Case 4:25-cv-00957-JST Document 44 Filed 09/16/26 Page 1 of 18 1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 GENRICCIO LIBERATO, Case No. 25-cv-00957-JST Plaintiff, 8 ORDER GRANTING MOTION TO v. DISMISS 9 10 GROCERY OUTLET HOLDING CORP. Re: ECF No. 39 SECURITIES LITIGATION, et al., 11 Defendants. 12 Northern District of California United States District Court 13 Before the Court is Defendant Grocery Outlet’s motion to dismiss the amended complaint, 14 a putative class action alleging violations of federal securities laws. ECF No. 39. The Court will 15 grant the motion. 16 I. BACKGROUND 17 The following facts are drawn from the amended complaint, ECF No. 38. Grocery Outlet 18 is an “extreme value retailer of consumables and fresh products sold via a network of 19 independently owned and operated stores,” with most of its locations operated by independent, 20 third-party operators, referred to as “IOs.” Id. ¶ 27. Grocery Outlet generally shares half of its 21 store-level profits with its IOs, paid as “commissions” based on store margins. Id. ¶ 27, 100. 22 While IOs handle local operations, Grocery Outlet handles inventory procurement, distribution, 23 and information systems. Id. ¶ 28. Defendant Robert Joseph Sheedy was the Company’s CEO 24 from January 2023 to October 29, 2024, and Defendant Charles Bracher was the Company’s CFO 25 from August 2012 until March 1, 2024. Id. ¶¶ 21, 22. 26 In 2021, Defendants decided to modernize and overhaul Grocery Outlet’s internal 27 enterprise resource planning (“ERP”) and information technology systems (the “Systems 28 Transition”). Id. ¶ 2. Its financial ledger, inventory management platform, and product data Case 4:25-cv-00957-JST Document 44 Filed 09/16/26 Page 2 of 18 1 warehouse system were all implicated. Id. The company developed and tested the new software 2 (manufactured by a company called SAP) in 2021 and 2022 with the goal of rolling it out in 3 March 2023, although the rollout was ultimately pushed back to August 2023. Id. ¶¶ 3–6, 46–49. 4 At the time of the rollout, Defendants had still not conducted “end-to-end User Acceptance 5 Testing (‘UAT’),” in which the company’s actual end-users, like IOs, planners and buyers, and 6 accounting personnel, test the new systems using real-world applications and data. Id. ¶¶ 50–55. 7 Plaintiff alleges that this testing would have confirmed the full functional flow of information 8 needed to effectively conduct the Company’s operations. Id. ¶¶ 54–55. 9 When the company went “live” with its new SAP ERP systems in late August 2023, it 10 immediately encountered widespread disruptions caused by problems with inventory visibility and 11 management, end-user errors, and data integrity. Id. ¶¶ 56–60. These disruptions impacted the 12 company’s procurement, distribution, accounting, and financial reporting. Id. ¶¶ 2, 56–60, 86–89, Northern District of California United States District Court 13 99–100. 14 On the November 2023 earnings call for Q3 2023, Defendants disclosed that the Systems 15 Transition had caused significant disruptions and material impacts to the Company’s financials, 16 describing “ordering and inventory disruptions that have impacted third and fourth quarter 17 results,” including “inventory visibility . . . challenges.” Id. ¶¶ 86, 89, 99. Bracher listed an 18 approximately 150-basis-point impact to store sales and a 50-basis-point impact to gross margin 19 stemming from inventory inefficiencies. Id. ¶ 87. He stated his expectation that the Systems 20 Transition would “significantly impact financial results in the fourth quarter and to a greater 21 degree than the third quarter.” Id. Sheedy stated “that we did expect some disruption during this 22 transition. It was factored into our previous guidance, just not to the degree that we’ve been 23 experiencing it.” Id. ¶ 89; see also id. ¶ 91 (Sheedy stating “we’ve always known how large [the 24 Systems Transition] was and complex. We did expect as a result, some disruption”). And Bracher 25 further stated that “as disappointed as we are with the magnitude of the impact in the fourth 26 quarter, we do expect and believe that it will be largely behind us by the end of the year.” Id. ¶ 91. 27 Following these disclosures, “the price of Grocery Outlet stock fell $1.31, or 4.6%, to close at 28 $27.15.” Id. ¶ 102. 2 Case 4:25-cv-00957-JST Document 44 Filed 09/16/26 Page 3 of 18 1 Bracher announced his resignation on December 11, 2023, effective March 1, 2024. Id. 2 ¶ 104. On that news, “the price of Grocery Outlet stock fell $1.83, or 6.2%, to close at $27.91 on 3 December 12, 2023.” Id. ¶ 106. 4 On February 27, 2024, the company issued a press release disclosing its Q4 2023 financial 5 results, ECF No. 38 ¶ 107, explaining that “[a]s previously disclosed, the Company experienced 6 disruptions as a result of the implementation of new technological platforms in late August 2023,” 7 id. ¶ 108. During the earnings call the same day, Sheedy explained that “data integration efforts 8 [were] taking longer than expected and [were] still impacting [Grocery Outlet’s] business results.” 9 Id. ¶ 111. Bracher further acknowledged that “the system transition impacted comp sales by 10 approximately 200 basis points for the quarter” and “the margin impact of our system integration 11 . . . was approximately 130 basis points in the quarter.” Id. ¶ 110. Bracher also disclosed that, as 12 a result of the systems transition, Grocery Outlet will “continue to experience [Profit & Loss, or Northern District of California United States District Court 13 P&L] impacts during the first quarter” of 2024, while expressing optimism that its issues would 14 “be resolved soon, after which the P&L impact will be behind us.” ECF No. 39-9 at 8; ECF No. 15 38 ¶ 116. Following these disclosures, “the price of Grocery Outlet stock fell $0.32, or 1.2%, to 16 close at $26.15.” Id. ¶ 119. After Grocery Outlet filed its Form 10-K Annual Report, which 17 provided additional detail about the impacts of the Systems Transition, the “the price of Grocery 18 Outlet stock fell another $0.36, or 1.4%, to close at $25.79 on February 29, 2024.” Id. ¶¶ 120–23. 