Maschhoff v. Polished.com Inc. et al

UNITED STATES DISTRJCT COURT
EASTERN DISTRJCT OF NEW YORK
Eden Alpha CI LLP, Individually and on behalf
of all others similarly situated,
Plaintiff,
-against-
POLISHED.COM INC. F/K/A 1847 GOEDEKER
INC., DOUGLAS T. MOORE, ALBERT
FOUERTI, and MARJA JOHNSON,
Defendants.
MEMORANDUM & ORDER
22-CV-6606 (NGG) (VMS)
NICHOLAS G. GARAUFIS, United States District Judge.
Lead Plaintiff Eden Alpha CI LLP ("Plaintiff') brings this putative
class 	action against Polished.com Inc. 	("Polished"), 	Douglas
Moore, Albert Fouerti, and Maria Johnson (collectively, "Defend-
ants"), alleging violations of the federal securities laws. (Second
Am. Compl. ("SAC") (Dkt. 53).) Pending before the court are De-
fendants 	Moore, 	Fouerti, 	and 	Johnson's 	(the 	"Individual
Defendants") motion for judicial notice of certain documents and
motion to dismiss the SAC. (Mot. for Jud. Not. ("Defs.' Mot. for
Not.") (Dkt. 56-2); Mot. to Dismiss C'MTD") (Dkt. 56-1) .) For the
reasons that follow, the motion for judicial notice is GRANTED
IN PART and DENIED IN PART, and the motion to dismiss is
GRANTED.
I. 	BACKGROUND
A. 	Facts
The court assumes familiarity with the background facts of the
case and references its fact section in its last Memorandum and
Order ("M&O") dismissing the First Amended Complaint ("FAC")
(Dkt. 34) with leave to amend. (M&O (Dkt. 51) at 2-12.)
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B. 	Procedural History
On October 21, 2022, Plaintiff filed suit against Polished, the In-
dividual Defendants, and several others, alleging violations of the
Securities Exchange Act of 1934 (the "Exchange Act"). (Compl.
(Dkt. 1).) In September 2023, Judge Scanlon appointed Eden Al-
pha CI llP as a lead plaintiff and The Rosen Law Firm, P.A. as
lead counsel. (Mem. and Order Appointing Lead Plaintiff (Dkt.
30) at 2.)
On October 31, 2023, on consent of the parties and by order of
the court, Plaintiff filed the FAC, alleging: (Count I) violations of
Section l0(b) 	of the Exchange Act and SEC Rule l0b-S(b)
against Polished, Fouerti, and Johnson; (Count II) violations of
Section l0(b) and Rule l0b-S(a) and (c) against Polished and
Fouerti; and (Count III) violations of Section 20(a) of the Ex-
change Act against the Individual Defendants. (Stipulation and
Order (Dkt. 33); FAC '!'I 167-190.) Count I alleges that several
statements in Polished's Q2 2021 Form 10-Q, Q3 2021 Form 10-
Q, Q3 2021 earnings call with investors, 2021 Form 10-K, and
Ql 2022 Form 10-Q were false or materially misleading, as evi-
denced by the allegations of Former Employees ("FEs") and the
July Restatement. (FAC '!'I 167-173.) Building upon these al-
leged misrepresentations, Count II claims scheme liability as to
Polished and Fouerti, and Count III claims control person liability
as to the Individual Defendants. (Id. '1'1180-190.)
On March 7, 2024, Polished filed for Chapter 7 bankruptcy in the
United States Bankruptcy Court for the District of Delaware, trig-
gering 	an 	automatic 	stay of the 	proceedings 	in 	this 	court
pursuant to 11 U.S.C. § 362(a). (Notice of Bankruptcy dated
3/7/2024 (Dkt. 42).) See In re Polished.com Inc., et al., No. 24-
BK-10353 (Bankr. D. Del.). However, as automatic stays gener-
ally do not apply to non-bankrupt codefendants, the proceedings
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continued against the Individual Defendants. 1 (See Pl.'s Letter
Dated 3/11/2024 (Dkt. 43).)
On June 21, 2024, the Individual Defendants filed their fully
briefed motion to dismiss the FAC under Federal Rules of Civil
Procedure 12(b) (6) and 9(b) and the Private Securities Litigation
ReformAct C'PSLRA"), 15 U.S.C. § 78u-4. (Defs.'FirstMTD (Dkt.
48-1); Pl.'s First MTD Opp'n (Dkt. 48-20); Defs.' Reply in Supp.
of First MTD (Dkt. 48-22).) At the same time, the Individual De-
fendants filed a fully briefed motion requesting that the court
consider or take judicial notice of certain documents. (See Defs.'
First Mot. for Not. (Dkt. 48-2); Pl.'s Opp'n to First Mot. for Not.
(Dkt. 48-21); Defs.' Reply in Supp. of First Mot. for Not. (Dkt. 48-
23).)
On January 24, 2025, the court issued its M&O granting in part
and denying in part the Individual Defendants' motion for con-
sideration 	and/or 	judicial 	notice, 	granting 	the 	Individual
Defendants' motion to dismiss, and granting Plaintiff's request for
leave to file a SAC. (M&O at 67.) The court made three central
findings. First, it found that it "could not credit the [former em-
ployee] 	accounts, 	as 	currently 	pleaded, 	for 	purposes 	of
establishing'' the false or misleading nature of the alleged repre-
sentations or omissions, or scienter. (M&O at 23, 23-29.) Second,
the court categorized the challenged statements as falling into
1 "It is well-established that stays pursuant to§ 362(a) are limited to debt-
ors and do not encompass non-bankrupt co-defendants." Tchrs. Ins. And
Annuity Ass'n of Am. v. Butler, 803 F.2d 61, 65 (2d Cir. 1986). After Pol-
ished filed for bankruptcy, Plaintiff informed the court that it intended to
dismiss Polished from the case without prejudice and pursue its claims
solely against the Individual Defendants. (PL's Letter Dated 3/11/2024 at
1.) After the issuance of the M&O and before the filing of the SAC, Plaintiff
informed the court that it would "describe Polished as a non-party defend-
ant'' and that "Polished is no longer a party to this action." (Pl.'s Letter
1/28/25 (Dkt. 52).) It has not followed through on the promises made in
either letter, (see SAC '11), and thus Polished formally remains a named
Defendant in this action.
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four categories-of these, the court only found that the FAC suc-
cessfully pleaded false and misleading statements with respect to
restated financial metrics, specifically Polished's 2021 10-K and
1Q2022 10-Q, as a result of the July Restatement. (Id. at 30-54.)
Third, the court found that the FAC failed to sufficiently raise a
strong inference of scienter. (Id. at 57.) The court described
Plaintiff as relying on "four sets of facts to establish circumstan-
tial evidence of conscious misbehavior or recklessness," which
included the FE accounts, the resignations of Fouerti and John-
son, the resignation of Polished's independent accounting firm,
Friedman, and alleged GAAP violations. (Id. at 56.) After dismiss-
ing the sufficiency of FE l's account, the court found that a holistic
analysis of the remaining three bases was also insufficient to es-
tablish a strong inference of scienter. (Id. at 56-62.) Separately,
the court declined to reach the issue of loss causation because
Plaintiff had not "identified actionable misstatements or omis-
sions or adequately alleged scienter." (Id. at 62 (citing Altayyar
v. Etsy, Inc., 242 F. Supp. 3d 161, 184 (E.D.N.Y. 2017) ("Since
the plaintiffs have not identified any actionable misstatements or
adequately alleged scienter, there is no basis upon which they
may plead reliance or loss causation.")).) 2
On February 24, 2025 Plaintiff filed its SAC. (Dkt. 53.) It alleges
the same three counts but adds Douglas Moore, Polished's former
CEO from August 2019 to August 31, 2021, as a defendant under
Count I. (SAC '!'I 190, 195-96.)
