(Estimated time to read: 18 – 20 minutes)
I. Introduction
As a new National Hockey League season enters full swing, some securities litigators are reminded of “hockey sticks” of another type: those associated with recurring securities cases alleging “channel stuffing.” The “hockey stick” effect when a company engages in “channel stuffing” refers to a situation where a company floods its distribution channel with an overload of inventory (channel stuffing) to temporarily inflate reported sales figures, resulting in a graph of sales that looks relatively flat for most of the reporting period but shows a sharp, upward spike at the end, resembling a hockey stick. It is a form of “earnings management” to meet financial targets.
While appearing on its surface to be deceptive, “channel stuffing” (like a curved hockey stick) is not necessarily unlawful. But sometimes it can be. In September of this year—just in time for hockey season—the Second Circuit addressed some of the instances in which “channel stuffing” can give rise to liability in Gimpel v. Hain Celestial Grp., Inc., 156 F.4th 1212 (2d Cir. Sept. 29, 2025). That decision does not purport to address all the situations in which channel stuffing may be actionable, but it does provide some additional guidance, at least in the Second Circuit.
II. Gimpel v. Hain Celestial Grp., Inc.
A. Facts
In Gimpel, plaintiffs brought a securities fraud class action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b), 78t(a), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. Defendant Hain is a corporation that made and sold organic and natural food and personal care products, primarily to specialty and natural food distributors, supermarkets, and certain e-commerce retailers.
Plaintiffs alleged that, in order to meet Wall Street consensus revenue and earnings estimates, and facing stiffening competition, the Defendants engaged in “channel stuffing” practices, offering Hain's distributors significant concessions at the end of each fiscal quarter to take much more product than they needed, without adequately disclosing the practice or accounting for its financial implications to investors.
More particularly, plaintiffs alleged that, during the class period, as Hain saw during a quarter that its revenues would fall short of analyst expectations, Hain estimated the shortfall and enticed its distributors to accept more product toward the end of the quarter in order to meet projections by offering them various concessions, including (1) cash incentives of up to $500,000 for a single distributor for a single quarter, (2) product discounts of up to 20%, (3) extended payment terms, (4) reimbursements for excess product that spoiled or expired, and (5) an absolute right of return.[1] Defendants then directed Hain’s managers to ship the excess inventory to the distributors. By pulling forward these sales, Hain could report that it had met its projected financial results without disclosing its declining financial prospects. This practice also inflated present sales at the expense of future performance—robbing Peter to pay Paul.[2] Moreover, pursuant to the “absolute right to return” product with no obligation to pay, distributors would return substantial amount of product to Hain, only to have the process begin again, although with an increasingly larger deficit due to the prior quarter’s credits for returns and concessions.[3] Additionally, these practices raised serious accounting issues. For example, Hain negotiated these concessions “off-contract” and in “side agreements,” typically memorialized only in emails, but did not have effective internal controls to assess the accounting impact of these arrangements.[4]
Ultimately, the scheme began to unravel when, filled to the brim with inventory, Hain's distributors informed Hain that they would no longer accept more inventory than necessary. Around the same time, Hain’s newly appointed Treasurer discovered anomalies in Hain’s books and brought in external auditors to investigate. Hain then cut its annual guidance substantially and ultimately announced in August 2016 it would delay the release of its 2016 financial results because it had “identified concessions that were granted to certain distributors … [and] is currently evaluating whether revenue associated with those concessions was accounted for in the correct period,” as well as whether it should have recognized revenue associated with concessions when its products sold through the distributors to end customers, rather than at the time of shipment to distributors, as it had been doing.[5]
On June 22, 2017, Hain issued its belated annual report on Form 10-K for the 2016 fiscal year, as well as its quarterly reports on Form 10-Q for the first, second and third quarters of 2017, and admitted that “both [its] fiscal 2016 and fiscal 2015 net sales benefited from certain concessions provided to [its] largest distributors, including payment terms beyond the customer’s standard terms, rights of return of product[,] and post sale concessions, most of which were associated with sales that occurred at the end of each respective quarter.” Hain restated its historical financials, disclosing that it overstated its net sales by $167 million—2.1%, 2.9% and 1.9% in FY 2014, FY 2015 and for the nine months ending March 31, 2016, respectively—and its GAAP earnings per share by $0.13 for Fiscal Years 2014, 2015 and the first three quarters of FY 2016.[6]
On December 11, 2018, the SEC announced that it had entered into a consent decree with Hain wherein Hain admitted that it violated Section 13(b)(2)(A) of the Exchange Act, which requires Hain to make and keep records that accurately and fairly reflect Hain’s transactions, and Section 13(b)(2)(B), which requires Hain to maintain a system of internal accounting controls sufficient to provide reasonable assurance that transactions are executed in accordance with GAAP.[7] Investors sued for damages from the resulting stock price declines.
