Liberato v. Grocery Outlet Holding Corp. Securities Litigation

Background

Genriccio Liberato brought a proposed class action against Grocery Outlet Holding Corp. Securities Litigation and other defendants under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. The proposed class consisted of people and entities who purchased Grocery Outlet common stock between August 9, 2023, and May 7, 2024.

The amended complaint focused on Grocery Outlet’s implementation of new enterprise resource planning and information-technology systems manufactured by SAP. Grocery Outlet began using the systems in August 2023. The complaint alleged that the company had not completed end-to-end user-acceptance testing before the rollout and that the transition caused problems with inventory visibility, data integrity, procurement, distribution, accounting, and financial reporting. The complaint also pointed to later disclosures about continuing disruptions, weaknesses in internal controls, limited financial visibility, and management departures. Grocery Outlet moved to dismiss the amended complaint.

Court’s analysis

To state a claim under Section 10(b) and Rule 10b-5, a plaintiff must adequately allege, among other things, a materially false or misleading statement or omission, a wrongful state of mind known as scienter, reliance, economic loss, and a causal connection between the alleged fraud and the loss. Securities-fraud claims also must satisfy heightened pleading requirements requiring specific facts about the alleged fraud and a strong inference that the defendants acted with intent to deceive or with deliberate recklessness.

The court held that the complaint did not identify a material misrepresentation or omission. First, the court rejected the argument that Grocery Outlet improperly described system-transition risks as hypothetical before the rollout. The court found that the rollout had not yet begun and that the complaint did not show that the risks had already materialized or that new information had made them significantly more likely. The court stated that poor preparation was not the same as fraud and found that the company had disclosed risks of implementation problems and business disruption.

Second, the court rejected the challenge to statements about internal controls. The complaint relied primarily on a February 2024 disclosure that the company’s internal control over financial reporting had been ineffective as of December 30, 2023. The court concluded that this later disclosure did not show that the defendants’ November 2023 statement was false when made. Instead, the court viewed the allegations as showing that company leadership discovered and disclosed adverse information over time.

Third, the court found that the complaint did not adequately allege that the defendants’ predictions that the system-transition problems would soon end were false when made. The court concluded that later statements about forecasting difficulties and limited data visibility did not establish when the defendants learned the extent of those problems or show that the earlier predictions were knowingly misleading. The court also held that the predictions were forward-looking statements and that the complaint did not allege actual knowledge that they were misleading.

The court separately held that the complaint failed to allege scienter. Allegations that executives knew about disruptions, that the company had not completed certain testing, that employees considered the launch premature, and that executives later left or were fired did not create a strong inference that the defendants intended to deceive investors or acted with deliberate recklessness. The court also found that the allegations did not adequately establish loss causation—the required connection between the alleged fraud and the stock-price losses—because the complaint had not adequately alleged that the defendants concealed a risk that later materialized.

Disposition

The court granted Grocery Outlet’s motion to dismiss. The order states that plaintiffs may file an amended complaint addressing the identified deficiencies within 28 days of the order. The opinion does not state that the motion was granted with or without prejudice.