19 In May 2024, the company revealed that the Q1 2024 results had been impacted by the 20 Systems Transition to a greater extent than the prior quarter—more than double their prior 21 estimate—with impacts lingering into the second quarter. Id. ¶¶ 124–25. Lindsay Gray, the 22 company’s interim CFO, also admitted on the Q1 2024 earnings call that the Systems Transition 23 had impaired the company’s ability to forecast financial results due to poor visibility from 24 business reporting systems and tools, as well as data integration issues and new processes within 25 the new applications. Id. ¶ 126. The company also explained that the lingering impacts in the 26 next quarter were attributable to the costs of IO margin payments, which could not be made until 27 physical inventory counts were completed after the end of the quarter. Id. ¶ 118. Following these 28 disclosures, “Grocery Outlet stock fell $5.02 per share, or 19.4%, to close at $20.88.” Id. ¶ 130. 3 Case 4:25-cv-00957-JST Document 44 Filed 09/16/26 Page 4 of 18 1 In October 2024, Sheedy was fired by the Board of Directors based on the company’s 2 struggles to effectively implement the Systems Transition. Id. ¶¶ 136–39. “On this news, the 3 price of Grocery Outlet stock fell $2.71 per share, or 16.3%, to close at $13.90 per share on 4 October 30, 2024.” Id. ¶ 137. 5 The amended complaint alleges violations of Sections 10(b) and 20(a) of the Securities 6 Exchange Act of 1934 (“Exchange Act”) and Securities and Exchange Commission (“SEC”) Rule 7 10b-5, individually and on behalf of a class defined as all persons and entities who purchased 8 Grocery Outlet common stock between August 9, 2023 and May 7, 2024. Id. ¶ 1. 9 Defendants filed this motion to dismiss on October 21, 2025. ECF No. 39. Plaintiff 10 opposed on December 23, 2025. ECF No. 40. Defendants replied on January 30, 2026. ECF No. 11 41. 12 II. JURISDICTION Northern District of California United States District Court 13 The Court has jurisdiction under 28 U.S.C. § 1331. 14 III. LEGAL STANDARD 15 SEC Rule 10b–5 makes it unlawful to, among other things, “make any untrue statement of 16 a material fact or to omit to state a material fact necessary in order to make the statements made, in 17 the light of the circumstances under which they were made, not misleading.” 17 C.F.R. 18 § 240.10b–5(b). “There are six elements to a securities fraud claim under § 10(b) and Rule 10b–5: 19 (1) a material misrepresentation or omission; (2) scienter (i.e., a wrongful state of mind); (3) a 20 connection between the misrepresentation and the purchase or sale of a security; (4) reliance upon 21 the misrepresentation (often established in ‘fraud-on-the-market’ cases via a presumption that the 22 price of publicly-traded securities reflects all information in the public domain); (5) economic 23 loss; and (6) loss causation.” Loos v. Immersion Corp., 762 F.3d 880, 886–87 (9th Cir. 2014), as 24 amended (Sept. 11, 2014) (citing Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 341–42 25 (2005)); see also In re Rigel Pharms., Inc. Sec. Litig., 697 F.3d 869, 876 (9th Cir. 2012). 26 Such claims must meet the “heightened pleading requirements” of Federal Rule of Civil 27 Procedure 9(b) and the Private Securities Litigation Reform Act (“PSLRA”). Id. at 876; 15 U.S.C. 28 § 78u-4(b)(1)–(2). These requirements have “teeth” and “present[] no small hurdle for the 4 Case 4:25-cv-00957-JST Document 44 Filed 09/16/26 Page 5 of 18 1 securities fraud plaintiff.” Nguyen v. Endologix, Inc., 962 F.3d 405, 414 (9th Cir. 2020). Rule 2 9(b) requires a plaintiff to “state with particularity the circumstances constituting fraud or 3 mistake” by pleading the “who, what, when, where, and how” of the alleged fraud. Vess v. Ciba- 4 Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003). The PSLRA imposes even “more 5 exacting pleading requirements.” Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 6 1051, 1057–58 (9th Cir. 2014). It requires the plaintiff to (i) “specify each statement alleged to 7 have been misleading [and] the reason or reasons why the statement is misleading,” and (ii) “state 8 with particularity facts giving rise to a strong inference that the defendant acted with the required 9 state of mind” for each act or omission. 15 U.S.C. § 78u-4(b)(1)(B), 78u-4(b)(2)(A). 10 Section 20(b) of the PSLRA holds jointly and severally liable “[e]very person who, 11 directly or indirectly, controls any person liable under” the Act. 15 U.S.C. § 78t(a). To prevail on 12 a claim for a violation of Section 20(a), “a plaintiff must first allege a violation of § 10(b) or Rule Northern District of California United States District Court 13 10b-5.” Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1035 n.15 (9th Cir. 2002). 14 IV. DISCUSSION 15 A. Material Misrepresentation or Omission (Falsity) 16 Plaintiff has not identified a false or misleading statement. A statement is false or 17 misleading if it (1) directly contradicts what the defendant knew at the time or (2) omits material 18 information. In re Cloudera, Inc., 121 F.4th 1180, 1186 (9th Cir. 2024). Even literally true 19 statements may mislead, due to their context and manner of presentation. Miller v. Thane Int’l, 20 Inc., 519 F.3d 879, 886 (9th Cir. 2008). Statements are misleading by omission only if they 21 “affirmatively create an impression of a state of affairs that differs in a material way from the one 22 that actually exists.” Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th Cir. 2002). 23 The securities laws do not prohibit statements that are merely incomplete because “no matter how 24 detailed and accurate disclosure statements are, there are likely to be additional details that could 25 have been disclosed but were not.” Intuitive Surgical, 759 F.3d at 1061. In addition, there is no 26 firm rule that “once a disclosure is made, there is a duty to make it complete and accurate.” 27 Brody, 280 F.3d at 1006. Falsity claims may not rely on hindsight; rather, they “must explain 28 ‘why the statements were false or misleading at the time they were made.’” Cloudera, 121 F.4th 5 Case 4:25-cv-00957-JST Document 44 Filed 09/16/26 Page 6 of 18 1 at 1187 (quoting In re Rigel Pharms., 697 F.3d at 876). 2 Plaintiff argues that the complaint alleges “particularized facts plausibly demonstrating that 3 Defendants concealed from investors: (1) material risks of prematurely implementing the Systems 4 Transition; (2) a material weakness in the Company’s internal controls; and (3) that Defendants 5 had no reasonable factual basis for assuring investors that the disruptions from the Systems 6 Transition were under control.” ECF No. 40 at 13. Each of these arguments fails. 7 1. Statements About the Then-Forthcoming Systems Transition 8 Plaintiff first argues that Defendants made statements in August 2023 fraudulently framing 9 certain risks of the Systems Transition as hypothetical and generalized when those risks had in fact 10 already materialized. ECF No. 40 at 15–16; ECF No. 38 ¶¶ 67, 68, 72, 74. In the company’s 11 quarterly report for the second quarter of 2023 (“August 2023 10-Q”), Defendants stated that there 12 had been “no material changes to our risk factors since the 2022 Form 10-K.” ECF No. 38 ¶ 68. Northern District of California United States District Court 13 The 2022 Form 10-K stated: “It is possible that we could experience implementation, operational 14 and functionality issues, delays, higher than expected costs and other issues during the course of 15 implementing and utilizing these improvements,” and “With any update or replacement of our 16 systems and infrastructure there is a risk of business disruption, liability and reputational damage 17 associated with these actions, including from not accurately capturing and maintaining data, 18 efficiently testing and implementing changes, realizing the expected benefit of the change and 19 managing the potential disruption of the actions and diversion of internal teams’ attention as the 20 changes are implemented.” Id. ¶ 67. 21 Courts find such hypothetical or speculative statements about future risks to be misleading 22 where the risks have already “come to fruition,” Berson v. Applied Signal Tech., Inc., 527 F.3d 23 982, 985–87 (9th Cir. 2008), or where defendants “did not meaningfully update the risk 24 disclosure” after learning new information that made the risk significantly more likely to occur, 25 Glazer Cap. Mgmt., L.P. v. Forescout Techs., Inc., 63 F.4th 747, 781 (9th Cir. 2023). See also In 26 re Alphabet, Inc. Sec. Litig., 1 F.4th 687, 696, 703–704 (9th Cir. 2021) (statement that public 27 concerns about privacy and security “could” harm company’s reputation was misleading where 28 company already discovered a bug that had been threatening thousands of user’s personal data for 6 Case 4:25-cv-00957-JST Document 44 Filed 09/16/26 Page 7 of 18 1 the past three years); In re SunPower Corp. Sec. Litig., 769 F. Supp. 3d 1042, 1055–56 (N.D. Cal. 2 2025) (“boilerplate risk disclosures did not meaningfully convey the significant risk that had 3 already materialized,” namely, “that SunPower was in a severe liquidity crisis”). 4 Plaintiff’s fraud claims fail because he does not allege that any risks had already come to 5 fruition nor that any new information had come to light. Indeed, the rollout had not yet begun. 6 ECF No. 38 ¶ 6. He faults Defendants for stating that “it was ‘possible’ the Systems Transition 7 ‘could’ cause implementation issues and disruptions, when in fact Defendants had chosen to 8 undertake a specific risky tactic by rushing out the Systems Transition before the Company was 9 adequately prepared.” ECF No. 40 at 16. But no particular circumstances made the disruption 10 risk more likely to materialize except for Defendants’ failure, in Plaintiffs’ view, to adequately 11 mitigate it. On this theory, a securities fraud claim would lie any time a corporation prepared 12 poorly or otherwise erred in implementing a change. Poor preparation is not the same thing as Northern District of California United States District Court 13 fraud. 14 In addition, Plaintiff fails to sufficiently allege that Defendants were unprepared for the 15 transition. See ECF No. 40 at 16–17. The complaint cites allegations from Former Employee 1 16 (“FE1”) that “end-to-end user acceptance testing (“UAT”) had not been completed before the 17 August 2023 launch,” and that such testing could have caught the problems that later materialized. 