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Martin v. GNC Holdings, Inc.

United States District Court, W.D. Pennsylvania

September 8, 2017

JAMES MARTIN, Individually and on Behalf of All Others Similarly Situated, Plaintiff,


          Mark R. Hornak, United States District Judge.

         Presently before the Court is a motion by Defendants GNC Holdings, Inc. ("GNC"), Joseph M. Fortunato, Michael M. Nuzzo, Andrew S. Drexler, Michael G. Archbold, Tricia K. Toliver and Patrick K. Fortune (collectively, the "Individual Defendants")[1] to dismiss Lead Plaintiff KBC Asset Management NV's ("Plaintiff) Amended Class Action Complaint for Violations of the Federal Securities Laws (the "Amended Complaint") (ECF No. 45) pursuant to the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4 (the "PSLRA") and Federal Rules of Civil Procedure 9(b) and 12(b)(6) (the "Motion to Dismiss") (ECF No. 53). In this class action securities litigation, Plaintiff alleges that it and other similarly situated investors (the "Class") purchased GNC's stock between November 16, 2011, and October 28, 2015 (the "Class Period"), and that GNC and the Individual Defendants have violated Section 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, as a result of various claimed misrepresentations and omissions by Defendants during the Class Period. Plaintiff also claims that the Individual Defendants have violated Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). Defendants have moved to dismiss the Amended Complaint on the basis that Plaintiff has failed to satisfy the heightened pleading burden that applies to securities fraud claims under the PSLRA. For the reasons set forth below, Defendants' Motion to Dismiss will be granted, and the Amended Complaint will be dismissed, without prejudice.

         I. BACKGROUND

         For purposes of ruling on the pending Motion to Dismiss, the Court will accept the facts as alleged in the Amended Complaint as true and review it in its entirety.[2] In reviewing the Amended Complaint, the Court notes that Plaintiff must satisfy the heightened pleading requirements established by the PSLRA as discussed in Part II, infra.

         On January 20, 2016, the Court appointed KBC to serve as lead plaintiff in this case. See ECF No. 36. KBC, based in Brussels, Belgium, is a large institutional investment company that provides financial and investment services. Am. Compl. ¶ 18. KBC's funds purchased shares of GNC's common stock during the Class Period, and KBC claims to have suffered damages as a result of the securities law violations alleged in the Amended Complaint. Id.

         GNC, headquartered in Pittsburgh, Pennsylvania, is a retailer of various health and wellness products, including vitamins, minerals, herbal supplements, diet products and sports nutrition products. Am. Compl. ¶¶ 19, 20. GNC manufactures and merchandises more than 2, 000 different products, including its own proprietary-branded products and products purchased from third-party vendors. Id. ¶ 28; Decl. of Koji Fukumura in Supp. of Defs.' Mot. to Dismiss (ECF No. 55), Ex. 2 at 6.

         Nuzzo served as GNC's Executive Vice President and CFO from 2008 until June 13, 2014. Am. Compl. ¶ 22. Fortunato served as GNC's President, CEO and a member of its Board of Directors from the beginning of the Class Period through August 4, 2014. Id. ¶ 21. Archbold succeeded Fortunato as GNC's CEO and serves as a member of its Board of Directors. Id. ¶ 24. Plaintiff alleges that Fortunato, Nuzzo and Archbold made false and misleading statements during the Class Period on GNC's scheduled earnings calls, at investor-related presentations and by signing GNC's Form 10-K filed with the Securities and Exchange Commission ("SEC") and executing certifications pursuant to the Sarbanes-Oxley Act ("SOX certifications").[3] Id. ¶¶ 21, 22, 24. As set out below, Plaintiffs claim of securities fraud revolves around alleged misrepresentations and omissions by GNC and the Individual Defendants regarding what Plaintiff refers to as key drivers of GNC's success - its product quality and its purported compliance with federal regulations. Id. ¶ 1.

