MARTUCCI et al v. PROCTER & GAMBLE, INC. et al
Filing
129
OPINION. Signed by Judge Jose L. Linares on 12/14/15. (DD, )
NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
Civil Action No.: 14-5556 (JLL) (MAH)
IN RE: ENZYMOTEC SECURITIES
LITIGATION
OPINION
LINARES, District Judge.
This matter comes before the Court by way of Defendant Enzymotec Ltd. ("Enzymotec"
or the "Company"), the Officer Defendants, and the Director Defendants' 1 (collectively
"Defendants") Motion to Dismiss the Amended Class Action Complaint (the "Amended
Complaint" or "AC"). (ECF No. 36.) In this action, Lead Plaintiffs David R. Raabe, David E.
Raabe, and Y ehuda L. Danon (collectively "Lead Plaintiffs") allege claims under §§ 1O(b) and
20(a) of the Securities Exchange Act of 1934 (the "Securities Exchange Act") and§§ 11, 12(a)(2),
and 15 of the Securities Act of 1933 (the "Securities Act"), 2 arising from alleged fraudulent
misrepresentations about the viability of Enzymotec's business, the strength of its customer
relationships, and the sales visibility that these relationships provided.
The Court has considered the parties' submissions and decides this matter without oral
1
The Officer Defendants are Ariel Katz ("Katz") and Oren Bryan ("Bryan"), Enzymotec's CEO and CFO,
respectively. (AC ilil 22-23.) The Director Defendants are: Jacob (Yaacov) Bachar ("Bachar''), Nir Belzer ("Belzer"),
Yoav Doppelt ("Doppelt"), Steve Dubin ("Dubin"), Dov PekeIman ("Pekelman"), Yossi Peled ("Peled"), Imanuel
Wasserman ("Wasserman"), Yossi Ohana ("Ohana"), Gilead Fortuna ("Fortuna"), Michal Silverberg ("Silverberg"),
Joseph Tenne ("Tenne"). (Id. ilil 148-58.) The Officer Defendants and Director Defendants are collectively the
"Individual Defendants."
2
The§ IO(b) and Rule lOb-5 claims are asserted against Enzymotec and the Officer Defendants (AC iJil 124-32); the
§ 20(a) claim is asserted against the Officer Defendants (id. ilil 133-38); the§ 11 claim is alleged against all Defendants
(id. iJiJ 169-81 ); the § 12(a)(2) claim is alleged against Enzymotec (id. iJiJ 182-89); and the § 15 claim is alleged against
the Individual Defendants (id. ilil 190-95).
argument pursuant to Rule 78 of the Federal Rules of Civil Procedure. For the reasons set forth
below, the Court grants in part and denies in part the Motion to Dismiss.
FACTUAL BACKGROUND 3
A. Enzymotec's Nutrition Business
Enzymotec is a global supplier of lipid-based specialty nutritional and medical food
products and solutions.
(AC
iii!
26-27; ECF No. 36-1, Declaration of Richard H. Zelichov
("Zelichov Deel."), Ex. B ("IPO Prospectus") at 49, 71.) Enzymotec was founded in 1998, and is
headquartered in Migdal Ha'Emeq, Israel, where it maintains its sole research and development
laboratory and manufacturing facility. (AC i! 20; IPO Prospectus at 17.) Enzymotec launched its
first product in 2003 and, as of its IPO in September 2013, had designed and developed twelve
products generating sales in over thirty countries.
(IPO Prospectus at 1, 49.)
However,
Enzymotec's revenues are derived mostly from its Nutrition segment, comprised mainly of two
products which are at the center of the Amended Complaint: InFat (an infant formula ingredient),
and krill oil products for the omega-3 fatty acid market. (AC i! 26.)
InFat is a nutritional ingredient that, when incorporated into baby formula, allows its fat
composition and structure to more closely resemble human breast milk, which is considered the
"gold standard" in infant nutrition. (AC i! 29; IPO Prospectus at 49.) Enzymotec manufactures an
enzyme that it exclusively supplies to AAK, a Sweden-based global producer of specialty oils;
AAK then mixes the enzymes with other raw materials at is facilities in Karlshamn, Sweden to
3
This background is derived from Plaintiffs Amended Complaint, which the Court must accept as true at this stage
of the proceedings, and other documents that are integral to and/or explicitly relied upon in the Amended Complaint,
such as SEC filings, press releases, and earnings call transcripts. See Alston v. Countrywide Fin. Corp., 585 F.3d 753,
758 (3d Cir. 2009); Winer Family Tr. v. Queen, 503 F.3d 319, 327 (3d Cir. 2007).
2
produce InFat. (AC if 30, IPO Prospectus at 77, 80, 86.) AL, a 50/50 joint venture formed in 2007
by Enzymotec and AAK, then markets and sells InFat to companies that make infant formula. (AC
ir 30.)
China is the largest market for infant formula containing InFat. (AC if 31; IPO Prospectus
at 15.) Specifically, approximately 89% of sales oflnFat come in Asia and primarily China. (AC
if
31.) AL's customers in China consist of non-Chinese manufacturers primarily producing
products containing InFat for Chinese infant formula brands, as well as a number of different
Chinese manufacturers. (AC ifif 30-31 & n.6; IPO Prospectus at 76.) The largest InFat customer
is Biostime, a Hong Kong-based brand of premium pediatric nutrition and baby care products.
(AC ir 31.) Sales of InFat attributable to sales in China by and under the brand name of Biostime
accounted for between 10% to 12% of the Company's consolidated net revenues in 2012. (Id.)
Enzymotec's other main product is krill oil-which is used in supplements and nutritional
products to provide omega-3 fatty acids-and which Enzymotec sells to vitamin and supplement
manufacturers and distributors, mainly in the United States and Australia.
(AC
if
32; IPO
Prospectus at 49, 50, 54.) Krill are small ocean crustaceans and Enzymotec produces krill oil by
sourcing raw krill meal and then extracting oil therefrom. (AC
if 32.)
At the time of the IPO,
Enzymotec contracted a manufacturer in India for the extraction, but was in the process of
expanding its Migdal Ha'Emaq facility so that it could process krill oil on its own. (Id.
if 33.)
On
January 13, 2014, Enzymotec announced a completion of the expansion and a successful operating
run of the process, which was expected to ultimately lead to improvement in the company's gross
margins. (Id.)
Enzymotec's ability to continue and grow InFat sales in China, and in particular through
3
its sales to Biostime, as well as the Company's continued growth in krill oil sales, were of utmost
importance to maintaining Enzymotec's overall financial results. (Id.
if 35.) Lead Plaintiffs allege
that Defendants failed to disclose to investors that Enzymotec's Nutrition segment was on
"unstable ground and that the rapid growth recorded prior to and during the first part of the Class
Period was unsustainable." (Id.) The proposed Class Period is from September 27, 2013 through
August
2014 (id.
if 196), and the Amended Complaint focuses on the Company's initial public
offering in September and October of2013 (IPO), the secondary public offering in February 2014
(SPO), and the ultimate disclosure of information relating to Enzymotec's nutrition segment.
B. The Public Offerings
In September and October of2013, the Company held an initial public offering of shares.
(Id.
if 38.) The proceeds were from the IPO were to be used to "meet [the Company's] anticipated
increased working capital requirements resulting from the expected growth in the Company's
business." (Id.) In its IPO Prospectus, Enzymotec emphasized that InFat had been "achieving
rapid penetration in the Chinese and other Asian markets," with "significant opportunities in other
developing markets," attributing a significant increase in the volume of InFat sales to "increased
market penetration due to growing awareness of the benefits of InFat, especially in the Chinese
market" and financial prospects that "outpace[d] ... industry growth." (Id.
if 36.) Enzymotec
further stated that it had "multi-year contracts with many of [its] customers" and "expect[ed] to
continue attracting new customers." (Id.
if 37.) In the IPO, the Company issued 5,073,800 shares
at $14 per share for net proceeds of $63.5 million. (Id.
if 38.) The shares closed at $18.16 after
the first day of trading. (Id.) The market responded favorably to Enzymotec's representations
concerning its business prospects. (Id.
iriI 40-41
(citing to analyst reports).)
4
On November 11, 2013, the Company issued record results for the third quarter of 2013,
including a 66.3% increase in net revenues and an 87.5% increase in net income. (Id.
if 42.)
In
connection with these results, Defendant Katz stated that Enzymotec's "top line performance was
driven by robust performance," including a growth of 68.9% year-over-year in Nutrition. (Id.) On
the same day, the stock price increased approximately 6.2% to a close of $23.29 and analysts
responded favorably. (Id.
ifif 43-44.)
On December 10, 2013, Defendant Katz emphasized Enzymotec's "very strong existing
business growth" and the Company's prospects for future improvements based on its ability to
"expan[ d] the number of consumers because [of] the unique value proposition that we bring." (Id.
if 45.) On December 13, 2013, Enzymotec's share price reached a Class-Period high of $33.44.
(Id.) Analysts continued to write favorably about the Company's prospects. (Id.
if 46.)
On February 13, 2014, Enzymotec reported positive financial results for the fourth quarter
and full year 2013, including 59% and 72% increases in quarterly and annual net revenues,
respectively; and 57% and 138% increases in quarterly and annual net income, respectively. (Id.
if 47.) Commenting on these results, Defendant Katz stated: "For fiscal year 2014, we believe our
revenue momentum will build sequentially throughout the year and enable us to report another
record performance. . . . Looking ahead, we are very optimistic about our long-term growth
prospects based on our competitive market position." (Id.) The Company further stated that it
"expects net revenues to continue to grow on a sequential basis throughout the year." (Id.
if 49.)
Indeed, Enzymotec issued optimistic guidance for fiscal year 2014, including: "Net revenues,
based on the equity method of accounting, of $88 million to $95 million, an increase of 35% to
46%"; "Net revenues, based on the proportionate consolidation method, of $110 million to $120
5
million, an increase of 36% to 49%"; "Non-GAAP net income of $18 million to $22 million, an
increase of 31 % to 60%"; and "Non-GAAP diluted EPS of $0. 77 to $0.94." (Id.
continued to respond favorably. (Id.
ii 48.) Analysts
ii 51-52.)
Also on February 13, 2014-approximately five months after the IPO-the Company filed
documents with the SEC for the SPO, in which selling shareholders would sell over 5.4 million
shares of Enzyrnotec stock for proceeds of over $150 million. (Id.
ii 50.) Two weeks later, the
Company effectuated the SPO at a price of $28 per share (double the IPO price). (Id.
ii 66.) Lead
Plaintiffs allege that the selling shareholders included Defendants Katz and Bryan, who personally
profited nearly $8 million from their sales, as well as several other senior executives and directors
of the Company.
