Sean Ryan v. FIGS, Inc. et al, No. 2:2022cv07939 - Document 113 (C.D. Cal. 2024)
Court Description: ORDER GRANTING DEFENDANTS' MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTIONCOMPLAINT by Judge Otis D. Wright, II: The Court GRANTS Defendants' Motions to Dismiss the Amended Class Action Complaint, WITH LEAVE TO AMEND 98 , 100 . If Plaint iffs elect to file a First Amended Class Action Complaint ("FAC"), they shall do so within forty-five (45) days of the date of this Order. If Plaintiffs file a FAC, Defendants shall file a response no later than 21 days from the date Plaintiffs file the FAC. If Plaintiffs do not timely file a FAC, then as of their deadline and without further notice this dismissal shall convert to a dismissal with prejudice. (lc)
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Sean Ryan v. FIGS, Inc. et al Doc. 113 O 1 2 3 4 5 6 7 8 United States District Court Central District of California 9 10 11 SEAN RYAN, 12 Plaintiff, 13 14 Case No. 2:22-cv-07939-ODW (AGRx) ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT [98 & 100] v. FIGS, INC. et al., 15 Defendants. 16 I. 17 INTRODUCTION 18 This is a putative class action for securities fraud under sections 10(b) and 20(a) 19 of the Securities Exchange Act of 1934 (“Exchange Act”) as well as non-fraudulent 20 securities violations under sections 11, 12(a)(2), and 15 of the Securities Act of 1933 21 (“Securities Act”). 22 Complaint against Defendants FIGS, Inc. along with individual Defendants Heather 23 Hasson, Catherine Spear, Jeffrey D. Lawrence, Daniella Turenshine, and J. Martin 24 Willhite.1 (Compl., ECF No. 1.) The case was thereafter consolidated with City of 25 Hallandale Beach Police Officers and Firefighters Personnel Retirement Trust v. FIGS, 26 Inc. et al., No. 2:22-cv-08912-ODW (KSx). (Min. Order, ECF No. 64.) The Parties On November 11, 2022, Plaintiff Sean Ryan filed his initial 27 28 1 Defendants Heather Hasson, Catherine Spear, Jeffery D. Lawrence, Daniella Turenshine, and J. Martin Willhite are referred to herein as the “Individual Exchange Act Defendants.” Dockets.Justia.com 1 designated Ryan’s case as the lead case and designated Plaintiffs Ronald Hoch and 2 Public Pension Plans2 as the Lead Plaintiffs. (Joint Stip., ECF No. 58.) Plaintiffs filed their consolidated Class Action Complaint on April 10, 2023. 3 4 (Class Action Compl. (“CAC”), ECF No. 88.) In their consolidated complaint, 5 Plaintiffs added Tulco, LLC, and Thomas Tull3 as defendants for all claims, and, for 6 Securities Act violations only, Plaintiffs added Sheila Antrum, Michael Sonen, and all 7 Underwriters4 involved in FIGS, Inc.’s Initial Public Offering (“IPO”) and Secondary 8 Public Offering (“SPO”). (Id.) 9 In the Class Action Complaint, Plaintiffs set forth six causes of action against 10 Defendants for (1) violations of section 10(b) of the Exchange Act and Securities and 11 Exchange Commission rule 10b-5; (2) violations of section 20(a) of the Exchange Act; 12 (3) violations of section 20(a) of the Exchange Act against insider trading; (4) violations 13 of section 11 of the Securities Act; (5) violations of section 12(a)(2) of the Securities 14 Act; and (6) violations of section 15 of the Securities Act. (CAC ¶¶ 318–339, 407– 15 435.) Plaintiffs allege that these violations occurred between May 27, 2021, and 16 February 28, 2023 (the “Class Period”). (Id. ¶ 1.) 17 On May 25, 2023, Defendants Tulco, Tull, FIGS, and all individually named 18 Defendants moved to dismiss the Class Action Complaint for failure to state a claim 19 pursuant to Federal Rule of Civil Procedure (“Rule”) 12(b)(6). (Tulco Mot., ECF 20 21 22 23 24 25 26 27 28 2 “Public Pension Plans” refers to multiple public pension plans suing on behalf of the pension plan members. The Public Pension Plans designation includes the following named plaintiffs: City of Pensacola Police Officers’ Retirement Plan, City of Warren Police and Fire Retirement System, Kissimmee Utility Authority Employees’ Retirement Plan, and Pompano Beach Police & Firefighters’ Retirement System. 3 Defendants Tulco, LLC, Thomas Tull, and J. Martin Willhite when grouped together are referred to herein as the “Tulco Defendants.” 4 The named Underwriters (“Underwriter Defendants”) are as follows: Goldman Sachs & Co. LLC, Morgan Stanley & Co. LLC, Barclays Capital Inc., Credit Suisse Securities (USA) LLC, BofA Securities, INC., Cower and Company, LLC, Guggenheim Securities, LLC, KeyBanc Capital Markets Inc., Oppenheimer & Co. Inc., Piper Sandler & Co., Telsey Advisory Group LLC, Academy Securities, Inc., R. Seelaus & Co., LLC, Samuel A. Ramirez & Company, Inc., and Seibert Williams Shank & Co., LLC. 2 1 No. 98; FIGS Mot., ECF No. 100.) The Underwriter Defendants joined Defendants 2 Tulco, Tull, and FIGS in their motions to dismiss. (Underwriter Joinder, ECF No. 103.) 3 Plaintiffs opposed all motions to dismiss, and Defendants responded. (Opp’n, ECF 4 No. 105; Tulco Reply, ECF No. 108; FIGS Reply, ECF No. 106.) For the reasons below, the Court GRANTS Defendants’ motions WITH LEAVE 5 6 TO AMEND.5 II. 7 The Class Action Complaint has over 108 pages of alleged background 8 9 BACKGROUND information. The Court briefly summarizes the relevant facts. 10 Defendant FIGS is an apparel company that sells fitted athleisure-style scrubs 11 and related clothing to medical professionals using an online, direct-to-consumer 12 (“DTC”) business model. (CAC ¶¶ 29–32.) The company rose to prominence during 13 the COVID-19 pandemic due to heightened demand for medical scrub products and a 14 global shift to online sales. (Id. ¶¶ 42–51.) Throughout the Class Period, FIGS claimed 15 to operate a robust customer data collection and analytic system to “better acquire and 16 retain customers[,] reliably predict buying patterns,” and improve “core operating 17 activities and decision-making processes.” (Id. ¶¶ 41, 166–167.) FIGS also represented 18 its merchandising model as a risk-mitigation “core product strategy” centered on the 19 seasonless nature of scrubs and a repeat customer base comprised of medical 20 professionals. (Id. ¶¶ 42–43, 147–149.) The instant action centers on alleged securities 21 fraud and misconduct committed by all named Defendants during the IPO, SPO, and 22 general Class Period, ultimately resulting in the decline of FIGS stock price and 23 economic loss to Plaintiffs. (See generally id.) 24 Defendants Heather Hasson and Catherine Spear are Co-Founders of FIGS and 25 served as Co-CEOs during the Class Period. (Id. ¶¶ 17–18.) Defendant Jeffrey D. 26 Lawrence was the CFO of FIGS during the Class Period from December 2020 to 27 28 5 Having carefully considered the papers filed in connection with the Motion, the Court deemed the matter appropriate for decision without oral argument. Fed. R. Civ. P. 78; C.D. Cal. L.R. 7-15. 3 1 December 2021. (Id. ¶ 19.) Defendant Daniella Turenshine replaced Lawrence as the 2 CFO of FIGS in December 2021 and remained CFO for the remaining duration of the 3 Class Period. (Id. ¶ 20.) Defendant J. Martin Willhite is a member of the FIGS Board 4 and has served as Vice Chairman of Tulco since July 2017. (Id. ¶ 21.) Each of the 5 aforementioned Defendants held positions as officers, directors, and controlling persons 6 of FIGS and controlled SEC filings, press releases, and other public statements during 7 the Class Period. (Id. ¶ 25.) Defendant Tulco, LLC is a venture capital investment firm 8 that controlled a significant percentage of FIGS’ voting interest by holding a substantial 9 portion of FIGS’ common stock during the Class Period. (Id. ¶ 26.) Defendant Thomas 10 Tull is Tulco’s Founder, chairman, and CEO. (Id. ¶ 27.) 11 Plaintiffs are investors who acquired FIGS Class A common stock during the 12 Class Period between May 27, 2021, and February 28, 2023. (Id. ¶ 1.) Plaintiffs allege 13 FIGS, Tulco, Tull, and the Individual Exchange Act Defendants committed Exchange 14 Act violations in two ways. First, Plaintiffs allege these Defendants schemed to 15 artificially increase the price of FIGS securities for the purpose of selling stocks quickly 16 to gain windfall profits (the “pump-and-dump” scheme). (Id. ¶¶ 125–134.) Second, 17 Plaintiffs allege these Defendants misled investors with false statements and omissions 18 during the Class Period ultimately leading to Plaintiffs’ economic losses. (Id. ¶¶ 135– 19 222.) Regarding the alleged Security Act violations, Plaintiffs assert FIGS, Hasson, 20 Spear, the Tulco Defendants, the Underwriter Defendants, and various other Individual 21 Exchange Act Defendants mislead Plaintiffs with false statements and omissions as well 22 as providing false and misleading IPO and SPO documents that violated Items 105 and 23 303 of SEC Regulation S-K6. (Id.) 24 25 26 27 28 6 Regulation S-K is a SEC regulation that outlines how registrants should disclose material qualitative descriptors of their business on registration statements, periodic reports, and any other filings. See generally 17 C.F.R. § 229.10. 4 A. Exchange Act Violations 1 2 First, Plaintiffs allege the pump-and-dump scheme began in 2017 when 3 Defendants Hasson, Spear, Tulco, and Tull allegedly induced early-stage investors to 4 sell their shares of FIGS stock to Tulco for significantly lower prices. (Id. ¶ 128.) This 5 resulted in Hasson, Spear, and Tulco jointly holding 88% of FIGS’ voting rights. (Id. 6 ¶¶ 128–129.) Upon gaining majority control of FIGS voting rights and in connection 7 with the IPO, a voting agreement was created reelecting Hasson, Spear, and Willhite— 8 Tulco’s representative—to the FIGS Board of Directors. (Id. ¶¶ 128–130.) With 9 control of the FIGS Board, Hasson, Spear, and the Tulco Defendants allegedly engaged 10 in a scheme to artificially inflate FIGS’ share prices by misrepresenting to the public 11 that FIGS possessed and used advanced data analytics and “unique inventory and supply 12 chain management capabilities.” 