IN RE BARE ESCENTUALS, INC. (N.D.Cal. 9-30-2010)

ccessful as to support plaintiffs' claim of misrepresentation. Plaintiffs do allege that in the two years following Bare's IPO, "the Company's so-called direct-to-consumer sales plummeted from $179 million in FY 2006, representing 45.6% of all sales, to $170 million in FY 2008, representing just 30.6% of all sales." Id., ¶¶ 18-19. However, this alleged decline is not sufficient, on its own, to support plaintiffs' claim that Bare's sales were lost as a consequence of the poor performance of the club program.

To the extent, moreover, that plaintiffs, in their opposition brief and at the hearing on this matter, urged the court to discern the failing nature of Bare's club sales from an unrelated case filing in the Northern District between Bare and a third party named Intelligent Beauty, the court declines to do so. The court may not take judicial notice of the substance of that unrelated complaint, for the truth of any matter asserted within that complaint.

In sum, the court agrees with defendants that plaintiffs' allegations fail to adequately establish that Bare's IPO and March 2007 statements/prospectuses improperly concealed Bare's reliance on its "club" program, as well as the negative effect of the club program on Bare's sales.

iii. Bare's efforts to "cross-sell" its non-foundation products

Next, plaintiffs allege that Bare's IPO and March 2007 statements/prospectuses included the following representation: that the company planned to "leverage its strong market position in foundation to cross-sell its other products," and that "to date, the company had demonstrated success in cross-selling its non-foundation products." These representations were misstatements, say plaintiffs, because in reality, Bare's cross-selling efforts had failed, as shown by the allegation that Bare's President of Retail stated on October 30, 2008, that the company had previously "tried and failed" to cross-sell its products and "broaden its offerings into related cosmetic categories." See CCC, ¶¶ 68, 76, 197.

These allegations do not suffice to state with particularity a material misstatement by defendants. While the time, date, place and content of the affirmative representation may be inferred from the allegation that the misstatements were contained within Bare's IPO and March 2007 registration statements/prospectuses, plaintiffs do not allege how or why the statements were wrong, and/or material, as conveyed at the time of the IPO and March 2007 registration statements/prospectuses. In particular, plaintiffs rely on an October 30, 2008 concession conveyed by a Bare executive in a third party analyst report stating the Company had previously "tried and failed" with respect to strategies "similar" to the Company's attempt to broaden its offerings into related cosmetics categories, in order to demonstrate that the company's statements on its September 2006 and March 2007 statements/prospectuses were misstatements. See CCC, ¶ 179. Without more — and in view of the fact that the actual IPO and March 2007 registration statements themselves actually state that the Company had experienced success in cross-selling blush, eye makeup and lip products in boutiques and on home shopping television — plaintiffs have failed to plausibly allege that the company's representation about its cross-selling success in 2006 and 2007 was a misrepresentation, let alone a material one. See, e.g., Declaration of Molly Arico ISP Mot. to Dismiss ("Arico Decl."), Ex. 11 at 3.

And since there are no other allegations to demonstrate the falsity of the purported misrepresentation, the allegations plainly fail.

iv. Bare's cannibalization of sales caused by its store expansion

Plaintiffs allege that Bare's IPO and March 2007 Registration Statements/Prospectuses contained the following material misstatements: that defendants planned to "further penetrate each of their multiple distribution channels" through a "wholesale" and "retail" approach; and that with respect to the retail approach, defendants believed "substantial opportunity exists to open additional domestic Boutiques." See CCC, ¶¶ 59-61, 75, 77-78. According to plaintiffs, these were misstatements because defendants were engaged in a "rampant expansion effort to chase immediate sales at all costs," and that this resulted in Bare opening "over 750" brick and mortar sales channels, without any efforts being made "to coordinate the multiple competing sales spots that were popping up." See id., ¶ 61. According to plaintiffs, this resulted in the cannibalization, rather than the growing, of "infomercial sales." Id.

These allegations are not sufficient to plead a material misstatement with particularity. Again, while the time, date, place and content of the affirmative representation may be inferred from the allegation that the misstatements were contained within Bare's IPO and March 2007 registration statements/prospectuses, plaintiffs fail to allege how the purported misstatements were misleading. Plaintiffs only conclusorily allege, for example, that Bare's so-called expansion efforts led to the cannibalization of Bare's infomercial sales. They provide no supporting facts that lead concrete credence to the conclusion that unexpected "cannibalization" of Bare's infomercial sales channels resulted from Bare's expansion of boutiques. Moreover, as defendants counter, plaintiffs' allegations with respect to the cannibalization caused by Bare's purportedly too-quick expansion test the plausibility threshold. Bare reported sales growth for 2006, 2007 and the first half of 2008. See CCC, ¶¶ 135, 157, 173; Arico Decl., Exs. 4, 6 at 67, 13. Indeed, Bare's so-called "rampant expansion" of brick and mortar stores is itself an indication of successful growth and the truth of Bare's representation that it sought to further penetrate a distribution channel that would encompass the growth of additional domestic Boutiques.

