Case 215cv00400GWAS Document 1 Filed 012015 Page 2 of 36 Page ID - PDF document

1 Case 2:15-cv-00400-GW-AS Document 1 File
Case 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 2 of 36 Page ID #:2 \tPlaintiff Sherif E. El Dabe (“Plaintiff”), individually and on behalf of all other 2 persons similarly situated, by his undersigned attorneys, for his complaint against 3 defendants, alleges the following based upon personal knowledge a s to himself and his 4 own acts, and information and belief as to all other matters, based upon, inter alia, the 6 investigation conducted by and through his attorneys, which included, among other 7 things, a review of the defendants’ public documents, conference calls and 8 announcements made by defendants, United States Securities and Exchange 9 Commission (“S EC”) filings, wire and press releases published by and regarding 10 Calavo Growers, Inc., (“C alavo” or the “Company”), an alysts’ reports and advisories 12 about the Company, and information readily obtainable on the Internet. Plaintiff 13 believes that substantial evidentiary support will exist for the allegations set forth herein 14 after a reasonable opportunity for discovery. 15 NATURE OF THE ACTION 16 1. 18 consisting of all persons and entities, other than Defendants (defined below) and their 19 affiliates, who purchased or otherwise acquired the securities of Calavo from March 5, 20 2012 to January 14, 2015, inclusive (the “Cl ass Period ”). Plaintiff seeks to pursue 21 remedies against Calavo and certain of

2 its officers and directors for violatio
its officers and directors for violations of the 23 federal securities laws under the Securities Exchange Act of 1934 (the “ Exchange 24 Act”). \t2. 26 perishable foods to food distributors, produce wholesalers, supermarkets, convenience 27 28 stores, and restaurants worldwide. Calavo was founded in 1924, is headquartered in CLASS ACTION C OMPLAINT Case 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 3 of 36 Page ID #:3 1 Santa Paula, California, and trades on the Nasdaq Global Exchange (“NASDAQ”) 2 under the ticker symbol “CVGW.” 3 \t4 for the acquisition of Renaissance Food Group (“RFG”), LLC, a closely held fresh-food 6 company that produces, markets and distributes nationally a portfolio of healthy, high 7 quality lifestyle products for consumers via the retail channel (the “RFG Acquisition 8 Agreement”). The transaction, which is closed in June 2 011, settled for a combination 9 of cash and stock, including “earn-out payments ” based o n financial performance. 10 4. 12 on the closing date approximately $ 16 million, payable in a combination of cash and 13 shares of unregistered Calavo common stock. In addition, provided RFG attained 14 specified financial goals for certain 12-month periods prior to the fifth anniversary of 15 the closing, the RFG Acquisition Agreement required Calavo to pay RFG up to an 17 additional approximate $8 0 million in earn-out consideration, paya

3 ble in cash and 18 shares of unregistere
ble in cash and 18 shares of unregistered Calavo common stock. As a result, if the maximum earn-out 19 consideration were to be earned, the total consideration payable to RFG pursuant to the 20 RFG Acquisition Agreement would be approximately $100 million from the time of 21 closing to the end of the five-year earn-out period. 23 5. 24 statements, and failed to disclose material adverse facts about the earn-out payments 25 provided under the RFG Acquisition Agreement. Specifically, during the Class Period, 26 Defendants made false and/or misleading statements and/or failed to disclose that: 27 28 (i) Calavo failed to maintain an accurately valued contingent consideration pursuant to its acquisition of RFG; (ii) Calavo overstated its non-cash operating expenses; (iii) the CLASS ACTION C OMPLAINT Case 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 4 of 36 Page ID #:4 1 Company lacked adequate internal controls over financial reporting; and (iii) as a result 2 of the above, the Company’s financial statements were materially false and misleading 3 at all relevant times. 4 6. 6 of the Company’s consolidated financial statements required to be included in its 7 Annual Report on Form 10-K for the fiscal year ended October 31, 2014, the Company 8 disclosed that it had identified a non-cash misstatement in its historical consolidated 9 financial statements related to its treatment of con

4 tingent consideration in the 10 acquisit
tingent consideration in the 10 acquisition of RFG in June 2011. 12 7. 13 RFG’s operating results exceeded the defined thresholds in accordance with the earn- 14 out provisions in the RFG Acquisition Agreement. A s a result, the Company was 15 required to, and did, make the maximum earn-out payments pursuant by the A cquisition 17 Agreement. Initially, Calavo recorded this additional contingent consideration, which 18 was settleable in common stock, as an equity instrument and, therefore, did not record 19 expense based on the changes in fair value of the contingent consideration. The 20 Company has now admitted, however, that the contingent consideration should have 21 been accounted for as a liability, requiring re-measurement to fair value and expense 23 recognition, which Calavo will treat as an amortization expense, at each reporting 24 period subsequent to the acquisition. 25 8. 26 non-cash charge – which the Company treats as amortization expense – totaling, over all 27 28 periods, $88.9 million before tax ($54.0 million net of tax) related to the misstatement f contingent consideration. CLASS ACTION C OMPLAINT Case 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 5 of 36 Page ID #:5 \t9. 2 Committee of the Board of Directors (the “Audit Committee”) o f Calavo concluded, 3 after review and discussion with management and the Company’s independent 4 registered public acc

