On September 18, 2023, Judge Manish S. Shah of the United States
District Court for the Northern District of Illinois narrowed a
putative class action asserting claims under the Securities
Exchange Act of 1934 against an airplane manufacturer and its
former CEO and CFO. College Ret. Equities Fund v. Boeing
Co., 2023 WL 6065260 (N.D. Ill. Sept. 18, 2023). Plaintiffs
alleged the company made misrepresentations regarding two crashes
of a new model of plane and the company's responsive measures
in an effort to return the fleet to service. The Court held that
various challenged statements were not actionable because
plaintiffs failed to adequately allege falsity or scienter. With
respect to the remaining challenged statements, the Court further
pared the claims by holding that loss causation was not
sufficiently alleged in connection with certain purported
corrective disclosures.
The Court first explained that challenged statements made before
the accidents were not actionable, because plaintiffs either failed
to allege falsity or failed to adequately allege scienter. For
example, the Court held that while the company's statement that
the airplane's "FAA certification affirms that the
airplane's handling, systems and overall performance all comply
with required aviation regulations" omitted material detail,
plaintiffs failed to allege that those who made and approved that
statement knew at the time it was made that it was false.
Id. at *5–6. The Court further determined that
statements touting that the plane had built-in "superior
capabilities" and was "designed to offer customers
exceptional performance" were mere puffery and that plaintiffs
in any event again failed to adequately allege scienter.
Id. at *6.
The Court then assessed the company's statements in connection
with the first plane crash. The Court explained that statements
affirming the company's core values were not actionable because
they were optimistic statements that were unimportant when compared
to the total mix of information available in the market
(i.e., that a plane had crashed). Id. at *7.
While the CEO noted the revamped plane was "designed to make
the airplane behave the same" as prior models with which
pilots were familiar, the Court determined that this statement was
not alleged to be false. Id. at *8. And while the Court
agreed that plaintiffs plausibly alleged that the CEO's
statements about referring pilots to existing procedures following
the crash were misleading—because they suggested erroneously
that the crash was merely the result of pilot error—the Court
nevertheless concluded that plaintiffs failed to establish that
defendants acted with scienter. Id. at *8–9. The
Court determined that, while making these statements despite
concerns voiced by the company's safety review board might
"support a strong inference of negligence," that was not
enough to show scienter because "[t]he much more plausible
inference is that, like [the company's] safety engineers and
the FAA, [the CEO] believed the airplane remained safe to
fly." Id. at *9.
The Court also explained that statements the company made
concerning its production rate of the revamped plane were not
actionable, since they were forward-looking statements accompanied
by meaningful cautionary language. The Court emphasized that an
accurate report of past success does not contain a promise of
future performance. Id. at *11–12. The Court also
noted that, with respect to challenged statements made by the CFO,
plaintiffs failed to plead with particularity that the CFO was
specifically informed that a safety review board within the company
believed it would require over two years to redesign the plane,
which weighed against an inference of scienter. Id. at
*12.
The Court then explained that certain statements the company made
in the wake of the second airplane crash were actionable. For
example, as to statements suggesting that a defective component did
not "control the airplane in normal flight; it improves the
behavior of the airplane in a non-normal part" of its
operations, the Court agreed the company materially omitted that
the component could be activated erroneously during a normal
flight. Id. at *13. The Court also agreed that the
company's statements touting its existing operations manual and
procedures were misleading because those procedures were
insufficient. Id. at *14. The Court determined that these
statements were plausibly made with scienter, because, given the
seriousness of the events that had by then transpired, it was
"impossible" for senior executives not to have been
involved in making these statements, and it was implausible to
believe that in the wake of the second crash, they were not aware
of issues involving the component at issue, and may have been aware
of related misstatements made to the FAA. Id. at
*14–15.
The Court also explained that the company's statement after the
second crash that all of its "airplanes are certified and
delivered to the highest levels of safety consistent with industry
standards" was materially misleading. Id. at
*17–18. The Court determined that, because the statement was
made in the wake of a "damning" article in the New
York Times that revealed inadequacies in the company's
procedures contributing to the plane crashes, this suggested
corporate officials were involved in making the statement and were
at this time aware of certain misstatements by its chief technical
pilot to the FAA. Id. The Court similarly concluded that
statements made by the CEO that essentially stated nothing out of
the ordinary happened in the course of the FAA's review of the
plane were actionable and that the scienter was adequately alleged
for the same reasons. Id. at *18–19.
The Court also agreed that specific statements about the revamped
plane's return to service were false and actionable in light of
a meeting the CEO allegedly had with the FAA's acting
administrator, where the administrator asked the CEO to "slow
down" the company's suggestions of progress in returning
the revamped plane into service. Id. at *21. While the
company argued the CEO genuinely believed the company was making
progress consistent with the at-issue statements, the Court found
the inference of scienter was just as cogent and compelling to
withstand a motion to dismiss, because the CEO had access to
government officials who disagreed with the company's
statements. Id. at *22.
However, the Court rejected claims regarding certain challenged
statements following the second crash. For example, the Court held
that statements downplaying the importance of the plane's
defective component were misleading but nevertheless held that
these statements were not actionable because plaintiffs did not
adequately allege loss causation or scienter. Id. at
*16–17. As to loss causation, the alleged corrective
disclosure with respect to these statements was a news article
published the day before the company downplayed the
significance of the defective component. Id. at *17. The
Court reiterated that plaintiffs failed to establish the CFO knew
about the chief technical pilot's conduct such that it could be
said that any false statements by the CFO were made with scienter.
Id. at *20. The Court also found statements in the
company's annual reports about the effectiveness of its
internal controls were immaterial and nothing that reasonable
investors would rely upon as representations of satisfactory
compliance with regulatory obligations. Id. at *23.
The Court also explained that only two of ten alleged corrective
disclosures could be said to have corrected any of the
company's actionably false statements—specifically, the
release of internal text messages sent by the company's chief
technical pilot and the production halt of the plane. The text
messages were sufficiently alleged to have corrected prior
statements that the company's training materials sufficiently
provided pilots information they needed to operate the plane and
respected the integrity of the FAA's certification of the
plane. Id. at *24–25. The suspension in production
was sufficiently alleged to have revealed that the plane would not
be returned to service on the timeline that the company had
promoted. Id. at *25. The Court concluded that, for those
two disclosures, plaintiffs sufficiently provided "some
indication of the loss and the causal connection that plaintiff has
in mind." Id.
College Ret. Equities Fund v. Boeing Co.
Originally published October 11, 2023
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