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Southern District Of New York Allows Control Person Claims To Proceed Against Food & Beverage Executive
08/12/2025On July 28, 2025, Judge Jessica G. L. Clarke of the United States District Court for the Southern District of New York denied a motion for judgment on the pleadings to dismiss a claim under Section 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) in a putative class action against a former executive (the “Individual Defendant”) of a natural food and beverages company (the “Company” and, together, “Defendants”). The complaint alleges Defendants concealed that the source of the Company’s increased profits derived from allegedly unsustainable business practices. Sills v. United Natural Foods, Inc., 23-CV-2364 (S.D.N.Y. July 28, 2025). The Court previously denied Defendants’ motion to dismiss the alleged predicate violations under Section 10(b) of the Exchange Act and Rule 10b-5 on falsity and scienter grounds. The Individual Defendant then moved under Rule 12(c) to dispose of the Section 20(a) claim arguing plaintiffs fail to plead (i) control of the primary violator by the Individual Defendant, and (ii) that the Individual Defendant was, in some meaningful sense, a culpable participant in the controlled person’s fraud. The Court denied that motion, holding that plaintiffs plausibly allege both elements.
Plaintiffs allege that the Company reported a spike in revenue that it attributed to inflation and other internal initiatives between 2021 and 2023. These improved margins, according to the Complaint, allegedly were driven by “forward buying,” a practice by which the Company would learn of supplier price increases before they would take effect, use that knowledge to increase inventory at lower prices, and then immediately pass along price increases to retailers. Plaintiffs claim Defendants concealed and misled investors about this allegedly unsustainable practice until 2023, when the Company’s earnings decreased and the Company allegedly announced that its profits had been driven by forward-buying gains.
In September 2024, the Court denied Defendants’ motion to dismiss claims under Section 10(b) and Rule 10b-5, holding that the Company’s statements about what was driving its profits were plausibly alleged to be misleading “half-truths” because they omitted the role of forward buying. The Court also held that plaintiffs adequately plead scienter, including allegations supporting an inference that the executives knew or were reckless in not knowing about the unsustainable nature of the Company’s profits and that they had a personal financial motive to mislead investors—citing both compensation structures and suspicious stock sales by executives during the relevant period. The Court denied the motion to dismiss the Section 20(a) claim against the Individual Defendant because the only argument raised was that the claim should be dismissed because the Complaint failed to allege an underlying violation of Section 10(b) and Rule 10b-5.
The Individual Defendant then moved to dismiss the Section 20(a) control-person claim, arguing plaintiffs fail to allege (1) his actual control over the company and (2) his culpable participation in the alleged violations. The Court rejected both arguments. It found that plaintiffs plausibly allege control by showing that the Individual Defendant reviewed press releases before publication and participated in earnings calls but then allegedly failed to use those opportunities to correct alleged misstatements and omissions about the Company’s forward-buying practices.
As to culpable participation, the Court held that its prior scienter analysis applied with equal force to the Section 20(a) claims against the Individual Defendant. In particular, the Court highlighted the magnitude and timing of the Individual Defendants’ allegedly suspicious stock sales that took place just before the first revelation of the Company’s forward-buying practices.
Accordingly, the Court denied the Individual Defendants’ motion for judgment on the pleadings.
