Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—N.D. Cal.: Grocery company did not hide the impact of a system transition, (Sep 17, 2026)

By R. Jason Howard, J.D.

The defendants consistently disclosed the issues caused by the system transition.

The Northern District of California has granted a motion to dismiss a putative class action brought against Grocery Outlet Holding Corp., its former CEO, and its former CFO, for alleged violations of federal securities laws (Liberato v. Grocery Outlet Holding Corp., No. 4:25-cv-00957-JST (N.D. Cal. Sept. 16, 2026)).

Grocery Outlet. Grocery Outlet is an “extreme value retailer of consumables and fresh products sold via a network of independently owned and operated stores,” with most of its locations operated by independent, third-party operators, referred to as “IOs.” While IOs handle local operations, Grocery Outlet handles inventory procurement, distribution, and information systems. The CEO was with the company from January 2023 to October 29, 2024, and the CFO was with the company from August 2012 until March 1, 2024.

In 2021, the defendants decided to modernize and overhaul Grocery Outlet’s internal enterprise resource planning (ERP) and information technology systems. When the company went “live” with its new SAP ERP systems in late August 2023, it immediately encountered widespread disruptions caused by problems with inventory visibility and management, end-user errors, and data integrity. During a November 2023 earnings call for Q3 2023, defendants disclosed that the system transition had caused significant disruptions and material impacts to the Company’s financials. Other disclosures followed and, after each, the company’s share price fell. The share price declined further after the CFO’s resignation and CEO’s termination.

Alleged violations. The amended complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 individually, and on behalf of a class defined as all persons and entities who purchased Grocery Outlet common stock between August 9, 2023, and May 7, 2024.

Material misrepresentations or omissions. The court examined the statements about the then-forthcoming systems transition, statements about grocery outlet’s internal controls, and statements about defendants’ visibility into the financial impacts of the systems transition disruptions but the court explained that the plaintiff failed to identify any material misrepresentations and noted that the defendants “consistently disclosed the issues caused by the system transition.”

Scienter. In determining whether the defendants acted with scienter, the court explained that the relevant inquiry “is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter.” Here, the court could not find that the defendants “acted with the intent to deceive or with deliberate recklessness as to the possibility of misleading investors,” because the plaintiff failed to identify any facts suggesting that the defendants were aware of or reckless about the possibility of deceiving investors. The plaintiffs asserted that the departure of the CFO and termination of the CEO established that they acted with an intent to deceive but the court found that “neither the complaint nor plaintiff’s briefing explained why the departures suggest the defendants committed fraud, rather than simply executing the IT systems transition poorly.”

Loss causation. At the pleading stage, the plaintiff only had to allege that the “revelation of fraudulent activity, rather than changing market conditions or other unrelated factors, proximately caused the decline in defendant’s stock price.” Here, the plaintiff argued that concealed risk gradually materialized as the true impacts of the system transition were revealed, resulting in six separate stock declines but the court explained that because it already concluded that the complaint did not sufficiently allege concealment of risk, the argument failed.

Conclusion. Grocery Outlet’s motion to dismiss was granted but the plaintiff may file an amended complaint addressing the deficiencies identified by the court within 28 days of September 16, 2026, the date of the order.

The case is No. 4:25-cv-00957-JST.

Judge: Tigar, J.

Attorneys: Laurence Matthew Rosen (The Rosen Law Firm, P.A.) for Genriccio Liberato. Craig I. Varnen (Gibson, Dunn & Crutcher LLP) for Grocery Outlet Holding Corp., Robert Joseph Sheedy and Charles C. Bracher.

Companies: Grocery Outlet Holding Corp.

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