18 ECF No. 38 ¶¶ 50–55, 61. Plaintiff’s position appears to be that Defendants could only have 19 avoided securities fraud liability by telling investors in August 2023 that the company had not 20 completed end-to-end UAT testing and that as such, the transition would be disruptive. But this 21 would only be true if end-to-end UAT testing were so obviously and critically essential to an IT 22 systems transition that (1) the transition was likely to go poorly in its absence and (2) executives 23 are likely to have been aware that the transition was highly likely to go poorly in its absence. In 24 other words, there must be something special about end-to-end UAT testing setting it apart from 25 routine preparatory measures that company leadership might decide to take (or not). Plaintiffs 26 allege none of these facts. One employee’s speculation that a particular type of testing could have 27 averted certain risks does not show that Defendants were so unprepared that their unpreparedness 28 can be equated to fraud. This is especially so given that Defendants did disclose the possibility of 7 Case 4:25-cv-00957-JST Document 44 Filed 09/16/26 Page 8 of 18 1 disruption in the August 2023 10-Q and 2022 Form 10-K. 2 Plaintiff also complains that, during the company’s earnings conference call for the same 3 quarter (Q2 2023), Sheedy touted the benefits of the new store portal component of the Systems 4 Transition, including “provid[ing] operators with better analytics and easier access to 5 information,” and “allow[ing] [IOs] to operate even more efficiently, . . . or operate the P&L more 6 efficiently.” Id. ¶ 72, 74. But he does not adequately allege that these statements were false or 7 misleading. The decision to postpone the launch to August 2023 suggests prudence, not 8 deception. Id. ¶¶ 73, 75 (asserting that the delay decision shows why the August 2023 statements 9 were misleading). Sheedy’s later admission that he knew the transition carried risks of disruptions 10 to operational efficiencies and data visibility, id. ¶¶ 89, 93, likewise do not show that his earlier 11 statements were false or misleading. Rather, it was consistent to explain the benefits sought 12 through a systems upgrade despite the risk of disruption during upgrade process. And as Northern District of California United States District Court 13 discussed above, those risks were also disclosed to investors. 14 That makes this case unlike Schueneman v. Arena Pharmaceuticals, Inc., on which 15 Plaintiff relies. 840 F.3d 698, 705–06 (9th Cir. 2016); ECF No. 40 at 117. Noting that 16 “companies can control what they have to disclose under these provisions by controlling what they 17 say to the market,” the court held that “‘once defendants cho[o]se to tout’ positive information to 18 the market, ‘they [are] bound to do so in a manner that wouldn't mislead investors,’ including 19 disclosing adverse information that cuts against the positive information.” Id. at 705–06 (first 20 quoting Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 45 (2011); then quoting Berson, 527 21 F.3d at 987). But disruption risks from implementation do not necessarily “cut against” the 22 benefits of new systems once implemented. In Schueneman, the defendants touted the safety and 23 high likelihood of securing approval of a drug in part by reference to favorable animal studies, 24 while failing to disclose a particularly unfavorable animal study suggesting the drug caused 25 several cancers. Id. at 704. “Defendants went ahead and told investors about their confidence in 26 lorcaserin’s approval being based on ‘the preclinical studies that [were] done, [and] all the animal 27 studies that have been completed.’” Id. at 707. “The public was assured that lorcaserin’s ‘long- 28 term safety and efficacy’ (and thus the likelihood of its imminent approval) were ‘demonstrated’ 8 Case 4:25-cv-00957-JST Document 44 Filed 09/16/26 Page 9 of 18 1 through ‘long-term preclinical toxicity and carcinogenicity studies.’” Id. The unfavorable study 2 that the defendants failed to disclose thus directly contradicted their representations about the 3 drug’s safety based on animal studies, and its existence made certain of those statements literally 4 false. Schueneman does not apply here, where Defendants merely failed to pair positive 5 statements about the Systems Transition’s benefits once implemented with additional warnings 6 about the disruption risks of the transition itself—particularly given that the transition risks were 7 disclosed. 8 Similarly in Matrixx, cited in Schueneman, the defendants made public statements 9 promoting their belief in a certain pharmaceutical drug’s market growth in the upcoming months 10 while concealing researchers’ concerns and pending lawsuits concerning the drug’s potential to 11 damage consumers’ sense of smell. 563 U.S. at 23–33 (2011). The growing evidence of 12 permanent loss of the sense of smell cut directly against the drug’s potential for growth. Michel v. Northern District of California United States District Court 13 Sumo Logic, Inc., also cited by Plaintiff, does not apply for the same reason. 779 F. Supp. 3d 14 1038, 1051 (N.D. Cal. 2025). That case faulted “representations that state the truth only so far as 15 it goes, while omitting critical qualifying information” but transition risks do not qualify the 16 benefits of a new system. Id. And the transition risks were not omitted, but disclosed. 17 Under these circumstances, Plaintiff has not shown that the August 2023 statements about 18 the soon-to-be underway Systems Transition were false or misleading. 