In re TerraVia Holdings, Inc.

Background

This securities class action was brought by the TerraVia Investor Group on behalf of people and entities that purchased or otherwise acquired TerraVia’s publicly traded securities between May 4, 2016, and November 6, 2016. The claims arose under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. The defendants were TerraVia Holdings, Inc.; former CEOs Jonathan S. Wolfson and Apurva S. Mody; and former CFO and COO Tyler W. Painter.

The investors alleged that TerraVia made public statements about the health benefits and commercial viability of its algae-based food products while failing to disclose adverse gastrointestinal-reaction reports and product recalls involving products sold by Honey Stinger and Soylent. TerraVia filed for bankruptcy in August 2017, and the case proceeded against Wolfson, Mody, and Painter.

Motion and governing standards

The defendants moved to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), arguing that the complaint did not adequately plead falsity, scienter, or loss causation. Scienter means the required wrongful state of mind, such as an intent to deceive or defraud. Because this was a securities-fraud case, the complaint also had to meet heightened requirements under Rule 9(b) and the Private Securities Litigation Reform Act, including identifying each misleading statement, explaining why it was misleading, and alleging particular facts supporting a strong inference of scienter.

Statements that could proceed

The court held that TerraVia’s general failure to disclose adverse reports and recalls, standing alone, could not support the fraud claims. But those omissions could make particular public statements misleading when viewed in context. Once TerraVia publicly promoted its partnerships with Honey Stinger and Soylent, it had to describe those relationships without misleading investors.

The court found sufficient allegations concerning statements about the commercial viability of TerraVia’s algae-based food products, including a May 4, 2016 statement by Wolfson that AlgaVia protein was gaining traction with producers such as Soylent and Honey Stinger and that food-industry companies were embracing TerraVia’s products. The court also found that TerraVia’s unqualified website statement that its products had “high protein digestibility” could be misleading in light of the alleged gastrointestinal reactions and recalls.

The court emphasized that the investors did not have to prove at the pleading stage that TerraVia’s products actually caused the reported illnesses. The existence of the reports and the fact that TerraVia’s partners attributed adverse reactions to its ingredients could themselves be information that made statements about the products’ health benefits and commercial viability misleading.

The court also held that the complaint adequately alleged scienter. It relied on allegations that TerraVia was notified by May 2016 that Honey Stinger’s manufacturer had identified TerraVia’s algae ingredient as the cause of customer gastrointestinal distress and that TerraVia acknowledged reports of adverse reactions in a June 27, 2016 letter. Those reports, together with two major recalls, supported a strong inference of the required wrongful state of mind at the pleading stage.

The court further held that the investors adequately pleaded loss causation, meaning a causal connection between the alleged deceptive conduct and their financial loss. The complaint alleged that a November 7, 2016 Bloomberg article disclosed the connection between TerraVia’s ingredients and the Soylent recall, as well as TerraVia’s earlier acknowledgment of adverse-reaction reports, and that TerraVia’s share price then declined.

Dismissed statements

The court dismissed the remaining challenged statements with leave to amend. These included generic mission statements and product descriptions, statements calling the products “truly better,” “high-value,” “healthier,” or innovative, certain safety-related statements, and executive opinions about TerraVia’s progress and opportunities. The court concluded that the investors had not pleaded particular facts showing that many of these statements were false or misleading, that some were accurate historical statements, and that others were subjective promotional statements or opinions. The court also found insufficient allegations concerning statements that the products were safe, provided various benefits, or were free of known allergens.

Section 20(a) claim and disposition

The defendants’ request to dismiss the Section 20(a) control-person claim depended entirely on their argument that the investors had not adequately alleged a Section 10(b) or Rule 10b-5 violation. Because the court found that the investors had adequately alleged those violations for some statements and omissions, it denied the motion to dismiss the Section 20(a) claim.

The court ordered that the defendants’ motion was granted in part and denied in part. The investors were allowed to amend the dismissed claims by March 2, 2020, and the parties were directed to file a proposed scheduling order by that date. Judge Donato signed the order.