Ruben Perales v. TerraVia Holdings, Inc. et al

Filing 80

ORDER RE 67 MOTION TO DISMISS. Signed by Judge James Donato on 2/4/2020. (jdlc4S, COURT STAFF) (Filed on 2/4/2020).

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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IN RE TERRAVIA HOLDINGS, INC.
SECURITIES LITIGATION

Case No. 16-cv-06633-JD
ORDER RE MOTION TO DISMISS

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Re: Dkt. No. 67

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United States District Court
Northern District of California

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This is a securities class action against TerraVia Holdings, Inc. (“TerraVia” or

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“Company”), its former CEOs Jonathan S. Wolfson and Apurva S. Mody, and former CFO and

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COO Tyler W. Painter. Plaintiffs, the TerraVia Investor Group, brought suit on behalf of all

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persons or entities who purchased or otherwise acquired TerraVia’s publicly traded securities

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between May 4, 2016 and November 6, 2016, under Sections 10(b) and 20(a) of the Securities

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Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and Securities and Exchange Commission

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Rule 10b-5. Dkt. No. 39 ¶¶ 1, 20. Plaintiffs allege in the consolidated complaint that defendants

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made public statements about the commercial viability of its algae-based food products with

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knowledge of non-public information that rendered those statements false and misleading. See id.

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¶¶ 7-11, 19.

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After TerraVia filed for bankruptcy in August 2017, the case proceeded against Wolfson,

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Mody and Painter. Dkt. Nos. 49, 57. A motion to dismiss filed on behalf of both TerraVia and the

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individual defendants, Dkt. No. 41, was terminated without prejudice to refiling on behalf of the

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individual defendants only. Dkt. No. 64. Defendants moved to dismiss for failure to state a claim,

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citing the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u-4, and

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Federal Rules of Civil Procedure 8, 9(b), and 12(b)(6). Dkt. No. 67. Defendants say the

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complaint should be dismissed because it fails to adequately plead (1) falsity, (2) scienter, and

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(3) loss causation.

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Dismissal is warranted for several claims, but defendants’ statements about the commercial

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viability of their algae food ingredients while they were in possession of adverse non-public

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knowledge are actionable. The heightened pleading requirements under Federal Rule of Civil

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Procedure 9(b) and the PSLRA are satisfied for those statements. Consequently, the motion to

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dismiss is granted and denied in part, and plaintiffs will have an opportunity to amend the

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dismissed claims.
BACKGROUND

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As alleged in the complaint, TerraVia produced and sold food, nutrition and specialty

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Northern District of California

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products developed from algae. Dkt. No. 39 ¶ 2. The company began in 2003 as a biofuel startup

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seeking to develop an algae-based oil that could replace traditional fuel. Id. ¶¶ 3-4, 41-42.

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Despite initial success, the biofuel market “soured,” and the company pivoted to other algae-based

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products in the cosmetics and nutrition industries. Id. ¶¶ 48, 54-55, 58. As early as 2014, the

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company began commercializing its AlgaVia and AlgaWise food ingredient products consisting of

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algae powders and algae-based food oils. Id. ¶¶ 58-61. These ingredients were touted as

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“healthier alternative” sources of protein and lipids, and sold to food manufacturers. Id. ¶ 59. In

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March 2016, the company rebranded as TerraVia and focused primarily on its food and nutrition

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products. Id. ¶¶ 5, 62-66. On August 2, 2017, while this lawsuit was pending, TerraVia filed for

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bankruptcy. Dkt. No. 48.

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Central to the complaint are TerraVia’s partnerships with two food manufacturers that used

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TerraVia’s algae-based products as ingredients: Honey Stinger and Soylent. Honey Stinger used

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TerraVia’s products in its protein chewable tablets. Dkt. No. 39 ¶ 68. In April 2016, Honey

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Stinger recalled its tablets “after customers reported becoming violently ill.” Id. Honey Stinger

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and its third-party manufacturer, Santa Cruz Nutritionals of California (“Santa Cruz”),

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investigated the cause of the illnesses and, by process of elimination, “reached a finding of near-

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certainty that TerraVia’s algae product was the problem.” Id. ¶¶ 72-74, 82. Plaintiffs include

