Citations
- 883 F. Supp. 2d 835
Full opinion text
MEMORANDUM AND ORDER
CATHERINE D. PERRY, District Judge.
This lawsuit brings class-wide securities claims against Monsanto and several of its senior managers on behalf of persons who purchased or acquired the common stock and debt securities of Monsanto Company between January 7, 2009 and May 27, 2010. Lead plaintiff Arkansas Teacher Retirement System claims that defendants violated §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 by knowingly or recklessly making false and misleading statements about Monsanto’s glyphosate/Roundup business, its newest seeds and traits products, and its earning projections for fiscal years 2009 through 2012. Defendants move to dismiss the second amended complaint on the ground that the challenged statements are either not actionable or are protected by the safe harbor provision of the Private Securities Litigation Reform Act, which governs this case. Defendants also contend that plaintiff has failed to meet the heightened pleading standard required by the PSLRA. After thorough review of the massive record in this case, which includes plaintiffs pleadings (the operative complaint alone stands at 89 pages and 315 paragraphs), the parties’ briefs (the current versions total 162 pages), and more than 65 supporting exhibits, I find that dismissal is required as plaintiff cannot state a claim for securities fraud against defendants.
Background
Monsanto makes agricultural products for farmers. The individual defendants named in this case are present and former officers of Monsanto. This case involves-Monsanto’s Roundup herbicide and other giyphosate-based products (called Agricultural Productivity), as well as seeds and traits for corn, soybeans, and other plants (called Seeds and Genomics).
From 2003 to 2007, the Seeds and Genomics business grew faster than Agricultural Productivity. For the fiscal year ended August 31, 2007, Monsanto had $3 billion gross profit from Seeds and Genomics and $1.2 billion from Agricultural Productivity, $854 million of which was from the sale of Roundup/glyphosate.
In November 2007, Monsanto announced a five-year plan to double gross profit by fiscal year 2012. It predicted this growth would come principally from Seeds and Genomics, which it forecasted to grow between $6.5 and $7 billion in 2012. Gross profit from Roundup/glyphosate was predicted to grow to $1.2 billion. Monsanto ultimately did not meet this goal, primarily because of competition from Chinese and other genéric glyphosate competitors. Monsanto repeatedly lowered its Roundup/glyphosate gross-profit forecasts, and by May of 2010, Monsanto expected the Roundup/glyphosate business to generate $250-300 million per year on an ongoing basis.
In fiscal year 2008, however, Monsanto reported gross profits of $6.177 billion, which represented a 46% increase over 2007. Roundup/glyphosate had a 131% increase ($1.976 billion gross profit), while Seeds and Genomics grew 28% to $3.857 billion, the fifth year of 20%-plus growth for this area.
In October 2008, Monsanto predicted gross profits for fiscal year 2009 of $4.5 to $4.6 billion for Seeds and Genomics and $2.3 to $2.4 billion of Roundup/glyphosate. Defendant Terry Crews, then Monsanto’s Chief Financial Officer, stated on an October 8, 2008 earnings call that Monsanto anticipated a “tough competitive environment” for Roundup/glyphosate as Chinese manufacturers, the principal competitors in this market, would supply increased amounts of generic product at a lower price. But Monsanto believed demand for Roundup would “remain strong” and that the business’s profitability would increase in fiscal year 2009 because the Chinese cost of production was roughly one-third higher than Monsanto’s.
Plaintiff claims that by the fiscal year ended August 31, 2008, defendants already knew or should have known that market conditions for Roundup/glyphosate had dramatically changed and the business would generate lower profit. Plaintiff alleges that Monsanto knew that its higher prices for Roundup were causing Monsanto’s customers to purchase cheaper generic glyphosate, which was being sold by Monsanto’s competitors below cost to gain market share from Monsanto’s seeds and traits business. Plaintiff alleges that the decline in Roundup/glyphosate sales was also evidenced by a buildup of excess inventory as early as November of 2008. In further support of its pledge to double gross profits, Monsanto also announced the introduction of a new premium soybean seed, Roundup Ready 2 Yield, for the 2009 growing season, and a new SmartStax corn seed for 2010. Plaintiff alleges that, contrary to defendants’ representations, there was little demand for these new seeds because they were too expensive and failed to produce improved crop yields. Plaintiff asserts that these material facts were known (or severely recklessly disregarded) at the beginning of the class period and not disclosed to investors, causing the price of Monsanto stock to decline from a high of over $93 per share to close at $50.27 per share at the end of the class period.
Legal Standards
Before discussing the standards that govern defendants’ motion to dismiss, I will briefly set out what plaintiff must plead and prove to prevail on its claims. Plaintiff brings claims under § 10(b) of the Securities Exchange Act, Rule 10b-5 implementing that section of the Act, and § 20(a) of the Act. Section 10(b) and Rule 10b-5 prohibit fraudulent conduct in the sale and purchase of securities. Section 10(b) makes it unlawful “[t]o use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors.” 15 U.S.C. § 78j(b). “Rule 10b-5 implements [§ 10(b) ] by making it unlawful to, among other things, ‘make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.’ ” Minneapolis Firefighters’ Relief Ass’n v. MEMO Electronic Materials, Inc., 641 F.3d 1023, 1028 (8th Cir.2011) (quoting Matrixx Initiatives, Inc. v. Siracusano, — U.S. -, 131 S.Ct. 1309, 1317, 179 L.Ed.2d 398 (2011)). As the Eighth Circuit Court of Appeals explained:
To prevail, a § 10(b)/Rule 10b-5 claimant ordinarily must show (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.
MEMO Electronic Materials, Inc., 641 F.3d at 1028 (citing Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008)).
“In order to satisfy the [PSLRAJ’s falsity pleading standard, a complaint may not rest on mere allegations that fraud has occurred.” In re Cerner Corp. Securities Litig., 425 F.3d 1079, 1083 (8th Cir.2005). “Instead, the complaint must indicate why the alleged misstatements would have been false or misleading at the several points in time in which it is alleged they were made. In other words, the complaint’s facts must necessarily show that the defendants’ statements were misleading.” Id. (internal citations and quotation marks omitted). “[T]o fulfill the materiality requirement there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.” Detroit General Retirement System v. Medtronic, Inc., 621 F.3d 800, 805 (8th Cir.2010) (internal citation and quotation marks omitted).
