Case: 1:19-cv-01339 Document #: 310 Filed: 08/11/21 Page 1 of 50 PageID #:15132
`
`GEORGE A. HEDICK, JR., et al.,
`
`
`Plaintiffs,
`
`
`THE KRAFT HEINZ COMPANY, et. al.,
`
`
`Defendants.
`
`v.
`
`
`
`
`
`
`
`IN THE UNITED STATES DISTRICT COURT
`FOR THE NORTHERN DISTRICT OF ILLINOIS
`EASTERN DIVISION
`
`)
`)
`)
`)
`)
`)
`)
`)
`)
`
`
`
`
`
`Case No. 19-cv-1339
`Judge Robert M. Dow, Jr.
`
`MEMORANDUM OPINION AND ORDER
`
`In this consolidated class actions securities case, arising out of the 2015 merger that created
`
`the Kraft Heinz Company, two motions to dismiss are before the Court. One is from the Kraft
`
`Heinz Company and a set of individual defendants who were executives and directors at the
`
`company [279], and the other is from a set of corporate entities (“3G,” for short) that effected the
`
`merger [281]. For the reasons set forth below, the Court denies both motions to dismiss [279,
`
`281].
`
`I.
`
`Background
`
`This securities class action stems from the 2015 merger of Kraft Foods Group, Inc.
`
`(“Kraft”) with The H.J. Heinz Company (“Heinz”) into the Kraft Heinz Company (“Kraft Heinz”
`
`or the “Company”). According to the amended complaint [274], the merger was orchestrated by
`
`3G Capital Partners (“3G”), a private equity partnership with a history of implementing a zero-
`
`based-budgeting strategy at companies it owned to extract cost savings. Plaintiffs say, in short,
`
`that 3G and Kraft (which 3G controlled before the merger) touted synergies, efficiencies, and
`
`eliminating redundancies as the benefits of Kraft’s merger with Heinz, but after the companies
`
`combined, executives at Kraft Heinz realized there were fewer savings to be had from synergies
`
`

`

`Case: 1:19-cv-01339 Document #: 310 Filed: 08/11/21 Page 2 of 50 PageID #:15133
`
`than they had expected, and certainly not on the level of the $1.5 billion they had suggested to
`
`investors. After that, according to the amended complaint, Kraft Heinz pursued indiscriminate
`
`cost-cutting measures that led to inferior products, deteriorating relationships with distributors,
`
`and inability to meet retailers’ demand, but simultaneously assured investors that the cost savings
`
`came from synergies, not short-term budget cuts. Ultimately, Kraft Heinz’s cost-cutting measures
`
`came back to bite it, and the company took a $15.4 billion dollar impairment to its goodwill and
`
`intangibles in February 2019, among other negative impacts, and its stock price took several hits
`
`during the fallout. Defendants, for their part, maintain that the company’s executives pursued a
`
`business strategy that did not work out, not any course of fraudulent conduct.
`
`Parties
`
`Plaintiffs in this matter are persons and entities who purchased or otherwise acquired
`
`securities of Kraft Heinz during the period from November 5, 2015 to August 7, 2019, inclusive
`
`(the “Class Period”).
`
`Defendant Kraft Heinz is a Delaware corporation, co-headquartered in Chicago, Illinois
`
`and Pittsburgh, Pennsylvania. The Company’s common stock was actively traded on the Nasdaq
`
`exchange throughout the Class Period under the symbol “KHC.” Kraft Heinz was created through
`
`a merger between Heinz and Kraft on July 2, 2015, and began trading publicly on July 6, 2015.
`
`[274 at ¶ 43.] Defendant 3G Capital Partners is a private equity firm with principal offices in New
`
`York, New York. 3G Capital, along with other partners, acquired Heinz in June 2013.
`
`Subsequently, 3G Capital and its affiliated funds orchestrated the July 2015 Merger between Kraft
`
`and Heinz that resulted in Kraft Heinz. Upon completion of the Merger, 3G Capital acquired
`
`approximately 25% of Kraft Heinz. 3G Capital Partners and its affiliated funds and business
`
`entities – including Defendant 3G Capital, Inc. (a Delaware corporation), and the following
`
`
`
`2
`
`

