Case 1:19-cv-10102-DPW Document 11 Filed 07/08/20 Page 1 of 34
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`UNITED STATES DISTRICT COURT
`FOR THE DISTRICT OF MASSACHUSETTS
`
`In re WAYFAIR, INC. Securities )
`)
`Litigation
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`) Civil Action No.
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`) 19-10062-DPW
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`This Document Relates To:
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`ALL ACTIONS
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`MEMORANDUM AND ORDER
`July 8, 2020
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`After Wayfair, Inc., an online home goods retailer, missed
`its quarterly financial projection by .002% one quarter, several
`individuals who say they consequently lost money in the stock
`market initiated the two lawsuits I have consolidated before me.
`This putative class action litigation is brought against Wayfair
`and its three most senior officers, all of whom also serve as
`directors, to recover those losses. Because I find Plaintiffs
`have not adequately alleged material misstatements of fact,
`demonstrated actionable scienter, or shown loss causation, I
`will grant Defendants’ motion to dismiss.
`I
`BACKGROUND1
`
`Wayfair is a huge online home goods store. As online
`
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`1 This background is drawn from the materials available in the
`motion to dismiss record for review—principally the operative
`Amended Complaint. It is presented in the light most favorable
`to the plaintiffs as non-moving parties. Silverstrand
`Investments v. AMAG Pharm., Inc., 707 F.3d 95, 101 (1st Cir.
`2013).
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`Case 1:19-cv-10102-DPW Document 11 Filed 07/08/20 Page 2 of 34
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`retail has grown and Wayfair has faced increasing competition,
`Wayfair has spent more and more money on advertising — $191
`million in 2014, $278 million in 2015, $409 million in 2016,
`$550 million in 2017, and $774 million in 2018 — to leverage
`revenue. Revenue correspondingly increased: Wayfair’s annual
`revenue was $1.32 billion in 2014, $2.25 billion in 2015, $3.38
`billion in 2016, $4.72 billion in 2017, and $6.78 billion in
`2018.
`During the alleged class period (August 2, 2018-October 31,
`2018), Wayfair’s advertising-revenue leverage was worse
`(deleveraged) than in previous years. Plaintiffs assert that
`Defendants knew of this problem but concealed it from investors.
`The defendants, Plaintiffs contend, in fact made false
`statements to the public about Wayfair’s financial position and,
`in particular, that defendant Niraj Shah, Wayfair CEO and
`President and Co-Chairman of the Board of Directors, made these
`false and misleading statements during this time period:
` So ad spend, if you look at it sequentially over the
`last few years, it continues to drift down . . . .
`the costs get less and less on the advertising.
`
` And what you see, no matter which way you cut, you
`can see systematically that actually as customers
`increasingly repeat, the effective ad cost to get
`them [to] come back goes down and those models are
`kind of self-learning . . . . [W]e’re highly
`confident that we understand what each tranche costs
`us. And you pretty much clearly see it coming down.
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` And we talked about advertising. We talked about the
`payback cycle and keeping that very tight . . . .
`But when you take the profit margin we talk about,
`and you multiply it by a very large top line, you
`start talking about a very significantly profitable
`company.
`
` The U.S. has now been EBITDA2 profitable, 6 of the
`last 7 quarters . . . . you can actually see how
`growing very quickly actually evolves you into the
`profitable model.
`Wayfair’s stock price during the class period reached
`$151.20 per share on September 14, 2018. During that same time
`period, the individual defendants, Shah, Steven K. Conine, Co-
`Chair of the Board of Directors, and Michael D. Fleisher, Chief
`Financial Officer, collectively sold $69 million of their
`personally held Wayfair shares in dozens of transactions. The
`record before me does not clearly indicate whether this was
`unusual transactional activity for those individuals.
`Before the stock market opened on November 1, 2018, the day
`Wayfair would be filing its 3Q 2018 SEC Form 10-Q, Defendants
`disclosed in a press release and a conference call that their 3Q
`results were worse than anticipated. In the conference call,
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`2 The standard definition of EBITDA is “[a] company’s income
`without deductions for interest expenses, taxes, depreciation
`expenses, or amortization expenses, used as an indicator of a
`company’s profitability and ability to service its debt.”
