Case Information
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
:
: IN RE WEIGHT WATCHERS : 19cv2005 INTERNATIONAL INC. SECURITIES :
LITIGATION : OPINION & ORDER
:
:
WILLIAM H. PAULEY III, Senior United States District Judge:
This case presents a familiar narrative: when a company’s earnings plunge and the stock tanks, shareholders flock to court for recourse. But not every stock drop is the product of securities fraud.
Plaintiffs bring this putative class action against Defendants WW International, Inc. (“WW” and f/k/a Weight Watchers International, Inc.), Artal Luxembourg S.A., Artal International S.C.A., Artal Group S.A. (together with Artal Luxembourg S.A., Artal International S.C.A., “Artal”), Raymond Debbane, Mindy Grossman, and Nicholas Hotchkin (collectively, “Defendants”) for violations of the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). At bottom, Plaintiffs allege that Defendants misled investors by failing to disclose that WW’s new business model was reliant on recruiting lapsed members and that WW had abandoned its practice of releasing program innovations at the end of each year. Defendants move to dismiss the Second Amended Complaint under Federal Rules of Civil Procedure 12(b)(6) and 9(b) and the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u-4(b). For the reasons that follow, Defendants’ motion to dismiss is granted.
BACKGROUND
Unless otherwise noted, the following facts are derived from the Plaintiffs’ Second Amended Complaint and are accepted as true for purposes of this motion.
I. The Parties
Plaintiffs purchased shares in Weight Watchers (now known as “WW), a publicly-traded company. Mindy Grossman is the President and CEO of Weight Watchers, and Nicholas Hotchkin serves as its CFO. Raymond Debbane—the CEO of Artal—chairs Weight Watchers’ board of directors. Artal has owned a major stake in Weight Watchers’ from September 1999 until it divested a significant portion of its Weight Watchers stock in 2018. II. WW Overview
Weight Watchers was founded in 1961 as a weight-loss program. (Second Consolidated Amended Class Action Complaint, ECF No. 86 (“SAC”), ¶ 47.) When Jean Nidetch founded the company, she “invited friends to her home in Queens to discuss the best ways to lose weight.” (SAC ¶ 47.) Weight Watchers expanded this in-person weight loss meeting model to millions of members around the globe. (SAC ¶ 47.) To monetize these meetings, members would pay a fee to attend and receive guides on how to lose weight. (SAC ¶¶ 47, 49.) More recently, Weight Watchers has capitalized on the internet by offering a suite of online programs, including workshops and products for additional fees. (SAC ¶ 47.) Weight Watchers also added a “points” system to aid subscribers in tracking what they eat. (SAC ¶ 48.) That system assigned specific point values to different foods, which allowed members to budget calories. (SAC ¶ 6.)
Historically, Weight Watchers’ “‘bread and butter’ customers consisted of middle-aged, white women.” (SAC ¶ 47.) A significant proportion of WW’s new subscriptions come from people who had previously subscribed to the program but allowed their memberships to lapse. (SAC ¶ 55.)
Weight Watchers also relied principally on a seasonal model. (See SAC ¶¶ 50, 157.) Most Weight Watchers customers subscribe between Thanksgiving and the post-New Year’s period when many people make aspirational resolutions regarding diet and weight loss. (See SAC ¶¶ 50, 157.) To monetize the seasonal nature of diets, Weight Watchers would release program innovations in early December of each year. (SAC ¶ 51.) These program innovations typically “took the form of offering a new benefit or an attractive modification to the Company’s program (e.g., a simpler or improved diet plan, a new counseling program, or other new service benefit).” (SAC ¶ 5.) In that way, potential new subscribers would be motivated to join Weight Watchers as part of their Nеw Year’s resolutions. (SAC ¶¶ 51–55, 158–62.) Plaintiffs allege that program innovations would take between one and two years to develop and launch. (SAC ¶ 54.)
In 2011, Weight Watchers launched its “PointsPlus” program that overhauled how points were calculated in the system. (See Decl. of George S. Wang in Supp. of Defs.’ Mot. to Dismiss, ECF No. 94 (“Wang Decl.”), Ex. A.) [1] This program revamped how Weight Watchers calculated points to encourage more “nutrient dense foods.” (Wang Decl. Ex. A, at 1.) In 2012, Weight Watchers introduced “WW 360,” which allowed for expanded online weight loss tools. (See Wang Decl. Ex. A.) For its end of the year update in 2013, Weight Watchers offered a “Simple Start” program that eased new members’ entry into the Weight Watchers ecosystem. (See Wang Decl. Ex. B.) In 2014, Weight Watchers added a feature for users to chat with experts and coaches. (See Wang Decl. Ex. C.) In 2015—much like in 2011—Weight Watchers changed its point calculation system with its “Beyond the Scale” program that included “SmartPoints.” (See Wang Decl. Ex. D.) This program sought to reinvent Weight Watchers’ point allocation by “translating complex nutritional information into one simple number,” and “nudg[ing] members toward a pattern of eating that includes more lean protein, fruits and vegetables, and less sugar and saturated fat.” (Wang Decl. Ex. D, at 1.) In 2016, Weight Watchers offered new subscribers an Apple Watch as an incentive to sign up and track their fitness goals. (See Wang Decl. Ex. E.) In 2017, Weight Watchers launched a “Freestyle” program which allotted zero points to certain foods. (See SAC ¶¶ 56–61, 163–68; Wang Decl. Ex. G.) This innovation was a major overhaul of the Weight Watchers points system and was immensely popular, precipitating a jump in Weight Watchers’ earnings and stock price. (SAC ¶¶ 57–59, 61, 164–66, 168.)
III. WW Changes its Business Model
In February 2018, Weight Watchers determined tо change its core ethos by transitioning from a weight loss program to a wellness program. Weight Watchers even changed its name from Weight Watchers to WW, to focus on wellness. (SAC ¶ 83.) In Grossman’s words, WW sought to stress that “[b]eing healthier is not just about weight anymore. It’s about overall health and wellness—being your best self.” (SAC ¶ 60.) Broadening WW’s appeal was key to this new strategy. (See SAC ¶¶ 60, 68–73.)
Before the paradigm shift, WW subscribers were overwhelmingly comprised of middle-aged, Caucasian women. (SAC ¶ 55.) After the shift, WW sought to reach an array of demographic groups, including younger and more ethnically diverse groups that had historically been under-represented in the WW community. (SAC ¶ 83.) WW planned to achieve this goal in part by partnering with “brand influencers” and celebrities to draw a younger and more diverse audience. (See SAC ¶¶ 60, 92–93, 167.) While engaging in this rebranding effort, WW failed to disclose that it would not implement a major program innovation at the close of 2018. (SAC ¶ 84.)
