     Case: 17-50840    Document: 00514667606    Page: 1   Date Filed: 10/03/2018




        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT      United States Court of Appeals
                                                     Fifth Circuit

                                                                          FILED
                                                                      October 3, 2018
                                 No. 17-50840
                                                                       Lyle W. Cayce
                                                                            Clerk
EMPLOYEES’ RETIREMENT SYSTEM OF THE STATE OF HAWAII,

             Plaintiff - Appellant

v.

WHOLE FOODS MARKET, INCORPORATED; JOHN P. MACKEY;
GLENDA JANE FLANAGAN; WALTER E. ROBB; A. C. GALLO; DAVID
LANNON; KENNETH J. MEYER,

             Defendants - Appellees



                Appeal from the United States District Court
                     for the Western District of Texas


Before KING, ELROD, and HAYNES, Circuit Judges.
KING, Circuit Judge:
      Whole Foods Market, Inc.—an international grocery-store chain
specializing in organic products—recently ran into trouble with several state
and local consumer-protection agencies for weights-and-measures violations.
On multiple occasions, Whole Foods admitted to mislabeling prepackaged
foods such that it charged consumers for more food than the packages actually
contained, in violation of national standards and local laws.
      Whole Foods subsequently faced lawsuits from or on behalf of consumers
who overpaid. This is not such a case. Rather, the plaintiffs in this putative
class-action lawsuit allege that in perpetuating this weights-and-measures
    Case: 17-50840     Document: 00514667606     Page: 2   Date Filed: 10/03/2018



                                  No. 17-50840
fraud against customers, Whole Foods and several of its executives also
defrauded Whole Foods shareholders in violation of federal securities law. The
district court disagreed and dismissed the plaintiffs’ complaint for failure to
state a claim. For the reasons explained below, we AFFIRM.
                                        I.
      We draw the following facts from the plaintiffs’ second-amended
complaint, documents attached to the complaint, and matters on which we may
take judicial notice. See Funk v. Stryker Corp., 631 F.3d 777, 783 (5th Cir.
2011).
                                       A.
      The plaintiffs’ allegations stem from a weights-and-measures scandal
that began to brew as early as 2013 and boiled over in the summer of 2015.
Principally, regulators in California and New York caught Whole Foods
including the weight of packaging—“tare weight,” in the industry parlance—
in the price of many of its prepackaged products. As a result, Whole Foods
effectively charged consumers more than the advertised price per pound for
the affected products. This practice violates national weights-and-measures
standards and various state and local laws that incorporate those standards.
      The plaintiffs allege that the defendants knew about Whole Foods’
weights-and-measures problems as early as February 2013, when it entered a
tolling agreement with authorities in California who were investigating the
issue. On June 11, 2014, this investigation culminated in a lawsuit the State
of California and three California cities brought against Whole Foods in state
court. Whole Foods settled that lawsuit within a week. As part of the
settlement, Whole Foods agreed to refrain from further violations at its
California stores and to implement procedures to ensure pricing accuracy. It
also agreed to pay about $800,000 in fines, fees, and restitution. The state court
issued an injunction that incorporated the terms of the settlement and retained
                                        2
     Case: 17-50840       Document: 00514667606         Page: 3    Date Filed: 10/03/2018



                                      No. 17-50840
jurisdiction over the case to oversee Whole Foods’ compliance. 1 Shortly
thereafter, Whole Foods wrote an open letter to its customers in which it
acknowledged unintentionally violating weights-and-measures standards and
promised to improve its practices.
       But the California settlement hardly marked the end of Whole Foods’
woes. Regulators in Albany, New York fined Whole Foods for weights-and-
measures violations in August 2014 and again in January 2015. Then, on June
24, 2015, the New York City Department of Consumer Affairs (“DCA”) released
a scathing report on Whole Foods’ weights-and-measures practices. In a press
release, the DCA said it uncovered violations at each of Whole Foods’ stores in
New York City. In fact, it reported that 89 percent of the products it tested
failed to meet federal weights-and-measures standards, causing Whole Foods
to overcharge customers between $0.80 and $14.84 per affected product. DCA
inspectors characterized their findings as “the worst case of mislabeling they
[had] seen in their careers.”
       Although Whole Foods officials initially denied the DCA’s allegations,
they soon pivoted to strike a conciliatory tone. On June 29, 2015, Whole Foods’
co-CEOs John Mackey and Walter Robb—both defendants in this lawsuit—
posted a video to Whole Foods’ website admitting that the company had “made
some mistakes” with regards to pricing in its New York City stores. Whole
Foods simultaneously posted a statement on its website detailing policy
changes it intended to implement to guard against future violations.
       The DCA report and Whole Foods’ subsequent apology received national
media attention in the weeks that followed. The New York Times published an
article highlighting the DCA’s allegations the day they were released. USA