B. The District Court Decisions and the Second Circuit’s Initial Ruling Vacating and Remanding
The District Court dismissed plaintiffs’ claims multiple times, first granting leave to replead,[8] then with prejudice in In re Hain Celestial Grp. Inc. Sec. Litig., 2020 WL 1676762 (E.D.N.Y. Apr. 6, 2020) (Splatt, J.) (“Hain II”). The District Court dismissed plaintiffs’ claims under Rule 10b-5(a) and (c), which prohibit the “employ[ment of] any device, scheme, or artifice to defraud,” and “engage[ment] in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.”[9] The District Court determined that plaintiffs had not sufficiently alleged an “absolute right to return” the products, which it held was dispositive to the “scheme liability” claims because “[c]hannel stuffing becomes a form of fraud only when it is used to book revenues on the basis of goods shipped but not really sold because the buyer can return them.”[10] The court then dismissed plaintiffs’ Section 10(b) and Rule 10b-5(b) claims (based on alleged materially false and misleading statements and omissions) because it had already determined that the channel stuffing scheme was legitimate.[11]
The Second Circuit vacated and remanded the Hain II decision in In re Hain Celestial Grp. Inc. Sec. Litig., 20 F.4th 131 (2d Cir. 2021). The Second Circuit concluded that the District Court had erred in dismissing plaintiffs’ Rule 10b-5(b) claim because whether the channel stuffing scheme is itself fraudulent under 10b-5(a) or (c) is not dispositive to a Rule 10b-5(b) claim, which focuses “not on schemes, devices, or practices, but on statements made” and “does not require that conduct underlying a purportedly misleading statement or omission amount to a fraudulent scheme or practice.”[12] Accordingly, the Second Circuit clarified that plaintiffs’ theory of liability—i.e., “that [the] Defendants made statements attributing Hain’s high sales volume to strong consumer demand, while omitting to state that … Hain’s high sales volume was achieved in significant part [through] channel stuffing”—depended on whether “something said was materially misleading, either because it included a false statement of a material fact or because it omitted to state a material fact which omission rendered the things said misleading.”[13]
On remand, the defendants’ renewed motion to dismiss was referred to a Magistrate Judge who issued a report and recommendation recommending dismissal on the grounds that plaintiffs had failed to plead (1) an actionable misstatement or omission, and (2) scienter.[14] The District Court largely adopted the Magistrate’s report and recommendation, stating that it “concur[red] with” the “threshold” recommendation finding that plaintiffs had failed to plead an actionable misstatement or omission” In re Hain Celestial Grp. Inc. Sec. Litig., 2023 WL 6360345, at *14, 18 (E.D.N.Y. Sept. 29, 2023) (Seybert, J.) (“Hain IV”), but—as the Second Circuit later pointed out—it “did not specifically adopt those portions of the R&R into its findings” and “explicitly adopted only the R&R's “scienter-related recommendations.”[15] Plaintiffs then appealed a second time.
