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Second Circuit Revives Putative Securities Fraud Class Action Against Food And Personal Care Company
10/06/2025On September 29, 2025, the United States Court of Appeals for the Second Circuit vacated a district court order dismissing a putative securities class action against a natural food and personal care company (the “Company”) and certain of its current and former executive officers. Gimpel v. Hain Celestial Grp., Inc., No. 23-7612 (2d Cir. Sept. 29, 2025). Plaintiffs alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, by allegedly engaging in “channel-stuffing” and disseminating false or misleading financial results. The United States District Court for the Eastern District of New York dismissed the complaint, holding that plaintiffs failed to adequately plead scienter. The Second Circuit reversed, holding plaintiffs adequately pled several actionable misstatements and a strong inference of scienter based on motive and opportunity allegations combined with allegations of circumstantial evidence of conscious misbehavior or recklessness.
Plaintiffs alleged that the Company, facing decreasing demand for its products and pressure to meet financial forecasts, engaged in “channel-stuffing”—i.e., the practice of artificially inflating sales figures by forcing more products into a company’s distribution channel than can actually be sold in the market. To this end, plaintiffs alleged that the Company offered its distributors significant concessions to accept more product than they needed at the end of each fiscal quarter, which plaintiffs alleged “cannibaliz[ed] future revenues to make present sales look more impressive.” Plaintiffs alleged that once the distributors would no longer accept additional inventory, the Company experienced “internal strife” and underwent both an independent audit and an investigation by the SEC, which ultimately led the Company to restate its financial statements, concede that it lacked adequate internal controls, and settle with the SEC. Plaintiffs brought suit, alleging that defendants made false statements to investors about, among other things, the Company’s financial results, the existence of adequate internal controls, and the Company’s compliance with Generally Accepted Accounting Principals (“GAAP”). In addition, plaintiffs alleged that the Company made misleading statements attributing its success to consumer demand, while downplaying its increasing inventory problems without disclosing its engagement in channel-stuffing.
At the outset, the Second Circuit held that while channel stuffing is “not necessarily fraudulent,” as offering distributors concessions is a “common practice,” channel stuffing may become fraudulent when it is “done to mislead investors.” The Court then held that plaintiffs plausibly alleged defendants made actionable material misstatements about, among other things, the Company’s financial results, compliance with GAAP, the existence of effective internal controls, the description of the Company’s revenue-recognition policies, and certifications in the Company’s SEC filings that those filings did not contain any untrue or misleading statements of material fact and rested on adequate internal controls. The Court also held that plaintiffs adequately alleged that defendants made actionable misleading “half-truth” statements by failing to disclose the Company’s use of channel stuffing to meet investor benchmarks, while openly discussing its financial success and inventory levels. The Court held that once the Company spoke on the particular issue or topic, it had a “duty to tell the whole truth[.]” The Court rejected defendants’ argument invoking the “truth-on-the-market” defense, holding generic statements in SEC filings that the Company undertook “sales incentives and promotions” could not sufficiently counterbalance the Company’s statements that attributed sales growth to growing demand to support dismissal at the pleading stage.
Addressing scienter, the Court held that plaintiffs adequately alleged that the individual defendants had the motive and opportunity to make false and misleading statements by pointing to allegedly suspicious stock sales that the Court held were unusual in both timing and volume. The Court further held that plaintiffs sufficiently alleged that the individual defendants had the motive to commit fraud because bonuses they received were “tied to the very metrics” that the Company admittedly overstated, and noted that one of the individual defendants surpassed that bonus metric by only 0.1% for one of the years at issue.
In addition, the Court credited plaintiffs’ allegations of circumstantial evidence of scienter, including, among other things, allegations by confidential witnesses that the individual defendants knew about, negotiated, or directed the relevant concessions, monitored the Company’s inventory shortfalls, and therefore knew or recklessly disregarded contradictory public statements. The Court also held that the very importance of channel-stuffing and inventory to the Company’s business supported the inference that the individual defendants would have monitored these operations “closely.” The Court further credited allegations regarding key personnel departures “under suspicious circumstances” as circumstantial evidence of scienter. Lastly, the Court held that the fact that the SEC did not prosecute the Company did not sufficiently negate an inference of scienter.
Turning to loss causation, the Court held that plaintiffs adequately alleged declines in the Company’s stock price following its negative disclosures and thus met the applicable pleading standard.
Having held that plaintiffs adequately pleaded their primary claims under Section 10(b), the Court revived plaintiffs’ control person liability claims under Section 20(a). The Court remanded the case to the district court and noted that this long-standing case should proceed to discovery.