`

`Case: 1:19-cv-01339 Document #: 310 Filed: 08/11/21 Page 3 of 50 PageID #:15134
`
`Cayman Islands business entities: Defendants 3G Global Food Holdings, L.P.; 3G Global Food
`
`Holdings GP LP; 3G Capital Partners LP; 3G Capital Partners II LP; and 3G Capital Partners Ltd.
`
`(collectively and together with 3G Capital Partners, Defendant “3G Capital” or “3G”) – had the
`
`power to control, and did control Kraft Heinz, throughout the Class Period. [Id. at ¶ 44.]
`
`Defendant Bernardo Hees served as Kraft Heinz’s CEO from the Company’s inception in
`
`July 2015 until June 2019. Prior to that, Hees served as the CEO of Heinz while it was under 3G
`
`Capital’s control from 2013 to 2015. Hees has been a Partner of 3G Capital since July of 2010.
`
`[Id. at ¶ 45.] Defendant Paul Basilio served as Kraft Heinz’s CFO from the Company’s inception
`
`in July 2015 until his appointment as Zone President of Kraft Heinz U.S. Business on October 1,
`
`2017. In July 2019, Basilio became Kraft Heinz’s Chief Business Planning and Development
`
`Officer. Before serving as Kraft Heinz’s CFO, Basilio served as the CFO of Heinz while it was
`
`under 3G Capital’s control from 2013 to 2015. Basilio has been a Partner of 3G Capital since July
`
`of 2012. [Id. at ¶ 46.] Defendant David Knopf served as Kraft Heinz’s CFO from October 2017
`
`until his departure in August 2019, after the end of the Class Period. Prior to serving as CFO,
`
`Knopf worked as the Vice President and Category Head of the Planters business at Kraft Heinz.
`
`After leaving Kraft Heinz, Knopf returned to 3G Capital, where he has been a Partner since July
`
`of 2015. [Id. at ¶ 47.] Defendant Alexandre Behring was the Chairman of Kraft Heinz’s Board of
`
`Directors during the Class Period. He is a co-founder and Managing Partner of 3G Capital. [Id. at
`
`¶ 48.] Defendant George Zoghbi served as the Chief Operating Officer of Kraft Heinz’s U.S.
`
`Business from the time of the Merger until becoming a Special Advisor at Kraft Heinz in October
`
`of 2017. Zoghbi also joined the Kraft Heinz Board in April 2018. [Id. at ¶ 49.] Defendant Rafael
`
`Oliveira was President of Kraft Heinz Europe from October of 2016 to July of 2019, when he
`
`became the International Zone President of Kraft Heinz. [Id. at ¶ 50.] Defendants Hees, Basilio,
`
`
`
`3
`
`

`

`Case: 1:19-cv-01339 Document #: 310 Filed: 08/11/21 Page 4 of 50 PageID #:15135
`
`Knopf, Behring, Zoghbi, and Oliveira are collectively referred to as the “Executive Defendants.”
`
`[Id. at ¶ 51.]
`
`Legal Background
`
`On February 24, 2019, Plaintiff George Hedick filed a purported class action complaint [1]
`
`in this case. Over the following eighteen months, the Court consolidated a variety of similar cases,
`
`appointed as lead plaintiffs Union Asset Management Holding AG and Sjunde APFonden [see
`
`149], and received the consolidated amended class action complaint (“amended complaint”) [274],
`
`which is now the operative complaint. The amended complaint alleges: violations of Section 10(b)
`
`of the Exchange Act and SEC Rule 10b-5 against Kraft Heinz and the Executive Defendants
`
`(Count I); violations of Section 20(a) of the Exchange Act against 3G Capital and the Executive
`
`Defendants (Count II); and violations of Section 10(b) and 20(a) of the Exchange Act and Rule
`
`10b-5 against 3G Capital (Count III).
`
`Section 10(b) of the Act makes it unlawful for any person to “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 Commission 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 forbids a company or an individual ‘to make any untrue statement of a material fact or to
`
`omit to state a material fact necessary in order to make the statements made, in the light of the
`
`circumstances under which they were made, not misleading.’” Makor Issues & Rights, Ltd. v.
`
`Tellabs Inc., 513 F.3d 702, 704 (7th Cir. 2008) (quoting 17 C.F.R. § 240.10b–5(b)). “The elements
`
`of a private securities fraud claim based on violations of § 10(b) and Rule 10b–5 are: ‘(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
`
`
`
`4
`
`