C. The Second Circuit’s Present Ruling
On appeal, the Second Circuit reiterated that “[c]hannel stuffing is not necessarily fraudulent,” insofar as “[o]ffering distributors concessions is a common practice” and “there may be legitimate reason for a company ‘pressing for sales to be made earlier than in the normal course,’” “such as to ‘incite [its] distributors to more vigorous efforts to sell the stuff lest it pile up in inventory.’”[16]
The Second Circuit then articulated what may be regarded as a guiding principle, namely that “channel stuffing may become fraudulent when it is ‘done to mislead investors.’”[17] However, it recognized that “[p]arsing between ‘[a] certain amount of channel stuffing [that] could be innocent,’ … and illegitimate channel stuffing done to mislead investors has been no easy task for courts.”[18]
The Court cited two circumstances in which other courts had suggested that channel stuffing may be inherently illegitimate. First, the Court cited the Supreme Court’s opinion in Tellabs, where the Supreme Court suggested that a company “writing orders for products customers had not requested” is the “illegitimate kind” of channel stuffing.[19] Second, the Court pointed out that, on remand, the Seventh Circuit in Tellabs opined that channel stuffing becomes fraudulent “only when it is used ... to book revenues on the basis of goods shipped but not really sold because the buyer can return them” because the conditions of revenue recognition—the transfer of “ownership and its attendant risks”—have not actually occurred.[20]
The Second Circuit then turned to the circumstance it had discussed in its earlier Hain opinion, noting that “[a]s we previously explained in this case, a plaintiff proceeding under Rule 10b-5(b) may successfully plead securities fraud even when the alleged channel stuffing practices are not themselves ‘fraudulent or otherwise illegal’ because Rule 10b-5(b) focuses “on whether something said was materially misleading, either because it included a false statement of a material fact or because it omitted to state a material fact which omission rendered the things said misleading….”[21]
Specifically, the Court noted that “[i]n our Circuit, courts have recognized two relevant scenarios in which a company may incur liability under Rule 10b-5(b) in connection with channel-stuffing practices.” First, “district courts have recognized that channel stuffing may give rise to liability if it results in improper revenue recognition and, therefore, false financial statements and violations of GAAP.”[22] Improper revenue recognition could occur, for example, where a company offers its distributors the “right to return” product and fails to account for those returns, or if it does not properly recognize the costs associated with the incentives used to induce channel stuffing.[23] Second, regardless of whether a company restated results, it may make materially misleading statements about its financial success or inventory levels when it speaks about them without disclosing its reliance on channel stuffing.[24] As the Second Circuit stated, “[f]ailing to disclose the existence of channel stuffing, under this theory, is misleading because investors would want to know that revenue is not being driven by increased demand but by sales tactics that will likely prove unsustainable once distributors reach maximum inventory and the company can no longer flood them with product.”[25]
Having articulated these principles, the Court then turned to the facts before it. In beginning its analysis, it noted that under Rule 10b-5(b), defendants are liable for (1) outright false statements, as well as (2) misleading “half-truths.”[26] Synthesizing these principles, the Court concluded, first, that plaintiffs plausibly alleged that defendants had made a series of outright material misstatements about, inter alia, Hain’s financial results, compliance with GAAP, existence of effective internal controls, description of its revenue-recognition policies, and in Sarbanes-Oxley certifications in its SEC filings that those filings did not contain any untrue or misleading statements of material fact. Here, the Court noted that Hain’s restatement of its financial results and disclosure of related material weaknesses in its internal controls and accounting practices “suffice to establish that these statements were in fact false at the time they were made.”[27] Second, the Court concluded that defendants had made a series of actionable misleading, “half-true” statements by failing to disclose to investors their reliance on the channel stuffing practices when discussing Hain’s financial success and the inventory levels at its distributors. For example, Hain made repeated statements during the class period attributing its purported success to factors such as “strong demand for [its] organic and natural brands as demonstrated by the increasing consumption of [its] products,” “momentum for organic and natural products,” its “diverse portfolio of brands and products,” and “strong worldwide demand for [its products]”—but nowhere disclosed that it achieved its financial results in significant part by granting distributors credits, incentives, spoils coverage, or a right to return product.[28] Here, the Second Circuit cited cases holding that, by “put[ting] the reasons for the company’s success at issue, but fail[ing] to disclose a material source of its success, specifically the practice of channel stuffing, the[se] statement[s] [were] materially misleading.”[29]
Having found that plaintiffs sufficiently alleged material misrepresentations and omitted material facts, the Second Circuit also went on to conclude that plaintiffs had adequately pled scienter and loss causation, as well as control person liability, and remanded to the District Court for further proceedings (specifically, that “this long-pending case should proceed to discovery.”).[30]
III. Implications
The Second Circuit’s opinion in Hain does not necessarily break new ground but does systematize at a minimum the Second Circuit’s approach to channel stuffing allegations in securities class actions. Several factors emerge as important considerations.
First, Hain reaffirmed the principle that channel stuffing is not necessarily per se fraudulent or actionable, but, to the contrary, may have legitimate purposes.