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testimony about the internal investigation from four confidential witnesses employed by Santa
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Cruz, Honey Stinger, and Honey Stinger’s parent corporation. Id. ¶¶ 70-81, 85-89. One of the

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confidential witnesses reported that by May 2016, Honey Stinger had notified TerraVia that its

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“algae ingredient was the cause of the sick customers.” Id. ¶ 82. On June 27, 2016, TerraVia

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responded to Honey Stinger’s notification with a letter acknowledging that “[t]here have been a

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modest number of reports of adverse gastrointestinal (GI) reactions to products containing

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AlgaVia® Protein-Rich Whole Algae, but given all available data on usage they represent a very

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low incidence rate for the total amount of product consumed by the population.” Id. ¶ 83.

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TerraVia did not publicly disclose the letter or any other information about the reports of adverse

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gastrointestinal reactions to its products. Id. ¶¶ 11, 84.

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A similar series of events occurred with Soylent, which manufactures a popular “on-the-go

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food substitute” made from nutrient-rich powder mixes. Id. ¶¶ 90-91. In June 2016, Soylent

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introduced new versions of two of its products using TerraVia’s “whole algal flour and high oleic

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algal oil.” Id. ¶¶ 92-93. In October 2016, Soylent recalled its reformulated Soylent Bar after

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customers reported “a variety of gastrointestinal problems,” including nausea, vomiting, and

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diarrhea. Id. ¶¶ 94-95. On October 27, 2016, Soylent stopped selling its powder drink product

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made from the same formula. Id. ¶ 97. Soylent determined that only customers who consumed its

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products formulated with TerraVia’s algal flour had suffered adverse consequences. Id. ¶¶ 98-99.

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On November 7, 2016, Bloomberg published an article announcing that Soylent had identified

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TerraVia’s algal flour as the cause of the recall, and that it “would be removing algal flour

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altogether from its product formulations.” Id. ¶¶ 13, 125. The same day, TerraVia’s share price

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fell $0.15 per share to close at $1.70, and another $0.20 to close at $1.50 on November 10. Id.

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¶¶ 126-27.

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Plaintiffs allege that, beginning in May 2016, defendants made false or misleading

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statements, and that the revelation of those statements’ falsity in the Bloomberg article caused the

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subsequent stock drop. Id. ¶ 19. Plaintiffs identify eleven allegedly false or misleading

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statements. Dkt. No. 39-1. Ten of these statements were made during TerraVia’s quarterly

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earnings calls in May, August and November 2016, and in corresponding press releases and SEC

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filings. The eleventh statement appeared on TerraVia’s website throughout the class period.
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Defendants say that the consolidated complaint does not satisfy the heightened pleading

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standards required in a securities fraud action. Specifically, defendants contend that (1) there was

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no duty to disclose any of the omitted information that plaintiffs allege rendered defendants’

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statements misleading; (2) many of the challenged statements are nonactionable; (3) plaintiffs fail

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to allege with particularity facts giving rise to a strong inference of scienter; and (4) the

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Bloomberg article published on November 7, 2016, cannot support plaintiffs’ theory of loss

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causation because it did not reveal a fraud. Dkt. No. 67.
DISCUSSION

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I.

Legal Standards
Well-established standards govern this motion to dismiss. To comply with the pleading

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Northern District of California

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requirements of Federal Rule of Civil Procedure 8(a)(2) and survive a Rule 12(b)(6) motion to

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dismiss, a plaintiff must allege “enough facts to state a claim to relief that is plausible on its face.”

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Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim has facial plausibility when the

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pleaded “factual content that allows the court to draw the reasonable inference that the defendant

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is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing

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Twombly, 550 U.S. at 556). In evaluating a motion to dismiss, the Court assumes that the

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plaintiffs’ allegations are true and draws all reasonable inferences in their favor. Usher v. City of

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Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). However, the Court need not “accept as true

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allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable

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inferences.” In re Gilead Sciences Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008) (internal

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quotation marks omitted) (quoting Sprewell v. Golden State Warriors, 226 F.3d 979, 988 (9th

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Cir.), amended on other grounds, 275 F.3d 1187 (9th Cir. 2001)).

