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`GEORGE A. HEDICK, JR., et al.,
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`Plaintiffs,
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`THE KRAFT HEINZ COMPANY, et. al.,
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`Defendants.
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`v.
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`IN THE UNITED STATES DISTRICT COURT
`FOR THE NORTHERN DISTRICT OF ILLINOIS
`EASTERN DIVISION
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`Case No. 19-cv-1339
`Judge Robert M. Dow, Jr.
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`MEMORANDUM OPINION AND ORDER
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`In this consolidated class actions securities case, arising out of the 2015 merger that created
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`the Kraft Heinz Company, two motions to dismiss are before the Court. One is from the Kraft
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`Heinz Company and a set of individual defendants who were executives and directors at the
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`company [279], and the other is from a set of corporate entities (“3G,” for short) that effected the
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`merger [281]. For the reasons set forth below, the Court denies both motions to dismiss [279,
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`281].
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`I.
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`Background
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`This securities class action stems from the 2015 merger of Kraft Foods Group, Inc.
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`(“Kraft”) with The H.J. Heinz Company (“Heinz”) into the Kraft Heinz Company (“Kraft Heinz”
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`or the “Company”). According to the amended complaint [274], the merger was orchestrated by
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`3G Capital Partners (“3G”), a private equity partnership with a history of implementing a zero-
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`based-budgeting strategy at companies it owned to extract cost savings. Plaintiffs say, in short,
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`that 3G and Kraft (which 3G controlled before the merger) touted synergies, efficiencies, and
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`eliminating redundancies as the benefits of Kraft’s merger with Heinz, but after the companies
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`combined, executives at Kraft Heinz realized there were fewer savings to be had from synergies
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`Case: 1:19-cv-01339 Document #: 310 Filed: 08/11/21 Page 2 of 50 PageID #:15133
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`than they had expected, and certainly not on the level of the $1.5 billion they had suggested to
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`investors. After that, according to the amended complaint, Kraft Heinz pursued indiscriminate
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`cost-cutting measures that led to inferior products, deteriorating relationships with distributors,
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`and inability to meet retailers’ demand, but simultaneously assured investors that the cost savings
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`came from synergies, not short-term budget cuts. Ultimately, Kraft Heinz’s cost-cutting measures
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`came back to bite it, and the company took a $15.4 billion dollar impairment to its goodwill and
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`intangibles in February 2019, among other negative impacts, and its stock price took several hits
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`during the fallout. Defendants, for their part, maintain that the company’s executives pursued a
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`business strategy that did not work out, not any course of fraudulent conduct.
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`Parties
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`Plaintiffs in this matter are persons and entities who purchased or otherwise acquired
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`securities of Kraft Heinz during the period from November 5, 2015 to August 7, 2019, inclusive
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`(the “Class Period”).
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`Defendant Kraft Heinz is a Delaware corporation, co-headquartered in Chicago, Illinois
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`and Pittsburgh, Pennsylvania. The Company’s common stock was actively traded on the Nasdaq
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`exchange throughout the Class Period under the symbol “KHC.” Kraft Heinz was created through
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`a merger between Heinz and Kraft on July 2, 2015, and began trading publicly on July 6, 2015.
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`[274 at ¶ 43.] Defendant 3G Capital Partners is a private equity firm with principal offices in New
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`York, New York. 3G Capital, along with other partners, acquired Heinz in June 2013.
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`Subsequently, 3G Capital and its affiliated funds orchestrated the July 2015 Merger between Kraft
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`and Heinz that resulted in Kraft Heinz. Upon completion of the Merger, 3G Capital acquired
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`approximately 25% of Kraft Heinz. 3G Capital Partners and its affiliated funds and business
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`entities – including Defendant 3G Capital, Inc. (a Delaware corporation), and the following
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`2
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`Cayman Islands business entities: Defendants 3G Global Food Holdings, L.P.; 3G Global Food
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`Holdings GP LP; 3G Capital Partners LP; 3G Capital Partners II LP; and 3G Capital Partners Ltd.