(Id.~
67.)
C. The Essence of the Alleged Misrepresentations
Lead Plaintiffs assert that Defendants materially misrepresented Enzyrnotec's prospects
for continued growth during the Class Period (September 2013 to August 2014), claiming that
Defendants were "well-aware ... that Enzyrnotec was facing formidable hurdles in order to
duplicate the astronomical growth in the Company's InFat sales that had fueled its increasing
financial results leading up to the IPO and in the first few quarters of Enzyrnotec's history as a
publicly-traded company." (Id.
ii 53.) Specifically, Lead Plaintiffs allege that the Company's
insiders "knew that the Chinese infant formula-market was facing a significant change in
government regulations that would materially hinder Enzyrnotec's crucial Chinese InFat sales
beginning in 2014" and that the Chinese infant formula market "was saturated and oversupplied,
which would also have negative consequences to the Company's bottom line." (Id.
6
ii 54.)
Safety and price-fixing concerns led to increased government oversight of the infant
formula industry in China. (Id. iii! 55-56.) News of the impending regulations appeared as early
as May 2013. (Id.
if 56.) On August 2, 2013-approximately eight weeks prior to the September
27, 2013 !PO-China announced newly proposed infant formula regulations, allegedly "drafted to
increase restrictions on foreign imports and to strengthen domestic markets." (Id.
if 57.) The
proposed legislation was enacted in November and December of 2013. (Id.; see also id. iii! 58-59
(detailing the specific regulations).) Lead Plaintiffs thus claim that leading up to the IPO and
throughout the Class Period, Defendants were "well-aware" that Chinese regulators "were
implementing extensive new regulations over the Chinese infant formula market."
These regulations stood to create significant changes to the infant
formula production process in China and would have a dramatic
effect on Chinese infant formula sales, which were a centerpiece of
Enzymotec's business operations. These regulatory changes posed
a significant and foreseeable threat to the profitability of InFat,
which represented a significant portion of the Company's revenue.
(Id.
if 60; see also if 61 highlighting Declaration of Dr. Mingruo Guo (Amended Complaint, Ex.
A) to show that changes were foreseeable.) Lead Plaintiffs allege that Defendants failed to disclose
this "known information" to investors despite their self-professed "regulatory expertise," and
"instead forecasted unsustainable growth in the Company's financial results in order to stoke
interest in and complete the Offerings." (Id.
if 62.)
Additionally, Lead Plaintiffs allege that Biostime, the largest purchaser ofinFat, 4 had been
involved in a price-fixing scandal and operational uncertainty prior to the Class Period which
would have also alerted Enzymotec to impending problems. (Id.
4
if 63.) A Chinese investigation
As noted, sales oflnFat attributable to sales in China by and under the brand name ofBiostime accounted for between
10% to 12% of the Company's consolidated net revenues in 2012. (AC if 31.)
7
into Biostime's pricing practices began in March 2013, and in August 2013, Biostime was fined
162.9 million yuan, equivalent to six percent of its 2012 sales, which negatively affected
Biostime's long-term prospects. (Id. iii! 63-65.) Furthermore, Lead Plaintiffs allege that these
issues were compacted by the fact that Biostime "had built up its inventory to approximately
double year-over-year with sales increasing 38%, which would have caused concern for the
Company's ability to reach its growth targets for the first half of 2014." (Id.
if 65.) Thus, Lead
Plaintiffs allege that "[d]espite knowledge of the operational issues plaguing one ofEnzymotec's
most important customers, the Exchange Act Defendants materially misled investors concerning
the impact of these issues on the Company's business." (Id.
if 65.)
D. Disclosure to the Markets
On May 14, 2014, Enzymotec announced positive financial results for the first quarter of
2014: net revenues increased 29.1 % to $17.9 million under the equity method, and 43.5% to $23.7
million under the proportionate consolidation method; net income increased 118.0% to $5.1
million; non-GAAP net income increased 135.3% to $5.6 million; adjusted EBITDA increased
119.3% to $6.5 million; and quarterly operating cash flow of$4.8 million. (Id.
if 68.)
Also on May 14, 2014, however, Defendants disclosed that the Company's Chinese
operations may experience problems due to changes in Chinese regulations over infant formula
manufacturing. (Id.
if 69.)
In particular, the Company stated as follows:
The Company expects second quarter net revenues and earnings to
be equal to or lower than the second quarter of 2013. As the
Company previously disclosed, in the second quarter it plans to
install new equipment to increase its manufacturing capacity, which
will require a temporary shutdown of the plant. Additionally, recent
changes in Chinese regulations require infant formula
manufacturers to make certain changes to their production chain. As
a result, changes may be required to supply arrangements in
8
response to customer requests. The Company does not expect this
change in Chinese regulations to impact its 2014 revenues, but it
does expect that this will result in revenues being shifted from the
second quarter to the second half of the year.
(Id.) As a result, Enzyrnotec updated its guidance for fiscal year 2014-which it had previously
issued on the same day it announced the SPO. (Id.
if 70.) The updated guidance included: "Net
revenues, based on the equity method of accounting, of $68 million to $85 million, an increase of
5% to 31 % over fiscal year 2013; Net revenues, based on the proportionate consolidation method,
of $90 million to $110 million, an increase of 12% to 36% over fiscal year 2013; Non-GAAP net
income of $15 million to $22 million, an increase of9% to 60% over fiscal year 2013; and NonGAAP diluted EPS of $0.64 to $0.94." (Id.) Commenting on the financial results and updated
guidance, Defendant Katz stated that the Company believed "these headwinds will mainly impact
us in the second quarter" and that it "remain[ ed] optimistic in our outlook for second half of the
year due to improved supply/demand dynamics across our business segments" and "believe[d]
Enzyrnotec is well positioned for future growth in revenues in profit ...." (Id.
if 71.) The
Company's share price dropped $6.48 per share on May 14, 2014 to close at $13.75 per share, a
one-day decline of over 32% on heavy trading volume. (Id.
statements into their own guidance. (Id.
if 72.) Analysts incorporated these
if 73.)
On August 5, 2014, Enzyrnotec announced negative financial results for the second quarter
of 2014: net revenues decreased 39.5% to $9.0 million under the equity method, and 34.4% to
$11.5 million under the proportionate consolidation method; second quarter net income decreased
to $0.4 million, and EBITDA decreased to $1.2 million. (Id.
if 77.) In connection with the results,
the press release stated as follows:
In the second quarter our business experienced operational
9
challenges based on external market dynamics which hindered our
financial performance," stated Dr. Ariel Katz, Enzymotec's
President and Chief Executive Officer. "While we expected these
headwinds in the quarter, particularly related to recent regulatory
changes in the Chinese infant formula market and weakness in the
U.S. and Australian Omega-3 industry, their overall impact was
greater than anticipated and will continue to adversely impact
Enzymotec for at least the next two quarters."
(Id.
ii 78.) Enzymotec also decreased guidance again for 2014 as follows: "Net revenues, based
on the equity method of accounting, of $46 million to $52 million; Net revenues, based on the
proportionate consolidation method, of $62 million to $70 million; Non-GAAP net income of $8
million to $10 million; and Non-GAAP diluted EPS of$0.34 to $0.43." (Id.
ii 79.) Thus, as stated
by Lead Plaintiffs, "in just five months after successfully completing the SPO in which Enzymotec
insiders sold approximately $54.3 million of their personal Company stock, Enzymotec slashed its
net revenue guidance in its key financial metrics by as much as 55%." (Id.) Analysts once again
incorporated this information into their guidance. (Id. iii! 80-81.) The Company's stock price
declined $5.85 per share on August 5, 2014 to close at $9.11 or nearly 40%, on heavy trading
volume, representing a 72% decrease from its Class Period high of$33.44. (Id.
if 82.)
PROCEDURAL BACKGROUND
This action was commenced on September 5, 2014. (ECF No. 1.) By Order dated February
11, 2015 and Supplemental Letter Opinion & Order dated March 3, 2015, United States District
Judge Madeline C. Arleo appointed the Enzymotec Investor Group as Co-Lead Plaintiffs,
approved their selection of counsel, and consolidated the related actions. (ECF Nos. 20, 24.)
In accordance with a scheduling stipulation and Order (ECF No. 29): Lead Plaintiffs filed
the Amended Complaint on May 18, 2015 (ECF No. 33); Defendants filed the instant motion to
10
dismiss on July 17, 2015 (see ECF No. 36-3 ("Mov. Br.")); Lead Plaintiffs filed opposition on
September 15, 2015 (ECF No. 38 ("Opp. Br.")); and Defendants replied on October 30, 2015 (ECF
No. 43 ("Reply Br.")).
Separately, on July 23, 2015, this action was transferred to the undersigned. (ECF No. 37.)
The motion is now ripe for resolution.
LEGAL STANDARD
To withstand a motion to dismiss for failure to state a claim, "a complaint must contain
sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face."'
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. 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."
Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556). "The plausibility standard is not akin to
a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted
unlawfully." Id.
To determine the sufficiency of a complaint under Twombly and Iqbal in the Third Circuit,
the court must take three steps: first, the court must take note of the elements a plaintiff must plead
to state a claim; second, the court should identify allegations that, because they are no more than
conclusions, are not entitled to the assumption of truth; finally, where there are well-pleaded
factual allegations, a court should assume their veracity and then determine whether they plausibly
give rise to an entitlement for relief. See Burtch v. Milberg Factors, Inc., 662 F.3d 212, 221 (3d
Cir. 2011) (citations omitted). "In deciding a Rule 12(b)(6) motion, a court must consider only
11
the complaint, exhibits attached to the complaint, matters of the public record, as well as
undisputedly authentic documents if the complainant's claims are based upon these documents."
Mayer v. Belichick, 605 F.3d 223, 230 (3d Cir. 2010).
The Court's role is not to determine whether the non-moving party "will ultimately prevail"
but whether that party is "entitled to offer evidence to support the claims." United States ex rel.
Wilkins v. United Health Grp., Inc., 659 F.3d 295, 302 (3d Cir. 2011). The Court's analysis is a
context-specific task requiring the court "to draw on its judicial experience and common sense."
Iqbal, 556 U.S. at 663-64.
ANALYSIS
A. Section lO(b) and Rule lOb-5 of the Securities Exchange Act5
Section lO(b) of the Securities Exchange Act of 1934 prohibits the ''use or employ[ment],
in connection with the purchase or sale of any security ... , [of] any manipulative or deceptive
device or contrivance in contravention of such rules and regulations as the Commission may
prescribe." 15 U.S.C. § 78j(b). Rule lOb-5, promulgated by the Securities and Exchange
Commission, makes it unlawful
(a) To employ any device, scheme, or artifice to defraud,
(b) To 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, or
(c) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any person, in
connection with the purchase or sale of any security.
