Summary
The Ninth Circuit affirmed in part and reversed in part the dismissal of shareholders’ claims under Sections 10(b) and 20(a) of the Securities Exchange Act and SEC Rule 10b-5 against Funko, Inc. and two officers. The court held that some allegations concerning inventory-management and information-technology risk disclosures sufficiently pleaded falsity and scienter, while affirming dismissal of claims based on other statements. The court remanded the case to the district court.
Topics
Practice areas
Questions Presented
- Whether plaintiffs adequately pleaded falsity under Exchange Act § 10(b) and Rule 10b-5 as to statements concerning Buckeye distribution-center operations, inventory quality, inventory-management risk disclosures, information-technology risk disclosures, and future distribution capabilities.
- Whether the inventory-management and existing-information-technology risk disclosures were protected forward-looking statements under the PSLRA safe harbor.
- Whether plaintiffs adequately pleaded scienter as to Funko's CEO and CFO under the PSLRA.
- Whether plaintiffs adequately pleaded control-person liability under Exchange Act § 20(a).
Holdings
- Plaintiffs did not adequately plead that Funko's statements describing the Buckeye distribution center as up and running, attributing elevated inventory to delayed shipments, describing inventory as generally high quality or healthy, or stating that additional distribution capability would be needed only in the future were materially false or misleading.
- Plaintiffs adequately pleaded falsity as to Funko's March, May, August, and November 2022 risk disclosures concerning inventory management.
- Plaintiffs adequately pleaded falsity as to Funko's risk disclosures concerning its then-existing information systems and its ability to operate those systems effectively.
- The September 13, 2022 statement that Funko would need additional distribution capability only in the future was a forward-looking statement protected by the PSLRA safe harbor because plaintiffs did not adequately plead that CFO Jung made it with actual knowledge of falsity.
- Plaintiffs adequately pleaded scienter as to CEO Andrew Perlmutter and CFO Jennifer Jung for the alleged misstatements concerning inventory management and existing information technology.
- Because the court reinstated plaintiffs' adequately pleaded § 10(b) claims, it also reversed dismissal of plaintiffs' § 20(a) control-person-liability claim.
Key quotations
“To establish falsity, “securities plaintiffs may rely on either an affirmative misrepresentation theory or an omission theory.”” (24)
“But where a statement about the future is in the form of a warning about a risk that might hurt business in the future, the statement implicitly serves as a comment on the present state of affairs, because it suggests that the circumstance posing the risk has not yet occurred.” (30-32)
“In sum, we conclude that a reasonable trier of fact could find that it would be absurd to believe that CEO Perlmutter and CFO Jung did not know that their statements related to Funko’s inventory and information technology system were misleading at the time that they were made.” (50-51)
Factual background
Funko operates a business dependent on rapid inventory turnover, effective inventory management, and information systems capable of managing its supply chain and distribution operations. In 2022, Funko opened a large distribution center in Buckeye, Arizona, while attempting to transition from its existing Microsoft NAV system to an Oracle enterprise-resource-planning system. Plaintiffs alleged that the warehouse became disorganized and overcapacity, inventory was difficult to track, shipping was delayed, and large quantities of excess and dead inventory accumulated while Funko executives made public statements concerning inventory quality, inventory-management risks, existing information systems, and future distribution needs. After the problems became public, Funko's stock price fell sharply and the company later abandoned the Oracle project and recorded substantial inventory-related write-downs.
Procedural history
Jonathan Studen filed a putative class action in June 2023. The district court appointed the Construction Laborers Pension Trust as lead plaintiff, after which plaintiffs filed an amended complaint alleging violations of Securities Exchange Act § 10(b), SEC Rule 10b-5, and § 20(a). In May 2024, the district court dismissed the complaint for failure to adequately plead falsity and scienter but granted leave to amend. Plaintiffs declined to amend and appealed.
Remand instructions
The district court must proceed with plaintiffs' surviving Exchange Act claims concerning the inventory-management risk disclosures and the existing-information-technology risk disclosures, as well as the related scienter allegations and § 20(a) control-liability claim. The dismissal remains affirmed as to the rejected falsity theories.