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`(collectively and together with 3G Capital Partners, Defendant “3G Capital” or “3G”) – had the
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`power to control, and did control Kraft Heinz, throughout the Class Period. [Id. at ¶ 44.]
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`Defendant Bernardo Hees served as Kraft Heinz’s CEO from the Company’s inception in
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`July 2015 until June 2019. Prior to that, Hees served as the CEO of Heinz while it was under 3G
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`Capital’s control from 2013 to 2015. Hees has been a Partner of 3G Capital since July of 2010.
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`[Id. at ¶ 45.] Defendant Paul Basilio served as Kraft Heinz’s CFO from the Company’s inception
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`in July 2015 until his appointment as Zone President of Kraft Heinz U.S. Business on October 1,
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`2017. In July 2019, Basilio became Kraft Heinz’s Chief Business Planning and Development
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`Officer. Before serving as Kraft Heinz’s CFO, Basilio served as the CFO of Heinz while it was
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`under 3G Capital’s control from 2013 to 2015. Basilio has been a Partner of 3G Capital since July
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`of 2012. [Id. at ¶ 46.] Defendant David Knopf served as Kraft Heinz’s CFO from October 2017
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`until his departure in August 2019, after the end of the Class Period. Prior to serving as CFO,
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`Knopf worked as the Vice President and Category Head of the Planters business at Kraft Heinz.
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`After leaving Kraft Heinz, Knopf returned to 3G Capital, where he has been a Partner since July
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`of 2015. [Id. at ¶ 47.] Defendant Alexandre Behring was the Chairman of Kraft Heinz’s Board of
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`Directors during the Class Period. He is a co-founder and Managing Partner of 3G Capital. [Id. at
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`¶ 48.] Defendant George Zoghbi served as the Chief Operating Officer of Kraft Heinz’s U.S.
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`Business from the time of the Merger until becoming a Special Advisor at Kraft Heinz in October
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`of 2017. Zoghbi also joined the Kraft Heinz Board in April 2018. [Id. at ¶ 49.] Defendant Rafael
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`Oliveira was President of Kraft Heinz Europe from October of 2016 to July of 2019, when he
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`became the International Zone President of Kraft Heinz. [Id. at ¶ 50.] Defendants Hees, Basilio,
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`3
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`Knopf, Behring, Zoghbi, and Oliveira are collectively referred to as the “Executive Defendants.”
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`[Id. at ¶ 51.]
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`Legal Background
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`On February 24, 2019, Plaintiff George Hedick filed a purported class action complaint [1]
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`in this case. Over the following eighteen months, the Court consolidated a variety of similar cases,
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`appointed as lead plaintiffs Union Asset Management Holding AG and Sjunde APFonden [see
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`149], and received the consolidated amended class action complaint (“amended complaint”) [274],
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`which is now the operative complaint. The amended complaint alleges: violations of Section 10(b)
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`of the Exchange Act and SEC Rule 10b-5 against Kraft Heinz and the Executive Defendants
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`(Count I); violations of Section 20(a) of the Exchange Act against 3G Capital and the Executive
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`Defendants (Count II); and violations of Section 10(b) and 20(a) of the Exchange Act and Rule
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`10b-5 against 3G Capital (Count III).
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`Section 10(b) of the Act makes it unlawful for any person to “use or employ, in connection
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`with the purchase or sale of any security * * * any manipulative or deceptive device or contrivance
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`in contravention of such rules and regulations as the Commission may prescribe as necessary or
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`appropriate in the public interest or for the protection of investors.” 15 U.S.C. § 78j(b). “Rule
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`10b–5 forbids a company or an individual ‘to make any untrue statement of a material fact or to
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`omit to state a material fact necessary in order to make the statements made, in the light of the
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`circumstances under which they were made, not misleading.’” Makor Issues & Rights, Ltd. v.