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Additional requirements apply because this is a securities fraud action. The circumstances

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constituting the alleged fraud must be stated with particularity under Federal Rule of Civil

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Procedure 9(b). See Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 604 (9th Cir.

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2014). In addition, pursuant to the PSLRA, the complaint must “specify each statement alleged to

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have been misleading, the reason or reasons why the statement is misleading, and, if an allegation

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regarding the statement or omission is made on information and belief, the complaint shall state
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with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). For each

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alleged misstatement or omission, the complaint must also “state with particularity facts giving

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rise to a strong inference that the defendant acted with the required state of mind.” Id.

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§ 78u-4(b)(2)(A).
“To plead a claim under section 10(b) and Rule 10b-5, [plaintiffs] must allege: (1) a

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material misrepresentation or omission; (2) scienter; (3) a connection between the

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misrepresentation or omission and the purchase or sale of a security; (4) reliance; (5) economic

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loss; and (6) loss causation.” Or. Pub. Emps. Ret. Fund, 774 F.3d at 603 (citing Stoneridge Inv.

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Partners v. Scientific-Atlanta, Inc., 552 U.S. 148, 157 (2008)). Here, defendants do not contest
elements (3) through (5), and so the Court focuses on whether plaintiffs have adequately pled

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Northern District of California

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falsity, scienter and loss causation.

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II.

Section 10(b) Claim

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A.

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Plaintiffs challenge eleven statements as materially false or misleading. Dkt. No. 39-1.

Misrepresentations or Omissions

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Plaintiffs rely primarily on an omissions theory of liability, arguing that TerraVia “failed to

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disclose” that its “algal products caused gastrointestinal distress, including nausea and vomiting,”

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and the failure to disclose these “aforementioned symptoms” rendered misleading all of

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TerraVia’s statements about the health benefits and commercial viability of its products. See id.

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Defendants argue that TerraVia did not have a duty to disclose any reports of gastrointestinal

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distress, and that the challenged statements are not false because they are “accurate statements of

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historical fact” or are otherwise not actionable because they amount to “inherently subjective

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puffing.” Dkt. No. 67 at 6, 10.

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Plaintiffs’ general omissions theory and TerraVia’s duty to disclose

Plaintiffs argue that all of TerraVia’s statements were rendered misleading because

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TerraVia failed to disclose the reports that its products had caused gastrointestinal distress. Dkt.

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No. 39-1; see also Dkt. No. 70 at 4 (“Defendants made a series of materially false and misleading

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statements to conceal their then-existing knowledge that their algae products were known to cause

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GI distress among certain individuals.” (emphasis added)). Section 10(b) and Rule 10b-5(b) “do
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not create an affirmative duty to disclose any and all material information.” Matrixx Initiatives,

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Inc. v. Siracusano, 563 U.S. 27, 44 (2011). Federal securities laws and regulations “prohibit only

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misleading and untrue statements, not statements that are incomplete.” In re Rigel Pharms., Inc.

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Sec. Litig., 697 F.3d 869, 880 n.8 (9th Cir. 2012). Statements “‘cannot be considered in isolation,’

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but must be viewed ‘in the context of their total presentation.’” See Casella v. Webb, 883 F.2d

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805, 808 (9th Cir. 1989) (quoting Hughes v. Dempsey-Tegeler & Co., Inc., 534 F.2d 156, 176 (9th

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Cir. 1976)); see also Huang v. Avalanche Biotechnologies, Inc., No. 15-CV-03185-JD, 2016 WL

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6524401, at *4 (N.D. Cal. Nov. 3, 2016). TerraVia’s failure to disclose reports of adverse

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gastrointestinal reactions and the associated recalls, without more, cannot sustain plaintiffs’ fraud

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claims. But these omissions provide context that renders some of the other challenged statements

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United States District Court
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materially misleading.