`Earnings before interest, taxes, and depreciation, BLACK’S LAW
`DICTIONARY (10th ed. 2014). The parties do not appear to dispute
`the common definition of this acronym for an earnings and
`profitability metric.
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`Defendant Fleisher said that Wayfair’s advertising had
`deleveraged in a year to year comparison between 3Q 2017 and
`3Q 2018, from 11.8% in 3Q 2017 to 11.9% in 3Q 2018.3 According
`to the amended complaint, however, Defendants had “misleadingly
`signaled during the Class Period” that they were experiencing
`positive leverage. Defendant Fleisher explained during the call
`that the two factors driving the incremental expense which
`resulted in a loss were advertising spending, which was higher
`than usual because of paybacks (“we continued to see great
`opportunities within our paybacks”) and headcount hiring.
`On November 1, 2018, following that conference call,
`Wayfair stock suffered a 12.8% loss, closing at $96.16 a share.
`Wayfair had an EBITDA loss of $76.4 million, a net loss of
`$151.7 million ($1.69/share), and negative free cash flow of
`$58.8 million. Plaintiffs characterize these losses as “much
`worse than Defendants had signaled during the Class Period
`[August 2, 2018 – October 31, 2018].” On November 2, 2018, the
`stock price fell an additional 3.3%.
`
`
` 
`3 When Wayfair released its second quarter earnings by filing its
`10-Q on August 2, 2018, it had forecasted advertising spending
`as a percentage of net revenue for the third quarter to be above
`the 10.7% experienced in its second quarter 2018 but below the
`11.8% experienced in the third quarter 2017. Instead, Wayfair’s
`advertising expense as a percentage of net revenue for third
`quarter 2018 was 11.9%, which Wayfair treats in its briefing,
`apparently through a rounding convention, to be .002% above the
`high end of its August 2, 2018 forecast.
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`II
`MOTION TO DISMISS STANDARD
`As a general proposition, a complaint must assert factual
`allegations that are more than merely speculative in order to
`survive a motion to dismiss under Fed. R. Civ. P. 12(b)(6).
`Isham v. Perini Corp., 665 F. Supp. 2d 28, 33 (D. Mass. 2009).
`In evaluating the plaintiffs’ allegations in the complaint, I
`may look only to the “facts alleged in the pleadings, documents
`attached as exhibits or incorporated by reference in the
`complaint and matters of which judicial notice can be taken.”
`Id. at 33 (citing Nollet v. Justices of the Trial Court of
`Mass., 83 F.Supp.2d 204, 208 (D. Mass. 2000) aff'd, 248 F.3d
`1127 (1st Cir.2000)). In evaluating the complaint, I must
`accept all factual allegations as true and draw all reasonable
`inferences in the light most favorable to the plaintiffs.
`Isham, 665 F.Supp.2d at 33 (citing Langadinos v. Am. Airlines,
`Inc., 199 F.3d 68, 69 (1st Cir.2000)).
`More specific requirements are in play for securities
`litigation. The First Circuit has directed that “[t]o state a
`claim under Section 10(b) of the Securities Exchange Act,
`plaintiffs must adequately plead ‘(1) a material
`misrepresentation or omission; (2) scienter; (3) a connection
`with the purchase or sale of a security; (4) reliance; (5)
`economic loss; and (6) loss causation.’” Metzler Asset
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`Case 1:19-cv-10102-DPW Document 11 Filed 07/08/20 Page 6 of 34
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`Management v. Kingsley, 928 F.3d 151, 158 (1st Cir. 2019)
`(quoting In re Biogen Inc. Securities Lit., 857 F.3d 34, 41 (1st
`Cir. 2017)). In addition, “[a] complaint alleging a violation
`of 10(b) must also meet the heightened pleading standards of the
`PSLRA [Private Securities Litigation Reform Act], which requires
`that the complaint ‘specify each statement alleged to have been
`misleading’ as well as ‘the reason or reasons why the statement
`is misleading.’” In re Biogen, 857 F.3d at 41 (quoting 15
`U.S.C. § 78u-4(b)(1)).