Scienter “can be established in three ways: (1) from facts demonstrating a mental state embracing an intent to deceive, manipulate, or defraud; (2) from conduct which rises to the level of severe recklessness; or (3) from allegations of motive and opportunity.” Id. at 808 (internal citation and quotation marks omitted). “The inquiry ... is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322-23, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). “[I]n determining whether the pleaded facts give rise to a strong inference of scienter, the court must take into account plausible opposing inferences.” Id. at 323, 127 S.Ct. 2499. The Supreme Court explained:
The strength of an inference cannot be decided in a vacuum. The inquiry is inherently comparative: How likely is it that one conclusion, as compared to others, follows from the underlying facts? To determine whether the plaintiff has alleged facts that give rise to the requisite “strong inference” of scienter, a court must consider plausible noneulpable explanations for the defendant’s conduct, as well as inferences favoring the plaintiff. The inference that the defendant acted with scienter need not be irrefutable, i.e., of the “smoking-gun” genre, or even the “most plausible of competing inferences.” Recall in this regard that § 21D(b)’s pleading requirements are but one constraint among many the PSLRA installed to screen out frivolous suits, while allowing meritorious actions to move forward. Yet the inference of scienter must be more than merely “reasonable” or “permissible” — it must be cogent and compelling, thus strong in light of other explanations. A complaint will survive, we hold, only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.
Id. at 323-24,127 S.Ct. 2499.
Section 20(a) of the Securities Exchange Act provides for a companion claim, establishing “liability of those who, subject to certain defenses, ‘directly or indirectly’ control a primary violator of the federal securities laws.” Lustgraaf v. Behrens, 619 F.3d 867, 873 (8th Cir.2010) (quoting 15 U.S.C. § 78t(a)). Section 20(a) has been interpreted “as requiring only some indirect means of discipline or influence short of actual direction to hold a ‘controlling person’ liable.” Id. at 873 (internal citation and quotation marks omitted). “The plain language of the control-person statute dictates that, absent a primary violation, a claim for control-person liability must fail.” Id. at 874.
Safe-Harbor Provision
The Exchange Act provides a safe harbor for a forward-looking statement that is “identified as a forward-looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement,” and also for a forward-looking statement that is “immaterial.” 15 U.S.C. § 78u-5(c)(1)(A). 15 U.S.C. § 78u-5(i)(l) defines six exclusive categories of forward-looking statements:
(A) a statement containing a projection of revenues, income (including income loss), earnings (including earnings loss) per share, capital expenditures, dividends, capital structure, or other financial items;
(B) a statement of the plans and objectives of management for future operations, including plans or objectives relating to the products or services of the issuer;
(C) a statement of future economic performance, including any such statement contained in a discussion and analysis of financial condition by the management or in the results of operations included pursuant to the rules and regulations of the Commission;
(D) any statement of the assumptions underlying or relating to any statement described in subparagraph (A), (B), or (C).
(E) any report issued by an outside reviewer retained by an issuer, to the extent that the report assesses a forward-looking statement made by the issuer; or
(F) a statement containing a projection or estimate of such other items as may be specified by rule or regulation of the Commission.
“Courts applying this safe harbor have made clear that it only protects purely forward-looking statements — i.e., not those that also contain representations as to present or historical facts.” Western Washington Laborers-Employers Pension Trust v. Panera Bread Co., 697 F.Supp.2d 1081, 1092-93 (E.D.Mo.2010); In re Stone & Webster, Inc., Securities Litig., 414 F.3d 187, 213 (1st Cir.2005) (“The safe harbor ... is intended to apply only to allegations of falsehood as to the forward-looking aspects of the statement.”). To decide whether a statement is truly forward-looking, “the determinative factor is not the tense of the statement; instead, the key is whether its ‘truth or falsity is discernible only after it is made.’ ” Panera Bread, 697 F.Supp.2d at 1093 (quoting Harris v. Ivax Corp., 182 F.3d 799, 805 (11th Cir. 1999)). The applicability of this safe harbor is a question of law. See 15 U.S.C. § 78u-5(e) (“On any motion to dismiss based upon [the safe harbor], the court shall consider any statement cited in the complaint and any cautionary statement accompanying the forward-looking statement, which are not subject to material dispute.... ”); Panera Bread, 697 F.Supp.2d at 1093. “[A] forward-looking statement is protected if it is immaterial or identified as forward-looking and accompanied by meaningful cautionary language, regardless of whether the speaker knows the statement is false.” Id. at 1089.
The safe harbor provision of the Exchange Act requires courts to assess whether cautionary language accompanying a forward-looking statement is sufficiently meaningful. See 15 U.S.C. § 78u-5(c)(l)(A)(i) (safe harbor requires “meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement”). The cautionary language need not be a part of the forward-looking statement so long as the statement specifies where it can be located. See 15 U.S.C. § 78u-5(c)(2) (oral statements); Panera Bread, 697 F.Supp.2d at 1089-1090 (courts uniformly conclude that incorporation by reference for written forward-looking statements is permissible); Yellen v. Hake, 437 F.Supp.2d 941, 963-64 (S.D.Iowa 2006) (same and collecting cases).
