC inquiry into GMCRs relationship with MBlock. See id. at 13-15. This

conclusion is unwarranted.

Specifically, Plaintiffs allege that the 39-week figures reported at the end of the third quarter

2010 for the first three quarters of fiscal 2010, in GMCRs earnings release, conference call and

Form 10-Q later filed with the SEC, were materially false and misleading because they included

21 [T]he mere fact that financial results were restated is sufficient basis for pleading that those

statements were false when made. In re Atlas Air Worldwide Holdings, Inc. Sec. Litig., 324 F.Supp. 2d 474, 486 (S.D.N.Y. 2004). The scope of the false statements include the financialstatements and press releases issued during the Class Period . . . to the extent they reported,discussed, or analyzed figures that subsequently were restated[,] as well as any financial statisticsderived from restated figures,In re BISYS Sec. Litig., 397 F. Supp. 2d 430, 437 (S.D.N.Y. 2005),and also representations that a companys financial statements had been compiled in accordance withGAAP when they were not. See In re CitiGroup Inc. Bond Litig., 723 F. Supp. 2d 568, 594(S.D.N.Y. 2010).

Similarly, false certifications under the Sarbanes-Oxley Act (SOX), concerningeffectiveness of internal controls over financial reporting and disclosure of potential fraud, arethemselves actionable misstatements. See In re Proquest Sec. Litig., 527 F. Supp. 2d 728, 745-46(E.D. Mich. 2007). Indeed, [f]or these certifications to have any substance, signatories to thecertifications must be held accountable for the statements. Middlesex Retirement Sys. v. QuestSoftware Inc., 527 F. Supp. 2d 1164, 1189 (C.D. Cal. 2007).

In cases where, as here, there is a restatement, the element of materiality is alleged because,under GAAP, previously issued financial statements should be restated only to correct materialaccounting errors that existed at the time the statements were originally issued. Atlas Air, 324 F.Supp. 2d at 486; SEC v. Kelly, 663 F. Supp. 2d 276, 285 (S.D.N.Y. 2009) (same).



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revenues from the first quarter that were the result of a substantial and undocumented delivery to

MBlock. 72, 77-78, 80. According to CW1, a former distribution planning manager, 150 truck-

loads of product were shipped to MBlock even though CW1 and GMCRs global transportation

manager could not find the requisite paperwork for the large shipment, i.e., purchase orders, material

requisition orders, and product shipment authorizations, andthe shipment was not listed on GMCRs

production forecast schedule. Employees who worked for CW1 saw the trucks leave GMCR and

saw the MBlock warehouses packed to the rafters with K-Cup inventory thereafter. CW1 indicated

that members of GMCRs senior management were aware of this highly-unorthodox, undocumented

shipment, including VP of Operations, Wettstein (who regularly provided updates to GMCR CEO,

Defendant Blanford), SCBU President McCreary and VP of Finance, Bissonette. Finally, CW1

approximated the amount of the improperly recognized revenue on the shipment as between

$7.5 million and $15 million. 70-72.

These allegations, which describe why GMCRs 39-week revenue figures were inflated by

$7.5-$15 million, readily satisfy the Second Circuits standard for pleading fraud with specificity, as

affirmed inRombach, because they (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. 355 F.3d at 170 (quoting Mills, 12 F.3d at 1175).

While this alleged improperly-recognized revenue was not part of the revenues removed in the

restatement announced on December 9, 2010, that does not reduce their falsity. Indeed, a

restatement requires the consent of management and it is thus within their discretion to determine if

a restatement should be made for this transaction, which resulted from the Companys inadequate

internal controls. See Aldridge v. A.T. Cross Corp., 284 F.3d 72, 83 (1st Cir. 2002). In any event,

GMCR has already warned investors that additional restatements might be necessary, depending

upon the conclusions reached in the SEC investigation.



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3. Board Chairman Stiller Can Be Held Liable for Class Period

Misstatements

Defendant Stiller, the Companys founder, and its President and CEO from GMCRs

inception until 2007, argues that he cannot be held responsible for any of GMCRs misstatements

during the Class Period because he did not personally speak or execute any Class Period documents

filed by GMCR with the SEC. See Stiller Br. at 2, 12-13.22 Stiller further contends that he is not

liable for GMCRs public statements under the group pleading doctrine because he is not actively

involved in the day-to-day operations of the Company. Id. at 13-15. However, as explained below,

that bald assertion is not supported by the facts.