In sum, plaintiffs' allegations belie their claim that defendants' expressed desire to increase growth through wholesale and retail approaches — including the creation of additional domestic boutiques — was demonstrably wrong when expressed. Plaintiffs base defendants' alleged misrepresentations to this effect on the fact that Bare was actually increasing its brick and mortar expansion at the expense of its infomercial sales, but provide no logical link as to why this would be the case, let alone any supporting allegations that would detail how this is the case.

Thus, the requisite degree of particularity is lacking.

* * *

In sum, defendants' motion to dismiss plaintiffs' Section 11 claim, based on the foregoing grounds, is GRANTED.

d. loss causation

Finally, defendants contend that plaintiffs fail to allege adequate loss causation. The Ninth Circuit has held, with respect to loss causation, that "plaintiff must demonstrate a causal connection between the deceptive acts that form the basis for the claim of securities fraud and the injury suffered by the plaintiff." In re Dauo, 411 F.3d at 1025. However, as defendants concede, loss causation is not an element of a section 11 claim; rather, it is an affirmative defense. Moreover, a "plaintiff is not required to show that a misrepresentation was the sole reason for the investment's decline in value in order to establish loss causation." Id. "As long as the misrepresentation is one substantial cause of the investment's decline in value, other contributing forces will not bar recovery under the loss causation requirement but will play a role in determining recoverable damages." Id.

Defendants argue that dismissal is warranted, notwithstanding that loss causation is an affirmative defense, because the face of the complaint is so lacking in any connection whatsoever between the alleged misrepresentation and plaintiffs' losses. The court, however, finds that plaintiffs have generally alleged that they suffered injury from the hit their stock took once it was understood that defendants' myriad misrepresentations had contributed to an over-inflation of stock. At this stage, this allegation is sufficient to pass muster.

The court accordingly DENIES defendants' motion to dismiss on this alternative and additional ground.

2. Section 12(a)(2) of the Securities Act

Defendants contend that plaintiffs' complaint fails to state a claim under Section 12(a)(2) of the Securities Act, given their failure to satisfactorily allege a section 11 claim. Defendants also contend that plaintiffs' Section 12(a)(2) claim fails because neither Bare nor the individual defendants who sold stock during the offerings were "sellers" of securities under the statute, since the IPO and March 2007 offerings were "firm commitment" underwritten offerings. Plaintiffs, by contrast, respond that the court should reject defendants' argument that they are not § 12(a)(2) "sellers," because defendants' combined actions clearly establish "solicitor seller" status. Specifically, plaintiffs point to their allegations that the individual defendants actively met with potential investors to present highly favorable information about the company and its sales model; that the defendants were motivated to solicit purchasers; and that they reaped millions of dollars from the company's offerings.

Section 12(a)(2) of the 1933 Securities Act imposes civil liability on any person for use of any instrumentality of interstate commerce to offer or sell securities by means of a prospectus or oral communication that includes "an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading. . . .". See 15 U.S.C. § 77 l(a)(2). To establish liability under section 12(a)(2), a plaintiff must prove that the defendants did more than simply urge another to purchase a security; rather, the plaintiff must show that the defendants solicited purchase of the securities for their own financial gain. See In re Daou Systems, Inc., 411 F.3d at 1029. A person is a statutory seller, or sells securities, if he or she either passes title of the security to the purchaser, or solicits the sale of the security. See Pinter v. Dahl, 486 U.S. 622, 646-648 (1988).

Defendants are correct that plaintiffs' claim fails in the first instance, because — as already discussed in the preceding sections — they have failed to allege, as a predicate, the existence of material misstatements and/or omissions in connection with the IPO and March 2007 registration statements/prospectuses. For this reason, therefore, dismissal of plaintiffs' section 12(a)(2) claim is warranted.

Defendants are also ultimately correct that the claim must be dismissed for plaintiffs' failure to satisfactorily plead that either Bare or the individual defendants who sold in the offerings were "sellers" of securities, as contemplated by Section 12(a)(2). To be sure, defendants' argument that the IPO and March 2007 offerings' status as "firm commitment" underwritten offerings prohibits defendants from qualifying as statutory "sellers," is not wholly convincing. As at least one district court has persuasively noted, "a firm commitment offering does not mean that only the underwriters selling the security may be sued, and that those involved in preparing the registration statement cannot be liable. In a firm commitment offering, officers of the company issuing the registration statement may not be held liable as "sellers" under section 12(2) "unless they actively `solicited' the Plaintiffs' purchase of securities to further their own financial motives . . . ". See In re Stratosphere Corp. Securities Litig., 1 F.Supp.2d 1096, 1120 (D. Nev. 1998). Thus, the court's inquiry must center on whether plaintiffs have adequately alleged active solicitation on defendants' part.

However, a "mere assertion that defendants are solicitors or sellers is a legal conclusion and therefore insufficient to withstand a motion to dismiss." See, e g, Shaw v. Digital Equipment Corp., 82 F.3d 1194, 1216 (1st Cir. 1996) (superceded in part by PSLRA); In re Westinghouse Securities Litig., 90 F.3d 696, 717 (3d Cir. 1996). Something more is needed. And it is this something more that plaintiffs have not provided. In support of their conclusion that defendants qualify as "sellers," plaintiffs rely on paragraphs 38-47, 56, 29, 71, 72, and 81. These paragraphs, however, fail to set forth with any degree of detail the means by which defendants actively solicited plaintiffs' purchase of securities. Rather, they allege via conclusory statements what defendants stood to gain, and what defendants reaped as a consequence of the sale. They do not set forth the actual efforts made to seek or solicit a purchase of securities.

