On August 21, 2023, the United States Court of Appeals for the
Tenth Circuit affirmed dismissal of a consolidated putative class
action alleging violations of Section 10(b) of the Securities
Exchange Act of 1934 (the "Exchange Act"), and Rule 10b-5
promulgated thereunder, against a large aerostructures
manufacturing company (the "Company") and certain of its
executives. Meitav Dash Provident Funds and Pension Ltd., et
al. v. Spirit AeroSystems Holdings, et al., No. 22-5013 (10th
Cir. Aug. 21, 2023). The Northern District of Oklahoma dismissed
plaintiffs' complaint, holding that plaintiffs failed to
adequately plead scienter. In a split decision, the Tenth Circuit
affirmed.
Plaintiffs—a putative class of investors in the
Company— alleged that the Company, which obtains roughly half
its yearly revenue from sales of shipsets to a large airplane
manufacturing company (the "Airplane Manufacturing
Company"), misled investors in October 2019 by reassuring them
that the Company would maintain its sales projections despite
allegedly knowing that its sales would decrease after the Airplane
Manufacturing Company halted production of one of its signature
planes following two airline accidents. The complaint also alleged
that, although the Company filed documents certifying the adequacy
of its accounting controls in October 2019, months later, the
Company disclosed material weaknesses in its accounting controls
and that several of its executives had left the Company. The
complaint attempted to allege, largely through allegations
attributed to anonymous former employees ("FEs"), that
the Company and its executives knew of those issues in October
2019. The district court dismissed the complaint for failure to
adequately plead scienter, which the Tenth Circuit considered on
appeal.
Addressing whether plaintiffs adequately pled scienter with respect
to the Company's statements about its sales, the Tenth Circuit
assessed whether plaintiffs had made sufficiently particularized
allegations that defendants had known in October 2019 that the
Airline Manufacturing Company had decided to reduce its purchases
from the Company. The Court held that unparticularized allegations
that unidentified employees of the Airline Manufacturing Company
had told unspecified executives at the Company of their plan to
reduce purchases did not adequately allege that the Company or the
executives were actually aware of the decrease in the Airline
Manufacturing Company's production and purchases. The Court
held, further, that conclusory allegations that one of the
defendant-executives was provided certain layoff projections
prepared by one of the FEs similarly failed to plead a strong
inference scienter. Moreover, the Court held that allegations that
one of the defendant-executives sold the Company's stock in
February 2020 failed to plead scienter because, among other things,
by the time of the stock sales the Company had already announced
that it was no longer selling shipsets for the then-discontinued
aircraft.
The Tenth Circuit also addressed plaintiffs' argument on appeal
that the district court erred by considering plaintiffs'
scienter allegations individually rather than holistically, holding
that "[t]he district court said four times that it was viewing
plaintiffs' allegations holistically ... [and] [w]e have no
reason to question the district court's statement."
Turning to plaintiffs' additional scienter arguments,
including, among other things, that one of the defendant's
position as former CEO of the Company would have made him aware of
the Company's production cuts and layoff projections, as well
as allegations regarding his stock sales, the Tenth Circuit held
that "[w]hether we view these factual allegations in isolation
or together, they don't create a particularized basis to draw a
strong inference of [the Company's former CEO's] awareness
of [the Airline Manufacturing Company's] plan to cut purchases
of the shipsets."
The Tenth Circuit further held that allegedly optimistic statements
in a November 2019 independent analyst report could not be
attributed to the Company's former CEO and CFO, because
plaintiffs did not adequately allege that the individual defendants
controlled the contents or method of the analyst report,
notwithstanding plaintiffs' allegations that the analyst report
was prepared following a meeting with the Company's management.
Moreover, the Tenth Circuit noted that plaintiffs had not pleaded
particularized allegations that any such meeting necessarily
occurred after the Airline Manufacturing Company disclosed its
plans to cut production of its aircraft, such that the individual
defendants would have been aware of this fact before providing the
optimistic information to the independent analyst.
Turning to the statements about the Company's accounting
controls, the Tenth Circuit assumed, for the sake of argument, that
the October 2019 regulatory statements were false, but held that
plaintiffs nevertheless failed to make particularized allegations
that the Company's executives actually knew of the internal
controls issues and it declined to impute scienter on the Company.
As such, the Court affirmed the dismissal of the complaint.
In a dissenting opinion, Judge Phillips stated "[n]o single
fact is dispositive in a scienter analysis because we assess all
the facts alleged, not individual allegations ... [and] [t]he
majority simply elevates the complaint's failure to allege a
particular fact to a dispositive status not warranted by
precedent." Judge Phillips further stated that he found the
allegations as a whole to be sufficient to allege scienter as it
relates to some of the individual defendants and, therefore,
"also impute that scienter to [the Company]."
Meitav Dash Provident Funds and Pension Ltd., et al. v. Spirit AeroSystems Holdings, et al.
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