For pleading purposes, under the group pleading doctrine, plaintiffs may rely on a

presumption that statements in prospectuses, registration statements, annual reports, press releases,

or other group-published information, are the collective work of those individuals with direct

involvement in the everyday business of the company. BISYS, 397 F. Supp. 2d at 438.23

Rather

than being solely limited to current officers, the doctrine may apply to outside directors, who . . .

can fall within the group pleading presumption when, by virtue of their status or a special

relationship with the corporation [they] have access to information more akin to a corporate insider.

22 Founder Stiller was GMCRs President and CEO for nearly 26 years, from July 1981 untilMay 2007. See Stiller Br. at 14. The period of the restatement started in fiscal 2006, the year thatGMCR acquired Keurig. Thus, not only did the financial misstatements incorporated into GMCRslater financial filings begin on Stillers watch (95), but even after stepping down as CEO, Stillercontinued to execute GMCRs yearly Form 10-K filings in 2008, 2009 and 2010 both prior to andsubsequent to the Class Period. See Rosenfeld Decl., Exhibit B 2010 10-K at 57; Rosenfeld Decl.,Exhibit J 2009 10-K at 43; Rosenfeld Decl., Exhibit N 2008 10-K at 41. During the ClassPeriod, the statements made in these earlier Forms 10-K remained alive and uncorrected.

23 Stiller suggests that it is unclear whether, in the Second Circuit, group pleading survived the2007 Tellabs decision. See Stiller Br. at 13 n.4. However, other courts in this Circuit have affirmedits viability. See King County, WA v. IKB Deutsche Industriebank AG, 751 F. Supp. 2d 652, 659-60and nn.48 and 49 (S.D.N.Y. 2010) (citing cases).



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Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC, 440 F. Supp. 2d

163, 180 (S.D.N.Y. 2006).

Such a special relationship can be found where a board chairman executes SEC filings, is a

significant consultant on company affairs, serves on board committees (see Schnall v. Annuity and

Life Re (Holdings) Ltd., No. 3:02 CV 2133, 2004 WL 231439 (D. Conn. Feb. 4, 2004) (so holding)),

or where the chairman founded and still owns a significant percentage of the company. See In re

Indep. Energy Holdings PLC Sec. Litig., 154 F. Supp. 2d 741, 767-68 (S.D.N.Y. 2001), abrogated

on other grounds,In re IPO Sec. Litig., 241 F. Supp. 2d 281 (S.D.N.Y. 2003) (so holding where

founder and chairman still a 3% owner). All of these factors are present here.

Stiller is not only GMCRs founder, but he owns more than 12% of GMCRs outstanding

shares. See Form DEF 14A, filed January 24, 2011 (the January 24, 2011 DEF 14A; Rosenfeld

Decl., Exhibit O), at 39. While Stiller claims that he was only acting as the Chairman of the Board

after May 2007 (Stiller Br. at 14), his role is a far more unique and active one than he implies:

[T]he Chairman is charged with presiding over all meetings of the Board and ourshareholders, and providing advice and counsel to our Chief Executive Officer andother Company officers regarding our business and operations . . . Moreover, as theCompanys founder and former Chief Executive Officer, our Chairman is uniquelyqualified to provide insight, advice, guidance and counsel to our Chief ExecutiveOfficer about the Companys operations and strategy.

Rosenfeld Decl., Exhibit O January 24, 2011 DEF 14A at 7.24 Moreover, in addition to his director

fees of $92,000, in 2009, Stiller received a one-time stock option grant of 30,643 shares at an

exercise price of $26.11 per share in recognition of his important role in the successful transition to a

24 Indeed, Stiller is not only the Chairman of the Board; he also serves as the Chairman of theBoards Corporate Social Responsibility Committee. See Rosenfeld Decl., Exhibit O January 24,2011 DEF 14A at 8. As such, he remains a very public face for GMCRs social responsibilityinitiatives.



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new chief executive officer. Form DEF 14A, filed January 25, 2010 (the January 25, 2010 DEF

14A; Rosenfeld Decl., Exhibit P), at 21.