         According to Plaintiff, GNC's success was threatened by a scandal that emerged in the supplement industry late in 2011 involving a potentially dangerous ingredient called dimethylamylamine ("DMAA"). Am. Compl. ¶ 5. On April 27, 2012, the Food and Drug Administration ("FDA") sent a letter to ten companies, including GNC, advising that certain dietary and sports nutrition products contained DMAA and warning to stop selling those products. Id. ¶¶ 5, 51. After that, GNC began selling reformulated DMAA products and assured investors that the FDA's action would not affect its sales. Id. ¶ 52. However, Plaintiff alleges that the reformulated products contained two potentially dangerous ingredients: picamilon[4] or P-Methylphenethylamine ("BMPEA").[5] Id. ¶¶9, 56.

         Regarding picamilon, Plaintiff alleges that Jennifer Jakell ("Jakell"), who was GNC's Senior Project Manager for Technical Research, maintained a file with documents translated from Russian indicating that it "is a derivative of the gamma-amino-butyric acid (GABA) and nicotinic acid" and it had "proven an effective medicinal treatment for patients with disorders of a neurotic level." Am. Compl. ¶¶ 37, 70. In May, 2007, Jakell made a notation in the file stating "[n]o NDI that I could find, " apparently referring to the fact that a "New Dietary Ingredient" submission was not tendered to the FDA for picamilon. Id. ¶¶ 42, 72. Again in April 2014, Jakell wrote in the file "still no NDI found." Id. ¶ 72.

         Subsequently, on September 28, 2015, Dr. Cara Welch of the FDA stated in a sworn declaration that "picamilon does not qualify as a dietary ingredient" under the Federal Food, Drug and Cosmetics Act of 1938, as amended by the Dietary Supplement Health and Education Act of 1994 (collectively, the "FDC Act").[6] Am. Compl. ¶¶ 42, 76. GNC had ceased selling products containing picamilon on September 21, 2015, one week prior to Dr. Welch's declaration. Id. ¶ 81.

         Plaintiff also alleges that during the Class Period, GNC sold sports nutrition and weight-loss products that contained BMPEA or acacia rigidula[7] spiked with BMPEA, despite knowing by the fall of 2013 that BMPEA was not a lawful dietary ingredient. Am. Compl. ¶¶ 82, 83. FDA scientists published an article about the use of acacia rigidula in weight-loss products and observed that some dietary supplements which supposedly contained acacia rigidula actually contained BMPEA, despite no evidence that BMPEA was a lawful dietary ingredient (hereinafter, "the Acacia Rigidula Study"). Id. ¶¶ 83, 84. According to Plaintiff, on November 2, 2013, Jakell received an email from a scientific research website with a link to the Acacia Rigidula Study. Id. ¶ 84. Then, on November 19, 2013, USA Today published an article about the Acacia Rigidula Study, which stated that "scientists have found a 'non-natural' amphetamine-like compound in dietary supplements" (hereinafter, the "USA Today article"). Id. ¶ 85. Jakell allegedly emailed the USA Today article to approximately 100 people at GNC's corporate headquarters, including Nuzzo. Id.

         Plaintiff alleges that despite the Acacia Rigidula Study and the USA Today article, GNC continued to sell products that were labeled as containing BMPEA or acacia rigidula, which could have been spiked with BMPEA. Am. Compl. ¶¶ 89-91. However, on April 23, 2015, when the FDA formally announced that BMPEA did not meet the definition of a dietary ingredient, GNC stopped selling products with BMPEA and acacia rigidula. Id. ¶ 95.

         Several months later on October 22, 2015, the Oregon Attorney General announced the filing of a civil action against GNC for selling products containing picamilon, BMPEA and acacia rigidula spiked with BMPEA (the "Oregon AG Complaint"). Am. Compl. ¶¶ 99, 102, 103. When that announcement was made, the price of GNC's common stock fell from $40.38 per share to a closing price of $34.50 per share. Id. ¶ 108. One week later on October 29, 2015, GNC issued a press release announcing that it had reduced its 2015 earnings per share outlook from $3.00-$3.10 per share to $2.85-$2.90 per share. Id. ¶ 109. That day, GNC's common stock closed at $28.24 per share, down from the prior day's closing price of $38.64 per share. Id. ¶ 111.