19 2. Statements About Grocery Outlet’s Internal Controls 20 Plaintiff next purports to locate falsity in Grocery Outlet’s November 2023 statements 21 concerning its internal controls. In its quarterly report filed in November 2023 (“November 2023 22 10-Q”), Grocery Outlet explained that it had replaced certain components of its ERP system, 23 “modified certain existing internal controls, as well as implemented new controls and procedures 24 impacted by the implementation of these new systems.” ECF No. 38 ¶ 79. As the report stated: 25 “Except for the implementation of these new systems, there was no change in our internal control 26 over financial reporting identified.” Id. The November 2023 10-Q was also accompanied by 27 certifications pursuant to the Sarbanes-Oxley Act of 2002 (“SOX”) attesting to the disclosure of 28 any material changes to (or material weaknesses in) the Company’s internal control over financial 9 Case 4:25-cv-00957-JST Document 44 Filed 09/16/26 Page 10 of 18 1 reporting. Id. ¶¶ 81–82. 2 Plaintiff argues that “[t]hese statements were false and misleading because they failed to 3 disclose the existing material weakness in the Company’s internal control over financial reporting 4 caused by the rampant disruptions from the Systems Transition during the third quarter of 2023.” 5 ECF No. 40 at 19. He bases this allegation primarily on revelations in the 2023 10-K, released in 6 February 2024. The 10-K disclosed that the Systems Transition had increased the volume of “user 7 access, program change management, and IT operations” transactions that Grocery Outlet’s 8 existing controls were not designed to address, such that certain dependent business controls were 9 also rendered ineffective. ECF No. 40 at 19; ECF No. 38 ¶ 122. It stated that “these control 10 deficiencies . . . created a reasonable possibility that a material misstatement to the consolidated 11 financial statements would not be prevented or detected on a timely basis.” Id. The company’s 12 “internal control over financial reporting was not effective as of December 30, 2023.” Id. Northern District of California United States District Court 13 But Plaintiff has not shown anything other than the normal process of company leadership 14 discovering over time and timely disclosing adverse information. In other words, that Defendants 15 knew by February 2024 that their business controls were ill-equipped to manage the volume of 16 new transactions does not suggest that their November 2023 statement that “there was no change 17 in our internal control over financial reporting identified” was false. See Davoli v. Costco 18 Wholesale Corp., 854 F. App’x 116, 118 (9th Cir. 2021) (“[T]he inferences raised by the 19 complaint’s allegations are not as compelling as the opposing innocent inference that Costco did 20 not know that its internal control was ineffective until the more rigorous internal review performed 21 in advance of the October 2018 Form 10-K.”). Plaintiff has not alleged that Defendants’ 22 November 2023 statements about their internal controls were false or misleading. 23 3. Statements About Defendants’ Visibility Into the Financial Impacts of 24 the Systems Transition Disruptions 25 Plaintiff also alleges that Defendants misled investors by repeatedly suggesting that the 26 negative impacts of the Systems Transition would shortly be resolved, which was misleading 27 because Defendants knew that “poor reporting visibility and data integration issues had hindered 28 their ability to make accurate forecasts” and because “commission expense calculations materially 10 Case 4:25-cv-00957-JST Document 44 Filed 09/16/26 Page 11 of 18 1 affecting the next quarter’s results could not be made until the current quarter’s end.” ECF No. 40 2 at 20. ECF No. 40 at 20. 3 During the November 2023 earnings call, Bracher reassured investors that “we do expect 4 and believe that [the impacts of the Systems Transition] will be largely behind us by the end of the 5 year. And so our view at this point is we will enter the new year without any lingering cost 6 impacts or otherwise related to the transition.” ECF No. 38 ¶ 91; see also id. ¶ 97. On the same 7 call, Sheedy stated that “in terms of impact looking forward . . . we do [expect] the transitional 8 impact to be contained to this year . . . . And then largely behind us at the end of the year. So you 9 should think about us reverting back to previous performance . . . for both gross margin and 10 bottom-line profit.” Id. ¶ 93; see also id. ¶ 95. Then, in February 2024, after revealing that the 11 disruptions and impacts of the Systems Transition had persisted into the first quarter of 2024, id. 12 ¶¶ 107–15, Defendants again reassured investors that the end was near. Bracher stated that “Our Northern District of California United States District Court 13 current guidance assumes that we . . . are back to steady state operations and conclude the elective 14 commission support by the end of the first quarter.” Id. ¶ 115. And Sheedy stated that “[w]e 15 expect these [data integration issues] to be resolved soon, after which the P&L impact will be 16 behind [us].” Id. ¶ 116. 17 In seeking to establish that Defendants knew their forecasting ability was limited, Plaintiff 18 cites May 2024 statements by the company’s interim CFO to the effect that “[f]orecasting has 19 been difficult during the system transition as we have not had good visibility to our normal 20 business reporting and tools. Compounding this have been data integration issues and new 21 processes that we and our operators are adapting to within new applications.” ECF No. 38 ¶ 127; 22 see also id. ¶ 129 (Sheedy explaining that “the gross margin and the systems issues” persisted into 23 the second quarter in part because of “limited data visibility for how we manage and forecast 24 margin,” which was “a bigger issue in the first quarter than it was in the fourth quarter because of 25 the amount of time that we've been managing the business with limited data”). 