`

`Case: 1:19-cv-01339 Document #: 310 Filed: 08/11/21 Page 5 of 50 PageID #:15136
`
`misrepresentation or omission; (5) economic loss; and (6) loss causation.’” Erica P. John Fund,
`
`Inc. v. Halliburton Co., 563 U.S. 804, 809-10 (2011) (quoting Matrixx Initiatives, Inc. v.
`
`Siracusano, 563 U.S. 27, 37 (2011)).
`
`Section 20(a) of the Act “provides a basis for holding individuals liable for acts of securities
`
`fraud if they control other individuals or businesses that violate the securities laws.” Plumbers &
`
`Pipefitters Local Union No. 630 Pension-Annuity Trust Fund v. Allscripts-Misys Healthcare Sols.,
`
`Inc., 778 F. Supp. 2d 858, 886 (N.D. Ill. 2011) (quoting 15 U.S.C. § 78t). Thus, “to state a claim
`
`under § 20(a), a plaintiff must first adequately plead a primary violation of securities laws.” Pugh
`
`v. Tribune Co., 521 F.3d 686, 693 (7th Cir. 2008).
`
`Kraft Heinz and the Executive Defendants move to dismiss [279] Plaintiffs’ complaint
`
`pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure and 15 U.S.C. § 78u-
`
`4. They argue that Plaintiffs fail to allege sufficient facts to establish materially false statements,
`
`scienter, and loss causation for their Section 10(b) and Rule 10b-5 claim. They also argue that the
`
`20(a) claim fails because the amended complaint does not plead an underlying securities violation
`
`or culpable participation by the individual defendants. 3G also moves to dismiss [281] Plaintiffs’
`
`Section 20(a) claim on the ground that Plaintiffs have failed to state a primary violation of the
`
`securities laws, as well as the insider trading claim.
`
`The Court has reviewed all 233 pages of the amended complaint, 265 pages of briefing on
`
`two motions to dismiss, in addition to various exhibits filed with the briefs, plus a few pages
`
`regarding a notice of supplemental authority. For purposes of this order, the Court presumes
`
`familiarity with the facts alleged in the amended complaint. The Court denies Defendants’ motions
`
`to dismiss.
`
`II.
`
`Legal Standards
`
`
`
`5
`
`

`

`Case: 1:19-cv-01339 Document #: 310 Filed: 08/11/21 Page 6 of 50 PageID #:15137
`
`
`
`“In an ordinary civil action, the Federal Rules of Civil Procedure require only ‘a short and
`
`plain statement of the claim showing that the pleader is entitled to relief.’” Tellabs, Inc. v. Makor
`
`Issues & Rights, Ltd., 551 U.S. 308, 319 (2007) (quoting Fed. R. Civ. P. 8(a)(2)). “Although the
`
`rule encourages brevity, the complaint must say enough to give the defendant ‘fair notice of what
`
`the plaintiff’s claim is and the grounds upon which it rests.’” Id. (quoting Dura Pharm., Inc. v.
`
`Broudo, 544 U.S. 336, 346 (2005)). A complaint that does not comply with Rule 8(a) is subject
`
`to dismissal under Rule 12(b)(6), which tests the sufficiency of the complaint. See Fed. R. Civ. P.
`
`12(b)(6); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007).
`
`
`
`Prior to the enactment of the Private Securities Litigation Reform Act of 1995 (“PSLRA”),
`
`“the sufficiency of a complaint for securities fraud was governed not by Rule 8, but by the
`
`heightened pleading standard set forth in Rule 9(b).” Tellabs, 551 U.S. at 319. Under Rule 9(b),
`
`a party alleging fraud or mistake “must state with particularity the circumstances constituting fraud
`
`or mistake,” but “intent, knowledge, and other conditions of a person’s mind may be alleged
`
`generally.” Fed. R. Civ. P. 9(b).
`
`The PSLRA “raise[d] the pleading standard for securities fraud claims beyond the
`
`requirements of even Rule 9(b).” Van Noppen v. InnerWorkings, Inc., 2015 WL 5770138, at *1
`
`(N.D. Ill. Sept. 30, 2015). These heightened pleading standards, which are discussed in detail
`
`below, apply to the “misrepresentation of material fact” and “scienter” elements of Section 10(b)
`
`and Rule 10b-5 claims. See generally Tellabs, 551 U.S. at 320. The Court is required to grant a
`
`motion to dismiss if these standards are not met. 15 U.S.C. § 78u-4(b)(3)(A).
`
`In evaluating Defendants’ motion to dismiss, the Court must accept all factual allegations
`
`in the complaint as true. Van Noppen, 2015 WL 5770138 at *17. The Court must also “draw all
`
`
`
`6
`
`