         Plaintiff alleges that Defendants made false and misleading statements during the Class Period regarding the following: GNC's quality controls and the purity of its products, Am. Compl. ¶¶ 112, 114, 116, 118, 144, 148, 152, GNC's ability to manage regulatory risk, id ¶¶ 119, 123, 137, and GNC's ability to offset any losses related to the removal of DMAA from its products. Id. ¶¶ 127, 129, 133, 140. According to Plaintiff, the false and misleading statements appeared in a press release, on GNCs website and in its Form 10-K filed with the SEC for fiscal years 2011, 2012, 2013 and 2014. Id. ¶¶l 12, 114, 116, 118, 148. Fortunato, Nuzzo and Archbold also purportedly made false and misleading statements when they spoke on earnings conference calls and at investor-related presentations. Id. ¶¶ 123, 127, 129, 133, 137, 140, 144, 152. Plaintiff asserts that following some of these statements, GNC's stock price rose and/or analysts responded favorably to the information provided by GNC. Id. ¶¶ 132, 135, 136, 139, 142, 146, 151.

         Plaintiff further alleges that the Individual Defendants made the misstatements knowingly or with reckless disregard of the fact that they were false or misleading. Am. Compl. ¶¶ 154-156. According to Plaintiff, several factors demonstrate Defendants' knowledge and/or deliberate recklessness. As a first example, Plaintiff cites GNC's "close connection" with its vendors and the manner in which GNC structured its vendor agreements. 14. ¶¶ 159-168. Regarding GNC's close working relationship with its vendors, a confidential witness identified as GNC's Associate Category Merchandising Manager for Sports Nutrition from 2010-2015 (the "Associate Category Manager") explained that GNC used a computerized data management system called "On Base" to track every third-party product GNC marketed.[8] Id. ¶¶ 36, 161. Because of that technology, Plaintiff asserts that Defendants would have had ingredient information for the third-party products, including knowledge of whether they contained picamilon or BMPEA. Id. ¶¶ 159, 161. Despite the availability of such information, another confidential witness who worked as a GNC Merchandise Manager commented that GNC "would buy anything from any vendor." Id. ¶ 168. According to Plaintiff, GNC was willing to "push the envelope" because its vendor contracts contained a guarantee that purported to indemnify GNC for any financial ramifications if a vendor-supplied product violated FDA or local regulations. Id.

         Plaintiff further alleges that the Individual Defendants' knowledge and/or recklessness is demonstrated by the fact that they had access to information about product recalls and regulatory concerns related to certain products. Am. Compl. ¶¶ 169, 175. A confidential witness identified as GNC's Director of International Business Operations and a Regional Sales Director from 2002 -2015 (the "Sales Director") recalled that Fortunato held weekly meetings with senior executives every Monday, referred to as "Bloody Monday" meetings, to discuss product and other issues. Id. ¶¶ 37, 170. According to the Sales Director, Fortunato "wanted a briefing on almost everything" and stressed that GNC's executives would have known about serious product issues because there was "paranoia" among them. Id. ¶ 171. The Sales Director recalled that Jakell conveyed relevant product information to appropriate recipients within GNC, such as the USA Today article discussing the Acacia Rigidula Study. Id. ¶¶ 172-173.

         The Sales Director also indicated that GNC held in-person meetings with its vendors once or twice a year purportedly to discuss current product performance and new product development. Am. Compl. ¶ 183. According to Plaintiff, those meetings highlight the central role vendors played in GNC's operations, and the Individual Defendants should be charged with knowledge concerning their products because third-party sports nutrition products represent a core operation of GNC. Id. ¶¶ 181-182, 183, 185.

         Plaintiff additionally claims that Fortunato's and Nuzzo's insider sales of GNC stock during the Class Period are probative of their motive to commit fraud. Am. Compl. ¶ 186. Fortunato purportedly sold 2, 076, 275 shares of GNC stock during the Class Period for proceeds of $77, 895, 035, while Nuzzo sold 260, 000 shares for proceeds of $10, 458, 803. Id. ¶¶ 187, 188. According to Plaintiff, Fortunato's and Nuzzo's 10b5-l trading plans do not shield them from accusations of insider trading. Id. ¶¶ 189-199.

         Finally, Plaintiff alleges that Fortunato, Nuzzo and Archbold signed GNC's false and misleading SOX certifications during the Class Period, which further evidences their knowledge or reckless disregard of the claimed material misrepresentations. Am. Compl. ¶¶ 200-201, 206. Plaintiff asserts that the SOX certifications were materially false and misleading when executed because these Individual Defendants were aware of, or recklessly disregarded, severe deficiencies in GNC's controls from a financial and operational perspective, namely the promotion and sale of products containing picamilon and BMPEA. Id. ¶¶ 201, 206.

