United States District Court, W.D. Pennsylvania
JAMES MARTIN, Individually and on Behalf of All Others Similarly Situated, Plaintiff,
GNC HOLDINGS, INC., JOSEPH M. FORTUNATO, MICHAEL M. NUZZO, ANDREW S. DREXLER, MICHAEL G. ARCHBOLD, TRICIA K. TOLIVER, and PATRICK K. FORTUNE, Defendants.
R. Hornak, United States District Judge.
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") 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.
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. 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.
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.
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.
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"). 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.
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 or P-Methylphenethylamine
("BMPEA"). Id. ¶¶9, 56.
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.
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"). 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.
also alleges that during the Class Period, GNC sold sports
nutrition and weight-loss products that contained BMPEA or
acacia rigidula 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.
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.
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.
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.
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. 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.
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.
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,
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.
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.
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.
ELEMENTS OF A SECURITIES FRAUD CLAIM
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).
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).
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. 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. 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).
STANDARD OF REVIEW
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).
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.
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
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. ¶¶
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.
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.
Although Most Challenged Statements are Non-Actionable
Puffery or Protected by the Safe Harbor, the Amended
Complaint Adequately Pleads Several Material
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).
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
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).
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.
Certain Challenged Statements Constitute Non-Actionable
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.
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. ...