5
The§ lO(b) and Rule lOb-5 claims are asserted against Enzymotec and the Officer Defendants. (AC iMJ 124-32.)
12
17 C.F.R. § 240.lOb-5.
To state a claim under§ lO(b) and Rule lOb-5, a plaintiff must allege that defendants: "[1]
made a misstatement or an omission of material fact [2] with scienter [3] in connection with the
purchase or the sale of a security [4] upon which plaintiff reasonably relied and [5] plaintiff's
reliance was the proximate cause of their injury." Inst. Invs. Grp. v. Avaya, Inc., 564 F.3d 242,
251 (3d Cir. 2009) (quoting Winer Family Tr. v. Queen, 503 F.3d 319, 326 (3d Cir. 2007)).
Furthermore, "[a] corporation is liable for statements by employees who have apparent authority
to make them." Id. (quoting Makar Issues & Rights, Ltd. v. Tellabs Inc. (Tellabs II), 513 F.3d 702,
708 (7th Cir. 2008)).
Additionally, Lead Plaintiffs must meet the heightened pleading requirements under
Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act ("PSLRA").
See
of Edinburgh Council v. Pfizer, Inc., 754 F.3d 159, 168 (3d Cir. 2014). Rule 9(b)
provides, in relevant part, as follows: "In alleging fraud ... , a party must state with particularity
the circumstances constituting fraud." Fed. R. Civ. P. 9(b ). Thus, at a minimum, "plaintiffs [must]
support their allegations of securities fraud with all of the essential factual background that would
accompany 'the first paragraph of a newspaper story'-that is, the 'who, what, when, where and
the events at issue." In re Alpharma Inc. Sec. Litig., 372 F.3d 137, 147 (3d Cir. 2004)
how'
(citation omitted).
Similarly, as per the PSLRA, a plaintiff must satisfy heightened pleading requirements and
"state with particularity both the facts constituting the alleged violation, and the facts evidencing
sci enter,
, the defendant's intention 'to deceive, manipulate, or defraud."' Tellabs, Inc. v. Makar
Issues & Rights, Ltd., 551 U.S. 308, 313, 321 (2007) (quoting Ernst & Ernst v. Hochfelder, 425
13
U.S. 185, 194, and n.12 (1976), and citing 15 U.S.C. § 78u-4(b)(l), (2)). First, with regard to
misleading statements and omissions of material fact, a plaintiff must "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 omissions is made on information and belief, the complaint
shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(l).
Further, the statement must have been misleading at the time it was made, as "liability cannot be
imposed on the basis of subsequent events." In re NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1330
(3d
2002). Additionally, "when assessing the sufficiency of allegations made on information
and belief pursuant to 15 U.S.C. § 78u-4(b)(l)," "plaintiffs need only plead with particularity
sufficient facts to support those beliefs." California Pub. Employees' Ret. Sys. v. Chubb Corp.,
394 F.3d 126, 146 (3d Cir. 2004) (adopting Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000)). In
other words, the facts alleged must be "sufficient to support a reasonable belief as to the misleading
nature of the statement or omission." Id.
As to the second requirement of scienter-the intent to deceive, manipulate, or defraud
investors-"each act or omission alleged to violate [Section lO(b)], [must] state with particularity
facts giving rise to a strong inference that the defendant acted with the required state of mind." 15
U.S.C. § 78u4(b)(2). 6 In evaluating whether a complaint meets this requirement, a court is required
to consider inferences urged by the plaintiff as well as "competing inferences rationally drawn
from the facts alleged." Tellabs, 551 U.S. at 314. A "strong" inference is "more than merely
plausible or reasonable-it must be cogent and at least as compelling as any opposing inference
6
To the extent that the PSLRA' s scienter pleading requirements conflict with those of Federal Rule of Civil Procedure
9(b), the PSLRA supersedes the latter as it relates to Rule lOb-5 actions. See Institutional lnv'rs Grp. v. Avaya, Inc.,
564 F.3d 242, 253 (3d Cir.2009); see also Alpharma, 372 F.3d at 148.
14
of nonfraudulent intent. ... The inference ... need not be refutable, i.e., of the 'smoking-gun'
genre, or even the 'most plausible of competing inferences."' Id. at 314, 324. The Third Circuit
permits a plaintiff to satisfy this requirement with allegations of strong circumstantial evidence of
either conscious behavior or recklessness. SE. C. v. Infinity Grp. Co., 212 F .3d 180, 192 (3d Cir.
2000); see also In re Radian Sec. Litig., 612 F.Supp.2d 594, 607 (E.D. Pa. 2009) (noting that
although in Tellabs the Supreme Court specifically reserved the question of whether recklessness
could give rise to civil liability under 1Ob-5, "every court of appeals to consider the issue has held
that a plaintiff can meet the scienter requirement by showing that a defendant acted intentionally
or recklessly.") In this context, recklessness is "highly unreasonable [conduct], involving not
merely simple, or even inexcusable negligence, but an extreme departure from the standards of
ordinary care, ... which presents a danger of misleading buyers or sellers that is either known to
the defendant or is so obvious that the actor must have been aware of it." S.E.C. v. Infinity Grp.
Co., 2
F .3d at 192. Finally, a court considers the entirety of a complaint in determining "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 this standard." Tellabs I, 551 U.S. at 322;
see also Avaya, 564 F.3d at 273.
Aside from the two requirements pertaining to the facts surrounding the alleged violation
and scienter, the PSLRA imposes additional burdens with respect to allegations involving forwardlooking statements. The PSLRA's Safe Harbor provision, 15 U.S.C. § 78u-5(c), "immunizes from
liability any forward-looking statement, provided that: the statement is identified as such and
accompanied by meaningful cautionary language; or is immaterial; or the plaintiff fails to show
15
the statement was made with actual knowledge of its falsehood." Avaya, 564 F.3d at 254. 7
However, a '"mixed present/future statement is not entitled to the safe harbor with respect to the
part of the statement that refers to the present."' Id. at 255 (quoting Tellabs II, 513 F.3d at 705).
If the statement is forward looking, cautionary language must be extensive yet specific and touch
upon the subject matter of the alleged misrepresentation in order for the safe harbor to apply. See
Semerenko v. Cendant Corp., 223 F.3d 165, 182 (3d Cir. 2000) ("[A] vague or blanket (boilerplate)
disclaimer which merely warns the reader that the investment has risks will ordinarily be
inadequate to prevent misinformation. To suffice, the cautionary statements must be substantive
and tailored to the specific future projections, estimates or opinions in the prospectus which the
plaintiffs challenge.") (quoting Jn re Trump Casino Sec. Litig., 7 F.3d 357, 371-72 (3d Cir.1993));
see also Avaya, Inc., 564 F.3d at 256 (3d Cir. 2009) (reiterating same). Thus, boilerplate language
that merely warns readers of the risks associated with investing is generally insufficient. Id.
Cautionary language in SEC filings "may be incorporated by reference" into the document
containing the forward-looking statement, and need not be contained within the same document as
the forward-looking statement itself. In re Aetna, Inc. Sec. Litig., 617 F.3d 272, 282 (3d Cir. 2010)
(quoting Jn re Merck & Co. Sec. Litig., 432 F.3d 261, 273 n.11 (3d Cir. 2005)).
Defendants generally do not dispute that the following elements of the cause of action are
properly pleaded: materiality, reliance, loss causation, 8 and damages. Falsity and scienter are
7
The Court also notes that the "bespeaks caution" doctrine is relevant to interpreting the PSLRA safe harbor. Avaya,
564 F.3d at 254-56; see also In re Anadigics, Inc., Sec. Litig., Civil Action No. 08-5572, 2011WL4594845, at *IO
n.4 (D.N.J. Sept. 30, 2011) (noting that the Third Circuit Court of Appeals has "incorporated much of the [bespeaks
caution] doctrine into its analysis of the PSLRA") (citing Nat 'l Junior Baseball League v. Pharmanet Dev. Grp. Inc.,
720 F. Supp. 2d 517, 533-34 (D.N.J. 2010))).
8
Defendants do argue that Lead Plaintiffs have failed to allege loss causation with respect to their krill oil claims.
(See Mov. Br. at 14 n.11 ("Plaintiffs assert that Enzymotec's stock price fell in response to press releases and
conference calls on May 14, 2014 and August 14, 2014. Neither of those announcements revealed any "true facts"
that had not already been disclosed concerning the high concentration of Enzymotec's sales of krill oil to a single
16
heavily disputed. The Court analyzes falsity and scienter below.
. Falsity
In the Amended Complaint, Lead Plaintiffs allege that "[i]n regular press releases,
conference calls, and filings with the SEC, Enzymotec and the Officer Defendants regularly made
false and misleading statements and material omissions during the Class Period" (AC ii 83),
concerning Enzymotec's financial guidance (id. iii! 84-92), Enzymotec's sales of InFat in China
(id.
iii! 93-102), Chinese regulations (id. iii! 103-09), and internal controls (id. iMf 110-13). Each
category is discussed more fully below.
For all of these above categories of statements, Lead Plaintiffs contend that the Exchange
Act Defendants made these statements "in contrast to Enzymotec's 'regulatory expertise"' and that
that these statements were materially false and misleading since
Defendants knew, or were reckless in disregarding, significant
information and red flags prevalent as early as May 2013-prior to
the start of the Class Period-that the Chinese regulatory landscape
concerning the infant formula market was about to undergo a
seismic shift that would have a significantly negative effect on the
Company's important InFat sales in China-a core area of
Enzymotec's operations.
(Id. iii! 90, 100, 107, 111.) Lead Plaintiffs allege that Defendants "knowingly or recklessly
disregarded the changing landscape of the infant formula industry in China, including the impact
of antitrust, disciplinary and overstocking issues relating to Biostime, the Company's primary
customer in China, and the resulting effect on Enzymotec's InFat sales." (Id. iii! 91, 101, 108,
112). Additionally, for the statements concerning Enzymotec's financial guidance (id. iii! 84-92),
customer.").) Lead Plaintiffs counter that loss causation is a fact intensive inquiry beyond the scope of a 12(b)(6)
motion. (Opp. Br. at 11 n.9.) Because the Court grants the motion to dismiss with respect to the krill oil claims due
to application of the safe harbor, see Part A.1.a, infra, the Court need not address this argument.
17
and internal controls (id.
ml 110-13 ), Lead Plaintiffs allege that the Company
knowingly or recklessly failed to account for the fact that a large
percentage of Enzymotec's growth in krill sales from 2012 to 2013
leading up to the IPO were obtained on the strength of additional
sales to a single customer who placed initial orders with the
Company in 2012 and significantly increased those orders in 2013,
thus rendering the Company dependent on these sales to maintain
the business and growth projections provided to investors in order
to stoke interest in the SPO.