         As a result of Defendants' alleged material false and misleading statements and omissions during the Class Period, Plaintiff maintains that GNC common stock traded at artificially inflated levels, but the stock price declined when the falsity of the misstatements and the concealed information were revealed. Am. Compl. ¶¶ 209, 210. This supposedly occurred when the Oregon AG Complaint was filed on October 22, 2015, and on October 29, 2015, when GNC reported lower earnings expectations for 2015, which analysts purportedly attributed, in part, to the Oregon AG Complaint. Id. ¶¶ 212-214. Plaintiff alleges that members of the Class suffered economic loss and damages as a result of their purchases of GNC common stock at artificially inflated prices during the Class Period. Id. ¶¶ 208, 211, 216.


         Section 10(b) of the Exchange Act makes it unlawful for any person "[t]o use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations ..." prescribed by the SEC. 15 U.S.C. § 78j(b). To implement § 10(b), the SEC promulgated Rule 10b-5, which makes it unlawful "[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading ... in connection with the purchase or sale of any security. " 17 C.F.R. § 240.10b-5(b).

         The Supreme Court has implied a private cause of action from the text and purpose of § 10(b) to investors who have been injured by its violation. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 318 (2007). To state a securities fraud claim under § 10(b), a plaintiff must allege the following elements: (1) a material misrepresentation or omission, (2) scienter, (3) a connection between the misrepresentation or omission and the purchase or sale of a security, (4) reliance upon the misrepresentation or omission, (5) economic loss, and (6) loss causation. Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005); City of Edinburgh Council v. Pfizer. Inc.. 754 F.3d 159, 167 (3dCir. 2014).

         In addition to pleading the foregoing elements, the PSLRA imposes two distinct, heightened pleading requirements that must be satisfied for a complaint to survive a motion to dismiss.[9] See Institutional Inv'rs Group v. Avaya. Inc., 564 F.3d 242, 252 (3d Cir. 2009). First, the PSLRA requires that "the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15U.S.C. § 78u-4(b)(1). Second, the complaint must, "with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2)(A). That state of mind is "scienter, " which is defined as a "mental state embracing intent to deceive, manipulate, or defraud" and it requires knowledge or recklessness. Avaya, 564 F.3d at 252 (citations omitted). Notably, both provisions require facts to be pled with particularity.[10] This standard "requires plaintiffs to plead the who, what, when, where and how: the first paragraph of any newspaper story." Id. at 253 (citation omitted).


         In considering a motion to dismiss pursuant to Rule 12(b)(6), the court is to "accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief." Phillips v. County of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008) (citation omitted). Ordinarily, to survive a motion to dismiss, a complaint must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 556).

         In addition to the traditional Rule 12(b)(6) standard, the Supreme Court has prescribed a three-step process for considering a motion to dismiss in a § 10(b) case. See Tellabs, 551 U.S. at 322-23. First, as with any motion to dismiss, the court must "accept all factual allegations in the complaint as true." Id. at 322. Second, the court must "consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice." Id. On this point, the inquiry is "whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard." Id. at 323 (emphasis in original). Third, "in determining whether the pleaded facts give rise to a 'strong' inference of scienter, the court must take into account plausible opposing inferences." Id.

         Guided by the foregoing legal principles, the Court finds that Plaintiffs Amended Complaint fails to state a claim for securities fraud under § 10(b) of the Exchange Act and a derivate claim under § 20(a) for the reasons we explain below.

         V. DISCUSSION

         Plaintiff asserts in Count One of the Amended Complaint that GNC and the Individual Defendants violated § 10(b) of the Exchange Act and Rule 10b-5 by making false statements of material fact and/or omitting to state material facts, which deceived the investing public, artificially inflated GNC's common stock and caused Plaintiff and members of the Class to purchase GNC's common stock at artificially inflated prices. See Am. Compl. ¶¶ 238-242. Plaintiff claims in Count Two that the Individual Defendants are liable as controlling persons of GNC in violation of § 20(a) of the Exchange Act. Id. ¶¶ 245-250.