Although courts have articulated the standard underlying the meaningfulness requirement differently, it requires more than mere boilerplate but less than disclosure of every potential risk. See, e.g., Panera Bread,, 697 F.Supp.2d at 1090; Asher v. Baxter International Inc., 377 F.3d 727, 732-33 (7th Cir.2004) (applying § 78u~5(e)(l)(A) and identically-worded § 77z-2(c)(l)(A) safe harbors, and concluding that the cautionary language requirement cannot require disclosure of all potential risks); Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 372 (5th Cir. 2004) (“The requirement for ‘meaningful’ cautions calls for ‘substantive’ company-specific warnings based on a realistic description of the risks applicable to the particular circumstances, not merely a boilerplate litany of generally applicable risk factors.”); Harris, 182 F.3d at 807 (to be meaningful, cautionary statements must warn of “risks of a significance similar to that actually realized....”). “[T]o determine whether cautionary language is adequate, courts should evaluate it in light of the allegedly undisclosed risk and determine if a reasonable investor would have concluded that the risk that eventually materialized never existed.” Panera Bread, 697 F.Supp.2d at 1090 (citing In re Sierra Wireless, Inc. Securities Litig., 482 F.Supp.2d 365, 380 (S.D.N.Y.2007)).
Standards Governing Motion to Dismiss
Defendants move to dismiss these claims under Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure and the PSLRA. To survive a motion to dismiss for failure to state a claim under Rule 12(b)(6), a complaint must contain factual allegations sufficient “ ‘to raise a right to relief above the speculative level.’ ” Parkhurst v. Tabor, 569 F.3d 861, 865 (8th Cir.2009) (quoting Bell Atlantic v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). Stated another way, “the complaint must allege only enough facts to state a claim to relief that is plausible on its face.” B & B Hardware, Inc. v. Hargis Industries, Inc., 569 F.3d 383, 387 (8th Cir.2009) (internal quotation marks and citation omitted). “The plausibility of a complaint turns on whether the facts alleged allow us to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Lustgraaf, 619 F.3d at 873 (internal citation and quotation marks omitted). The court must still “accept as true the plaintiffs well pleaded allegations,” Parkhurst, 569 F.3d at 865, and “construe the complaint liberally in the light most favorable to the plaintiff.” Eckert v. Titan Tire Corp., 514 F.3d 801, 806 (8th Cir.2008).
Although Rule 8(a) of the Federal Rules of Civil Procedure ordinarily requires only a “short and plain statement” of the claims, Rule 9(b) and the PSLRA apply to plaintiffs securities fraud claims. “Under Rule 9(b)’s heightened pleading standard, allegations of fraud, including fraudulent concealment for tolling purposes, [must] be pleaded with particularity.” Summerhill v. Tenninix, Inc., 637 F.3d 877, 880 (8th Cir.2011) (internal citation and quotation marks omitted). “In other words, Rule 9(b) requires plaintiffs to plead the who, what, when, where, and how: the first paragraph of any newspaper story.” Id. As the Eighth Circuit Court of Appeals has explained, “The PSLRA goes beyond the ordinary pleading requirements described in Rules 8(a)(2) and 9(b) of the Federal Rules of Civil Procedure....” In re 2007 Novastar Financial Inc., Securities Litig., 579 F.3d 878, 882 (8th Cir.2009). “Claims governed by the PSLRA must specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading (the falsity requirement), and state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind (the scienter requirement).” Lustgraaf, 619 F.3d at 873 (internal citations and quotation marks omitted); see also Medtronic, 621 F.3d at 805. Where, as here, the “primary violation” is a § 10(b)/Rule 10b-5 securities fraud claim, the plaintiffs § 20(a) “control person” claims against the individual defendants, as well as the § 10(b)/Rule 10b-5 claim, must satisfy the PSLRA’s heightened pleading requirements. Lustgraaf, 619 F.3d at 874.
Discussion-Allegations of Falsity
A. First Quarter Fiscal Year 2009
Defendants’ Statements
On January 7, 2009, Monsanto announced its first-quarter 2009 results and raised its ongoing earnings-per-share (EPS) guidance for the year from a range of $4.20 to $4.40 to a range of $4.40 to $4.50. Monsanto also projected gross profit in the Roundup/glyphosate business of $2.4 to $2.5 billion for the year, but predicted it would fall to $1.9 billion in 2012. Defendant Hugh Grant, Monsanto’s Chairman, President and Chief Executive Officer, is quoted in the earnings press release as stating, “Our Latin American business once again displayed its strength and set the pace for a great fiscal 2009, giving us confidence to raise our earnings projections and helping us take another solid step toward fulfilling our 2012 gross profit commitments.” Monsanto also reported that sales in the first quarter for its Agricultural Productivity segment grew 28 % ($337 million), largely from “higher net selling prices and higher sales volumes of the company’s Roundup and other glyphosate-based herbicides in Brazil along with higher net selling prices in all major world areas.” The January 7, 2009, earnings release includes the following language:
Certain statements contained in this release are ‘forward-looking statements,’ such as statements concerning the company’s anticipated financial results, ... future product performance, ... business and financial plans and other non-historical facts ... [S]ince these statements are based on factors that involve risks and uncertainties, the company’s actual performance and results may differ materially from those described or implied by such forward-looking statements.
Factors that could cause or contribute to such differences include, among others: continued competition in seeds, traits, and agricultural chemicals; the company’s exposure to various contingencies, including ... public acceptance of biotechnology products; the success of the company’s research and development activities; ... the accuracy of the company’s estimates related to distribution inventory levels; ... the effect of weather conditions ... on the agricultural business or the company’s facilities; and other risks and factors detailed in the company’s most recent Form 10-K Report. ...
Monsanto’s Form 10-K Report contains the following warnings of “some of the important reasons that actual results may be materially different from those that we anticipate”:
—Competition in seeds and traits and agricultural chemicals has significantly affected, and will continue to affect, our sales ... Our competitors’ success could render our existing products less competitive, resulting in reduced sales compared to our expectations or past results. We expect to see increasing competition from agricultural biotechnology firms and from major agrichemical, seed and food companies. We also expect to face continued competition for our Roundup herbicides ... The extent to which we can realize cash and gross profit from these products will depend on our ability to ... predict and respond effectively to competitor pricing and marketing; provide marketing programs meeting the needs of our customers and of the farmers who are our end users; maintain an efficient distribution system, and develop new products with features attractive to our end users.
—The successful development and commercialization of our pipeline products will be necessary for our growth. The processes of breeding, biotechnology trait discovery and development and trait integration are lengthy, and a very small percentage of the genes and germplasm we test is selected for commercialization ...