       1 The plaintiffs allege that Whole Foods violated this settlement continuously through
at least August 2016.
                                             3
    Case: 17-50840      Document: 00514667606     Page: 4   Date Filed: 10/03/2018



                                   No. 17-50840
Today and Forbes later published articles discussing Whole Foods’ acceptance
of responsibility. At least one market analyst weighed in with a report that
discussed Whole Foods’ “surprising apology for inaccurate pricing.”
      The plaintiffs allege that consumers took notice. Whole Foods’ third-
quarter financial data, which it released on July 29, showed that Whole Foods
missed its sales targets for the quarter and demonstrated a marked slowdown
in sales growth in the two weeks between the DCA’s report and the end of the
quarter. On a conference call with investors that evening, Robb and Whole
Foods CFO Glenda Jane Flanagan—another defendant in this lawsuit—
attributed the decline to the DCA findings and the negative press that it
attracted. Market analysts concurred in this assessment. Whole Foods’
common-stock price fell about ten percent the next day on high-volume trading.
                                         B.
      The putative class plaintiffs purchased Whole Foods common stock
between July 31, 2013, and July 29, 2015. The plaintiffs say that during this
period, Whole Foods made various fraudulent statements that artificially
inflated the price of its stock. Then, the plaintiffs allege, when the extent of
Whole Foods’ weights-and-measures issues came to light, Whole Foods stock
declined to reflect its true value, harming those investors that purchased the
stock at artificially inflated prices.
      The plaintiffs allege three general categories of statements that Whole
Foods made, which (they say) the weights-and-measures scandal eventually
revealed to be false. First, they challenge the defendants’ frequent assertions
that Whole Foods provides competitive pricing to its customers or is working
to improve its pricing:
         • On July 31, 2013, defendant Kenneth Meyer—a Whole
           Foods executive vice president—told investors on a
           conference call, “We don’t have to be ashamed compared to

                                         4
Case: 17-50840   Document: 00514667606    Page: 5   Date Filed: 10/03/2018



                           No. 17-50840
       any other competitor for the exact same items we have great
       prices.”

    • On November 6, 2013, Mackey told investors on a conference
      call, “We have narrowed the price gap versus our competitors
      on known value items to its narrowest margin yet . . . .”

    • On February 12, 2014, Robb told investors on a conference
      call, “Our internal pricing surveys showed improvements
      from Q4 to Q1, in a competitive price positioning across
      virtually all competitors in all areas . . . .”

    • On February 21, 2014, Whole Foods stated in a Form 10-Q
      it filed with the SEC that it was “improving [its] relative
      price positioning[] [and] expanding its value offerings across
      the store.”

    • On May 6, 2014, Robb told investors on a conference call that
      Whole Foods was “continuing to make . . . investments
      strategically in price.” On that same call, defendant A.C.
      Gallo, Whole Foods’ president and COO, said Whole Foods
      was “really focused on being really competitive with [its]
      prices.”

    • On July 30, 2014, Robb told investors on a conference call,
      “[W]e believe our value efforts continue to be a key element
      in driving sales growth over the long-term,” and “[o]ur focus
      going forward is primarily in perishables, where we see
      opportunities to narrow price gaps on select known value
      items.”

    • On November 5, 2014, Mackey told investors on a conference
      call, “We remain committed to the highest quality standards
      and to expanding our value offering.” On that same call,
      defendant David Lannon—a Whole Foods executive vice
      president—said Whole Foods’ internal testing showed it was
      “matching toe-to-toe with all of [its] competitors.”

    • On February 11, 2015, Robb told investors on a conference
      call, “We continue to see unit lift from the lower produce
      pricing we are testing in several markets . . . . [W]e believe

                                 5
    Case: 17-50840    Document: 00514667606    Page: 6   Date Filed: 10/03/2018



                                No. 17-50840
            more competitive produce pricing will greatly benefit our
            overall value perception.”

         • On February 27, 2015, Mackey told an audience of investors
           that Whole Foods has “made investments in price in selected
           markets.”

These statements are false, the plaintiffs insist, because prices on many Whole
Foods products were effectively higher than advertised as a result of the
weights-and-measures problem.
      Second, the plaintiffs point to various proclamations the defendants
made suggesting that Whole Foods holds itself to high standards for
transparency, quality, and corporate responsibility:
         • On November 6, 2013, Mackey told investors on a conference
           call that Whole Foods “continu[ed] to raise the bar even
           higher on [its] standards of transparency.”