`

`Case: 1:19-cv-01339 Document #: 310 Filed: 08/11/21 Page 7 of 50 PageID #:15138
`
`reasonable inferences in favor of the plaintiff,” except when it is evaluating the scienter element.
`
`See Makor, 513 F.3d at 705. The standard that applies to the scienter element is discussed below.
`
`Finally, The Seventh Circuit has explained that “[a] motion to dismiss under Rule 12(b)(6)
`
`doesn’t permit piecemeal dismissals of parts of claims; the question at this stage is simply whether
`
`the complaint includes factual allegations that state a plausible claim for relief.” BBL, Inc. v. City
`
`of Angola, 809 F.3d 317, 324-25 (7th Cir. 2015). Rule 12 is, in this way, unlike Rule 56, which
`
`expressly permits courts to award “[p]artial [s]ummary [j]udgment” to litigants who “identif[y]
`
`each claim or defense—or the part of each claim or defense” on which there is no genuine dispute
`
`of material fact. See BBL, 809 F.3d at 325 (internal quotation marks omitted). If plaintiff states a
`
`claim based on some statements, then he states a claim that survives defendants’ motion to dismiss.
`
`See Cothron v. White Castle Sys., Inc., 467 F. Supp. 3d 604, 618 (N.D. Ill. 2020); Kenall Mfg. Co.
`
`v. Cooper Lighting, LLC, 354 F. Supp. 3d 877, 898 (N.D. Ill. 2018); In re Testosterone
`
`Replacement Therapy Prod. Liab. Litig. Coordinated Pretrial Proc., 159 F. Supp. 3d 898, 923-24
`
`(N.D. Ill. 2016).
`
`III. Analysis
`
`A.
`
`Preliminary Matters
`
`Before beginning its analysis, the Court addresses a few preliminary matters. First, for the
`
`sake of judicial efficiency, the Court presumes familiarity with the allegations in the amended
`
`complaint. Additionally, all Defendants challenge the amended complaint’s reliance on
`
`allegations by anonymous former employees of Kraft Heinz. The Seventh Circuit has determined
`
`that information from anonymous sources must be discounted when assessing the sufficiency of
`
`as securities class action complaint, Higginbotham v. Baxter Int’l, Inc., 495 F.3d 753, 756 (7th Cir.
`
`
`
`7
`
`

`

`Case: 1:19-cv-01339 Document #: 310 Filed: 08/11/21 Page 8 of 50 PageID #:15139
`
`2007), and the Company and the Executive Defendants ask the Court not just to discount them but
`
`to disregard them completely. [280 at 13.]
`
`The problem with anonymous allegations is that “anonymity conceals information that is
`
`essential to the sort of comparative evaluation required by Tellabs.” Higginbotham, 495 F.3d at
`
`757. For this reason, the Seventh Circuit directs district courts to discount allegations from
`
`anonymous informants, often steeply. Id. But information from anonymous sources need not be
`
`discounted to zero, particularly if the accounts of the confidential witnesses are set forth in
`
`“convincing detail” and the witnesses provide enough information about their jobs to demonstrate
`
`that they “were in a position to know at first hand the facts to which they are prepared to testify.”
`
`Pension Tr. Fund for Operating Engineers v. DeVry Educ. Grp., Inc., 2017 WL 6039926, at *8
`
`(N.D. Ill. Dec. 6, 2017) (quoting Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702, 711-
`
`12 (7th Cir. 2008) (“Tellabs II”) on remand from Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551
`
`U.S. 308 (2007)). Here, Plaintiffs here have provided information in that vein about numerous
`
`former employees, such as descriptions of their duties at Kraft, Heinz, or Kraft Heinz. Makor
`
`Issues & Rts., Ltd. v. Tellabs Inc., 513 F.3d 702, 712 (7th Cir. 2008) (crediting allegations by
`
`confidential sources because they, “in contrast [to those in Higginbotham], are numerous and
`
`consist of persons who from the description of their jobs were in a position to know at first hand
`
`the facts to which they are prepared to testify”). Knowing their roles and responsibilities allows
`
`the Court do the sort of weighing described in Tellabs, and it also helps that some of the anonymous
`
`allegations corroborate and elaborate on evidence from other sources. See Higginbotham, 495
`
`F.3d. at 757. For these reasons, the Court follows Higginbotham in discounting, but not
`
`completely ignoring, the allegations from anonymous sources. Id.
`
`
`
`8
`
`