5 ounting firm, Ernst & Young LLP (“EY”),
ounting firm, Ernst & Young LLP (“EY”), that the C ompany’s 6 consolidated financial statements for the fiscal years ended October 31, 2013 and 2012 7 and the quarters therein, as well as the quarters ended January 31, 2014, April 30, 2014 8 and July 31, 201 4 (the “Rel evant Peri ods”), should no longer be relied upon. Similarly, 9 the Company announced that the related press releases, and st ockholder 10 communications describing the Co mpany’s consolidated financial statements for the 12 Relevant Periods should no longer be relied upon. Additionally, according to the 13 Company, EY’s reports on the consolidated financial statements, including EY’s 14 opinion on the effectiveness of internal control over financial reporting, likewise should 15 no longer be relied upon. \t10. On the news, shares of Calavo fell $4.72 per share, or over 9%, to close at 18 $43.07 per share on January 15, 2015. \t11. As a result of Defendants’ wrongful acts and omissions, and the precipitous 20 decline in the market value of the Company’s securities, Plaintiff and other Class 21 members have suffered significant losses and damages. \tJURISDICTION AND VENUE \t12. The claims asserted herein arise under and pursuant to § §10(b) and 20(a) of 25 the Exchange Act (15 U.S.C. §§78j(b) and 78t(a)) and Rule 10b-5 promulgated 26 thereunder by the SEC (17 C.F.R. §240.10b-5). 27 13. This Court has jurisdiction over th

6 e subject matter of this action under 28
e subject matter of this action under 28 CLASS ACTION C OMPLAINT Case 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 6 of 36 Page ID #:6 \t14. Venue is proper in this District pursuant to §27 of the Exchange Act (15 2 U.S.C. §78aa) and 28 U.S.C. §1391(b) as a significant portion of the Defendants’ 3 actions, and the subsequent damages, took place within this District. 4 15. In connection with the acts, conduct and other wrongs alleged in this 6 Complaint, Defendants, directly or indirectly, used the means and instrumentalities of 7 interstate commerce, including but not limited to, the United States mail, interstate 8 telephone communications and the facilities of the national securities exchange. 9 PARTIES 10 16. Plaintiff, as set forth in the accompanying Certification, which is 12 I incorporated by reference herein, purchased the securities of Calavo at artificially 13 inflated prices during the Class Period and was damaged upon the revelation of the 14 alleged corrective disclosures. 15 17. Defendant Calavo Growers, Inc. markets and distributes avocados, 17 prepared avocados, and other perishable foods t o food distributors, produce wholesalers, 18 supermarkets, convenience stores, and restaurants worldwide. Calavo was founded in 19 1924, i s headquartered in Santa Paula, California, and trades on the NASDAQ under the 20 ticker symbol “C VGW.” 21 18. Defendant Lecil E. Cole (“Cole”)

7 has served as the Company’s Chairman 23
has served as the Company’s Chairman 23 of the Board, President, and Chief Executive Officer at all relevant times. \t19. Defendant Arthur Bruno (“Bruno”) has served as the Company’s Chief 25 Operations Officer, Chief Financial Officer and Corporate Secretary at all relevant 26 times. 27 20. Defendants referenced above in ¶¶ 18 and 19 are sometimes referred to herein, collectively, as the “Individual Defendants.” CLASS ACTION C OMPLAINT Case 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 7 of 36 Page ID #:7 21. SUBSTANTIVE ALLEGATIONS 22. f the deal, Calavo agreed to pay $15 million in cash, subject in the form of both cash and Calavo stock. Materially False and Misleading 25. elease announcing fiscal 2012 first quarter operating results. According to the elease, revenues grew 29 percent to $11 7.4 million versus $ 91.3 million in first 6 percent to $2.7 million, or $0.18 per m $2.3 million, or $ 0.16 per diluted share the prior year; and the RFG ition success increased Contingent Consideration expense by $11 8,000, or imately $ 0.01 per diluted share. Regarding the Contingent Con sideration cally, the press release stated, in part: 1 17 18 19 27 28 CLASS ACTION C OMPLAINT Case 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 8 of 36 Page ID #:8 1 17 18 19 27 28 Pursuant to the terms o f its RFG acquisition, which triggered in accounting treatment, Calavo performs a quarte

8 rly related contingent consideration lia
rly related contingent consideration liability account this contingent consideration obligation to its mated fair value. As a result o f its most recent review, the pany recorded a $1 18,000 expense, equal to about $0.01 diluted share, during the first quarter of fiscal 2012 in ng, general and administration (SG&A) expenses. The first-ter SG&A expense reflects an increase i n the probability of mance-based earnout payments by Calavo to wing to the success of the transaction. eases or decreases in the fair value of this c ontingent ideration obligation can result from factors such as changes he assumed timing and amount of revenue and expense mates or changes in assumed discount periods and rates. gned by defendants Cole and Bruno, and reiterated the Co mpany’s previously ced quarterly financial results and financial position. In addition, the Form 10-Q ed signed certifications pursuant to the Sarbanes-Oxley Act of 2002 (“ SOX”) by ants Cole and Bruno, stating that the financial information contained in the Form was accurate and disclosed any material changes to the Company’ s internal ncial reporting. h period we revalue the contingent consideration obligations eir fair value and record increases or decreases in the fair e into selling, general and administrative expense. Increases ecreases in the fair value of the contingent cons ideration obligations can result from changes in

