Sherif El Dabe v. Calavo Growers, Inc., 16-55426

Calavo acquired Renaissance Food Group (RFG) in 2011, paying $16M at closing plus up to $84M contingent consideration payable if RFG met financial targets within five years.
Calavo disclosed the contingent payment terms but classified the contingent consideration as equity (not liability) in fiscal 2011–2013 financial statements.
That accounting treatment overstated Calavo’s earnings; RFG met targets within three years, making the contingent payment due and prompting a restatement.
In 2015 Calavo announced it had misclassified the contingent consideration, issued corrections and non-cash charges to its 2012–2014 statements, and reduced reported 2014 earnings by about $40M.
Plaintiffs (shareholders) sued under § 10(b)/Rule 10b-5 and § 20(a), alleging defendants (Calavo, two executives, five audit committee members) knowingly or recklessly issued false/misleading financials to inflate results and secure bonuses.
The district court dismissed the Second Amended Complaint under Rule 12(b)(6); the Ninth Circuit affirmed, finding plaintiffs failed to plead a strong inference of scienter.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether statements violated §10(b)/Rule 10b-5 via false/misleading financials	Calavo knowingly or recklessly misclassified contingent consideration as equity, causing large earnings overstatements	Misclassification was an accounting error; auditors issued clean opinions; no facts show defendants knew or were deliberately reckless	Dismissed — plaintiffs failed to plead scienter with particularity
Whether magnitude of restatement creates strong inference of scienter	Huge restatement ($40M) indicates conscious misconduct	Size alone insufficient to show intent or recklessness	Dismissed — magnitude insufficient to infer scienter
Whether motive allegations (bonuses, meet expectations, hide drought effects) support scienter	Motive to inflate results supports inference defendants intended deception	Generalized motives are inadequate without corroborating facts (e.g., suspicious trades)	Dismissed — motives alone do not create strong inference
Whether §20(a) control-person claim survives after §10(b) dismissal	§20(a) derivative on primary violation; defendants were control persons	§20(a) depends on adequately pleaded primary securities claim	Dismissed — §20(a) claim fails because §10(b)/Rule 10b-5 claims were dismissed

Lloyd v. CVB Fin. Corp., 811 F.3d 1200 (9th Cir. 2016) (standard of de novo review for Rule 12(b)(6) dismissal decisions)
Or. Pub. Emps. Ret. Fund v. Apollo Group, Inc., 774 F.3d 598 (9th Cir. 2014) (pleading scienter requires particularized facts giving rise to a strong inference)
In re Daou Sys., Inc., 411 F.3d 1006 (9th Cir. 2005) (scienter defined as intent or deliberate recklessness)
In re Software Toolworks, Inc., 50 F.3d 615 (9th Cir. 1994) (expert accounting conclusions do not, by themselves, create scienter)
In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994) (similar limits on inferences from accounting errors)
City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605 (9th Cir. 2017) (restatement magnitude alone does not establish scienter)
Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009) (generalized motive allegations inadequate; control-person liability depends on primary violation)