26 These May 2024 admissions do not establish the falsity of Defendants’ November 2023 27 and February 2024 predictions that the Systems Transition disruption would soon end for several 28 reasons. First, Sheedy’s comment suggests a problem that was present in the fourth quarter but 11 Case 4:25-cv-00957-JST Document 44 Filed 09/16/26 Page 12 of 18 1 ramped up in the first quarter, meaning that only Defendants’ February 2024 statements 2 (pertaining to Q4 2023) could be expected to have accounted for the forecasting issue, which in 3 any event was apparently still minor. Second, and more fundamentally, Plaintiff does not explain 4 why margin forecasting accuracy bears directly on Defendants’ ability to know whether and when 5 the Systems Transition disruption would end. Defendants may have reasonably believed that as 6 deficiencies in the new IT systems were resolved or abated, recovery of the company’s margins 7 would naturally follow. That prediction would not necessarily rely on the usual margin 8 forecasting tools. 9 Plaintiff also argues that these statements were misleading because “commission expense 10 calculations materially affecting the next quarter’s results could not be made until the current 11 quarter’s end.” ECF No. 40 at 20. He points to Interim CFO Lindsay Gray’s statement that the 12 company “had to complete ‘catch-up invoice processing and final margin reconciliation and the Northern District of California United States District Court 13 end of the quarter’ in order to calculate store margins and IO commissions, which ‘can only be 14 calculated after a full inventory period has been completed.’” Id. at 21 (citing ECF No. 38 ¶ 118). 15 It is not clear, however, why the absence of final store margin calculations undermined 16 Defendants’ ability to make predictions about the end of the disruption caused by the Systems 17 Transition.1 Plaintiff has not adequately alleged falsity. 18 Additionally, Defendants correctly aver that these statements are forward-looking and 19 therefore immune from liability. ECF No. 39 at 15–16. Forward-looking statements are 20 nonetheless actionable if they were made with actual knowledge of their misleading nature. 15 21 U.S.C. § 78u–5(c)(1)(B)(i); see In re Twitter, Inc. Sec. Litig., 506 F. Supp. 3d 867, 882 (N.D. Cal. 22 2020), aff’d sub nom. Weston Fam. P’ship LLLP v. Twitter, Inc., 29 F.4th 611 (9th Cir. 2022). 23 But here, for the reasons set forth above, Plaintiff has alleged no facts suggesting that Defendants 24 predicted the impending end of the Systems Transition disruption with actual knowledge that such 25 statements were misleading. 26 27 1 For the same reason, the Court rejects Plaintiff’s argument that the non-final nature of IO 28 commission data establishes Sheedy and Brascher’s scienter for the falsity of these reassuring statements. ECF No. 40 at 26. 12 Case 4:25-cv-00957-JST Document 44 Filed 09/16/26 Page 13 of 18 1 * * * 2 Plaintiff remarks that “[c]ourts routinely sustain claims at the pleading stage based on 3 misrepresentations about a company’s problematic ERP implementation.” ECF No. 40 at 13. His 4 cited cases, however, highlight the deficiencies in the instant complaint. For instance, in 5 Employees Retirement System of Puerto Rico Electric Power Authority v. Conduent Inc., the 6 defendants stated that they had “addressed our sub-optimized IT-related workforce and vendor 7 relationships” and “inventoried the company’s legacy IT systems,” but the complaint alleged that 8 defendants had in fact done neither. No. CV 19-8237 (SDW) (SCM), 2020 WL 3026536, at *2 9 (D.N.J. June 5, 2020). Other materially false statements included “informing investors that the 10 initial phase of the Strategic Transformation was complete, and failing to disclose that the lack of 11 systems inventory and ensuing problems with the data migration were causing significant 12 problems with Conduent’s tolling business.” Id. Northern District of California United States District Court 13 Likewise in Hall v. Rent-A-Ctr., Inc., the complaint alleged that the defendants failed to 14 disclose that “the rollout of its proprietary point-of-sale (‘POS’) management information system 15 . . . was an abject failure fraught with stability and functionality problems that directly affected the 16 Company’s ability to complete sales and collect rental income.” No. 4:16CV978, 2017 WL 17 6379334, at *1 (E.D. Tex. Dec. 14, 2017); see also id. at *6 (noting that “the complaint alleges 18 Defendants repeatedly misrepresented and omitted the severe problems the Company was 19 encountering in the development and implementation of its POS system”). And In re Towne 20 Servs., Inc. Sec. Litig. denied a motion to dismiss on similar grounds. 184 F. Supp. 2d 1308, 1319 21 (N.D. Ga. 2001). That court found plausible the theory that “the Prospectus’s open-ended, 22 general, and future-oriented warnings about Towne’s computer systems (and the possibility of 23 customer attrition) are misleading in light of severe, discrete problems Towne had already suffered 24 in this regard.” Id. 25 Here, Plaintiff has not identified any material misrepresentation and Defendants have 26 consistently disclosed the issues caused by the Systems Transition. As Defendants argue, 27 “Plaintiff’s theory boils down to the claim that Defendants should have disclosed more detail or 28 sounded more pessimistic when describing the progress and challenges associated with the 13 Case 4:25-cv-00957-JST Document 44 Filed 09/16/26 Page 14 of 18 1 systems upgrade.” ECF No. 39 at 14–15. But this is not sufficient to state a claim for a violation 2 of the securities laws. The fact that Defendants were allegedly wrong in some of their predictions 3 is likewise insufficient. “[L]later, sobering revelations do not by themselves make the earlier, 4 cheerier statement a falsehood.” Cloudera, 121 F.4th at 1189 (cleaned up). The complaint does 5 not state a claim under Section 10(b) and Rule 10b–5 because it identifies no material 6 misrepresentation or omission. 