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`Tellabs Inc., 513 F.3d 702, 704 (7th Cir. 2008) (quoting 17 C.F.R. § 240.10b–5(b)). “The elements
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`of a private securities fraud claim based on violations of § 10(b) and Rule 10b–5 are: ‘(1) a material
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`misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the
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`misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the
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`4
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`Case: 1:19-cv-01339 Document #: 310 Filed: 08/11/21 Page 5 of 50 PageID #:15136
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`misrepresentation or omission; (5) economic loss; and (6) loss causation.’” Erica P. John Fund,
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`Inc. v. Halliburton Co., 563 U.S. 804, 809-10 (2011) (quoting Matrixx Initiatives, Inc. v.
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`Siracusano, 563 U.S. 27, 37 (2011)).
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`Section 20(a) of the Act “provides a basis for holding individuals liable for acts of securities
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`fraud if they control other individuals or businesses that violate the securities laws.” Plumbers &
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`Pipefitters Local Union No. 630 Pension-Annuity Trust Fund v. Allscripts-Misys Healthcare Sols.,
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`Inc., 778 F. Supp. 2d 858, 886 (N.D. Ill. 2011) (quoting 15 U.S.C. § 78t). Thus, “to state a claim
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`under § 20(a), a plaintiff must first adequately plead a primary violation of securities laws.” Pugh
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`v. Tribune Co., 521 F.3d 686, 693 (7th Cir. 2008).
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`Kraft Heinz and the Executive Defendants move to dismiss [279] Plaintiffs’ complaint
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`pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure and 15 U.S.C. § 78u-
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`4. They argue that Plaintiffs fail to allege sufficient facts to establish materially false statements,
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`scienter, and loss causation for their Section 10(b) and Rule 10b-5 claim. They also argue that the
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`20(a) claim fails because the amended complaint does not plead an underlying securities violation
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`or culpable participation by the individual defendants. 3G also moves to dismiss [281] Plaintiffs’
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`Section 20(a) claim on the ground that Plaintiffs have failed to state a primary violation of the
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`securities laws, as well as the insider trading claim.
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`The Court has reviewed all 233 pages of the amended complaint, 265 pages of briefing on
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`two motions to dismiss, in addition to various exhibits filed with the briefs, plus a few pages
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`regarding a notice of supplemental authority. For purposes of this order, the Court presumes
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`familiarity with the facts alleged in the amended complaint. The Court denies Defendants’ motions
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`to dismiss.
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`II.
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`Legal Standards
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`5
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`“In an ordinary civil action, the Federal Rules of Civil Procedure require only ‘a short and
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`plain statement of the claim showing that the pleader is entitled to relief.’” Tellabs, Inc. v. Makor
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`Issues & Rights, Ltd., 551 U.S. 308, 319 (2007) (quoting Fed. R. Civ. P. 8(a)(2)). “Although the
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`rule encourages brevity, the complaint must say enough to give the defendant ‘fair notice of what
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`the plaintiff’s claim is and the grounds upon which it rests.’” Id. (quoting Dura Pharm., Inc. v.
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`Broudo, 544 U.S. 336, 346 (2005)). A complaint that does not comply with Rule 8(a) is subject
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`to dismissal under Rule 12(b)(6), which tests the sufficiency of the complaint. See Fed. R. Civ. P.
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`12(b)(6); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007).
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`Prior to the enactment of the Private Securities Litigation Reform Act of 1995 (“PSLRA”),
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`“the sufficiency of a complaint for securities fraud was governed not by Rule 8, but by the
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`heightened pleading standard set forth in Rule 9(b).” Tellabs, 551 U.S. at 319. Under Rule 9(b),
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`a party alleging fraud or mistake “must state with particularity the circumstances constituting fraud
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`or mistake,” but “intent, knowledge, and other conditions of a person’s mind may be alleged
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`generally.” Fed. R. Civ. P. 9(b).
