Background
Funko shareholders brought a putative class action against the collectibles company, its then-CEO Andrew Perlmutter, and its then-CFO Jennifer Jung under Exchange Act Sections 10(b) and 20(a) and Rule 10b-5. They alleged that the defendants misled investors during a 2022–2023 class period about Funko’s warehouse relocation to Buckeye, Arizona, its inventory management, its information-technology systems, and its distribution capacity.
The complaint alleged that Buckeye’s operations were badly disrupted: inventory was misplaced or untracked, the warehouse was over capacity, and hundreds of shipping containers sat outside. Funko ultimately announced that it would abandon its Oracle enterprise-resource-planning project and write down associated costs and $30 million to $36 million in inventory. Its share price fell 59% after November 2022 disclosures. The district court dismissed the complaint for insufficient falsity and scienter; plaintiffs declined leave to amend and appealed.
The Court’s Holding
The Ninth Circuit affirmed in part, reversed in part, and remanded. It held that plaintiffs did not adequately allege falsity as to statements describing Buckeye as “up and running,” statements attributing higher inventory partly to delayed shipments, generalized statements that inventory was “high quality” or “healthy,” or Jung’s prediction that more distribution capacity would not be needed within 12 months. The inventory-quality statements were nonactionable puffery, and the distribution-capacity statement was protected as forward-looking.
But the court held that plaintiffs plausibly alleged that Funko’s repeated inventory-management risk disclosures were misleading because they described risks as hypothetical when the alleged inventory problems had already materialized. Plaintiffs likewise adequately alleged falsity concerning risk disclosures about Funko’s then-existing IT systems and their operation, though not disclosures concerning the delayed Oracle upgrade. The court further held that the allegations supported a strong inference of scienter as to Perlmutter and Jung under the core-operations doctrine, and therefore revived the derivative Section 20(a) control-person claim.
Key Takeaways
- Risk disclosures may be actionable when they frame an existing and ongoing problem as a future possibility.
- General claims that inventory is “healthy” or “high quality” are ordinarily puffery, absent concrete and objectively verifiable assertions.
- Allegations concerning a company’s core inventory and IT operations can support scienter where it would be absurd to think senior officers lacked awareness of the problems.
Why It Matters
The decision reinforces that PSLRA safe-harbor protection does not shield risk warnings whose alleged falsity rests on an implied assertion about present conditions. Companies should ensure risk factors distinguish genuinely contingent risks from known operational failures already affecting the business.
For securities plaintiffs, the ruling illustrates how detailed allegations of operational breakdowns, their business significance, and executive involvement can support both falsity and scienter at the pleading stage.