In sum, defendants' motion to dismiss plaintiffs' claim pursuant to Section 12(a)(2) of the Securities Act is GRANTED.

3. Section 10(b) of the Securities Exchange Act

Defendants also contend that plaintiffs' complaint fails to state a valid claim under Section 10(b) of the Securities Exchange Act. Plaintiffs' claim is premised on the fraudulent statements purportedly made by defendants in connection with the IPO and March 2007 registration statements, as well as numerous other public statements made during the class period. Defendants generally assert that plaintiffs have failed to plead facts sufficient to establish either of the requisite elements of falsity, or scienter. At any rate, defendants argue, the Company's forward-looking statements are protected by the safe harbor and the

`bespeaks caution' doctrine. Plaintiffs, naturally, respond that the allegations of their complaint are more than adequate to establish falsity, and to raise a strong inference of scienter. Furthermore, plaintiffs counter that defendants cannot escape liability for their false and misleading statements by invoking any safe harbor provision or "bespeaks caution" doctrine.

As with plaintiffs' Section 11 claim, the arguments raised by the parties in connection with plaintiffs' Section 10(b) claim require a straightforward analysis. In short, the court's analysis depends upon discussion and resolution of the following issues: (a) the standards applicable to section 10(b) claims; (b) whether plaintiffs plead claims satisfying the `falsity' element; (c) whether plaintiffs plead facts satisfying the `scienter' element; and (d) whether defendants' forward-looking statements are protected by the safe harbor/'bespeaks caution' doctrine.

a. standards applicable to section 10(b) claims

To plead securities fraud under Section 10(b) of the 1934 Act or Rule 10b-5, plaintiffs must allege (1) a misstatement or omission; (2) of material fact; (3) made with scienter; (4) on which plaintiffs relied; (5) which proximately caused the plaintiffs' injury. DSAM Global Value Fund v. Altris Software, Inc., 288 F.3d 385, 388 (9th Cir. 2002). A presumption of reliance is available to plaintiffs alleging violations of § 10(b) based primarily on omissions of material fact, but not in cases alleging significant misrepresentations in addition to omissions, or alleging only misrepresentations. Id. at 1063-64. A presumption of reliance is also available in a "fraud on the market" case, where the plaintiff alleges that a defendant made material representations or omissions concerning a security that is actively traded in an "efficient market." Id. at 1064 (citingBasic, Inc. v. Levinson, 485 U.S. 224, 247 (1988)).

The Private Securities Litigation Reform Act ("PSLRA") was enacted by Congress in 1995 to establish uniform and stringent pleading requirements for securities fraud actions, and "to put an end to the practice of pleading `fraud by hindsight.'" In re Silicon Graphics, 183 F.3d 970, 958 (9th Cir. 1999). The PSLRA heightened the pleading requirements in private securities fraud litigation by requiring that the complaint plead both falsity and scienter with particularity. In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1084 (9th Cir. 2002). If the complaint does not satisfy these pleading requirements, the court, upon motion of the defendant, must dismiss the complaint. 15 U.S.C. § 78u-4(b)(3)(A).

Under the PSLRA — whether alleging that a defendant "made an untrue statement of a material fact" or alleging that a defendant "omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading" — the complaint must now specify each statement alleged to have been false or misleading, specify the reason or reasons why each such statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, state with particularity all facts on which that belief is formed. 15 U.S.C. § 78u-4(b)(1). If the challenged statement is not false or misleading, it does not become actionable merely because it is incomplete. In re Vantive, 283 F.3d at 1085; Brody v. Transitional Hosp. Corp., 280 F.3d 997, 1006 (9th Cir. 2002).

Matters that are not alleged on personal knowledge are considered to be alleged on information and belief. See In re Vantive, 283 F.3d at 1085 n. 3.

In addition — whether alleging that a defendant "made an untrue statement of material fact" or alleging that a defendant "omitted to state a material fact" — the complaint must now, with respect to each alleged act or omission, "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2); see also In re Vantive, 283 F.3d at 1084. By requiring particularized, detailed allegations showing a strong inference of scienter, the PSLRA was intended to "eliminate abusive and opportunistic securities litigation." Gompper v. VISX, Inc., 298 F.3d 893, 897 (9th Cir. 2002).

In the Ninth Circuit, the required state of mind is "deliberate or conscious recklessness." In re Silicon Graphics, 183 F.3d at 979. If the challenged act is a forward-looking statement, the required state of mind is "actual knowledge . . . that the statement was false or misleading." 15 U.S.C. § 78u-5(c)(1); see No. 84 Employer-Teamster Joint Council Pension Trust Fund v. America West Holding Co., 320 F.3d 920, 931 (9th Cir. 2003). Because falsity and scienter in securities fraud cases are generally strongly inferred from the same set of facts, the Ninth Circuit has incorporated the falsity and scienter requirements into a single inquiry. Id. at 932. While the court must take the totality of the allegations into account when considering whether the heightened pleading standard has been met, see America West, 320 F.3d at 945, the complaint must continue to comply with the Silicon Graphics standards in order to state a claim. In re Read-Rite, 335 F.3d at 846.