7 B. Scienter 8 Plaintiff likewise fails to allege scienter. “Scienter is ‘a mental state embracing intent to 9 deceive, manipulate, or defraud.’” Intuitive Surgical, 759 F.3d at 1061 (quoting Ernst & Ernst v. 10 Hochfelder, 425 U.S. 185, 193 n.12 (1976)). To plead scienter, the complaint must “‘state with 11 particularity facts giving rise to a strong inference’ that defendants acted with the intent to deceive 12 or with deliberate recklessness as to the possibility of misleading investors.” Berson, 527 F.3d at Northern District of California United States District Court 13 987 (quoting 15 U.S.C. § 78u–4(b)(2)); see also Vernazza v. S.E.C., 327 F.3d 851, 860 (9th Cir. 14 2003) (scienter “may be supported by knowing or reckless conduct, without a showing of willful 15 intent to defraud” (cleaned up)). “Reckless conduct may be defined as a highly unreasonable 16 omission, involving . . . an extreme departure from the standards of ordinary care, and which 17 presents a danger of misleading buyers or sellers that is either known to the defendant or is so 18 obvious that the actor must have been aware of it.” Hollinger v. Titan Capital Corp., 914 F.2d 19 1564, 1569 (9th Cir. 1990) (en banc). This is a “high burden.” Prodanova v. H.C. Wainwright & 20 Co., LLC, 993 F.3d 1097, 1108 (9th Cir. 2021). The relevant inquiry “is whether all of the facts 21 alleged, taken collectively, give rise to a strong inference of scienter.” Tellabs, Inc. v. Makor 22 Issues & Rts., Ltd., 551 U.S. 308, 310 (2007). 23 Here, Plaintiff does not identify any facts suggesting that Defendants were aware of or 24 reckless about the possibility of deceiving investors. 25 In endeavoring to establish Defendants’ knowledge that the Systems Transition would 26 result in disruption and financial impact, Plaintiff points to Sheedy’s statement in November 2023 27 that “we did expect some disruption,” ECF No. 38 ¶¶ 89, 93, but that possibility of disruption was 28 disclosed in the August 2023 10-Q and 2022 Form 10-K. Plaintiff also points to evidence from 14 Case 4:25-cv-00957-JST Document 44 Filed 09/16/26 Page 15 of 18 1 FE1 that the Project Steering Committee for the Systems Transition held weekly meetings 2 attended by Bracher to discuss “critical issues” with the transition and what was “ready and not 3 ready,” maintaining “tracking documents” to track ongoing issues and readiness, which the 4 Accounting and Finance departments discussed during weekly meetings. Id. ¶¶ 43–45. But this 5 only suggests routine planning and preparation for a major infrastructure change—not Defendants’ 6 knowledge of their own unpreparedness. Similarly, Former Employee evidence that the company 7 made the decision to launch the systems transition without having tested the system using live data 8 or completed end-to-end UAT likewise suggests, at worst, poor preparation. ECF No. 40 at 24. 9 Under these circumstances, the failure to complete a certain kind of testing falls short of 10 establishing that Defendants knew an unsuccessful and disruptive transition was likely. Plaintiff 11 also cites Former Employees’ statements that the company was unprepared for the launch and that 12 most colleagues felt the launch was premature, ECF No. 40 at 24 (citing ECF No. 38 ¶¶ 48–49), Northern District of California United States District Court 13 but this testimony does not establish Defendants’ knowledge or state of mind.2 14 Plaintiff is similarly unable to establish scienter concerning the company’s lack of 15 visibility into its financials and inventory or the ineffectiveness of its internal controls during the 16 Systems Transition. Plaintiff points to Defendants’ May 2024 disclosures that “[f]orecasting has 17 been difficult during the system transition as we have not had good visibility to our normal 18 business reporting and tools,” ECF No. 38 ¶ 126, and that “limited data visibility for how we 19 manage and forecast margin” caused margin and systems issues to persist, id. ¶ 129. Those 20 statements, however, do not specify when Defendants became aware of the extent of the data 21 visibility challenges. And the underlying alleged fraudulent statements, in any case, are 22 2 23 Defendants argue that the Court should also disregard these Former Employee allegations for the additional reason that Plaintiff has not established that the Former Employees are “in a position to 24 know” that the launch was premature. See Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 996 (9th Cir. 2009), as amended (Feb. 10, 2009); Forescout, 63 F.4th at 767 (complaint may rely 25 on confidential witness testimony if it provides “an adequate basis for determining that the witnesses in question have personal knowledge of the events they report”). The Former 26 Employees were a Director of Financial Planning and Analysis, a grocery buyer, and an assistant planner in charge of buying and allocating products. ECF No. 38 ¶¶ 38–40. Defendants’ 27 objection is well-taken as to FE2 and FE3. As to FE1, however, the complaint alleges that FE1 worked on a team “dedicated to the implementation of the SAP systems.” Id. ¶ 41. As such, FE1 28 may have held an educated opinion that the launch was premature. That opinion nonetheless does not establish Defendants’ scienter. 