On June 9, 2025, the Individual Defendants filed their fully
briefed motion to dismiss the SAC under Federal Rules of Civil
Procedure 12(b) (6) and 9(b) and the Private Securities Litigation
Reform Act ("PSLRA"), 15 U.S.C. § 78u-4. (MTD; Pl.'s Opp'n to
MTD 	("Opp'n") 	(Dkt 56-17); Defs.' Reply in Supp. of MTD
("Defs.' Reply'') (Dkt. 56-19).) At the same time, the Individual
2 When quoting cases, unless otherwise noted, all citations and internal
quotation marks are omitted, and all alterations are adopted.
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Defendants filed a fully briefed motion requesting that the court
take judicial notice of certain documents. (See Defs.' Mot. for Not.
(Dkt. 56-2); Pl.'s Opp'n to Mot. for Not. (Dkt. 56-18); Defs.' Reply
in Supp. of Mot. for Not. (Dkt. 56-20).)
II. 	LEGAL STANDARDS
In considering a motion to dismiss, the court accepts as true all
factual allegations in the complaint and draws all reasonable in-
ferences in the plaintiffs favor. See Goldstein v. Pataki, 516 F.3d
50, 56 (2d Cir. 2008). To survive a motion to dismiss under Rule
12(b) (6), "a complaint must contain sufficient factual matter, ac-
cepted as true, to 'state a claim to relief that is plausible on its
face."' Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).
Complaints alleging securities fraud are subject to the heightened
pleading requirements of Federal Rule of Civil Procedure 9(b)
and the PSLRA. In re Synchrony Fin. Sec. Litig., 988 F.3d 157,
166-67 (2d Cir. 2021) ("Synchrony''). Rule 9(b) requires that "a
party must state with particularity the circumstances constituting
fraud." Fed. R. Civ. P. 9(b). To satisfy this standard, a plaintiff
must: "(1) specify the statements that the plaintiff contends were
fraudulent, (2) identify the speaker, (3) state where and when
the statements were made, and (4) explain why the statements
were fraudulent." Synchrony, 988 F.3d at 167. "Allegations that
are conclusory or unsupported by factual assertions are insuffi-
cient." ATS! Comms., Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d
Cir. 2007) (''ATSI").
The PSLRA expands on the Rule 9(b) standard, requiring securi-
ties fraud complaints to "specify each misleading statement; ...
set forth the facts on which a belief that a statement is misleading
was formed; and ... state with particularity facts giving rise to a
strong inference that the defendant[s] acted with the required
state of mind." Anschutz Corp. v. Merrill Lynch & Co., 690 F.3d
5
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98, 108 (2d Cir. 2012); see also 15 U.S.C. § 78u-4(b)(l), (2).
''The requisite state of mind in a Rule l0b-5 action is 'an intent
to deceive, manipulate or defraud."' Ganino v. Citizens Utils. Co.,
228 F.3d 154,168 (2d Cir. 2000) (quotingEmst&Emstv. Hoch-
felder, 425 U.S. 185, 193 n.12 (1976)). Such an intent may be
established "by alleging facts (1) showing that the defendants
had both motive and opportunity to commit the fraud or (2) con-
stituting strong circumstantial evidence of conscious misbehavior
or recklessness." ATSI, 493 F.3d at 99.
The court makes all new findings in reviewing this motion to dis-
miss the SAC. Arce v. Walker, 139 F.3d 329, 332 n.4 (2d Cir.
1998) ("It is well established that an amended complaint ordi-
narily supersedes the original and renders it of no legal effect.")
(quoting Int'l Controls Corp. v. Vesco, 556 F.2d 665, 668 (2d Cir.
1977)). Plaintiff's assertion that there is any "law of the case" is
incorrect, and the court will rule on the SAC as though it is the
first complaint it has considered. (Opp'n at 21.) However, the
court at various times refers to and incorporates its findings from
the prior M&O into this opinion to the extent they concern the
allegations asserted in the SAC.
III. MOTION FOR JUDICIAL NOTICE
In ruling on a motion to dismiss, the court "may consider any
written instrument attached to the complaint, statements or doc-
uments incorporated into the complaint by reference, legally
required public disclosure documents filed with the SEC, and
documents possessed by or known to the plaintiff and upon
which it relied in bringing the suit." ATSI, 493 F.3d 98. "A docu-
ment is incorporated by reference if the complaint makes[] a
clear, definite and substantial reference to the document." Stin-
nett v. Delta Air Lines, Inc., 278 F. Supp. 3d 599, 608 (E.D.N.Y.
2017). Where a document is not incorporated by reference, the
court may nevertheless consider it if "the complaint relies heavily
upon [the document's] terms and effect, thereby rendering the
6
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document integral to the complaint." DiFolco v. MSNBC Cable
L.L.C., 622 F.3d 104, 111 (2d Cir. 2010).
The court "may also consider matters of which judicial notice
may be taken under Fed. R. Evid. 201." Kramer v. Time Warner
Inc., 937 F.2d 767, 773 (2d Cir. 1991). A court may take judicial
notice of a fact that is "not subject to reasonable dispute" either
because it is "generally known within the trial court's territorial
jurisdiction" or because it "can be accurately and readily deter-
mined 	from 	sources whose 	accuracy cannot reasonably be
questioned." Fed. R. Evid. 201(b). It is well-established that
courts may take judicial notice of "public disclosure documents
required by law to be filed, and actually filed, with the SEC." Kra-
mer, 937 F.2d at 774.
Here, Individual Defendants request that the court take judicial
notice of thirteen (13) documents and four Financial Accounting
Standards Board ("FASB") standards. (Defs.' Mot. for Not. at 3-
7.) The documents include financial forms filed by Polished with
the SEC, press releases, and a transcript of its November 15, 2021
earnings call. (Id. at 3-4.) The Individual Defendants argue that
these documents are "incorporated by reference into the [SAC]
and/or [are] a proper subject of judicial notice." (Id. at 1.) Plain-
tiff opposes this request. (Pl.'s Opp'n to Mot. for Not. at 1.)
The court declines to take judicial notice of any documents but
agrees with the Individual Defendants that it may consider Ex-
hibits 1-13 because they are incorporated by reference in the
SAC. The court will also consider the FASB standards just as it
would any other source of regulatory authority. (See M&O at 18);
Ganino, 228 F.3d at 159 n.4 (''The SEC treats the FASB's stand-
ards as authoritative.").
A. 	Exhibits 1-13
Exhibits 1-13 include four press releases (contained within Ex-
hibits 8, 9, 10, and 11), a transcript of Polished's Q3 2021
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earnings call held on November 15, 2021, (Exhibit 3), and eleven
documents filed by Polished with the SEC, (Exhibits 1, 2, 4-13).
(Defs.' Mot. for Not. at 3-4.) The SAC quotes from and makes
substantial reference to each of these documents. (Defs.' Mot. for
Not. at 3-4. (citing the SAC).) These "clear, definite and substan-
tial reference[s]" to each of the Exhibits incorporates them by
reference so that they are part of the SAC. Stinnett, 278 F. Supp.
3d at 608; Roth v. Jennings, 489 F.3d 499, 509 (2d Cir. 2007).
B. 	FASB Standards
Individual Defendants request that the court consider four FASB
standards (also referred to as Accounting Standards Codification
or "ASC") cited in the SAC. (Defs.' Mot. for Not. at 6-7.)
Plaintiff alleges that the Individual Defendants, in making certain
financial disclosures, violated Generally Accepted Accounting
Principles ("GAAP"). (SAC 'f'f 101-131.) '1'he SEC has the statu-
tory 	authority 	for 	the 	promulgation 	of 	GAAP 	for 	public
companies and has delegated that authority to the [FASB] and
the American Institute of Certified Public Accountants." In re Bear
Steams Cos., Inc. Sec., Derivative, and BRISA Litig., 763 F. Supp.