13 management capabilities were allegedly touted as ways FIGS could weather 14 macroeconomic pressures and provide insight into possible market behavior. (Id. 15 ¶¶ 125–126.) Additionally, Defendants promised investors a product strategy focusing 16 on a core set of medical scrub products that would provide consistent predictable 17 revenue from a base of repeat customers. (Id. ¶¶ 43–46.) (Id. ¶ 125.) These data analytic systems and 18 On May 26, 2021, Defendants priced FIGS’ IPO of 26.4 million shares at $22.00 19 per share. (Id. ¶ 69.) FIGS and Tulco sold over thirty million shares and gained 20 $546 million by the IPO’s closing. (Id. ¶ 76.) During the SPO, FIGS’ shares were 21 valued at $40.25 per share, and Hasson, Spear, and Tulco sold another ten million shares 22 for over $412 million by the SPO’s closing. (Id. ¶ 84.) Plaintiffs highlight that while 23 the IPO and SPO resulted in nearly $1 billion of FIGS stock sold, only $96 million— 24 less than ten percent of the overall gains—went to FIGS for company operations. (Id. 25 ¶¶ 76, 131.) 26 Second, Plaintiffs allege FIGS, Tulco, Tull, and the Individual Exchange Act 27 Defendants issued a series of material misstatements and omitted material facts in 28 FIGS’ “public filings, press releases and other documents throughout the Class Period” 5 1 to conceal issues from investors and artificially inflate and maintain inflation of FIGS’ 2 share price (Id. ¶ 135.) 3 Following the public offerings, FIGS, Tulco, Tull, and the Individual Exchange 4 Act Defendants allegedly continued to misrepresent FIGS’ data capabilities, financial 5 performance, and market strategies to the public and investors. (Id. ¶¶ 135–136.) On 6 various earnings calls during the Class Period, multiple individual Defendants 7 apparently assured investors that the FIGS’ core product strategy would be able to 8 deliver on promised revenue margins despite “COVID-19 macro supply chain 9 challenges.” (Id. ¶¶ 195, 179–181, 185–188, 195, 197–198.) FIGS and the Individual 10 Exchange Act Defendants allegedly made similar claims on their SEC filing Form 10-K 11 and other public filings. (Id. ¶¶ 202–209.) However, according to Plaintiffs, these 12 assurances and reports were far from reality. (See generally id.) Plaintiffs claim that, 13 throughout the Class Period, FIGS, Tulco, Tull, and the Individual Exchange Act 14 Defendants were instead: 15 16 17 18 19 20 “(i) [E]ngaged in a high-risk merchandising model that included developing numerous new styles per quarter for which demand was untested, and: (a) was either failing to consider data and analytics in making purchase orders; or (b) did not have the data capabilities to reliably predict demand; (ii) relying heavily on expensive air freight in order to compensate for inadequate demand planning; (iii) experiencing rising levels of inventory, including of non-core products; and (iv) incurring significant costs related to each of the above. 21 22 (Id ¶ 135.) 23 These discrepancies were revealed to investors through four sets of disclosures 24 from November 10, 2021, to February 28, 2023. (Id. ¶¶ 88, 121–123, 270, 287–288, 25 289–290, 295, 297–299, 300–02, 309.) The disclosures covered multiple topics ranging 26 from diminished gross margins due to increased costs of transporting supplies by 27 airfreight, the departure of Lawrence as FIGS’ CFO, and lack of product inventory 28 6 1 management increasing storage and overall operational costs. (Id.) Plaintiffs allege 2 that these misrepresentations and fraudulent conduct are directly responsible for 3 Plaintiffs’ economic losses and the decline in value of FIGS’ Class A stock from $42.25 4 per share when purchased during the SPO to $6.76 per share following the corrective 5 disclosures on March 1, 2023. (Id. ¶¶ 309–312.) 6 B. Securities Act Violations 7 Plaintiffs’ Securities Act allegations assert that FIGS’ IPO and SPO Documents 8 (collectively, the “Registration Statements”) contained “untrue statements of material 9 fact and omitted material facts required by governing regulation and necessary to make 10 the statements therein not materially misleading.” (Id. ¶¶ 371, 390.) The Registration 11 Statements allegedly misrepresented that FIGS maintained a low-risk product line 12 because FIGS possessed data analytics capabilities that permitted FIGS to “reliably 13 predict buying patterns” and “anticipate demand.” (Id. ¶¶ 372–401.) Additionally, the 14 IPO Offering Documents apparently focused on FIGS’ commitment to their core scrub- 15 wear product line as opposed to the reality of FIGS’ true intentions to branch out and 16 develop hundreds of new high-risk products. (Id.) Furthermore, Plaintiffs contend the 17 IPO Offering Documents misrepresented that air freight was being used “only as a 18 response to supply chain disruptions arising from the COVID-19 pandemic,” and failed 19 to disclose the actual frequency and additional reasons why FIGS chose to use air 20 shipping methods. (Id.) 21 Finally, Plaintiffs allege the FIGS Registration Statements were false and 22 misleading when issued because “they failed to disclose material information require to 23 be disclosed pursuant to the regulations governing their preparation.” (Id. ¶ 403.) For 24 Item 105, the Registration Statements apparently failed to provide the requisite 25 “discussion of the material factors that make an investment in the registrant or offering 26 speculative or risky.” (Id. ¶ 404 (quoting 17 C.F.R. § 229.105(a)).) Plaintiffs allege the 27 Item 105 risk factor discussion was “materially incomplete and therefore misleading.” 28 (Id.) Similarly, Plaintiffs allege that the Registration Statements failed to comply with 7 1 Item 303, which requires the Registration Statements to “[d]escribe any known trends 2 or uncertainties that have had or that [FIGS reasonably expects are] likely to have a 3 material favorable or unfavorable impact on net sales or revenues or income from 4 continuing operations.” (Id. (quoting 17 C.F.R. § 229.303(b)(2)(ii)).) Plaintiffs claim 5 the Registration Statements failed to both include material uncertainties and disclose 6 significant problems with FIGS’ merchandising and production processes. (Id. ¶ 405.) III. 7 8 A. LEGAL STANDARD Rule 12(b)(6) Generally 9 A court may dismiss a complaint under the Federal Rules of Civil Procedure 10 (“Rule”) Rule 12(b)(6) for lack of a cognizable legal theory or insufficient facts pleaded 11 to support an otherwise cognizable legal theory. Balistreri v. Pacifica Police Dep’t, 12 901 F.2d 696, 699 (9th Cir. 1988). To survive a dismissal motion, a complaint need 13 only satisfy the “minimal notice pleading requirements” of Rule 8(a)(2). Porter v. 14 Jones, 319 F.3d 483, 494 (9th Cir. 2003). Rule 8(a)(2) requires “a short and plain 15 statement of the claim showing that the pleader is entitled to relief.” The factual 16 “allegations must be enough to raise a right to relief above the speculative level.” Bell 17 Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007); Ashcroft v. Iqbal, 556 U.S. 662, 678 18 (2009) (holding that a claim must be “plausible on its face” to avoid dismissal). 19 The determination of whether a complaint satisfies the plausibility standard is a 20 “context-specific task that requires the reviewing court to draw on its judicial 21 experience and common sense.” Iqbal, 556 U.S. at 679. A court is generally limited to 22 the pleadings and must construe all “factual allegations set forth in the complaint . . . as 23 true and . . . in the light most favorable” to the plaintiff. Lee v. City of Los Angeles, 24 250 F.3d 668, 679 (9th Cir. 2001). However, a court need not blindly accept conclusory 25 allegations, unwarranted deductions of fact, and unreasonable inferences. Sprewell v. 26 Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). Ultimately, there must be 27 sufficient factual allegations “to give fair notice and to enable the opposing party to 28 defend itself effectively,” and the “allegations that are taken as true must plausibly 8 1 suggest an entitlement to relief, such that it is not unfair to require the opposing party 2 to be subjected to the expense of discovery and continued litigation.” Starr v. Baca, 3 652 F.3d 1202, 1216 (9th Cir. 2011). 4 Because Plaintiffs in this action allege that Defendants fraudulently violated 5 federal securities laws, Plaintiffs’ initial burden is heightened by the “dual pleading 6 requirements of [Rule] 9(b) and the [Private Securities Litigation Reform Act (PSLRA), 7 15 U.S.C. § 78u–4].” Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th 8 Cir. 2009). 9 B. Pleading Fraud Under Rule 9(b) 10 Rule 9(b) provides: “In alleging fraud or mistake, a party must state with 11 particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). “A 12 pleading satisfies Rule 9(b) if it identifies ‘the who, what, when, where, and how’ of the 13 misconduct charged.” MetroPCS v. SD Phone Trader, 187 F.Supp.3d 1147, 1150 14 (S.D. Cal. 2016) (citing Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 15 2003)). The plaintiff must “set forth more than the neutral facts necessary to identify 16 the transaction.” Vess, 317 F.3d at 1106. “The plaintiff must set forth what is false or 17 misleading about a statement, and why it is false.” Id. 18 C. Pleading Requirements Under the PSLRA 19 Securities fraud claims must also meet a higher pleading standard under the 20 PSLRA. Under the PSLRA, a securities fraud plaintiff must plead “(1) each statement 21 alleged to have been misleading; (2) the reason or reasons why the statement is 22 misleading; and (3) all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1); 23 Desaigoudar v. Meyercord, 223 F.3d 1020, 1023 (9th Cir. 2000). Plaintiffs must “state 24 with particularity facts giving rise to a strong inference that the defendant acted with 25 the required state of mind.” Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 345 (2005) 26 (alterations in original) (quoting 15 U.S.C. §§ 78u–4(b)(1)–(2)). 27 28 9 1 IV. REQUEST FOR JUDICIAL NOTICE 2 FIGS and the Tulco Defendants request that the Court take judicial notice of 3 twenty-four exhibits. (Tulco Req. Judicial Notice (“Tulco RJN”), ECF No. 97; FIGS 4 Req. Judicial Notice (“FIGS RJN”), ECF No. 102.) Plaintiffs do not oppose either 5 request for judicial notice. The Tulco Defendants ask the Court to take judicial notice 6 of four exhibits: (1) a public voting agreement publicly filed as a Form 10-K exhibit 7 filed with the Securities Exchange Commission (“SEC”) on March 22, 2022; (2) an 8 amended restated stockholder agreement; (3) Tulco’s Form 4 reflecting trades of FIGS 9 common stock; and (4) Tull’s Form 4 reflecting trades of FIGS common stock. 10 (See Tulco RJN Exs. 1–4.) FIGS seeks judicial notice of twenty exhibits, grouped 11 generally into seven categories: (1) transcripts of earnings calls from November 2021 12 to February 2023; (2) FIGS’ Form 10-K; (3) several of FIGS’ Forms 10-Q ranging from 13 2021 to 2022; (4) FIGS’ 2021 Form S-1 A Registration Statements; (5) news articles 14 regarding FIGS leadership and success; (6) presentation slides relating to financial 15 strategies; and (7) Hasson’s and Spear’s Form 4s reflecting trades of FIGS common 16 stock. (See FIGS RJN Exs. A–T.) 17 Although district courts generally may not consider evidence outside of the 18 pleadings when ruling on a motion to dismiss under Rule 12(b)(6), see United States v. 19 Ritchie, 342 F.3d 903, 907–08 (9th Cir. 2003), a court may properly consider evidence 20 outside of the pleadings if it is properly subject to judicial notice or is incorporated by 21 reference into the pleadings. Lee, 250 F.3d at 689. As is particularly relevant to 22 Defendants’ motions, the Court may properly take judicial notice of SEC filings, as they 23 are “public disclosure documents required by law to be filed.” Plevy v. Haggerty, 38 F. 24 Supp. 2d 816, 821 (C.D. Cal. 1998) (taking judicial notice of SEC filings, even those 25 “not specifically mentioned” in the complaint). 26 Courts may also consider material incorporated by reference into the complaint 27 as true for purposes of a motion to dismiss under Rule 12(b)(6) where the plaintiff refers 28 to the material extensively or it forms the basis of the plaintiff's claims. Ritchie, 10 1 342 F.3d at 908; see also In re Wet Seal, Inc. Sec. Litig., 518 F. Supp. 2d 1148, 1159 2 (C.D. Cal. 2007) (taking judicial notice of a document where security fraud plaintiffs’ 3 claims were “predicated upon” the document); In re Copper Mountain Sec. Litig., 4 311 F. Supp. 2d 857, 864 (N.D. Cal. 2004) (recognizing press releases submitted in 5 opposition to a motion to dismiss under Rule 12(b)(6) via both judicial notice and 6 incorporation by reference). 7 As Plaintiffs object to neither the Tulco RJN nor the FIGS RJN, and the materials 8 in both RJNs fall into the above categories, the Court GRANTS both RJNs and 9 considers the materials appended thereto for the purposes of these motions. V. 10 DISCUSSION 11 Plaintiffs assert their first cause of action against FIGS, Tulco, Tull, and the 12 Individual Exchange Act Defendants, for violating section 10(b) and rule 10b 5 of the 13 Exchange Act. Plaintiffs assert their second cause of action against the Individual 14 Exchange Act Defendants, Tulco, and Tull for control person liability under section 15 20(a) of the Exchange Act. Plaintiffs assert their third cause of action against Hasson, 16 Spear, Tulco, and Tull for insider trading under section 20(a) under the Exchange Act. 17 Plaintiffs assert their fourth cause of action against FIGS, Hasson, Spear, Lawrence, 18 Antrum, Sonen, Willhite, Tulco, Tull, and the Underwriter Defendants for violating 19 Section 11 of the Securities Act and violating Item 105 and 303 of SEC Regulation S- 20 K. Plaintiffs assert their fifth cause of action against FIGS, Hasson, Spear, Tulco, and 21 Tull for violating section 12(a)(2) of the Securities Act. Plaintiffs assert their sixth 22 cause of action against Hasson, Spear, Lawrence, and the Tulco Defendants for 23 violating section 15 of the Securities Act. Defendants oppose all claims. The Court 24 addresses each cause of action in order. 25 A. Violations of Section 10(b) of the Exchange Act 26 Plaintiffs assert their first cause of action against FIGS, Tulco, Tull, and the 27 Individual Exchange Act Defendants (Hasson, Spear, Lawrence, Turenshine, and 28 Willhite) for allegedly employing devices, schemes, and artifices to defraud Plaintiffs 11 1 by disseminating or approving materially false and misleading statements, failing to 2 disclose and or omitting material facts necessary to make statements not misleading, 3 and selling FIGS Class A Stock while in possession of material non-public information 4 (“MNPI”) in violation of section 10(b) and rule 10b-5. (CAC ¶ 321.) 5 Section 10(b) of the Securities and Exchange Act of 1934 makes it unlawful “[t]o 6 use or employ, in connection with the purchase or sale of any security . . . any 7 manipulative or deceptive device or contrivance in contravention of such rules and 8 regulations as the Commission may prescribe.” 15 U.S.C. § 78j(b). Pursuant to this 9 section, the SEC promulgated rule 10b-5, which makes it unlawful, in connection with 10 11 12 13 14 15 16 the purchase or sale of any security: (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made . . . not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person . . . . 17 C.F.R. § 240.10b-5. 17 The “elements that must be pleaded to state a claim for securities fraud are 18 strenuous but well established.” Curry v. Yelp Inc., 875 F.3d 1219, 1224 (9th Cir. 2017). 19 A plaintiff must plead and prove the following elements: “(1) a material 20 misrepresentation or omission by the defendant; (2) scienter; (3) a connection between 21 the misrepresentation or omission and the purchase or sale of a security; (4) reliance 22 upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” 23 Stoneridge Inv. Partners, LLC v. Sci.-Atlanta, Inc., 552 U.S. 148, 157 (2008). 24 FIGS, Tulco, Tull, and the Individual Exchange Act Defendants move to dismiss 25 Plaintiffs’ first cause of action on the grounds that the Class Action Complaint fails to 26 sufficiently allege elements of falsity, scienter, and loss causation. (Tulco Mot. 7–8; 27 FIGS Mot. 2–3.) For the reasons below, the Court finds that Plaintiffs fail to sufficiently 28 plead scienter under Rule 9(b) and the PSLRA. As a result, Plaintiffs do not meet the 12 1 requisite elements necessary to allege a violation under section 10(b). Accordingly, the 2 Court finds it unnecessary to address the elements of falsity or loss causation for the 3 purpose of this Order. 4 To successfully allege “scienter” under the PSLRA, a plaintiff must “state with 5 particularity facts giving rise to a strong inference that the defendant acted with the 6 required state of mind.” 15 U.S.C. § 78u-4(b)(2)(A). A “strong inference” under 7 15 U.S.C. § 78u-4(b)(2)(A) “must be more than merely plausible or reasonable—it 8 must be cogent and at least as compelling as any opposing inference of nonfraudulent 9 intent.” Tellabs, Inc. v. Makor Issues & Rights, 551 U.S. 308, 314 (2007). “In [the 10 Ninth C]ircuit, the required state of mind is a mental state that not only covers intent to 11 deceive, manipulate, or defraud, but also deliberate recklessness.” E. Ohman J:or 12 Fonder AB v. NVIDIA Corp., 81 F.4th 918, 937 (9th Cir. 2023) (quoting In re Quality 13 Sys., Inc. Sec. Litig., 865 F.3d 1130, 1136 (9th Cir. 2017)). A defendant acts with the 14 required state of mind, or scienter, only if she makes false or misleading statements 15 either intentionally or with deliberate recklessness. In re Daou Sys., Inc. Sec. Litig., 16 411 F.3d 1006, 1015 (9th Cir. 2005). 17 departure from the standards of ordinary care . . . which presents a danger of misleading 18 buyers or sellers that is either known to the defendant or is so obvious that the actor 19 must have been aware of it.’” Schueneman v. Arena Pharms., Inc., 840 F.3d 698, 705 20 (9th Cir. 2016) (quoting Zucco, 552 F.3d at 991). “[D]eliberate recklessness is ‘an extreme 21 When analyzing the sufficiency of a plaintiff’s scienter pleadings, a court must 22 first “determine whether any of the allegations, standing alone, are sufficient to create 23 a strong inference of scienter.” N.M. State Inv. Council v. Ernst & Young, 641 F.3d 24 1089, 1095 (9th Cir. 2011) (quoting Zucco, 552 F.3d at 991–92). Second, “if no 25 individual allegation is sufficient . . . the court [must] conduct a ‘holistic’ review of the 26 same allegations to determine whether the insufficient allegations combine to create a 27 strong inference of intentional conduct or deliberate recklessness.” Id. 28 13 1 Upon review, the underlying factual allegations in the consolidated Class Action 2 Complaint do not adequately establish a strong inference of scienter. Plaintiffs allege 3 scienter under five separate theories: (a) core operations; (b) access to data; (c) 4 misleading statements; (d) sale of stocks; and (e) executive departures. The Court 5 considers each of Plaintiffs’ scienter theories in turn. 6 a. Core operations 7 Plaintiffs first rely upon the “core operations” theory of scienter, alleging the 8 Individual Exchange Act Defendants admitted to having “deep institutional knowledge 9 regarding all aspects of [FIGS].” (CAC ¶ 228.) 