Notably, the more traditional duties of a Chairman of the Board, e.g., chairing and calling

Board meetings, serving as a liaison between the Board and the CEO, consulting with the CEO (and

Chairman Stiller) on matters to be presented at Board and committee meetings, have been delegated

to Lead Director William Davis, who appears to have held that role since 2009. See Form DEF 14A,

filed January 26, 2009 (the January 26, 2009 DEF 14A; Rosenfeld Decl., Exhibit Q), at 24;

Rosenfeld Decl., Exhibit P January 25, 2010 DEF 14A at 7. Consequently, Chairman Stillers

significant and unique duties and actions place him squarely within the realm of an insider, for the

purposes of group pleading liability. Thus, Defendant Stiller may be held liable for GMCRs public

statements during the Class Period.25

4. The Complaint Adequately Alleges Scienter

Plaintiffs plead a strong inference of scienter by alleging facts that, when accepted as true

and taken collectively, would [have] a reasonable person deem the inference of scienter at least as

strong as any opposing inference[.] Tellabs, 551 U.S. at 310, 322. The inference is strong if it is

cogent and compelling and at least as likely as any plausible opposing inference.Id. at 324, 328

(emphasis in original). Where the inference of scienter is equal to a plausible opposing inference, a

25Stiller repeatedly citesDresner v. Utility.com, Inc., 371 F. Supp. 2d 476 (S.D.N.Y. 2005), to

argue that a founder andformerboard chairman is not an insider because he is no longer involved inthe day-to-day activities of the corporation. See Stiller Br. at 12-15. Dresner, however,distinguished between officers, denominated insider defendants, and all other individualdefendants, referred to as non-insider defendants. 371 F. Supp. 2d at 482-83. The court noted thatnon-insiders, almost by definition, are excluded from the day-to-day management of a corporation.Id. at 494. Here, however, because of Stillers recent employment history as well as his ongoingspecial role with the Company GMCR deemed Stiller an inside director rather than anindependent, outside director. See, e.g., Rosenfeld Decl., Exhibit P January 25, 2010 DEF 14A at 6(At the Boards meeting in September 2009, the Board determined that all of our Directors, exceptMessrs. Blanford and Stiller, are independent . . .).



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tie goes to the plaintiff. See id. at 324;see also Heller, 590 F. Supp. 2d at 620; Sloman v. Presstek,

Inc., No. 06 CV 377, 2007 WL 2740047, at *7 (D.N.H. Sept. 18, 2007). Also [t]he inference that

the defendant acted with scienter need not be irrefutable, i.e., of the smoking-gun genre, or even

the most plausible of competing inferences. Tellabs, 551 U.S. at 324 (citation omitted).

GMCRs scienter may be established separate and apart from the Individual Defendants:

[I]t is possible to draw a strong inference of corporate scienter without being able toname the individual who concocted and disseminated the fraud. Suppose GeneralMotors announced that it had sold one million SUVs in 2006, and the actual numberwas zero. There would be a strong inference of corporate scienter, since so dramatican announcement would have been approved by corporate officials sufficientlyknowledgeable about the company to know that the announcement was false.

Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital, Inc., 531 F.3d 190, 195-96 (2d

Cir. 2008) (Dynex) (quoting Makor Issues & Rights, Ltd. v. Tellabs, Inc., 513 F.3d 702, 710 (7th

Cir. 2008)). Thus, a complaint may adequately allege corporate scienter without alleging scienter

as to any particular defendant. Sgalambo v. McKenzie, 739 F. Supp. 2d 453, 486 n.205 (S.D.N.Y.

2010) (citingDynex, 531 F.3d at 195). A corporations scienter necessarily derives from the state

of mind of its employees (In re Marsh & McClennan, 501 F. Supp. 2d at 481 (citing Suez Equity

Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 101 (2d Cir. 2001)) . . . Proof of a

corporations collective knowledge and intent is sufficient.In re Take-Two Interactive Sec. Litig. ,

551 F. Supp. 2d 247, 281 (S.D.N.Y. 2008) (quotingIn re WorldCom, Inc. Sec. Litig., 352 F. Supp.

2d 472, 497 (S.D.N.Y. 2005)).