2d 423,467 (S.D.N.Y. 2011). The FASB is "the designated organ-
ization in the private sector for establishing standards of financial
accounting and reporting." In re WorldCom, Inc. Sec. Litig., 352
F. Supp. 2d 472,478 n.3 (S.D.N.Y. 2005). These standards "have
been recognized by the SEC as authoritative." Id. SEC Regulation
S-X provides that financial statements filed with the SEC that are
not presented in conformity with GAAP are presumed to be mis-
leading. 	17 	C.F.R. 	§ 	210.4-0l(a) (1). 	Ultimately, 	however,
"[a]llegations of a violation of GAAP provisions or SEC regula-
tions, without corresponding fraudulent intent, are not sufficient
to state a securities fraud claim." Stevelman v. Alias Rsch. Inc., 174
F.3d 79, 84 (2d Cir. 1999).
Plaintiff alleges that the Individual Defendants violated four
FASB standards: ASC 606, ASC 330, ASC 705, and ASC 310.
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(SAC 'f 151.) The SAC relies significantly on alleged violations of
FASB standards in attempting to state a securities fraud claim.
(Id. 'f'f 101-17, 150-51, 160-61.) Plaintiff presumably wants the
court to refer to those standards in adjudicating the motion to
dismiss. As such, the court will consider the FASB standards, par-
ticularly the standards cited in the SAC, just as it would any other
source of regulatory authority. Cf In re Avon Sec. Litig., No. 19-
CV-1420 (CM), 2019 WL 6115349, at *21 (S.D.N.Y. Nov. 18,
2019) (crediting alleged GAAP violations as support for scienter
allegations).
In sum, the Individual Defendants' request that the court con-
sider Exhibits 1-13 and the FASB standards is GRANTED, and
their request that the court take judicial notice of these Exhibits
is DENIED.
N. MOTION TO DISMISS
A. 	Primary liability
The SAC fails to rectify the shortcomings of the FAC as to primary
liability for the reasons that follow.
1. 	Class Period
In a footnote in its opposition, Plaintiff writes that "the Court
may, if it chooses, shorten the Class Period to start on March 31,
2022, to reflect its different rulings on the falsity of the 2Q21 and
3Q21 financial statements versus the fiscal year 2021 and 1Q22
financial statements." (Opp'n at 21 n.19.) By this, Plaintiff refers
to this court's prior ruling, as described above, where it found
credible misstatements in the 202110-K and 1Q22 10-Q because
of the July Restatement, 3 but that also found the 2Q21 and 3Q21
financial statements not to contain false statements. Individual
3 AB summarized in the M&O, the July Restatement refers to Polished's fil-
ing of its delayed 2022 Form 10-K with the SEC, where it restated financial
results from fiscal year 2021 and 1Q22. (See M&O at 10-11.)
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Defendants 	characterize 	"these 	concessions" 	as 	constituting
waiver of Plaintiffs claims as to statements contained in these
documents, (Defs.' Reply at 5), while Plaintiff "reserves all rights
regarding these statements," (Opp'n at 21). While the court has
the power to "alter or modify the class" as it sees fit, In re Sumi-
tomo Copper Litig., 262 F.3d 134, 139 (2d Cir. 2001), no class
has yet been certified, and thus Plaintiff's allegations control. To
adjudicate this motion, and in accordance with the court's find-
ings below, see infra Section N.A.4, the court adopts Plaintiffs
proposed class period as beginning on March 31, 2022, and end-
ing on July 31, 2023. (Opp'n at 21 n.19; SAC 'f'f 2, 10.)
Accordingly, 	as Individual Defendants point out, 	the claims
against Moore are dismissed, as Moore stepped down as CEO on
August 31, 2021, and stepped down as a director of Polished in
September 2021, half a year before the new class period began.
(SAC 'I 18; Defs.' Reply at 6.) There are no allegations that he
helped prepare, sign, or certify any financial statements contain-
ing a challenged statement during the class period. (See, e.g., SAC
'122.)
2. 	Additional FE Allegations
The FAC and the SAC utilized anonymous witness accounts to
attempt to prove both material falsity and scienter. (FAC '!'I 38-
84; SAC 'l'f 42-100.) The first M&O explained that anonymous
witness accounts, like the ones pleaded in the FAC and the SAC,
are discredited in four circumstances:
"First, courts generally do not credit the statements of\
anonymous witnesses ''who are insufficiently described or
whose descriptions do not suggest that they [were] in [a]
position to know the facts attributed to them." Miao v.
Fanhua, Inc., 442 F. Supp. 3d 774, 799 (S.D.N.Y. 2020)
(collecting cases). Second, statements "that cannot situ-
ate 	in 	time 	relevant 	occurrences 	are 	sometimes
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disregarded because they cannot establish that the chal-
lenged statements were knowingly false when made." Id.
(collecting cases). Third, allegations by anonymous wit-
nesses 	that 	are 	insufficiently 	particular 	are 	often
discounted or disregarded. Id. at 800 (collecting cases).
Fourth, courts tend not to credit uncorroborated state-
ments 	of 	anonymous 	witnesses 	that 	are 	sourced
secondhand from individuals ''with whom plaintiffs' coun-
sel have not themselves interacted." Id. (collecting cases).
(M&O at 23-24.) In the FAC, each of the eleven anonymous FEs
suffered from at least one of these deficiencies. (See M&O at 24.)
The SAC attempts to rectify Plaintiffs pleading by marshaling ad-
ditional allegations for FEs 1, 2, 4, and 11. However, as no new
material allegations are presented regarding FEs 3, 5, and 6-10,
the court reiterates the deficiencies identified in the First M&O as
to these individuals. (Id. at 24-29.) Its analysis of the new allega-
tions likewise reveals their deficiencies and finds that they cannot
support Plaintiff's claims.
a. 	FE2, FE4, and FEl 1
The SAC fails to establish any of these accounts as credible for
purposes of supporting its claims.
FE2 was a "reverse logistics manager" and FE4 was a "chargeback
specialist" in the company's accounting department. (SAC lflf 43,
45.) The SAC attempts to moor their allegations in time. (See SAC
lflf 45, 86, 87, 91, 96.) While this new information helps to un-
derstand 	more 	precisely 	when 	different 	events 	allegedly
occurred, these accounts still suffer from fatal defects.
FE2's account still fails to describe their access to Fouerti and re-
cites conclusory allegations that they "rais[ed] these issues with
management at 	[ACI] ." 	(SAC If 76.) 	These are not specific
enough to find that Fouerti or others were on notice of FE2's
complaints. (M&O at 28; citing Loe. No. 38, Int'l Bhd. of Elec.
Workers Pension Fund v. Am. Express Co., 724 F. Supp. 2d 447,
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Workers Pension Fund v. Am. Express Co., 724 F. Supp. 2d 447,
460 (S.D.N.Y. 2010) (discounting CW allegations where there
was no indication that the sources had any contact with the indi-
vidual defendants).) FE2's account is further undermined by its
heavy reliance on secondhand reports. (See) e.g., SAC 'f 86 (de-
scribing what an employee of Fouerti's is alleged to have told FE2
about being forced to forge documents) and 'f 87 (same, with
another employee named Vito).) Such secondhand accounts are
not credited by courts. See Miao, 442 F. Supp. 3d at 799.
FE4's allegations, meanwhile, relate to a party not in the lawsuit,
and the court cannot impute knowledge to other defendants
based on what may have been raised to the then-Chief Account-
ing Officer, Robert Barry. (SAC 'f 91); see In re Am. Express Co.
Sec. Litig., No. 02-CV-5533 (WHP), 2008 WL 4501928, at *36
(S.D.N.Y. Sept. 26, 2008), affd sub nom. Slayton v. Am. Exp. Co.,
604 F.3d 758 (2d Cir.2010) (finding no inference of scienter
where "Plaintiffs have also failed to allege any facts showing that
the confidential source[] ... had any contact with the Individual
Defendants or would have knowledge of what they knew or
should have known during the Class Period"). Accordingly, be-
cause FE4 is not alleged to have "met the Individual Defendants,
reported any concerns, received any instructions, or made any
personal contact with them during the Class Period," this em-
ployee's allegations cannot support any inference of scienter. In
re Wachovia Equity Sec. Litig., 753 F. Supp. 2d 326,352 (S.D.N.Y.