9 assumed discount periods and rates, cha
assumed discount periods and rates, changes in the assumed timing and amount of nue and expense estimates. Significant judgment is ning the appropriateness of these mptions a s of the acquisition date and for each subsequent od. Accordingly, future business and economic conditions, CLASS ACTION C OMPLAINT Case 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 9 of 36 Page ID #:9 1 17 18 19 27 28 as well as changes in any of the assumptions described above, materially impact the amount of contingent cons ideration nse we record in any given period. Total net increase to . 28. econd quarter operating results. According to the press release, net income rose 4 million; revenues advanced 1 7 percent from $118.7 million to $139.0 million; and gross margin climbed 57 percent t o $14.7 million from $9.3 million in the ear’s second quarter. On June 8, 2012, the Company filed a Form 10-Q with the SEC which was dants Cole and Bruno, and reiterated the Co mpany’s previously ced quarterly financial results and financial position. In addition, the Form 10-Q ed signed SOX certifications by defendants Cole and Bruno, stating that the al information contained in the Form 10-Q was accurate and disclosed any to the Co mpany’s internal control over financial reporting. h period we revalue the contingent consideration obligations eir fair value and record increases or decreases in the fair e in

10 to selling, general and administrative
to selling, general and administrative expense. Increases ecreases in the fair value of the contingent cons ideration obligations can result from changes in assumed discount periods and rates, changes in the assumed timing and amount of nue and expense estimates. Significant judgment is ning the appropriateness of these mptions a s of the acquisition date and for each subsequent od. Accordingly, future business and economic conditions, ell as changes in any of the assumptions described above, materially impact the amount of contingent cons ideration nse we record in any given period. Total net increase to CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 10 of 36 Page ID #:10 1 17 18 19 27 28 the contingent considerations during the three and six months ended April 30, 2012 totaled $0.1 million and $0.2 million. perating results. According to the press release, net income d 109 percent to $5.7 million from $2. 7 million last year; diluted earnings per otaled $0. 38 versus $0.18 in fiscal 2011 period; and gross margin rose to $16.2 , a 44 percent increase from $ 11.2 million in the corresponding quarter the prior Regarding the Contingent Consideration specifically, the press release stated, in ng, general and administrative (SG&A) expenses in the arter totaled $7.8 million, equal to 5.1 percent of nues, versus $6.7 million, or 4.1 percent revenues in last r

11 iod and was comparable to SG&A in fiscal
iod and was comparable to SG&A in fiscal 2012 nd quarter. The year-over-year increase in SG&A reflects addition of RFG, as well as accruals for c ontingent ideration related to the RFG transaction and an increase in k-based compensation expense. Contingent cons ideration unted for approximately $245, 000 of total SG&A expenses cent quarter and amounts to about $415,000 for fiscal year to date. SG&A as a percentage of gross margin by more than 1,200 basis points to 47.9 percent in the most nt quarter from 60.0 percent in the fiscal 2011 third period. ed by defendants Cole and Bruno, and reiterated the C ompany’s usly announced quarterly financial results and financial position. In addition, the 0-Q contained signed SOX certifications by defendants Cole and Bruno, stating e financial information contained in the Form 10- Q was accurate and disclosed terial changes to the Company ’s internal control over financial reporting. CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 11 of 36 Page ID #:11 1 17 18 19 27 28 33. h period we revalue the contingent consideration obligations eir fair value and record increases or decreases in the fair e into selling, general and administrative expense. Increases ecreases in the fair value of the contingent cons ideration obligations can result from changes in assumed discount periods and rates, changes in the assumed ti

12 ming and amount of nue and expense estim
ming and amount of nue and expense estimates. Significant judgment is ning the appropriateness of these mptions a s of the acquisition date and for each subsequent od. Accordingly, future business and economic conditions, ell as changes in any of the assumptions described above, materially impact the amount of contingent cons ideration nse we record in any given period. Total net increase to . diluted EPS equaled $0.42 versus $0.25 in the final quarter of fiscal 2011; and gross from $13.2 million in the year-earlier fourth quarter. For the full-year, the Company reported net income reached new all-time high of $18.9 million, a 54 percent increase from $11.1 million in the prior year; diluted EPS of $1.27 as compared to $0.75 in fiscal 2011; gross margin soared 43 percent to record $60.7 million from $42.3 million; and revenues grew CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 12 of 36 Page ID #:12 1 17 18 19 27 28 35. Form 10-K contained signed SOX certifications by defendants Cole and Bruno, stating h period, we revalue our contingent cons ideration obligations to their fair value and record increases or decreases he fair value into selling, general and administrative nse. Increases or decreases in the fair value of the sideration obligations can result from changes in assumed timing and amount of revenue and expense mates, changes in the probability of

13 payment scenarios, as al market conditi
payment scenarios, as al market conditions, which impact the ount rate used in the fair valuation. Significant judgment is ning the appropriateness of these mptions a s of the acquisition date and for each subsequent od. Accordingly, future business and economic conditions, ell as changes in any of the assumptions described above, materially impact the amount of contingent cons ideration nse we record in any given period. Total net increase to the contingent considerations in fiscal year 2012 totaled $0.4 . 2013 first quarter operating results. According to the press release, revenues advanced mbed $13.1 CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 13 of 36 Page ID #:13 1 17 18 19 27 28 million from $11.9 million in the prior year’s first quarter; net income rose 31 percent to As referenced at the outset, pursuant to the terms of its RFG isition, which triggered certain accounting treatment, vo performs a quarterly review of the related c ontingent ideration liability account and revalues this c ontingent ideration obligation to its estimated fair value. As a result s most recent review, the company recorded a $1. 2 million ormance-based earn-out consideration expense, equal to t $0.06 per diluted share, during the first quarter of fiscal d in selling, general and rst-quarter SG&A nse reflects an increase in the probability o f future ormance-based cas