`
`III
`CLASS CERTIFICATION
`
`Federal Rule of Civil Procedure 23(c)(1)(a) directs a court
`to act on a motion for class certification “[a]t an early
`practicable time.” In light of the rigorous analysis I would be
`required to undertake in order to determine whether class
`certification is appropriate in this Private Securities
`Litigation Reform Act litigation, I am of the view that
`addressing the case at the threshold through a motion to dismiss
`is the best course. See generally 3 Newberg on Class Actions §
`7:9 (5th ed.)(“Given the early nature of most motions to
`dismiss, courts will often handle them prior to deciding a
`motion for class certification.”); cf. In re New Motor Vehicles
`Canadian Exp. Antitrust Litig., 522 F.3d 6, 26–27 (1st Cir.
`2008)(“[I]t is not uncommon to defer final decision on
`certifications pending completion of relevant discovery.”).
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`Accordingly, I follow the direction chosen by the defendants in
`first filing a motion to dismiss and consider the dispositive
`question whether the case, irrespective of class treatment,
`presents claims upon which relief may be granted.
`IV
`SECTION 10(b) ALLEGATIONS
`
`Plaintiffs allege securities fraud under § 10(b) of the
`Securities and Exchange Act. That section provides:
`It shall be unlawful for any person, directly or
`indirectly . . .(b) To use or employ, in connection
`with the purchase or sale of any security registered
`on a national securities exchange or any security not
`so registered, or any securities-based swap agreement
`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.A. § 78j.
`
`A. Whether Plaintiffs Have Pled Any Actionable Misstatements
`or Omissions
`
`To state a claim for securities fraud, Plaintiffs must
`allege a material misrepresentation or omission. Metzler, 928
`F.3d at 158. Under the Private Securities Litigation Reform
`Act, at the pleading stage a complaint “alleging securities
`fraud [must] ‘specify each statement alleged to have been
`misleading’ and ‘the reason or reasons why the statement is
`misleading.’” Mehta v. Ocular Therapeutix, Inc., 955 F.3d 194,
`206 (1st Cir. 2020)(quoting 15 U.S.C. § 78u-4(b)(1)).
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`Plaintiffs allege four material omissions and approximately
`twelve actionable misstatements.
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`I examine each of the statements as part of a group of
`similar statements.
`1. Statements Showing Defendants’ Confidence in Wayfair’s
`Performance
`
`Several of the defendants’ alleged statements are merely
`generalized expressions of confidence in Wayfair’s performance.
`Those statements are:
`August 2, 2018 press release, Defendant Shah:
` “We are delighted with the progress that we are
`making and the way in which we are positioned to
`keep taking market share as dollars shift online.”
`
`August 2, 2018 conference call, Defendant Fleisher:
`
` “We remain incredibly bullish about our business,
`both in the near term and long term. The investments
`we have been making to bring our customers the best
`possible offering are clearly working with strength
`across our customer KPIs [key performance
`indicators] and our market share growing, as a
`result.”
`
`Those statements are not actionable.
`[C]ourts have demonstrated a willingness to find
`immaterial as a matter of law a certain kind of rosy
`affirmation commonly heard from corporate managers and
`numbingly familiar to the marketplace—loosely
`optimistic statements that are so vague, so lacking in
`specificity, or so clearly constituting the opinions
`of the speaker, that no reasonable investor could find
`them important to the total mix of information
`available.
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`In re Biogen Inc. Sec. Litig., 193 F. Supp. 3d 5, 41 (D. Mass.
`2016), aff'd, 857 F.3d 34 (1st Cir. 2017)(quoting Shaw v.
`Digital Equip. Corp., 82 F.3d 1194, 1217 (1st Cir. 1996)).
`Such “[c]laims of puffery now require a court to consider
`(1) ‘whether the statement is so vague, so general, or so
`loosely optimistic that a reasonable investor would find it
`unimportant to the total mix of information’ and (2) ‘whether
`the statement was also considered unimportant to the total mix
`of information by the market as a whole.’” In re Biogen Inc.