2011). The M&O correctly rejected this level of interaction as too
attenuated. (See M&O at 25.)
The SAC also adds allegati_ons to FEll's account. FEll was an
"inventory control manager" before Polished acquired Appli-
ances Connection ("AC").4 (SAC 'f 73.) FEll now alleges that in
4 For simplicity, the court will refer to Appliances Connection, the pre-ac-
quisition company, as "AC," and Appliances Connection Inc. as "ACI," the
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comparing orders for delivery with the existence of the appli-
ances in the warehouse, "[a]ppliances would commonly, almost
daily, not be present in the warehouse" and that FEl 1 ''was or-
dered 	to send 	a different product, 	or an already damaged
product, that was in the YF Logistics 5 warehouse." (Id.) FEll
would bring such issues to Fouerti ''with whom he had frequent
conversations" but Fouerti would "handle" the issues and FEl 1
"never heard of the issue[s] again." (Id.)
These allegations likewise cannot sustain Plaintiffs claim. First,
FEl 1 did not work in Polished's warehouse, but YF logistics, a
subsidiary. (SAC If 52.) Accordingly, FEl l would not have suffi-
cient insight into how the company operated as a whole to know
if these alleged discrepancies had a material impact on Polished's
financial statements. See) e.g., Frankfurt-Tr. Inv. Luxemburg AG v.
United Techs. Corp., 336 F. Supp. 3d 196, 223 (S.D.N.Y. 2018)
(disregarding the statements of five former employees because
they ''worked mainly within a single [company] unit, so they had
no insight on how other [company] units, let alone other [com-
pany] divisions, projected aftermarket sales"); In re China Mobile
Games & Ent. Grp.) Ltd Sec. Litig., No. 14-CV-4471 (KMW), 2016
WL 922711, at *4 (S.D.N.Y. Mar. 7, 2016) (disregarding allega-
tions of confidential witness ("CW") who worked at a subsidiary,
not the parent company, as such testimony "could describe the
anomalies of a rogue fiefdom rather than company-wide prac-
tices"). These new allegations also do nothing to rectify an
additional issue raised in the first M&O: FEl 1 left YF logistics in
March of 2021, "months before the start of the class period"-
post-transaction name for the Goedeker wholly owned subsidiary of the
AC assets. (SAC «J 6.)
5 AC owned YF Logistics, a 200,000 square foot subsidiary warehouse in
Hamilton, New Jersey, along with four other subsidiaries called 1 Stop
Electronics Center, Inc., Gold Coast Appliances, Inc., Superior Deals, Inc.,
and Joe's Appliance LLC. (SAC «J 33.) The SAC elsewhere refers to YF Lo-
gistics as "ACI's main warehouse." (Id. 'I 46.)
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now a year before the new class period. (M&O at 27.) As de-
scribed below, even though pre-class period allegations can be
considered by the court, FEl l's do not fall within even the twelve
months covered by the 2021 Form 10-K. (SAC 'f'I 52.) The court
resists crediting these attenuated allegations, far from "contem-
poraneous" with the statements made at the beginning of the
class period. See Glickman v. Alexander & Alexander Servs., Inc.,
No. 93-CV-7594 (LAP), 1996 WL 88570, at *11 n.6 (S.D.N.Y.
Feb. 29, 1996) ("[A] stronger inference of fraud may be raised
when the fraudulent acts occur simultaneously with, or closely
precede, the realization of their purpose.").
The additional allegations in the SAC fail to move the needle as
to the credibility of these accounts. Plaintiffs greatest revisions
to the SAC come with the account of FEl, the former ''VP of Lo-
gistics."
b. 	FEl
Plaintiffs main addition in the SAC is a more fleshed out series
of allegations about FEl, which describe direct communication
with the Individual Defendants in Polished's leadership. Alt-
hough Plaintiffs SAC bolsters some of the allegations of FEl, the
court declines to credit the allegations made by this anonymous
account.
The SAC satisfies the M&O's critique that there were no allega-
tions that FEl brought the allegedly fraudulent practices to the
attention of Johnson or Fouerti at the September 21, 2021 meet-
ing. (M&O at 28.) The SAC details what FEl allegedly shared
with these Individual Defendants such that, assuming the allega-
tions to be true, Fouerti and Johnson both "knew about the
alleged improper business practices." (Id.) It also situates in time
when the statements were made. (See SAC '!'I 59-69.) Although
these alleged timeframes are not precise, for example, "[i]n early
August 2021," this level of accuracy is sufficient at the pleading
stage. See Madison Maidens, Inc. v. Am. Mfrs. Mut. Ins. Co., No.
14
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05-CV-4585 (LTS) (JCF), 2006 WL 785270 (S.D.N.Y. Mar. 27,
2006) (''[A] plaintiff need not plead dates, times and places with
absolute precision, so long as the complaint gives fair and rea-
sonable notice to defendants of the claim and the grounds upon
which it is based.").
The parties dispute if this is enough. Individual Defendants argue
that the SAC does not include details indicating that FEl was "in
a position to know facts attributed to him" including that "(1)
there were 1,200 'missing appliances' at YF Logistics, and/or (2)
that those allegedly missing appliances caused the Company's
valuation of inventory to be 'materially false."' (MTD at 8 (citing
SAC 'l'l 61, 139).) In their view, neither FEl's alleged hand
counts of inventory nor access to ACI's ledger suffice to allege
anything about ACI or Polished's inventory more broadly. (MTD
at 8-9; see SAC 'l 61.) Individual Defendants aver that no pleaded
facts 	connect 	these 	missing 	appliances 	to 	FEl's 	personal
knowledge that they "resulted in the [Polished's] financial state-
ments being false or misleading." (Id. at 9.)
Plaintiff counters that FEl's allegations "directly address the
weakness this Court found in the FAC" and that the SAC "ade-
quately pleads the Individual Defendants' knowledge of the
inventory and other issues, which they ignored in publishing ma-
terially false financial statements." (Opp'n at 10.) Plaintiff details
a series of conversations FEl allegedly had with each of the Indi-
vidual Defendants, including a conversation with Defendant
Moore in July 2021, (SAC 'l 62), one with Defendant Johson,
(id.), and several with Defendant Fouerti-including twice in Au-
gust 2021, (id. 'l 64.) In these meetings FEl told them about "all
of the inventory problems and the 1,200 missing appliances," (Id.
'l 62), and told Fouerti that "inventory was missing and materi-
ally overstated on the balance sheet." (Id. at 'l 64.)
Individual Defendants 	are 	right, 	but on narrower grounds.
Throughout Individual Defendants' briefing they push the court
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to disregard the FE accounts, because they concern conduct that
allegedly occurred before the class period began. (MTD at 7, 9,
10; Defs.' Reply at 5-6). However, "[f]acts that fall outside the
relevant period can be considered in determining whether a com-
plaint alleges scienter" and "[a]ny information that sheds light
on whether class period statements were false or materially mis-
leading is relevant." See City of Sterling Heights Police & Fire Ret.