14 h earn-out payments b y Calavo to RFG’
h earn-out payments b y Calavo to RFG’s s owing to the success o f the transaction. eases or decreases in the fair value of this c ontingent ideration obligation can result from factors such as changes he assumed timing and amount of revenue and expense mates or changes in assumed discount periods and rates. contained signed SOX certifications by defendants Cole and Bruno, stating that the part: CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 14 of 36 Page ID #:14 1 17 18 19 27 28 Each period we revalue the contingent consideration obligations eir fair value and record increases or decreases in the fair e into selling, general and administrative expense. Increases ecreases in the fair value of the contingent cons ideration obligations can result from changes in assumed discount periods and rates, changes in the assumed timing and amount of nue and expense estimates. Significant judgment is ning the appropriateness of these mptions a s of the acquisition date and for each subsequent od. Accordingly, future business and economic conditions, ell as changes in any of the assumptions described above, materially impact the amount of contingent cons ideration nse we record in any given period. The total revalue . 4 0. On June 5, 2 013, the Company issued a press release announcing fiscal econd quarter operating results. According to the press release, ne

15 t income period one year earlier; secon
t income period one year earlier; second-quarter gross margin totaled $11.5 million, compared vo also recorded accruals for contingent purchase ideration related to the company’s acquisition of RFG. uant to the terms of the RFG acquisition, Calavo performs uarterly review of the related contingent cons ideration liability account and revalues this contingent cons ideration obligation to its estimated fair value. As a result of its most nt review the company recorded a $199 ,000 performance-d, earn-out consideration expense, equal to about $0.01 per CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 15 of 36 Page ID #:15 1 17 18 19 27 28 diluted share, during the second quarter of fiscal 2013 which been recorded SG&A. signed by defendants Cole and Bruno, and reiterated the Company’s previously contained signed SOX certifications by defendants Cole and Bruno, stating that the h period we revalue the contingent consideration obligations eir fair value and record increases or decreases in the fair e into selling, general and administrative expense. Increases ecreases in the fair value of the contingent cons ideration obligations can result from changes in assumed discount periods and rates, changes in the assumed timing and amount of nue and expense estimates. Significant judgment is ning the appropriateness of these mptions a s of the acquisition date and fo

16 r each subsequent od. Accordingly, futur
r each subsequent od. Accordingly, future business and economic conditions, ell as changes in any of the assumptions described above, materially impact the amount of contingent cons ideration nse we record in any given period. The total revalue . perating results. According to the press release, net income CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 16 of 36 Page ID #:16 1 rose 13 percent to $6.4 million, equal to $0.43 per diluted share (EPS), from $5.7 2 million, or $0.38 per diluted share in the prior year’s quarter. Results from the quarter 3 included approximately $1.1 million in pre-tax expenses associated with a contingent 5 consideration charge related to the Company’s RFG purchase and its investment in 6 FreshRealm, LLC, translating to approximately $0.05 per diluted share ($0.02 and $0.03 8 per diluted share associated with, respectively, RFG and FreshRealm) and had the 9 impact of reducing diluted earnings per share from $0.48 in the fiscal 2013 third quarter. 10 Revenues advanced to $194.9 million, a 27 percent increase from $153.2 million in the 12 corresponding prior-year period; and gross margin in the quarter expanded by $1.9 13 million, or 11.5 percent, to $18.1 million, or 9.3 percent of revenues, from $16.2 million, 15 or 10.5 percent o f revenues, in the third period of fiscal 2012. 16 17 44. On September 6, 2013, the Company filed a

17 Form 10-Q with the SEC 18 which was sign
Form 10-Q with the SEC 18 which was signed by defendants Cole and Bruno, and reiterated the Company’s 19 previously announced quarterly financial results and financial position. In addition, the 20 Form 10-Q contained signed SOX certifications by defendants Cole and Bruno, stating 22 that the financial information contained in the Form 10-Q was accurate and disclosed 23 any material changes to the Company’s internal control over financial reporting. 25 45. Regarding the accounting for the Company’s Contingent Consideration 26 specifically, the Form 10-Q stated, in part: 27 28 Each period we revalue the contingent consideration obligations eir fair value and record increases or decreases in the fair e into selling, general and administrative expense. Increases CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 17 of 36 Page ID #:17 or decreases in the fair value of the contingent cons ideration obligations can result from changes in assumed discount periods and rates, changes in the assumed timing and amount of nue and expense estimates. Significant judgment is ning the appropriateness of these mptions a s of the acquisition date and for each subsequent od. Accordingly, future business and economic conditions, ell as changes in any of the assumptions described above, materially impact the amount of contingent cons ideration nse we record in any given period. T

18 otal net increase to . have amended our
otal net increase to . have amended our acquisition agreement with RFG in rds to the cash payment portion of the Stage II earnout. As uly 31, 2013, we no longer will pay $5 million in cash, but rather in the form of shares of our common stock. We recorded a revalue adjustment of $0.4 million in the third quarter of 2013 the entire liability o f $4.2 million has been reclassified to tional paid in capital. 46. On January 7, 2014, the Company issued a press release announcing fiscal revenues climbed 35 percent to reach $190.7 million from $141.6 million in final period the prior year; and gross margin equaled $17.4 million in the fiscal 2013 fourth quarter, which compared with $17.9 million in the year-earlier period. For the full-year, net percent to a record $691.5 million from $551.1 million; gross margin was substantially CLASS ACTION C OMPLAINT 17 18 19 27 28 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 18 of 36 Page ID #:18 1 17 18 19 27 28 unchanged, standing at $60.1 million in the most-recent year versus $60.7 million in Form 10-K contained signed SOX certifications by defendants Cole and Bruno, stating h period, we revalue our contingent cons ideration obligations to their fair value and record increases or decreases he fair value into selling, general and administrative nse. Increases or decreases in the fair value of the sideration obligations can result from changes in