`Sec. Litig., 193 F. Supp. 3d at 41 (quoting Brumbaugh v. Wave
`Sys. Corp., 416 F.Supp.2d 239, 250 (D. Mass. 2006)). Here, the
`defendants’ claims that they were “delighted” with the progress
`Wayfair was making, that they were “bullish” about their
`business, and that market share would grow are examples of
`expressions of loose optimism and here immaterial. See LSI
`Design & Integration Corp. v. Tesaro, Inc., No. 18-CV-12352-LTS,
`2019 WL 5967994, at *5 (D. Mass. Nov. 13, 2019)(finding
`defendant’s “statement that Tesaro was ‘well positioned to take
`this forward’ is precisely the type of statement of corporate
`optimism that courts routinely deem immaterial as a matter of
`law”).
`2. Forward-Looking Statements
`Another set of Defendants’ alleged statements are forward-
`looking projections and forecasts about what the defendants
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` 
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`expected to see in Wayfair’s future.
`August 2, 2018 conference call, Defendant Fleisher:
` “For consolidated adjusted EBITDA, we forecast
`margins of negative 3.7% to negative 4% for Q3 2018.
`We expect international adjusted EBITDA to be
`negative $45 million to negative $50 million in Q3
`as we continue to add resources and ad spend in
`Canada, the U.K. and Germany. In the U.S. business,
`we expect to deliver adjusted EBITDA margin of
`approximately negative 1% as we invest primarily in
`headcount to build continued scale in our primary
`market.”
`
` “Q2 advertising spend of $178 million or 10.7% of
`net revenue represents year-over-year leverage of
`over 30 basis points, as we invest in engaging both
`new and repeat customers and benefit from a growing
`base of repeat customers who require a lower level
`of ad spend per dollar of revenue. . . . Looking out
`to Q3, we’re comfortable leaning in on ad spend,
`while maintaining our overall 1-year contribution
`margin payback target, given the ongoing strength
`we’re seeing in customer KPIs [key performance
`indicators]. We, therefore, expect overall ad spend
`as a percentage of net revenue to increase
`sequentially in Q3 versus Q2, as it did last year,
`while still showing a modest amount of year-over-
`year leverage compared to the 11.8% level of Q3 last
`year.”
`
`August 2, 2018, Form 10-Q for 2Q18, Defendants Shah
`and Fleisher:
` “Advertising consists of direct response performance
`marketing costs, such as display advertising, paid
`search advertising, social media advertising, search
`engine optimization, comparison shopping engine
`advertising, television advertising, direct mail,
`catalog and print advertising. We expect
`advertising expense to continue to increase but
`decrease as a percentage of net revenue over time
`due to our increasing base of repeat customers.”
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`These forward-looking statements, in which the terms of
`expectation have been set in bold for emphasis in this
`Memorandum, are covered by the safe-harbor provision of the
`Private Securities Litigation Reform Act. “Congress, in
`providing the limited safe harbor protection, sought to
`encourage market efficiency by encouraging companies to disclose
`future projections without fear that those projections, if they
`did not materialize, would result in an action for fraud.” In
`re Biogen, 193 F.Supp.3d at 39-40 (quoting In re Biogen IDEC,
`Inc. Sec. Litig., 05-cv-10400-WGY, 2007 WL 9602250, at *10 (D.
`Mass. Oct. 25, 2007)). Accordingly,
`issuers and underwriters of securities shall not be
`liable in any private action based on an untrue or
`misleading statement of a material fact ”with respect
`to any forward-looking statement” if the forward-
`looking statement is “identified as a forward-looking
`statement, and is accompanied by meaningful cautionary
`statements identifying important factors that could
`cause actual results to differ materially from those
`in the forward-looking statement, . . . or . . . the
`plaintiff fails to prove that the forward-looking
`statement . . . [if made on behalf of a business
`entity by or with the approval of an executive
`officer] was made . . . with actual knowledge by that
`officer that the statement was false or misleading.”
`
`In re Stone & Webster, Inc., Sec. Litig., 414 F.3d 187, 211-12
`(1st Cir. 2005)(quoting 15 U.S.C. § 78u–5(c)(1)).
`The Private Securities Litigation Reform Act defines
`“forward-looking statement” as:
`(A) a statement containing a projection of revenues,
`income (including income loss), earnings (including
`earnings loss) per share, capital expenditures,
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`dividends, capital structure, or other financial
`items; (B) a statement of the plans and objectives of
`management for future operations . . .; (C) a
`statement of future economic performance, including
`any such statement contained in a discussion and
`analysis of financial condition by the management . .
`. .