10 Under the core operations theory of proving scienter, “[w]here a complaint relies 11 on allegations that management had an important role in the company but does not 12 contain additional detailed allegations about the defendants’ actual exposure to 13 information, it will usually fall short of the PSLRA standard.” S. Ferry LP, No. 2 v. 14 Killinger, 542 F.3d 776, 784 (9th Cir. 2008). As the Ninth Circuit notes, “[p]roof under 15 this theory is not easy.” Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 16 759 F.3d 1051, 1062 (9th Cir. 2014). To establish scienter under the core operations 17 theory, “[a] plaintiff must produce either specific admissions by one or more corporate 18 executives of detailed involvement in the minutia of a company’s operations . . . or 19 witness accounts demonstrating that executives had actual involvement in creating false 20 reports.” Id. In “rare circumstances” a plaintiff may establish scienter under the core 21 operations theory by pleading with particularity specific events of such prominence 22 “that it would be ‘absurd’ to suggest that management was without knowledge of the 23 matter.” Killinger, 542 F.3d at 786. 24 In the present case, Plaintiffs allege multiple instances of Hasson and Spear 25 publicly stating they were either “deeply involved” or managed the day-to-day 26 operations of FIGS during the Class Period. (CAC ¶¶ 227–229.) Plaintiffs claim that 27 Hasson and Spear’s statements of company involvement provide strong evidence that 28 either: (1) Hasson and Spear knew the alleged false statements were materially false 14 1 and misleading when made; or (2) Hasson and Spear were reckless when making those 2 statements. (Id. ¶ 230.) 3 In response, FIGS and the Individual Exchange Act Defendants argue that 4 Hasson’s and Spear’s statements are being taken out of context and were not in 5 reference to the alleged misleading misstatements and omissions. (FIGS Mot. 28–29.) 6 FIGS and the Individual Exchange Act Defendants argue these statements were instead 7 related to “labor abuses in the supply chains of other apparel companies.” (Id. at 29.) 8 Here, the Court finds Plaintiffs fail to provide any substantively particularized 9 allegations or facts beyond Hasson’s and Spear’s blanket public statements of 10 involvement. These broad statements of involvement do not rise to the level of 11 specificity required to establish a strong inference of scienter, as discussed in Police 12 Retirement System of St. Louis. 759 F.3d at 1051. Currently, Plaintiffs’ core operation 13 allegations support only a “mere inference of [the defendants’] knowledge of all core 14 operations” and do not rise to the required level necessary to establish scienter. See 15 Killinger, 542 F.3d at 785 (internal quotation marks omitted). The Court requires far 16 more clear statements made by defendants indicating scienter—not “selectively 17 chosen” out of context remarks—in Plaintiffs’ pleadings. 18 Plaintiffs ultimately conclude their core operations theory of scienter by arguing 19 that the remaining Individual Exchange Act Defendants, FIGS, Tulco, and Tull can be 20 “presumed to have knowledge of adverse facts related to FIGS’ operations, supply 21 chain, merchandising, and inventory management.” 22 Defendants Tulco and Tull argue that the core operations theory does not apply to them 23 because there are no particularized allegations in the Class Action Complaint that Tulco 24 or Tull “had any responsibility or control over FIGS’ day-to-day operations. (Tulco 25 Mot. 11.) (CAC ¶ 231.) In response, 26 The Court agrees with Defendants. Plaintiffs rely solely on statements made by 27 Hasson and Spear to impute scienter onto the remaining Individual Exchange Act 28 Defendants, FIGS, Tulco, and Tull. Even assuming arguendo that Hasson’s and Spear’s 15 1 statements gave rise to a strong inference of scienter, Plaintiffs’ broad-strokes-attempt 2 to impute scienter to all other Defendants fails to meet the scienter requirements under 3 the core operations theory and the heightened particularity requirements of the PSLRA. 4 See In re Copper Mountain Sec. Litig., 311 F. Supp. 2d at 872 (noting the assumption 5 that officers have knowledge of certain information by virtue of their position within 6 the company would reduce pleading scienter to “boilerplate assertions, which would 7 defeat the PSLRA’s requirement that scienter be pled with particularity”). 8 allegations in the Class Action Complaint regarding FIGS generally, Tulco’s, Tull’s, 9 and the remaining Individual Exchange Act Defendants’ roles at FIGS are far from the 10 requisite “specific admissions from top executives that they are involved in every detail 11 of the company.” Daou, 411 F.3d at 1022 (noting even “allegations of defendants’ 12 ‘hands-on’ management style, their interaction with other officers and employees, their 13 attendance at meetings, and their receipt of unspecified weekly or monthly reports” are 14 insufficient to establish a strong inference of scienter). Plaintiffs may not presume “that 15 the allegedly false and misleading ‘group published information’ complained of is the 16 collective action of officers and directors.” In re GlenFed, Inc. Sec. Litig., 60 F.3d 591, 17 593 (9th Cir. 1995). The 18 Accordingly, after reviewing all 443 paragraphs of the 136-page Class Action 19 Complaint, the Court finds Plaintiffs fail to plead sufficient particularized facts 20 regarding FIGS’, Tulco’s, Tull’s, and the Individual Exchanges Defendants’ actual 21 exposure to the information underlying the allegedly misleading statements to 22 sufficiently plead scienter under a core operations theory. Police Ret. Sys., 759 F.3d 23 at 1062 (finding plaintiff did not adequately allege scienter where the complaint “lacked 24 allegations of specific admissions by the individual defendants regarding their 25 involvement with [the company’s] operations”). 26 b. Access to data 27 Next, Plaintiffs allege FIGS, Tulco, Tull, and the Individual Exchange Act 28 Defendants had access to multiple data analytic systems which gave them knowledge 16 1 of FIGS’ less-than-favorable financial, supply-chain, and inventory-level status during 2 the Class Period. (CAC ¶¶ 63, 180–181, 229, 232–241.) Plaintiffs claim Defendants— 3 through their possession of this data—knew the FIGS’ public statements made 4 concerning “demand, air freight, inventory,” and associated financials were “materially 5 false and misleading when made and/or were made with reckless disregard for the 6 truth.” (Id. ¶ 241.) Plaintiffs alternatively assert that “if [FIGS] did not have the ability 7 to manage every aspect of its products’ lifecycles as the [Defendants] assured investors, 8 then the [Defendants] statements concerning these abilities were knowingly false and 9 misleading.” (Id.) In response, FIGS and the Individual Exchange Act Defendants 10 argue that Plaintiffs fail to sufficiently plead scienter under this theory because Plaintiffs 11 do not provide or allege the specific contents of the purported data. Defendants further 12 assert that under the “access to data” theory, Plaintiffs’ scienter allegations regarding 13 data access “can only support an inference of scienter where Plaintiffs specifically plead 14 ‘the contents of . . . of the purported data,’ so the Court can ‘ascertain whether there is 15 any basis for the allegations that [Defendants] had actual or constructive knowledge’ 16 their statements were false or misleading when made.” (FIGS Mot. 30 (citing Lipton v. 17 Pathogenesis Corp., 284 F.3d 1027, 1036 (9th Cir. 2002)).) 18 Here, Plaintiffs again rely on statements made by Hasson and Spear to impute 19 knowledge and data access capabilities onto all other Defendants in this cause of action. 20 Plaintiffs are correct that Hasson and Spear made statements relating to FIGS’ 21 employment of multiple data analytic systems. However, Plaintiffs fail to identify any 22 uncontroverted data, inconsistent with FIGS’ public statements, that Hasson or Spear 23 learned from these analytics. In re Wet Seal, 518 F. Supp. 2d at 1174 (finding 24 allegations that defendants had access to real time reports allegedly showing the 25 company’s deteriorating financial condition were insufficient because plaintiffs failed 26 to allege any specific data that the individual defendants learned from these reports that 27 was inconsistent with the company’s public statements); see also Wozniak v. Align 28 Tech., Inc., 850 F. Supp. 2d 1029, 1034 (N.D. Cal. 2012) (concluding that a complaint 17 1 failed to allege scienter because “[a]lthough plaintiff refer[red] to the existence of sales 2 and shipment data and ma[de] a general assertion about what the data showed, plaintiff 3 allege[d] no hard numbers or other specific information”). Currently, Plaintiffs’ factual 4 allegations of data access merely amount to a possible inference of recklessness, but do 5 not rise to the state of mind necessary to establish scienter under the PSLRA. 6 Similarly, Plaintiffs fail to allege specific instances or particularized facts 7 regarding the remaining Individual Exchange Act Defendants’, Tulco’s, and Tull’s 8 access to similar information. Plaintiffs’ make an attenuated allegation that Tulco and 9 Tull employed a “hands-on operational approach” with FIGS management that would 10 grant the two Defendants access to knowledge of data analytics at FIGS. (Opp’n 29.) 11 Plaintiffs do not allege any particularized facts that state Tulco or Tull had access to the 12 data analytics at FIGS. Without particularized facts implicating each accused defendant 13 in this cause of action, the Court declines to make inferential leaps relating to data 14 access and knowledge of falsity. Any such conclusions would be in direct contradiction 15 to the heightened pleading requirements demanded by the PSLRA. 