         • On November 22, 2013, Whole Foods filed a Form 10-K with
           the SEC that stated Whole Foods “seek[s] to be a deeply
           responsible company in the communities where [it] do[es]
           business around the world, providing ethically sourced,
           high-quality products and transparent information to [its]
           customers.”

         • On March 12, 2014, Robb told an audience of investors,
           “Whole Foods Market has the highest standards in the
           supermarket      industry     of    any    company. . . . The
           transparency that is going to continue to unfold over the
           coming years, that is where we are the leaders and we will
           continue to be the leaders.” He further remarked, “[I]t is not
           just the quality of the products; it is the quality of the
           standards behind the products.”

         • In its June 26, 2014, letter to customers about the California
           settlement, Whole Foods stated that it “always strive[s] for
           transparency and accuracy in everything [it] do[es]” and it
           “take[s] pride in setting higher standards for quality.”


                                      6
    Case: 17-50840    Document: 00514667606     Page: 7   Date Filed: 10/03/2018



                                 No. 17-50840
        • On July 30, 2014, Robb told investors on a conference call,
          “Our brand and our marketing campaign will highlight both
          our value and our values, reinforcing our leadership around
          quality and transparency in the marketplace.” On the same
          call, Mackey said, “We’re going to remind our customers, and
          also people who don’t know Whole Foods very well, what we
          really stand for, and how we’re different and better than
          many of our competitors.”

        • On November 21, 2014, Whole Foods again filed a Form 10-
          K with the SEC in which it stated Whole Foods “seek[s] to
          be a deeply responsible company in the communities where
          [it] do[es] business around the world, providing ethically
          sourced, high-quality products and transparent information
          to [its] customers.”

         • On February 27, 2015, Mackey told an audience of investors,
           “[W]e’re going to concentrate in building that new top for this
           industry: new levels of quality, new levels of transparency,
           new levels of accountability across the entire business.”

         • On May 6, 2015, Mackey stated in a press release, “Our
           Whole Foods Market brand has helped lead the shift in
           consciousness toward fresh, healthy foods by offering the
           highest quality, broadest selection, and best customer
           service. . . .”


The plaintiffs say these statements are false because—far from being
transparent or responsible—Whole Foods was defrauding its customers,
principally by charging them for tare weight.
      Third, the plaintiffs claim that Whole Foods published inflated earnings
statements by including in revenues receipts from fraudulently labeled
products, in violation of generally accepted accounting principles (“GAAP”).
Essentially, the plaintiffs say that because Whole Foods was overcharging
customers on some prepackaged goods, every time it publicly announced its
financial numbers—whether through regulatory filings, press releases, or

                                       7
    Case: 17-50840    Document: 00514667606      Page: 8   Date Filed: 10/03/2018



                                  No. 17-50840
other communications—it exaggerated its earnings by taking into account
money that it had actually received but had not actually earned. According to
the plaintiffs, GAAP prevents a business from recording earnings until the
business has substantially performed its obligation to become entitled to those
earnings. Therefore, the argument goes, because Whole Foods’ weights-and-
measures violations prevented it from substantially performing its obligations
to countless consumers, Whole Foods violated GAAP by counting the money it
had collected from the defrauded customers as earnings.
      As an illustration, consider a customer who purchases chicken at an
advertised price of $5.00 per pound. If the package of chicken the customer
selects is labeled as containing three pounds of chicken but actually contains
only two pounds of chicken and one pound of tare weight, then (according to
the plaintiffs) GAAP dictates that Whole Foods can only count $10.00 of the
$15.00 it collects from the customer as earnings. If Whole Foods records all
$15.00 from that transaction as earnings, then according to the plaintiffs, it
has inflated its earnings by $5.00 allegedly in violation of GAAP. When this
extra $5.00 is compounded by innumerable similar transactions, the plaintiffs
assert that Whole Foods could have inflated its earnings by more than $100
million.
      Thus, the plaintiffs allege that every time Whole Foods communicated
its earnings to shareholders, it misled them by failing to discount money the
company collected but did not earn because of its weights-and-measures
problems. To give one of many examples that the plaintiffs point to, Whole
Foods on February 11, 2015, announced that it took in $167 million in net
income for the first quarter of 2015. The plaintiffs allege that this number is
overstated because it accounts for receipts fraudulently collected in exchange
for tare weight, which—consistent with GAAP—Whole Foods should not have
counted towards its net income.
                                       8
    Case: 17-50840     Document: 00514667606     Page: 9   Date Filed: 10/03/2018



