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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