On a Rule 12(b)(6) motion to dismiss a complaint brought under the PSLRA, when considering whether plaintiffs have shown a strong inference of scienter, "the district court must consider all reasonable inferences to be drawn from the allegations, including inferences unfavorable to the plaintiffs." Gompper, 298 F.3d at 897 (noting the "inevitable tension . . . between the customary latitude granted the plaintiff on a [12(b)(6)] motion to dismiss . . . and the heightened pleading standard set forth under the PSLRA). In other words, the court must consider all the allegations in their entirety in concluding whether, on balance, the complaint gives rise to the requisite inference of scienter.Id.

b. the `falsity' element

Defendants substantively challenge plaintiffs' ability to adequately allege falsity. Plaintiffs allege numerous material misrepresentations and omissions by defendants, based on defendants' purported statements made in connection with various conference calls, financial press releases, and SEC statements from September 2006 through October 2008. Plaintiffs base their claim of falsity on allegations that defendants group into the

To the extent plaintiffs seek to allege falsity in connection with Bare's statements regarding its multi-channel distribution model and growth strategy (i.e., cross-selling and cannibalization of sales via rapid expansion), brand loyalty and club sales program, and premium image dilution, defendants contend — and are correct — that the same reasons for dismissing plaintiffs' Section 11 claim, also apply here, and warrant dismissal of plaintiffs' Section 10(b) claim on falsity grounds. Thus, the court as a preliminary matter GRANTS defendants' motion to dismiss plaintiffs' 10(b) claim, to the extent premised on these same allegations.

following categories: (1) Bare's business model was not performing well, rendering Bare's financial guidance "meaningless;" (2) Bare's infomercials were "not performing" and new infomercials had caused declines in sales; (3) Bare's wholesale channels had problems; and (4) the international markets were failing. See, e.g., CCC, ¶¶ 112, 134(a)-(k).

Defendants assert that plaintiffs' allegations fall short of Rule 9(b)'s heightened pleading requirements. First, defendants argue that a review of the financial reports cited by plaintiffs discloses that Bare actually exceeded its financial guidance numerous times, and only reduced its guidance in July and October 2008 in response to the deepening recession — thus giving the lie to plaintiffs' allegation that Bare's business model was not performing well and that its stated financial guidance was "meaningless". See CCC, ¶¶ 129, 135-36, 140-41, 155, 173, 195;see Arico Decl., Exs. 3-5, 7-8. Second, defendants note plaintiffs' failure to plead facts that actually show that Bare knew the performance of its infomercials would be disappointing, and that to the extent defendant Blodgett said she was "excited" about an upcoming infomercial in May 2007, this was non-actionable puffery. See In re Foundry Networks, Inc. Sec. Litig., 2003 WL 22077729 (N.D. Cal. Aug. 29, 2003). Third, defendants contend that Bare's wholesale channels were actually doing well, based on the performance reflected in the financial reports cited by plaintiffs in their complaint, and also that plaintiffs fail to plead facts showing that Bare somehow knew that its premium wholesale partners would reduce inventory levels while claiming the opposite. Finally, defendants argue that Bare's international expansion efforts actually proved successful, as demonstrated by the performance records contained within the financial reports cited by plaintiffs in their complaint. See Mot. Dismiss at 19:3-23:11.

In opposition, however, plaintiffs do not substantively respond to the majority of defendants' arguments. Rather, plaintiffs merely counter that it would be "impossible to meaningfully summarize the 100+ page complaint here in order to outline every class period misstatement." See Op. Br. at 10-16. By failing to at least meaningfully summarize and combat the various categories of statements highlighted by defendants, however, plaintiffs have essentially abdicated their responsibility to rebut defendants' dismissal arguments, and conceded the point.

Plaintiffs do counter defendants' arguments with respect to the performance of Bare's "infomercials" specifically, relying on paragraphs 60, 75, 77, and 86 and 90, for the proposition that Bare believed in the growth continuity of the infomercial sales channel — thereby purportedly demonstrating the falsity of such statements in light of the infomercials' declining performance and declining sales. See Opp. Br. at 34:23-35:6. Critically, however, plaintiffs completely fail to set forth any particularized allegations that would demonstrate `how' or `why' defendants' alleged statements relating to Bare's infomercial program were false when made. Plaintiffs have essentially alleged that, while defendants stated their "belief" in the growth of Bare's infomercial and online shopping sales, the reality reflected something different, since infomercial sales were actually diminishing as a result, for example, of defendants' rapid expansion into brick and mortar sales channels. See, e.g., ¶ 75, 77-78. These allegations do nothing to establish that defendants' statements regarding the growth of its infomercial programs were false when made, however. In short, plaintiffs fail to plead the falsity of Bare's statements in connection with its infomercial program, with sufficient particularity.

Moreover, because plaintiffs do not bother to address any of the other three categories of allegedly material misstatements and/or omissions highlighted by defendants, plaintiffs have also failed to discharge their burden to successfully rebut defendants' well-supported arguments.