—Our ability to match our production to the level of product demanded by farmers or our licensed customers has a significant effect on our sales, costs, and growth potential. Farmers’ decisions are affected by market, economic and weather conditions that are not known in advance ... However, product inventory levels at our distributors may reduce sales in future periods, as those distributor inventories are worked down. In addition, inadequate distributor liquidity could affect distributors’ ability to pay for our products and, therefore, affect our sales....
On a January 7, 2009 conference call, defendant Terry Crews stated that Monsanto expected the “U.S. Roundup business to still be strong” and to see “solid growth in the U.S. seeds and traits business.” He said, “I think we’re up about $300 million of GP in the first quarter, largely driven by Brazil, ... We’re talking about another 2 to $300 million in the rest of the year and that’s largely going to be driven by our U.S. business----” In response to a participant’s question about “what incentivizes the farmer to prepay [seed],” Crews responded that “one [reason] is orders improving and the pace of orders picking up in December and January and that’s — that is largely driven by people wanting to lock in particular seed at that point. The prepay program is really more of financial management program for the growers....” In the same call, another Monsanto executive reminded participants that “this call will include statements concerning future events” and as such, “the Company’s actual performance and results may vary in a material way from those expressed or implied in any forward-looking statements.” Participants were directed to Monsanto’s 10-K and press release for a “description of the factors that may cause such a variance.”
The next day, Monsanto filed its 10-Q for first quarter fiscal 2009, which made similar statements, including for example, that Monsanto “expect[ed] to see increased gross profit as [its] higher-margin seeds and traits business grows and [it] realize[s] the full-year impact of improved average net selling prices in [its] Roundup business.” Page 1 of the Form 10-Q contains the following cautionary language regarding forward-looking statements:
[W]e share our expectations for our company’s future performance ... Since these statements are based on factors that involve risks and uncertainties, our company’s actual performance and results may differ materially from those described or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, among others: continued competition in seeds, traits and agricultural chemicals; the company’s exposure to various contingencies, including those relating to intellectual property protection, regulatory compliance and the speed with which approvals are received, and public acceptance of biotechnology products; the success of the company’s research and development activities; ... fluctuations in commodity prices; ... the accuracy of the company’s estimates related to distribution inventory levels; the company’s ability to fund its short-term financing needs and to obtain payment for the products that it sells; the effect of weather conditions, natural disasters and accidents on the agriculture business or the company’s facilities; and other risks and factors described or referenced in .... our Report on Form 10-K for the fiscal year ended Aug. 31, 2008.
The Outlook section of the Form 10-Q states in relevant part as follows:
In the Seeds and Genomics segment, our seeds and traits business is expected to expand. In the Agricultural Productivity segment, our glyphosate business grew through increases in our average net selling prices, and our selective chemistry business is expected to decline ... In 2009, we also expect to see increased gross profit as our higher-margin seeds and traits business grows and we realize the full-year impact of improved average net selling prices in our Roundup business ... We believe that our seeds and traits businesses will have significant near-term growth opportunities through a combination of improved breeding and continued growth or stacked and second-generation bio-tech traits ... We believe our Roundup herbicide business will continue to generate a sustainable source of cash and gross profit. Prices of generic formulations of glyphosate herbicides will continue to generate a sustainable source of cash and gross profit. Prices of generic formulations of glyphosate herbicides increased during 2008. The generic and private-label pricing can be somewhat unstable during the short-term, but we believe both the short- and long-term trends will be favorable relative to the previous three-year period. We have experienced increased demand in recent years, and we are increasing production capacity at our Luling, Louisiana plant to meet the anticipated future demand for Roundup, as well as for our glyphosate supply business.
At a February 10, 2009 investor conference, Crews reaffirmed that Monsanto “still expect[ed]” to “more than doubl[e] the gross profit between 2007 and 2012” and was “comfortable that [it was] still staying on that trajectory.” After reminding the participants that he would be making some “forward-looking statements,” Crews stated:
And the Roundup business this year is reaching what will be its peak, I believe, in terms of gross profit — in terms of annual gross profit growth. What we’ve seen in the last few years, based on changes that we’ve made in Roundup a few years ago to lower our cost position, reduce our working capital investment in that portfolio, and to make sure that we’re only resourcing our facilities to make sure we maintain a low-cost producer. And as a result of that we’ve seen improved profitability and gladly taking advantage of a situation where supply and demand was out of balance or increased supply over demand.
And as a result of that we think this year our gross profit in Roundup’s going to be in the $2.4 billion to $2.5 billion range. And that gross profit growth is going to come from a combination of higher pricing — probably $20-plus in the brand — but probably lower volumes this year, particularly on the non-branded side of our business. But that combination is going to result in a gross profit this year in $2.4 billion to $2.5 billion. ... I do believe that this year is the peak in Roundup, and I think we’ll begin to see a decline in Roundup. So I’m comfortable to tell you that it will come down in price and will come down in GP and probably moving toward our $1.9 billion objective in 2012.
A week later defendant Carl Casale, Executive Vice President of Strategy and Operations, appeared at a separate investor conference and said that Monsanto was clearly “on track” to meet that projection and “expected that [its] Roundup franchise will be from approximately $2.4 billion, $2.5 billion of gross profit this year.” Monsanto made similar statements at the Credit Suisse 14th Annual Global Ag Productivity Conference on March 10, 2009.
Plaintiff’s Allegations That Defendants’ Statements Were False or Misleading
Plaintiffs second amended complaint alleges that Monsanto enjoyed increased profits when it materially increased the price of Roundup in 2008 due to a glyphosate supply shortage. Plaintiff alleges the shortage resulted, in part, “from a reduction in Chinese manufacturing due to higher fuel costs, stricter environmental guidelines imposed by the Chinese government in anticipation of the 2008 Olympic Games, and an earthquake in China that disrupted production of glyphosate.” However, plaintiff alleges that Chinese manufacturers returned to the market in the fall of 2008, raising questions about whether Roundup would continue to generate the same high level of profits enjoyed in fiscal 2008.