Initially, this strategy appeared to pay off. In Q1 2018, overall recruitment numbers were up over the same period in 2017 and a significant percentage of the signups were brand-new to WW. (See Wang Decl. Ex. P, at 5.) WW’s earnings also rose dramatically compared to Q1 2017. (See Wang Decl. Ex. P, at 6.)
WW additionally sought to reduce the seasonality in its business model.
Typically, people sign up for weight loss programs in the winter, especially around the beginning of the new year with people making New Year’s resolutions. (See SAC ¶¶ 2, 5, 50, 157; Wang Decl. Ex. JJ, at 7.) But WW wanted to move away from that model for two reasons. First, it would “inspire people to be healthier all year long,” which would advance WW’s transition from a weight-loss program to a wellness company. (Wang Decl. Ex. K, at 10.) Second, a year-round focus would reduce seasonality in WW’s revenues. (See Wang Decl. Ex. R, at S-7.) Throughout 2018, WW launched a series of innovations to accomplish their goal of year-round wellness. This included a line of kitchen tools and products in March, (see Wang Decl. Ex. M), a social impact campaign in May, (see Wang Decl. Ex. X), a “Summer of Impact” campaign to promote year-round health in June, (see Wang Decl. Ex. Y), a member referral program in July, (see Wang Decl. Ex. JJ, at 8–9), a meal-kit program in September, (see Wang Decl. Ex. JJ, at 11), and a membership rewards program in October, (see Wang Decl. Ex. JJ, at 10).
WW also launched a number of program innovations in December 2018. This included a partnership with Aaptiv to offer curated workouts, a partnership with Headspace to offer mediation, a social network, “FitPoints” which measured personalized activities, and a partnership with Blue Apron to have meal kits delivered that were automatically tracked in the WW system. (See Wang Decl. Exs. MM, NN.) However, Plaintiffs aver that these changes were a significant departure from WW’s practice of releasing “meaningful” program innovations at the end of each calendar year. (SAC ¶¶ 9, 20, 85.)
IV. WW’s Earnings Slide
WW’s new strategies did not drive subscriber growth at the end of 2018. WW was not able to attract as many new subscribers at it had previously touted. (See SAC ¶ 13.) When reporting the 2018 results, WW lowered its earnings guidance for 2019 to $1.25–$1.50 per share compared with a reported $3.19 earnings per share. (SAC ¶ 225.) WW stock dropped precipitously. It fell 33% from $29.57 at the close on February 26, 2019—before the earnings release—to $19.37 on February 27, 2019. (See SAC ¶¶ 97, 227.) Notably, this is a 72% decline from the stock’s May 2018 secondary public offering price of $69. (SAC ¶¶ 97, 227.) During the earnings call accоmpanying this announcement, WW’s CEO, Grossman, noted that the WW “campaign did not drive recruitment of our significant universe of lapsed members,” and that WW’s “winter advertising did not drive consumers, particularly our former members to action in the way we had hoped.” (SAC ¶ 89.)
V. Secondary Public Offerings
During 2018, Artal reduced its WW holdings. On May 15, 2018, WW conducted a secondary public offering (“SPO”) in which the Company announced that Artal was selling 8.625 million of WW shares. (SAC ¶¶ 183; Wang Decl. Ex. R.) Through this SPO, Artal reduced its WW holdings from 44% to 33% and received $571,320,000. (SAC ¶¶ 36, 39, 186; Wang Decl. Ex. R, at 1, S-10.) A consortium of investment banks underwrote the SPO. (SAC ¶¶ 33, 36, 66–67; Wang Decl. Ex. R, at S-30.) The offering materials for the SPO included a registration statement, (SAC ¶ 65; Wang Decl. Ex. S), and prospectus supplement, (SAC ¶ 66; Wang Decl. Ex. R), which incorporated certain of WW’s prior annual and quarterly SEC filings by reference. (See Wang Decl. Ex. R, at S-36, S-37; see also SAC ¶ 82 (“[t]he Offering Materials . . . incorporated the 2017 10-K and the 1Q18 10-Q”).)
In August 2018, WW conducted a second SPO of Artal shares. Through underwriters, Artal disposed of approximately 6 million shares and reaped $456 million, thereby reducing its holdings from 33% to 22%. (SAC ¶¶ 143, 151, 214.)
Plaintiffs allege that Hotchkin sold 131,466 WW shares, which was
approximately 61% of his WW holdings. (SAC ¶ 215.) However, this fact is contested by Defendants. Defendants assert that in August 2018, Hotchkin exercised approximately 130,000 options and netted over $6 million. (See Wang Decl. Ex. FF.) Defendants aver that Hotchkin exercised his oldest RSU and PSU options, [2] which did not change the approximately 84,000 WW shares he held. (See Wang Decl. Ex. V.) Defendants further argue that if Hotchkin’s RSU and PSU options are taken into account, Hotchkin increased his WW position due to his RSU vesting schedule. (See Wang Decl. Ex. VV, at 75.)
VI. Procedural History
On March 4, 2019, Plaintiffs filed this putative class action suit alleging Exchange Act violations against Defendants. (See ECF No. 1.) On March 21, 2019, a second action asserting substantially similar claims against WW was filed in this District. (Seе ECF No. 63, at 1.) On June 12, 2019, this Court consolidated the actions, appointed City of Omaha Police and Fire Retirement System and the Weight Watchers Investment Group as co-lead plaintiffs, and appointed Scott+Scott Attorneys at Law LLP and Grant & Eisenhofer P.A. as co-lead counsel. (ECF No. 63.) On July 31, 2019, Plaintiffs filed their Consolidated Amended Class Action Complaint. (ECF No. 74.) On September 27, 2019, Plaintiffs amended their complaint to add Securities Act claims relating to WW’s secondary stock offering. (ECF No. 86.) Plaintiffs specifically allege Defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act, and Sections 10(b) and 20(a) of the Exchange Act. The putative class period is from May 4, 2018 to February 26, 2019. (SAC ¶¶ 7, 13.)
Plaintiffs allege that the May 7, 2018 Prospectus and the May 10, 2018 Prospectus Supplement represented that WW sought to grow the company by seeking a more diverse membership base. (See SAC ¶¶ 68–81.) However, Plaintiffs allege that these prospectuses were fundamentally misleading because WW failed to disclose that even with their attempt at a broader membership base, WW still relied on recruiting lapsed members. Additionally, Plaintiffs allege that WW failed to disclose that it would no longer follow the “formula” and release a “meaningful” program at the end of 2018. (See SAC ¶¶ 82–86.)
Plaintiffs allege that Artal saw the end of 2017 stock price as a great opportunity to divest. Accordingly, Plaintiffs allege this provided motive for WW to conceal the fact that their strategy relied on recruiting lapsed members and that they did not plan to release a major program innovation in 2018. Plaintiffs contend the truth was revealed on February 26, 2019, when WW announced disappointing 2018 earnings. (SAC ¶ 13.)