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Materially misleading omissions related to the recalled products

While defendants were not under an affirmative duty to disclose the status of TerraVia’s

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partnerships with Honey Stinger and Soylent, once they chose to publicly tout those partnerships,

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“they were bound to do so in a manner that wouldn’t mislead investors.” Berson v. Applied Signal

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Tech., Inc., 527 F.3d 982, 987 (9th Cir. 2008); see also Matrixx, 563 U.S. at 45 (“[C]ompanies can

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control what they have to disclose . . . by controlling what they say to the market.”). Treating

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plaintiffs’ allegations as true for purposes of the motion to dismiss, the Court focuses on whether

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the challenged statements were made misleading as a result of the failure to disclose the reports of

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adverse gastrointestinal reactions related to the Honey Stinger recall and the Honey Stinger recall

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itself.

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A statement or omission is actionably false if it creates “an impression of a state of affairs

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that differs in a material way from the one that actually exists.” Brody v. Transitional Hosps.

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Corp., 280 F.3d 997, 1006 (9th Cir. 2002). Even if not objectively false, a statement “may be

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misleading if it omits material information.” Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988,

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1008-09 (9th Cir. 2018), cert. denied, 139 S.Ct. 2615 (2019). In these circumstances, disclosure is

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required when necessary to make “statements made, in light of the circumstances under which

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they were made, not misleading.” Id. at 1009 (internal quotation marks omitted) (quoting Matrixx,
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563 U.S. at 44). An omission renders a statement materially false “when there is ‘a substantial

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likelihood that the disclosure of the omitted fact would have been viewed by the reasonable

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investor as having significantly altered the “total mix” of information made available.’” Matrixx,

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563 U.S. at 38 (some internal quotation marks omitted) (quoting Basic Inc. v. Levinson, 485 U.S.

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224, 231-32 (1988)).

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Defendants contest the falsity of all challenged statements and omissions by arguing that

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plaintiffs fail to plead facts sufficient to show that ingestion of TerraVia’s algae products was the

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true cause of the reported adverse gastrointestinal reactions. But the misleading nature of the

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challenged statements or omissions does not turn on whether TerraVia’s algae products were
correctly blamed for customers’ gastrointestinal distress. Whether or not TerraVia’s algae

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United States District Court
Northern District of California

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products were in fact to blame, the existence of such reports, and the fact that TerraVia’s partners

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attributed their consumers’ adverse reactions to TerraVia’s algae products, was the sort of

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information that could render TerraVia’s statements regarding the health benefits and commercial

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viability of its algae-based food products misleading.

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A statement made by former CEO Wolfson during the May 4, 2016 quarterly earnings call

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illustrates this point. Wolfson stated that “AlgaVia Whole Algae Protein continues to gain traction

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with producers of protein-rich beverages and snacks like Soylent and Honey Stinger” and “food

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industry innovators, established food leaders, and established personal care leaders are all

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embracing our products.” Dkt. No. 39 ¶ 105 (emphasis modified). Defendants say this statement

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was not contemporaneously false because it was made “before the two incidents that . . . triggered

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a duty to disclose.” Dkt. No. 73 at 5. The complaint alleges otherwise. Honey Stinger was

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recalled in April 2016 and TerraVia was notified “as of May 2016” that Honey Stinger had

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identified the algae ingredient as the cause. Dkt. No. 39 ¶ 82. Because defendants failed to

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disclose the Honey Stinger recall and the reports of adverse gastrointestinal reactions, both the

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explicit reference to TerraVia’s partnership with Honey Stinger and the claim that “all” food

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industry innovators and established food leaders were “embracing” its algae-based products were

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materially misleading. Whether Honey Stinger was correct to identify TerraVia’s algae ingredient

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as the cause of its customers’ gastrointestinal distress does not change the effect that TerraVia’s
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failure to disclose the adverse reports and related recalls had on the total mix of information

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available to investors.

