Sills v. United Natural Foods, Inc.

Background

Dan Sills and George Dick, individually and on behalf of others similarly situated, brought a securities-fraud action against United Natural Foods, Inc. (UNFI) and several executives, including Christopher P. Testa. The plaintiffs allege that UNFI used “forward buying”—stocking up on inventory after learning of supplier price increases but before those increases took effect—to increase its earnings in 2022. They allege that the defendants’ public statements were misleading because they did not disclose the effect of the unusually high level of forward buying on UNFI’s results.

The plaintiffs asserted claims under Section 10(b) of the Securities Exchange Act and Rule 10b-5, as well as Section 20(a), which allows control-person liability. In a prior opinion, the Court held that the plaintiffs adequately stated a primary securities-fraud claim and denied the defendants’ motion to dismiss the Section 20(a) claim against Testa because the defendants had relied only on the alleged failure to plead the primary violation. The Court did not then decide whether the allegations against Testa satisfied the other Section 20(a) requirements.

Motion and Legal Standard

Testa moved under Rule 12(c) for judgment on the pleadings on the remaining Section 20(a) claim. A Rule 12(c) motion uses the same standard as a motion to dismiss for failure to state a claim: the Court accepts the complaint’s factual allegations as true, draws reasonable inferences for the plaintiffs, and asks whether the claim is plausible.

To state a Section 20(a) claim, the plaintiffs had to allege three things: a primary securities-law violation, Testa’s control over the primary violator, and Testa’s culpable participation in the fraud. The Court had already found that the plaintiffs adequately alleged the primary violation.

Control

The Court held that the plaintiffs adequately alleged that Testa exercised control. Testa was UNFI’s President during the relevant period. The complaint alleged that he had authority over the contents of UNFI’s reports, press releases, and presentations; received relevant statements before or shortly after issuance; had the ability to prevent or correct misleading statements; and participated in UNFI earnings calls.

The Court acknowledged that Testa’s title alone would not establish control and that the allegations concerning his participation in one earnings call were limited. But the Court concluded that his participation in the call, together with his alleged authority and access to company statements, plausibly suggested that he exercised actual control over misleading statements. The Court also considered the context of his statements alongside statements by another executive that allegedly omitted information about forward buying.

Culpable Participation

The Court also held that the plaintiffs adequately alleged culpable participation. The Court noted that courts disagree about whether this element must be pleaded with the same particularity required for scienter, meaning a defendant’s required state of mind in a securities-fraud claim. The Court concluded that the plaintiffs had sufficiently alleged culpable participation under either approach.

The Court relied on its prior finding that the plaintiffs adequately pleaded conscious recklessness by executives Alexander Miller Douglas and John W. Howard. Seven of the eight bases for that earlier finding also applied to Testa. The Court further considered allegations that Testa sold more than 27,000 shares of UNFI stock—about 17 percent of his holdings—for more than one million dollars on January 23, 2023, about one and a half months before defendants reported negative information about the market. The Court concluded that these allegations, combined with the other allegations, supported an inference of the required state of mind.

Disposition

The Court held that the plaintiffs adequately pleaded all three elements of their Section 20(a) claim against Testa. It denied Testa’s motion for judgment on the pleadings and directed the Clerk of Court to terminate ECF No. 81.