`15 U.S.C. § 78u–5(i)(1).
`In other words, a statement is not actionable under the
`statute if it is identified as forward-looking and is cabined by
`cautionary language, or if the plaintiff does not show that the
`officer making the statement knew it was false or misleading.
`Statements projecting likely growth in the future are examples
`of such forward-looking statements. In re Biogen, 193 F.Supp.3d
`at 40.
`
`Here, Wayfair’s forward-looking projections about how it
`expected to do in the coming quarters is the type of forward-
`looking projection that the Private Securities Litigation Reform
`Act covers. The language “we expect” and “we forecast” is
`clearly “forward-looking, predictive language.” Coyne v.
`Metabolix, Inc., 943 F. Supp. 2d 259, 266 (D. Mass. 2013). More
`specifically, Plaintiffs have not alleged with particularity
`that Defendants knew these statements were false at the time
`they were made; all that has been suggested is that it defies
`common sense that Defendants did not know.
`
`I find Plaintiffs have not demonstrated that these
`statements were anything other than forward-looking expressions
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`of opinion and subject to the safe-harbor provision of the
`Private Securities Litigation Reform Act.
`3. Other Non-Fraudulent Statements
`A third category of Defendants’ statements are not forward-
`looking or puffery, but are, instead, statements about Wayfair’s
`strategies, including its advertising strategies, that
`Plaintiffs simply have not adequately alleged were fraudulent
`when made. These statements are:
`August 2, 2018 conference call, Defendant Shah:
` “I think the key thing to keep in mind on what we do
`on our paid advertising, and this is a very unique
`thing for us when you compare us to other folks, is
`we built all our advertising technology in-house. .
`. . So there’s a lot of new customers to get. And
`then, obviously, the share of wallet is a huge
`opportunity. So to your point, repeat is, obviously,
`a big opportunity too. So I think building our own
`ad tech has been a huge advantage, but there’s also
`a lot more customers to get, so that’s why we keep
`adding them.”
`
`August 8, 2018, Canaccord Genuity Growth Conference,
`Defendant Shah:
` “Actually, so our cost for repeat orders continues
`to get lower and lower, because customers--
`basically we invest a lot to make the experience
`great, okay. And that’s useful, if someone
`experiences it, but they have customers who have and
`customers who haven’t, so. Then customer
`acquisition, we’re very quantitative about that.
`We’ll spend an amount of money such that we get paid
`back within a year. So the number of customers we
`get is the outcome of basically how many customers
`we can acquire with that payback methodology. The
`reason we grow so quickly is that every quarter
`since we went public, you can look at our growth
`based on repeat orders and our growth based on new
`orders, so new customers basically, and you look at
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`Case 1:19-cv-10102-DPW Document 11 Filed 07/08/20 Page 14 of 34
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`our overall growth rate, and our repeat growth has
`outpaced our total growth every quarter.”
`
` “[T]he revenue growth, in fact, has accelerated, and
`it’s gotten—the revenue growth in dollars got
`increasingly, increasingly high, and the ad cost as
`a percentage keeps coming down. So I think the
`understanding that the repeat base drives leverage
`is reasonable well understood now.”
` “So ad spend, if you look at it sequentially over
`the last few years, it continues to drift down, and
`that’s despite the fact that international
`deleveraged it, because international ad costs,
`because we don’t have a repeat base there, is ad
`cost is much, much higher as a percentage of net
`revenues. So the fact that’s coming down, the U.S.
`is even lower than that line, right, delevered then
`by the international, which pulls it back up to
`where you see it. . . . The reason the profitability
`of the business has kept getting better is not
`actually that we’ve ever pulled back on investing.
`It’s just that we’re simply not spending all of the
`incremental contribution margin dollars.”
`
`September 5, 2018, Goldman Sachs Global Retailing
`Conference, Defendant Shah:
` “In terms of how we know what it cost us, what we do
`is, basically, every bit of our spend is--we have
`fairly complex attribution. So we don’t just do last
`click or multi-click. But we have multiple different
`attribution models that we overlay on top of each
`other to basically make sure we triangulate in on
`what we think actual--every action had cost us in
`spend. And then we also add up spend against the
`cohorts of the different customers. And so we’re
`able to know is, well, what’s it cost us to get a
`new customer from a certain channel or a campaign.