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`The PSLRA “raise[d] the pleading standard for securities fraud claims beyond the
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`requirements of even Rule 9(b).” Van Noppen v. InnerWorkings, Inc., 2015 WL 5770138, at *1
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`(N.D. Ill. Sept. 30, 2015). These heightened pleading standards, which are discussed in detail
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`below, apply to the “misrepresentation of material fact” and “scienter” elements of Section 10(b)
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`and Rule 10b-5 claims. See generally Tellabs, 551 U.S. at 320. The Court is required to grant a
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`motion to dismiss if these standards are not met. 15 U.S.C. § 78u-4(b)(3)(A).
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`In evaluating Defendants’ motion to dismiss, the Court must accept all factual allegations
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`in the complaint as true. Van Noppen, 2015 WL 5770138 at *17. The Court must also “draw all
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`6
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`reasonable inferences in favor of the plaintiff,” except when it is evaluating the scienter element.
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`See Makor, 513 F.3d at 705. The standard that applies to the scienter element is discussed below.
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`Finally, The Seventh Circuit has explained that “[a] motion to dismiss under Rule 12(b)(6)
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`doesn’t permit piecemeal dismissals of parts of claims; the question at this stage is simply whether
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`the complaint includes factual allegations that state a plausible claim for relief.” BBL, Inc. v. City
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`of Angola, 809 F.3d 317, 324-25 (7th Cir. 2015). Rule 12 is, in this way, unlike Rule 56, which
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`expressly permits courts to award “[p]artial [s]ummary [j]udgment” to litigants who “identif[y]
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`each claim or defense—or the part of each claim or defense” on which there is no genuine dispute
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`of material fact. See BBL, 809 F.3d at 325 (internal quotation marks omitted). If plaintiff states a
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`claim based on some statements, then he states a claim that survives defendants’ motion to dismiss.
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`See Cothron v. White Castle Sys., Inc., 467 F. Supp. 3d 604, 618 (N.D. Ill. 2020); Kenall Mfg. Co.
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`v. Cooper Lighting, LLC, 354 F. Supp. 3d 877, 898 (N.D. Ill. 2018); In re Testosterone
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`Replacement Therapy Prod. Liab. Litig. Coordinated Pretrial Proc., 159 F. Supp. 3d 898, 923-24
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`(N.D. Ill. 2016).
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`III. Analysis
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`A.
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`Preliminary Matters
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`Before beginning its analysis, the Court addresses a few preliminary matters. First, for the
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`sake of judicial efficiency, the Court presumes familiarity with the allegations in the amended
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`complaint. Additionally, all Defendants challenge the amended complaint’s reliance on
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`allegations by anonymous former employees of Kraft Heinz. The Seventh Circuit has determined
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`that information from anonymous sources must be discounted when assessing the sufficiency of
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`as securities class action complaint, Higginbotham v. Baxter Int’l, Inc., 495 F.3d 753, 756 (7th Cir.
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`7
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`2007), and the Company and the Executive Defendants ask the Court not just to discount them but
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`to disregard them completely. [280 at 13.]
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`The problem with anonymous allegations is that “anonymity conceals information that is
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`essential to the sort of comparative evaluation required by Tellabs.” Higginbotham, 495 F.3d at
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`757. For this reason, the Seventh Circuit directs district courts to discount allegations from
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`anonymous informants, often steeply. Id. But information from anonymous sources need not be
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`discounted to zero, particularly if the accounts of the confidential witnesses are set forth in
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`“convincing detail” and the witnesses provide enough information about their jobs to demonstrate
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`that they “were in a position to know at first hand the facts to which they are prepared to testify.”