Second, Hain articulated the overarching principle that channel stuffing may become fraudulent when it is done to mislead investors.
Third, Hain cited two specific examples of instances where courts have suggested that channel stuffing may be inherently illegitimate: (1) where a company was “writing orders for products customers had not requested,” and (2) “when it [channel stuffing] is used ... to book revenues on the basis of goods shipped but not really sold because the buyer can return them.” Here, it is unclear whether Hain considered such practices to be a “device, scheme, or artifice to defraud,” or an “act, practice, or course of business which operates or would operate as a fraud or deceit upon any person” for purposes of Rule 10b-5(a) and (c) “scheme” liability, rather than under Rule 10b-5(b), but it is noteworthy that in discussing these examples, Hain added in a footnote that “because these provisions [Rule 10b-5(a) and (c)] are not before us, we do not consider the circumstances in which channel stuffing might become a fraudulent scheme in and of itself.”[31] Accordingly, this leaves the door open to more circumstances where channel stuffing may be considered inherently illegitimate.
Fourth, Hain reverted to the Second Circuit’s previous analysis of channel stuffing as actionable under Rule 10b-5(b) (regardless of whether it was inherently illegitimate) where defendants issue materially false statements or “half-truths” about it.
Fifth, Hain indicates that channel stuffing may be actionable under the “material misstatement” line of cases under Rule 10b-5(b) when it results in a restatement of financial results (constituting an admission of the “false statement” element of Rule 10b-5(b)), or other admissions of GAAP or other accounting violations, or potentially in other circumstances where a defendant acknowledges that a statement was rendered false due to defendants’ channel stuffing activity.
Sixth, Hain indicates that channel stuffing may be actionable under the “misleading half-truth” line of cases under Rule 10b-5(b), when a defendant fails to disclose that its reliance on channel stuffing rendering its statements materially misleading. A typical example of this may be where a defendant attributes the reasons for its purported success to other factors (e.g., high demand, product superiority, cost controls, etc.), while failing to disclose that a significant reason for that “success” was the use of channel stuffing (particularly where it includes costly give-aways or incentives such as “incentive payments” or absolute rights of return).
Seventh, relatedly, where a company engages in complex “give-aways” or incentives, there is a heightened danger that this will put the corporation at risk for adverse financial impact down the road—either from a “robbing Peter to pay Paul perspective, or by complicating the corporation’s accounting—i.e., heightening the risk that statements about effective accounting controls, or financial statements accurately portraying financial results, may actually be false when made.
Eighth, Hain underscored that a plaintiff still must satisfy the other elements of a Rule 10b-5 claim to survive a motion to dismiss, such as pleading materiality, scienter, and loss causation.[32]
Ninth, as a caveat, particularly where there is no restatement of earnings, the sufficiency of plaintiff’s channel stuffing allegations may depend—as it does in many securities class actions under the Private Securities Litigation Reform Act’s (“PSLRA”) pleading standards—on the particularity of plaintiff’s allegations, i.e., such that they render plaintiff’s allegations plausible (and their scienter allegations at least as plausible as any other competing inference).[33]
[1] Id. at 130.
[2] Id. Indeed, Hains’ “off-contract” incentive-based arrangements with two distributors accounted for 15% and 8% of Hain’s entire U.S. sales, respectively. Id.
[3] Id. at 131.
[4] Hain also utilized various credits and accruals—which it counted as revenue as soon as shipments left the warehouse—to offset sales deficits and further make revenues appear better than they were. Id. at 130-31.
[5] Id. at 131-32.
[6] Id. at 132-33.
[7] Id. at 133-34.
[8] Case No. 2:16-cv-04581 (ADS)(SIL), ECF No. 106 (E.D.N.Y. Mar. 29, 2029) (“Hain I”).
[9] 17 C.F.R. § 240.10b-5(a), (c); Hain II, 2020 WL 1676762 at *9.
[10] Hain II, 2020 WL 1676762 at *9-12.
[11] Id. at *12 (“This theory fails because its predicate is the illegitimacy of the channel stuffing practices the Court already found to be legitimate.”).
[12] Hain, 20 F.4th at 136-37.
[13] Id.
[14] In re Hain Celestial Grp. Inc. Sec. Litig. (“Hain III”), 2022 WL 18859055, at *34 (E.D.N.Y. Nov. 4, 2022) (Dunst, M.J.).