In this Circuit, the scienter requirement can be satisfied by alleging facts constituting strong

circumstantial evidence that: (1) Defendants had motive and opportunity to commit fraud; or

(2) facts that demonstrate Defendants conscious misbehavior or recklessness. See In re Scholastic

Corp. Sec. Litig., 252 F.3d 63, 74 (2d Cir. 2001) (citingNovak, 216 F.3d at 311);In re IPO Sec.

Litig., 544 F. Supp. 2d 277, 286 (S.D.N.Y. 2008). Regarding the second prong, allegations that may

give rise to a strong inference of scienter include that the defendants knew facts or had access to



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information suggesting that their public statements were not accurate or that they failed to check

information they had a duty to monitor. ECA, 553 F.3d at 199 (citingNovak, 216 F.3d at 311).

To satisfy either prong, great specificity is not required provided the plaintiff alleges

enough facts. See Teamsters Local 445 Freight Div. Pension Fund v. Bombardier, Inc., No. 05

Civ. 1898, 2005 WL 2148919, at *7 (S.D.N.Y. Sept. 6, 2005) (Bombardier); In re Veeco

Instruments Sec. Litig., 235 F.R.D. 220, 231 (S.D.N.Y. 2006);In re Am. Intl Group, Inc., 741 F.

Supp. 2d 511, 532 (S.D.N.Y. 2010) (multiple facts may complement each other to create an

inference of sufficient strength to satisfy the PSLRA); cf. Tellabs, 551 U.S. at 322-23 (allegations

contributing to strong inference are considered together, not individually). Here, Plaintiffs allege

fact, with sufficient detail, that, when taken together, make it at least as likely as not that Defendants

acted with scienter.

a. The Complaint Has Pled with Particularity Motive and

Opportunity

(1) The Disclosure of the SEC Inquiry on the Day of

the Lavazza Closing Was Highly Suspicious

Defendants scoff at the notion that GMCRs financing activities may give rise to an inference

of scienter, contending that it is a motive of all companies to keep share prices high to enhance stock

placements. See GMCR Br. at 4, 17-18; B&R Br. at 8-10; Stiller Br. at 6-8. However, the Second

Circuit long ago recognized that in certain instances, the artificial inflation of stock price in the

acquisition context may be sufficient for securities fraud scienter. In re Unisys Corp. Sec. Litig.,

No. Civ. A. 00-1849, 2000 WL 1367951, at *6 (E.D. Pa. Sept. 21, 2000) (citingIn re Time Warner

Inc. Sec. Litig., 9 F.3d 259, 270 (2d Cir. 1993)). Specifically, in a transaction where the investment

amount is fixed but the number of shares to be issued is tied entirely to the price of common stock,

scienter may be inferred when a defendant conceals material facts because their disclosure would

have caused a price drop and the defendant would have had to issue more shares to close the deal.

See In re ATI Techs. Inc., Sec. Litig., 216 F. Supp. 2d 418, 439-40 (E.D. Pa. 2002) (and cases cited



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therein). Here, Lavazza agreed to purchase $250 million of newly-issued shares, with the share price

to be equal to the volume-weighted average price of the Common Stock as quoted on the Nasdaq

for the 60 Business Days ending on the Business Day immediately precedingthe Closing, less seven

and a half percent (7.5%). (Emphasis added.)26

Consequently, while GMCR argues that disclosure of the SEC inquiry and the initial items to

be restated on the same day as the Lavazza closing serve to negate scienter, quite the contrary is true.

While one witness claims that Defendants knew about the SEC inquiry as early as the spring of 2010

(68), GMCR admittedly knew about the SEC inquiry no later than September 20, 2010. 90. A

strong inference of scienter is thus raised by GMCR withholding bad news news which brought its

share price down 16% once revealed until the day of the Lavazza closing, once the price per share

had just been fixed pursuant to the terms of the contract.27

26See Rosenfeld Decl., Exhibit R Common Stock Purchase Agreement, Form 8-K, filed

August 11, 2010, at Ex. 10.1, Sec. 2.