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Defendants suggest that TerraVia made adequate disclosures to investors in its Form 10-Q,

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pointing to the warning that TerraVia faced “an inherent risk of product liability claims and the

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associated adverse publicity.” Dkt. No. 67 at 2, 9; see also Dkt. No. 68-1 at 40. This disclaimer

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does not render the challenged statements regarding TerraVia’s partnerships with the manufacturer

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of Honey Stinger less misleading. The relevant risk regarding the reports of adverse

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gastrointestinal reactions and resulting recalls was not limited to the potential for product liability

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lawsuits.
Plaintiffs also challenge a statement from TerraVia’s website advertising that its products

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Northern District of California

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have “[h]igh protein digestibility.” Dkt. No. 39 ¶ 123. At a minimum, this unqualified statement

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is undermined by the reports that certain consumers suffered gastrointestinal distress and

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digestibility-related symptoms as a result of the recalled Honey Stinger and Soylent products. The

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complaint alleges that these statements appeared on TerraVia’s website throughout the class

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period, including after both the Honey Stinger and Soylent recalls. Id. ¶ 124. As early as the date

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TerraVia received notice of the Honey Stinger recall, and no later than when it received notice of

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the Soylent recall in October 2016, TerraVia’s unqualified statement that its products had “[h]igh

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protein digestibility” was materially misleading.

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The remainder of plaintiffs’ challenged statements are inactionable

The remainder of the claims are dismissed with leave to amend. Plaintiffs lump together

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many challenged statements covering a broad range of topics without stating with particularity

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why each statement is false or misleading. “A litany of alleged false statements, unaccompanied

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by the pleading of specific facts indicating why those statements were false, does not meet” the

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PSLRA’s standard for pleading falsity. Metzler Inv. GMBH v. Corinthian Colleges, Inc., 540 F.3d

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1049, 1070 (9th Cir. 2008) (discussing 15 U.S.C. § 78u-4(b)(1)). Additionally, a number of these

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statements are accurate statements of historical fact related to TerraVia’s business and

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development, while others are clearly opinion statements that are puffery.

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General mission and descriptive statements:

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Plaintiffs proffer a number of TerraVia’s general mission statements, which it repeated

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throughout the class period in its quarterly earnings reports. For example, plaintiffs challenge

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these statements from each of TerraVia’s quarterly press releases and SEC Form 10-Q filings:

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“[T]he Company is well positioned to help meet the growing need of
consumer packaged goods and established and emerging food
manufacturers to improve the nutritional profile of foods without
sacrificing taste . . . .” Dkt. No. 39 ¶ 101 (quoting Q1 2016 Press
Release); see also id. ¶ 110 (same from Q2 2016 Press Release); id.
¶ 117 (same from Q3 2016 Press Release).

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“[T]he Company’s mission is to create products that are truly better
for people and better for the planet.” Id. ¶ 101 (quoting Q1 2016
Press Release); see also id. ¶ 110 (same from Q2 2016 Press
Release); id. ¶ 117 (same from Q3 2016 Press Release).

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“We are commercializing high-value oils and powder products to
companies that primarily use them as ingredients.” Id. ¶ 103
(quoting Q1 2016 Form 10-Q); see also id. ¶ 112 (same from Q2
2016 Form 10-Q); id. ¶ 121 (same from Q3 2016 Form 10-Q).

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“AlgaVia® Lipid Powder (commonly known as whole algae flour)
and AlgaVia® Protein (commonly known as whole algae protein) are
whole algae ingredients that can improve the nutritional profile of
foods and beverages.” Id. ¶ 103 (quoting Q1 2016 Form 10-Q); see
also id. ¶ 112 (same from Q2 2016 Form 10-Q); id. ¶ 121 (same
from Q3 2016 Form 10-Q).

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Plaintiffs say that because TerraVia’s products “caused gastrointestinal distress, including nausea

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and vomiting,” they were not “truly better for people” and therefore the Company’s “business and

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prospects were worse than represented.” Dkt. No. 39 ¶¶ 102, 111, 118. They also contend that

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TerraVia’s “algal products were not ‘high-value’ in that they caused the aforementioned

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symptoms, thus seriously diminishing their commercial viability.” Id. ¶¶ 104, 113, 122.

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Plaintiffs do not allege particularized facts establishing that these generic mission

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statements and product descriptions were false or misleading. A statement is false “when a

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plaintiff points to defendant’s statements that directly contradict what the defendant knew at that

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time.” Khoja, 899 F.3d at 1008. Further, misleading statements “must be capable of objective

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verification.” Id. (internal quotation marks omitted) (quoting Retail Wholesale & Dep’t Store

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Union Local 338 Ret. Fund v. Hewlett-Packard Co., 845 F.3d 1268, 1275 (9th Cir. 2017)).

