(CN) – The maker of the Keurig single-cup coffee system must face a securities fraud class-action lawsuit, the Second Circuit ruled on Friday.
Five employee retirement systems acquired stock in Green Mountain Coffee Roasters Inc., which manufactures Keurig coffee makers.
The plaintiffs are the retirement systems of the Virgin Islands government, Louisiana municipal police employees, Ft. Lauderdale (Fla.) city employees and Mississippi public employees and Sjunde AP-Fonden, a Swiss firm.
They took Green Mountain to Federal Court in Vermont, alleging that the company misrepresented its inventory, growth prospects and business performance.
During 2011, Green Mountain’s stock soared from $32.96 in February to $111.62 per share in August.
The plaintiffs stated that during this time, Green Mountain had represented to them that demand for its coffee makers was so high that it was increasing production without accumulating excess inventory.
However, the plaintiffs alleged that witnesses within the company had stated that Green Mountain was in fact accumulating excess inventory.
One said that inventory was piling “up to the rafters” and was being stored in employees’ work spaces. Another said the company was throwing away “pallet after pallet after pallet” of excess K-cup inventory.
The plaintiffs alleged that during the 2011 stock boom period, Green Mountain’s senior executives sold some of their stock and added $49 million to their personal net worth.
In the fall of 2011, investor David Einhorn reported that Green Mountain had engaged in “a variety of shenanigans that appear designed to mislead auditors and to inflate financial results.”
Einhorn confirmed the report of one of the plaintiffs’ witnesses that the company had inventories half a million Keurig machines in the second quarter of 2011 that were never shipped.
After the report was published in the Wall Street Journal, the company’s stock dropped to $69.80 per share.
The district court granted Green Mountain’s motion to dismiss the plaintiffs’ case for failure to allege a misleading statement or omission of material fact, along with failure to plead a compelling inference of scienter.
However, the Second Circuit overturned the ruling and allowed the plaintiffs to continue their case. U.S. Circuit Judge Chin stated that the plaintiffs “adequately pled” its allegations of false statements.
“The complaint alleges (1) specific misleading statements by defendants about the status of Green Mountain’s inventory during the class period, the identity of the speakers, and where and when the statements were made, and (2) explains why these statements were fraudulent,” he wrote.
Chin added that the plaintiffs also successfully pleaded scienter and can move forward with their class action.
“Plaintiffs plead strong circumstantial evidence of Green Mountain’s intent to deceive or defraud plaintiffs by detailing both (1) Defendants’ efforts to deceive auditors and investors and conceal the true facts about Green Mountain’s excess inventory, and (2) Defendants’ significant personal gain from these efforts,” he wrote.
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