(Id.
i!if
, 112.)
Defendants first argue that Enzymotec's guidance, forecasts, and predictions are protected
by the "safe harbor" for forward-looking statements. (Def. Mov. Br. at 11-14; Def. Reply Br. at
2-3.) Next, they contend that Enzymotec made no false or misleading statements about InF at sales,
since they were accurate statements of historical fact or puffery or otherwise not actionable. (Def.
Mov. Br. at 14-16; Def. Reply Br. at 3-4.) Additionally, Defendants claim that Enzymotec had no
duty to disclose Chinese regulations not directed at it or specifics about its sales contracts. (Def.
Mov. Br. at 16-20; Def. Reply Br. at 4-6.) Finally, Defendants argue that the market had complete
information concerning the changes in the Chinese regulations of infant formula manufacturers.
(Def Mov. Br. at 20-21; Def. Reply Br. at 6-7.)
In response, Lead Plaintiffs argue that the "safe harbor" is inapplicable because many of
Defendants' statements were statement of present fact (in that the risks they were warning of had
already come to pass), and that even if they were forward-looking they were not accompanied by
meaningful cautionary language. (PL Opp. Br. at 8-12.) Next, Lead Plaintiffs contend that the
statements are not mere puffery because they go to the heart of Enzymotec's financial stability,
and in any event raise fact questions not to be determined at the pleadings state. (Id. at 12-14.)
Additionally, Lead Plaintiffs argue that Defendants' statements were false and misleading at the
18
time that they were issued. (Id. at 14-19.) Finally, Lead Plaintiffs contend that the Defendants
omitted material information where there was a duty to disclose and that the truth on the market
defense is without merit. (Id. at 19-21.) The Court addresses each argument in turn.
a. The Court Cannot Conclude at This Stage That the Safe Harbor Applies to
Enzymotec 's Guidance, Forecasts, and Predictions because ofSpecific Allegations
that Cautionary Language Was Not Meaningful.
With respect to Enzymotec's guidance, Lead Plaintiffs allege that in the February 13, 2014
press release announcing financial results for the quarter and fiscal year ending December 31,
201
Defendant Katz stated: "[ t]or fiscal year 2014, we believe our revenue momentum will build
sequentially throughout the year and enable us to report another record performance. . . . Looking
ahead, we are very optimistic about our long-term growth prospects based on our competitive
market position."
(AC~
85.) The February 13, 2014 press release further stated: "The Company
expects net revenues to continue to grow on a sequential basis throughout the year."
(Id.~
86.) In
the Company's May 10, 2014 Ql 2014 press release, Defendant Katz cautioned that "headwinds"
would impact the Company in the second quarter, but stated that "[n ]otwithstanding our outlook
for the second quarter, I believe Enzymotec is well positioned for future growth in revenues and
profit as we continue to expand our customer base .... " (Id.
~
87.) Addressing the change in
Chinese regulations, the guidance for 2014 contained in a May 14, 2014 press release stated that
"[t]he Company does not expect this change in Chinese regulations to impact its 2014 revenues,
but it does expect that this will result in revenues being shifted from the second quarter to the
second half of the year'' and on a conference call the same day Defendant Katz reiterated that "[ t]he
changes in Chinese regulation should not[] impact our 2014 revenues, but we do expect that this
will result in revenues being shifted from the second quarter to the second half of the year." (Id.
19
iiir 88,
Defendants argue that the statements Lead Plaintiffs challenge concerning Enzymotec's
guidance (id.
i!il 84-92) "are quintessential forward-looking statements" that were "accompanied
by meaningful cautionary language that mirrors Plaintiffs' allegations regarding Enzymotec's
missed projections." (Mov. Br. at 12.) In other words, Defendants contend that Enzymotec
provided its stockholders with adequate and meaningful risk disclosures warning them of the exact
issues that Plaintiffs claim prevented Enzymotec from meeting its forecasts and reaching its goals.
(Mov. Br. at 11-14; Reply Br. at 2-3.) Specifically, Defendants point out that Enzymotec's public
filings warned that the Company's "international operations and sales are subject to a number of
risks, including: . . . regulatory limitations imposed by foreign governments and unexpected
changes in regulatory requirements, tariffs, customs, duties, tax laws, and other trade barriers."
(Mov. Br. at 12 (citing IPO Prospectus at 22; Zelichov Deel., Ex. C ("Annual Report") at 13;
Zelichov Deel., Ex. D ("SPO Prospectus") at 2).) Defendants further note that Enzymotec also
stated that it is "subject to significant and increasing government regulations regarding the sale
and marketing of [its] products," that "regulatory authorities may change processes, regulations,
and policies related to our products," and identified the Ministry of Health in China as one of the
regulatory bodies to which Enzymotec and its products are subject. (Id. at 12-13 (citing IPO
Prospectus at 24; Annual Report at 15; SPO Prospectus at 25).) Additionally, Defendants note
that Enzymotec even disclosed that "Chinese authorities have recently launched investigations and
levied fines related to alleged price fixing by infant nutrition companies including Biostime and
may do so in the future." (Id. at 13 (citing IPO Prospectus at 15; Annual Report at 5; SPO
Prospectus at 13).)
20
Furthermore, with respect to the krill oil business, Defendants point out that Enzymotec's
Annual Report, filed on the same day as its February 13, 2014 press release, specifically disclosed
that
are subject to a degree of customer concentration and our customers do not enter into
long-term purchase commitments with us" and that:
Our remaining significant customers in 2013 include one North
American purchaser of krill products that accounted for 15% of our
revenues in that year up from less than 2% in 2012.
(Id. at 13 (citing Annual Report at 6; SPO Prospectus at 14; Zelichov Deel., Ex. G ("Feb. 13, 2014
6-K") at 7 ("[W]e are subject to a degree of customer concentration"); Zelichov Deel., Ex. I ("May
14, 2014 6-K") at 5 (same).)
Defendants note that the Company also disclosed that
"[a]pproximately $9.2 million of the increase in sales of krill oil products was from one customer."
(Id. (citing Annual Report at 51, F-18; SPO Prospectus at 14, 53).)
Finally, Defendants argue that the Amended Complaint "lacks particularized allegations
that any of the Defendants had actual knowledge that their statements were false or misleading
when made" such that the third prong of the safe harbor does not apply. (Reply Br. at 3 n.3.)
Lead Plaintiffs counter that the safe harbor is inapplicable because the statements
concerning Enzymotec's financial guidance were either statements of present or historical fact,
and that even if they were forward-looking, the cautionary language is insufficient because the
risks Defendants were warning of had already come to pass. (Opp. Br. at 9-12.) First, Plaintiffs
argue that the statements "concerned Enzymotec's present business and operational state that were
materially false and misleading at the time they were made given the prevalent changes in China's
regulatory environment, which changes would have a materially adverse effect on the Company's
financial condition." (Id. at 9-10 (citing AC iii! 86-87, 93, 94, 99).)
21
Second, Lead Plaintiffs argue that even if the statements can be considered forward
looking, the safe harbor still does not apply because the cautionary language was "nothing but
legally ineffective boilerplate" and that determining whether cautionary language is sufficiently
"meaningful" raises fact issues that are improperly resolved on a motion to dismiss. (Id. at 9 n.6,
10.) In particular, Lead Plaintiffs argue that disclosure that a company is "subject" to "government
regulations" is applicable to "any company in any industry," and that the language does not warn
investors of the specific risks that the changes in the Chinese regulations would have on the
Company's business. (Id.) Similarly, Lead Plaintiffs contend that the disclosures regarding krill
oil sales "do not warn of the specific risks actually experienced at the time, which is particularly
ineffective given the Company's contemporaneous assurances that its customer relationships
provided 'good visibility' in sales." (Id. at 11.) Alternatively, Lead Plaintiffs argue that the
statements are not entitled to safe harbor because they were made with knowledge of their falsity.
(Id. at 11 (citing AC ifif 85-89, 93-94, 99); id. at 15-16.)
The Court finds that Lead Plaintiffs have set forth sufficient allegations of materially false
and misleading statements with respect to guidance, forecasts, and predictions to survive the
Motion to Dismiss with respect to Inf at. First, the Court finds that at least part of the statements
relating to Enzymotec's guidance could be deemed by a fact finder to be statements of present or
historical fact, and as such are not entitled to PSLRA's safe harbor at this stage. For example,
statements relating to Enzymotec being "well positioned for future growth" (AC if 87), or relating
to InFat "achieving rapid penetration" or "increased market penetration" (id.
ifif 93, 94) relate to
then-existing conditions as opposed to future projections. These statements, even if made within
the context of truly forward-looking statements, are not entitled to the safe harbor. See Avaya, 564
22
F.3d at 255 ('"[A] mixed present/future statement is not entitled to the safe harbor with respect to
the part of the statement that refers to the present."') (quoting Tellabs II, 513 F.3d at 705).
Second, to the extent that the alleged misrepresentations by Defendant were forwardlooking, the Court finds that Lead Plaintiffs have specifically alleged that the statements were not
accompanied by meaningful cautionary language to entitle safe harbor protection at this stage. For
example, even though Defendants warned generally of "significant and increasing government
regulations" and specifically identified the Ministry of Health in China in their SPO Prospectus,
Lead Plaintiffs specifically allege that these risks had already come to pass and that it was therefore
unreasonable to make generalized warnings when Defendants knew, or should have known, of the
specific regulations and their likely effect. (See
AC~~
90, 91.) The Court finds that at this early
stage of the litigation, Lead Plaintiffs have alleged with adequate particularity that any forwardlooking statements made by Defendants regarding InFat were not accompanied by sufficient
cautionary language.
See Semerenko, 223 F.3d at 182 (nothing that a "vague or blanket
(boilerplate) disclaimer which merely warns the reader that the investment has risks will ordinarily
be inadequate to prevent misinformation" and that "the cautionary statements must be substantive
and tailored" to suffice); see also City ofHialeah Employees' Ret. Sys. & Laborers Pension Trust
Funds for N California v. Toll Bros., No. 07-1513, 2008 WL 4058690, at *2 (E.D. Pa. Aug. 29,
2008) ("Plaintiffs have specifically pied that there existed several material adverse facts at the time
the future projections were made that suggest that these projections were unreasonable at the time
they were made.").