`

`Case: 1:19-cv-01339 Document #: 310 Filed: 08/11/21 Page 9 of 50 PageID #:15140
`
`Finally, the Court notes that the parties’ briefs proceed by example. For each reason that
`
`Defendants say the amended complaint fails, Defendants’ motions to dismiss pull a few examples
`
`from the amended complaint to support the argument, and they further rely on a table [280-2] that
`
`lists all the statements that they claim fail and the arguments for each statement’s failure. See [280
`
`at 28, n. 8 (“For purposes of this motion, Defendants focus on illustrative examples of each below
`
`and, for the sake of brevity, do not address each and every challenged misstatement.”)]. Plaintiffs,
`
`quite reasonably, respond the same way, by rebutting Defendant’s arguments based on examples.
`
`Accordingly, the reasoning in the Court’s order proceeds by example as well.
`
`B. Material Misrepresentations or Omissions
`
`The PSLRA requires that in any action where “the plaintiff alleges that the defendant (A)
`
`made an untrue statement of a material fact; or (B) omitted to state a material fact necessary in
`
`order to make the statements made, in light of the circumstances in which they were made, not
`
`misleading,” the complaint must “specify each statement alleged to have been misleading” and
`
`“the reason or reasons why the statement is misleading.” 15 U.S.C. § 78u-4(b)(1)(A), (B). In a
`
`case where, as here, the allegations are based on information and belief, the plaintiff is also
`
`required to “state with particularity all facts on which that belief is formed.” Id. § 78u-4(b)(1).1 In
`
`determining whether a statement is misleading, the Court “consider[s] the context in which the
`
`statement was made” and “must determine ‘whether the facts alleged are sufficient to support a
`
`reasonable belief as to the misleading nature of the statement or omission.’” Constr. Workers
`
`Pension Fund-Lake Cty. & Vicinity v. Navistar Int’l Corp., 114 F. Supp. 3d 633, 651 (N.D. Ill.
`
`2015) (quoting Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588, 596 (7th Cir. 2006),
`
`vacated and remanded, 551 U.S. 308 (2007)); see also Van Noppen, 2015 WL 5770138 at *5.
`
`
`1 Plaintiffs’ complaint states that all allegations are based on information and belief except allegations
`specifically pertaining to Plaintiffs. [1] at 1.
`
`
`
`9
`
`

`

`Case: 1:19-cv-01339 Document #: 310 Filed: 08/11/21 Page 10 of 50 PageID #:15141
`
`1. Falsity
`
`Defendants argue that certain statements are not actionable because they are not false. The
`
`Court addresses these statements in the categories identified in Defendants’ briefs.
`
`a. Statements Regarding Integration and Savings Plan
`
`Defendants argue that many of Plaintiffs’ allegations about the integration and savings plan
`
`are conclusory and do not adequately allege falsity. [280 at 30.] As an example, Defendants point
`
`to ¶ 362 in the amended complaint. But Defendants’ argument mischaracterizes Plaintiffs’
`
`allegations. ¶ 362 pulls Defendants’ statements from the preceding portion of the complaint (e.g.,
`
`¶ 357, the source of the “savings without sacrificing quality” quote) and contrasts them with
`
`allegations from other paragraphs (e.g., ¶¶ 92-97, detailing reductions in maintenance and quality
`
`control that diminished product quality, which ¶ 362 refers to as “eliminating critical maintenance
`
`and product quality functions”). ¶ 362 and the other allegations Defendants challenge on these
`
`grounds are a summary of a set of assertions, not a conclusory allegation, so the Court rejects this
`
`argument.
`
`b. Statements Regarding Transitory Issues
`
`Defendants argue that Plaintiffs fail to allege that the transitory and short-term issues that
`
`Defendants point to as the cause of certain poor performances were false. That is in some sense
`
`true—Plaintiffs do not allege that these events or issue never occurred. Rather, Plaintiffs’ position
`
`is (broadly) that it was misleading for Defendants to say that the transitory issues, rather than
`
`Defendants’ own choices and practices, had “dominated” the company’s performance, [274 at ¶
`
`431], and that Defendants should have disclosed the true nature of their cost-cutting strategy and
`
`its role in the Company’s performance problems. Defendants’ argument misses the mark and does
`
`not provide a reason to dismiss any claim.
`
`
`
`10
`
`