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Although the feeling of positivity informing TerraVia’s statements can be questioned, the
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complaint does not allege facts showing that TerraVia’s products lacked nutritional value or the

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advertised levels of proteins, lipids or other nutrients. In addition, phrases like “truly better” and

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“high value” are not objectively verifiable statements and are more akin to “inherently subjective

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‘puffing,’” which cannot provide the basis for a securities violation. Or. Pub. Emps. Ret. Fund,

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774 F.3d at 606. Unlike the challenged statements regarding the recalled Honey Stinger products,

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none of these statements are made materially misleading by failing to disclose the reports of

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adverse gastrointestinal reactions or the resulting recall.

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For much the same reason, the challenged statements describing TerraVia’s products as
delivering “true and much-needed innovation,” Dkt. No. 39 ¶ 100; “healthier,” id. ¶¶ 105, 119; or
providing “enhanced nutrition,” id. ¶ 114, are also dismissed. These statements are

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Northern District of California

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generalizations that provide “nothing concrete upon which a plaintiff could reasonably rely.” Or.

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Pub. Emps. Ret. Fund, 774 F.3d at 606.

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Safety related statements:

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Plaintiffs challenge several statements declaring that TerraVia’s products are safe to

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consume. For example, each of TerraVia’s quarterly SEC filings included a statement that its

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products “received an FDA generally recognized as safe (GRAS) ‘No Questions’ letter.” Dkt. No.

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39 ¶ 103 (Q1 2016 Form 10-Q). See also id. ¶ 112 (Q2 2016 Form 10-Q); id. ¶ 121 (Q3 2016

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Form 10-Q). Plaintiffs acknowledge that TerraVia did receive an FDA “No Questions” letter, but

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argue that it was nevertheless misleading for TerraVia to describe its products as safe at a time

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when there were “known reports of GI distress.” Dkt. No. 70 at 7. That is an internally

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inconsistent claim, and no other allegations demonstrate falsity. Consequently, it cannot go

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forward.

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So too for the statements from TerraVia’s website that described its products as providing

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“an array of benefits” and as being “free of known allergens.” Dkt. No. 39 ¶ 123. Plaintiffs

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suggest that such statements are materially false and misleading because “the Company’s algal

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products created allergic reactions in consumers, including the aforementioned symptoms.”

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Id. ¶ 124. But plaintiffs do not allege any facts establishing that the reported incidents of

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gastrointestinal distress were the result of allergic reactions or that TerraVia’s products had no
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potential health benefits. Plaintiffs have not adequately pleaded falsity with respect to these

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statements.

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CEO opinion statements:

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Plaintiffs challenge several statements made by TerraVia executives in quarterly press
releases and during earnings calls, including:

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“We’re excited about the momentum we’re building at a time when
consumer demand for healthier alternatives is on the rise.” Dkt. No.
39 ¶ 100 (TerraVia CEO Wolfson, Q1 2016 Press Release).

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“[W]e believe we have all the pieces in place to deliver on this
opportunity, anchor partnerships, commercial food grade
manufacturing and operation and a portfolio of products that
significantly enhance taste and texture, deliver an improved
nutritional profile and economic sustainability.” Id. ¶ 107 (TerraVia
CFO and COO Painter, Q1 2016 Earnings Call)

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“We are excited about the opportunities we see to serve demand for
healthier and more sustainable food and ingredient alternatives that
are better for the people and the planet.” Id. ¶ 109 (Wolfson, Q2
2016 Press Release).

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“Overall, we’re making strong progress commercially in food and
nutrition.” Id. ¶ 114 (Wolfson, Q2 2016 Earnings Call).

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“Based on what I’ve seen in a very short time, we have the
capability to deliver innovation to the food and nutrition industry for
many years to come.” Id. ¶ 116 (TerraVia CEO Mody, Q3 2016
Press Release).

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Plaintiffs argue that these statements were materially false and misleading because “ingestion of

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the Company’s algal products caused gastrointestinal distress, including nausea and vomiting,” id.