19 assumed timing and amount of revenue a
assumed timing and amount of revenue and expense mates, changes in the probability of payment scenarios, as al market conditions, which impact the ount rate used in the fair valuation. Significant judgment is ning the appropriateness of these mptions a s of the acquisition date and for each subsequent od. Accordingly, future business and economic conditions, ell as changes in any of the assumptions described above, materially impact the amount of contingent cons ideration nse we record in any given period. We have amended our isition agreement with RFG in regards t o the cash payment on of the Stage II & III earnouts. We no longer will pay r in the form of shares of our common stock. We CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 19 of 36 Page ID #:19 \tand the entire liability of $4.2 million has been reclassified to \tadditional paid in capital. Total net decrease to the co ntingent . 3 49. On March 5, 2014, the Company issued a press release announcing fiscal 5 2014 first quarter operating results. According to the press release, net income climbed 6 to $4.0 million, equal to $0.25 per diluted share, from $2.7 million, or $0.18 per diluted 8 share, in the first quarter of fiscal 2013; revenues advanced to $168.2 million, a new first 9 quarter record, eclipsing the prior year’s first quarter revenue of $139.5 million which 11 had been the previous a

20 ll-time period high; gross margin expand
ll-time period high; gross margin expanded to $13.7 million, 12 equal to 8.1 percent of total revenues, up from $13.1 million, or 9.4 percent of total 13 revenues, in the fiscal 2013 first quarter; and operating income vaulted 26 percent in the 15 most recent quarter to $5.4 million, compared with $4.3 million in the year-earlier first 16 17 quarter. \t50. On March 11, 2014, the Company filed a Form 10-Q with the SEC which 19 was signed by defendants Cole and Bruno, and reiterated the Company’s previously 20 announced quarterly financial results and financial position. In addition, the Form 10-Q 22 contained signed SOX certifications by defendants Cole and Bruno, stating that the 23 financial information contained in the Form 10-Q was accurate and disclosed any 25 material changes to the Company’s internal control over financial reporting. 26 51. Regarding the accounting for the Company’s Contingent Consideration 27 28 specifically, the Form 10-Q stated, in part: CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 20 of 36 Page ID #:20 1 17 18 19 27 28 On at least an annual basis, we revalue the c ontingent ideration obligations to their fair value and record increases decreases in the fair value into selling, general and or decreases in the fair value he contingent consideration obligations can result from ges in assumed discount periods and rates, changes in the me

21 d timing and amount of revenue and expe
d timing and amount of revenue and expense estimates. Significant judgment is employed in determining the opriateness of these assumptions as of the acquisition date for each subsequent period. Accordingly, future business l as changes in any of the mptions described above, can materially impact the amount ontingent consideration expense we record in any given od. The total revalue adjustment of the co ntingent . three months ended April 30, 2014, increased 205 percent to $6.7 million, equal to $0.43 per diluted share, from $2.2 million, or $0.15 per diluted share, in the second quarter the from $166.3 million in the corresponding quarter of 2013; second-quarter gross margin advanced to $19.0 million, a new single-period historic high and equal to 9.7 percent of and operating income jumped 195 percent to $9.9 million in the most recent quarter from $3.3 million in the second period of fiscal 2013. 53. signed by defendants Cole and Bruno, and reiterated the Company’s previously CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 21 of 36 Page ID #:21 1 17 18 19 27 28 announced quarterly financial results and financial position. In addition, the Form 10-Q contained signed SOX certifications by defendants Cole and Bruno, stating that the h period we revalue the contingent consideration obligations eir fair value and record increases or decreases in the fair e

22 into selling, general and administrati
into selling, general and administrative expense. Increases ecreases in the fair value of the contingent cons ideration obligations can result from changes in assumed discount periods and rates, changes in the assumed timing and amount of nue and expense estimates. Significant judgment is ning the appropriateness of these mptions a s of the acquisition date and for each subsequent od. Accordingly, future business and economic conditions, ell as changes in any of the assumptions described above, materially impact the amount of contingent cons ideration nse we record in any given period. No revalue adjustments 30, 2014. net income advanced 31.6 percent to $8.4 million, equal to $0.53 per diluted share, from revenues rose nearly $24 million, or 12.2 percent, to $218.7 million, from $194.9 million ion, or 9. 6 percent of revenues, from $18.1 million, or 9.3 CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 22 of 36 Page ID #:22 1 17 18 19 27 28 percent of revenues, in the fiscal 2013 third quarter; and operating income in the fiscal Form 10-Q contained signed SOX certifications by defendants Cole and Bruno, stating h period we revalue the contingent consideration obligations eir fair value and record increases or decreases in the fair e into selling, general and administrative expense. Increases ecreases in the fair value of the contingent cons ideratio

23 n obligations can result from changes i
n obligations can result from changes in assumed discount periods and rates, changes in the assumed timing and amount of nue and expense estimates. Significant judgment is ning the appropriateness of these mptions a s of the acquisition date and for each subsequent od. Accordingly, future business and economic conditions, ell as changes in any of the assumptions described above, materially impact the amount of contingent cons ideration nse we record in any given period. No revalue adjustments . CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 23 of 36 Page ID #:23 \t58. The statements referenced in ¶¶ 25–57 above were materially false and 2 misleading because Defendants made false and/or misleading statements, and failed to 3 disclose material adverse facts about the earn-out payments provided under the RFG 4 Acquisition Agreement. Specifically, during the Class Period, Defendants made false 6 and/or misleading statements and/or failed to disclose that: (i) Calavo failed to maintain 7 an accurately valued contingent consideration pursuant t o its acquisition of RFG; (ii) 8 Calavo overstated its non-cash operating expenses; (iii) the Company lacked adequate 9 internal controls over financial reporting; and (iii) as a result of the above, the 10 Company’s financial statements were materially false and misleading at all relevant 12 times. \tThe Truth Emer