All of which warrants DISMISSAL of plaintiffs' section 10(b) claim, for failure to allege defendants' purported misstatements with particularity.

c. the `scienter' element

Even if failure to plead falsity did not provide a basis for dismissal, plaintiffs' failure to allege scienter ultimately would. "In considering whether a private securities fraud complaint can survive dismissal under Rule 12(b)(6), [the court] must determine whether particular facts in the complaint, taken as a whole, raise a strong inference that defendants intentionally or with deliberate recklessness made false or misleading statements." America West, 320 F.3d at 932. To determine whether a plaintiff has alleged facts that give rise to the requisite "strong inference" of scienter, a court must consider plausible nonculpable explanations for the defendant's conduct, as well as inferences favoring the plaintiff. See Tellabs, Inc., 551 U.S. at 323.

Plaintiffs generally contend that they adequately allege scienter by virtue of: (i) core operation allegations; (ii) unusual stock sales; and (iii) corroboration of confidential witnesses. Ultimately, however, none of these are sufficient.

i. core operation allegations

Plaintiffs argue that each individual defendant's role as a "key player" in Bare's internal operations helps satisfy the scienter requirement with respect to misrepresentations regarding Bare's infomercial business. Specifically, plaintiffs allege that each defendant knew of the performance of various sales channels and was intimately involved in and fully aware of actual reports regarding sales through all channels." See, e.g., CCC, ¶¶ 38-45. This is proof of scienter, argue plaintiffs, with respect to the company's misrepresentations regarding the "infomercial" sales channel as an avenue of growth for the company.

As defendants point out, however, plaintiffs rely too broadly on a very narrow exception to the scienter requirement. As a general rule, complaints alleging that "facts critical to a business's core operations or an important transaction generally are so apparent that their knowledge may be attributed to the company and its key officers" are found inadequate. Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 1000 (9th Cir. 2009). However, a narrow exception exists when (a) falsity is combined with "allegations regarding a management's role in the company" that are "particular and suggest that the defendant had actual access to the disputed information," and where "the nature of the relevant fact is of such prominence that it would be `absurd' to suggest that management was without knowledge of the matter;" and (b) where the information misrepresented is readily apparent to the defendant corporation's senior management. See id. at 1000-01. Here, plaintiffs appear to be relying on the latter category of exemption. But, as defendants point out, under this exemption, "reporting false information will only be indicative of scienter where the falsity is patently obvious" — i.e., where the "facts [are] prominent enough that it would be `absurd to suggest' that top management was unaware of them." Id. And here, plaintiffs fail to allege especially prominent facts. Rather, they charge that Bare misstated its belief that it could "further penetrate" its multiple distribution channels, including growing infomercial sales." See CCC, ¶¶ 38-39, 41-45, 60, 75-77. But as noted previously, there are insufficient facts to detail the falsity of this claim with particularity — let alone to establish that the falsity was "patently obvious."

Thus, plaintiffs cannot utilize the `core operations' exemption here to show scienter with respect to purported misrepresentations surrounding Bare's infomercial program. Plaintiffs have not attempted to utilize the exemption to show scienter in connection with other categories of misrepresentations.

ii. unusual stock sales

Plaintiffs argue that stock sales by several defendants are indicative of scienter. As defendants note, however, the only defendants who really sold stock were Bare officers Blodgett and McCormick, and Bare directors John and Ottinger. Blodgett sold stock in the March/June 2007 offerings, and sold 18.9% and 8.21% respectively; McCormick sold stock in the June 2007 offering, and sold 6.66% of his stock; John sold 14.5% of his holdings in February 2008, pursuant to a 10b-5 trading plan; and Ottinger sold stock in the March/June 2007 offerings, and sold 17.0% and 8.14%, respectively. See CCC, ¶¶ 38-39, 44-45, 72, 82, 248.

Generally, the PSLRA "neither prohibits nor endorses the pleading of insider trading as evidence of scienter, but requires that the evidence meet the `strong inference' standard." In re Daou Sys., 411 F.3d at 1022 (citation and quotation omitted). Stock trades are only suspicious when "dramatically out of line with prior trading practices at times calculated to maximize the personal benefit from undisclosed inside information." In re Silicon Graphics, 183 F.3d at 986. To evaluate suspiciousness of stock sales, the court should consider the amount and percentage of shares sold, the timing of the sales, and whether the sales were consistent with prior trading history. Nursing Home, 380 F.3d at 1232.

Here, only 4 of the 10 individual defendants sold stock during the class period. And not all of these 4 defendants are alleged to have made false and or misleading statements. Moreover, no defendant sold more than 20% of their stock at any given time. Furthermore, while plaintiffs are correct that the amounts of stock sold are alleged to have generated extraordinarily large sums for the defendants — e.g., $58 million for Blodgett and $700 million for McCormick — they do not suggest that there was anything especially problematic with the timing of the sales, since the stock was sold before final and favorable results for 2007 were reported.

In short, the court does not find the stock sales, without more, by several of the Individual defendants to be probative of scienter.

iii. corroboration of confidential witnesses

Plaintiffs also point to the testimony of confidential witnesses in order to establish scienter. See CCC, ¶¶ 13-14, 15, 17, 114. Confidential witnesses whose statements are introduced to establish scienter must be described with sufficient particularity to establish their reliability and personal knowledge. In re Daou, 411 F.3d at 1015-16. In addition, those statements which are reported by confidential witnesses with sufficient reliability and personal knowledge must themselves be indicative of scienter. See id. at 1022, 1022.