                                  No. 17-50840
                                       C.
      Yochanan Markman, a Whole Foods stockholder, initially brought this
action in the district court against Whole Foods, Mackey, Robb, and Flanagan.
Markman alleged that the defendants each violated § 10(b) of the Securities
Exchange Act of 1934 by deceiving Markman and other investors into
purchasing Whole Foods stock at artificially inflated prices. He further alleged
that the individual defendants violated § 20(a) of the Securities Exchange Act
by controlling Whole Foods’ unlawful conduct. And he purported to represent
a class of similarly situated plaintiffs pursuant to Federal Rule of Civil
Procedure 23.
      The district court later substituted the Employees’ Retirement System
of the State of Hawaii (the “Retirement System”) as the lead plaintiff. The
Retirement System filed an amended complaint in which it added corporate
officers Gallo, Meyer, and Lannon as defendants. On the defendants’ motion,
the district court dismissed the amended complaint without prejudice. It first
concluded that the plaintiffs failed to sufficiently allege that any of the
defendants made a materially false statement in violation of § 10(b). It held
that the statements about transparency, integrity, and quality were all
nonactionable puffery. It next held that the plaintiffs failed to allege the
defendants’ statements about Whole Foods competitive pricing were actually
false or misleading. And it held that the plaintiffs failed to allege Whole Foods’
financial statements were fraudulent with sufficient particularity because it
did not point to any specific instances of Whole Foods recording unearned
money as revenue. It alternatively held that the plaintiffs failed to allege
specifically that any of the defendants knew or should have known the falsity
of the various statements when made. And it explained that because the
plaintiffs did not sufficiently plead a misrepresentation, they also failed to


                                        9
    Case: 17-50840      Document: 00514667606    Page: 10   Date Filed: 10/03/2018



                                  No. 17-50840
plead that the defendants caused their loss. It also dismissed the plaintiffs’
§ 20(a) claims as dependent on the § 10(b) claims.
      The Retirement System filed a second amended complaint, which
included additional factual allegations. Most notably, the Retirement System
attached an affidavit that a Whole Foods data analyst prepared for a separate
lawsuit, which detailed Whole Foods’ total sales on certain perishable products
in New York State between June 2012 and June 2015. The defendants again
moved to dismiss and the district court again granted the defendants’ motion—
this time with prejudice. The district court explained that the affidavit did not
cure the plaintiffs’ prior pleading deficiencies because its conclusion was
hypothetical and was “based on aggregate sales and inventory records not
pertaining to the weight and pricing of prepackaged products.” It further
concluded that the plaintiffs’ new allegations about the defendants’ knowledge
still failed to identify what each individual defendant knew about the falsity of
his statements. It accordingly concluded that the plaintiffs again failed to state
a § 10(b) claim and therefore also failed to state a derivative § 20(a) claim. The
plaintiffs appeal.
                                       II.
      We review orders dismissing a complaint for failure to state a claim de
novo. Alexander v. AmeriPro Funding, Inc., 848 F.3d 698, 705 (5th Cir. 2017).
For a claim to survive the motion-to-dismiss stage, it must state plausible
grounds for relief. See Peña v. City of Rio Grande City, 879 F.3d 613, 618 (5th
Cir. 2018). A claim states plausible grounds for relief when—assuming the
truth of all the plaintiff’s nonconclusory allegations and viewing them in the
light most favorable to the plaintiff—we can “draw the reasonable inference
that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009).


                                       10
    Case: 17-50840     Document: 00514667606       Page: 11    Date Filed: 10/03/2018



                                   No. 17-50840
      Generally, a “short and plain statement” that shows a plausible claim for
relief will suffice. Fed. R. Civ. P. 8(a)(2). But a plaintiff that alleges fraud “must
state with particularity the circumstances constituting fraud.” Fed. R. Civ. P.
9(b). To fulfill Rule 9’s particularity requirement, we have explained that a
plaintiff must “identify[] the ‘time, place, and contents of the false
representations, as well as the identity of the person making the
misrepresentation and what that person obtained thereby.’” Owens v. Jastrow,
789 F.3d 529, 535 (5th Cir. 2015) (quoting Tuchman v. DSC Commc’ns Corp.,
14 F.3d 1061, 1068 (5th Cir. 1994)). A federal securities-fraud plaintiff must
additionally comply with the pleading requirements set forth in the Private
Securities Litigation Reform Act (“PSLRA”). See id. The PSLRA requires
plaintiffs to “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, . . . [to]
state with particularity all facts on which that belief is formed.” 15 U.S.C.
§ 78u-4(b)(1). It further requires that to the extent a plaintiff must prove the
defendant acted with a particular state of mind, the plaintiff “shall, with
respect to each act or omission alleged . . . state with particularity facts giving
rise to a strong inference that the defendant acted with the required state of
mind.” § 78u-4(b)(2)(A).
                                         III.
      The plaintiffs claim the defendants violated § 10(b) of the Securities
Exchange Act. Section 10(b) makes it unlawful “[t]o use or employ, in
connection with the purchase or sale of any security . . . any manipulative or
deceptive device or contrivance in contravention of such rules and regulations
as the [Securities and Exchange] Commission may prescribe.” Id. § 78j(b). In
turn, SEC Rule 10b-5 makes it unlawful to, in connection with the sale of a
security, “make any untrue statement of a material fact or to omit to state a
                                         11
     Case: 17-50840     Document: 00514667606         Page: 12   Date Filed: 10/03/2018