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`Pension Tr. Fund for Operating Engineers v. DeVry Educ. Grp., Inc., 2017 WL 6039926, at *8
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`(N.D. Ill. Dec. 6, 2017) (quoting Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702, 711-
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`12 (7th Cir. 2008) (“Tellabs II”) on remand from Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551
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`U.S. 308 (2007)). Here, Plaintiffs here have provided information in that vein about numerous
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`former employees, such as descriptions of their duties at Kraft, Heinz, or Kraft Heinz. Makor
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`Issues & Rts., Ltd. v. Tellabs Inc., 513 F.3d 702, 712 (7th Cir. 2008) (crediting allegations by
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`confidential sources because they, “in contrast [to those in Higginbotham], are numerous and
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`consist of persons who from the description of their jobs were in a position to know at first hand
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`the facts to which they are prepared to testify”). Knowing their roles and responsibilities allows
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`the Court do the sort of weighing described in Tellabs, and it also helps that some of the anonymous
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`allegations corroborate and elaborate on evidence from other sources. See Higginbotham, 495
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`F.3d. at 757. For these reasons, the Court follows Higginbotham in discounting, but not
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`completely ignoring, the allegations from anonymous sources. Id.
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`8
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`Case: 1:19-cv-01339 Document #: 310 Filed: 08/11/21 Page 9 of 50 PageID #:15140
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`Finally, the Court notes that the parties’ briefs proceed by example. For each reason that
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`Defendants say the amended complaint fails, Defendants’ motions to dismiss pull a few examples
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`from the amended complaint to support the argument, and they further rely on a table [280-2] that
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`lists all the statements that they claim fail and the arguments for each statement’s failure. See [280
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`at 28, n. 8 (“For purposes of this motion, Defendants focus on illustrative examples of each below
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`and, for the sake of brevity, do not address each and every challenged misstatement.”)]. Plaintiffs,
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`quite reasonably, respond the same way, by rebutting Defendant’s arguments based on examples.
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`Accordingly, the reasoning in the Court’s order proceeds by example as well.
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`B. Material Misrepresentations or Omissions
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`The PSLRA requires that in any action where “the plaintiff alleges that the defendant (A)
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`made an untrue statement of a material fact; or (B) omitted to state a material fact necessary in
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`order to make the statements made, in light of the circumstances in which they were made, not
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`misleading,” the complaint must “specify each statement alleged to have been misleading” and
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`“the reason or reasons why the statement is misleading.” 15 U.S.C. § 78u-4(b)(1)(A), (B). In a
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`case where, as here, the allegations are based on information and belief, the plaintiff is also
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`required to “state with particularity all facts on which that belief is formed.” Id. § 78u-4(b)(1).1 In
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`determining whether a statement is misleading, the Court “consider[s] the context in which the
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`statement was made” and “must determine ‘whether the facts alleged are sufficient to support a
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`reasonable belief as to the misleading nature of the statement or omission.’” Constr. Workers
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`Pension Fund-Lake Cty. & Vicinity v. Navistar Int’l Corp., 114 F. Supp. 3d 633, 651 (N.D. Ill.
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`2015) (quoting Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588, 596 (7th Cir. 2006),
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`vacated and remanded, 551 U.S. 308 (2007)); see also Van Noppen, 2015 WL 5770138 at *5.
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`1 Plaintiffs’ complaint states that all allegations are based on information and belief except allegations
`specifically pertaining to Plaintiffs. [1] at 1.
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`9
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`1. Falsity
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`Defendants argue that certain statements are not actionable because they are not false. The
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`Court addresses these statements in the categories identified in Defendants’ briefs.
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`a. Statements Regarding Integration and Savings Plan
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`Defendants argue that many of Plaintiffs’ allegations about the integration and savings plan
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`are conclusory and do not adequately allege falsity. [280 at 30.] As an example, Defendants point
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`to ¶ 362 in the amended complaint. But Defendants’ argument mischaracterizes Plaintiffs’
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`allegations. ¶ 362 pulls Defendants’ statements from the preceding portion of the complaint (e.g.,
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`¶ 357, the source of the “savings without sacrificing quality” quote) and contrasts them with
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`allegations from other paragraphs (e.g., ¶¶ 92-97, detailing reductions in maintenance and quality
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`control that diminished product quality, which ¶ 362 refers to as “eliminating critical maintenance
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`and product quality functions”). ¶ 362 and the other allegations Defendants challenge on these
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`grounds are a summary of a set of assertions, not a conclusory allegation, so the Court rejects this
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`argument.