`But we actually also can know what’s it cost us when
`we move customers from one order to 2 orders, or 2
`orders to 3 orders, or 3 orders to 4 orders. And
`what’s it cost us for customers of different ages.
`So you can kind of cut it many different ways when
`you do this type of attribution. And what you see,
`no matter which way you cut, you can see
`systematically that actually as customers
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`increasingly repeat, the effective ad cost to get
`them come back goes down and those models are kind
`of self-learning. . . .
`So that is a long-winded way of saying, we’re highly
`confident that we understand what each tranche costs
`us. And you pretty much clearly see it coming down.
`I would agree with you if we only sold a very narrow
`set of very high-cost low-frequency goods – if we
`were selling cars or something like that. Then
`you’re right. You would have to effectively
`reacquire them very – each time unless they had like
`particular brand loyalty. But basically, the mix of
`goods we have does lend itself to being able to
`build a relationship.”
`
` “And we talked about advertising. We talked about
`the payback cycle and keeping that very tight. . . .
`[W]hen you take the profit margin we talk about, and
`you multiply it by a very large top line, you start
`talking about a very significantly profitable
`company. . . . The U.S. has now been EBITDA
`profitable, 6 of the last 7 quarters. . . . [Y]ou
`can actually see how growing very quickly actually
`evolves you into the profitable model.”
`
`September 6, 2018, Citi Global Technology Conference:
` Defendant Conine: “[T]he investment we’re making in
`TV, we’ll continue to sort of grow at a reasonable
`rate. And we see that we get good leverage out of it
`today . . . .”
`
` Defendant Fleisher: “[T]he bigger investment over
`the last few years [than television] has really been
`in the direct online [advertising] where we know
`exactly what the yield is that we’re getting. And I
`think that’s TV— and the brand awareness creates a
`halo around all of that, that’s really quite
`powerful.”
`Plaintiffs have not provided particularized reasons to find
`these statements were false when they were made, or, if so, that
`Defendants knew these statements were false when made. What
`these statements essentially say is that Wayfair’s growth
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`strategy was to keep the customers it brought in, and that the
`defendants were optimistic that the strategy was working.
`Plaintiffs’ conclusory allegation that these statements must
`have been false because Wayfair’s advertising was deleveraged
`during the Class Period even though the statements make it seem
`as though Wayfair was retaining customers is simply not enough
`under the Private Securities Litigation Reform Act standard to
`make these statements actionable as fraudulent.
`Accordingly, I find that Plaintiffs have not adequately
`alleged any fraudulent statements.
`4. Omissions
`The plaintiffs argue that the defendants omitted
`information sufficient to inform the public that:
`in the face of intense competition, Wayfair significantly
`increased advertising spending to meet revenue growth
`expectations;
`the Company’s high advertising expenses, together with high
`operating expenses such as headcount hiring, reduced the
`Company’s margins to an extent much worse than the Company
`disclosed;
`the Company was unable to drive positive advertising
`leverage (i.e., lower advertising spending as a percentage
`of net revenue); and
`the Company was becoming increasingly unprofitable due to
`the escalating expenses needed to maintain revenue growth.
`
`I find this “omitted” information is not sufficiently
`particularized to be actionable under the Private Securities
`Litigation Reform Act. That Wayfair had significantly increased
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`advertising spending was obvious from the statements it made and
`by the fact that it increased advertising spending year to year
`over the most recent several years, as Plaintiffs themselves
`observe. That Wayfair’s advertising expenses reduced the
`company’s margins to an extent worse than disclosed is precisely
`the matter at issue; Plaintiffs claim that Defendants kept this
`information from investors, while Defendants claim they did not.
`Merely stating that Defendants omitted this information is not
`particularized pleading sufficient to meet Private Securities
`Litigation Reform Act standards.
`
`
`
`B. Whether the Amended Complaint Alleges Facts Giving Rise to
`a Strong Inference of Scienter
`A fundamental aspect of actionable securities fraud is
`scienter. Scienter is “a mental state embracing intent to
`deceive, manipulate, or defraud.” Mehta, 955 F.3d at 206
`(quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S.