                                      No. 17-50840
material fact necessary in order to make the statements made, in the light of
the circumstances under which they were made, not misleading.” 17 C.F.R.
§ 240.10b-5(b). Courts have read Section 10(b) and Rule 10b-5 to create an
implied private right of action for victims of securities fraud. See Dura Pharm.,
Inc. v. Broudo, 544 U.S. 336, 341 (2005).
       In cases like this one where a plaintiff alleges the fraud occurred in the
public securities market, we have explained,
       [T]he action’s basic elements are: (1) a material misrepresentation
       (or omission), (2) scienter, i.e., a wrongful state of mind, (3) a
       connection with the purchase or sale of a security, (4) reliance,
       often referred to in cases involving public securities markets
       (fraud-on-the-market cases) as “transaction causation”; (5)
       economic loss; and (6) “loss causation,” i.e., a causal connection
       between the material misrepresentation and the loss.

Lormand v. US Unwired, Inc., 565 F.3d 228, 238-39 (5th Cir. 2009) (quoting
Dura, 544 U.S. at 341-42).
       Below, the district court dismissed the plaintiffs’ § 10(b) claims because
it   determined   the    plaintiffs     failed   to   properly   allege   a   material
misrepresentation, scienter, or loss causation. The defendants do not dispute
that the plaintiffs allege the other elements of a § 10(b) claim.
       Recall that the plaintiffs allege the defendants made repeated false
statements, each of which falls into one of three general categories: (1)
statements touting Whole Foods’ price competitiveness or efforts to increase
its price competitiveness; (2) statements about Whole Foods’ commitment to
transparency, quality, and corporate responsibility; and (3) statements
announcing Whole Foods’ allegedly inflated revenues. We conclude that the
first two categories do not constitute material misrepresentations under
§ 10(b). As for the third category, we conclude that even assuming such
statements were material falsehoods, they did not cause the plaintiffs’ loss.

                                           12
   Case: 17-50840     Document: 00514667606     Page: 13    Date Filed: 10/03/2018



                                 No. 17-50840
                                       A.
      We agree with the district court that the plaintiffs fail to allege that the
defendants’ particular statements about Whole Foods’ prices are false. First, it
does not follow that Whole Foods’ weights-and-measures issues rendered false
the defendants’ statements about Whole Foods decreasing its prices. The fact
that Whole Foods’ prices at the time of these statements were effectively higher
than advertised does not mean that the prices were higher than they had been
previously. Otherwise put, if Whole Foods decreased the price of chicken from
$5.00 per pound to $4.00 per pound, the price would drop regardless of whether
Whole Foods impermissibly charged customers for tare weight. Thus, when,
for example, Robb said in a February 12, 2014, conference call that Whole
Foods’ “internal pricing surveys showed improvements from” the fourth
quarter of 2013 to the first quarter of 2014, nothing that the plaintiffs allege
about Whole Foods’ weights-and-measures problems makes that statement
false. The plaintiffs cannot plausibly allege that the defendants lied about
improving Whole Foods’ prices without comparing the prices at the time of the
alleged misrepresentations with prior prices. As the plaintiffs make no such
comparison, they fail to allege these statements were misleading.
      Similarly, the plaintiffs fail to allege that Whole Foods’ true prices were
not comparable to its competitors’ prices or were otherwise unattractive to
consumers. The plaintiffs essentially ask us to assume that because Whole
Foods’ effective prices were revealed to be higher than advertised, the
defendants must have lied when they characterized Whole Foods’ prices as
“competitive.” But this conclusion is not inevitable; just because Whole Foods’
prices were not as competitive as advertised, it need not follow that they were
not competitive. It is certainly possible that even if Whole Foods’ advertised
prices accurately reflected the amount customers were charged when taking
tare weight into account, those prices would nevertheless be comparable to
                                       13
   Case: 17-50840     Document: 00514667606      Page: 14   Date Filed: 10/03/2018



