United States District Court, D. Utah, Central Division
APRIL RUMBAUGH, Individually and On Behalf of Others Similarly Situated, Plaintiffs,
USANA HEALTH SCIENCES, INC., DAVID A. WENTZ and PAUL A. JONES, et al., Defendants.
MEMORANDUM DECISION AND ORDER
Benson United States District Judge
above-captioned case is a federal securities class action
lawsuit filed on behalf of all persons, other than
defendants, who purchased or acquired USANA securities
between March 14, 2014 and February 7, 2017 (the “Class
Period”), seeking damages for the alleged violation of
federal securities laws. (Dkt. 22, Am. Compl. ¶ 1.) This
case is before the court on Defendants' motion to dismiss
the Consolidated Amended Class Action Complaint pursuant to
Federal Rules of Civil Procedure 8, 9(b), and 12(b)(6), and
the Private Securities Litigation Reform Act of 1955, 15
U.S.C. § § 78u-4(a) et seq.
is a publicly traded Utah company that develops, manufactures
and sells nutritional and personal care products worldwide.
To distribute and sell its products, USANA has traditionally
employed a multi-level marketing business model, relying
“on its existing distributors to recruit new
distributors by paying the existing distributors a percentage
of their recruits' sales.” (Dkt. 22, Am. Compl.
¶ 3.) The recruits are known as a distributor's
“downline” while the distributor is known as the
recruits “upline.” (Id.) Distributors
also make money through direct sales of products to
has an absolute prohibition on multi-level marketing (i.e.,
payment to promoters based on the recruitment of other
promoters rather than based on sales to customers).
Accordingly, companies such as USANA who do business in China
are required to modify their business models to focus on
direct sales to consumers rather than distributor
recruitment. (Id. ¶ 4.)
alleges that during the years leading up to the class period
in this case, Defendants created a “scheme” of
illicit sales in China. According to Plaintiff, part of that
scheme involved circumventing Chinese laws banning
multi-level marketing by recruiting Chinese nationals and
having them register using a fictitious address in Hong Kong.
According to Plaintiff, this resulted in an
“explosion” of Hong-Kong based revenue between
2009 and 2012. (Id. ¶ 7.)
midst of those years, in 2010, USANA acquired Baby Care, a
People's Republic of China-based manufacturing company
that develops and sells nutritional products primarily for
infants. Plaintiff asserts that BabyCare's direct selling
license provided a means for USANA to establish a
“behind-the-scenes” presence in China. (Am.
Compl. ¶¶ 9-10.) As a result of acquiring BabyCare,
over the next several years, USANA was able to obtain Chinese
government approval for “hard to obtain” direct
selling licenses in multiple Chinese provinces. (Id.
alleges that Hong Kong sales began to decline in direct
proportion to the rise in mainland China sales, as sales once
attributed to USANA's Hong Kong market “appeared to
be reported in BabyCare” in violation of the Foreign
Corrupt Practices Act. (Id. ¶ 12.) Plaintiff
also claims that even though USANA had acquired multiple
direct selling licenses, USANA nonetheless continued to
engage in banned multi-level marketing practices.
setting forth these historical underpinnings, Plaintiff
alleges that during the relevant class period - March 14,
2014 through February 7, 2017 - USANA made numerous false
statements and misleading omissions when speaking about its
business in China. Specifically Plaintiff alleges that USANA
misled investors by purporting to be in compliance with
Chinese regulations prohibiting multi-level marketing, when
in actuality USANA was continuing to knowingly engage in the
prohibited practice, and that USANA's China sales
“exploded” as a result of improperly
“redirected Hong Kong sales.” (Id.
further alleges that in September 2016, during the class
period, local police opened an investigation into illegal
multi-level marketing by BabyCare/USANA. Plaintiff claims
that the local investigation turned into a “full-blown
national investigation, ” and that in November 2016,
USANA received a warning from authorities concerning its
compliance with Chinese law. (Id. ¶¶
16-18.) Plaintiff complains that neither the investigation
nor the warning were communicated to USANA investors.