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`b. Statements Regarding Transitory Issues
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`Defendants argue that Plaintiffs fail to allege that the transitory and short-term issues that
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`Defendants point to as the cause of certain poor performances were false. That is in some sense
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`true—Plaintiffs do not allege that these events or issue never occurred. Rather, Plaintiffs’ position
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`is (broadly) that it was misleading for Defendants to say that the transitory issues, rather than
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`Defendants’ own choices and practices, had “dominated” the company’s performance, [274 at ¶
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`431], and that Defendants should have disclosed the true nature of their cost-cutting strategy and
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`its role in the Company’s performance problems. Defendants’ argument misses the mark and does
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`not provide a reason to dismiss any claim.
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`10
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`Statements Regarding the Company’s Financial Performance and Projections
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`Defendants argue that their May 2018 EBITDA statements are consistent with their
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`February 2018 statements about expectations for the company’s performance and are true.
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`Plaintiffs argue that the “in line to exceed expectations” statement was false because Defendants’
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`cost cutting strategy was unsustainable and that future cost savings were nonexistent, meaning that
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`the strategy would drag the company’s performance down. Other judges in this district have found
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`similar statements actionable. See, e.g., Silverman v. Motorola, Inc., 2008 WL 4360648, at *10
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`(N.D. Ill. Sept. 23, 2008) (“The fact that the ‘competitive’ products are ‘on track,’ ‘quite on track,’
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`or ‘keyed up,’ would be material if in fact defendants knew that those products were not on track.”)
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`(emphasis added); Desai v. Gen. Growth Props., Inc., 654 F. Supp. 2d 836, 855 (N.D. Ill. 2009)
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`(declining to dismiss claim based on statement that defendant had “every confidence” in
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`company’s ability to obtain financing because it “could prove to have been [a] misleading
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`falsehood[]”); Plumbers & Pipefitters, 778 F. Supp. 2d at 880 (statement that “rollout [was] going
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`very well” was properly pleaded as misleading when made). The Court finds that the amended
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`complaint adequately pleads the falsity of statements regarding the Company’s financial
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`projections and performance.
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`c. Statements Regarding Case Fill Rates
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`Plaintiffs challenge statements that Defendants’ case fill rates—the level of customer
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`demand met through immediate stock availability, without backorders or lost sales [274 at 29]—
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`were 96% or higher at various points during 2016. See, e.g., [274 at ¶¶ 352, 355, 358]. Defendants,
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`in response, argue that the amended complaint’s allegations are vague or conclusory. [280 at 34.]
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`But the amended complaint provides specific assertions about sub-90% case fill rates, from a range
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`of former employees. It describes frequent factory shutdowns from Kraft Heinz’s failure to
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`11
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`Case: 1:19-cv-01339 Document #: 310 Filed: 08/11/21 Page 12 of 50 PageID #:15143
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`effectively integrate the companies’ supply chain and enterprise systems onto a joint platform [274
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`at ¶ 113], a Jell-O plant failing to fill orders by margins exceeding 40%, [id. at ¶ 96], “fill rates in
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`the mid-70% range across its U.S. supply chain for the products manufactured in his plants,
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`including all singleserve products, such as ketchup packets,” [id. at ¶113], fill rates around 80%
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`and never higher than 90% at another plant, [id.], and fill rates dropping into the 80% range for
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`Kraft Heinz’s most significant customer, Walmart [id.] The amended complaint elsewhere
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`describes Kraft Heinz’s fill rates as “far below target” and “chronically low” [id. at ¶¶ 106, 113],
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`but it backs up those characterizations with sufficiently specific allegations.