         Defendants argue that Plaintiffs § 10(b) claim must be dismissed because: (1) Plaintiff fails to plead falsity with the requisite particularity; (2) Plaintiff fails to plead facts that raise a strong inference of scienter; and (3) Plaintiff fails to plead loss causation because there has been no corrective disclosure. The Individual Defendants also argue that Plaintiffs failure to allege a primary § 10(b) violation is fatal to its control person claim under § 20(a), thus the § 20(a) claim must be dismissed as well.

         Defendants are correct, in part. Although Plaintiff has pleaded several actionable misleading statements, Plaintiff has failed to adequately plead scienter and loss causation. For those reasons, the Amended Complaint must be dismissed.

         A. Although Most Challenged Statements are Non-Actionable Puffery or Protected by the Safe Harbor, the Amended Complaint Adequately Pleads Several Material Misrepresentations.

         The first element of a securities fraud claim under § 10(b) is a material misrepresentation or omission. Under the heightened pleading standard of the PSLRA, a plaintiff first must specify each allegedly misleading statement, why the statement was misleading, and, if an allegation is made on information and belief, all facts supporting that belief with particularity. 15 U.S.C. § 78u-4(b)(1).

         As required, Plaintiff has identified the allegedly misleading statements made by Defendants. See Am. Compl.¶¶ 112, 114, 116, 118, 119, 123, 127, 129, 133, 137, 140, 144, 148, 152. Plaintiff also has asserted the reasons why the statements were false or misleading. See Id. ¶¶ 113, 115, 117, 120, 124, 128, 130-131, 134, 138, 141, 145, 150, 153. Defendants argue, however, that the allegedly misleading statements and omissions are not actionable because they are immaterial, either as non-actionable puffery and/or as forward looking statements protected by the PSLRA's safe harbor provision. See 15 U.S.C. §78u-5(c)(1). Thus, we next address whether any of the challenged statements are actionable as material misrepresentations.

         To prevail on a § 10(b) claim, a plaintiff must show that the defendant made a misleading statement or omission as to a material fact. Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 38 (2011) (citing Basic Inc. v. Levinson, 485 U.S. 224, 238 (1988)). A misrepresentation or omission "is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to [act]." TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). The Supreme Court has held that to satisfy the materiality requirement "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." Basic, 485 U.S. at 231-32 (quoting TSC Industries, 426 U.S. at 449).

         The Third Circuit has held that the question of materiality "typically presents a mixed question of law and fact, " which traditionally has been viewed as appropriate for the trier of fact. Semerenko v. Cendant Corp., 223 F.3d 165, 178 (3d Cir. 2000). However, "... complaints alleging securities fraud often contain claims of omissions or misstatements that are obviously so unimportant that courts can rule them immaterial as a matter of law at the pleading stage." In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997). Because some of the challenged statements fall into this latter category, the Court can rule on the materiality issue at this juncture.

         1. Certain Challenged Statements Constitute Non-Actionable Puffery.

         As an initial matter, the Court agrees with Defendants that some of the challenged statements are not material as defined above, but rather constitute non-actionable puffery. "Material representations must be contrasted with statements of subjective analysis or extrapolations, such as opinions, motives and intentions, or general statements of optimism...." EP Medsystems, Inc. v. EchoCath. Inc.. 235 F.3d 865, 872 (3d Cir. 2000). Such statements "constitute no more than 'puffery' and are understood by reasonable investors as such." Burlington Coat Factory, 114 F.3d at 1428 n. 14. In other words, statements are deemed to be puffery if they "would not alter the total mix of relevant information available to a reasonable investor." EP Medsystems, 235 F.3d at 872.

         The challenged statements set forth in ¶¶ 112, 114, 116, 118, 144 and 148 of the Amended Complaint, which relate to GNC's quality controls and product purity, essentially tout GNC as an "industry leader" who maintains "high standards" or "sets the [industry] standard, " or otherwise reflect GNC's optimism about its products. In addition, the statement in ¶ 137 that GNC's number one priority is to protect the customer is vague and aspirational. None of those general statements of optimism would alter the total mix of information available to a reasonable investor, nor is there a substantial likelihood that a reasonable investor would deem them important in deciding how to act. ...

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