Plaintiffs have withdrawn their Exchange Act claims with regard to the lapsed member allegatiоns. (Pls.’s Mem. of Law in Opp’n to Def.’s Mot. to Dismiss, ECF No. 95 (“Opp’n”), at 17 n.12.) However, Plaintiffs still allege that WW’s failure to disclose that recruiting lapsed members was critical to their strategy violated Sections 11, 12(a)(2), and 15 of the Securities Act.
DISCUSSION
I. Legal Standard
a. Motion to Dismiss
On a motion to dismiss, a court accepts all facts alleged in the complaint as true
and construes all reasonable inferences in a plaintiff’s favor. ECA, Local 134 IBEW Joint
Pension Tr. of Chi. v. JP Morgan Chase Co.,
Moreover, claims sounding in securities fraud must meet the heightened pleading
requirements of Federal Rule of Civil Procedure 9(b). Kalnit v. Eichler,
Accordingly, in addition to providing a facially plausible claim to relief, Plaintiffs
“must state with particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P.
9(b). Although “[m]alice, intent, knowledge, and other conditions of a person’s mind may be
alleged generally,” Fed. R. Civ. P. 9(b), the relaxation of the particularity requirement for
conditions of mind must not be mistaken for a “license to base claims of fraud on speculation
and conclusory allegations,” Acito v. IMCERA Grp., Inc.,
b. Section 10(b) of the Exchange Act
To assert a claim under Section 10(b) of the Exchange Act, a “plaintiff must
prove (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a
connection between the misrepresentation or omission and the purchase or sale of a security; (4)
reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.”
Amgen Inc. v. Conn. Ret. Plans & Tr. Funds,
c. Section 20(a) of the Exchange Act
To plead a control person claim under Section 20(a) of the Exchange Act, “a
plaintiff must show (1) a primary violation by the controlled person, (2) control of the primary
violator by the defendant, and (3) that the defendant was, in some meaningful sense, a culpable
participant in the controlled person’s fraud.” ATSI Commc’ns,
d. Section 11 of the Securities Act
“Section 11 of the Securities Act imposes liability on issuers and other signatories
of a registration statement that, upon becoming effective, ‘contain[s] an untrue statement of a
material fact or omit[s] to state a material fact required to be stated therein or necessary to make
the statements therein not misleading.’” Litwin v. Blackstone Grp., L.P.,
Moreover, “[w]hen analyzing offering materials for compliance with the
securities laws, we review the documents holistically and in their entirety.” In re Morgan
Stanley Info. Fund,
e. Section 12(a)(2) of the Securities Act
To state a claim under Section 12(a)(2), the plaintiff must allege: “(1) the
defendant is a ‘statutory seller’; (2) the sale was effectuated ‘by means of a prospectus or oral
communication’; and (3) the prospectus or oral communication ‘include[d] an untrue statement
of a material fact or omit[ted] to state a material fact necessary in order to make the statements,
in the light of the circumstances under which they were made, not misleading.’” In re Morgan
Stanley Info Fund,
f. Section 15 of the Securities Act
To plead a control person claim under Section 15 of the Securities Act, “plaintiffs
must allege: (i) an underlying primary violation of the securities laws by the controlled person;
(ii) control over the controlled person; and (iii) particularized facts as to the controlling person's
culpable participation in the violation of the controlled person.” DeMaria v. Andersen, 153 F.
Supp. 2d 300, 314 (S.D.N.Y. 2001), aff’d,
II. Documents Incorporated by Reference
Defendants append a raft of SEC filings to their opposition. Plaintiffs urge this
Court to ignore these documents at the motion to dismiss stage. However, this Court may rely
on documents the “plaintiff has actual notice of . . . and relied upon . . . in framing the
complaint.” Cortec Indus., Inc. v. Sum Holding L.P.,
These SEC filings may be considered for the fact that they contained certain
information and that their contents were publicly disclosed, but not for the truth of their contents.
See Staehr v. Hartford Fin. Servs. Grp., Inc.,
The documents that Defendants appended to their motion are all SEC filings. Moreover, many of the documents Defendants seek to introduce are directly referenced in the SAC. [3] Accordingly, this Court may consider these documents.
III. Confidential Witnesses
Plaintiffs rely on confidential witnesses (“CWs”) to buttress their allegations.
(See, e.g., SAC ¶¶ 19–25, 53–55, 68, 161–62, 187.) WW implorеs this Court to ignore these allegations. However—at the pleading stage—this Court sees little reason to do so.
To demonstrate the purported falsity of the challenged statements—as well as
Defendants’ fraudulent intent—Plaintiffs offer reports from five CWs. Where a plaintiff relies
on allegations from confidential witnesses, those sources must be “described in the complaint
with sufficient particularity to support the probability that a person in the position occupied by
the source would possess the information alleged.” Novak v. Kasaks,
Plaintiffs offer statements from five former WW employees who worked at the company during the purported class period. (See SAC ¶¶ 19–24.) CW1 is a former WW executive who was involved with WW’s program innovations. (SAC ¶ 20.) CW2 was an account executive. (SAC ¶ 21.) CW3 was a manager in the northeast focusing on tracking new subscribers and subscriber retention. (SAC ¶ 22.) CW4 was a product designer at WW focusing on program innovations. (SAC ¶ 23.) CW5 was the director of marketing for a division of WW. (SAC ¶ 24.) The CWs detail allegations consistent with their respective roles. CW1, CW2, and CW3 describe WW’s plans to abandon recruitment of lapsed members. (See SAC ¶¶ 53, 55.) CW1, CW2, CW4, and CW5 provide factual assertions regarding WW’s alleged plan to abandon its end of the year program innovation model. (See SAC ¶¶ 50–55.) Given the CWs’ respective
positions, it is logical that they would have direct knowledge on these matters.
Here, Plaintiffs have “pled with particularity the knowledgeable positions
occupied by each of the CWs, . . . many of whom had first-hand interactions with the Defendants
concerning the matters alleged in the Complaint.” Freudenberg v. E*Trade Fin. Corp., 712 F.