16 17 18 Accordingly, the Court finds Plaintiffs’ allegations of Defendants’ data access fall short of establishing scienter. c. March and May 2022 Earnings Calls 19 Plaintiffs next assert that Spear’s and Turenshine’s statements during FIGS’ 20 March 2022 earnings call misled Plaintiffs by painting a very positive image of FIGS’ 21 financial, supply-chain, and inventory status going into Q1 2022. (CAC ¶¶ 242–250.) 22 However, the May 2022 earnings call disclosed the actual Q1 results, which were far 23 less positive than promised during the March 2022 earnings call. (Id. ¶ 245.) Plaintiffs 24 then cite to various underwriter analysts’ suspicions insinuating that there may be “more 25 at play” regarding Defendants’ alleged excuses for the large difference in March 2022 26 Q1 projections versus May 2022 Q1 results. (Id. ¶ 250.) In response, FIGS and the 27 Individual Exchange Act Defendants provided the transcript of the March 2022 28 earnings call and argue that they provided proactive disclosures to place investors on 18 1 notice of possible risks. (FIGS Mot. 29; see Decl. Heather Speers ISO FIGS Mot. 2 (“Speers Decl.”) Ex. E, ECF No. 101.) After reviewing the March 2022 earnings call 3 transcript, the Court finds Defendants did, in fact, provide proactive disclosures. (Id.) 4 While the disclosures are not expressly forefront, their existence negates any strong 5 inference of fraudulent intent or deliberate recklessness. Tellabs, 551 U.S at 314 6 (holding that a strong inference under 15 U.S.C. § 78u-4(b)(2)(A) “must be more than 7 merely plausible or reasonable—it must be cogent and at least as compelling as any 8 opposing inference of nonfraudulent intent”). Accordingly, the Court does not find a 9 strong inference of scienter based on the earnings calls. 10 11 12 d. Sale of Stocks Next, Plaintiffs claim Hasson’s, Spear’s, Tulco’s, and Tull’s stock sales during the Class Period raise a strong inference of scienter. 13 Stock sales by corporate insiders “[are] suspicious only when [they are] 14 ‘dramatically out of line with prior trading practices at times calculated to maximize the 15 personal benefit from undisclosed inside information.’” City of Dearborn Heights Act 16 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605, 621 (9th Cir. 2017) 17 (quoting Zucco, 552 F.3d at 1005). To make this determination, courts look to three 18 factors: “(1) the amount and percentage of shares sold by insiders; (2) the timing of the 19 sales; and (3) whether the sales were consistent with the insider's prior trading history.” 20 Id. The Court addresses each factor in turn. 21 First, to raise suspicion around the amount and percentage of stocks sold, a 22 plaintiff must demonstrate that defendants sold the overwhelming majority of their 23 shares. No. 84 Emp.-Teamster Joint Council Pension Tr. Fund v. Am. W. Holding 24 Corp., 320 F.3d 920, 939 (9th Cir. 2003) (holding that nine individual defendants 25 selling at least 88% of their total security holdings raised suspicion). “The greater 26 percentage of stock sold, the greater likelihood a court will infer scienter.” In Re 27 Alteryx, Inc. Sec. Litig., No. 21-cv-01540-DOC (JDEx), 2021 WL 4551201, at *4 28 (C.D. Cal. June 17, 2021). There are “novel situations” where the “stock sales result in 19 1 a truly astronomical figure” and courts must give greater weight to the monetary return 2 instead of the percentage of stocks sold. Nursing Home Pension Fund, Local 144 v. 3 Oracle Corp., 380 F.3d 1226, 1232 (9th Cir. 2004) (determining that an individual 4 defendant who sold $900 million in stock raised suspicion, even though it only 5 represented 2.1% of his total securities holding). 6 Plaintiffs rely heavily on Nursing Home Pension Fund, Local 144 v. Oracle 7 Corp. (“Oracle”) in asserting that the near $1 billion combined total of proceeds 8 Defendants made from selling FIGS stock supports finding the “novel situation” 9 justifying an “overwhelming inference of scienter.” (Opp’n 22.) In Oracle, the Ninth 10 Circuit found the stock sales of an individual defendant to be suspicious, rather than the 11 combined total of multiple defendants’ stock sales as Plaintiffs argue here. See Oracle, 12 380 F.3d at 1232. Therefore, the Court considers Hasson’s, Spear’s, Tulco’s, and Tull’s 13 individual stock sales to determine whether suspicion exists. 14 Plaintiffs allege that during the Class Period, Hasson sold over $97 million in 15 stocks and Spear sold over $60 million. (CAC ¶¶ 84, 259.) Unlike Oracle, these are 16 not “astronomical figures,” 380 F.3d at 1232, and the Court therefore places greater 17 weight on the percentage of holdings sold to infer scienter. Plaintiffs allege Hasson 18 sold “almost 15% of her total holdings,” and Spear sold “nearly 9% of her total 19 holdings.” (CAC ¶¶ 84, 259.) These percentages do not raise suspicion of scienter. See 20 Metzler, 540 F.3d at 1067 (concluding that selling 37% of total stock holding is not high 21 enough to support an inference of scienter). 22 Regarding Tulco and Tull, the Court finds the combined total of $821 million in 23 stocks sold to be in the realm of “astronomical” as contemplated in Oracle, and 24 therefore suspicious on its face. See 380 F.3d at 1232. However, this imprecise 25 suspicion alone does not support a strong inference of scienter. In re Vantive Corp. Sec. 26 Litig., 283 F.3d 1079, 1087 (9th Cir. 2002) (holding that, although a sale of stocks was 27 suspicious, a strong inference was not raised because analysis of the remaining factors 28 20 1 did not raise suspicion). As Plaintiffs fail to plead the individual amount of stock Tulco 2 and Tull sold, the Court is unable to find a strong inference of scienter based thereon. 3 Second, when the timing and circumstances of a sale seem “calculated to 4 maximize the personal benefit from undisclosed inside information,” courts are more 5 likely to infer scienter. Ronconi v. Larkin, 253 F.3d 423, 435 (9th Cir. 2001). In the 6 present case, Plaintiffs argue Hasson and Spear “sold over $4.5 million of stock [in 7 December,] . . . less than a week before the Company announced Lawrence’s departure, 8 causing FIGS’ share price to decline over 23%.” (Opp’n 27.) FIGS and the Individual 9 Exchange Act Defendants argue there was nothing suspicious about the timing of 10 Hasson’s and Spear’s December stock sales because the sales were tax related. (FIGS 11 Mot. 31–32.) The Court reviewed Hasson’s and Spear’s Form 4 tax filings and finds 12 their December sale of stocks were not overtly suspicious. (Speers Decl. Exs. S–T); In 13 re NVIDIA Corp. Sec. Litig.,768 F.3d 1046, 1058 n.10 (9th Cir. 2014) (noting when 14 individual defendant’s Form 4s are incorporated by reference and “assumed to be true 15 for purposes of a motion to dismiss, . . . both parties—and the Court—are free to refer 16 to any of its contents”). 17 In contrast, the timing of Tulco’s September 2021 stock sale raises a degree of 18 suspicion indicating scienter. Plaintiffs allege Tulco sold stocks approximately two 19 months prior to Defendants’ first corrective disclosure in November 2021. (Opp’n 26– 20 27; CAC ¶ 262.) Similar courts in this district have held that selling stocks within 21 months of corrective disclosures may support an inference of scienter. See Baron v. 22 Hyrecar Inc., No. 2:21-cv-06918-FWS (JCx), 2022 WL 17413562, at *15 (C.D. Cal. 23 Dec. 5, 2022). As such, the Court determines that Plaintiffs have established the timing 24 of Tulco’s September 2021 stock trade to be suspicious. However, as the Court has 25 cautioned throughout this section, one suspicious factor alone does not support a strong 26 inference of scienter, and therefore Plaintiffs fail to meet that requirement as to Tulco. 27 Regarding Tull, Plaintiffs do not allege that Tull made any individual stock sales. 28 Accordingly, the Court cannot make a determination as to whether the timing and 21 1 circumstances of Tull’s stock sales raise an inference of suspicion until Plaintiffs 2 provide sufficient factual allegations. 3 Third, stock sales “[are] suspicious only when [they are] ‘dramatically out of line 4 with prior trading practices.” City of Dearborn, 856 F.3d at 621. Plaintiffs do not allege 5 prior trading history for Hasson or Spear. (See generally CAC.) This is because Hasson 6 and Spear were subject to a 180-day lock-up period which legally forbade them from 7 trading until specific requirements were met. (Id. ¶¶ 255–258.) Similar courts have 8 found that stock sales following a lack of prior trading history is not suspicious or 9 “dramatically out of line” when individual defendants are subject to lock-up 10 agreements. Scheller v. Nutanix, Inc., 450 F. Supp. 3d 1024, 1042 (N.D. Cal. 2020) 11 (holding the fact that neither individual had previously sold stock was not suspicious 12 because individual defendants were subject to 180-day lock-up periods prior to the 13 Class Period.) Regarding Tulco and Tull, the Court requires Plaintiffs to provide more 14 information in their amended complaint as to Tulco’s and Tull’s prior trading history. 15 The Court cannot make a determination on trading history given Plaintiffs’ current 16 factual allegations. 17 In summation, after reviewing all three stock sales factors, the Court does not 18 find Hasson’s and Spear’s stock sales suspicious. The Court does find that Plaintiffs 19 established an indicium of suspicion regarding Tulco’s and Tull’s stock sales. 20 However, this sole indicium alone is insufficient to support a strong inference of 21 scienter against Tulco and Tull. Therefore, Plaintiffs fail to sufficiently allege scienter 22 under this theory. 23 e. Executive Departures 24 Lastly, Plaintiffs allege the departure of Lawrence and Varelas, Hasson’s 25 transition from co-CEO to Executive Chair of the FIGS Board, and high employee 26 turnover establish a strong inference of scienter. (CAC ¶¶ 267–281.) 