24 ges \t59. On January 15, 2015, in connec
ges \t59. On January 15, 2015, in connection with the preparation, review and audit 15 of the Company’s consolidated financial statements required to be included in its 17 Annual Report on Form 10-K for the fiscal year ended October 31, 2014, the Company 18 disclosed that it had identified a non-cash misstatement in its historical consolidated 19 financial statements related to its treatment of contingent consideration in the 20 acquisition of RFG in June 2011. 21 60. Specifically, in the immediate period following the RFG acquisition, 23 RFG’s operating results exceeded the defined thresholds in accordance with the earn- 24 out provisions in the RFG Acquisition Agreement. A s a result, the Company was 25 required to, and did, make the maximum earn-out payments pursuant by the A cquisition 26 Agreement. Initially, Calavo recorded this additional contingent consideration, which 27 28 was settleable in common stock, as an equity instrument and, therefore, did not record e based on the changes in fair value of the contingent consideration. The CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 24 of 36 Page ID #:24 1 I Company has now admitted, however, that the contingent consideration should have 2 been accounted for as a liability, requiring re-measurement to fair value and expense 3 recognition, which Calavo will treat as an amortization expense, at each repo

25 rting 4 period subsequent to the acquis
rting 4 period subsequent to the acquisition. 6 6 1. According to the January 15, 2015 announcement, Calavo will record a 7 non-cash charge – which the Company will treat as an amortization expense – totaling, 8 over all periods, $88.9 million before tax ($54.0 million net of tax) related to the 9 misstatement in its treatment of contingent consideration. 10 62. As a result of the above, the Company announced that the Audit 12 I Committee of the Board of Directors (the “Audit Committee”) o f Calavo concluded, 13 after review and discussion with management and the Company’s independent 14 registered public accounting firm, Ernst & Young LLP (“EY”), that the C ompany’s 15 consolidated financial statements for the fiscal years ended October 31, 2013 and 2012 17 and the quarters therein, as well as the quarters ended January 31, 2014, April 30, 2014 18 and July 31, 201 4 (the “Rel evant Peri ods”), should no longer be relied upon. Similarly, 19 the Company announced that the related press releases, and st ockholder 20 communications describing the Co mpany’s consolidated financial statements for the 21 Relevant Periods should no longer be relied upon. Additionally, according to the 23 Company, EY’s reports on the consolidated financial statements, including EY’s 24 opinion on the effectiveness of internal control over financial reporting, likewise should 25 no longer be relied upon.

26 26 63. On this news, shares of Calavo
26 63. On this news, shares of Calavo fell $4.72 per share, or over 9%, to close at 27 28 $43.07 per share on January 15, 2015. CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 25 of 36 Page ID #:25 \t64. As a result of Defendants’ wrongful acts and omissions, and the precipitous 2 decline in the market value of the Company’s securities, Plaintiff and other Class 3 members have suffered significant losses and damages. \tPLAINTIFF’ CLASS ACTION ALLEGATIONS 6 65. Plaintiffs bring this action as a class action pursuant to Federal Rule of 7 Civil Procedure 23(a) and (b)(3) on behalf o f a Class, consisting of all those who 9 purchased or otherwise acquired Calavo securities during the Class Period (the “Class”); 10 and were damaged upon the revelation of the alleged corrective disclosures. Excluded 11 from the Class are Defendants herein, the officers and directors of the Company, at all 12 relevant times, members of their immediate families and their legal representatives, 14 heirs, successors or assigns and any entity in which Defendants have or had a 15 controlling interest. \t66. The members of the Class are so numerous that joinder of all members is 17 impracticable. Throughout the Calavo Class Period, securities of Calavo were actively 18 19 traded on the NASDAQ Global Select Market. While the exact number of Class 20 members is unknown to Plaintiffs at

27 this time and can only be ascertained
this time and can only be ascertained through 21 appropriate discovery, Plaintiffs believe that there are hundreds or thousands of 22 members in the proposed Class. Record owners and other members of the Class may be 23 identified from records maintained by Calavo or their transfer agents and may be 24 notified of the pendency of this action by mail, using the form of notice similar to that 26 customarily used in securities class actions. 27 28 CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 26 of 36 Page ID #:26 1 17 18 19 27 28 67. Common questions of law and fact exist as to all members of the Class and · whether the federal securities laws were violated by Defendants’ acts ged herein; · whether statements made by Defendants to the investing public during lass Period misrepresented material facts about the business, ions and management of Calavo; · whether the Individual Defendants caused Calavo to issue false and ments during the Class Period; · whether Defendants acted knowingly or recklessly in issuing false and ments; · whether the prices of Calavo securities during the Class Period were ially inflated because of the D efendants’ conduct complained of ; and, · whether the members of the Class have sustained damages and, if so, s the proper measure of damages. CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 27 o