Supp. 2d 171, 196 (S.D.N.Y. 2010). These CWs were not low-level employees who would have
been unaware of WW’s strategy with respect to lapsed members and program innovations. See
In re Lehman Bros. Sec. & Erisa Litig.,
For Securities Act and Exchange Act claims, Plaintiffs must plead a “material
misrepresentation or omission by the defendant.” Amgen,
A violation of securities laws premised on misstatements cannot occur unless an
alleged material misstatement was false at the time it was made. See San Leandro Emergency
Med. Grp. Profit Sharing Plan v. Philip Morris Cos., Inc.,
Moreover, claims for corporate mismanagement are not actionable under
securities laws. See Santa Fe Indus., Inc. v. Green,
While much of the case law focuses on falsity at the time of the statement, see,
e.g., In re Magnum Hunter Res. Corp. Sec. Litig.,
To sustain their lapsed-member Securities Act claims, Plaintiffs allege that the offering documents—and WW’s other public filings incorporated by reference into those offering documents—failed to clarify that WW still depended heavily on recruiting lapsed members.
i. Challenged Statements
Plaintiffs allege that the May 7, 2018 registration statement, (Wang Decl. Ex. S), and the May 10, 2018 prospectus supplement, (Wang Decl. Ex. R), set forth WW’s initiative to recruit new, diverse members. Specifically, these offering documents stated:
(cid:120) WW sought to “increase recruitment of new subscribers [by] expand[ing] [its] member base through a growing influencer community, effective marketing, and agile, brand-led innovations.” (SAC ¶ 71.) (cid:120) “[WW’s] strong, widely-recognized and trusted brand allows [it] to more efficiently acquire new members and broaden our appeal to new audiences.” (SAC ¶¶ 74, 78.)
(cid:120) WW’s goal to “[c]ontinue to Broaden and Diversify our Influencer Network to Attract Members.” (SAC ¶ 75.) (cid:120) “[WW] [is] continually expanding [its] scope of influencers to include a diverse range of individuals, from celebrities to member ambassadors, to promote our brand and expand its appeal to a broader group of people across ethnicities, geographies, age, lifestage and gender.” (SAC ¶ 75.) (cid:120) “[WW] seek[s] to expand and strengthen [its] communities and diversify our reach across ethnicities, geographies, age, lifestage and gender through [its] strategic relationships with influencers.” (SAC ¶ 76.) (cid:120) “[WW] partnеred with several key celebrities and influencers to begin diversifying [its] global reach across ethnicity, geography and gender, including most notably [its] strategic partnership with Oprah Winfrey.” (SAC ¶ 77.)
But Plaintiffs allege that WW failed to disclose a crucial caveat: that WW was still highly dependent on recruiting lapsed members. Relying on CWs, Plaintiffs aver that WW and its executives knew that the business model—despite its new direction—was dependent on Caucasian women who previously subscribed to the program. (See SAC ¶¶ 80, 92, 93.) ii. WW’s Prior Disclosures
Plaintiffs ignore WW’s disclosures. WW sought to expand its membership base to a more diverse group, thereby reducing its reliance on lapsed members and middle-aged Caucasian women. But WW did not say that they were abandoning their base—just expanding it.
At the beginning of 2018, WW announced that it sought to broaden its user base and incorporate a “broad cross-section of diversity: age, gender, race, ethnicity, geography and life stage.” (Wang Decl. Ex. K, at 14.) WW wanted to “appeal[] to a broader audience who may not have considered Weight Watchers as a program for them in the past.” (Wang Decl. Ex. P, at 6.) To reach that goal, WW began shifting its marketing away from purely targeting middle- aged Caucasian women. But this is distinct from abandoning these past subscribers. Rather, WW sought to supplement the return of lapsed subscribers with new members drawn from a more diverse pool.
Despite the change in its business model, WW continued to emphasize that it sought to advertise to both “new and returning customers.” (Wang Decl. Ex. L, at 8.) WW reiterated that it sought to recruit both new and lapsed members through “[t]he word of mouth generated by our current and former customers” and its “strong brand and known effectiveness.” (Wang Decl. Ex. L, at 8.) As WW pursued this new strategy, it continued tо inform investors of its revised business model and why WW believed the new direction would lead to success. In the offering documents themselves, WW touted its ability to “attract new and returning customers efficiently.” (Wang Decl. Ex. R, at S-4.)
Indeed, even in the February 26, 2019 earnings call, which Plaintiffs allege is the
corrective disclosure, the strategy and messaging appear linear and not a revelation of the truth.
On that call, Grossman stated that while the “winter advertising did not drive consumers,
particularly our former members, to action in the way we had hoped,” it “was very geared to
both attracting new members as well as lapsed members.” (Wang Decl. Ex. QQ, at 6, 13.)
While WW focused on attracting new and lapsed members, its efforts did not bear fruit. But this
is more of a complaint about strategy than about the adequacy of disclosures. In WW’s
prospectus supplement, it emphasized its ability to “attract new and returning customers
efficiently” and noted that “a significant percentage [of its members] have repeatedly
resubscribed to the program.” (Wang Decl. Ex. R, at S-4.) As such, the offering documents,
when read as a whole, clearly demonstrate that WW sought to attract both new subscribers as
well as lapsed members. See Sedighim,
Indeed, this case is similar to Nguyen v. MaxPoint Interactive, Inc., 234 F. Supp.
3d 540 (S.D.N.Y. 2017). There, to support Section 11 claims, plaintiffs alleged that defendant
failed to disclose the extent of the defendant’s reliance on a small number of customers in its
registration statement. Nguyen,
To bolster their argument that WW disclosed its reliance on lapsed members, Defendants also point to repeated statements where WW disclosed the percentage of subscribers who had previously subscribed. (See Wang Decl. Ex. P, at 6 (“Looking at the U.S. as an example, approximately 40% of our member signups in Q1 were new to Weight Watchers.”); Wang Decl. Ex. T, at 6 (“Typically, 2/3 of the people in our program have done Weight Watchers before, 1/3 of the people are new to the brand.”).) If Defendants were relying solely on these past membership metrics, such disclosure would likely be insufficient. Standing alone, it is difficult to view these statements as disclosing the risk about which Plaintiffs complain: that WW was still reliant on past subscribers. This demonstrates that WW was reliant on past subscribers, not that it will continue to be reliant on them. However, Defendants do not rely on these specific statements alone.
At bottom, Plaintiffs’ claims have little bearing on disclosure. Plaintiffs’
opposition brief undermines their position and reveals that their claims are fundamentally about
corporate mismanagement. They argue that “[b]ecause of the importance of middle-aged
Caucasian women to WW, a marketing shift away from this demographic would risk WW’s
ability to sign up its lapsed members and grow its subscriber base.” (Opp’n, at 1.) That is a
complaint about strategy, not disclosures as required by securities laws. The fact that WW was
not successful does not give rise to securities violations. See Acito,
b. Program Innovations
Plaintiffs also contend that WW materially misled investors by failing to disclose that they would no longer be launching a “meaningful” program innovation at the end of the year. However, Plaintiffs ignore WW’s numerous disclosures that WW intended to do just that.
i. Challenged Statements
Plaintiffs allege that while WW disclosed that it was engaging in a “significant rebranding initiative,” it failed to disclose that this “did not involve the development of a program innovation to be launched in the fourth quarter of 2018, which had historically been critical to the Company’s success in increasing subscriber recruitment (including lapsed member recruitment) in the all-important December–March period.” (SAC ¶ 84.)