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¶¶ 102, 108, 111, 115, 118; and because TerraVia had “overstated the commercial viability of its

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algal products, and was therefore not making strong progress commercially in food and nutrition,”

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id. ¶ 115.

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All of these statements are opinions or opinions with embedded facts. An opinion

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statement is actionably false only: “(1) if the speaker did not in fact hold the stated belief; or (2) if

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the speaker omitted facts going to the basis for one’s opinion that would make the opinion

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statement misleading to a reasonable person.” West v. Ehealth, Inc., No. 3:15-CV-00360-JD,

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2016 WL 948116, at *8 (N.D. Cal. Mar. 14, 2016) (citing Omnicare, Inc. v. Laborers Dist.

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Council Const. Indus. Pension Fund, 575 U.S. 175, 184-85, 194 (2015)); see also City of
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Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605, 615-16 (9th

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Cir. 2017). For an opinion with an embedded statement of fact to be actionable, plaintiffs must

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allege that the supporting fact the speaker supplied is untrue. City of Dearborn Heights, 856 F.3d

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at 616. Plaintiffs do not allege that any of the speakers did not subjectively believe their

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statements and, to the extent the speakers relied on any embedded factual statements, plaintiffs

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have not pleaded particular facts showing that any such statement of fact is untrue.

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B.

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For each actionable statement or omission, a plaintiff must “state with particularity facts

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Scienter

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); see also West, 2016 WL 948116, at *9. The required state of mind is

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“scienter, ‘a mental state embracing intent to deceive, manipulate, or defraud.’” Tellabs, Inc. v.

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Makor Issues & Rights, Ltd., 551 U.S. 308, 319 (2007) (quoting Ernst & Ernst v. Hochfelder, 425

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U.S. 185, 193-94 & n.12 (1976)). To constitute a “strong inference” of scienter, the inference

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raised by the facts alleged “must be more than merely ‘reasonable’ or ‘permissible,’” it must be

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“cogent and at least as compelling as any opposing inference one could draw.” Id. at 324. The

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relevant inquiry is “whether all of the facts alleged, taken collectively, give rise to a strong

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inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that

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standard.” Id. at 323 (emphasis in original).

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Plaintiffs say that a holistic reading of the complaint establishes scienter because TerraVia

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and the individual defendants withheld knowledge of the reports of adverse gastrointestinal

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reactions and related recalls during their quarterly earnings calls. Dkt. No. 70 at 2, 13.

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Defendants say that plaintiffs fail to allege facts related to the individual defendants’ states of

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mind on the dates of the challenged statements. Dkt. No. 67 at 11. Defendants also contend that

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plaintiffs have not pleaded facts establishing whether and when defendants learned that Honey

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Stinger’s manufacturer believed TerraVia’s product caused its customers’ gastrointestinal distress.

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Id. at 11-12. Defendants argue that, even when viewed holistically, the allegations in the

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complaint show only “that, at worst, TerraVia may have faced a problem.” Id. at 13.

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The complaint in its entirety sufficiently alleges scienter. After the Honey Stinger recall,

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TerraVia was notified “as of May 2016” that its algae ingredient had been identified by Honey

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Stinger’s manufacturer as the cause of its customers’ gastrointestinal distress. Dkt. No. 39 ¶ 82.

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While defendants contest whether Wolfson was notified of the cause of the recall before the May

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4, 2016 earnings call, Dkt. No. 79 (June 21, 2019 H’rg Tr.) at 6:8-14, it appears undisputed that

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defendants would have been notified of such no later than June 27, 2016, when TerraVia issued

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the letter to Honey Stinger stating that it was aware of a “modest number of reports of adverse

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gastrointestinal (GI) reactions to products containing AlgaVia® Protein-Rich Whole Algae.” Dkt.

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No. 39 ¶ 83. Defendants’ failure to disclose even statistically insignificant reports of adverse
effects is properly considered under a holistic analysis of scienter. Matrixx, 563 U.S. at 48-49.

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United States District Court
Northern District of California

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Those reports, coupled with two major product recalls, were more than just “a problem” for

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TerraVia.
Consequently, plaintiffs have sufficiently alleged scienter at the pleadings stage, and the

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Court need not consider plaintiffs’ core operations or financing theories of scienter, see Dkt. No.

