A federal appeals court on Friday revived a consolidated class action accusing natural-foods company Hain Celestial Group of misleading investors for three years by touting the high demand for its products while concealing that it was propping up its sales figures by “channel stuffing” – offering generous incentives and return policies to get distributors to order excess inventory.
The 2nd U.S. Circuit Court of Appeals vacated part of a ruling by then-Senior U.S. District Judge Arthur Spatt in Long Island, who granted the motion by Hain’s attorneys at DLA Piper to dismiss the entire action in April 2020. Spatt ruled that channel stuffing was not inherently fraudulent, and therefore, Hain Celestial had no duty to disclose it.
But Spatt “mistakenly imported” a fraud requirement into a subsection of the securities law that has none, Judge Pierre Leval wrote for the 2nd Circuit. Information can be materially misleading even if it involves conduct that isn’t fraudulent, Leval added. He was joined by Circuit Judges Robert Sack and Michael Park.
Christine Fox of Labaton Sucharow, co-lead counsel for the class, said she was pleased by the remand. “We look forward to vigorously prosecuting this case on behalf of Hain’s shareholders,” Fox wrote in an email. Hain’s attorneys did not immediately respond to requests for comment.
Its shares fell 26 percent on the news, and dropped another 8 percent when it announced that it was being investigated by the Securities and Exchange Commission in February 2017.
The SEC investigation concluded in 2018 without any charges of fraud, and with no monetary penalties. Hain settled the SEC’s charges of accounting and internal-control violations by agreeing to change its procedures, but without admitting liability.
The investors’ class actions did allege that Hain had engaged in fraud; however, they did not appeal the dismissal of the fraud charges.
For Hain Celestial Group: John Hillebrecht and Marc Silverman of DLA Piper