27 Where sufficiently “numerous or suspicious,” “resignations, terminations, and 28 other allegations of corporate reshuffling may in some circumstances be indicative of 22 1 scienter.” Zucco, 552 F.3d at 1002. “Absent allegations that the resignation at issue 2 was uncharacteristic when compared to the defendant’s typical hiring and termination 3 patterns or was accompanied by suspicious circumstances,” courts typically do not find 4 an indication or inference of scienter. 5 corporation forced certain employees to resign because of its knowledge of the 6 employee’s role in the fraudulent representations will never be as cogent or as 7 compelling as the inference that the employees resigned or were terminated for 8 unrelated personal or business reasons.” Id. Id. “[T]he inference that the defendant 9 Prior to his departure, Lawrence served as the CFO of FIGS. (CAC ¶¶ 267–272.) 10 Plaintiffs allege his departure from FIGS supports a strong inference of scienter because 11 he resigned shortly before his one-year anniversary with the company leaving “a 12 significant amount of FIGS stock that would have vested on his one-year anniversary.” 13 (Id. ¶ 267.) Additionally, Plaintiffs assert that FIGS categorized Lawrence’s departure 14 as a “retirement” from FIGS, but Lawrence was employed eight months later at a 15 different company, and Plaintiffs argue this inconsistency is another indication of 16 scienter. (Opp’n 34.) However, based on the factual allegations presented, the Court 17 does not find Lawrence’s departure to be under suspicious circumstances. While his 18 departure as CFO may have been unexpected, the Court declines to speculate as to the 19 reasons behind a change of leadership positions within a large corporation. 20 Accordingly, absent additional factual allegations, Lawrence’s departure alone does not 21 establish a strong inference of scienter. 22 Turning to Vaerlas, while at FIGS, Varelas served as an independent director on 23 the FIGS board, the chair of the audit committee, and a member of the compensation 24 and governance committees. (CAC ¶ 273.) Varelas’s term on the FIGS board was set 25 to expire in 2024, however Varelas resigned in August 2021 prior to FIGS’ first issue 26 of financial results as a publicly traded company. (Id. ¶ 274.) Plaintiffs assert Varelas’s 27 departure from FIGS supports an inference of scienter but do not provide any other 28 factual allegations or substantively compelling suspicious circumstances. Here, the 23 1 Court does not find an inference of scienter given the current set of factual allegations 2 presented by Plaintiffs. In re Downey Sec. Litig., No. 2:08-cv-3261-JFW (RZx), 3 2009 WL 736802, at *11 (C.D. Cal. Mar. 18, 2009) (“A resignation or termination 4 provides evidence of scienter only when it is accompanied by additional evidence of 5 the defendant’s wrongdoing.”); cf. Middlesex Ret. Sys. v. Quest Software Inc., 527 F. 6 Supp. 2d 1164, 1188 (C.D. Cal. 2007) (finding support for scienter where officer 7 resigned specifically to avoid cooperating with internal investigation). 8 Regarding Hasson, Plaintiffs allege that Hasson’s transition from co-CEO to 9 Executive Chair of FIGS’ board coincided with Defendants’ fraud beginning to unravel. 10 (CAC ¶ 278.) But Plaintiffs offer no facts or evidence to support this claim of scienter 11 other than conflicting statements from Spear regarding the efficiency of having co- 12 CEOs. (Id. ¶¶ 276–277.) Accordingly, the Court does not find any inference of scienter 13 regarding Hasson’s transition from co-CEO to a more advisory role in FIGS’ leadership. 14 In re NVIDIA, 768 F.3d at 1063 (declining to find scienter on the basis of executive 15 departures in part because “two of the three individuals remained at NVIDIA in some 16 type of advisory role”). 17 Finally, as to high turnover, Plaintiffs allege FIGS experienced “an unusually 18 high degree of employee turnover . . . throughout the Class Period.” (CAC ¶ 279.) 19 Plaintiffs rely on various third-party websites such as Glassdoor and supposed 20 anonymous employees to support their allegation of scienter. Courts typically treat 21 anonymous internet postings—like those posted on Glassdoor—as tantamount to 22 confidential witness statements. ScripsAmerica, Inc. v. Ironridge Glob. LLC, 119 F. 23 Supp. 3d 1213, 1261 (C.D. Cal. 2015). A complaint relying on the statements of 24 confidential witnesses to establish scienter (1) must describe the confidential witnesses 25 with sufficient particularity to establish their reliability and knowledge, and (2) must 26 plead statements by confidential witnesses with sufficient reliability and personal 27 knowledge that are indicative of scienter. Zucco, 552 F.3d at 995. Accordingly, it is 28 Plaintiffs’ burden to provide factual allegations supporting the reliability and personal 24 1 knowledge of third-party internet postings. ScripsAmerica, 119 F. Supp. 3d at 1261 2 (holding that, to allege scienter with internet postings, a plaintiff must plead “reliability” 3 and “personal knowledge” to the same degree as if pleading scienter with confidential 4 witnesses). Here, Plaintiffs fail to allege facts supporting an inference that these third- 5 party internet postings, reviews, and articles are reliable and possess knowledge of 6 FIGS’ alleged fraudulent misconduct. As such, Plaintiffs fail to sufficiently allege a 7 strong inference of scienter. 8 f. Holistic Evaluation of Scienter 9 Considering the allegations of the Class Action Complaint as a whole, the Court 10 finds Plaintiffs have not adequately pleaded a holistic inference of scienter with respect 11 to FIGS, Tulco, Tull, or the Individual Exchange Act Defendants. Accordingly, the Court GRANTS Defendants’ motions and DISMISSES 12 13 Plaintiffs' Section 10(b) cause of action WITH LEAVE TO AMEND. 14 B. Violation of Section 20(a) of the Exchange Act 15 Plaintiffs assert their second cause of action against the Individual Exchange Act 16 Defendants, Tulco, and Tull for control person liability under section 20(a) of the 17 Exchange Act. 18 individuals [are] also liable for violations of section 10(b) and its underlying 19 regulations.” Zucco, 552 F.3d at 990 (citing 15 U.S.C. § 78t(a)). A claim under 20 section 20(a) is dependent on a primary violation of section 10(b) of the Exchange Act 21 or rule 10b-5. Id. (holding the existence of a primary violation under section 10(b) is a 22 prerequisite for control person liability under section 20(a)); see also In re NVIDIA, 23 768 F.3d at 1062 (“[A plaintiff] must first prove a primary violation of underlying 24 federal securities laws, such as section 10(b) or rule 10b-5, and then show that the 25 defendant exercised actual power over the primary violator.”). Here, as explained 26 above, Plaintiffs have failed to adequately plead scienter and therefore have not 27 adequately stated a section 10(b) or rule 10b-5 violation, so there is no alleged primary Under section 20(a) of the Exchange Act, “certain ‘controlling’ 28 25 1 violation that could support a section 20(a) cause of action against the Individual 2 Exchange Act Defendants. Accordingly, the Court GRANTS Defendants’ motions and DISMISSES 3 4 Plaintiffs’ section 20(a) cause of action WITH LEAVE TO AMEND. 5 C. Violation of Section 20(a) for Insider Trading 6 Plaintiffs bring their third cause of action—also pleaded under section 20(a) of 7 the Exchange Act—against Hasson, Spear, Tulco, and Tull. Section 20(a) also creates 8 a private cause of action for ‘contemporaneous’ insider trading. Hefler v. Wells Fargo 9 & Co., No. 16-cv-05479-JST, 2018 WL 1070116, at *12 (N.D. Cal. Feb. 27, 2018). “To 10 satisfy [section 20(a)], a plaintiff must plead (i) a predicate violation of the securities 11 laws; and (2) facts showing that the trading activity of plaintiffs and defendants occur 12 ‘contemporaneously.’” Id. (internal citations omitted). Here, as with Plaintiffs’ section 13 20(a) claim above, Plaintiffs have failed to plead a predicate primary violation of 14 securities laws to support their section 20(a) cause of action. Macomb Cnty. Emps. Ret. 15 Sys. V. Align Tech., 39 F.4th 1092, 1100 n.2 (9th Cir. 2022) (pleading a violation of 16 Section 10(b) is a “threshold issue” for a violation of section 20(a)). Therefore, 17 Plaintiffs fail to state a private section 20(a) cause of action against Hasson, Spear, 18 Tulco, and Tull. As such, the Court GRANTS Defendants’ motions and DISMISSES Plaintiffs’ 19 20 section 20(a) cause of action WITH LEAVE TO AMEND. 21 D. Violation of Section 11 of the Securities Act 22 Plaintiffs assert their fourth cause of action against FIGS, Hasson, Spear, 23 Lawrence, Antrum, Sonen, Willhite, Tulco, Tull and the Underwriter Defendants, for 24 issuing Registration Statements that contained materially false or misleading statements 25 or omissions in violation of section 11 of the Securities Act. (CAC ¶¶ 341–344). 26 Plaintiffs additionally assert the Registration Statements violate Item 105 and Item 303 27 of SEC Regulation S-K. (Id. ¶ 403.) 28 26 1 1. Section 11 2 Section 11 creates a private right of action for any purchaser of a security where 3 “any part of the registration statement, when such part became effective, contained an 4 untrue statement of a material fact or omitted to state a material fact required to be stated 5 therein or necessary to make the statements therein not misleading.” 6 § 77k(a). Under section 11, a plaintiff must plead facts proving the following two 7 elements: 8 misrepresentation, and (2) that the omission or misrepresentation was material, that is, 9 it would have misled a reasonable investor about the nature of his or her investment.’” 