Plaintiff alleges that the statements made by Monsanto in the first and second quarters of fiscal year 2009 were false and misleading because defendants had failed to disclose that: demand for Roundup had materially declined and the inventory was materially increasing due to Monsanto’s “high prices;” competitive prices of glyphosate, “which defendants used to establish Monsanto’s gross profitability targets, had dramatically declined;” and, Monsanto’s competitors, Dow and Syngenta, were selling glyphosate at a material discount to gain market share, which “materially, negatively affected” the sales of Monsanto’s seeds.
Plaintiff cites Confidential Informant 3, a former inventory manager for Monsanto during the relevant time period, as the source for information about Monsanto’s inventory. The second amended complaint alleges:
55. The dramatic change in market dynamics was also apparent in Monsanto’s inventory that had materially increased prior to the Class Period. According to [Confidential Informant 3], at the beginning of Monsanto’s 2009 fiscal year (September 1, 2008), inventory of glyphosate was very low. By early November 2008, glyphosate inventory had increased by approximately 500,000 Roundup Equivalent Gallons (“REGs”) per week. The increase in inventory was discussed at weekly Product Availability (“PAV”) and Supply Effectiveness Team (“SET”) meetings. On a weekly basis, the inventory of glyphosate was monitored and the inventory levels would be reported in a chart in a Tactical Supply & Operations Planning memo for a monthly meeting.
56. According to Cl 3, at the monthly TSOP meetings, the meeting participants' “looked for places to put this stuff,” referring to glyphosate, beginning in November 2008. Defendants materially increased both the terminal and rail storage space to store excess glyphosate inventory. For example, approximately 1.6 million gallons of storage space was added in Houston, Texas, Harrold, South Dakota and Brooton, Minnesota in February 2009. According to Cl 3, Monsanto’s lease of space in a storage facility in Houston, Texas was unprecedented because “nobody bought glyphosate in Houston.” Further, Monsanto used a material portion of its leased-railcar fleet to store excess inventory in the Budweiser rail yard in St. Louis. Moreover, a material amount of 30 gallon drums of Roundup PowerMAX were stored in Fresno, California.
Plaintiffs second amended complaint further alleges that Monsanto’s inventory build-up was accompanied by a decline in sales in late 2008.. “According to Cl 3, Amy Halleran, Senior Customer Operations Specialist, presented reports at the TSOP meetings that reflected a material and continuous decline in sales volume and, accordingly, forecasts for glyphosate sales were materially lowered.” Plaintiff alleges that “Cl 3 personally informed Defendant Begemann about the increase in glyphosate inventory.” The second amended complaint cites another confidential informant, Cl 4 (a former Monsanto employee that sold Roundup), as the source of its information that “throughout 2009[ ] there ‘was a lot of excess Roundup which sat in tanks ... due to lower demand.’ ”
According to Confidential Informant 5 (a marketing manager at a Monsanto subsidiary), “material damage was done to Monsanto’s image and customer demand for Monsanto’s soybean and corn seed products” because Monsanto “materially overpriced glyphosate.” The amended complaint alleges that Cl 5 heard “a lot of turbulent messages” from farmers about Roundup performance, relayed his frustration at Monsanto’s sales expectations and “blatant disregard of the widespread negative sentiments” to Monsanto, and was told “that the sales problems were national and that Monsanto’s corporate office was aware of the trend.” Cl 1 also allegedly observed farmers switching to generic glyphosate because the price of Roundup was too high.
The second amended complaint alleges that “alarm bells went off inside Monsanto” in March of 2009 because glyphosate inventory was so high (18 million REGs). Plaintiff cites Confidential Informant 6 (a former member of Monsanto’s finance department) and Confidential Informant 7 (a former financial analyst who “supported” Monsanto) as the sources of its allegation that “starting in February and March 2009, the decline in glyphosate was so steep that Monsanto’s finance department began to plan material cuts to certain expenses. CIs 6 and 7 understood that the material reduction in expenditures was needed for Monsanto to meet its projected earnings per share for fiscal 2009.”
Analysis
Almost all of the statements being challenged by plaintiff in this case are forward-looking statements as defined by the Exchange Act because they include projections of revenues, income, earnings, statements of future economic performance, statements of plans and objectives of management for future operations, and the assumptions “underlying or relating to” such statements. The tense of the statement is not determinative; rather, “the key is whether its truth or falsity is discernible only after it is made.” Panera Bread, 697 F.Supp.2d at 1093. Like the plaintiffs in Panera Bread, plaintiff here challenges as fraudulent all of defendants’ projections about quarterly earnings per share and sales growth, and its projections about doubling gross profit by 2012. Plaintiff argues that defendants knew they could not meet these projections because they were aware that their growth strategy (through Roundup and the newest seeds and traits business) was failing. But defendants’ forecasts of future sales and earnings and doubling gross profit are the “sorts of projections [that] are quintessential forward-looking statements.” Id. This remains true regardless of the tense of some of these statements because they do not make any “specific, verifiable representation about the present state of affairs.” Id. at 1094. Statements that Monsanto “was still staying on [the] trajectory” of doubling gross profit and was “on track” “while in the present tense, are inherently forward-looking.” In re Federal-Mogul Corp. Securities Litig., 166 F.Supp.2d 559, 565 (E.D.Mich.2001). They are not, as plaintiff argues, factual statements of Monsanto’s current performance. It is also clear that statements about Monsanto expecting to see increased gross profit as its seeds and traits business grows, when read in context, are also forward-looking as an assumption underlying defendants’ projections about Monsanto’s performance going forward, as well as statements of the plans and objectives for future operations. As such, these forward-looking statements are protected by the safe harbor provision of the Exchange Act if they are accompanied by meaningful cautionary statements.