Here, plaintiffs' confidential witness testimony, as alleged in the complaint, falls short of the standard needed to raise an inference of scienter. First, as defendants contend,

plaintiffs have failed to offer any confidential witness information concerning six of the eight Individual defendants — defendants Blodgett, Ottinger, Jones, Bloom, Hansen, and John. Since there is no allegation that any confidential witness "had any interaction or communication with any of the defendants, or to have provided any defendant with information, or to have heard or read any statement by any defendant, that contradicted or even cast doubt on a public statement made during the class period," there is simply no basis from which to infer scienter with respect to these six defendants.

Second, with respect to the remaining two witnesses — defendants McCormick and Miles — plaintiffs' confidential witness testimony consists of the following: testimony by a former Director of Retail Boutiques, to the effect that approximately 30 executives attended monthly meetings conducted by defendant McCormick, and sometimes defendant Miles, at which the issue of sales at Target and Costco was common knowledge and raised regularly. See CCC, ¶¶ 17, 114. There is no allegation that either defendant Miles or McCormick raised the issue themselves, nor is there any indication that either defendant in any way knew, as plaintiffs charge, that Bare was intentionally shipping company goods to big-box discounters while deliberately disclaiming any involvement in such sales. To the contrary, plaintiffs have alleged that "McCormick assured the sales Directors the Company "was looking into" the situation — an allegation that could just as easily support defendants' innocence, as their culpability. Id., ¶ 114.

In sum, plaintiffs' isolated confidential witness statements fail to create an inference of scienter more cogent or compelling than an alternative innocent inference.

* * *

The court therefore GRANTS defendants' motion to dismiss, for failure to adequately allege scienter.

d. safe harbor/'bespeaks caution' doctrine

Finally, defendants assert that many of the alleged misstatements pled by plaintiffs during the class period are non-actionable, pursuant to the `bespeaks caution' doctrine. In essence, defendants argue that the alleged misstatements were accompanied by meaningful cautionary language, such as to render any claim of fraudulent misstatement not actionable. Plaintiffs, in response, contend that rote cautionary language such as that contained in the statements highlighted by defendants, cannot counter the alleged misstatements made by defendants at the dismissal stage.

While the court would not normally find it necessary to reach this ground in view of plaintiffs' difficulties in establishing both falsity and scienter, the court nonetheless addresses defendants' arguments here in order to provide the parties with a thorough analysis of all arguments made.

Defendants have specifically and adequately highlighted the following instances of defendants' alleged forward-looking statements: defendants' press releases and/or conference statements dated November 7, 2006, February 28, 2007, May 2, 2007, June 5, 2007, August 1, 2007, September 26, 2007, October 31, 2007, November 29, 2007, February 26, 2008, March 1, 2008, and July 30 2008. See CCC, ¶¶ 129, 131-32, 135-36, 140-42, 145, 148, 151-52, 155, 157-58, 167, and 173. As alleged by plaintiffs, on each of these instances, defendants provided future projections with regard to the Company's financial guidance and/or general future expenditures. As such, defendants' projections easily meet the definition of a forward-looking statement. See 15 U.S.C. § 78-u5i(i)(1)(A).

Defendants' projections and forward-looking statements are inactionable under the PSLRA's safe harbor and the `bespeaks caution' doctrine, provided they are accompanied by meaningful cautionary language. See, e.g., Employers Teamseters Local Nos. 175 and 505 Pension Trust Fund v. Clorox Co., 353 F.3d 1125, 1133-34 (9th Cir. 2004). This is so here, with respect to at least some of defendants' forward-looking statements.

Specifically, defendants have established that meaningful cautionary language accompanied defendants' forward-looking statements in connection with the Company's releases and/or conferences dated November 7, 2006; February 28, 2007; May 2, 2007; June 5, 2007; August 1, 2007; October 31, 2007; November 29, 2007; and February 26, 2008. See CCC, ¶¶ 131-32, 180-82, 184, 188; see also Arico Decl., Exs. 3-5, 13-14, 27, 29-30, 37-39, 40-41. Moreover, defendants have also correctly noted that defendants' Form 10-Ks — which investors were also directed to in connection with the foregoing instances of cautionary language — additionally included meaningful cautionary language. See, e.g., Arico Decl., Exs. 1-2, 6.

All of which renders defendants' forward-looking statements inactionable. Plaintiffs oppose such a finding on grounds that the cautionary language relied on by defendants is too "generic" to support invocation of the `bespeaks caution' doctrine at the pleading stage. However, the court is unpersuaded, and finds that defendants' cautionary language is sufficiently specific so as to support application of the doctrine in the foregoing instances. Furthermore, even if unaccompanied by cautionary language, forward-looking statements cannot support liability unless they are made with actual knowledge of their falsity. See 15 U.S.C. § 78u-5(c)(1)(A)(i). And as already explained, plaintiffs have not plead with particularity Defendants' actual knowledge of falsity in any event.

Thus, defendants' motion to dismiss is GRANTED, with respect to the forward-looking statements accompanied by meaningful cautionary language, as highlighted herein.