Sys. 	v. 	Reckitt Benckiser Grp. 	PLC, 587 F. Supp. 	3d 56, 95
(S.D.N.Y. 2022); In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 72
(2d Cir. 2001). Indeed, a case Individual Defendants cite in both
their motion and their reply with an explanatory parenthetical
that "allegations relating to conduct pre-dating the class period
could not support scienter" is misleading. Fogel v. Wal-Mart de
Mexico SAB de CV, No. 13-CV-2282 (KPF), 2017 WL 751155, at
*17 (S.D.N.Y. Feb. 27, 2017). That case only rules that statements
made in the pre-class period are not actionable. See id. But it is
silent on accounts that are brought forward before the class pe-
riod and the extent to which they can be used to make inferences
about falsity and scienter during the class period. And the ac-
counts of employees no longer at the company could be relevant
if they were close in time or pertinent to the full-year financial
reporting for FY21, at the earliest. See) e.g., In re Arqit Quantum
Inc. Sec. Litig., 774 F. Supp. 3d 505, 529-30 (E.D.N.Y. 2025) (re-
jecting defendants' claim that the CWs could not have relevant
knowledge because none were employed at the company when
the challenged statements were made); see also Nguyen v. New
Link Genetics Corp., 297 F. Supp. 3d 472,484 (S.D.N.Y. 2018), re-
manded on other grounds sub nom. Abramson v. Newlink Genetics
Corp., 965 F.3d 165 (2d Cir. 2020) (finding a "period leading up
to" the relevant event strengthened plaintiffs' allegations regard-
ing anonymous source's role); Emps.' Ret. Sys. v. Blanford, 794
F.3d 297, 307 (2d Cir. 2015) ("[A]llegations concerning activity
in one period can support an inference of similar circumstances
in a subsequent period.").
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The narrower and correct rule statement is that these examples
lose explanatory value the further they are from the alleged mis-
statements, not that they should be rejected as a bright line rule.
Compare Reckitt Benckiser Grp., 587 F. Supp. 3d at 95 ("facts that
fall outside the relevant period can be considered"), with Glick-
man, 1996 WL 88570, at *11 n.6 ("[A] stronger inference of
fraud may be raised when the fraudulent acts occur simultane-
ously with, or closely precede, the realization of their purpose."),
and In reFuboTVInc. Sec. Litig., No. 21-CV-1412 (ALC), 2023 WL
2711826, at *11 (S.D.N.Y. Mar. 30, 2023) (finding that allega-
tions made by a CW who left the company seven months
previously would be "even less likely [to] have information that
could support an inference of contemporaneous falsity''). Thus,
the court can still consider FEl's allegations even though they
occurred outside the Class Period.
The main reason that FEl's allegations as to falsity and scienter
fail is because FEl was not in a position to know, nor had the
expertise to value, the allegedly missing inventory. As to units of
inventory, at some point during June of 2021, FEl conducted
"two separate hand counts" of YF Logistics warehouse. (SAC 'I
61.) FEl compared his hand counts of YF Logistics' inventory to
ACI's ledger to come to the conclusion that "the ledger and, in
tum, ACI's balance sheet were materially false." (SAC 'I 61.)
There are not sufficient allegations that lay out in detail how
many units were in the warehouse at the time, what percentage
of total units this number represented, if the warehouse was
closed to prevent units from coming in and out and keep the
numbers stable, and importantly, whether this count was ever
repeated at a later point in time. See) e.g., Ford v. Vo.xx Int'l Corp.)
No. 	14-CV-4183 	(JS) 	(AYS), 	2016 	WL 	3982466, 	at 	*6-7
(E.D.N.Y. July 22, 2016) (declining to credit a single FEl who
could not quantify alleged magnitude of declining sales); Caiafa
v. Sea Containers Ltd., 525 F. Supp. 2d 398, 411 n.10 (S.D.N.Y.
2007) (failing to credit allegations of a write-down as a CW failed
17
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to "distinguish between ferry and container assets" and conclu-
sory allegations to when certain containers were overvalued).
Without more, Plaintiff rests most of its case on numbers from a
single day, which could have changed the next day or week with-
out FEl's knowledge. See In re Lehman Bros. Sec. & Erisa Litig.,
No. 10-CV-6637 (LAK), 2013 WL 3989066, at *4 (S.D.N.Y. July
31, 2013) (disregarding CWs who ''were loan level underwriters,
not managers or corporate officers who could have spoken to the
company's practices broadly''). Further, as ACI was a ''wholly
owned subsidiary'' of Polished, its inventory system would not
necessarily reflect the entire company's inventory, and the SAC
makes no representation about how much of the entire com-
pany's inventory was on this system. (SAC ff 6.) Accordingly, FEl
would not have a complete picture of the entire inventory of the
company's stock keeping units. See Loe. No. 38 Int'l Bhd. of Elec.
Workers Pension Fund v. Am. Express Co., 724 F. Supp. 2d 447,
460 (S.D.N.Y. 2010), affd, 430 F. App'x 63 (2d Cir. 2011) (dis-
counting 	allegations 	of CWs 	whom 	the 	complaint did 	not
indicate had any "access to aggregated data regarding [the com-
pany's] credit risk"); In re Sierra Wireless, Inc. Sec. Litig., 482 F.
Supp. 2d 365, 367 (S.D.N.Y. 2007) (finding insufficient allega-
tions by a former founder of a subsidiary who had no knowledge
about the parent's corporate strategy). The SAC fails to represent
how FEl knew that 1,200 missing units at the subsidiary, on a
single day, "materially misstated [Polished's inventory] on the
balance sheet" for an entire quarter or fiscal year. (SAC ff 65.)
The court took no position in the M&O as to whether FEl could
be so credited, and Individual Defendants persuasively argue that
the SAC does not plead facts sufficient to allow the court to be-
lieve FEl's account. (See M&O at 27-28; MTD at 8-11.)
Regarding valuation, there are also no allegations that FEl could
accurately value the missing units. (MTD at 10.) Polished alleg-
edly had 500,000 stock keeping units, or items of inventory for
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sale, as of March 31, 2022. (Polished's 2021 Form 10-K, filed
with SEC March 31, 2022 (Dkt. 56-7) at ECF p. 10.) There is no
allegation that FEl understood how to value this inventory, and
the omission of the value of these missing units also undermines
Plaintiffs credibility. Campo v. Sears Holdings Corp., 635 F. Supp.
2d 323, 335-36 (S.D.N.Y. 2009), affd, 371 F. App'x 212 (2d Cir.
2010) (finding that reports relied upon by a CW that contained
"lease terms for less than a third of Kmart's stores" were "ques-
tionable" in valuing Kmart's entire real estate portfolio); Caiafa,
525 F. Supp. 2d 398 at 411 n.10 (failing to credit CW's write-
down allegations that failed to "specif[y] the amount by which
the containers were overvalued, and at what times"). Even as-
suming these 1,200 units were truly missing, the court cannot
credit that this number was material without knowing anything
about the valuation of these goods.
Plaintiff points to this court's decision in Nio to attempt to salvage
its claims. (Opp'n at 10 (citing In re Nia, Inc. Sec. Litig., No. 19-
CV-1424 (NGG) (JRC), 2021 WL 3566300, at *7 (E.D.N.Y. Aug.
12, 2021)).) There, the court credited the accounts of three
anonymous sources to deny a motion to dismiss a securities fraud
claim. The accounts of three individuals-a purchasing manager
in charge of factory development, a senior salesperson, and a car
design engineer-supported the claim for material misrepresen-
tation that an electric vehicle factory had been built. Nio, 2021
WL 3566300, at *4, 7. The court credited the allegations of the
latter two through the accounts of the first, since that FEl-the
purchasing manager-was directly in charge of "selecting factory
sites and negotiating with factory suppliers." Id. at *7. Whether
the company had begun building the factory was directly within
both FEls knowledge and competence to assess. Here, however,
Plaintiffs FEl did not have a complete picture of Polished's entire
inventory, and the valuation of thousands of units of inventory
would require specialization or familiarity with valuation meth-
ods (neither of which is alleged in the SAC). Unlike the findings
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in Nia, the anonymous accounts here cannot sustain or corrobo-
rate 	each 	other because 	the 	court finds 	them 	individually
unreliable.
Plaintiff levels serious allegations against Individual Defendants.
However, the weakness of key FE accounts precludes this court
from deeming them sufficiently credible to sustain Plaintiffs
claims. See Novak v. Kasaks, 216 F.3d 300, 314 (2d Cir. 2000);
see also In re MRU Holdings Sec. Litig., 769 F. Supp. 2d 500, 515
(S.D.N.Y. 2011) ("Clearly, an inference that the defendants knew
their statements to be false cannot be based on allegations which
are themselves speculative.") (quoting Wexner v. First Manhattan
Co., 902 F.2d 169, 173 (2d Cir. 1990)). As such, the court will
not credit their accounts in assessing the sufficiency of the alle-
gations in the SAC.