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`Defendants also argue that Former Employee 9 worked at Kraft Heinz only in 2017 (and
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`for a customer of Kraft Heinz from 2017 through 2019), so his statements about fill rates cannot
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`support Plaintiffs’ position. [280 at 34-35.] That may be true, but as described above, the amended
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`complaint’s allegations regarding case fill rates are sufficient even without Former Employee 9’s
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`statements.
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`d. Statements Regarding Working Media Investments
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`Defendants argue that Plaintiffs have not demonstrated the falsity of statements that the
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`Company was increasing its investment in working media (meaning money spent on buying ad
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`space and airtime, and promotional activity) [274 at ¶ 141]. Specifically, they challenge
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`allegations from Former Employee 3, an international sales executive who left the Company in
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`December 2016. Defendants point out that some of the statements regarding working media were
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`made after Former Employee 3 left Kraft Heinz and argue that the amended complaint does not
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`explain how an international sales executive would know how much Kraft Heinz was spending on
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`working media. [280 at 35.] Though it is not outlandish to think that a senior sales executive would
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`have information about a company’s spending on marketing, Defendants’ points are well taken.
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`12
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`Case: 1:19-cv-01339 Document #: 310 Filed: 08/11/21 Page 13 of 50 PageID #:15144
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`But the amended complaint contains other allegations about cuts to media spending that undermine
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`Defendants’ argument, including one former employee’s comment that Kraft Heinz “was always
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`cutting the media budget” and had no “long-term strategy for growth,” and another former
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`employee’s report that the marketing budget for one of the company’s coffee brands was cut from
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`$30 million to $2 million. [274 at ¶ 138.] Even if the Court sets aside Former Employee 3’s
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`statements, the amended complaint’s allegations regarding working media investment are
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`sufficient.
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`e. Statements Regarding Contracts with Canadian Retailers
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`In 2016, several Canadian retailers renegotiated contracts with Kraft Heinz. Plaintiffs
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`allege that Kraft Heinz engaged in channel stuffing that prompted the renegotiations and that the
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`new contracts did not include guaranteed volume agreements, which led to significantly decreased
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`volumes of sales in Canada. Defendants deny the falsity of several of their statements about
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`Canadian retailers, including that Defendants were satisfied with the new contracts, that the new
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`contracts were a “win-win,” and that the new contracts restored “normal go-to-market activity.”
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`[280 at 36.] Plaintiffs argue that it was misleading to say these things but not reveal information
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`about termination of the volume agreements. [274 at ¶ 168; 295 at 51.] The Court agrees. The
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`amended complaint pleads that Defendants’ failure to disclose the changes to Canadian retailer
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`contracts, especially the loss of guaranteed volume of sales to certain retailers, rendered misleading
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`its statements about the renegotiated contracts. Those allegations are sufficient for the pleading
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`stage. See In re Neopharm, Inc. Sec. Litig., 2003 WL 262369, at *11 (N.D. Ill. Feb. 7, 2003) (if
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`Phase II trials of experimental drug failed so badly that Phase I results would be effected and
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`company was effectively back to the drawing board with respect to that drug’s development, public
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`statement that concealed the nature of the problems with the drug were misleading); In re Westell
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`Techs., Inc., 2001 WL 1313785, at *8 (N.D. Ill. Oct. 26, 2001) (finding optimistic statements about
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`sales to a customer to be misleading when defendants knew that sale to that customer would “drop
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`precipitously”); In re Spyglass, Inc. Sec. Litig., 1999 WL 543197, *3 (N.D. Ill. July 21, 1999)
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`(denying motion to dismiss where plaintiff alleged a material misrepresentation based on
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`defendants’ release of positive news while omitting information that half of the contracts on which
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`profitable projections had been made were in jeopardy).
