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Oklahoma Police Pension & Retirement System v. Boulder Brands, Inc.

United States District Court, D. Colorado

March 28, 2017

OKLAHOMA POLICE PENSION & RETIREMENT SYSTEM, Individually and on behalf of all others similarly situated, Plaintiff,


          Marcia S. Krieger Chief United States District Judge.

         THIS MATTER comes before the Court pursuant to the Plaintiffs' (“OPPRS”) Objections (# 59) to the Magistrate Judge's March 1, 2017 Recommendation (# 56) that the Defendants' Motion to Dismiss (# 46) be granted.


         The Court summarizes the pertinent allegations here and elaborates as necessary in its discussion. Defendant Boulder Brands, Inc. (“Boulder”) is a manufacturer and distributor of food products primarily sold at retail. Since 2007, it has sold a variety of margarines, oils, spreads, and related products under the trade name of “Smart Balance.” Until 2011, Smart Balance products were Boulder's primary source of revenue, account for 70% or more of its net sales. In 2012, however, Boulder acquired several other subsidiaries, including entities that produced various baked goods and other products, many of which were pitched at the gluten-free market, under trade names such as “Udi's” and “EVOL.” Those and similar products are generally referred to as Boulder's “Natural” unit (as opposed to the Smart Balance unit). Since that time, products in the Natural unit have become more prominent sources of Boulder's revenue, and Smart Balance sales dropped to about 30% of Boulder's overall revenues.

         Plaintiff OPPRS, on behalf of a putative class of Boulder shareholders, alleges that Boulder made numerous false statements and misleading omissions when speaking about its business from December 23, 2013 to October 22, 2014.[2] The alleged false statements and omissions can generally be grouped into two categories. First, OPPRS alleges that Boulder mislead investors during 2014 by promising to shore up sales in the high-margin Smart Balance unit. OPPRS alleges that, in actuality, Boulder was knowingly diverting promotional spending and attention away from Smart Balance products in favor of the lower-margin products in the Natural unit, and focusing more on emerging promotional channels like social media instead of the traditional television and coupon advertising that Boulder had previously relied upon to reach Smart Balance's older customer demographics. OPPRS alleges that the Boulder “effectively abandoning Smart Balance” in 2014 was partly the cause of Boulder falling short of third-quarter 2014 revenue expectations, a fact that was revealed to the market on October 23, 2014, causing Boulder's stock price to drop by more than 25%.

         The second category of false statements is somewhat more diffuse, but centers around Boulder's efforts to incorporate the acquisition of popular brands like Udi's and EVOL into its existing business. Demand for these products apparently surged in 2014, such that Boulder's Range Street manufacturing facilities for them were forced to run above the maximum capacity for extended periods of time. While this might ordinarily be cause for celebration, OPPRS alleges that this caused Boulder to mis-allocate its resources, such that an uneven mix of products were produced. The demands also exposed flaws in Boulder's Oneida Street warehouse, which was ill-equipped to handle both the increased demand for delivery of raw materials to the manufacturing facilities and the storage and distribution of finished products. The net result of these difficulties was that Boulder sometimes failed to fully satisfy orders being placed by its customers, a practice known as “shorting.” Boulder has also experienced unspecified difficulties with its customer service team in 2013 and was in the midst of attempting to fix those problems when the manufacturing and warehousing issues arose in 2014, which OPPRS alleges further exacerbated the problem. Cumulatively, these problems also affected Boulder's revenues in the third quarter and contributed to the disappointing third-quarter 2014 results. OPPRS alleges that Boulder failed to disclose the various difficulties it was having, including failing to disclose that its antiquated warehouse and absence of a modern inventory system. As a result, investors were mislead into accepting Boulder's rosy profit expectations and promises during 2014 to focus its efforts on certain projects and improvements that would improve Boulder's profit margins, projects that Boulder had declared were “low-hanging fruit” that could be quickly accomplished.

         Based on these allegations, OPPRS asserts claims for: (i) securities fraud under Section 10(b) of the Exchange Act, 15 U.S.C. § 78j; and (ii) control person liability against the individual Defendants pursuant to Section 20(a) of the Exchange Act, 15 U.S.C. § 78t. The Court ultimately consolidated several actions brought by Boulder shareholders into this case and appointed OPPRS as the lead Plaintiff.