28 f 36 Page ID #:27 1 17 18 19 27 of the
f 36 Page ID #:27 1 17 18 19 27 of the Class to individually redress the wrongs done to them. There will be no difficulty · Defendants made public misrepresentations or failed to disclose al facts during the Class Period; . the omissions and misrepresentations were material; . Calavo securities are traded in efficient markets; · the C ompany’s shares were liquid and traded with moderate to heavy e during the Class Period; · the Company traded on the NASDAQ, and was covered by multiple ts; · the misrepresentations and omissions alleged would tend to induce a tor to misjudge the value of the Company’s securities; · Plaintiff and members o f the Class purchased and/or sold Calavo ties between the time the Defendants failed t o disclose or presented material facts and the time the true facts were sed, without knowledge of the omitted or misrepresented facts. 73. ption of reliance established by the Supreme Court in Affiliated Ute Citizens of te of Utah v. United States, 406 U.S. 12 8, 92 S. C t. 2430 (1 972), as Defendants d material information in their Class Period statements in violation of a duty to e such information, as detailed above. CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 28 of 36 Page ID #:28 \tCOUNT I \tViolation of Section 10(b) of \tThe Exchange Act and Rule 1 0b-5 \tAgainst All Defendants \t74. Plaintiff repeats and realleges each

29 and every allegation contained above as
and every allegation contained above as 6 if fully set forth herein. 7 75. This Count is asserted against Defendants and is based upon Section 10(b) 8 of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the 10 SEC. \t76. During the Class Period, Defendants engaged in a plan, scheme, conspiracy 12 and course of conduct, pursuant to which they knowingly or recklessly engaged in acts, 13 transactions, practices and courses o f business which operated as a fraud and deceit 14 upon Plaintiff and the other members of the Class; made various untrue statements of 16 material facts and omitted to state material facts necessary in order to make the 17 statements made, in light of the circumstances under which they were made, not 18 misleading; and employed devices, schemes and artifices to defraud in connection with 19 the purchase and sale of securities. Such scheme was intended to, and, throughout the 21 Class Period, did: (i) deceive the investing public, including Plaintiff and other Class 22 members, as alleged herein; (ii) artificially inflate and maintain the market price of 23 Calavo securities; and (iii) cause Plaintiff and other members of the Class to purchase or 24 otherwise acquire Calavo securities and options at artificially inflated prices. In 25 furtherance of this unlawful scheme, plan and course of conduct, Defendants, and each 27 of them, took t

30 he actions set forth herein. 28 CLASS A
he actions set forth herein. 28 CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 29 of 36 Page ID #:29 \t77. Pursuant to the above plan, scheme, conspiracy and course o f conduct, 2 each o f the Defendants participated directly or indirectly in the preparation and/or 3 issuance of the quarterly and annual reports, SEC filings, press releases and other 4 statements and documents described above, including statements made to securities 6 analysts and the media that were designed to influence the market for Calavo securities. 7 Such reports, filings, releases and statements were materially false and misleading in 8 that they failed to disclose material adverse information and misrepresented the truth 9 about Calavo’s finances and business prospects. 10 78. 12 of the materially false and misleading statements and material omissions alleged herein 13 and intended thereby to deceive Plaintiff and the other members of the Class, or, in the 14 alternative, Defendants acted with reckless disregard for the truth in that they failed or 15 refused to ascertain and disclose such facts a s would reveal the materially false and 17 misleading nature of the statements made, although such facts were readily available to 18 Defendants. Said acts and omissions of Defendants were committed willfully or with 19 reckless disregard for the truth. I n addition, each defen

31 dant knew or recklessly 20 disregarded t
dant knew or recklessly 20 disregarded that material facts were being misrepresented or omitted as described 21 above. 22 79. Defendants were personally motivated to make false statements and omit 24 material information necessary to make the statements not misleading in order to 25 personally benefit from the sale of Calavo securities from their personal portfolios. \t80. Information showing that Defendants acted knowingly or with reckless 27 28 disregard for the truth is peculiarly within Defendants’ knowledge and control. As the CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 30 of 36 Page ID #:30 1 senior managers and/or directors of Calavo, the Individual Defendants had knowledge 2 of the details of Calavo’s internal affairs. 3 81. The Individual Defendants are liable both directly and indirectly for the 4 wrongs complained of herein. Because of their positions of control and authority, the 6 Individual Defendants were able to and did, directly or indirectly, control the content of 7 the statements of Calavo. As officers and/or directors of a publicly-held company, the 8 Individual Defendants had a duty to disseminate timely, accurate, and truthful 9 information with respect to Calavo’s businesses, operations, future financial condition 10 and future prospects. As a result of the dissemination of the aforementioned false and 12 misleading reports, releases

32 and public statements, the market price
and public statements, the market price of Calavo securities 13 was artificially inflated throughout the Class Period. In ignorance of the adverse facts 14 concerning Calavo’s business and financial condition which were concealed by 15 Defendants, Plaintiff and the other members of the Class purchased or otherwise 17 acquired Calavo securities at artificially inflated prices and relied upon the price of the 18 securities, the integrity o f the market for the securities and/or upon statements 19 disseminated by Defendants, and were damaged thereby. 20 82. During the Class Period, Calavo securities were traded on an active and 21 efficient market. Plaintiff and the other members of the Class, relying on the materially 23 false and misleading statements described herein, which the Defendants made, issued or 24 caused to be disseminated, or relying upon the integrity of the market, purchased or 25 otherwise acquired shares of Calavo securities at prices artificially inflated by 26 Defendants’ wrongful conduct. Had Plaintiff and the other members of the Class 27 28 known the truth, they would not have purchased or otherwise acquired said securities, or not have purchased or otherwise acquired them a t the inflated prices that were CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 31 of 36 Page ID #:31 1 paid. At the time of the purchases and/or acquisitions by P