However, the Court agrees with Defendants that Lead Plaintiffs have not stated a claim
with respect to statements concerning krill oil. Specifically, the Court finds Defendants have
23
demonstrated that they are entitled to safe harbor protection for statements relating to krill oil and
that Lead Plaintiffs have not demonstrated how the cautionary language regarding the krill oil
segment was insufficient. Enzymotec's Annual Report, filed on the same day as its February 13,
2014 press release, specifically disclosed that "[w]e are subject to a degree of customer
concentration and our customers do not enter into long-term purchase commitments with us" and
that:
Our remaining significant customers in 2013 include one North
American purchaser of krill products that accounted for 15% of our
revenues in that year up from less than 2% in 2012.
(Annual Report at 6; SPO Prospectus at 14; Feb. 13, 2014 6-K at 7 ("[W]e are subject to a degree
of customer concentration"); May 14, 2014 6-K at 5 (same).) Further, the Company also disclosed
that "[a)pproximately $9 .2 million of the increase in sales of krill oil products was from one
customer." (Annual Report at 51, F-18; SPO Prospectus at 14, 53).) Lead Plaintiffs allegations
that Defendants provided only generalized warnings with respect to krill oil sales (Opp. Br. at 11
(citing to statement regarding "good visibility" in sales)) are thus directly contradicted by these
specific disclosures. See St. Matthew's Baptist Church v. Wachovia Bank Nat. Ass 'n, No. 04-4540,
2005 WL 1199045, at *3 (D.N.J. May 18, 2005) ("To the extent that Plaintiffs allegations are
contradicted by the documents attached to the Complaint upon which its claims are based, the
Court need not accept such allegations as true.") (citing Genesis Bio-Pharmaceuticals, Inc. v.
Chiron Corp., 27 Fed. Appx. 94, 99-100 (3d Cir. 2002)).
Accordingly, the Court will grant the motion to dismiss with respect to claims concerning
krill oil sales but will deny the motion to dismiss with respect to claims concerning InFat. Because
the Amended Complaint makes specific allegations with adequate particularity about the alleged
24
inapplicability of the safe harbor relating to InFat, the Court finds that that Lead Plaintiffs are
"entitled to offer evidence to support the claims." Wilkins, 659 F.3d at 302 (3d Cir. 2011).
b. Statements Concerning InFat Sales are Mixed Questions ofLaw and Fact Not
Appropriate for Resolution at This Stage
With respect to sales of InFat in China, in the IPO Offering Documents, the Company
stated that "InFat has been achieving rapid penetration in the Chinese and other Asian markets"
and further touted "increased market penetration due to growing awareness of the benefits ofinFat,
especially in the Chinese market." (AC
if 93.) And in the July 10, 2013 Form DRS Draft
Registration Statement, the Company emphasized that it had
multi-year contracts with many of our customers and are embedded
within their product development cycles, resulting in high switching
costs for them and providing us with good visibility on sales ....
Furthermore, we expect to continue attracting new customers as the
strong brand recognition of our existing key customers, such as
Biostime and IVC in our Nutrition segment, builds consumer
awareness of our premium products. Sales of our infant formula
products are currently strongest in China. . . . We expect net
revenues to increase as additional infant nutrition brands choose to
use InFat.
(Id.
if 94.) Similarly, on a November 11, 2013 conference call, Defendant Katz reiterated that
"InFat has been achieving rapid penetration in Chinese and other Asian markets .... " (Id.
if 95.)
And on a February 13, 2014 conference call, Defendant Bryan stated that "[w]e see continuous
growth and interest [in InFat] ... [and] feel on track with what we have spoken in the-when we
went to the IPO and we see a good acceptance of the products continue" and Defendant Katz stated
"[r]egarding the contracts that we have in our - with our customers, we feel confident, we're
striving all the time to bring more value and it seems that is very stable contracts." (Id.
ifif 96-97.)
In the Company's 2013 Form 20-F, the Company highlighted "increased market penetration due
25
to growing awareness of the benefits of InFat, especially in the Chinese market." (Id.
if 98.)
Further, on the May 14, 2014 conference call, Defendant Katz stated that the InFat "joint venture
with AAK has also been achieving rapid penetration in Chinese and other Asian market(s) .... "
(Id.
il 99.)
Defendants argue that the statements concerning InFat sales (id.
ilil 93-100) are not
actionable for three reasons. First, Defendants claim that the statements are accurate statements
about Enzymotec's historical and present financial performance. For example, Enzymotec had
been achieving "rapid" or "increased" penetration in China-"its sales in Asia increased 45% in
the first six months of 2013, 400% for the whole year, and Enzymotec had sales growth in line
with its February 2014 projection in the first quarter of2014 as well." (Mov. Br. at 15 (citing IPO
Prospectus at 50; Annual Report at 47; May 14, 2014 6-K).) Defendants argue that "the fact that
InFat sales did not continue to grow in the second quarter of 2014 does not render any of these
statements false when made and simply constitutes an effort to plead fraud by hindsight." (Mov.
Br. at 1
Second, to the extent that the statements are not deemed accurate statements about
Enzymotec's historical and present financial performance, Defendants assert that "most of
Enzymotec's statements are puffery and cannot, as a matter oflaw, support a claim for securities
fraud." (Id.) Defendants contend that statements such as "rapid penetration,"9 "strong brand
recognition," 10 "continuous growth and interest," 11 "on track," 12 "good acceptance," 13
9
AC iJ'1! 93, 95, 99.
Id. '1! 94.
ii Id. '1! 96.
12 Id.
13 Id.
10
26
"confident," 14 and "very stable," 15 are "simply 'vague expressions of hope' that 'have been almost
uniformly rejected by the courts' as the basis for a claim under the securities laws." (Mov. Br. at
15 (quoting In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1427 (3d Cir. 1997).)
Third, Defendants argue that statements that the Company "expect[ s] to continue attracting
new customers" and "expect[s] net revenues to increase" 16 are entitled to safe harbor protection
since they are forward-looking and accompanied by meaningful cautionary language. (Mov. Br.
at 15-1
Lead Plaintiffs counter that the statements concerning the viability of InFat sales and the
strength of Enzymotec's contractual relations cannot be considered inactionable puffery at this
stage. (Opp. Br. at 12-14.) As an initial matter, Lead Plaintiffs contend that puffery determinations
are a mixed question of law and fact that should ultimately be left to the trier of fact, since a
statement is considered puffery only when it is immaterial, such that a "reasonable investor would
not rely on it in considering the 'total mix' of [available] information." (Id. at 12 (citing Shapiro
v. UJB
903
Corp., 964 F.2d 272, 280 n.11 (3d Cir. 1992); Hoxworth v. Blinder, Robinson & Co.,
186, 200-01 (3d Cir. 1990).) Lead Plaintiffs thus argue that the statements regarding
InFat sales were material to investors because they "go to the heart of Enzymotec's financial
stability and were made against the backdrop of a general decline in the infant formula industry."
(Id. at 12.) Additionally, they argue that statements alluding to "good visibility" resulting from
the Company's customer relationships "conveyed to investors stability in Enzymotec's customer
relationships and a sound basis upon which their assurances concerning continued growth were
AC ii 97
AC ii 97
16
AC ifil 93-94, 99.
14
15
27
evaluated." (Id. at 13.) Further, Lead Plaintiffs contend that they have sufficiently alleged specific
facts concerning Defendants' knowledge of the falsity of their statements at the time they were
made. (Id. at 13-18.)
Ultimately, Lead Plaintiffs assert that they "do not seek to hold Defendants accountable for
failing to predict regulatory changes. Rather, the Amended Complaint's allegations are based on
Defendants' misrepresentations and omissions about Enzymotec's practices and the then-existing
developments in Chinese regulations, both of which were critical to Enzymotec' s bottom line and
to investors." (Id. at 14.) In essence, Lead Plaintiffs contend that "although Defendants knew (or
should have known) of the looming decrease in InFat sales, they deliberately withheld this
information until after completing the SPO, while incredibly claiming that the Company's growth
was sustainable" (id. at 17 (citing AC ifif 53-67)) and that Defendants "either knew of and ignored
the effects on Enzymotec's business that the regulatory changes presented, or were deliberately
reckless in not knowing about them, in order to effectuate the SPO." (Id. at 18.)
an initial matter, for the reasons stated in Part A. l .a, supra, the Court finds that the
statements regarding InFat sales are not entitled to safe harbor protection at this stage, since Lead
Plaintiffs have specifically alleged that the accompanying cautionary language is inadequate.
Additionally, the Court finds that when viewing the Amended Complaint in its entirety, it cannot
conclude that all of the statements regarding InFat sales are accurate statements about Enzymotec's
historical and present financial performance. Lead Plaintiffs' specifically allege that "Defendants
knowingly or recklessly disregarded the changing landscape of the infant formula industry in
China, including the impact of antitrust, disciplinary and overstocking issues related to Biostime,
the Company's primary customer in China, and the resulting effect on Enzymotec's InFat sales"
28
and that "Defendants provided a materially false and misleading depiction of the Company's InFat
sales in the Chinese market during the Class Period[.]" (AC ifil 101, 102.) When taking such
allegations into consideration and viewing them in a light most favorable to Lead Plaintiffs, the
Court finds that the statements regarding InFat sales-such as "see[ing] continuous growth and
interest," "good acceptance of the products continue," and "very stable contracts" (AC ifil 96, 97)can plausibly give rise to liability, such that Lead Plaintiffs are "entitled to offer evidence to
support the claims." Wilkins, 659 F.3d at 302 (3d Cir. 2011).
Indeed, although the Court
acknowledges and appreciates Defendants' :framing of the case as merely one of ":fraud-byhindsight," this particularized analysis "is not something that the Court is tasked with tackling at
this stage, given the inferences owed to the Plaintiff." In re Viropharma Inc. Sec. Litig., 21 F.
Supp. 3d 458, 470 n.20 (E.D. Pa. 2014).
Furthermore, the Court cannot conclude at this stage of the litigation that the statements
regarding InFat sales are inactionable puffery. Puffery is "vague and non-specific expressions of
corporate optimism on which reasonable investors would not have relied." Se. Pennsylvania
Transp. Auth. v. Orrstown Fin. Servs., Inc., No. 12-00993, 2015 WL 3833849, at *16 (M.D. Pa.
June
2015) (citing In re Advanta, 180 F.3d 525 (3d Cir. 1999)); see also In re Aetna, Inc. Sec.
Litig., 617 F.3d 272, 283 (3d Cir. 2010) (noting that puffery includes "statements of subjective
analysis or extrapolations, such as opinions, motives and intentions, or general statements of
optimism.").
In other words, a statement is considered puffery only when it is immaterial.
"Materiality is a mixed question of law and fact, and the delicate assessments of the inferences a
reasonable shareholder would draw from a given set of facts are peculiarly for the trier of fact."
Shapiro v. UJB Fin. Corp., 964 F.2d 272, 280 (3d Cir. 1992) (citing TSC Indus., Inc. v. Northway,
29
Inc., 426 U.S. 438, 450 (1976)).