                                  No. 17-50840
Whole Foods’ competitors. The plaintiffs do not provide any point of
comparison that might show Whole Foods’ true prices were genuinely
uncompetitive. Therefore, we conclude the plaintiffs fail to plausibly allege
with requisite particularity that the statements about Whole Foods’ price
competitiveness were misleading. Accordingly, the plaintiffs cannot state a
§ 10(b) claim based on the defendants’ comments about Whole Foods’ prices.
                                       B.
      We also agree with the district court that the defendants’ comments
about Whole Foods’ commitments to transparency and quality—even if false—
are immaterial. “A misstatement or omission is material if ‘there [is] a
substantial likelihood that the disclosure of the omitted fact would have been
viewed by the reasonable investor as having significantly altered the “total
mix” of information made available.’” Rosenzweig v. Azurix Corp., 332 F.3d 854,
865 (5th Cir. 2003) (alteration in original) (quoting Basic, Inc. v. Levinson, 485
U.S. 224, 231 (1988)). We have explained that a company’s “generalized,
positive statements” are immaterial because they do not alter a reasonable
investor’s assessment of the company’s prospects. Id. at 869; see also ECA,
Local 134 IBEW Joint Pension Tr. of Chi. v. JP Morgan Chase Co., 553 F.3d
187, 206 (2d Cir. 2009) (holding that bank’s statements about its integrity were
“too general to cause a reasonable investor to rely upon them”); City of Monroe
Emp.’s Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 671 (6th Cir. 2005)
(“[S]tatements describing a product in terms of ‘quality’ or ‘best’ or benefitting
from ‘aggressive marketing’ are too squishy, too untethered to anything
measurable, to communicate anything that a reasonable person would deem
important to a securities investment decision.”); Raab v. Gen. Physics Corp., 4
F.3d 286, 290 (4th Cir. 1993) (“Analysts and arbitrageurs rely on facts in
determining the value of a security, not mere expressions of optimism from
company spokesmen.”).
                                       14
   Case: 17-50840    Document: 00514667606      Page: 15   Date Filed: 10/03/2018



                                 No. 17-50840
      We conclude that, as the district court held, the defendants’ generalized
statements about Whole Foods’ transparency, quality, and responsibility are
the sort of puffery that a reasonable investor would not rely on. On appeal, the
plaintiffs do not dispute that such puffery is generally immaterial. But they
say this case is different because Whole Foods has built a brand around holding
itself to higher ethical standards than its competitors. Maybe so, but that does
not change the fact that a reasonable investor will not judge Whole Foods’
value based on its own generalized and self-serving statements.
      The Second Circuit rejected a similar argument in Local 134 IBEW. See
553 F.3d at 205-06. In that case, a bank’s shareholders alleged that it made
numerous false statements touting its reputation. See id. The shareholders
argued that the statements were material because “the significance of a bank’s
reputation is undeniable.” Id. at 206. The court agreed with the plaintiffs’
premise but explained that in reaching their conclusion, the “[p]laintiffs
conflate[d] the importance of a bank’s reputation for integrity with the
materiality of a bank’s statements regarding its reputation.” Id. That is,
although a reasonable investor would certainly consider the bank’s integrity to
be relevant to its investment decision, a reasonable investor would not take
the bank at its word that it indeed possesses the integrity it claims. See id.
(“No investor would take such statements seriously in assessing a potential
investment, for the simple fact that almost every investment bank makes these
statements.”). The same is true here. Surely it matters to investors whether
Whole Foods is transparent and otherwise holds itself to high standards. But
reasonable investors will not simply take Whole Foods’ word for it. They will
“rely on facts” to determine whether this is so. Raab, 4 F.3d at 290.
      Accordingly, as the district court correctly held, the plaintiffs cannot
state a § 10(b) claim based on the defendants’ generalized statements about
Whole Foods’ transparency, quality, and integrity.
                                      15
    Case: 17-50840       Document: 00514667606         Page: 16     Date Filed: 10/03/2018