10 Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156, 1161 (9th Cir. 2009) (quoting In re 11 Daou Sys., 411 F.3d at 1027. “By definition, a plaintiff must show that a purported 12 misstatement in a registration statement was misleading at the time the registration 13 statement was issued.” In re: Resonant Inc. Sec. Litig., No. 2:15-cv-01970 SJO (PJWx), 14 2016 WL 1737959, at *7 (C.D. Cal. Feb. 8, 2016). Similarly, “[a] claim under section 15 11 based on the omission of information must demonstrate that the omitted information 16 existed at the time the registration statement became effective.” Rubke, 551 F.3d at 17 1164. “‘(1) that the registration statement contained an 15 U.S.C. omission or 18 “Although the heightened pleading requirements of the PSLRA do not apply to 19 section 11 claims, plaintiffs are required to allege their claims with increased 20 particularity under Rule 9(b) if their complaint sounds in fraud.” Id. at 1161. To 21 determine whether a complaint sounds in fraud, courts must examine the complaint’s 22 language and structure and assess “whether the complaint alleges a unified course of 23 fraudulent conduct and relies entirely on that course of conduct as the basis of a claim.” 24 Id. However, “[w]here . . . a complaint employs the exact same factual allegations to 25 allege violations of section 11 as it uses to allege fraudulent conduct under section 10(b) 26 of the Exchange Act, we can assume that it sounds in fraud.” Id. 27 28 27 a. CAC Sounds in Fraud 1 2 As a preliminary matter, the Court first addresses whether the Class Action 3 Complaint, in its entirety, sounds in fraud. “[A] plaintiff’s nominal efforts to disclaim 4 allegations of fraud with respect to its section 11 claims are unconvincing where the 5 gravamen of the complaint is fraud and no effort is made to show any other basis for 6 the claims.” In re Rigel Pharms., Inc. Sec. Litig., 697 F.3d 869, 885–86 (9th Cir. 2012) 7 (holding that Rule 9(b) applied when the plaintiff’s section 11 claim relied on the same 8 alleged misrepresentations as plaintiff’s fraud-based section 10(b) claims even though 9 the plaintiff “disclaimed in its complaint any allegation of fraud in connection with the 10 section 11 cause of action”). Here, Plaintiffs assert that their section 11 claims are 11 “based solely on strict liability and negligence—i.e., not intentional or reckless 12 conduct.” 13 section . . . expressly disclaims any allegations of fraud, scienter, or recklessness pled 14 herein in connection with the Exchange Act claims.” (CAC ¶ 340.) Plaintiffs argue 15 their “Securities Act claims do not allege Defendants knew about adverse undisclosed 16 facts or knowingly failed to disclose such facts while making the challenged 17 statements,” and therefore do not sound in fraud. (Opp’n 50.) Nevertheless, the Court 18 finds the gravamen of Plaintiffs’ Class Action Complaint sounds in fraud, as Plaintiffs 19 rely on the same factual allegations of misleading false statements, misstatements, 20 omissions, Registration Statements, and individual Defendant behavior for their 21 Securities Act claims as in their fraud-based Exchange Act claims. (CAC ¶¶ 1–124, 22 135–155, 164–174, 214–216, 341, 371–406.) 23 (CAC ¶ 340.) Plaintiffs further declare “[t]his [Securities Act] b. Rule 9(b) Defendants 24 Accordingly, the Court finds Plaintiffs’ section 11 claims against FIGS, Hasson, 25 Spear, Lawrence, Willhite, Tulco, and Tull sound in fraud and therefore must satisfy 26 Rule 9(b). This is because the alleged “course of conduct” to support Plaintiffs’ section 27 11 Securities Act and fraud-based section 10(b) Exchange Act claims against these 28 Defendants are “so substantially similar.” In re Eventbrite, Inc. Sec. Litig., Case 28 1 No. 5:18-cv-02019-EJD, 2020 WL 2042078, at *15 (N.D. Cal. Apr. 28, 2020). 2 Therefore, Plaintiffs’ section 11 claims against FIGS, Hasson, Spear, Lawrence, 3 Willhite, Tulco, and Tull will only survive if the complaint has “set forth what is false 4 or misleading about [the alleged misconduct] and why [it is] false.” Rubke, 551 F.3d 5 at 1161. 6 contemporaneous statements or information (such as internal reports) which were made 7 by or available to the defendants.’” Id. (citing Yourish v. Cal. Amplifier, 191 F.3d 983, 8 993 (9th Cir. 1999). This requirement “can be satisfied ‘by pointing to inconsistent 9 Plaintiffs assert the Registration Statements were false and misleading. (CAC 10 ¶¶ 371–389, 390–402.) The Registration Statements allegedly misrepresented that 11 FIGS maintained a low inventory risk, “purportedly because [FIGS] had data analytics 12 capabilities that permitted FIGS to ‘reliably predict buying patterns’ and ‘anticipate 13 demand’ and because FIGS was supposedly operating a ‘lower-risk merchandising 14 model’ focused on its core products rather than rapid development of hundreds of new 15 products.” 16 Registration Statements apparently misrepresented that air freight was being used only 17 “as a response to supply chain disruptions arising from the COVID-19 pandemic,” 18 omitting the true frequency and additional reasons FIGS utilized the more expensive 19 shipping method. (Id. ¶¶ 373, 388–389, 401–402.) These documents were signed by 20 Hasson, Spear, Lawrence, and Willhite (who was acting on behalf of Tulco). (Id. 21 ¶¶ 374, 392.) (Id. ¶¶ 372, 375–382, 391, 393–399.) Next, Plaintiffs allege the 22 As currently pleaded, Plaintiffs’ factual allegations do not meet the heightened 23 standards required by Rule 9(b). Plaintiffs go to great lengths to describe “what” is 24 false and misleading about Defendants’ Registration Statements but fall short in their 25 explanation on “why” a particular statement is false or misleading under Rule 9(b). 26 Rubke, 551 F.3d at 1161. Rather than expend further judicial resources piecing together 27 arguments for Plaintiffs under Rule 9(b), the Court grants Plaintiffs leave to amend their 28 consolidated Class Action Complaint and tailor their section 11 allegations in 29 1 accordance with the discussion above. Upon receipt of an amended complaint, the 2 Court will analyze Plaintiffs’ amended section 11 claims against FIGS, Hasson, Spear, 3 Lawrence, Willhite, Tulco, and Tull under Rule 9(b). 4 c. Rule 8(a) Defendants 5 In contrast, the Court finds Plaintiffs’ section 11 claims against Antrum, Sonen, 6 and the Underwriter Defendants do not need to be pleaded with the particularity that 7 Rule 9(b) requires. Plaintiffs do not assert fraud-based Exchange Act claims against 8 these Defendants. The only factual allegations and claims made against Antrum, Sonen, 9 and the Underwriter Defendants are non-fraudulent and rooted in negligence. The 10 alleged “course of conduct” Plaintiffs rely on to support the section 11 claims against 11 these Defendants is not substantially similar to the fraud-centered conduct discussed in 12 the above paragraph. Accordingly, the Court holds the allegations against Antrum, 13 Sonen, and the Underwriter Defendants are evaluated under Rule 8(a). 14 v. Uber Techs., Inc., No. 19-cv-06361-RS, 2020 WL 4569846, at *4 (N.D. Cal. Aug. 7, 15 2020) (holding that, Rule 9(b) does not apply where the plaintiff “has made an effort to 16 plead a non-fraudulent basis for Section 11 liability”). 17 Bos. Ret. Sys. However, Plaintiffs’ Rule 8(a) claims still fail due to outstanding issues and 18 inconsistences regarding Plaintiffs’ current factual allegations. Plaintiffs provide 19 conflicting information regarding the involvement and conduct of Antrum and Sonen. 20 Initially, Plaintiffs allege Antrum and Sonen, “signed the IPO and SPO Offering 21 Documents at issue, and/or were named as directors in the registration statements for 22 the IPO and SPO.” (CAC ¶ 346.) Then Plaintiffs state Antrum and Sonen only 23 reviewed and authorized their signatures on the SPO Offering Documents, not both. 24 (Id. ¶¶ 347, 348.) The Court requires Plaintiffs clarify the inconsistencies regarding 25 Antrum’s and Sonen’s involvement with the IPO and SPO. 26 Plaintiffs next allege the Underwriter Defendants failed to conduct an “adequate 27 and reasonable investigation into the business operations of [FIGS]” and ultimately 28 provided false and misleading statements in the Registration Statements. (Id. ¶¶ 369– 30 1 370, 384–387.) It is plaintiff’s burden to provide factual allegations that demonstrate a 2 defendant’s statement or omission in the registration statement was misleading at the 3 time the registration statement was issued. In re: Resonant, 2016 WL 1737959, at *7. 4 Here, Plaintiffs do not clearly allege that the Underwriter Defendants’ statements were 5 misleading at the time the Registration Statements were issued. Accordingly, Plaintiffs’ 6 Rule 8(a) claims fail. As discussed in the above subsection, upon receipt of an amended 7 complaint, the Court will analyze the amended section 11 claims against Antrum, 8 Sonen, and the Underwriter Defendants under Rule 8(a). 9 10 Accordingly, the Court DISMISSES Plaintiffs’ section 11 claims WITH LEAVE TO AMEND. 11 2. Item 105 and Item 303 12 Turning to Plaintiffs’ Item 105 and Item 303 claims, Item 105 of SEC Regulation 13 S-K requires that registration statements filed on Form S-1 include “a discussion of the 14 most significant factors that make an investment in the registrant or offering speculative 15 or risky.” 17 C.F.R. § 229.105(a). Item 303 of SEC Regulation S-K requires that 16 offering materials disclose “any known trends or uncertainties that have had or that the 17 registrant reasonably expects will have a material favorable or unfavorable impact on 18 net sales or revenues or income from continuing operations.” 