         The Defendants moved (# 46) to dismiss OPPRS' claims pursuant to Fed.R.Civ.P. 12(b)(6). The Court referred that motion to the Magistrate Judge for a Recommendation. On March 1, 2017, the Magistrate Judge recommended (# 56) that the Defendants' motion be granted. Specifically, the Magistrate Judge found: (i) OPPRS' Amended Complaint was an improper “puzzle pleading” in violation of Fed.R.Civ.P. 9, although the Magistrate Judge declined to recommend dismissal based simply on this defect; (ii) that most of the statements by Boulder alleged by OPPRS to be misleading were forward-looking statements (although a handful were mixed statements of present fact and future projection); (iii) all of the statements in question were accompanied by sufficient cautionary statements, and thus non-actionable under the PSLRA's “safe harbor” provision, 15 U.S.C. § 78u-5; (iv) OPPRS failed to plead facts showing that the person making any of the statements knew them to be false at the time they were made; (v) Boulder's statements regarding its focus on Smart Balance's profitability were “non-actionable puffery” and did not create any duty to disclose additional information; (vi) Boulder's statements about its customer service improvements were accurate statements of historical successes and thus non-actionable; (vii) OPPRS failed to plead facts supporting its contentions that the Individual Defendants made false certifications under the Sarbanes-Oxley Act; and (viii) OPPRS failed to adequately plead facts supporting its contention that the Defendants violated “Item 303.” 17 C.F.R. § 229.303(a)(3)(ii).

         OPPRS filed timely Objections (# 59), arguing: (i) the Magistrate Judge failed to account for the handful of statements that she determined were not forward-looking, and that those statements alone would be sufficient to support the securities fraud claims; (ii) the Magistrate Judge did not draw all reasonable inferences in OPPRS' favor when interpreting the significance of post-October 22, 2014 statements, as such statements (when supported by favorable inferences) would demonstrate the falsity and misleading nature of Boulder's statements during 2014; (iii) Boulder's statements concerning its margin-improvement projects were not protected forward-looking because they omitted non-favorable information known to Boulder, namely the warehousing and production difficulties that were occurring; (iv) the Magistrate Judge erred in finding that Boulder's “boilerplate” cautionary disclaimers were sufficient to bring Boulder within the “safe harbor” provision; and (v) the statements concerning Smart Balance were materially misleading.


         A. Standard of review

         The Court reviews the objected-to portions of the Recommendation de novo. Fed.R.Civ.P. 72(b).

         OPPRS has not disagreed with the general standards the Magistrate Judge applied, and the Court adopts them here. Under Fed.R.Civ.P. 12(b)(6), the Court must accept all well-pleaded allegations in the Amended Complaint as true and view those allegations in the light most favorable to the nonmoving party. Stidham v. Peace Officer Standards & Training, 265 F.3d 1144, 1149 (10th Cir. 2001) (quoting Sutton v. Utah State Sch. for the Deaf & Blind, 173 F.3d 1226, 1236 (10th Cir. 1999)). The Court must limit its consideration to the four corners of the Amended Complaint, any documents attached thereto, and any external documents that are referenced in the Amended Complaint and whose accuracy is not in dispute. Oxendine v. Kaplan, 241 F.3d 1272, 1275 (10th Cir. 2001); Jacobsen v. Deseret Book Co., 287 F.3d 936, 941 (10th Cir. 2002); Dean Witter Reynolds, Inc. v. Howsam, 261 F.3d 956, 961 (10th Cir. 2001). A claim is subject to dismissal if it fails to state a claim for relief that is “plausible on its face, ” but the Court must discard allegations that are merely legal conclusions or “threadbare recitals of the elements of a cause of action, supported by mere conclusory statements.” Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009).

         Because OPPRS asserts claims of fraud subject to the Private Securities Litigation Reform Act (“PSLRA”), it bears an especially heavy pleading burden. It must satisfy Fed.R.Civ.P. 9(b)'s requirement that acts of fraud must be pled with particularity. Moreover, it must satisfy the pleading requirements of the PSLRA, which require it to: (i) specify each statement alleged to have been misleading; (ii) explain the reasons why the statement is misleading; and (iii) if the allegation is made upon information and belief, state the factual basis for that belief. 15 U.S.C. § 78u-4(b)(1); In re Gold Resource Corporation Securities Litig., 776 F.3d 1103, 1108-09 (10th Cir. 2015). Allegations of scienter are subject to even more requirements: OPPRS cannot allege scienter generally, and must state particular facts giving rise to a strong inference of scienter with respect to each act or omission, taking into account plausible, non-culpable alternative explanations for a defendant's conduct along with inferences that favor the plaintiff. Id. at 1109; 15 U.S.C. § 78u-4(b)(2).

         B. Merits

         To state a claim for securities fraud, OPPRS must show: (i) that a defendant made a representation of fact that was untrue or misleading, or failed to state additional material facts that were necessary to make a statement by the defendant not misleading; (ii) the statement or omission was made in conjunction with the sale of securities; (iii) the defendant acted with scienter, meaning the intent to defraud or with reckelessness; (iv) that OPPRS relied upon the misleading ...

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