`

`Case: 1:19-cv-01339 Document #: 310 Filed: 08/11/21 Page 11 of 50 PageID #:15142
`
`Statements Regarding the Company’s Financial Performance and Projections
`
`Defendants argue that their May 2018 EBITDA statements are consistent with their
`
`February 2018 statements about expectations for the company’s performance and are true.
`
`Plaintiffs argue that the “in line to exceed expectations” statement was false because Defendants’
`
`cost cutting strategy was unsustainable and that future cost savings were nonexistent, meaning that
`
`the strategy would drag the company’s performance down. Other judges in this district have found
`
`similar statements actionable. See, e.g., Silverman v. Motorola, Inc., 2008 WL 4360648, at *10
`
`(N.D. Ill. Sept. 23, 2008) (“The fact that the ‘competitive’ products are ‘on track,’ ‘quite on track,’
`
`or ‘keyed up,’ would be material if in fact defendants knew that those products were not on track.”)
`
`(emphasis added); Desai v. Gen. Growth Props., Inc., 654 F. Supp. 2d 836, 855 (N.D. Ill. 2009)
`
`(declining to dismiss claim based on statement that defendant had “every confidence” in
`
`company’s ability to obtain financing because it “could prove to have been [a] misleading
`
`falsehood[]”); Plumbers & Pipefitters, 778 F. Supp. 2d at 880 (statement that “rollout [was] going
`
`very well” was properly pleaded as misleading when made). The Court finds that the amended
`
`complaint adequately pleads the falsity of statements regarding the Company’s financial
`
`projections and performance.
`
`c. Statements Regarding Case Fill Rates
`
`
`
`Plaintiffs challenge statements that Defendants’ case fill rates—the level of customer
`
`demand met through immediate stock availability, without backorders or lost sales [274 at 29]—
`
`were 96% or higher at various points during 2016. See, e.g., [274 at ¶¶ 352, 355, 358]. Defendants,
`
`in response, argue that the amended complaint’s allegations are vague or conclusory. [280 at 34.]
`
`But the amended complaint provides specific assertions about sub-90% case fill rates, from a range
`
`of former employees. It describes frequent factory shutdowns from Kraft Heinz’s failure to
`
`
`
`11
`
`

`

`Case: 1:19-cv-01339 Document #: 310 Filed: 08/11/21 Page 12 of 50 PageID #:15143
`
`effectively integrate the companies’ supply chain and enterprise systems onto a joint platform [274
`
`at ¶ 113], a Jell-O plant failing to fill orders by margins exceeding 40%, [id. at ¶ 96], “fill rates in
`
`the mid-70% range across its U.S. supply chain for the products manufactured in his plants,
`
`including all singleserve products, such as ketchup packets,” [id. at ¶113], fill rates around 80%
`
`and never higher than 90% at another plant, [id.], and fill rates dropping into the 80% range for
`
`Kraft Heinz’s most significant customer, Walmart [id.] The amended complaint elsewhere
`
`describes Kraft Heinz’s fill rates as “far below target” and “chronically low” [id. at ¶¶ 106, 113],
`
`but it backs up those characterizations with sufficiently specific allegations.
`
`Defendants also argue that Former Employee 9 worked at Kraft Heinz only in 2017 (and
`
`for a customer of Kraft Heinz from 2017 through 2019), so his statements about fill rates cannot
`
`support Plaintiffs’ position. [280 at 34-35.] That may be true, but as described above, the amended
`
`complaint’s allegations regarding case fill rates are sufficient even without Former Employee 9’s
`
`statements.
`
`d. Statements Regarding Working Media Investments
`
`Defendants argue that Plaintiffs have not demonstrated the falsity of statements that the
`
`Company was increasing its investment in working media (meaning money spent on buying ad
`
`space and airtime, and promotional activity) [274 at ¶ 141]. Specifically, they challenge
`
`allegations from Former Employee 3, an international sales executive who left the Company in
`
`December 2016. Defendants point out that some of the statements regarding working media were
`
`made after Former Employee 3 left Kraft Heinz and argue that the amended complaint does not
`
`explain how an international sales executive would know how much Kraft Heinz was spending on
`
`working media. [280 at 35.] Though it is not outlandish to think that a senior sales executive would
`
`have information about a company’s spending on marketing, Defendants’ points are well taken.
`
`
`
`12
`
`