Indeed, "the emphasis on a fact-specific determination of
materiality militates against a dismissal on the pleadings." Weiner v. Quaker Oats Co., 129 F.3d
310, 317 (3d Cir. 1997). Although Defendants' argument that the statements concerning InFat
sales amount to nothing more than puffery are well-taken, when viewing the Amended Complaint
as a whole and in a light most favorable to Lead Plaintiffs as the Court must, the Court concludes
that the allegations here sufficiently raise a mixed question oflaw and fact to allow the claims to
proceed. "Only if the alleged misrepresentations or omissions are so obviously unimportant to an
investor that reasonable minds cannot differ on the question of materiality is it appropriate for the
district court to rule that the allegations are inactionable as a matter oflaw." Shapiro, 964 F.2d at
280 (citing TSC, 426 U.S. at 450). Given the inferences owed to Lead Plaintiffs, the Court
concludes at this stage of the litigation that reasonable minds could differ on the question of
materiality with respect to the statements regarding InFat sales.
c. Giving All Inferences to Lead PlaintifJs, Defendants Had a Duty to Disclose
Chinese Regulations
With respect to Chinese regulations, Lead Plaintiffs allege that in the Company's May 14,
2014 press release, the company acknowledged the "recent changes in Chinese regulations" but
stated that "[t]he Company does not expect this change in Chinese regulations to impact its 2014
revenues, but it does expect that this will result in revenues being shifted from the second quarter
to the second half of the year." (AC if 104.) This statement was reiterated when Defendant Bryan
stated during the May 14, 2014 earnings call that "[w]e believe [the recent changes in Chinese
regulation] will result in revenues being shifted form the second quarter to the second half of the
year." (Id.
if 105.) During the June 5, 2014 Jefferies 2014 Global Healthcare Conference, Lead
Plaintiffs allege that Defendant Katz stated that the regulatory change "doesn't impact our not
30
expect [sic] to have impacting [sic] 2014" and reiterated that the Company "will see slowdown
during quarter two and expect that (inaudible) catch-up in quarter three and quarter four." (Id.
~
106.)
Defendants argue that they had no obligation to disclose the details of the new Chinese
regulations every time it "accurately described" sales oflnFat in China because the securities laws
do not require companies to disclose general industry-wide trends. (Mov. Br. at 16.) Defendants
contend that since the regulations did not become effective until May 2014, "they have no bearing
whatsoever on Enzymotec's statements through May 2014, rendering the vast majority of the
[Amended Complaint] entirely irrelevant." (Id. at 17.) Additionally, Defendants stress that InFat
was not immediately implicated by the regulatory changes-instead, the changes were to
regulations of infant formula manufacturers, which Enzymotec does not manufacture. (Id. at 1718.) Similarly, Defendants argue that statements about "good visibility" on sales do not require
disclosure of every possible factor potentially affecting sales, especially because "good visibility"
is puffery and Lead Plaintiffs have not explained how the statements make any of the statements
about past results false or misleading. (Id. at 18-19.) Specifically, Defendants point out that
Enzymotec' s last indication that it had "good visibility on sales" was in the prospectus for the SPO
in February 2014, and that thereafter, Enzymotec reported good results in May 2014, putting it on
track to meet its February guidance. (Id. at 19.) Defendants thus argue that Lead Plaintiffs "cannot
claim that any of Enzymotec's statements about 'good visibility' were false or misleading because
Enzymotec met its projections even after the last time it made that statement." (Id.)
Lead Plaintiffs contend that Defendants "routinely and publicly highlighted the Company's
viability of its InFat business-which drove Enzymotec's continuous growth-thus triggering a
31
duty to disclose and correct any 'inaccurate or misleading prior disclosure.'" (Opp. Br. at 20
(citing In re Urban Outfitters, Inc. Sec. Litig., 2015 WL 2069222, at *10 (E.D. Pa. May 4, 2015)).)
Lead Plaintiffs argue that at the very least, Defendants' arguments raise a fact question. (Id. at
20.)
"[N]on-disclosure of material information will not give rise to liability under Rule I Ob-5
unless the defendant had an affirmative duty to disclose that information." See Oran v. Stafford,
226 F.3d 275, 78-86 (3d Cir. 2000). "Disclosure is required ... only when necessary 'to make
. . . statements made, in the light of the circumstances under which they were made, not
misleading."' Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309, 1321 (2011) (quoting Rule
lOb-5 and Basic v. Levinson, 485 U.S. 224, 239 n.17 (1988)); Oran v. Stafford, 226 F.3d 275, 28586 (3d Cir. 2000) ("[A] duty to disclose may arise when there is ... an inaccurate, incomplete or
misleading prior disclosure.").
Here, the Court finds that, when giving all inferences in favor of Lead Plaintiffs,
Defendants had a duty to disclose the specifics of the Chinese regulations. As an initial matter,
the Court agrees that the question of whether disclosure was required is best left to the trier of fact,
since whether a prior disclosure is inaccurate, incomplete, or misleading in light of all of the
evidence is a mixed question oflaw and fact. See Weiner, 129 F .3d 310, 317 (3d Cir. 1997) ("[T]he
emphasis on a fact-specific determination of materiality militates against a dismissal on the
pleadings."). Furthermore, Lead Plaintiffs specifically allege a duty to disclose. For example,
although Defendants warned generally of "significant and increasing government regulations" and
specifically identified the Ministry of Health in China in their SPO Prospectus, Lead Plaintiffs
specifically allege that these risks had already come to pass and that it was therefore unreasonable
32
to make generalized warnings when Defendants knew, or should have known, of the specific
regulations and their likely effect. (See AC ifif 107-09.) Accordingly, the Court finds that, at this
early stage of the litigation, the Amended Complaint adequately alleges that Defendants had a duty
to disclose.
d. Whether There Was Complete Information in the Market Concerning the Changes
in the Chinese Regulations ofInfant Formula Manufacturers Should Not Be
Determined at This Early Stage
Defendants argue that all of the alleged misstatements and omissions are immaterial given
the "total mix" ofinformation available to investors. (Mov. Br. at 20-21.) Specifically, Defendants
contend that because the new Chinese regulations were publicly known-as evidenced by news
articles, government reports, and analyst reports subject to judicial notice--Plaintiffs cannot show
a misstatement or an omission of material fact. (Id.)
Lead Plaintiffs counter that Defendants "repeatedly and directly obfuscated the impact" of
the Chinese regulations, such that a reasonable investor could not have ascertained the effect of
the changes. (Opp. Br. at 20-21.) Additionally, Lead Plaintiffs argue that, to prevail on this theory,
Defendants would have to show that the market understood the regulations' implications, which
is a fact question not properly addressed at this stage. (Id. at 21.)
"The 'truth on the market' defense recognizes that a statement or omission is materially
misleading only ifthe allegedly undisclosed facts have not already entered the market." The Winer
Family
v. Queen, No. 03-4318, 2004 WL 2203709, at *4 (E.D. Pa. Sept. 27, 2004) ajf'd sub
nom, Winer Family Tr. v. Queen, 503 F.3d 319 (3d Cir. 2007). "To prevail on a 'truth on the
market' defense at th[ e] [motion to dismiss] stage of the litigation ... defendants must establish
that defense as a matter oflaw on the basis of the allegations of the Amended Complaint[.]" In re
33
Res. Am. Sec. Litig., No. 98-5446, 2000 WL 1053861, at *5 (E.D. Pa. July 26, 2000). Again, the
Court is guided by its duty to accept all factual allegations as true and to construe the Amended
Complaint in a light most favorable to Lead Plaintiffs. Given the strong inferences in favor of
Lead Plaintiffs, the Court finds that it is inappropriate to rule at this stage whether the truth on the
market defense applies. See, e.g., Ganino v. Citizens Utilities Co., 228 F.3d 154, 167 (2d Cir.
2000) ("The truth-on-the-market defense is intensely fact-specific and is rarely an appropriate
basis for dismissing a § 1O(b) complaint for failure to plead materiality.").
e. Lead Plaintiffs Have Sufficient Plead Allegations Relating to Internal Controls
Finally, with respect to internal controls, Lead Plaintiffs allege that Enzymotec's February
13, 2014 Form 20-F included SOX certifications by Defendants Katz and Bryan, in which they
certified in part that "this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report"
and "[b ]ased on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report ...." (AC
if
110.)
Defendants argue that Lead Plaintiffs fail to explain how these SOX certifications were
false or misleading. (Mov. Br. at 10 n.7.) Defendants contend that Lead Plaintiffs have failed to
state a claim in part because Enzymotec has not restated any of its financial results and
Enzymotec's independent auditors have never questioned Enzymotec's internal controls. (Id.)
Lead Plaintiffs counter that they have sufficiently stated a claim for relief with regard to
34
internal controls because they specifically allege that Defendants Katz and Bryan each falsely
certified under Sarbanes-Oxley that Enzymotec maintained effective internal controls over
financial reporting and that the Company's financial statements were accurate and fairly presented
the Company's financial condition. (Opp. Br. at 18.) Lead Plaintiffs contend that Defendants had
no reasonable basis for stating that Enzymotec's financial results did "not contain any untrue
statement" and "fairly present[ ed] in all material respects the financial condition, results of
operations and cash flows" of the Company. (Id.)
Given the early stage of the litigation and the requirement that it must give all inferences
in favor of the plaintiff, the Court finds that Lead Plaintiffs have adequately pled that Defendants
Katz and Bryan each falsely certified that Enzymotec maintained effective internal controls over
financial reporting and that the Company's financial statements were accurate and fairly
represented the Company's financial condition. (AC ifil 110-13.) In particular, in contrast to the
certifications, Lead Plaintiffs specifically allege that the internal controls were deficient, such that
Defendants were allowed to engage in the allegedly fraudulent behavior during the Class Period.
(Id.
if 113.)
The Court finds this sufficient in light of the fact that its role at this stage is not to
determine whether the non-moving party "will ultimately prevail" but whether that party is
"entitled to offer evidence to support the claims." Wilkins, 659 F.3d at 302. (3d Cir. 2011).
Scienter
Defendants move to dismiss the Amended Complaint on grounds that Lead Plaintiffs have
failed to adequately plead scienter. (Mov. Br. at 22-28 (citing AC ifil 7, 21-23, 67, 79, 130, 14950, 152); Reply Br. at 7-12.) Defendants first argue that Lead Plaintiffs present nothing more than
generalized imputations of knowledge, and point out that Lead Plaintiffs rely on the speculative
35
assertions of an outside expert as opposed to a confidential witness, internal memorandum, or other
Company source. (Mov. Br. at 22-23.) Defendants further contend that any allegations of scienter
are undermined by both the timing of the new regulations and the fact that Biostime failed to
accurately predict their impact. (Id. at 24-25.)
