This week, the Second Circuit issued an opinion reversing a district court’s dismissal of a securities fraud complaint filed against The Hain Celestial Group. The facts are these.

The plaintiffs alleged that Hain Celestial Group, and certain of its officers, engaged in a channel stuffing scheme by offering various concessions to distributors, so that it could book sales early and meet Wall Street expectations.  Allegedly, Hain failed to properly account for the concessions that it offered, which were accomplished through “off book” arrangements.  Distributors were granted an “absolute right to return,” with one employee reportedly processing hundreds of thousands of dollars in returns in one quarter – but the sales were included in Hain’s financial results regardless.

Eventually, as with all channel stuffing schemes, things fell apart, and the whole thing ended in the restatement of several years of financial results and a dramatic drop in sales.

The Second Circuit first held that the plaintiffs had properly alleged misstatements in violation of Section 10(b).  Restatements are a per se admission of falsity, so that covered the financials.  Further, Hain had engaged in misleading half-truths when it attributed its purportedly positive results to customer demand, rather than the distributor concessions.

As for scienter, Hain’s CEO, Chair, and founder sold 66% of his stock during the class period; the CEO of Hain North America sold 74%.  Meanwhile, confidential witnesses stated they had personal knowledge of these defendants directing the sales practices at issue.  Confidential witnesses also stated that they heard the individual defendants affirmatively attempt to conceal these practices – by telling employees not to talk about them, and so forth.

Finally, Hain had shifted personnel in a suspicious manner.  The CFO left in 2015 after only two years, allegedly after objecting to the CEO over Hain’s accounting.  Another executive in charge of accounting was demoted.  Two other finance executives resigned mid class period.  The CEO of Hain North America was removed.  The CFO resigned with the restatements, new financial personnel were brought on, and the CEO/founder resigned in 2018.

Collectively, then, the Second Circuit concluded that plaintiffs had alleged scienter, and remanded to the district court for further proceedings.

It seems very difficult to quarrel with these conclusions, and normally, I’d leave it as, this is a securities case with overwhelming prima facie indicia of fraud.  Not even that interesting, legally, except –

Let’s take a step back for a minute.

In 2016, Hain announced that its financial results would be delayed while it reviewed its accounting.  In 2017, it still had not filed its financial results, had received subpoena requests from the SEC, and announced that it had expanded its investigation to include historical periods.  That’s when the CEO of Hain North America was removed, and the company was warned that due to its failure to file financials, it was subject to NASDAQ delisting.

In 2017, Hain finally filed its 2016 financial results, and restated its finances for 2014 and 2015.  The restatements revealed that instead of hitting Wall Street consensus earnings predictions for each quarter, it in fact had missed them every quarter.  At the same time, several finance personnel, including the CFO, were fired.  In 2018, the SEC concluded a two year investigation and settled with Hain on internal books and records charges.

The first securities cases were filed in 2016, and were eventually consolidated into a single action.  The district court dismissed the complaint in 2019, and the amended complaint in 2020.  The Second Circuit reversed that dismissal and remanded in 2021, at which point, the district court dismissed for a third time in 2023.  The second appeal was docketed in 2023, argued in December 2024, and finally decided nearly a year later in September 2025.

It’s now been over nine years since this company started to unravel, and despite admitted extensive accounting problems, despite the ultimate departure of multiple top officers – including the founder/CEO – despite the turnover of almost all the accounting personnel, despite a dramatic shift in financial results, the plaintiffs will only now get to begin discovery.

What are we doing here?

I know, I know, nuisance suits, yadda yadda yadda, but doesn’t this all suggest that perhaps maybe the PSLRA – and the layers of doctrine that have been piled on top of it – overcorrected a bit?

And as we head into this period where the SEC is operating (when the government is open) with far less staff, will be conducting (apparently) fewer enforcement actions and fewer routine reviews, as quarterly reporting will apparently be eliminated, at the same time multiple states race to eliminate fiduciary constraints on managerial behavior – in this period, private securities actions may be one of the few remaining deterrents to corporate misconduct. And we seem to have kneecapped those as well.

Update: Well, this is awkward. A reader points out that even though the Second Circuit did, in fact, point to a restatement as per se falsity, in fact, there was no big R restatement in this case – not because the GAAP accounting was correct, Hain admitted it wasn’t – but because it concluded the errors were immaterial, and it made non-restatement “revisions” instead. Not sure if that changes the picture, but it’s worth mentioning.

Also, quick plug.  I was privileged to participate in the 2025 Accountability in a Sustainable World digital conference, sponsored by the Center for Accounting Research and Education.  The full online program is now available here; my remarks – Corporate Sustainability Disclosure: Who’s Listening? – are available if you scroll down a few videos after the lunch break.

And another thing.  On this week’s Shareholder Primacy podcast, Mike Levin and I talk about mandatory arbitration of federal securities claims.  Here at Apple, here at Spotify, and here at YouTube.