15 Case 4:25-cv-00957-JST Document 44 Filed 09/16/26 Page 16 of 18 1 Defendants’ bullish predictions that the Systems Transition disruption would soon end. 2 Defendants’ awareness of margins forecasting difficulties does not establish scienter as to those 3 statements. 4 Plaintiff also points to Defendant’s 2023 10-K, released in February 2024, which disclosed 5 pervasive control deficiencies rendering ineffective as of December 30, 2023 the company’s 6 internal control over financial reporting. ECF No. 38 ¶ 122. But as the Court already observed, 7 evidence of what Defendants knew in February 2024 sheds little light on what they knew in 8 November 2023 when they signed SOX certifications asserting that internal controls remained 9 effective. Id. ¶¶ 79–82. 10 Finally, FE1’s account of inventory visibility challenges commencing immediately in 11 August 2023 and FE3’s vague statement that the Systems Transition “broke all the functionality of 12 everything” do not speak to Defendants’ knowledge. Id. ¶¶ 58, 60; see Zucco Partners, LLC v. Northern District of California United States District Court 13 Digimarc Corp., 552 F.3d 981, 995 (9th Cir. 2009), as amended (Feb. 10, 2009) (“[T]hose 14 statements which are reported by confidential witnesses with sufficient reliability and personal 15 knowledge must themselves be indicative of scienter.”). 16 That Sheedy and Bracher’s held high-ranking positions at the company and therefore may 17 have been aware of the company’s core operations is also insufficient to establish scienter under 18 these circumstances. Plaintiff argues that “[t]he Systems Transition was ‘such a central 19 component of [the Company’s] operations that Defendants can be presumed to have knowledge of 20 the problems with [it].’” ECF No. 40 at 26 (quoting Azar v. Yelp, Inc., No. 18-cv-00400-EMC, 21 2018 WL 6182756, at *20 (N.D. Cal. Nov. 27, 2018)). But that Defendants were aware of 22 problems with the Systems Transition does not suggest they were aware of the misleading nature 23 of their own statements. For instance, one underlying fact of which Sheedy and Bracher were 24 supposedly aware is that the company had not conducted end-to-end UAT testing. As the Court 25 has explained, this fact did not necessarily suggest that the transition would be unsuccessful. 26 The same is true of Bracher’s departure in December 2023 and Sheedy’s termination in 27 October 2024; those facts falls woefully short of establishing that Defendants “acted with the 28 intent to deceive or with deliberate recklessness as to the possibility of misleading investors.” 16 Case 4:25-cv-00957-JST Document 44 Filed 09/16/26 Page 17 of 18 1 Berson, 527 F.3d at 987. In fact, neither the complaint nor Plaintiff’s briefing explains why the 2 departures suggest Defendants committed fraud, rather than simply executing the IT systems 3 transition poorly. See ECF No. 40 at 27; ECF No. 138 ¶¶ 104–06, 138–39. It is Plaintiff’s burden 4 to “allege sufficient information to differentiate between a suspicious change in personnel and a 5 benign one.” Zucco, 552 F.3d at 1002; see In re Cornerstone Propane Partners, L.P., 355 F. 6 Supp. 2d 1069, 1093 (N.D. Cal. 2005) (“Most major stock losses are often accompanied by 7 management departures, and it would be unwise for courts to penalize directors for these 8 decisions.”). 9 The complaint fails to allege scienter as to any misrepresentation. 10 C. Loss Causation 11 Pleading loss causation requires allegations of “a causal connection between the material 12 misrepresentation and the loss.” Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 342 (2005). “At the Northern District of California United States District Court 13 pleading stage, a plaintiff need only allege that the ‘revelation of fraudulent activity,’ rather than 14 changing market conditions or other unrelated factors, proximately caused the decline in 15 defendant’s stock price.” Grigsby v. BofI Holding, Inc., 979 F.3d 1198, 1204–05 (9th Cir. 2020). 16 “One way to prove loss causation is to show that the defendant’s fraud was revealed to the market 17 through one or more ‘corrective disclosures’ and that the company’s stock price declined as a 18 result.” In re BofI Holding, Inc. Sec. Litig., 977 F.3d 781, 786 (9th Cir. 2020). Plaintiff may also 19 plead “materialization of the risk,” alleging “that ‘the very facts about which defendant lied’ 20 caused the injuries.” In re WageWorks, Inc., Sec. Litig., No. 18-CV-01523-JSW, 2020 WL 21 2896547, at *5 (N.D. Cal. June 1, 2020) (quoting Mineworkers’ Pension Scheme v. First Solar 22 Inc., 881 F. 3d 750, 753 (9th Cir. 2018)). Plaintiff argues that concealed risk gradually 23 materialized as the company partially revealed the true impacts of the Systems Transition, 24 resulting in “six separate stock declines.” ECF No. 40 at 30. Because the Court has concluded 25 that that the complaint does not sufficiently allege concealment of risk, this argument fails. See 26 Yaron v. Intersect ENT, Inc., No. 19-cv-02647-JSW, 2020 WL 6750568, at *10 (N.D. Cal June 19, 27 2020) (no loss causation where there were no allegations of “any hidden risk”). 28 /// 17 Case 4:25-cv-00957-JST Document 44 Filed 09/16/26 Page 18 of 18 1 CONCLUSION 2 The motion to dismiss is granted. ECF No. 39. Plaintiffs may file an amended complaint 3 addressing the deficiencies identified herein within 28 days of the date of this order. 4 IT IS SO ORDERED. 5 Dated: September 16, 2026 ______________________________________ 6 JON S. TIGAR 7 United States District Judge 8 9 10 11 12 Northern District of California United States District Court 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 18