3. 	Alleged Material Misrepresentations and Omissions
Plaintiff makes nearly identical allegations in the 	SAC that
Fouerti and Johnson made numerous material misrepresenta-
tions and omissions across four SEC filings and one earnings call.
The challenged statements in the SAC generally fall into four cat-
egories: (1) financial metrics and opinions regarding Polished's
future prospects (SAC 'I'! 132, 134, 142, 144, 154); (2) restated
financial metrics (id. '!'I 150, 160); (3) statements and certifica-
tions regarding Polished's internal controls (id. '!'I 136, 146, 148,
152, 162); and (4) statements concerning Polished's fulfilment,
logistics, and returns processes (id. '!'I 138, 140, 156, 158).
"A material misrepresentation or omission must be both (1) false
or misleading, 	and 	(2) 	material." Leadersel Innotech ESG v.
Teladoc Health) Inc., No. 23-CV-1112, 2024 WL 4274362, at *2
(2d Cir. Sept. 24, 2024) (citing Singh v. Cigna Corp., 918 F.3d
57, 62-63 (2d Cir. 2019)). To adequately allege a material mis-
representation, "a plaintiff must plead facts that show that the
defendant made a statement of material fact that was untrue at
the time it was made." In re Liberty Tax) Inc. Sec. Litig., 435 F.
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Supp. 3d 457, 465 (E.D.N.Y. 2020). A misrepresentation or omis-
sion is 	material if there 	is 	a "substantial likelihood 	that a
reasonable investor would find the misrepresentation important
in making an investment decision." United States v. Gramins, 939
F.3d 429, 445 (2d Cir. 2019); Omnicare, Inc. v. Laborers Dist.
Council Const. Indus. Pension Fund, 575 U.S. 175, 186-89 (2015)
(applying the same standard to omissions). A misrepresentation
or omission is important to a reasonable investor "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."
Gramins, 939 F.3d at 445 (citing Basic Inc. v. Levinson, 485 U.S.
224, 231-32 (1988)); see also Matrixx Initiatives, Inc. v. Sira-
cusano, 563 U.S. 27, 38, 45-47 (2011).
The SAC does not make materially different claims as to the state-
ments. As the court declines to credit the new allegations brought
by the FEs, it adopts the same reasoning and conclusions for the
aforementioned four groups of statements as the M&O. The
statements contained in groups (1), (3), (4) fail to allege mate-
rial misrepresentations and omissions. (M&O at 30-38, 41-54.)
But the SAC adequately alleges that certain challenged state-
ments in the restated financial metrics-those contained in group
(2)-which include the 2021 Form 10-K and 2022 Form 10-Q,
were both false and misleading when stated. (M&O at 38-41.)
The court briefly addresses two of Plaintiffs new arguments for
the sake of completeness. Plaintiff argues that the 2021 10-K Risk
Factor, 6 a statement in group (4), had already materialized when
it was made, and that the SOX Certifications, in group (3), were
false statements of fact. (Opp'n at 22-23.) Plaintiff argues that
FEl's new allegations show that Fouerti knew this risk had ma-
terialized, 	because Polished was 	already shipping 	damaged
6 Polished included a risk warning in its 2021 10-K outlining factors that
could impact the company's growth. (SAC «J 158.)
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products. (SAC 'f'f 73-74, 79-80.) Plaintiff also avers that FEl's
account proves that the SOX Certifications were false because
FEl directly told Fouerti about improprieties in the business.
(Opp'n at 22-23.) This, Plaintiff reasons, renders his certifications
false. (Id.)
For this Risk Factor, the pleading for FEs 1, 3, and 11, whose
accounts Plaintiff cites in support of allegedly damaged products
being shipped, contains no dates of when FEl, FE3, or FEll al-
legedly heard Fouerti demand that employees ship and carry
damaged goods for sale. (Opp'n at 22 (citing SAC 'f'f 73-74, 79-
80).) This is a fatal defect to their accounts. See Miao, 442 F.
Supp. 3d at 799.
SOX Certifications are statements of opinion, not fact. (M&O at
44-45 (citing New England Carpenters Guaranteed Annuity and
Pension Funds v. Decarlo, 122 F.4th 28, 47 (2d Cir. 2023)).) Ac-
cordingly, Plaintiff must allege that "(1) the speaker does not
hold the belief ... professed; (2) the facts supplied in support of
the belief professed are untrue; or (3) the speaker omits infor-
mation that makes the statement misleading to a reasonable
investor." Frankfurt-Tr. Inv. Luxemburg AG v. United Techs. Corp.,
336 F. Supp. 3d 196, 217 (S.D.N.Y. 2018) (quoting Tongue v.
Sanofi, 816 F.3d 199,210 (2d Cir. 2016)). FEl's accounts are not
credible for the reasons laid out above. Even taken as true, no
allegations here are sufficient to prove that Fouerti and Johnson
disbelieved these statements, provided false facts, or omitted in-
formation making the statement misleading. See id. The 1,200
pieces of allegedly missing inventory from two hand-counts
months earlier from a subsidiary warehouse are insufficient to
prove fraud. Nor do they meet the PSLRA's heightened pleading
standard. See Synchrony, 988 F.3d at 166-67. And as Individual
Defendants point out, the SAC is impermissibly vague with re-
spect to the alleged forgeries or hiring practices. (Defs.' Reply at
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6-7.) FEl's accounts do not mention that he even brought hiring
practices to Fouerti or Johnson's attention. (SAC 'I'f 64-67.)
For these reasons, the SAC fails to plead that either the Risk Fac-
tor or the SOX Certifications were either false or misleading.
4. 	Scienter
Plaintiffs claims, including new allegations attempting to estab-
lish Individual Defendants' motive to commit fraud, fail to raise
a strong inference of scienter.
Under the PSLRA, a plaintiff must "state with particularity facts
giving rise to a strong inference that the defendant[s] acted with
the required state of mind." Anschutz Corp., 690 F.3d at 108.
''The requisite state of mind in a Rule l0b-5 action is an intent to
deceive, manipulate or defraud." Ganino, 228 F.3d at 168. Such
an intent may be established "by alleging facts (1) showing that
the defendants had both motive and opportunity to commit the
fraud or (2) constituting strong circumstantial evidence of con-
scious misbehavior or recklessness." ATSI, 493 F.3d at 99. Motive
and opportunity may be established by demonstrating that de-
fendants benefitted "in a concrete and personal way'' from the
alleged fraud. Novak, 216 F.3d at 311. Conscious misbehavior
means "deliberate [ly] illegal behavior, a standard met when it is
clear that a scheme, viewed broadly, is necessarily going to in-
jure." Gould v. Winstar Comms.) Inc., 692 F.3d 148, 158 (2d Cir.
2012). Recklessness may be established ''where a defendant has
engaged in conduct that was highly unreasonable, representing
an extreme departure from the standards of ordinary care to the
extent that the danger was either known to the defendant or so
obvious that the defendant must have been aware of it." Id. at
158-59. This standard is met "where a defendant failed to review
or check information that it had a duty to monitor, or ignored
obvious signs of fraud." Id. at 159.
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Importantly, there are "several important limitations on the
scope of liability for securities fraud based on reckless conduct."