`308, 319 (2007)). This requires “intentional or willful conduct
`designed to deceive or defraud investors by controlling or
`artificially affecting the price of securities,” City of Dearbon
`Heights Act 345 Police & Fire Ret. Sys. v. Waters Corp., 632
`F.3d 751, 757 (1st Cir. 2011)(quoting Ernst & Ernst v.
`Hochfelder, 425 U.S. 185, 199 (1976)), or a “high degree of
`recklessness.” Mehta, 955 F.3d at 206 (quoting Kader v. Sarepta
`Therapeutics, Inc., 887 F.3d 48, 57 (1st Cir. 2018)).
`Recklessness in this context is a very high bar; it must be “an
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`Case 1:19-cv-10102-DPW Document 11 Filed 07/08/20 Page 18 of 34
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`extreme departure from the standards of ordinary care [] which
`presents a danger of misleading buyers and sellers that is
`either known to the defendant or so obvious that the actor must
`have been aware of it.” Mehta, 955 F.3d at 206 (quoting Brennan
`v. Zafgen, Inc., 853 F.3d 606, 613 (1st Cir. 2017)).
`A strong inference of scienter “must be more than merely
`plausible or reasonable—it must be cogent and at least as
`compelling as any opposing inference of nonfraudulent intent,”
`Mehta, 955 F.3d at 206 (quoting Tellabs, 551 U.S. at 314).
`Consequently, the court must consider “competing inferences
`rationally drawn from the facts alleged.” Mehta, 955 F.3d at
`207 (quoting Tellabs, 551 U.S. at 314). This demanding standard
`for scienter is met “where a complaint ‘contains clear
`allegations of admissions, internal records or witnessed
`discussions suggesting that at the time they made the statements
`claimed to be misleading, the defendant[s] were aware that they
`were withholding vital information or at least were warned by
`others that this was so.’” Mehta, 955 F.3d 206-07 (quoting
`Brennan, 853 F.3d at 614). Facts and circumstances
`demonstrating motive, opportunity, and fraudulent intent can be
`evidence of scienter. Brennan, 853 F.3d at 614.
`
`The Amended Complaint alleges that Defendants knowingly or
`recklessly disseminated materially false information in issued
`statements and also neglected to disclose material facts. The
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`plaintiffs allege that the defendants did so through their
`public statements. The plaintiffs further allege that
`Defendants had a motive to make these false statements.
`1. Did Defendants Knowingly or Recklessly Make False
`Public Statements?
`One of Plaintiffs’ primary arguments is that Defendants
`demonstrated scienter through making publicly false statements
`that they knew or must have known were false. The Amended
`Complaint alleges that the defendants were deeply involved with
`Wayfair’s finances and operations, were intimately aware of
`Wayfair’s financial condition, and therefore knew that Wayfair’s
`financial condition was worse than they disclosed to the market
`during the Class Period. From the outset, it will be important
`to distinguish facts that I must accept as true for the purposes
`of a motion to dismiss from mere speculation, which I am not to
`accept as true. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555
`(2007).
`Here, that Defendants were quite familiar with Wayfair’s
`financial condition is superficially reasonable, since the
`individual defendants were the CEO, Co-Chairman, and CFO of the
`company. I accept that assumption as true for purposes of this
`motion. However, to say that this means that the defendants
`failed to disclose material information to the public during the
`class period is speculative, and I will not adopt such
`speculation.
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`Plaintiffs provide nine statements that Defendants
`allegedly made showing that they knew the precise data regarding
`Wayfair’s advertising expenses, leverage from those expenses,
`customer key performance indicators, and profitability. For
`instance:
`August 2, 2018 Conference Call, Defendant Fleisher:
`
` “Looking out to Q3, we’re comfortable leaning in on
`ad spend, while maintaining our overall 1-year
`contribution margin payback target, given the ongoing
`strength we’re seeing in our customer KPIs [key
`performance indicators]. We, therefore, expect
`overall ad spend as a percentage of net revenue to
`increase sequentially in Q3 versus Q2, as it did last
`year, while still showing a modest amount of year-
`over-year leverage compared to the 11.8% level of Q3
`last year.”
`
`September 5, 2018 Goldman Sachs Global Retailing
`Conference, Defendant Shah:
`
` “And what you see, no matter which way you cu