                                      No. 17-50840
                                             C.
       All that remains is the plaintiffs’ claim that the defendants consistently
exaggerated Whole Foods’ financial results by counting towards its revenues
receipts that Whole Foods fraudulently collected by overcharging customers.
The plaintiffs allege that GAAP forbids an entity from counting money received
as revenue unless “the entity has substantially accomplished what it must do
to be entitled to the benefits represented by the revenues.” Thus, the plaintiffs
reason that whenever Whole Foods sold products to customers that weighed
less than represented on the label, it had not “substantially accomplished what
it must do to be entitled to” the portion of the purchase price that exceeded the
advertised price. Accordingly, the plaintiffs insist that to the extent Whole
Foods counted any such money as revenue, it did so in violation of GAAP. And
because financial statements in violation of GAAP are presumptively
misleading, 2 the plaintiffs conclude that the defendants’ statements about
Whole Foods’ revenues during the class period amount to misrepresentations
under § 10(b).
                                             1.
       The district court rejected this argument because it concluded the
plaintiffs failed to plead falsity with the particularity Rule 9(b) and the PSLRA
require. On appeal, the plaintiffs point to an affidavit that Whole Foods
presented to establish federal subject-matter jurisdiction in a separate lawsuit.
The plaintiffs extrapolate from the affidavit’s analysis to allege that “Whole
Foods overstated its revenues by $127.7 million” during the relevant period. 3




       2 See 17 C.F.R. § 210.4-01(a)(1) (“Financial statements filed with the [SEC] which are
not prepared in accordance with generally accepted accounting principles will be presumed
to be misleading or inaccurate, despite footnote or other disclosures, unless the [SEC] has
otherwise provided.”).
       3 Whole Foods reported approximately $26 billion in sales during the class period.

                                             16
    Case: 17-50840       Document: 00514667606         Page: 17     Date Filed: 10/03/2018



                                      No. 17-50840
The plaintiffs argue this allegation suffices to plead with particularity that
Whole Foods fraudulently inflated its revenue.
       The plaintiffs have a threshold problem. Even if this affidavit sufficiently
establishes the total amount by which Whole Foods overcharged its customers,
the plaintiffs make no attempt to plead how much of its revenue Whole Foods
overstated in “each statement alleged to have been misleading.” § 78u-4(b)(1)
(emphasis added). But we need not answer this question. Even assuming
arguendo that the plaintiffs allege falsity in reported revenues with
particularity, 4 we nonetheless affirm because the plaintiffs do not allege that
Whole Foods’ inflated revenues caused the plaintiffs’ loss.
                                             2.
       As discussed above, a § 10(b) claim requires the plaintiff show that the
defendant’s misrepresentation caused the plaintiffs’ loss. Where, as here, a
plaintiff pursues a fraud-on-the-market theory, “the plaintiff must allege that
when the ‘relevant truth’ about the fraud began to leak out or otherwise make
its way into the marketplace, it caused the price of the stock to depreciate and,
thereby, proximately caused the plaintiff's economic harm.” Pub. Emp.’s Ret.
Sys. of Miss. v. Amedisys, Inc., 769 F.3d 313, 320 (5th Cir. 2014) (quoting
Lormand, 565 F.3d at 255). If the stock does not depreciate, then “it cannot be


       4 Additionally, on this record we are unsure whether Whole Foods’ failure to discount
the money it overcharged customers from its reported revenue is indeed a GAAP violation—
or at least a GAAP violation that amounts to a material misrepresentation. Whole Foods
actually collected this money, and the plaintiffs do not make any allegations that defrauded
customers collected refunds. Further, nowhere in this record is an explanation of what the
appropriate accounting for any of these disparities would look like. Notably, the Retirement
System’s counsel was unable to explain at oral argument what steps Whole Foods’
accountants should have or even could have taken in this circumstance to comply with GAAP.
Thus, the plaintiffs’ attempt to stretch Whole Foods’ weights-and-measures malfeasance into
accounting malfeasance strikes us (particularly on this record) as strained. Nevertheless,
because disputes over proper accounting methods often turn on fact questions not
appropriately addressed at the motion to dismiss stage, see Barrie v. Intervoice-Brite, Inc.,
397 F.3d 249, 257-58 (5th Cir. 2005), we explore this question no further and assume without
deciding that the plaintiffs have adequately pleaded a material misrepresentation.
                                             17
    Case: 17-50840    Document: 00514667606          Page: 18   Date Filed: 10/03/2018



                                  No. 17-50840
said that there is in fact an economic loss attributable to that
misrepresentation.” Semerenko v. Cendant Corp., 223 F.3d 165, 185 (3d Cir.
2000). Rather, “the cost of the alleged misrepresentation is still incorporated
into the value of the security and may be recovered at any time simply by
reselling the security at the inflated price.” Id.
      We have prescribed the following framework through which fraud-on-
the-market plaintiffs can show loss causation:
      (1) identifying a “corrective disclosure” (a release of information
      that reveals to the market the pertinent truth that was previously
      concealed or obscured by the company’s fraud); (2) showing that
      the stock price dropped soon after the corrective disclosure; and (3)
      eliminating other possible explanations for this price drop, so that
      the factfinder can infer that it is more probable than not that it was
      the corrective disclosure—as opposed to other possible depressive
      factors—that caused at least a “substantial” amount of price drop.