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70 at 12-14, the latter of which is premised on factual allegations not found in the complaint.

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C.

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Defendants contend that the Bloomberg article fails to establish loss causation because it

Loss Causation

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does not constitute a corrective disclosure. Dkt. No. 67 at 14-15. To prove loss causation,

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plaintiffs “must demonstrate a causal connection between the deceptive acts that form the basis for

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the claim of securities fraud and the injury suffered” by plaintiffs. Or. Pub. Emps. Ret. Fund, 774

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F.3d at 608 (internal quotation marks omitted) (quoting Ambassador Hotel Co. v. Wei-Chuan Inv.,

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189 F.3d 1017, 1027 (9th Cir. 1999)). Like other elements of a securities fraud action, Rule 9(b)’s

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heightened pleading standards apply to loss causation. Id. at 605. As loss causation is “a variant

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of proximate cause, the ultimate issue is whether” defendants’ statements or omissions, “as

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opposed to some other fact, foreseeably caused” plaintiffs’ loss. Mineworkers’ Pension Scheme v.

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First Solar Inc., 881 F.3d 750, 753 (9th Cir. 2018) (internal quotation marks omitted) (quoting

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Lloyd v. CVB Fin. Corp., 811 F.3d 1200, 1210 (9th Cir. 2016)), cert. denied, 139 S.Ct. 2741

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(2019).
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Plaintiffs have sufficiently alleged a causal connection between defendants’ alleged

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misrepresentations and their loss. The Bloomberg article revealed that TerraVia’s algae

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ingredients had been linked to the cause of the Soylent recall and that TerraVia had previously

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sent a letter to Honey Stinger acknowledging reports of adverse gastrointestinal reactions to its

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ingredients. Dkt. No. 39 ¶¶ 13-14. The article revealed that TerraVia had privately acknowledged

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earlier that year that its ingredients may have caused gastrointestinal reactions such as those

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responsible for the Honey Stinger recall, and that it had failed to disclose that information in its

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public statements regarding the commercial prospects of its food products and its partnerships

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with food manufacturers. Plaintiffs allege that TerraVia’s share prices fell due to these

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disclosures. Id. ¶¶ 126-27.
Defendants say that the Bloomberg article did not reveal a fraud, or even a risk of or

United States District Court
Northern District of California

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potential for fraud. Dkt. No. 67 at 14-15. That goes too far. The Bloomberg article is not akin to

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the mere announcement of an SEC investigation in Loos v. Immersion Corp., 762 F.3d 880, 890 &

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n.3 (9th Cir. 2014), or the unsubstantiated consumer complaints in Curry v. Yelp Inc., 875 F.3d

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1219, 1225-26 (9th Cir. 2017). Rather, the Bloomberg article disclosed a prior omission about the

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Honey Stinger recall, along with the information that TerraVia’s products had been linked to a

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second recall. Because the challenged omissions were directly related to TerraVia’s

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representations regarding its relationship with Honey Stinger in particular and food manufacturers

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generally, plaintiffs’ allegations about the Bloomberg article and subsequent stock price decline

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are sufficient to plead loss causation.

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III.

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Section 20(a) Claim
Defendants’ motion to dismiss the Section 20(a) claim rests entirely on the argument that

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plaintiffs cannot establish liability under Section 10(b) and Rule 10b-5. Dkt. No. 67 at 15; cf. Or.

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Pub. Emps. Ret. Fund, 774 F.3d at 610 (holding that plaintiffs cannot establish control person

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liability under section 20(a) when “they have not adequately alleged violations of section 10(b)

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and Rule 10b-5”). Because plaintiffs have adequately alleged violations of Section 10(b) and Rule

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10b-5, defendants’ motion to dismiss the Section 20(a) control person liability claim is denied.

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CONCLUSION

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Defendants’ motion is granted and denied in part. Plaintiffs may amend their complaint,

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consistent with the findings of this order, by March 2, 2020. The parties are directed to jointly file

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a proposed scheduling order by March 2, 2020.

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IT IS SO ORDERED.
Dated: February 4, 2020

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JAMES DONATO
United States District Judge

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United States District Court
Northern District of California

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