4. Whether Plaintiffs' Claims are Time-Barred

The Bare defendants also argue that plaintiffs' claims under both the Securities Act and the Exchange Act are untimely, and barred by the relevant statute of limitations. Defendants' arguments, which are sparse, contend that paragraphs 203 and 205-06 of the complaint disclose that "the nature and extent of the defendants' fraud" was "revealed to investors and the market" on June 5, 2007, and again on August 1, October 31, and November 26, 2007. Thus, the one year limitations period that applies to Securities Act claims expired on June 5, 2008, and the two-year limitations period that applies to Exchange Act claims expired on June 5, 2009 — well before the July 2009 filing of plaintiffs' complaint. At a minimum, defendants contend that the limitations period began to run on February 26, 2008, when Bare publicly disclosed the existence of the Target/Costco sales. Plaintiffs, in response, contend that it was not until the final eventful disclosure that occurred on October 30, 2008 — via the Company's 3rd quarter earnings release statement — that the statute of limitations began to run.

The court declines to dismiss plaintiffs' claims as time-barred. The determination of inquiry notice is fact-intensive. See, e.g., La Grasta v. First Union Sec., Inc., 358 F.3d 840, 847, 850 (11th Cir. 2004) (holding that a decline in stock price alone is not enough to put investors on inquiry notice when stock had history of volatility); Caprin v. Simon Transp. Serv., Inc., 99 Fed. Appx. 150, 156-57 (10th Cir. 2004) (stating that plaintiff was on inquiry notice of the company's fraudulent activity in light of the dramatic decline in stock price and press release projecting loss); Benak v. Alliance Capital Management, LP, 435 F.3d 396 (3d Cir. 2006) (mutual fund investors are held to a lower standard of inquiry notice because they may be unaware of where their investments are placed); Swack v. Credit Suisse First Boston, 383 F. Supp. 2d 223, 234-236 (D. Mass. 2004) (finding that extensive reports about conflicts of interest were not significant enough to trigger the limitations period until the facts were revealed in a government investigation); Menowitz v. Brown, 991 F.2d 36, 41-42 (2d Cir. 1993) (holding that inquiry notice was provided by SEC filings); In re Dynegy, Inc. Sec. Litig., 339 F. Supp. 2d 804 (S.D. Tex., Oct. 7, 2004).But see Newman v. Warnaco Group, Inc., 335 F.3d 187 (2d Cir. 2003) (holding that SEC filing of restated earnings did not put the plaintiffs on inquiry notice because the report attributed the restatement to a "benign" accounting change and failed to disclose the presence of serious inventory problems); Shah v. Stanley, No. 03 CIV. 8761 (RJH), 2004 WL 2346716, at *9-13 (S.D.N.Y. Oct. 19, 2004), aff'd, 435 F.3d 244 (2d Cir. 2006) (finding that suit was time barred because an investor in a security firm had inquiry notice about conflicts of interest when articles critical of the security firm's practices were published); In re WorldCom, Inc. Sec. Litig., 294 F.Supp. 2d 431 (S.D.N.Y. 2003) (finding that SEC subpoena by itself does not trigger inquiry notice).

Here, in light of the various purported disclosures and relevant dates that plaintiffs allege, stemming throughout the class period — the last of which allegedly occurred in the October 30, 2008 earnings release statement — the court finds that resolution of the limitations issue is not appropriate at the pleading stage, but must be determined once an evidentiary record has been developed. Moreover, while defendants are correct that plaintiffs allege multiple disclosures beginning as early as June 5, 2007 regarding the exposure of defendants' fraud, plaintiffs are also entitled to the reasonable inference that it is the course of all disclosures collectively that ultimately placed plaintiffs on notice of the need to investigate for fraud — i.e., that it was no single disclosure that was dispositive, but rather all the disclosures collectively.

The court accordingly DENIES defendants' motion to dismiss plaintiffs' claims on statute of limitations grounds.

5. Whether Plaintiffs State `Control Person' Claims or `Insider Trading' Claims Under the Securities Laws

Defendants point out that, to state a claim for control person liability under section 15 of the Securities Act or section 20(a) of the Exchange Act, or for insider trading under Section 20A of the Exchange Act, plaintiffs must plead a predicate violation of section 11 or 10(b). Since they have failed to do so here, therefore, plaintiffs' claims must fail as to section 15 and 20(a), too. To the extent, moreover, that plaintiffs also seek to bring control person claims against the outside directors of Bare, these claims also fail because plaintiffs fail to plead specific facts establishing that these persons exercised a "significant degree of day to day operational control" over the company, as the law requires. In response, plaintiffs do not specifically rebut or challenge defendants' argument on this point, except with a brief argument included as part of plaintiffs' section 10(b) arguments. Namely, plaintiffs state that their allegations generally demonstrate that each Bare defendant was a key player in the day to day operations of the company.

Adequate pleading of a primary violation of sections 11 and 10(b) is required for a plaintiff to adequately plead control liability under § 20(a) of the Exchange Act and § 15 of the Securities Act. See, e.g., 15 U.S.C. § 78t. Accordingly, because the complaint fails to state a claim for primary liability under the Securities Act or the Exchange Act, it follows that the court must therefore GRANT defendants' motion to dismiss plaintiffs' claim for control person liability.