The cautionary language accompanying the forward-looking statements is meaningful as a matter of law because it is substantive and addresses risks specific to Monsanto’s business. Indeed, defendants repeatedly warned of the very risks that plaintiff alleges they failed to disclose, including: “competition in seeds and traits and agricultural chemicals has significantly affected, and will continue to affect, our sales;” “increasing competition from agricultural biotechnology firms and from major agrichemical, seed and food companies,” specifically “continued competition for our Roundup herbicides;” and, “our ability to match our production to the level of product demanded by farmers or our licensed customers has a significant effect on our sales, costs, and growth potential.” These are not generic, boilerplate risks that could apply to any business — they are specific warnings about the volatility in the glyphosate business, the competition faced by Roundup, and issues with respect to levels of production and demand affecting sales. These warnings were repeated by Crews in February, when he told investors that Roundup was “reaching its peak” in annual gross profit growth and that it would begin to decline in price and gross profit. Similarly detailed cautionary language accompanied each of defendants’ statements at issue.
I am also not persuaded by plaintiffs argument that defendants’ cautionary language is not meaningful simply because it “remained virtually unchanged” during the relevant time period. While some of the language used in Monsanto’s public filings was similar, the warnings were specific to Monsanto’s business and were indeed the very risks that, according to plaintiff, caused Monsanto to miss its targeted projections. Moreover, Monsanto’s cautionary language included more than just those risk factors disclosed in public filings. During conference calls and other public statements, defendants continually warned investors of these specific risks, including competition in the glyphosate market and the challenges and setbacks associated with the launch of new products. The language is simply not the type of rote, boilerplate language found insufficient under the Act by other courts. While defendants may have underestimated the effect of these risks to its glyphosate business, they did not mislead investors or falsely deny that these risks existed.
In a last-ditch effort to avoid the safe harbor provision, plaintiff argues that it does not apply because the statements were false at the time they were made. I agree with Judge Webber’s conclusion in Panera Bread that “a forward-looking statement is protected if it is immaterial or identified as forward-looking and accompanied by meaningful cautionary language, regardless of whether the speaker knows the statement is false.” 697 F.Supp.2d at 1089; see also, W. Washington Laborers-Employers Pension Trust v. Panera Bread Co., 2009 WL 3756619, at *2-*3 (E.D.Mo. Nov. 6, 2009). Defendants’ forward-looking statements were accompanied by meaningful cautionary language and are not actionable under the safe harbor provision of the Act.
To the extent plaintiff argues that Crews’ January 7, 2009 statement about “orders improving and the pace of orders picking up in December and January” constitutes a present statement of verifiable fact, it completely misreads the context of this statement. Crews was responding to a question about what drives a hypothetical farmer to prepay for seed, and he responded that a farmer may want to lock in a particular seed in December or January. It is clear that Crews was speculating on the motives of a hypothetical farmer and not making any factual statements about Monsanto’s seed business. For plaintiff to suggest otherwise grossly misstates the record in this case.
Statements about how a product is performing relative to expectations are, as a general matter, inactionable puffery under the Exchange Act. Panera Bread, 697 F.Supp.2d at 1094 n. 5; see Johnson v. Tellabs. Inc., 262 F.Supp.2d 937, 951 (N.D.Ill.2003) (statements such as “demand for that product is exceeding out expectations” and “we feel very, very good about the robust growth we’re experiencing” are “nothing more than puffery and cannot be the basis of a cause of action.”). Defendants’ comments that Monsanto expected “solid growth” and the Roundup business to be “strong” do not contain any specific, concrete factual representations as to present facts. Instead, they are inactionable puffery about performance relative to expectations. See Parnes v. Gateway 2000, Inc., 122 F.3d 539, 547 (8th Cir.1997) (“[S]ome statements are so vague and such obvious hyperbole that no reasonable investor would rely upon them ... soft, puffing statements generally lack materiality because the market price of a share is not inflated by vague statements predicting growth. No reasonable investor would rely on these statements ....”) (internal quotation marks and citations omitted).
Plaintiff argues that defendants had a duty to disclose additional facts — such as the amount that Roundup inventory was increasing and that Dow and Syngenta were selling glyphosate at a material discount — so that their state-merits would not be rendered materially false or misleading. The Supreme Court in Matrixx wrote:
[I]t bears emphasis that § 10(b) and Rule 10(b)-5 do not create an affirmative duty to disclose any and all material information. Disclosure is required under these provisions only when necessary to make ... statements made, in the light of the circumstances under which they were made, not misleading. Even with respect to information that a reasonable investor might consider material, companies can control what they have to disclose under these provisions by controlling what they say to the market.
Matrixx, 131 S.Ct at 1321-22 (internal quotation marks and citations omitted); see also Basic Inc. v. Levinson, 485 U.S. 224, 239 n. 17, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988) (“Silence, absent a duty to disclose, is not misleading under Rule 10b-5.”). “A fact is material if it is substantially likely that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.” In re K-tel International, Inc. Securities Litig., 300 F.3d 881, 897 (8th Cir.2002) (quoting Levinson, 485 U.S. at 231-32, 108 S.Ct. 978). “Materiality alone is not sufficient to place a company under a duty of disclosure ... the law requires an actor to provide complete and non-misleading information with respect to the subjects on which he undertakes to speak.” K-tel, 300 F.3d at 898 (internal quotation marks and citations omitted). Here, plaintiff falls far short of demonstrating that disclosure of these additional facts was somehow required. As discussed above, defendants repeatedly disclosed continued competition in the glyphosate market, as well as expected lower sales volumes of Roundup, in the challenged statements. Plaintiffs position in this case seems to be that, by making any statements about the expected performance of Roundup, defendants were then obligated to disclose every bit of pricing, inventory, and marketing information underlying these predictions, right down to every comment allegedly made by “unidentified customers” to “confidential informants.” But the securities laws impose no such duty, for such a requirement would undoubtedly drown the reasonable investor in a never-ending— and ultimately, meaningless — deluge of information. When defendants’ statements are viewed as a whole, it is clear that no disclosure of additional facts is necessary to render them not misleading under Matrixx.