`

`Case: 1:19-cv-01339 Document #: 310 Filed: 08/11/21 Page 13 of 50 PageID #:15144
`
`But the amended complaint contains other allegations about cuts to media spending that undermine
`
`Defendants’ argument, including one former employee’s comment that Kraft Heinz “was always
`
`cutting the media budget” and had no “long-term strategy for growth,” and another former
`
`employee’s report that the marketing budget for one of the company’s coffee brands was cut from
`
`$30 million to $2 million. [274 at ¶ 138.] Even if the Court sets aside Former Employee 3’s
`
`statements, the amended complaint’s allegations regarding working media investment are
`
`sufficient.
`
`e. Statements Regarding Contracts with Canadian Retailers
`
`In 2016, several Canadian retailers renegotiated contracts with Kraft Heinz. Plaintiffs
`
`allege that Kraft Heinz engaged in channel stuffing that prompted the renegotiations and that the
`
`new contracts did not include guaranteed volume agreements, which led to significantly decreased
`
`volumes of sales in Canada. Defendants deny the falsity of several of their statements about
`
`Canadian retailers, including that Defendants were satisfied with the new contracts, that the new
`
`contracts were a “win-win,” and that the new contracts restored “normal go-to-market activity.”
`
`[280 at 36.] Plaintiffs argue that it was misleading to say these things but not reveal information
`
`about termination of the volume agreements. [274 at ¶ 168; 295 at 51.] The Court agrees. The
`
`amended complaint pleads that Defendants’ failure to disclose the changes to Canadian retailer
`
`contracts, especially the loss of guaranteed volume of sales to certain retailers, rendered misleading
`
`its statements about the renegotiated contracts. Those allegations are sufficient for the pleading
`
`stage. See In re Neopharm, Inc. Sec. Litig., 2003 WL 262369, at *11 (N.D. Ill. Feb. 7, 2003) (if
`
`Phase II trials of experimental drug failed so badly that Phase I results would be effected and
`
`company was effectively back to the drawing board with respect to that drug’s development, public
`
`statement that concealed the nature of the problems with the drug were misleading); In re Westell
`
`
`
`13
`
`