C. Underwriters' Motion to Dismiss

Separately, the Underwriter defendants contend that dismissal of plaintiffs' Section 11 and Section 12(a)(2) claims against the underwriters are time-barred. Defendants make two general arguments in support of dismissal: first, that plaintiffs have failed to sufficiently plead compliance with the statute of limitations; and second, that plaintiffs could not satisfy their pleading burden with respect to the statute of limitations at any rate, given the substantive allegations of the complaint. Plaintiffs contest defendants' assertions, arguing that the defendants are incorrect as to the time frame in which plaintiffs' causes of action accrued, and that the statute of limitations issue is not appropriate for resolution at the pleading stage in this instance.

As a general matter, the controlling standard for accrual of plaintiffs' claims is not in dispute: plaintiffs must have filed suit within one year of the date they discovered or should have discovered that the alleged statements or representations were untrue. See 15 U.S.C. § 77m. As the Supreme Court recently recognized, "discovery of the facts constituting the violation" occurs not only once a plaintiff actually discovers the facts, but also when a hypothetical reasonably diligent plaintiff would have discovered them. See Merck Co., Inc. v. Reynolds, 130 S.Ct. 1784, 1795 (2010) ("discovery" as [applied to Exchange Act limitations period] encompasses not only those facts the plaintiff actually knew, but also those facts a reasonably diligent plaintiff would have known."); see also Gray v. First Winthrop Corp., 82 F.3d 877, 881 (9th Cir. 1996); Volk v. D.A. Davidson Co., 816 F.2d 1406, 1412 (9th Cir. 1987).

While Merck applied this rule to a 10(b) violation, it is the same rule applicable to section 11 Securities Act claims such as those asserted against the underwriters here.

In contending that plaintiffs have fallen short of their duty to adequately plead compliance with the statute of limitations, defendants rely onToombs v. Leone, 777 F.2d 465 (9th Cir. 1985). As a general matter, defendants are correct thatToombs holds that plaintiffs are required to plead sufficient facts to demonstrate conformity with the statute of limitations. However, Toombs does not detail the kind of facts that are required in order for a plaintiff to adequately allege conformity with the statute of limitations. In the case before it, the Toombs court merely held that plaintiff's failure to allege the date upon which his securities were delivered, or any dates upon which securities were sold to other investors, ultimately rendered plaintiff's claim time-barred. See id. at 468. Here, by contrast, the court finds that plaintiffs have generally alleged, at a minimum, the amounts of stock sold at different points in time, the amount of proceeds as a result of the alleged sales, and the amount of alleged fees received by the Underwriter defendants. See, e.g., CCC ¶¶ 29, 71-72, 81; see also id., ¶ 230. As such, the court declines defendants' invitation to dismiss plaintiffs' claims for failure to appropriately plead compliance with the statute of limitations under Toombs.

Defendants also focus on the substance of plaintiffs' allegations, contending that plaintiffs' allegations regarding defendants' alleged misstatements make clear that the facts concerning all purported misstatements were in the public domain in 2007 and the first part of 2008 — a fact which makes plaintiff's August 2009 complaint as to the underwriters untimely. Defendants have broken the alleged misstatements down into the following three now familiar categories: (1) the Company's statements that it was marketing and selling its products through premium channels, when in reality its products were also available at Costco and Target; (2) the Company's reliance on "club deals," in which customers found themselves receiving products they had not ordered and/or did not want; and (3) the Company's multi-channel distribution strategy, and/or the Company's infomercial program, and/or the Company's expansion into brick and mortar sales venues, all of which were failing or in jeopardy of failing.

On balance, the court is unpersuaded by defendants' arguments. As was explained in connection with the Individual defendants' motion to dismiss on statute of limitations grounds, the question of inquiry notice — and the commencement of the statute of limitations on plaintiffs' claims — is fact-intensive. As a result, and because the court does not find plaintiffs' allegations so devoid of substance that they are completely lacking in plausibility with respect to the running of the statute of limitations, plaintiffs are entitled to develop a factual record prior to resolution of the issue.

Thus, the Underwriter defendants' motion to dismiss on statute of limitations grounds, is accordingly DENIED without prejudice.

D. Leave to Amend

Plaintiffs request that they be given leave to amend the complaint. Federal Rule of Civil Procedure 15(a) dictates that leave to amend be "freely given" when justice so requires. See Foman v. Davis, 371 U.S. 178, 182 (1962). Accordingly, the court GRANTS plaintiffs' request for leave to amend, so that plaintiffs may attempt to cure the deficiencies noted herein. Plaintiffs' amendments are limited to the grounds discussed herein; plaintiffs may not attempt to broaden the scope of their claims against defendants beyond that which has already been pled and discussed.

E. Conclusion

For all the foregoing reasons, the court hereby GRANTS in part and DENIES in part the Individual defendants' motion to dismiss; GRANTS in part and DENIES in part defendants' request for judicial notice; GRANTS plaintiffs' request for judicial notice; GRANTS in part and DENIES in part plaintiffs' motion to strike; and DENIES the Underwriter defendants' motion to dismiss. Leave to amend is also granted, and any amended complaint shall be filed within 28 days of the filing of this order.

IT IS SO ORDERED.

Dated: September 30, 2010