Additionally, Defendants argue that Lead Plaintiffs' attempt to plead scienter based upon
the Officer Defendants' stock sales at an allegedly inflated price is without merit, since motive and
opportunity alone cannot give rise to a strong inference of scienter. (Id. at 25-27.) Defendants
assert that Officer Defendants "sold only 35% of their stock in the SPO, thereby remaining heavily
invested in the Company by continuing to hold nearly 500,000 shares" and further note that the
SPO took place in February 2014, approximately three months after Enzymotec's stock price
reached its peak in December 2013. (Id. at 26.) Additionally, Defendants argue that Lead
Plaintiffs have holistically failed to establish scienter since the Company expected continued sales
growth in 2014, made large investments in its krill oil business and increased its raw materials
inventory over 40% between the end of 2012 and 2013, provided early disclosure of its
"disappointing" second quarter 2014 results, and reduced its guidance in May 2014 even when it
had a good quarter. (Id. at 27.)
response, Lead Plaintiffs argue that the Amended Complaint alleges compelling facts
evidencing Defendants' knowledge and recklessness. (Pl. Opp. Br. at 22-25.) First, Lead Plaintiffs
contend that because the alleged misstatements and omissions concerned Enzymotec's core
business about which Defendants regularly spoke, knowledge may be imputed to individual
defendants under the "core operations doctrine." (Id. at 22-23.) Additionally, Lead Plaintiffs
argue that Defendants were in possession of information regarding the Chinese regulations that
36
"undercut their public statements regarding Enzymotec's operations in the Chinese markets,
strength in its relationships with its then-current customers, and its ability to attract new
customers." (Id. at 24-25.)
Furthermore, Lead Plaintiffs contend that Defendants were motivated to commit fraud in
order to inflate the Company's stock price for purposes of profiting through the SPO. (Id. at 2529.) The Amended Complaint alleges that, through the SPO, a total of ten insiders profited by
selling .94 million shares for gross proceeds of approximately $54.3 million, which represented
58%
the shares that these insiders collectively owned at the time, and that Defendants Katz
(233,526 shares) and Bryan (51,802 shares) sold significant amounts of shares for nearly $8
million, representing respectively 35% and 42% of their holdings. (Id. at 25-27 (citing AC if 67).)
Lead Plaintiffs argue that these amounts are suspicious, even if the insiders did not liquidate all of
their shares, especially since the SPO was announced almost contemporaneously with the
Company's announcement ofrecord financial results in February 2014. (Id.)
Additionally, Lead Plaintiffs note that Defendants are primarily located in Israel, with the
operational events in Israel, Sweden, and China, and point to the relaxed particularity rules in
situations where information is peculiarly within a defendant's knowledge or control. (Id. at 27.)
Lead Plaintiffs further allege that Defendants are being disingenuous when they attempt to distance
themselves from the infant formula market, especially given the importance of InFat to the
Company's business. (Id. at 28.)
As noted, "each act or omission alleged to violate [Section lO(b)], [must] state with
particularity facts giving rise to a strong inference that the defendant acted with the required state
of mind [i.e., scienter]." 15 U.S.C. § 78u4(b)(2). Scienter is a "mental state embracing intent to
37
deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). In
evaluating whether a complaint meets this requirement, a court is required to consider inferences
urged by the plaintiff as well as "competing inferences rationally drawn from the facts alleged."
Tellabs, 551 U.S. at 314. A "strong" inference is "more than merely plausible or reasonable--it
must be cogent and at least as compelling as any opposing inference of nonfraudulent intent. ...
The inference ... need not be refutable, i.e., of the 'smoking-gun' genre, or even the 'most
plausible of competing inferences.'" Id. at 314, 324.
The Third Circuit permits a plaintiff to satisfy this requirement with allegations of strong
circumstantial evidence of either conscious behavior or recklessness. S.E.C. v. Infinity Grp. Co.,
212 F.3d 180, 192 (3d Cir. 2000); see also In re Radian Sec. Litig., 612 F.Supp.2d 594, 607 (E.D.
Pa. 2009) (noting that although in Tellabs the Supreme Court specifically reserved the question of
whether recklessness could give rise to civil liability under 1Ob-5, "every court of appeals to
consider the issue has held that a plaintiff can meet the scienter requirement by showing that a
defendant acted intentionally or recklessly.") In this context, recklessness is "highly unreasonable
[conduct], involving not merely simple, or even inexcusable negligence, but an extreme departure
from the standards of ordinary care, ... which presents a danger of misleading buyers or sellers
that is either known to the defendant or is so obvious that the actor must have been aware of it."
S.E. C. v. Infinity Grp. Co., 212 F .3d at 192. Finally, a court considers the entirety of a complaint
in determining "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 this standard."
Tellabs I, 551 U.S. at 322; see also Avaya, 564 F.3d at 273.
The Court finds that when considering the Amended Complaint in its entirety, Lead
38
Plaintiffs have adequately pied scienter. As an initial matter, Lead Plaintiffs have alleged that the
matter at issue is central to the core business of the Company, 17 about which Defendants spoke
regularly. 18 Although such allegations are not sufficient in and of themselves to show scienter, the
Court keeps them in consideration when viewing the entirety of the Amended Complaint. See Mill
Bridge V, Inc. v. Benton, No. 08-2806, 2009 WL 4639641, at *31 (E.D. Pa. Dec. 3, 2009) ("[W]hile
a court may not infer that a defendant was aware of information merely by virtue of his or her
position within a company, where the information relates to the organization's core business, such
facts are powerful circumstantial evidence of scienter.")
Most compelling to the Court when viewing the Amended Complaint holistically are the
allegations surrounding the SPO. Although motive or opportunity "may no longer serve as an
independent route to scienter," Avaya, 564 F.3d at 277-78, Lead Plaintiffs have specifically alleged
that Defendants Katz and Bryan sold large amounts of shares for significant personal financial
gain and that the sales were unusual in scope and timing. See Tellabs, 551 U.S. at 325 (noting that
"personal financial gain may weigh heavily in favor of a scienter inference"); In re Advanta, 180
F.3d at 540 ("[W]e will not infer fraudulent intent from the mere fact that some officers sold stock.
But if the stock sales were unusual in scope or timing, they may support an inference of sci enter.")
(citing In re Burlington Coat Factory, 114 F.3d at 1424) (internal citations and punctuation marks
omitted); see also In re Alpharma Inc. Sec. Litig., 372 F.3d 137, 152 (3d Cir. 2004) (reviewing
complaint for allegations that stock sales were ''unusual in scope (e.g., compared to their total level
of compensation or the size of previous sales) or timing (e.g., compared to the timing of past
See AC iMJ 26, 29, 32, 34 (noting that Nutrition segment made up 96% of Company's revenues in 2012, with InFat
and krill oil sales comprising the vast majority of the segment); see also id. iMJ 28, 93 (suggesting that the Company
viewed itself as a participant in the infant formula industry, despite its corporate structure).
18 See, e.g., AC if 47 (statement from Defendant Katz regarding financial outlook).
17
39
trades)").
particular, the Amended Complaint alleges that as part of the SPO, Defendant Katz sold
233,526 shares, or 35% of his total holdings, for gross proceeds in excess of $6.5 million;
Defendant Bryan sold 51,802 shares, or 42% of his total holdings, for gross proceeds of $1.45
million. (AC if 67.) Furthermore, Lead Plaintiffs have specifically alleged that these sales were
"suspiciously-timed" (id.), in that they occurred at a time when the price of the stock was allegedly
artificially inflated due to Defendants' misrepresentations concerning the impact of the Chinese
regulations. For example, Lead Plaintiffs allege that the SPO was announced on February 13,
2014:
months after the IPO, the same day as favorable guidance (id.
if 48), the same day that
Defendant Katz stated that "[f]or fiscal year 2014, we believe our revenue momentum will build
sequentially throughout the year and enable us to report another record performance.... Looking
ahead, we are very optimistic about our long-term growth prospects based on our competitive
market position" (id.
if 47), and the same day that the Company stated that it "expects net revenues
to continue to grow on a sequential basis throughout the year." (Id.
if
49.) Crucially, Lead
Plaintiffs specifically tie together the timing of these sales with the core of the alleged
misrepresentations: at the time of the SPO, Defendants were aware, or should have been aware, of
the severe negative impact that the impending Chinese regulations would have on the Company's
business. (Id.
ifif 55-65.)
Furthermore, Lead Plaintiffs allege that the truth about the impact of the
regulations was fully revealed six months after the SPO, at which point the price of the shares
tanked. (Id.
irif 68-82.)
Thus, Lead Plaintiffs allege that when the SPO was effectuated, the price
of the stock was inflated as a result of the misrepresentations.
The allegedly suspiciously timed stock sales are bolstered by the declaration of Dr.
40
Mingruo Guo, which Lead Plaintiffs attach to the Amended Complaint to support their contentions
that Defendants should have known of, and anticipated, the true impact of the regulatory changes.
(AC,
A). Although the declaration of an outside expert of a food scientist such as Dr. Guo is
admittedly not as strong as a confidential witness, the declaration of Dr. Guo only serves to
supplement the allegations contained in the Amended Complaint, 19 especially where the
operational events occurred in Israel, Sweden, and China. In re Burlington Coat Factory Sec.
Litig., 114 F.3d at 1418 ("[T]he normally rigorous particularity rule has been relaxed somewhat
where the factual information is peculiarly within the defendant's knowledge or control.").
The particularized allegations before this Court of motive viewed in the context of the
Amended Complaint as a whole are compelling. In short, the allegations significantly enhance the
inference of sci enter, especially when read in light of relevant Third Circuit precedent. See Avaya,
564
at 279 (concluding that allegations concerning stock transactions did not significantly
enhance the inference of scienter where defendants sold 1.7% and 17.7% of their respective
holdings and "trading practices remained consistent year-over-year"); In re Suprema Specialties,
Inc.
Litig., 438 F.3d 256, 277-78 (3d Cir. 2006) (concluding that allegations that stock sales
were suspiciously timed since they occurred six weeks before defendants retired, occurred at
artificially high prices as a result of the scheme, and resulted in significant personal gain of
approximately $7 million were sufficient to survive motion to dismiss, despite the fact that
defendants had retained significant percentage of stock holdings).
Upon a holistic consideration of the allegations contained in the Amended Complaint, the
19
Pub. Employees Ret. Sys. ofMississippi, Puerto Rico Teachers Ret. Sys. v. Amedisys, Inc., 769 F.3d 313, 323 (5th
Cir.
cert. denied sub nom. Amedisys, Inc. v. Pub. Employees' Ret. Sys. ofMississippi, 135 S. Ct. 2892 (2015)
(noting use of declaration of outside expert).