Plaintiff’s CWs allege that by early 2018 WW had abandoned its plan to launch a “meaningful” year-end program innovation without telling investors. (SAC ¶ 85.) Because these programs normally took over a year to develop, Plaintiffs assert that WW and its executives were aware of this paradigm shift long in advance of the end of 2018.
Plaintiffs allege that WW continued to mislead investors with its 10-Qs for the second and third quarters of 2018 by optimistically predicting increases in subscribers and revenue without disclosing that WW no longer intended to launch year-end program innovations. (SAC ¶¶ 206–213, 218–224.) Plaintiffs further argue that the SPO offering documents did not disclose that WW had abandoned the “formula” and would not release a “meaningful” program innovation in 2018.
Plaintiffs contend that “meaningful” program innovations require one to two years of planning to launch. Therefore, Defendants already knew prior to the start of 2018 that there would be no “meaningful” year-end program innovation and failed to disclose that fact to investors.
ii. WW’s Prior Disclosures
Plaintiffs’ argument ignores the fact that WW was deliberately shifting away from this business model and repeatedly disclosed its intent to do so. WW announced this change in its business model at the beginning of 2018. WW sought to end its practice of launching programs in December and relying on large winter subscriptions. WW saw two issues with its prior business model. First, WW was transitioning from “weight” focused to “wellness” focused branding. This entailed year-round wellness and not New Year’s resolution diets which are typically abandoned by February. WW announced a “bold” “strategic vision” to make wellness “accessible to all” by becoming a leading healthy living and wellness brand and year-long partner to its members, rather than exclusively a weight-loss program. (Wang Decl. Ex. I.) Launching large scale innovations at the end of the year would be at odds with this new message. Second, the prior strategy produced seasonality in WW’s earnings. Since WW primarily derives revenues from membership fees, their old strategy resulted in significant upticks in revenue in Q1 of each fiscal year, with leaner quarters throughout. (See Wang Decl. Ex. QQ.) In an effort to stabilize earnings throughout the year and produce consistent, sustainable growth, WW wanted to attract new members year-round.
WW repeatedly disclosed its new strategy to reduce seasonality. For example, during the May 17, 2018 earnings call, Hotchkin specifically noted that they were attempting to get away from a seasonal business model:
Our business does follow a predictable seasonality. 40% of the people who join us do so in the first quarter. But frankly, historically, that’s where we’ve focused our marketing spend and not a very efficient marketing model, though in Q1, the ratio of subscriber value to cost per acquisition was 5x, the highest it’s been in years and we’re leveraging that expertise and marketing efficiency into this Summer of Impact campaign. People want to be healthy year around, not just with the New Year’s resolution. And so we’re taking the opportunity to be much more visible in the Summer, both in our marketing and in our other channels to celebrate food, family and fun and be much more visible globally this summer as we continue to build our brand and our momentum.
(Wang Decl. Ex. T, at 6 (emphasis added).)
During the February 7, 2018 earnings call, Grossman commented that: Now we also know that the first quarter, as we’ve seen, is a great time to engage people in getting healthier in the new year, but people want to get healthy all year around. So we’re announcing a summer of impact, a global campaign launching in May, which will celebrate Freestyle, Flex, Liberté, Your Way, showing how we can be a powerful partner for health in people’s lives all year long. And it’s going to be around food, family, fun and healthy. (Wang Decl. Ex. J, at 18 (emphasis added).) WW shifted away from the previous “formula” by rolling out program innovations throughout 2018. For example, WW deployed their “Summer of Impact” program. (See Wang Decl. Ex. Y.) The name of this program put investors on notice that WW was no longer limiting itself to December program innovations. In the May 3, 2018 earnings call, Grossman noted “[members] want to get healthy year-round, not just in January.” (Wang Decl. Ex. P, at 9.) Grossman further emphasized that this was a change in strategy as “[h]istorically, [WW] [had] had little to no marketing presence during the summer months.” (Wang Decl. Ex. P, at 9.) Additionally, WW launched a variety of program innovations, beginning in March 2018. These included a new line of kitchen tools and products in March, (see Wang Decl. Ex. M); a social impact campaign in May, (see Wang Decl. Ex. X); a “Summer of Impact” campaign in June, (Wang Decl. Ex. Y); the “Invite a Friend” program in July, (see Wang Decl. Ex. JJ, at 8–9); a partnership with FreshRealm to create WW-branded quick-prep fresh meal kits in September, (see Wang Decl. Ex. JJ, at 11); and the launch of a membership rewards program in October, (see Wang Decl. Ex. JJ, at 10). WW’s disclosure of its intention to release program innovations throughout the year rather than in December—coupled with WW’s actual release of year-round program innovations—adequately placed shareholders on notice of the company’s plans.
The offering documents themselves discussed WW’s changing business model. “We now innovate throughout the year, which helps reduce the seasonality of our business and increases excitement around our brand.” (Wang Decl. Ex. R, at S-7.) Indeed, had WW done what Plaintiffs argue they should have—only release innovations at the end of each year— Plaintiffs would likely have actionable claims. Then, WW would have announced a change in its core business operations and failed to follow through. “Against this backdrop, the challenged statements cannot be said to be untrue or materially misleading.” Gagnon, 368 F. Supp. 3d at 767.
Plaintiffs also offer statements by CWs to bolster their claims. But the CWs’
statements are not compelling when viewed through the lens of WW’s multiple disclosures.
Allegations “primarily based on the CWs’ subjective views of how the Company should have
managed such challenges, arе not sufficient to demonstrate that any of the statements were
inaccurate at the time they were made, or that any Defendant believed them to be so.” In re
Adient plc Sec. Litig.,
As such, Plaintiffs also fail to plead falsity for their program innovation claims.
c. Plaintiffs’ Secondary Liability Claims
In light of the dismissal of the Section 11 and Section 10(b) claims against all
Defendants, Plaintiffs’ Sections 15 and 20(a) claims, which rely on the same underlying factual
allegations, are also dismissed. See Scott v. Gen. Motors Co.,
V. Protected Forward-Looking Statements
As discussed above, Plaintiffs fail to plead actionable misstatements or omissions.
While that alone is sufficient to resolve WW’s motion, this Court addresses WW’s remaining arguments for the sake of completeness. See In re Skechers USA, Inc. Sec. Litig., 444 F. Supp. 3d 498, 523 (S.D.N.Y. 2020).
Defendants argue that their statements are protected by the PSLRA’s safe harbor
because they are forward looking and accompanied by meaningful cautionary language.