Amedisys, 769 F.3d at 321 (quoting FindWhat Inv’r Grp. v. FindWhat.com, 658
F.3d 1282, 1311-12 (11th Cir. 2011)). Importantly, the corrective disclosure
must reveal some information not already known to the market, otherwise “the
stock price would have incorporated that information, and its disclosure could
not have caused a loss.” Alaska Elec. Pension Fund v. Asar, 898 F.3d 648, 665
(5th Cir. 2018). But a series of partial disclosures may suffice if “the whole is
greater than the sum of its parts.” See Amedisys, 769 F.3d at 324-25.
      The plaintiffs allege that their loss occurred when Whole Foods’ stock
price dropped about ten percent on July 30, 2015, the day after it released its
third-quarter numbers showing a substantial slowdown in sales growth. But
the plaintiffs do not allege that the defendants revealed any new information
about Whole Foods’ unfolding weights-and-measures scandal in the July 29
press release or conference call. Indeed, the plaintiffs do not allege that any
new information about Whole Foods’ overcharging had come out since the DCA
released its findings more than a month prior. The market did not significantly
                                        18
    Case: 17-50840     Document: 00514667606      Page: 19   Date Filed: 10/03/2018



                                  No. 17-50840
react at that point, even amidst considerable national media coverage about
Whole Foods’ weights-and-measurements problems. Therefore, the market
was well aware for weeks before the July 30 decline that Whole Foods had been
overcharging customers (and therefore, according to the plaintiffs, overstating
its revenues).
      The plaintiffs do not dispute this. But they nevertheless argue that the
drop in sales growth revealed on July 29 was a partial disclosure because it
showed the financial impact of previously revealed fraud. Yet the plaintiffs do
not argue that the fraud allegedly actionable in this case—i.e., Whole Foods’
overstated revenues—in any way caused the disappointing sales. Rather, the
plaintiffs allege that revenues failed to meet expectations because Whole
Foods’ customers took exception to the possibility of being defrauded and voted
with their feet. This is certainly a plausible inference. But the plaintiffs do not
premise their § 10(b) claims on Whole Foods’ misrepresentations to its
customers;   rather,   they   base   the     claims   on   Whole   Foods’   alleged
misrepresentations to its shareholders through its accounting errors. Nor do
the plaintiffs allege that the disappointing sales numbers somehow
represented customer dissatisfaction with Whole Foods’ accounting practices.
      The plaintiffs’ apparent error is that they conflate the nonactionable
weights-and-measures fraud with the allegedly actionable securities fraud.
The relationship between the weights-and-measures fraud and the plaintiffs’
loss (the decline in the stock price) is causal; the relationship between the
alleged securities fraud and the plaintiffs’ loss is spurious. Whole Foods’
overcharging caused (1) the alleged accounting problems and (2) the public-
relations problems. The public-relations problems arguably led to slowed sales
and the loss in stock price. But the accounting problems did not cause the
public-relations problem, nor do the plaintiffs allege that the accounting
problems caused a separate loss in stock price.
                                        19
    Case: 17-50840    Document: 00514667606      Page: 20   Date Filed: 10/03/2018



                                  No. 17-50840
      To illustrate, consider a counterfactual scenario in which Whole Foods
overcharged its customers but its accountants did not record the ill-gotten
receipts as revenue. In all likelihood, upon learning about the overcharging,
consumers would have reacted just as negatively, Whole Foods’ sales growth
would have dropped just as much, and its stock price would have declined all
the same. When the stock declined on July 30, 2015, the plaintiffs would have
suffered the exact same harm regardless of whether Whole Foods had
overstated its revenue. Nothing in the plaintiffs’ complaint suggests otherwise.
      Accordingly, the plaintiffs fail to identify a decline in stock price that
shortly followed a corrective disclosure. They therefore fail to plead a § 10(b)
violation. See Amedisys, 769 F.3d at 321; cf. Berckeley Inv. Grp., Ltd. v. Colkitt,
455 F.3d 195, 223 (3d Cir. 2006) (concluding § 10(b) counterclaimant failed to
show loss causation because record revealed “absolutely no connection between
the price decrease in [the stock] and [the plaintiff’s] unrelated alleged
misrepresentation as to its intent to comply with offshore registration
requirements”). Their § 20(a) claims likewise fail because they are derivative
of the plaintiffs’ § 10(b) claims. See Rosenzweig, 332 F.3d at 863.
                                       IV.
      For the foregoing reasons, we AFFIRM the district court’s judgment.




                                        20
