On August 10, 2021, the United States Court of Appeals for the Seventh Circuit affirmed a decision of the United States District Court for the Northern District of Illinois, Eastern Division that dismissed a putative securities fraud class action asserting claims under Rule 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. City of Taylor Police and Fire Retirement System v. Zebra Technologies Corp., et al, No. 20-3258 (7th Cir. Aug. 10, 2021). Plaintiff alleged that defendants, a commercial electronics manufacturer (the "Company") and two of its executives, misled investors by issuing false statements about the integration of assets following the Company's acquisition of a separate commercial electronics company. The district court dismissed the claims, holding that plaintiff failed to adequately allege scienter and falsity. The Seventh Circuit affirmed the dismissal.
According to the complaint, the Company acquired a division of a telecommunications equipment company in 2014, with Company executives touting the savings expected from the acquisition. Following the acquisition, the Company announced that the integration was "progressing as planned" and made other optimistic projections. However, the consolidation allegedly led to the Company spending an additional $200 million, which caused the Company's share price to decline. Plaintiff alleged defendants were aware of these issues but continued to make misleading statements as consolidation was underway, including the announcement of a larger projected gross profit margin than the Company ultimately recorded. The district court dismissed plaintiff's claims for failure to adequately plead scienter and falsity.
The Seventh Circuit affirmed dismissal of plaintiff's claims. The Court held that the Company's "profit-margin projection"—which the Company missed by just one percentage point—was insufficient to allege fraud. The Court emphasized that the "Securities Exchange Act does not demand perfection from forecasts, which are inevitably inaccurate," and that the Private Securities Litigation Reform Act accordingly exempts certain forward-looking statements from liability. With respect to an executive's alleged statement that integration was "progressing as planned," the Seventh Circuit agreed with the district court that this statement was inactionable puffery, adding that the executive had not made "any concrete assertion" and "expressed only vague optimism." Finally, addressing scienter, the Court was not convinced that the allegations were sufficient to plead that the Company's executives "knew early in the process that consolidation would be costlier and more difficult than anticipated . . . [and] chose to hoodwink investors into thinking that integration was seamless." Instead, the Court found it more plausible that defendants' positive statements were related to the fact that they had limited information about the inner workings of the acquired company early on and gained a greater understanding of the associated costs over time.
The Court emphasized that "[r]etrospective disclosures can and should be precise because corporations generally possess good information about completed operations," but "[t]he law tolerates greater imprecision from forecasts because predicting the future is an uncertain enterprise," as is "speaking about a developing process, especially when another corporation's assets are involved." Noting that "[t]he fatal flaw of the [plaintiff's] suit is that it seeks to apply rules covering retrospective statements to ongoing developments[,]" the Court affirmed dismissal of the claims.
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