[15] Hain, 156 F. 4th at 135, 138, quoting Hain IV, 2023 WL 6360345, at *14, 18.
[16] Hain, 156 F. 4th at 136, citing Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308, 325 (2007); Greebel v. FTP Software, Inc., 194 F.3d 185, 202 (1st Cir. 1999).
[17] Hain, 156 F.4th at 136, citing Garfield v. NDC Health Corp., 466 F.3d 1255, 1262 (11th Cir. 2006). See also Hain, 156 F. 4th at 128 (“Channel stuffing is not necessarily illegal, but it may give rise to liability under the Exchange Act when a company engages in the practice to deceive investors.”).
[18] Hain, 156 F.4th at 136, quoting Makor Issues & Rts., Ltd. v. Tellabs Inc., 513 F.3d 702, 709 (7th Cir. 2008).
[19] Hain, 156 F.4th at 136, citing Tellabs, 551 U.S. at 325.
[20] Hain, 156 F.4th at 136-37, citing Makor, 513 F.3d at 709.
[21] Hain, 156 F.4th at 137.
[22] Id., citing Plumbers & Pipefitters Nat. Pension Fund v. Orthofix Int’l N.V., 89 F. Supp. 3d 602, 608-09, 616 (S.D.N.Y. 2015) (plaintiff stated claim where defendant engaged in channel stuffing to inflate revenue and later restated its financial results and admitted GAAP violations).
[23] Hain, 156 F.4th at 137.
[24] Hain, 156 F.4th at 137-38, citing Okla. Firefighters Pension & Ret. Sys. v. Lexmark Int'l, Inc., 367 F. Supp. 3d 16, 31-34 (S.D.N.Y. 2019) (concluding that defendants’ statements about inventory levels, revenue growth, and price harmonization were actionable in light of channel stuffing allegations); San Antonio Fire & Police Pension Fund v. Dentsply Sirona Inc., 732 F. Supp. 3d 300, 316 (S.D.N.Y. 2024) (statements about “the strength and sustainability of the company's earnings in general and demand for [the] products in particular” misleading if “much of [the company's] sales were due to channel stuffing”); In re Solaredge Techs., Inc. Sec. Litig., 2024 WL 4979296, at *7 (S.D.N.Y. Dec. 4, 2024) ("Plaintiffs have adequately pleaded that it was misleading for [defendant] to attribute increased revenues in late 2022 to a variety of factors meanwhile omitting that part of the increase in revenues was caused by a practice of channel stuffing.”).
[25] Hain, 156 F.4th at 138.
[26] See Hain, 156 F.4th at 138-39. As the Second Circuit noted in Hain (at 139), for securities-fraud claims, “although ‘§10(b) and Rule 10b-5 do not create an affirmative duty to disclose any and all material information,’ Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 44 [] (2011), once ‘a company speaks on an issue or topic,’ it must ‘tell the whole truth,’ Meyer v. Jinkosolar Holdings Co., 761 F.3d 245, 250 (2d Cir. 2014). That is, when a company does speak, it assumes ‘a duty to be both accurate and complete,’ Caiola v. Citibank, N.A., N.Y., 295 F.3d 312, 331 (2d Cir. 2002), and adequate disclosure is required to make other statements, ‘in light of the circumstances under which they were made, not misleading,’ Meyer, 761 F.3d at 250.”
[27] Hain, 156 F.4th at 139-40 (citations omitted).
[28] Id. at 141.
[29] Id., citing In re Solaredge Techs., Inc. Sec. Litig., 2024 WL 4979296, at *8 (S.D.N.Y. Dec. 4, 2024); see also San Antonio Fire, 732 F. Supp. 3d at 316 (statements discussing strength and sustainability of the company's earnings and demand for its products “would be misleading if (as alleged) the company was having trouble getting the materials to make the products, many of the products it did make didn't work, and much of its sales were due to channel stuffing”); Okla. Firefighters, 367 F. Supp. 3d at 33 ("[A] reasonable investor would likely have found it significant that ... revenues were driven by inflated channel inventory and not increased end-user demand because those forces fundamentally differ in sustainability.”).
[30] Hain, 156 F.4th at 143-51.
[31] Id. at 137 n.10.
[32] Id. at 137, 139, 143-51.
[33] See id. at 129, 138-39, 141, 143-44.
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