[4]
Under
the PSLRA’s safe harbor, a defendant “shall not be liable with respect to any forward-looking
statement” if (1) the forward-looking statement is “identified” as such and “accompanied by
meaningful cautionary statements,” or (2) the forward-looking statement is “immaterial,” or (3)
the plaintiff “fails to prove that the forward-looking statement . . . if made by a natural person,
was made with actual knowledge by that person that the statement was false or misleading.” 15
U.S.C. § 78u-5(c)(1)(A)–(B). “Because the statute is written in the disjunctive, statements are
protected by the safe harbor if they satisfy any one of these three categories.” Lopez, 173 F.
Supp. 3d at 25 (citing Slayton v. Am. Exp. Co.,
To fall within the “meaningful cautionary statements” prong of the safe harbor,
the cautionary language “must convey substantive information about factors that realistically
could cause results to differ materially from those projected in the forward-looking statement.”
Slayton,
The PSLRA safe harbor also “specifies an ‘actual knowledge’ standard for
forward-looking statements,” which means that “thе scienter requirement for forward-looking
statements is stricter than for statements of current fact. Whereas liability for the latter requires a
showing of either knowing falsity or recklessness, liability for the former attaches only upon
proof of knowing falsity.” Slayton,
The Second Circuit has held that “‘[a] statement may contain some elements that
look forward and others that do not,’” and that “‘forward-looking elements’ may be ‘severable’
from ‘non-forward looking’ elements.” See In re Vivendi,
Many of the challenged statements are forward looking. When WW discussed its goal to “increase recruitment of new subscribers [by] expand[ing] [its] member base through a growing influencer community, effective marketing, and agile, brand-led innovations,” (SAC ¶ 71), WW is outlining its future plans. That is necessarily a forward-looking statement. WW stated that “[it] partnered with several key celebrities and influencers to begin diversifying our global rеach across ethnicity, geography and gender, including most notably our strategic partnership with Oprah Winfrey.” (SAC ¶ 77.) While this statement discusses WW’s past partnerships, it is in the context of its future ability to expand its membership base. As is the statement “[w]e are continually expanding our scope of influencers to include a diverse range of individuals, from celebrities to member ambassadors, to promote our brand and expand its appeal to a broader group of people across ethnicities, geographies, age, lifestage and gender.” (SAC ¶ 75.) WW’s statement that it sought to “[c]ontinue to Broaden and Diversify [its] Influencer Network to Attract Members” is also forward looking. (SAC ¶ 75.)
However, some of WW’s statements are not forward looking. When WW executives discussed prior enrollment proportions, these were statements about the past, not the future. (See, e.g., Wang Decl. Ex. P, at 6 (“Looking at the U.S. as an example, approximately 40% of our member signups in Q1 were new to Weight Watchers.”); Wang Decl. Ex. T, at 6 (“Typically, 2/3 of the people in our program have done Weight Watchers before, 1/3 of the people are new to the brand.”).) Additionally, when WW stated that “[its] strong, widely- recognized and trusted brand allows [it] to more efficiently acquire new members and broaden our appeal to new audiences,” (SAC ¶ 74), WW touted its present ability. This is not a forward- looking statement. Statements that WW’s “winter advertising did not drive consumers, particularly our former members, to action in the way we had hoped,” and it “was very geared to both attracting new members as well as lapsed members,” (Wang Decl. Ex. QQ, at 6, 13), are clearly discussing past events and are not forward looking. Accordingly, these statements do not fall within the sаfe harbor.
Having found that several of Defendants’ statements are forward-looking
statements, this Court addresses whether these statements were identified as such and
accompanied by meaningful cautionary language, or whether Plaintiffs fail to allege that the
statements were made with “actual knowledge” of their falsity. In re Adient,
While this Court has already determined that the alleged statements lacked falsity—and thus, Defendants could not have had actual knowledge of the statement’s falsity— the statements also contain meaningful cautionary language. Defendants point to several statements in WW’s 2017 10-K [5] that provide cautionary language. Specifically, WW warned that (1) “[its] business success depends on [its] ability to attract and retain members;” (2) “[its] business depends on the effectiveness of [its] advertising and marketing programs, including the strength of our social media presence, to attract and retain members and subscribers;” (3) “[its] future success depends on [its] ability to develop and market new, innovative services and products and to enhance our existing services and products, each on a timely basis . . . . We may not be successful in developing, introducing on a timely basis or marketing any new or enhanced product services;” and (4) “[it] may not be able to successfully implement [its] strategic initiatives and realize the intended business opportunities, [and] growth prospects.” (Wang Decl. Ex. L, at 15).
Such statements concern “the plans and objectives of management for future operations.” 15 U.S.C.A. § 78u-5(i)(1)(b). These warnings are not vague. They disclose the exact risk of which Plaintiffs complain. Indeed, it is hard to fathom what additional disclosures would be required. Accordingly, WW’s forward-looking statements are protected by the PSLRA’s safe harbor.
VI. Scienter
The PSLRA requires a plaintiff to plead with particularity facts giving rise to a
strong inference of scienter, i.e., an intent to deceive, manipulate, or defraud. See Tellabs, Inc. v.
Makor Issues & Rights, Ltd.,
“Motive . . . could be shown by pointing to the concrete benefits that could be
realized from one or more of the allegedly misleading statements or nondisclosures; opportunity
could be shown by alleging the means used and the likely prospect of achieving concrete benefits
by the means alleged.” S. Cherry St., LLC v. Hennessee Grp. LLC,
at least four circumstances that may give rise to a strong inference of the requisite scienter: where the complaint sufficiently alleges that the defendants (1) benefited in a concrete and personal way from the purported fraud; (2) engaged in deliberately illegal behavior; (3) knew facts or had access to information suggesting that their public statements were not accurate; or (4) failed to check information they had a duty to monitor.
ECA,
a. Motive and Opportunity
“Motive can be shown when corporate insiders allegedly make a
misrepresentation in order to sell their own shares at a profit.” In re Skechers, 444 F. Supp. 3d at
523 (quotation marks omitted). However, “the mere fact that insider stock sales occurred does
not suffice to establish scienter.” Constr. Laborers Pension Tr. for S. Cal. v. CBS Corp., 433 F.
Supp. 3d 515, 543 (S.D.N.Y. 2020) (quotation marks omitted). Rather, plaintiffs must establish
that the sales at issue were “unusual” or “suspicious.” See, e.g., Acito,
i. Artal
Plaintiffs allege that Artal sold approximately 14 million shares through two
SPOs for over $1 billion. (See SAC ¶¶ 2, 7, 11.) This reduced Artal’s WW ownership from
approximately 44% to approximately 22%. (See SAC ¶¶ 143, 151, 214.) “Insider sales have
been found unusual based on a variety of factors, including the amount of profit from sales.”