27 Nor does the VanHoutte (LLVH Holdings) deals event chronology negate scienter, asGMCR contends. See GMCR Br. at 4, 17-18. The purchase and the terms of debt financing for thedeal were announced on September 14, 2010, one week before the SEC requested documentsconcerning the MBlock relationship, and two weeks before the revelation of problems at GMCR.87, 88, 90. Disclosure of the SEC inquiry and the initial items to be restated was made pursuant toRegulation FD, in conjunction with the deal and the associated financing transaction meaning thatGMCR, having disclosed this material information to the participating lenders, was required topublicly disclose it as well. Thereafter, the scope of the restatement grew, stemming from internalcontrol problems, and the SEC inquiry was not quickly resolved. 92-95. The deal closed onlyafter the audited restatement was filed, with the terms of the financing significantly altered.Compare Rosenfeld Decl., Exhibit S Form 8-K, filed September 14, 2010, at Ex. 99.1 ($1.35B ofnew debt financing comprised of: (i) $750M 5-year senior secured revolving credit facility;(ii) $250M 5-year senior secured term loan A; and (iii) a $350M 6-year senior secured term loan B),with Rosenfeld Decl., Exhibit T Form 8-K, filed December 17, 2010, at Ex. 99.1 ($1.45B offinancing, consisting of: (a) $250M term loan A; (b) $550M term loan B; (c) $450M U.S. revolvingcredit facility; and (d) $200M alternative currency revolving credit facility).



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(2) The Scienter of the Senior Executives Who

Engaged in Highly-Suspicious Stock Sales May

Be Imputed to GMCR

The Complaint alleges suspiciously-timed stock sales by Stacy and McCreary, the Presidents

of GMCRs Keurig and SCBU business units, respectively. 102-104. Even though neither had

sold stock in more than a year, McCreary sold shares valued at $6.6 million just six weeks before

GMCR announced the first restated items and the SEC inquiry; Stacy reaped almost $1 million in

proceeds on shares sold on the very same day she adopted a Rule 10b5-1 plan a plan she had

initially forgotten she had adopted when she made the required SEC filings on later sales and

another $185,000 on shares sold the day afterGMCR claimed to have first been contacted about the

SECs inquiry, a weekbefore GMCR made the information public.28 Yet GMCR contends that there

is nothing unusual or suspicious about McCrearys and Stacys sales. See GMCR Br. at 19-23,

arguing the point at length. As explained below, GMCRs claim strains credulity.

Before undertaking a contextual analysis of the trading, GMCR stresses at the outset that

neither unit President is named as a defendant; later, they make the parallel argument that the

Individual Defendants did not sell any shares. See GMCR Br. at 19 and 23. Neither argument is

dispositive. With respect to the first point, because, as explained above, corporate scienter is not

limited to the scienter of the named defendants, courts may consider insider sales by other members

of senior management. See, e.g., Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1225 (1st Cir. 1996)

(insider trading in suspicious amounts or at suspicious times may permit an inference that the

28 The SEC inquiry is clearly material, in light of the fact that MBlock is GMCRs chieffulfillment vendor, one so critical that GMCRs SEC filings contain risk warnings concerningadverse business effects a disruption of this relationship would cause. See, e.g., Rosenfeld Decl.,Exhibit B 2010 10-K at 14. Material information to be filed on Form 8-K must be filed within fourbusiness days yet GMCR did not do so on Friday, September 24, 2010, but waited instead untilSeptember 28, 2010. See 17 C.F.R. 249.308;see also Rosenfeld Decl., Exhibit U blank, fillableForm 8-K, available at http://www.sec.gov/about/forms/form8-k.pdf.



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trader and by further inference, the company possessed material nonpublic information at the

time) (citation omitted). Regarding the latter point, the Supreme Court made clear in Tellabs, the

absence of a motive allegation is not fatal. 551 U.S. at 325.

Next, in defense of Stacys sales, GMCR argues that periodic stock sales pursuant to a

trading plan adopted under Rule 10b5-1 cannot be deemed unusual or suspicious. See GMCR Br. at

20. This argument is flawed in three respects. First, the existence of a Rule 10b5-1 trading plan is

an affirmative defense, not properly raised on a motion to dismiss. See Miss. Pub. Emps. Ret. Sys. v.

Boston Scientific Corp., 523 F.3d 75, 92 (1st Cir. 2008) (Boston Scientific) (on a pleading motion,

there is no evidence of when the trading plans went into effect, that such trading plans removed

entirely from defendants discretion the question of when sales would occur, or that they were

unable to amend these trading plans);In re ArthroCare Corp. Sec. Litig., 726 F. Supp. 2d 696, 722-

23 (W.D. Tex. 2010) (quoting Boston Scientific, 523 F.3d at 92);Freudenberg v. E*Trade Fin.