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`f. Statements Regarding Efficacy of Internal Controls
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`Kraft Heinz’s SEC filings during the Class Period certified that Kraft Heinz’s internal
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`controls were effective and provided reasonable assurances regarding the reliability of the
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`Company’s financial reports. See [274 at ¶ 489-493.] Kraft Heinz later admitted that its internal
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`controls were deficient and had material weaknesses. [274 at ¶¶ 265, 494-500.] Defendants say
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`that the amended complaint fails to state a claim because it lacks allegations that these statements
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`“inaccurately reflect[] the conclusions reached by the CEO and CFO at that time or incorrectly
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`portrayed the process used to reach those conclusion.” [280 at 37.] But the amended complaint
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`alleges that the material weaknesses in Kraft Heinz’s financial controls caused specific
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`deficiencies that led to overstatements in the financial reporting, despite its public statements to
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`the contrary during the class period and despite knowing that the SEC was investigating Kraft
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`Heinz’s accounting practices. That is enough to satisfy the falsity requirement at this stage.2 In re
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`Akorn, Inc. Sec. Litig., 240 F. Supp. 3d 802, 815–16 (N.D. Ill. 2017); Roth v. OfficeMax, Inc., 2006
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`WL 2661009, at *4 (N.D. Ill. Sept. 13, 2006) (“Plaintiffs have adequately alleged that these
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`statements were false or misleading because the Company restated its financial results....”); see
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`also In re BISYS Sec. Litig., 397 F.Supp.2d 430, 437 (S.D.N.Y. 2005) (“Pursuant to Generally
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`2 Defendants’ argument seems more related to scienter, which the Court addresses below.
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`Accepted Accounting Principles (‘GAAP’), previously issued financial statements should be
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`restated only to correct material accounting errors that existed at the time the statements were
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`issued.... [T]he mere fact that financial results were restated is sufficient basis for pleading that
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`those statements were false and misleading.”) (internal quotation marks omitted).
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`2. Materiality
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`Defendants argue that the amended complaint fails to allege materiality for certain
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`statements. Materiality is a “fact-specific inquiry” that “depends on the significance the reasonable
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`investor would place on the withheld or misrepresented information.” Basic Inc. v. Levinson, 485
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`U.S. 224, 240 (1988). Therefore, “the determination of materiality requires delicate assessments
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`of the inferences a reasonable shareholder would draw from a given set of facts and the significance
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`of those inferences to him, and these assessments are peculiarly ones for the trier of fact; thus a
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`materiality determination is rarely appropriate at the summary judgment stage, let alone on a
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`motion to dismiss.” Marks v. CDW Computer Ctrs., Inc., 122 F.3d 363, 370 (7th Cir. 1997)
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`(reversing dismissal of a § 10(b) claim and rejecting defendant’s argument that statements were
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`not material as a matter of law) (brackets and internal quotation marks omitted); see also Ganino
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`v. Citizens Util. Co., 228 F.3d 154, 162 (2d Cir. 2000) (“[W]hen presented with a Rule 12(b)(6)
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`motion, a complaint may not properly be dismissed on the ground that the alleged misstatements
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`or omissions are not material unless they are so obviously unimportant to a reasonable investor
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`that reasonable minds could not differ on the question of their importance.”) (internal quotation
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`marks and ellipsis omitted).
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`Defendants first argue that Plaintiffs’ “scattershot” allegations about problems at “isolated
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`components” of Kraft Heinz’s “vast business” do not meet the threshold for materiality. [280 at
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`38.] But Defendants miss the point. The amended complaint does not assert that, on its own and
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`out of context, the failure to disclose each of these problems was a material misstatement or
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`omission. Rather, the amended complaint provides specific—not scattershot—examples to
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`support its allegations that Defendants cut costs in maintenance and quality assurance across the
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`company and that those choices caused problems. ¶ 93, the first one that Defendants claim is
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`inadequate (see [280 at 38]) starts with “As an example of how Kraft Heinz’s cost-cutting impacted
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`the Company’s supply chain…” [274 at ¶ 93] (emphasis added). The Court declines to take
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`Defendants’ view of these allegations, because neither the PSLRA, nor Rule 9(b),