Novak, 216 F.3d at 309. First, plaintiffs cannot "proceed with al-
legations of fraud by hindsight." Id. "Corporate officials need not
be clairvoyant; they are only responsible for revealing those ma-
terial facts reasonably available to them." Id. As such, "allegations
that defendants should have anticipated future events and made
certain disclosures earlier than they actually did do not suffice to
make out a claim of securities fraud." Id. Second, "as long as the
public statements are consistent with reasonably available data,
corporate officials need not present an overly gloomy or cautious
picture of current performance and future prospects." Id. And
where a plaintiff claims that defendants had access to contrary
facts, the plaintiff "must specifically identify the reports or state-
ments containing this information." Id. Finally, "[a]llegations of
a violation of GMP provisions or SEC regulations, without cor-
responding 	fraudulent 	intent, 	are 	not 	sufficient 	to 	state 	a
securities fraud claim." Stevelman, 174 F.3d at 84; see also Novak,
216 F.3d at 309.
"[I]n determining whether the pleaded facts give rise to a strong
inference of scienter, the court must take into account plausible
opposing inferences." Tellabs) Inc. v. Makar Issues & Rts.J Ltd., 551
U.S. 308, 323 (2007) ("Tellabs"). A complaint will survive "only
if a reasonable person would deem the inference of scienter co-
gent and at least as compelling as any opposing inference one
could draw from the facts alleged." Id. at 324. In making this de-
termination, 	the 	court 	must 	review 	"all 	the 	allegations
holistically." Id. at 326.
The SAC adds new allegations to argue that Fouerti and Moore
had the motive and the opportunity to commit fraud, and like the
FAC, relies on circumstantial evidence of conscious misbehavior
or recklessness to establish scienter. In addition to the original
four sets of facts alleged in the FAC-(1) the FE accounts; (2) the
24
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resignations of Fouerti and Johnson; (3) the resignation of Pol-
ished's independent accounting firm, Friedman; and (4) alleged
GAAP violations, (SAC '!'I 42-131, Opp'n at 7-21)-the SAC adds
(5) a section alleging that Fouerti and Moore had motives to vi-
olate the securities laws. (SAC '!'I 53-56.) For the reasons that
follow, the court does not find that this additional allegation
raises a strong inference of scienter as to any Individual Defend-
ant.
a. 	Motive and Opportunity
Plaintiffs additional allegations as to motive are insufficient as a
matter oflaw. 7 Plaintiff asserts that the SAC "pleads Fouerti's mo-
tive to concoct and carry out the fraudulent scheme, '!'I 53-55,
and that the fraudulent scheme predated Goedeker's purchase of
[AC]. '1'153-97." (Opp'n at 14.) Fouerti allegedly"directed fraud-
ulent inventory practices, and other fraud 	. . . well before
Polished acquired [AC]." (SAC 'I 53.) He purportedly "leveraged
the scheme to produce numbers which were clearly attractive to
Goedeker, and negotiated a concrete personal benefit for himself
of $180 million" upon acquisition of his company. (Opp'n at 14
(citing SAC '154).) Fouerti also allegedly stole $800,000 directly
from Polished and paid his father a $104,000 salary for a ficti-
tious job at YF Logistics. (SAC 'I 55.) Plaintiff then alleges that
Moore's motive is established by his $650,000 severance pay-
ment when he left the CEO role on August 30, 2021. (SAC 'I 56.)
These allegations fail to bolster Plaintiffs allegations of scienter.
As to Fouerti, the allegations about the fraudulent inventory
practices and "false financials" before the acquisition are not
pleaded with sufficient detail for this court to credit them. There
are no detailed allegations of what type of fraud occurred, or why
7 The parties do not contest whether the Individual Defendants had "op-
portunity," 	which 	generally 	requires 	access 	to 	inside 	corporate
information. See Stevelman v. Alias Research, Inc., 174 F.3d 79, 86 (2d Cir.
1999).
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the financials were supposedly false. See ATS!, 493 F.3d at 99
("Allegations that are conclusory or unsupported by factual as-
sertions are insufficient."). Further, the idea that he made the
numbers "attractive" to Goedeker is insufficient to show motive.
Even accepting this allegation as true, schemes to defraud other
shareholders do "not support the argument that [the alleged
fraud] show[ed] motive to defraud a company's own sharehold-
ers." EGA, Loe. 134 !BEW Joint Pension Tr. of Chicago v. JP Morgan
Chase Co., 553 F.3d 187, 200-201 (2d Cir. 2009) ("EGA"). In-
deed, without further allegations, it is "at least as compelling" an
inference, Tellabs, 551 U.S. at 326, that this alleged motive,
"common to most corporate officers . . . for the corporation to
appear profitable and the desire to keep stock prices high to in-
crease officer compensation," could be legitimate. EGA, 552 F.3d
at 198. And in any event, this motive would "not constitute 'mo-
tive' for the purposes of this inquiry." Id.; see also Kalnitv. Eichler,
264 F.3d 131, 141 (2d Cir. 2001) (''The desire to achieve the
most lucrative acquisition proposal can be attributed to virtually
every company seeking to be acquired.").
This alleged motive also has nothing to do with any challenged
statement. Goedeker's purchase of AC is not only activity far be-
fore the class period, but also before Fouerti was an employee of
Polished. See In re Lions Gate Ent. Corp. Sec. Litig., 165 F. Supp.
3d 1, 23 (S.D.N.Y. 2016) (declining to find a concrete benefit to
defendants in retaining control over company in a takeover battle
three years before the challenged statements, and finding a lack
of connection between nondisclosure of an SEC investigation and
this "benefit"). This alleged scheme is not adequately connected
to any class period activity or defrauding investors. As with the
other scienter pleading requirements, "mere conclusory allega-
tions connecting fraud to benefits for purposes of motive are
insufficient." Glaser v. 	The9, 	Ltd., 772 F. Supp. 2d 573, 587
(S.D.N.Y. 2011) (citing Fort Worth Employers' Ret. Fund v. Biovail
26
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Corp., 615 F. Supp. 2d 218, 225 (S.D.N.Y. 2009)). And as De-
fendants point out, none of Plaintiffs cited cases in its Opposition
deal directly with whether motive allegations concerning a differ-
ent, pre-class fraud can create a strong inference of scienter.
(Defs.' Reply at 8 n.7.) 8
Likewise, accepting as true the allegations that Fouerti stole
$800,000 from the company, and created a fake job for his father
at YF Logistics, Plaintiff has not tied these "motives" to any chal-
lenged statement or a scheme to perpetrate a fraud on the
company's investors. Glaser, 772 F. Supp. 2d at 587; In re Lions
Gate, 165 F. Supp. 3d at 23 (''The plaintiffs have failed to con-
nect the motive to 	the 	allegedly materially false statements or
omissions.").
Lastly, while Moore has already been dismissed from the case,
considering the new pleading still ends with the same result.
Moore's motive allegations fail as Moore is only connected to
2Q21 financial statements, and any contemporaneity is highly at-
tenuated. (SAC 'f 132); see Glickman, 1996 WL 88570, at *11
n.6. And as Defendants insist, Moore's severance payment is "un-
remarkable 	and 	cannot 	demonstrate 	motive 	to 	defraud
investors." (Defs.' Reply at 8; see also M&O at 58-60 (citing volu-
minous 	caselaw in finding 	the 	resignations 	of Fouerti and
Johnson failed to support a strong inference of scienter); In re
PXRE Grp.) Ltd.) Sec. Litig., 600 F. Supp. 2d 510 (S.D.N.Y.), affd
8 These include an out-of-circuit, unreported default judgment action that
details the standard for obtaining a permanent injunction in the Ninth Cir-
cuit, not the lOb-5 scienter standard in the Second Circuit. (Opp'n at 14
(citing Sec. & Exch. Comm'n v. McMillan, No. 06-CV-0951 (PCT) (SMM),
2009 WL 10708627, at *3 (D. Ariz. Oct. 20, 2009)).) Another out-of-cir-
cuit, unreported SEC action does not aid the court in comparing either facts
or law to the instant case, as Plaintiff merely parrots that a prior order
concluded the defendant acted with scienter. (Id. (citing SEC v. Yin Nan
Wang, No. 13-CV-7553 (JAK), 2016 WL 11533562, at *2, *9 (C.D. Cal.
Oct. 31, 2016)).)
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sub nom. Condra v. PXRE Grp. Ltd., 357 F. App'x 393 (2d Cir.