`

`Case: 1:19-cv-01339 Document #: 310 Filed: 08/11/21 Page 14 of 50 PageID #:15145
`
`Techs., Inc., 2001 WL 1313785, at *8 (N.D. Ill. Oct. 26, 2001) (finding optimistic statements about
`
`sales to a customer to be misleading when defendants knew that sale to that customer would “drop
`
`precipitously”); In re Spyglass, Inc. Sec. Litig., 1999 WL 543197, *3 (N.D. Ill. July 21, 1999)
`
`(denying motion to dismiss where plaintiff alleged a material misrepresentation based on
`
`defendants’ release of positive news while omitting information that half of the contracts on which
`
`profitable projections had been made were in jeopardy).
`
`f. Statements Regarding Efficacy of Internal Controls
`
`Kraft Heinz’s SEC filings during the Class Period certified that Kraft Heinz’s internal
`
`controls were effective and provided reasonable assurances regarding the reliability of the
`
`Company’s financial reports. See [274 at ¶ 489-493.] Kraft Heinz later admitted that its internal
`
`controls were deficient and had material weaknesses. [274 at ¶¶ 265, 494-500.] Defendants say
`
`that the amended complaint fails to state a claim because it lacks allegations that these statements
`
`“inaccurately reflect[] the conclusions reached by the CEO and CFO at that time or incorrectly
`
`portrayed the process used to reach those conclusion.” [280 at 37.] But the amended complaint
`
`alleges that the material weaknesses in Kraft Heinz’s financial controls caused specific
`
`deficiencies that led to overstatements in the financial reporting, despite its public statements to
`
`the contrary during the class period and despite knowing that the SEC was investigating Kraft
`
`Heinz’s accounting practices. That is enough to satisfy the falsity requirement at this stage.2 In re
`
`Akorn, Inc. Sec. Litig., 240 F. Supp. 3d 802, 815–16 (N.D. Ill. 2017); Roth v. OfficeMax, Inc., 2006
`
`WL 2661009, at *4 (N.D. Ill. Sept. 13, 2006) (“Plaintiffs have adequately alleged that these
`
`statements were false or misleading because the Company restated its financial results....”); see
`
`also In re BISYS Sec. Litig., 397 F.Supp.2d 430, 437 (S.D.N.Y. 2005) (“Pursuant to Generally
`
`
`2 Defendants’ argument seems more related to scienter, which the Court addresses below.
`
`
`
`14
`
`

`

`Case: 1:19-cv-01339 Document #: 310 Filed: 08/11/21 Page 15 of 50 PageID #:15146
`
`Accepted Accounting Principles (‘GAAP’), previously issued financial statements should be
`
`restated only to correct material accounting errors that existed at the time the statements were
`
`issued.... [T]he mere fact that financial results were restated is sufficient basis for pleading that
`
`those statements were false and misleading.”) (internal quotation marks omitted).
`
`2. Materiality
`
`Defendants argue that the amended complaint fails to allege materiality for certain
`
`statements. Materiality is a “fact-specific inquiry” that “depends on the significance the reasonable
`
`investor would place on the withheld or misrepresented information.” Basic Inc. v. Levinson, 485
`
`U.S. 224, 240 (1988). Therefore, “the determination of materiality requires delicate assessments
`
`of the inferences a reasonable shareholder would draw from a given set of facts and the significance
`
`of those inferences to him, and these assessments are peculiarly ones for the trier of fact; thus a
`
`materiality determination is rarely appropriate at the summary judgment stage, let alone on a
`
`motion to dismiss.” Marks v. CDW Computer Ctrs., Inc., 122 F.3d 363, 370 (7th Cir. 1997)
`
`(reversing dismissal of a § 10(b) claim and rejecting defendant’s argument that statements were
`
`not material as a matter of law) (brackets and internal quotation marks omitted); see also Ganino
`
`v. Citizens Util. Co., 228 F.3d 154, 162 (2d Cir. 2000) (“[W]hen presented with a Rule 12(b)(6)
`
`motion, a complaint may not properly be dismissed on the ground that the alleged misstatements
`
`or omissions are not material unless they are so obviously unimportant to a reasonable investor
`
`that reasonable minds could not differ on the question of their importance.”) (internal quotation
`
`marks and ellipsis omitted).
`
`Defendants first argue that Plaintiffs’ “scattershot” allegations about problems at “isolated
`
`components” of Kraft Heinz’s “vast business” do not meet the threshold for materiality. [280 at
`
`38.] But Defendants miss the point. The amended complaint does not assert that, on its own and
`
`
`
`15
`
`

`

`Case: 1:19-cv-01339 Document #: 310 Filed: 08/11/21 Page 16 of 50 PageID #:15147
`
`out of context, the failure to disclose each of these problems was a material misstatement or
`
`omission. Rather, the amended complaint provides specific—not scattershot—examples to
`
`support its allegations that Defendants cut costs in maintenance and quality assurance across the
`
`company and that those choices caused problems. ¶ 93, the first one that Defendants claim is
`
`inadequate (see [280 at 38]) starts with “As an example of how Kraft Heinz’s cost-cutting impacted
`
`the Company’s supply chain…” [274 at ¶ 93] (emphasis added). The Court declines to take
`
`Defendants’ view of these allegations, because neither the PSLRA, nor Rule 9(b),