Investors get another bite in Hain Celestial’s share cut lawsuit

The Second United States Court of Appeals at 500 Pearl Street in New York City. REUTERS / Caitlin Ochs

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A federal appeals court revived a consolidated class action on Friday accusing health food company Hain Celestial Group of misleading investors for three years by touting high demand for its products while hiding it backing its sales figures through “channel stuffing” – offering generous incentives and return policies to get distributors to order excess inventory.

The 2nd U.S. Circuit Court of Appeals overturned part of a ruling by then U.S. District Judge Arthur Spatt on Long Island which allowed Hain’s attorneys’ motion to DLA Piper to dismiss all of the action in April 2020. Spatt ruled that the channel jam was not inherently fraudulent, and therefore, Hain Celestial had no obligation to disclose it.

But Spatt “mistakenly imported” a fraud requirement into a subsection of securities law that does not have one, Judge Pierre Leval wrote for Circuit 2. The information can be materially misleading even if it involves conduct that is not fraudulent, Leval added. He was joined by circuit judges Robert Sack and Michael Park.

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Christine Fox of Labaton Sucharow, the group’s lead co-lawyer, said she was happy with the pre-trial detention. “We look forward to vigorously pursuing this matter on behalf of Hain shareholders,” Fox wrote in an email. Hain’s lawyers did not immediately respond to requests for comment.

The three consolidated lawsuits were filed in August 2016, days after Hain revealed that it was “opening an internal investigation into whether it had properly accounted for the revenue” associated with the distributorships.

Its shares fell 26% on the news, and fell 8% when it announced it was under investigation by the Securities and Exchange Commission in February 2017.

The SEC investigation ended in 2018 without any charges of fraud and without any financial penalties. Hain settled the charges of the SEC’s accounting and internal control violations by agreeing to change its procedures, but without admitting responsibility.

The investors’ class actions alleged that Hain had committed fraud; however, they did not appeal the dismissal of the fraud charges.

The case is In re The Hain Celestial Group Inc Securities Litigation, 2nd United States Court of Appeals, No. 20-1517.

For Hain Celestial Group: John Hillebrecht and Marc Silverman of DLA Piper

For the principal applicants: David Goldsmith of Schlam Stone & Dolan, Jonathan Gardner and Christine Fox of Labaton Sucharow, and Robert Prongay of Glancy Prongay & Murray

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