2009) (failing to find scienter through tenuous linkage between
a negotiation of a "golden parachute" severance payment and the
alleged fraud). No motive allegations are made as to Johnson,
which therefore also fail.
b. 	Circumstantial Evidence
Plaintiff also fails to offer sufficient circumstantial evidence to
successfully raise an inference that the Individual Defendants
were acting with conscious misbehavior or recklessness. "[I]f a
plaintiff fails 	to allege adequate motive, 	as 	in 	this case, 	the
strength of the circumstantial allegations of conscious misbehav-
ior or recklessness must be correspondingly greater." Kuriakose v.
Fed. Home Loan Mortg. Corp., 897 F. Supp. 2d 168, 184 (S.D.N.Y.
2012), affd sub nom. Cent. States~ Se. & Sw. Areas Pension Fund
v. Fed. Home Loan Mortg. Corp., 543 F. App'x 72 (2d Cir. 2013)
(summary order). As detailed above, the court does not credit
the amended allegations as to the FEs. While FEl's allegations
now include more information about what was allegedly dis-
cussed in their direct conversations with Fouerti and Johnson,
including the September 21, 2021 meeting where FEl's employ-
ment was terminated, (SAC 'f'f 59-69), FEl's statements are not
credible because there are no allegations that they "played any
direct or meaningful role in the company-wide financial forecast-
ing or reporting process," in either fully understanding Polished's
inventory or its valuation. NECA-IBEW Health & Welfare Fund v.
Pitney Bowes Inc., No. 09-CV-1740 (VLB), 2013 WL 1188050, at
*35 (D. Conn. Mar. 23, 2013); see also In re MRU Holdings Sec.
Litig., 769 F. Supp. 2d at 515.
The M&O found that individually the other three factors, (1) the
resignations of Fouerti and Johnson, (2) the resignation of Pol-
ished's independent accounting firm, Friedman, and (3) alleged
GAAP violations were insufficient to create a "strong inference of
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scienter." (M&O at 58 (citing Novak, 216 F.3d at 309 ("[A]llega-
tions of GAAP violations or accounting irregularities, standing
alone, are insufficient to state a securities fraud claim."); In re
Scotti.sh Re Grp. Sec. Litig., 524 F. Supp. 2d 370, 394 n.176
(S.D.N.Y. 2007) ("[A]lthough not sufficient in and of themselves,
[resignations] add to the overall pleading of circumstantial evi-
dence 	of 	fraud.").) 	And 	even 	when 	considering 	them
"holistically'' the court still did not find they adduced "strong cir-
cumstantial evidence of conscious misbehavior or recklessness."
(M&O at 58 (citing Tellabs, 551 U.S. at 326); see generally id. 58-
62 (discussing the other factors).) As the court declines to credit
the allegations of FEl and the other anonymous witnesses, (see
supra Section N.A.3), the court again finds that Plaintiff has
failed to materially augment its FAC. There is not sufficient cir-
cumstantial evidence from which to infer conscious misbehavior
or recklessness as to any Individual Defendant.
Taken holistically with the other allegations already discussed
and substantially identical to those in the FAC, Plaintiff fails to
raise a strong inference of scienter as to any Individual Defend-
ant.
5. 	Loss Causation
Because the majority of the challenged statements are not action-
able misstatements or omissions, and because Plaintiff has failed
to adequately raise a strong inference of scienter as to the few
actionable misstatements, the court declines to reach the issue of
loss causation. (See M&O at 62); see, e.g., Altayyar v. Etsy, Inc.,
242 F. Supp. 3d 161, 184 (E.D.N.Y. 2017) ("Since the plaintiffs
have not identified any actionable misstatements or adequately
alleged scienter, there is no basis upon which they may plead re-
liance or loss causation."); In re Neurotrope, Inc. Sec. Litig., 315 F.
Supp. 3d 721, 730 (S.D.N.Y. 2018) ("Because the Complaint fails
to allege a material misrepresentation or omission, and scienter,
the loss causation issue is not addressed.").
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* 	* 	*
In sum, the Second Amended Complaint does not sufficiently al-
lege a material misrepresentation, omission, or scienter. See
Synchrony, 988 F.3d at 167. Thus, Plaintiff fails to state a claim
under Section l0(b) and Rule 10b-5(b).
B. 	Scheme Liability
The court previously found 	that Plaintiffs Count II alleging
scheme liability failed because the various purportedly improper
practices failed to describe a scheme "in connection with the pur-
chase or sale of securities." (M&O at 63-64.)
Count II of the SAC fails for the same reasons. 9 As a threshold
matter, scheme liability cannot be established when a complaint
"only alleges misstatements and omissions." SECv. Rio Tinto, 41
F.4th 47, 53 (2d Cir. 2022). Outside the allegations of the mis-
statements, which make up the vast majority of the ink spilled in
the SAC, Plaintiff fails to "articulate with precision the contours
of an alleged scheme to defraud investors, or which specific acts
were conducted in furtherance of it." Plumber & Steamfitters Loe.
773 Pension Fund v. Danske Bank NS, 11 F.4th 90, 105 (2d Cir.
2021). The purported acts of fraud against Polished, customers,
and credit card companies "do not establish a deceptive scheme
to defraud investors." (M&O at 64 (quoting Plumber & Steamfit-
ters Loe., 11 F.4th at 105 (holding that allegations of money
9 Plaintiff incorrectly states in its briefing that the court made factual find-
ings as to the various allegations in the FAC about improper business
practices directed and carried out by Fouerti. (Opp'n at 23.) As a matter of
elementary procedure, "[o]n a motion to dismiss, the court does not find
facts." United States v. Prevezon Holdings LTD., 122 F. Supp. 3d 57, 78
(S.D.N.Y. 2015). As described above, while the court refers to its earlier
M&O to the extent certain allegations and arguments are materially iden-
tical, it reviews only the SAC as the operative complaint. Thus, there is no
law of the case Plaintiff can point to here. See supra Section II.
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laundering were insufficient to plead a scheme to defraud inves-
tors)); Fogel v. Wal-Mart de Mexico SAB de CV, No. 13-CV-2282
(KPF), 2017 WL 751155, at *18 (S.D.N.Y. Feb. 27, 2017) (hold-
ing 	that 	allegations 	of 	a 	bribery 	scheme 	were 	similarly
insufficient).) Scienter, a necessary element of a scheme-liability
claim, is likewise missing and requires dismissal. See Plumber &
Steamfitters Loe., 11 F.4th at 105; Meyer v. Organogenesis Hold-
ings Inc., 727 F.Supp.3d 368, 398 n.12 (E.D.N.Y. 2024) (finding
that a scheme liability claim failed "in light of Plaintiffs' failure to
establish scienter"). 10
C. 	Section 20(a)
The court previously found that Plaintiff failed to allege viola-
tions of Section 20(a) against Individual Defendants in its Count
III, as the FAC failed to "allege a primary violation of the securi-
ties 	laws." 	(M&O 	at 	65 	(citing EGA, 	553 	F.3d 	at 	206-07
(concluding that the "control person liability claim pursuant to .
. . section 20 of the Exchange Act must also fail for want of a
primary violation")).) For the reasons stated above the SAC fails
to allege a primary violation of the securities laws. Consequently,
Plaintiff cannot allege a violation of Section 20(a). See EGA, 553
F.3d at 206-07.
V. 	CONCLUSION
For foregoing reasons, the Individual Defendants' motion for ju-
dicial notice is GRANTED IN PART and DENIED IN PART. The
Individual Defendants' motion to dismiss is GRANTED and the
Second Amended Complaint is DISMISSED WITH PREJUDICE as
10 The primary case Plaintiff discusses here is an unreported, out-of-circuit
decision. (Opp'n at 24 (citing Maverick Fund, Ltd. v. Mohawk Industries,
Inc., 21-CV-0118 (VMC), 2023 WL 2887603, at *9 (N.D. Ga. Mar. 31,
2023)).) It is immaterial to this case that the court there found defendants
to have adequately pled falsity and scienter.
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s/Nicholas G. Garaufis
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