Of course, even if these statements were not forward-looking or were otherwise actionable, plaintiff would still have to demonstrate their falsity to avoid dismissal. “In order to satisfy the Reform Act’s falsity pleading standard, a complaint may not rest on mere allegations that fraud has occurred ... The complaint’s facts must necessarily show that the defendants’ statements were misleading.” In re Hutchinson Technology, Inc. Securities Litig., 536 F.3d 952, 958-59 (8th Cir.2008) (internal quotation marks and citation omitted). With projections about future sales and earnings, this is very difficult because “corporate officials need not be clairvoyant.” In re Navarre Corp. Securities Litig., 299 F.3d 735, 743 (8th Cir.2002) (internal quotation marks and citation omitted). Merely using hindsight to demonstrate a statement is false is insufficient to meet the heightened pleading standard of the PSLRA; “[i]nstead, the complaint must indicate why the alleged misstatements would have been false or misleading at the several points in time in which it is alleged they were made.” In re Cerner Corp. Securities Litig., 425 F.3d 1079, 1083 (8th Cir.2005).
I agree with defendants that the Eighth Circuit’s decision in Cemer is instructive on this issue. The complaint in Cemer alleged that the defendants’ favorable statements regarding future earnings were materially false and misleading because the company was losing deals due to increased competition, dissatisfied customers, a general economic downturn, an inexperienced sales force, and a neglect of smaller deals. Affirming the district court’s dismissal of the complaint, the Eighth Circuit held:
The complaint is devoid, however, of any indication that this alleged loss of deals, even if ‘material,’ is necessarily inconsistent with Cerner’s statements that its demand was ‘strong.’ A company could conceivably lose a material number of deals it had pursued, and yet continue to see a strong demand for its products and substantial future opportunities. Furthermore, there is no indication on the face of the complaint that even a material loss of deals necessarily rendered Cerner unable to achieve its projected earnings. Finally, and perhaps most importantly, the complaint does not identify a single specific deal that was lost due to alleged changes in Cerner’s corporate structure and strategies. Without any indication that an undefined loss of sales necessarily would affect the company’s overall demand or its ability to meet its future earnings projections, these allegations cannot survive the Reform Act’s falsity standard.
Id. at 1084. Like the challenged statements in Cemer, Monsanto’s future projections and statements that Roundup would continue to generate “a sustainable source of cash and gross profit” are not necessarily inconsistent with alleged decreasing sales. Indeed, a reasonable investor (and the Court) could easily conclude that Roundup could continue to provide a “sustainable source of cash and gross profit” even with softening demand. Furthermore, there is no indication on the face of the complaint that even a material decline in sales necessarily rendered Monsanto unable to achieve its projected earnings. As defendants point out, the glyphosate market was extremely volatile so the price of generic glyphosate at any given point in January of 2009 would not necessarily render the forecasts for the entire fiscal year false, let alone the predictions for 2012. This is particularly true because the price of generic glyphosate was only one of the factors used to forecast the profitability of Roundup. Under these circumstances, these allegations cannot survive the PSLRA’s falsity standard. In sum, I find no actionable statements for the first quarter of fiscal year 2009.
B. Second Quarter Fiscal Year 2009
Defendants’ Statements
On April 2, 2009, Monsanto issued a press release announcing its second quarter-2009 results and reaffirming its EPS guidance in the range of $4.40 to $4.50. At the same time, Monsanto also announced that Roundup sales had decreased 21% compared with the prior year’s second quarter, but it expected orders to shift back to previous selling patterns in the “third and fourth quarters.” The press release states that the decrease was “largely a timing effect, as our customer’s shipments were ahead of a preannounced price increase ... additionally, results in the quarter were also affected by lower branded volumes of glyphosate due to the drought conditions in Latin America.” Monsanto repeated these statements on a conference call held the same day. In this call, Crews also predicted that “Roundup gross profit for the full fiscal year will be approximately $2.4 billion. This is supported by the fact that we have reached the half-way mark of $1.2 billion in gross profit already.” Crews warned that the “Roundup business is likely to become more competitive” as the Chinese “bring more volume online.” Chief Executive Officer, defendant Grant, then spoke and reiterated the prediction that Roundup gross profit would peak in 2009 and decline to approximately $1.9 billion by fiscal 2012. He stated that he did not know whether Roundup gross profit would reach “steady state in 2010 or 2012, or if the path between them will be steep or rolling. They are all possible.” Grant also reported strong sales in Seeds and Genomics and predicted “gross profit ... to top $7 billion.”
Monsanto’s Form 10-Q issued on April 3, 2009, contains the same cautionary language regarding forward-looking statements as the previous Form 10-Q. The form states Monsanto’s belief that is “positioned to sustain earnings growth and strong cash flow” and that it “expects to see increased gross profit as [its] higher-margin seeds and traits business grows and [it] realizes the full-year impact of improved average net selling prices in our Roundup business.” It also predicts that Roundup sales would “peak in 2009 and continue to generate a significant source of cash and gross profit thereafter.” In the Outlook section, Monsanto reported in relevant part as follows:
In the Seeds and Genomics segment, our seeds and traits business is expected to expand.... We believe that our seeds and traits businesses will have significant near-term growth opportunities through a combination of improved breeding and continued growth of stacked and second-generation biotech traits ... We believe our Roundup herbicide business will peak in 2009 and continue to generate a significant source of cash and gross profit thereafter. Prices of generic formulations of glyphosate herbicides increased during 2008. Against a background of increased global capacity and softening raw material values, prices of generic formulations of glyphosate are now trending back towards prior level. We have experienced increased demand in recent years, and we are increasing production capacity at our Luling, Louisiana plant to meet the anticipated future demand for Roundup, as well as for our glyphosate supply business. We will continue to actively manage our inventory and other costs and offer production innovations, superi- or customer service and logistics and marketing programs to support or allow us to maintain premium prices commensurate with our brands’ value. Further expansion of crops with our Roundup Ready traits may also incrementally increase sales of our Roundup products.