Rothman v. Gregor,
Cоurts in the Second Circuit have found that stock sales are not indicative of
scienter when they are more than two months before the announcement in question. See In re
KeySpan Corp. Sec. Litig.,
A “sale amounting to a large percentage of an individual’s holdings may be
sufficient.” In re SLM Corp.,
ii. Hotchkin
Plaintiffs allege that Hotchkin sold a significant portion of his holdings during the putative class period. Specifically, Plaintiffs assert that Hotchkin began the class рeriod with 215,395 WW shares and sold 131,466 of those shares. (See SAC ¶¶ 215, 240.) This generated nearly $10 million in proceeds and represented approximately 61% of Hotchkin’s WW position. (SAC ¶ 215.) Hotchkin sold for an average share price of $75.28, (see SAC ¶¶ 215, 240), which is far above the $19.37 price at the end of the putative class period, (SAC ¶¶ 97, 227). Moreover, Plaintiffs allege that this was Hotchkin’s first stock sale since 2012. (SAC ¶ 241.)
Defendants counter that Hotchkin did not actually sell any shares. Instead, they aver that he exercised RSU and PSU options, purchasing the shares for $3,617,760.82 and selling them for $6,328,399.12. (Defs.’ Mem. of Law in Supp. of their Mot. to Dismiss, ECF No. 93 (“Defs.’ MOL”), at 18–19; see also Wang Decl. Ex. FF.) Defendants argue that this Court should not consider Hotchkin’s RSU and PSU exercise and thus, Hotchkin began and ended the putative class period with 83,929 WW shares. Further, if this Court were to consider Hotchkin’s RSUs and PSUs for purposes of alleging scienter, Defendants argue that this Court should take into account the additional RSUs that vested in November 2018. (Wang Decl. Ex. O, at 77; Wang Decl. Ex. VV, at 75.) If these are taken into account, Hotchkin actually increased his WW holdings by 18%.
The parties dispute whether stock options may be considered for purposes of
demonstrating stock sales as a percentage of total holdings. While the Second Circuit has yet to
opine directly on this issue, most courts have expressed an inclination to include exercisable
stock options. In re eSpeed, Inc. Sec. Litig.,
Defendants argue that this Court need not wade into the issue of whether stock
options can evince scienter. If the RSUs and PSUs count, then Hotchkin would have increased
his holdings by virtue of his RSUs vesting. If the RSUs and PSUs are not considered, then
Hotchkin began and ended the class period with the same WW’s position. Under either
formulation, Plaintiffs fail to plead motive and opportunity. Indeed, other courts in this District
have determined that minor stock sales—let alone no stock sales or stock purchases—do not
demonstrate motive and opportunity. See Acito,
However, at this stage, this Court must confine itself to the pleadings. See Iqbal,
iii. Other Defendants
Plaintiffs do not allege that either Grossman or Debbane sold any shares. Indeed, Grossman increased her WW position during the putative class period. (See Wang Decl. Ex. O, at 77; Wang Decl. Ex. VV, at 75.) As such, Plaintiffs fail to plead motive and opportunity for these Defendants.
b. Conscious Misbehavior or Recklessness
Absent a showing of motive, a plaintiff may demonstrate scienter through
allegations regarding conscious misbehavior or recklessness, but “the strength of the
circumstantial allegations must be correspondingly greater.” ECA,
Circumstantial evidence can support a strong inference of scienter, under the
“conscious misbehavior or recklessness” theory, where defendants: “(1) benefitted in a concrete
and personal way from the purported fraud; (2) engaged in deliberately illegal behavior; (3)
knew facts or had access to infоrmation suggesting that their public statements were not
accurate; or (4) failed to check information they had a duty to monitor.” Employees’ Ret. Sys. of
Gov’t of the Virgin Islands v. Blanford,
Under this prong, recklessness may be sufficiently pled where there are
“[p]lausible allegations that a defendant had facts at his disposal contradicting material public
statements, but then ignor[ed] such facts or proceed[ed] despite them.” In re Lululemon, 14 F.
Supp. 3d at 574 (citing Novak,
The SAC is bereft of any allegations of deliberate, illegal behavior or
recklessness. Plaintiffs offer only conclusory allegations that because Defendants were senior WW executives they were aware that WW had abandoned its plan to release a “meaningful” program innovation at the end of 2018. (Opp’n, at 21.) But Plaintiffs’ theory would effectively vitiate scienter standards for any securities class action. Under Plaintiffs’ theory, merely naming senior executives as defendants would fulfill the Exchange Act and PSLRA’s scienter element. Such a reading clearly contradicts the plain text of the Exchange Act and PSLRA.
Unable to establish conscious misbehavior оr recklessness, Plaintiff's resort to the
“core operations” doctrine. (See Opp’n, at 20–21.) But this is unpersuasive. “The core
operations doctrine permits an inference that a company and its senior executives have
knowledge of information concerning the ‘core operations’ of a business.” Das, 332 F. Supp. 3d
at 816 (quotation marks omitted). “Core operations include matters critical to the long term
viability of the company and events affecting a significant source of income.” Das, F. Supp. 3d
at 816 (quotation marks omitted). The core operations doctrine, however, “typically applies only
where the operation in question constitute[s] nearly all of a company’s business,” and moreover,
“does not independently establish scienter.” Das, F. Supp. 3d at 816 (alteration in original)
(quoting Lipow v. Net1 UEPS Tech., Inc.,
VII. 12(a)(2) Claims Against Artal
WW contends that Plaintiffs have not plead that Artal is a statutory seller. The
Securities Act does not define statutory seller. Fed. Hous. Fin. Agency for Fed. Nat’l Mortg.
Ass’n v. Nomura Holding Am., Inc.,
Plaintiffs do not allege that Artal actively or directly marketed WW securities.
Cf. In re Vivendi Universal, S.A.,
While indirect solicitation can suffice to state a claim under Section 12(a)(2), see
Capri v. Murphy,
Instead, Plaintiffs argue that by signing the Registration Statement, Artal is a
statutory seller. (Opp’n, at 23–24.) The Second Circuit has not yet addressed whether signing a
registration statement on its own makes an individual or entity a statutory seller. See Yi Xiang v.
Inovalon Holdings, Inc.,
Plaintiffs counter that Artal “was a party to the underwriting agreement for the
SPO, along with WW, Goldman Sachs & Co., LLC, Morgan Stanley & Co. LLC, and UBS
Securities LLC.” (SAC ¶ 36.) There, Artal “made representations and warranties to Weight
Watchers and to the underwriters,” that the “SPO was conducted as a result of Artal exercising
[its] rights,” and that an agreement “required Artal’s consent to [WW]’s choice of underwriters
for any public offering of shares owned by Artal.” (SAC ¶ 36.) But Artal’s representations and
warranties and its consent to WW’s choice of underwriters is akin to “mere[] assist[ance] in
another’s solicitation efforts.” Shain,
VIII. Section 10(b) Claim Against Artal
In a lone paragraph, Defendants argue that this Court should dismiss the Section
10(b) claim against Artal because it was not a maker of any statement under Janus Capital
Group, Inc. v. First Derivative Traders.
For purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. Without control, a person or entity can merely suggest what to say, not “make” a statement in its own right. One who prepares or publishes a statement on behalf of another is not its maker.
Janus,
In Janus, the Supreme Court rejected primary liability for an investment adviser
based on its part in helping to prepare the public filings of its “legally independent” client.
Janus,
Whether a defendant is the “maker” of the misstatement may depend on
inferential or circumstantial evidence. “[I]n the ordinary case, attribution within a statement or
implicit from surrounding circumstances is strong evidence that a statement was made by—and
only by—the party to whom it is attributed.” Janus,
found relevant that nothing “on the face of the prospectuses indicate[d] that any statements
therein came from [the investment adviser] rather than [the investment fund]—a legally
independent entity with its own board of trustees.” Janus,
Plaintiffs argue that Artal made the alleged misstatements because Artal owns a
large stake in WW and has placed board members. However, this falls short of demonstrating
that Artal has “ultimate authority” to make statements. See In re Virtus,
Moreover, Plaintiffs’ allegations of control fall short of circumstances in which other courts in this District have determined parties had “ultimate authority” over statements. For example, in IOP Cast Iron Holdings, LLC v. J.H. Whitney Capital Partners, LLC, a judge in
this District determined defendants were makers of actionable statements only after finding clear
indicia of control.
Plaintiffs’ conclusory allegations that Artal controlled WW are insufficient. See
McIntire v. China MediaExpress Holdings, Inc.,
Plaintiffs also argue that signing a registration statement is sufficient under Janus.
“[C]ourts consistently hold that signatories of misleading documents ‘made’ the statements in
those documents, and so face liability under Rule 10b-5(b).” In re Smith Barney Trаnsfer Agent
Litig.,
IX. Allegations of Control
Defendants also argue that Plaintiffs fail to allege control by Grossman, Hotchkin, Debbane, and Artal to support their Section 20(a) claim and by Debbane and Artal for their Section 15 claim.
To sustain control person claims, Plaintiffs must allege defendants have “the
power to direct or cause the direction of the management and policies of [the primary violators],
whether through the ownership of voting securities, by contract, or otherwise.” S.E.C. v. First
Jersey Sec., Inc.,
Beginning with Grossman, Hotchkin, and Debbane, Plaintiffs have pled control.
“[B]oilerplate allegations of control basеd on one’s status as an officer or director” are generally
insufficient to establish control. In re Virtus,
However, Plaintiffs’ allegations against Artal are deficient. First, Plaintiffs offer
that “Artal was party to a Voting Agreement with Oprah Winfrey, whereby Ms. Winfrey agreed
to vote all of her Weight Watchers common stock to elect as directors any nominees designated
by Artal.” (SAC ¶ 122.) But this agreement only aggregates approximately 46.3% of the total
voting shares. (SAC ¶ 39.) Plaintiffs do not allege that Artal—through this agreement or
otherwise—held a majority of the shares or the ability to appoint a majority of directors. See In
re BioScrip,
Second, Plaintiffs argue that Debbane’s signature on various SEC filings is sufficient to establish Artal as a control entity. But again, Debbane’s signature on the registration statement and other SEC filings does not equate to Artal signing the documents. Rather, Debbane signed them as a WW director, not as the managing director of Artal. (See Wang Decl. Ex. S, at 28.)
Other than these two facts, Plaintiffs only assert conclusory allegations. These include that Artal had access to documents, (SAC ¶ 126), “the power to prevent the issuance of the statements or omissions or to cause them to be corrected,” (SAC ¶ 126), and that Artal had “direct and supervisory involvement in the day-to-day operations of [WW],” (SAC ¶ 283). These allegations are insufficient to establish control.
To rebut allegations of control by Grossman, Hotchkin, and Debbane, Defendants
also argue that Plaintiffs have not pled culpable participation by any defendant. In addition to
alleging a primary violation for a control person claim, Plaintiffs must “allege particularized
facts” of the defendants’ “culpable participation in the fraud perpetrated by the controlled
person.” Pa. Pub. Sch. Employees’ Ret. Sys. v. Bank of Am. Corp.,
Plaintiffs argue that they do not need to plead culpable participation. “The
Second Circuit has recognized this disagreement but not yet resolved it.” In re ForceField
Energy Inc. Sec. Litig.,
Under the PSLRA, “a plaintiff must allege ‘culpable participation’ and plead that
element with particularity.” In re NQ Mobile, Inc. Sec. Litig.,
As discussed above, Plaintiffs have only pled scienter for Hotchkin and Artal. That fact—combined with Plaintiffs’ failure to allege control by Artal—means that Plaintiffs have failed to allege control for all parties except Hotchkin.
X. Loss Causation
Finally, Defendants argue that Plaintiffs fail to allege loss causation because there were no material omissions or misstatements. This Court agrees with Defendants.
“[T]o establish loss causation, a plaintiff must allege . . . that the subject of the
fraudulent statement or omission was the cause of the actual loss suffered, i.e., that the
misstatement or omission concealed something from the market that, when disclosed, negatively
affected the vаlue of the security.” Lentell v. Merrill Lynch & Co.,
CONCLUSION
For the foregoing reasons, Defendants’ motion to dismiss is granted. The Clerk of Court is directed to mark this case closed.
Dated: November 30, 2020
New York, New York
Notes
[1] To support their motion to dismiss, Defendants attached numerous WW securities filings. As discussed below, this Court will consider these documents.
[2] “RSUs” are restricted stock units and “PSUs” are performance stock units. RSUs vest according to a predetermined schedule, and PSUs vest according to a schedule if certain predetermined performance metrics are met.
[3] For example, the SPO registration statement that Defendants offer as Wang Decl. Ex. R is referenced repeatedly in the SAC. (See, e.g., SAC ¶¶ 65, 139, 149, 183–184.) And the 2018 Q3 earnings call transcript that Defendants offer as Wang Decl. Ex. JJ is also frequently discussed in the SAC. (See, e.g., SAC ¶¶ 12, 218.)
[4] While the PSLRA safe harbor does not protect material omissions, see, In re Salix Pharm., Ltd., 2016 WL
1629341, at *9 (S.D.N.Y. Apr. 22, 2016) (citing City of Providence v. Aeropostale, Inc.,
[5] This document is incorporated by reference into the SPO offering materials. (See Wang Decl. Ex. R, at S- 36.)
[6] The Supreme Court’s recent decision in Lorenzo v. Sec. & Exch. Comm’n is not relevant for the question at hand.139 S. Ct. 1094 (2019).