33 laintiff and the Class, the 2 true value
laintiff and the Class, the 2 true value of Calavo securities was substantially lower than the prices paid by Plaintiff 3 and the other members of the Class. The market price of Calavo securities declined 4 sharply upon public disclosure of the facts alleged herein to the injury of Plaintiff and 6 Class members. 7 83. By reason of the conduct alleged herein, Defendants knowingly or 8 recklessly, directly or indirectly, have violated Section 10(b) of the Exchange Act and 9 Rule 10b-5 promulgated thereunder. 10 84. As a direct and proximate result of Defendants’ wrongful conduct, Plaintiff 12 I and the other members of the Class suffered damages in connection with their 13 respective purchases, acquisitions and sales of the Company’s securities during the 14 Class Period, upon the disclosure that the Company had been disseminating 15 misrepresented financial statements to the investing public. 17 COUNT II 18 Violation of Section 20(a) o f 19 The Exchange Act Against The Individual Defendants 20 85. Plaintiff repeats and realleges each and every allegation contained in the 21 foregoing paragraphs as if fully set forth herein. 22 86. During the Class Period, the Individual Defendants participated in the 23 operation and management of Calavo, and conducted and participated, directly and 25 indirectly, in the conduct of Calavo’s business affairs. Because of their senior positions, 26 they knew the adv

34 erse non-public information about Cal av
erse non-public information about Cal avo’s misstatement of income 27 and expenses and false financial statements. 28 CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 32 of 36 Page ID #:32 \t87. As officers and/or directors of a publicly owned company, the Individual 2 Defendants had a duty to disseminate accurate and truthful information with respect to 3 Calavo’s financial condition and results of operations, and to correct promptly any 4 public statements issued by Calavo which had become materially false or misleading. \t88. Because of their positions of control and authority as senior officers, the 7 Individual Defendants were able to, and did, control the contents of the various reports, 8 press releases and public filings which Calavo disseminated in the marketplace during 9 the Class Period concerning Calavo’s results of operations. Throughout the Class 10 Period, the Individual Defendants exercised their power and authority to cause Calavo 12 to engage in the wrongful acts complained of herein. The Individual Defendants 13 therefore, were “ controlling persons” of Calavo within the meaning of Section 20(a) of 14 the Exchange Act. In this capacity, they participated in the unlawful conduct alleged 15 which artificially inflated the market price of Calavo securities. \t89. Each of the Individual Defendants, therefore, acted as a controlling person 18 of C

35 alavo. By reason of their senior manage
alavo. By reason of their senior management positions and/or being directors of 19 Calavo, each of the Individual Defendants had the power to direct the actions of, and 20 exercised the same to cause, Calavo to engage in the unlawful acts and conduct 21 complained of herein. Each of the Individual Defendants exercised control over the 23 general operations of Calavo and possessed the power to control the specific activities 24 which comprise the primary violations about which Plaintiff and the other members of 25 the Class complain. \t90. By reason of the above conduct, the Individual Defendants are liable 27 28 pursuant to Section 20(a) o f the Exchange Act for the violations committed by Calavo. CLASS ACTION C OMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 33 of 36 Page ID #:33 1 17 18 19 27 28 PRAYER FOR RELIEF WHEREFORE, Plaintiff demands judgment against Defendants as follows: A. C. DEMAND FOR TRIAL BY JURY Plaintiff hereby demands a trial by jury. \tGLANCY BINKOW & GOLDBERG LLP s/ Robert V. Prongav Lionel Z. Glancy Robert V. Prongay Telephone: (310) 201-9150 CLASS ACTION COMPLAINT 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 34 of 36 Page ID #:34 1 POMERANTZ LLP Francis P. McConville 600 Third Avenue, 20th Floor New York, New York 10016 Telephone: 212-661-1100 POMERANTZ LLP Patrick V. Dahlstrom Chicago, Illinois 60603 Attorneys for Plaintiff 2 17 18 19

36 27 CLASS ACTION COMPLAINT Case 2:15-c
27 CLASS ACTION COMPLAINT Case 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 35 of 36 Page ID #:35 CERTIFICATION PURSUANT TO FEDERAL SECURITIES LAWS I, SHERIF E EL DABE, make this declaration pursuant to Section 27(a)(2) of the Securities Act To the best of my current knowledge, the attached sheet lists all of my transactions in Calavo sought to serve as a representative party on behalf of a class under the federal securities laws. Executed January 19, 2015 .SiERIF E. EL DABE Case 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 36 of 36 Page ID #:36 CALAVO GROWERS INC. (CVGW) \tSherif E. El Dabe LIST OF PURCHASES AND SALES PURCHASE \tPRICE PER DATE \tOR SALE \tSH/UT 09/15/2014 09/30/2014 10/01/2014 11/11/2014 11/20/2014 PUR PUR PUR PUR PUR 100 200 300 100 250 $41.5000 $45.6788 $43.7900 $47.1600 $41.7000 Case 2:15-cv-00400-GW-AS Document 1 Filed 01/20/15 Page 1 of 36 Page ID #:1 LIONEL Z. GLANCY (#134180) ROBERT V. PRONGAY (#270796) GLANCY BINKOW & GOLDBERG LLP Attorneys For Plaintiff Sherif E. El Dabe [Additional Counsel On Signature Page] UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA : SHERIF E. EL DABE, Individually : and on Behalf of All Others Similarly : Situated, : : : COMPLAINT FOR VIOLATIONS : OF THE FEDERAL SECURITIES v. : LAWS CALAVO GROWERS, INC., LECIL : E. COLE, and ARTHUR BRUNO, : : DEMAND FOR JURY TRIAL : : 1 18 19 CLASS ACTIO