17 C.F.R. 19 § 229.303(a)(3)(ii). A “disclosure duty exists where a trend, demand, commitment, 20 event or uncertainty is both [1] presently known to management and [2] reasonably 21 likely to have material effects on the registrant’s financial condition or results of 22 operation.” Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1296 (9th Cir. 1998) 23 (internal citations omitted). 24 knowledge of an adverse trend, material impact, and that ‘the future material impacts 25 are reasonably likely to occur from the present-day perspective.’” Berg v. Velocity Fin., 26 Inc., No. 2:22-cv-06780-RGK (PLAx), 2021 WL 268250, at *9 (C.D. Cal. Jan. 25, 27 2021) (quoting Steckman, 143 F.3d at 1297). “Thus, Item 303 requires disclosure when there is 28 31 1 Plaintiffs assert that “[a]lthough the [Registration Statements] included a 2 discussion of risk factors, that discussion was materially incomplete and therefore 3 misleading,” and in violation of Item 105. 4 Defendants negligently violated Item 105 and Item 303 in the Registration Statements 5 because they failed to disclose: 6 7 8 9 10 11 12 (CAC ¶ 404.) Plaintiffs also allege significant problems with FIGS’s merchandising and production process, specifically, that (i) FIGS did not have sophisticated data analytics, or, if it did, was not using those sophisticated data analytics to reliably predict demand for its new and existing products; and (ii) its shift throughout 2021 away from non-discretionary core products which were subject to replenishment, and toward a greater and growing number of new styles for which demand was not established created extreme risk that FIGS would be ill-equipped to reliably predict customer demand, especially in the absence of data driven forecasting solutions. 13 (Id. ¶ 405.) Plaintiffs claim the aforementioned misstatements and omissions resulted 14 in an increased dependance “on expensive air freight to ship its products, lost sales due 15 to stockouts resulting from [FIGS’] deviation from its core-style strategy, and . . . 16 skyrocketing costs associated with ballooning inventory levels as increasing numbers 17 of new products failed to find a market.” (Id. ¶ 406.) Plaintiffs further allege these facts 18 were “known to management, presented uncertainty, and made investment in FIGS 19 speculative and risky.” (Id.) 20 FIGS and the Individual Exchange Act Defendants oppose each of Plaintiffs’ 21 allegations. To refute the misleading data analytics allegations, Defendants argue the 22 “alleged misrepresentations about data analytics cannot qualify as a ‘trend’ or 23 ‘uncertainty’ under Items 303 or 105, nor would it decrease the predictive value of 24 FIGS’ reported results.” (FIGS Mot. 40.) Defendants further state FIGS did disclose 25 the “inherent uncertainty of forecasts and the increased uncertainty caused by 26 macroeconomic factors[,]” in their IPO documents. (Id. at 4–5, 40.) In response to the 27 alleged undisclosed shift away from core products, Defendants respond that the IPO 28 32 1 documents disclosed that “weekly new product launches were a staple of FIGS’ prior 2 success and a key pillar of its growth strategy.” (Id. at 41.) 3 First, the Court addresses Plaintiffs’ Item 303 Claim. To state a claim for Item 4 303 disclosure violations, a plaintiff must allege facts demonstrating the defendant had 5 knowledge of an adverse trend or uncertainty. 17 C.F.R. § 229.303(a)(3)(ii). Plaintiffs 6 allege the above facts were “known to management,” but fail to offer any factual 7 allegations indicating Defendants’ concrete knowledge of the alleged adverse 8 information. (CAC ¶ 406.); Terenzini v. GoodRx Holdings, Inc., No. 8:20-cv-11444- 9 DOC (MARx), 2022 WL 122944, at *8 (C.D. Cal. Jan. 6, 2022) (finding plaintiffs 10 failed to allege specific facts indicating defendants’ concrete knowledge of a third- 11 party’s adverse plan that would negatively affect defendants’ future stock value). 12 Similarly, courts in this district have held that factual allegations inferring a defendant’s 13 knowledge of adverse trends do not suffice to raise a claim above a “speculative level.” 14 Belodoff v. Netlist, Inc., No. 8:07-cv-00677-DOC (MLGx), 2009 WL 1293690, at *11– 15 12 (C.D. Cal. Apr. 17, 2009) (finding plaintiff’s Item 303 claim alleging defendant’s 16 knowledge of adverse trends of dwindling customer demand—supported by inferential 17 evidence (e.g., excess inventory of products)—failed to raise the claim of defendant’s 18 knowledge above a speculative level). Therefore, the Court finds the facts underlying 19 Plaintiffs’ Item 303 claim to be merely speculative and lacking sufficient factual 20 allegations plausibly demonstrating Defendants’ concrete knowledge of the alleged 21 adverse trends at the time of filing the Registration Statements. As such, Plaintiffs’ 22 Item 303 claim fails as to all defendants. 23 Next, the Court addresses Plaintiff’s Item 105 Claim. As stated above, Plaintiffs 24 admit Defendants’ Registration Statements discussed risk factors, but contend the 25 discussion was insufficient regarding Defendants’ data analytics capabilities and 2021 26 shift away from its core product line. (CAC ¶¶ 404–406.) Regarding Defendants’ data 27 analytic capabilities, Plaintiffs do not allege any factual allegations that plausibly 28 demonstrate Defendants’ alleged data analytic shortcomings. 33 Without factual 1 allegations demonstrating FIGS and the other named Defendants had knowledge of 2 either: (1) a company-wide lack of sophisticated data analytics; or (2) the nonuse of 3 existing data analytic capabilities—the Court does not find it necessary to require 4 Defendants to warn against risks of which Defendants may or may not have had 5 knowledge. The Court declines to make inferential leaps and instead implores Plaintiffs 6 to plead their data analytic Item 105 claim with sufficient detail and specificity. 7 Finally, regarding the 2021 shift away from its core product line, Defendants did 8 include a discussion in the Registration Statements addressing the 2021 shift to broaden 9 product lines as a part of a developing business strategy. (FIGS Mot. 4–5.) Plaintiffs 10 do not allege that Defendants had knowledge of potential risks regarding broadening 11 product lines at the time of disclosure. As such, Plaintiffs fail to state a claim that would 12 require Defendants to include speculative future-facing warnings on the subject in their 13 Registration Statements. Accordingly, Plaintiffs’ Item 105 claim also fails. Accordingly, the Court DISMISSES Plaintiffs’ Item 105 and Item 303 claims 14 15 WITH LEAVE TO AMEND. 16 E. Violation of Section 12(a)(2) of the Securities Act 17 Plaintiffs bring their fifth cause of action against Defendants FIGS, Hasson, 18 Spear, Tulco, and Tull pursuant to section 12(a)(2) of the Securities Act and on behalf 19 of all members of the Securities Act Class who purchased FIGS Class A common stock 20 pursuant to the IPO and/or SPO. 21 “Sections 11 and 12(a)(2) are ‘Securities Act siblings’ with similar elements. In 22 re Velti PLC Sec. Litig., No. 13-cv-03889-WHO, 2015 WL 5736589, at *31 (N.D. Cal. 23 Oct. 1, 2015) (quoting In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 359 24 (2d Cir. 2010)). “To plead a claim under Section 12(a)(2), the plaintiff must allege that 25 (1) the defendant is a statutory seller; (2) the sale was effected by means of a prospectus 26 or oral communication; and (3) the prospectus or oral communication contained a 27 material misstatement or omission.” Maine State Ret. Sys. v. Countrywide Fin. Corp., 28 No. 2:10-cv-0302-MRP (MANx), 2011 WL 4389689, at *8 (C.D. Cal. May 5, 2011). 34 1 “The ‘misstatement or omission’ requirement under Section 12(a)(2) is materially 2 identical to that under Section 11.” In re Velti PLC, 2015 WL 5736589, at *31. 3 Therefore, because the Court has already dismissed Plaintiffs’ section 11 claims, 4 the Court DISMISSES Plaintiffs’ section 12(a)(2) cause of action on the same grounds 5 WITH LEAVE TO AMEND. 6 F. 7 8 Violation of Section 15 of the Securities Act Plaintiffs assert their sixth and final cause of action against Hasson, Spear, Lawrence, and the Tulco Defendants pursuant to section 15 of the Securities Act. 9 Section 15 imposes secondary liability on someone who “controls” any person 10 who is liable for a primary violation under either section 11 or section 12 of the 1933 11 Act. See, e.g., In re ZZZZ Best Sec. Litig., No. 87-cv-3574-RSWL (Bx), 1994 WL 12 746649, at *6 (C.D. Cal. Oct. 26, 1994). Like section 20, section 15 imposes 13 “controlling person” liability that cannot survive absent a primary violation. See, e.g., 14 In re Rigel Pharms., 697 F.3d at 886 (“Section 20(a) and section 15 both require 15 underlying primary violations of the securities laws.” (citing 15 U.S.C. §§ 77o, 78t(a))). 16 Because, as explained above, Plaintiffs fail to plead adequate violations of section 11 17 and section 12, the Court DISMISSES Plaintiffs’ section 15 claims as well, WITH 18 LEAVE TO AMEND. 19 20 21 22 23 24 25 26 27 28 35 VI. 1 CONCLUSION 2 For the reasons discussed above, the Court GRANTS Defendants’ Motions to 3 Dismiss the Amended Class Action Complaint, WITH LEAVE TO AMEND. (ECF 4 No. 98; ECF No. 100.) 5 Complaint (“FAC”), they shall do so within forty-five (45) days of the date of this 6 Order. If Plaintiffs file a FAC, Defendants shall file a response no later than twenty- 7 one (21) days from the date Plaintiffs file the FAC. If Plaintiffs do not timely file a 8 FAC, then as of their deadline and without further notice this dismissal shall convert to 9 a dismissal with prejudice. If Plaintiffs elect to file a First Amended Class Action 10 11 IT IS SO ORDERED. 12 13 January 17, 2024 14 15 16 ____________________________________ OTIS D. WRIGHT, II UNITED STATES DISTRICT JUDGE 17 18 19 20 21 22 23 24 25 26 27 28 36
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