Corp., 712 F. Supp. 2d 171, 200-01 (S.D.N.Y. 2010) ([T]he existence of a Rule 10b5-1 Trading

Plan is an affirmative defense that must be pled and proved.) (quoting Malin v. XL Capital Ltd., 499

F. Supp. 2d 117, 156 (D. Conn. 2007)). While it is true that the Complaint references Stacys plan,

its terms are not before the Court; thus, it is cannot be used to negate an inference of scienter.

Second, an attempt to use a Rule 10b5-1 plan as a non-suspicious explanation for trading is

undercut when the plan is entered into during the class period. See Freudenberg, 712 F. Supp. 2d at

201 (citing Cent. Laborers Pension Fund v. Integrated Elec. Servs. Inc., 497 F.3d 546, 554 (5th Cir.

2007)); In re Fed. Natl. Mortg. Assn. Sec., Deriv., and ERISA Litig., 503 F. Supp. 2d 25, 48

(D.D.C. 2007) (citing cases). An inference of innocence can only be afforded if the plan was

adopted prior to the time the insider came into possession of material, non-public information. See

Lefkoe v. Jos. A. Bank Clothiers, No. WMN-06-1892, 2008 WL 7275126, at *5 and n.7 (D. Md.

May 13, 2008);In re Cardinal Health Inc. Sec. Litig., 426 F. Supp. 2d 688, 734 and n.58 (S.D. Ohio



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2006) (finding four sales on two dates by insider, totaling $743,984, to be evidence of scienter and

rejecting argument that timing of adoption is not beside the point: The timing of the plan is

crucial because, without a 10b5-1 plan in existence, Jensens trading activity could very well point to

Jensens effort to dump his Cardinal stock.).

Here, the Class Period began on July 28, 2010, when GMCR announced its results for the 13

and 39 weeks ended June 26, 2010. 77. According to CW1, however, by no later than early May,

Defendants were aware of the SEC investigation (because CW1 had received telephone calls from

employees still at GMCR asking if CW1 had been the whistleblower to the SEC). 68. Whereas

Keurig relies on a single order fulfillment entity, [MBlock], to process the majority of sales orders

for its AH single-cup business with retailers in the United States, Rosenfeld Decl., Exhibit B 2010

10-K at 43, it defies logic that Stacy, the President of Keurig, was not aware of the SEC inquiry by

May 2010. Therefore, Plaintiffs have alleged sufficient facts to establish that Stacy was in

possession of material, non-public information both at the start of the Class Period and at the time

she purportedly adopted her Rule 10b5-1 trading plan on August 13, 2010. 104.

Third, a question of fact exists about the date on which Stacys plan was actually adopted.

On August 17, 2010, Stacy filed a Form 4 (as required by the SEC for all stock transactions by

officers, directors and large shareholders) for a $928,500 stock sale made on August 13, 2010. See

Rosenfeld Decl., Exhibit W. No reference is made to adoption of a Rule 10b5-1 trading plan29

although it supposedly occurred just four days earlier. See id. On September 15, 2010, Stacy filed a

Form 4 for a $177,000 sale made on September 13, 2010. See Rosenfeld Decl., Exhibit X. Again,

no mention is made of a Rule 10b5-1 trading plan. See id. On September 21, 2010 a day after

GMCR claims to have been first contacted by the SEC and asked to produce documents concerning

29A Form 4 includes an area where one can make a notation to indicate if the sale is being

made pursuant to a rule 10b5-1 trading plan.



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the MBlock relationship Stacy made two sales, totaling $185,000. See Rosenfeld Decl., Exhibit Y.

Once again, there is no mention in the Form 4 of any Rule 10b5-1 trading plan. See id. In the wake

of the accounting revelations that followed, Sam Antar raised questions about the propriety of the

trades:

On October 21, 2010, I raised questions about the timing of Michelle Stacys stocksales.

On October 28, 2010, Stacy belatedly filed amended Form 4 reports and claimed sheestablished a Rule 10b5-1 trading

2011 07-12 Horowitz v Green Mountain Coffee Plaintiff's Opposition

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Transcript of 2011 07-12 Horowitz v Green Mountain Coffee Plaintiff's Opposition