41
Court finds that a reasonable person would deem the inference of scienter at least as strong as any
opposing inference. See Tellabs, 551 U.S. at 314, 326. Accordingly, the Court finds that Lead
Plaintiffs have adequately alleged a claim under Section 1O(b) and Rule 1Ob-5 of the Securities
Exchange Act, sufficient to allow the claim to proceed at this time.
B. Control Person Claim Against the Officer Defendants under§ 20(a) of the Securities
Exchange Act2°
Section 20(a) of the Securities Exchange Act of 1934 creates a cause of action against
individuals who exercise control over a "controlled person," including a corporation, that has
committed a violation of Section lO(b). 15 U.S.C. § 78t(a); In re Suprema, 438 F.3d at 284.
Accordingly, liability under Section 20(a) is derivative of an underlying violation of Section 1O(b)
by the controlled person. Avaya, 564 F.3d at 252; In re Alpharma Inc. Sec. Litig., 372 F.3d 137,
153 (3d Cir. 2004) ("[P]laintiffs must prove not only that one person controlled another person,
but also that the 'controlled person' is liable under the Act.") (internal quotation marks omitted).
Because the Court has found Lead Plaintiffs have adequately alleged a violation of the
Securities Exchange Act, it likewise finds that Lead Plaintiffs Plaintiff have sufficiently stated a
claim for control liability under Section 20(a). See In re NU! Sec. Litig., 314 F. Supp. 2d 388, 418
(D.N.J. 2004). Accordingly, the Court will deny Defendant's motion to dismiss this claim.
C. Securities Act Claims 21
The Securities Act creates federal duties related to the registration and disclosure of public
offerings. In re Suprema, 438 F .3d at 269 (citations and quotation marks omitted). Lead Plaintiffs
assert claims arising under the following sections of the Securities Act: Section 11, Section
The § 20(a) claim is asserted against the Officer Defendants. (AC iMJ 133-38.)
The§ 11 claim is alleged against all Defendants (AC iMJ 169-81); the§ 12(a)(2) claim is alleged against Enzymotec
(AC i!if 182-89); and the§ 15 claim is alleged against the Individual Defendants (AC iii! 190-95).
20
21
42
1
and Section 15. (AC at 60-74.) Sections 11 and 12(a)(2) of the Securities Act "impose
civil liability for the making of materially false statements in registration statements and
prospectuses." In re Adams GolfInc. Sec. Litig., 381F.3d267, 273 (3d Cir. 2004); see 15 U.S.C.
§§ 77k, 77l(a)(2). In addition, Section 15 allows a plaintiff to bring a claim for "control liability"
against a person who controls a person liable for an underlying violation of the Securities Act. See
In re Suprema, 438 F.3d at 284-85.
Section 11 of the Securities Act concerns material misstatements or om1ss1ons m
registration statements. 15 U.S.C. § 77k(a). Under Section 11, "a private action for damages may
be brought 'by any person acquiring such security' if a registration statement, as of its effective
date:
'contained an untrue statement of material fact'; (2) 'omitted to state a material fact
required to be stated therein'; or (3) omitted to state a material fact 'necessary to make the
statements therein not misleading.'" In re Suprema, 438 F.3d at 269 (quoting 15 U.S.C. § 77k(a)).
Furthermore, a Section 11 claim may be brought against the issuer of securities, its directors or
partners, underwriters, and accountants who prepared or certified the registration statement. Id.
Section I is a "virtually absolute liability provision[], which do[ es] not require plaintiffs to allege
that defendants possessed any scienter." In re Adams Golf, Inc. Sec. Litig., 381 F.3d 267, 274 n.
7 (3d.
2004). "If a plaintiff purchased a security issued pursuant to a registration statement,
he need only show a material misstatement or omission to establish his prima facie case." Jn re
Suprema, 438 F.3d at 269 (citing Herman & MacLean v. Huddleston, 459 U.S. 375, 382 (1983)).
Section 12(a)(2) provides civil liability for anyone who offers or sells a security "by means
of a prospectus or oral communication, which includes an untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements ... not misleading." 15
43
U.S.C. § 77l(a)(2). Thus, to state a claim under section 12(a)(2), a plaintiff must allege that they
purchased securities pursuant to a materially false or misleading prospectus or oral
communication. In re Adams Golf, Inc. Sec. Litig., 381 F.3d 267, 273-74 (3d Cir. 2004) (internal
citations and quotations omitted). And, like section 11, section 12 is a "virtually absolute" liability
provision which does not require a plaintiff to allege that the defendants possessed scienter, and
instead requires only rather, only that the plaintiff made the purchase pursuant to a materially false
or misleading prospectus or oral communication. In re Adams Golf, 381 F.3d at 274 & n.7.
Section 15 of the Securities Act provides for joint and several liability on the part of one
who controls a violator of Section 11 or Section 12. See 15 U.S.C. § 770; see also, In re Adams
Golf, 381 F.3d at 273 n.3. To state a claim under § 15, plaintiffs must prove that one person
controlled another person or entity and that the controlled person or entity committed a primary
violation of the securities laws. In re Suprema, 438 F.3d at 284.
Section 11 and 12(a)(2) claims are generally not subject to the heightened pleading
standards required under the PSLRA and Federal Rule of Civil Procedure 9(b ); rather, the liberal
notice pleading requirements of Rule 8 generally apply. See In re Suprema, 438 F.3d at 269-70
(citations omitted).
However, "where the plaintiff grounds [the] Securities Act claims in
allegations of fraud-and the claims thus 'sound in fraud'-the heightened pleading requirements
of Rule 9(b) apply." Id. (citing Cal. Pub. Emps. 'Ret. Sys. v. Chubb Corp., 394 F.3d 126, 161-63
(3d Cir.2004) ("CALPERS")). However, if the allegations are pled separately and plaintiffs
expressly premise Securities Act claims on negligence rather than fraud, Rule 9(b) is inapplicable.
Id. at
273 ("[W]here ... individual defendants are accused in separate claims of the same
complaint as having violated Section 11, Section 12(a)(2), and Section lO(b), the Securities Act
44
claims do not sound in fraud if ordinary negligence is expressly pied in connection with those
claims.") Id. at 273. Inin re Suprema the plaintiff carefully separated its allegations of negligence
from
allegations of fraud against the same defendants by "pleading its Section 11 and Section
12(a)(2) claims in negligence before-and wholly apart from-pleading its fraud-based Section
1O(b) claims." Id.
Here, the Amended Complaint similarly separates the factual allegations supporting the
Securities Act claims from those supporting the Exchange Act claims. (See Compl.) The Section
lO(b) claims are pied before the Section 11 and 12(a)(2) claims. (Id.) The Securities Act claims
are prefaced by the following statement: "In this part of the Complaint, Lead Plaintiffs assert a
series
strict liability and negligence claims based on the Securities Act . . . [and] expressly
disclaim any allegations of knowing or reckless misconduct[.]" (AC
if 139.) Accordingly, the
Court finds that Plaintiff has pied its Securities Act claims in a manner sufficient "to avoid
triggering Rule 9(b)." In re Suprema, 438 F.3d at 273.
Keeping in mind the elements to state a claim and the requirement that the Court must
accept all factual allegations as true at this stage, the Court finds that Lead Plaintiffs have
sufficiently pied these causes of actions to survive the instant motion to dismiss. (See AC ifil 16981(Section11); id. iii! 182-89 (Section 12(a)(2)); id. iii! 190-95 (Section 15).)
With respect to standing for these claims, Lead Plaintiffs specifically allege that they
purchased Enzyrnotec securities issued in, or traceable to, the offering of Enzyrnotec securities
that were conducted pursuant to either the IPO or SPO. (AC iii! 141-43.) In the Third Circuit, the
question of determining standing through tracing is a "factual one, to be resolved through
discovery, as to whether plaintiffs can demonstrate that the shares they allegedly purchased are in
45
fact traceable to the registration statement alleged to be false and misleading." In re Suprema, 438
F.3d at
n.7 (concluding that plaintiffs' assertions of purchases "in" and "traceable to" the
Suprema stock offerings were sufficient at the pleading stage). "If, as appellees suggest, plaintiffs
have misrepresented the circumstances of their stock purchases and do not in fact have standing,
appellees can raise that matter at the summary judgment stage after discovery." Id. Accordingly,
accepting all allegations in the Amended Complaint as true at this stage as it must, the Court finds
that Lead Plaintiffs have adequately alleged standing.
Furthermore, as discussed above in Part A, supra, Lead Plaintiffs have adequately alleged
that the Prospectuses contained untrue statements or omissions of material facts. For example,
even though Defendants warned generally of"significant and increasing government regulations"
and specifically identified the Ministry of Health in China in their SPO Prospectus, Lead Plaintiffs
specifically allege that these risks had already come to pass and that it was therefore unreasonable
to make generalized warnings when Defendants knew, or should have known, of the specific
re!_:,JUlations and their likely effect. (See AC
ifif 165-68; see also id. 161-64.) Additionally, the
Court declines to rule on whether the truth-on-the-market doctrine applies at this stage and believes
that discovery is necessary to determine that doctrine's applicability. See, e.g., Ganino, 228 F.3d
at 1
(2d Cir. 2000) ("The truth-on-the-market defense is intensely fact-specific and is rarely an
appropriate basis for dismissing a § lO(b) complaint for failure to plead materiality."). 22
Accordingly, the Court denies the Motion to Dismiss the Securities Act claims. 23
22
See also Todd R. David, Jessica P. Corley, Ambreen A. Delawalla, Heightened Pleading Requirements, Due
Diligence, Reliance, Loss Causation, and Truth-on-the-Market -Available Defenses to Claims Under Sections 11
and 12 of the Securities Act of 1933, 11 Transactions: Tenn. J. Bus. L. 53, 87-91 (2010).
23
Although Defendants argue that the claim against Defendant Gilead Fortuna must be dismissed because he was no
longer a director of Enzymotec when the registration statement for the IPO went effective (Mov. Br. at 29 n.19), the
Court denies the motion at this time. Even though Lead Plaintiffs did not directly respond to this point, Defendants
do not cite to anything which would allow the Court to confirm this contention. Accordingly, the Court denies the
46
CONCLUSION
For the reasons above, the Court grants in part and denies in part the Motion to Dismiss.
An appropriate Order accompanies this Opinion.
DATED: December
2015
JQ
L. LINARES
~ITED STATES DISTRICT JUDGE
motion with respect to Defendant Fortuna at this time but permits to Defendants to remove at summary judgment.
47
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