At a May 13, 2009 conference, Monsanto reaffirmed that it was “on track” to double gross profits from 2007 to 2012. On May 27, 2009, Monsanto issued a press release and held an investor conference. The press release states that Monsanto “is on track to meet the lower end of its previous ongoing earnings guidance for fiscal year 2009” of $4.40 per share. Monsanto also announced that its Roundup business would likely generate about $2 billion gross profit in fiscal year 2009, “down from its previous forecast of $2.4 billion.” The release states that “application of [Roundup] is half that compared with product use at the end of May 2008” and notes that the “supply of glyphosate is now exceeding demand globally.” The release cites weather and increased competition from generic glyphosate suppliers as among the reasons for the gross profit decline in Roundup, but predicts it will be offset by the “continued outstanding performance from [Monsanto’s] seeds and traits business.” The press release contains substantially the same cautionary language as appears in the Form 10-Q. During the conference, Grant acknowledged that the “cold, wet spring” and “large volume of Chinese generic material” in the marketplace contributed to the revised Roundup forecast. He then stated that Monsanto would “reassess the path forward with Roundup. There was an inevitability in this. It was always coming. We always said it was going to get smaller....” However, Grant predicted that “despite the decline of Roundup to that $2 billion dollar level in gross profit, we still see the overall opportunity in growing the business by about 20% even with that Roundup softness.”
Plaintiff’s Allegations That Defendants’ Statements Were False or Misleading
Plaintiff relies on the same facts discussed in connection with the first quarter fiscal year 2009 as evidence that defendants’ statements in the second quarter were false and misleading. Plaintiff also alleges that these statements were false and misleading because “the launch of Monsanto’s new Roundup Ready 2 Yield soybeans for the 2009 growing season was a failure because defendants could not sell the new seeds at premium prices. In fact, sales were so poor that Monsanto’s retailers materially discounted the price of Roundup Ready 2 Yield to prices near those for Roundup Ready I seeds.” Analysis
I have already concluded that defendants’ projections of revenues, income, and earnings, statements of plans and objectives for future operations, statements of future economic performance, and the assumptions “underlying or relating to” these statements are forward-looking statements subject to the safe harbor provision. This includes predictions of gross profit (including the prediction of an “overall opportunity in growing the business by about 20%”), Roundup gross profit, gross profit for Seeds and Genomics “topping $7 billion,” increased profit for the seeds and traits business (and the underlying assumption that it would be caused by improved breeding and continued growth of stacked and second-generation biotech traits), as well as the predicted guidance numbers.
I also find that these forward-looking statements are accompanied by meaningful cautionary language for the reasons previously discussed. In addition to the specific, detailed risks set out in the press releases and the Form 10-Q, defendants’ statements made during the April and May conferences also included appropriate cautionary language regarding forward-looking statements. Defendants also expanded on these risks in the statements themselves. For example, in the April conference call Grant warned participants that he did not know whether Roundup gross profit would reach “steady state in 2010 or 2012, or if the path between them will be steep or rolling. They are all possible.” Crews echoed the warning, stating that the Roundup business “is likely to become more competitive” as the Chinese “bring more volume online.” The May press release cites weather and increased competition from generic glyphosate suppliers as among the reasons for declining gross profit of Roundup and warns of excess supply and decreasing demand. Grant reiterated these same concerns during the May investor conference. He told them that “it [decreased Roundup profits] was always coming. We always said it was going to get smaller----” These identified risks were detailed and specific to Monsanto’s business and the changing conditions of the marketplace. Under these facts, I find that defendants’ forward-looking statements were accompanied by meaningful cautionary language and are not actionable under the safe harbor provision of the Exchange Act.
Plaintiff argues that the April 2, 2009 press release includes a present statement of verifiable fact that decreased Roundup sales were due to a pre-announced price increase. Again, plaintiff takes the statement out of context, which states that decreased sales were “largely” the result of that effect, but also of drought conditions in Latin America. Plaintiff presents no evidence that this statement, when read in its entirety, is false or misleading as is required to state a claim under the Act, particularly when considered as a whole with all of the available information about Roundup’s declining sales. Plaintiff also fails to demonstrate that defendants’ statements about its soybean and seeds and traits business are false and misleading. First, the statement about growers “buying our higher performing, higher value soybean products” does not even specifically address the Roundup Ready 2 Yield soybeans, much less the price or volume of Roundup Ready 2 Yield soybean purchases. I also agree with defendants that the statement about “growers steadily buying” products constitutes inactionable puffery. Second, as explained by Crews in the April 2 conference call, the launch of Roundup Ready 2 Yield in 2009 was a “pre-commercial introduction” limited to just 1.5 million acres. There is no evidence that this limited pre-launch was a “failure” or that its results somehow rendered defendants’ statements regarding its seeds and traits business false or misleading.
Plaintiff also argues that Monsanto’s statement in its Form 10-Q that the Company had “experienced increased [glyphosate] demand in recent years” is a misleading statement of verifiable fact. Although not a forward-looking statement, there is no evidence that it is either false or misleading. In fact, plaintiffs second amended complaint alleges that Monsanto had experienced increased glyphosate demand in the years preceding April of 2009. Because this statement accurately reported past historical fact and contains no representations of present or future demand, it is not actionable. My review of the record reveals no actionable statements for the second quarter of fiscal year 2009.
C. Third Quarter Fiscal Year 2009
Defendants’ Statements
On June 24, 2009, Monsanto issued a press release announcing its third quarter results. In it, Grant stated that “[o]ur 2009 fiscal year represents a milestone for our business as our seeds and traits business alone will deliver more gross profit than all of Monsanto did in 2007, a remarkable achievement in just two short years.” Grant also reiterated that Monsanto “remain[s] committed to doubling gross profit for the entire company from the 2007 base of $4.2 billion to roughly $8.6-to-8.8 billion in 2012.” However, the press release acknowledges declining sales in the Agricultural Productivity segment, which it attributes to “increased pressure from generic glyphosate and other branded competitors who continue to aggressively move larger-than-expected volumes or lower-priced material into the marketplace and to a lesser extent by cold, wet weather in parts of the U.S. com belt.” Monsanto also reported “increased revenues from seed and traits products,” “estimat[ing] that some 16,000-plus farmers [