(Id. ¶ 19.)
the Amended Complaint alleges that on February 7, 2017, the
Class Period ended with USANA's disclosure that
“[t]he company is voluntarily conducting an internal
investigation of its China operations, BabyCare Ltd. . . .
focus[ing] on the compliance with the Foreign Corrupt
Practices Act . . . and certain conduct and policies at
BabyCare, including BabyCare's expense reimbursement
policies.” (Am. Compl. ¶ 22.) USANA advised
investors that the company had retained outside counsel to
conduct the investigation and had notified both the SEC and
the U.S. Department of Justice of the investigation. On this
news, USANA's share price fell 11.57% to close at $55.40
on February 8, 2017. (Id. ¶ 23.)
on these allegations, on August 4, 2017, Plaintiff filed the
Amended Consolidated Class Action Complaint asserting claims
for (1) securities fraud under Section 10(b) of the Exchange
Act, 15 U.S.C. § 78j, and implementing Rule 10b-5; and
(2) control person liability against the individual
defendants pursuant to Section 20(a) of the Exchange Act, 15
U.S.C. § 78t.) Defendants have moved to dismiss,
contending that Plaintiff's complaint fails to meet the
pleading requirements of Rules 8, 9(b) and 12(b)(6) of the
Federal Rules of Civil Procedure and the Private Securities
Litigation Reform Act, and otherwise fails to state a claim
for which relief can be granted.
court's function on a Rule 12(b)(6) motion is not to
weigh potential evidence that the parties might present at
trial, but to assess whether the plaintiff's complaint
alone is legally sufficient to state a claim for which relief
may be granted.” Dubbs v. Head Start, Inc.,
336 F.3d 1194, 1201 (10th Cir. 2003) (citations
and quotation marks omitted). Under Rule 12(b)(6), the court
must accept all well-pleaded allegations in the Amended
Complaint as true and view those allegations in the light
most favorable to the nonmoving party. Stidham v. Peace
Officer Standards Training, 265 F.3d 1144, 1149
(10th Cir. 2001) (quoting Sutton v. Utah Sch.
for the Deaf & Blind, 173 F.3d 1226, 1236
(10th Cir. 1999)).
Court must limit its consideration to the four corners of the
Amended Complaint, and any documents attached thereto, and
any external documents that are referenced in the Amended
Complaint and whose accuracy is not in dispute. Oxendine
v. Kaplan, 241 F.3d 1272, 1275 (10thCir.
2001); Jacobsen v. Deseret Book Co., 287 F.3d 936,
941 (10th Cir. 2002). “To survive a motion
to dismiss, a complaint must contain sufficient factual
matter, accepted as true, to ‘state a claim to relief
that is plausible on its face.'” Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009) (citing Bell
Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)).
Plausibility, in the context of a motion to dismiss,
constitutes facts which allow “the court to draw the
reasonable inference that the defendant is liable for the
misconduct alleged.” Id.
the court need not accept conclusory allegations without
supporting factual averments. Southern Disposal, Inc. v.
Texas Waste, 161 F.3d 1259, 1262 (10th Cir.
1998). “[T]he tenet that a court must accept as true
all of the allegations contained in a complaint is
inapplicable to legal conclusions. Threadbare recitals of the
elements of a cause of action, supported by mere conclusory
statements, do not suffice.” Iqbal, 556 U.S.
at 678. “Where a complaint pleads facts that are
‘merely consistent with' a defendant's
liability, it ‘stops short of the line between
possibility and plausibility of ‘entitlement to
relief.'” Id. (citation omitted).
civil actions, a complaint need only contain “a short
and plain statement of the claim showing that the pleader is
entitled to relief.” Fed.R.Civ.P. 8(a)(2). However,
civil actions alleging securities fraud are subject to a
heightened pleading standard. Prior to the enactment of the
Private Securities Litigation Reform Act
(“PSLRA”), securities fraud actions were analyzed
by the pleading standards of Federal Rule of Civil Procedure
9(b), which required that “the circumstances
constituting the fraud . . . be stated with particularity,
” though “[m]alice, intent, knowledge, and other
condition of the mind of a person, may be averred
generally.” Fed.R.Civ.P. 9(b); Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 319
PSLRA, which now applies to such actions, requires that the
complaint “specify each statement alleged to have been
misleading, the reason or reasons why the statement is
misleading, and, if an allegation regarding the statement or
omission is made on information and belief, the complaint
shall state with particularity all facts on which that belief
is formed.” 15 U.S.C. § 78u-4(b)(1). Allegations
of scienter are subject to even more requirements: Plaintiff
cannot allege scienter generally, and must state particular
facts giving rise to a strong inference of scienter with
respect to each act or omission, taking into account
plausible, non-culpable alternative explanations for a
defendant's conduct along with inferences that favor the
plaintiff. In re Gold Resource Corporation Securities
Litig., 776 F.3d 1103, 1108-09 (10th Cir.
2015); 15 U.S.C. § 78u-4(b)(2). “Congress left the
key term ‘strong inference' undefined, ” but
the Supreme Court has held that, “[t]o qualify as
‘strong' . . ., an 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.” Tellabs, 551 U.S. at
314; see id. at 324, 328 (stating that the
“inference that the defendant acted with scienter need
not be irrefutable” but must be “at least as
likely as any plausible opposing inference”).