Late last month, Lion Air Flight 610 crashed into the Java Sea shortly after its takeoff in Jakarta, killing all 189 passengers and crew members on board. As details about the doomed flight have emerged, investigators have raised questions about the possible malfunction of new flight control features on the Boeing 737 MAX 8 jet involved in the crash, as well as about Boeing’s documentation and training relating to the flight control features. Under these circumstances, the possibility that there might be litigation is hardly surprising. What might be less obvious is that the litigation against Boeing relating to the crash might involve a securities class action lawsuit.
In the latest example of what I have described as event-driven securities litigation, on November 28, 2018, a Boeing shareholder filed a securities suit against the company and certain of its executives based on allegations relating to the Lion Airlines crash. A copy of the plaintiff’s complaint can be found here. The plaintiff law firm’s November 28, 2018 press release can be found here.
Lion Air Flight 610 flew on the latest generation of Boeing 737 passenger jet, the Boeing 737 Max 8 model. Boeing delivered its first 737 Max 8 passenger jet in May 2017. The Max 8 included a new stall-prevention system, designed to help flight crews from mistakenly raising the plane’s nose too high. The flight crew override procedure for the new system differs from the override procedures on prior models; in the prior models, the crew could override the system by pulling back on the control column. To override the new system, flight crews must take a series of steps involving manual switches.
In a November 13, 2018 article (here), the Wall Street Journal reported that Boeing “withheld information about potential hazards associated with a new flight-control feature suspected of playing a role in last month’s fatal Lion Air crash.” The article reports further that the flight control system can push the plane’s nose down “unexpectedly and so strongly that flight crews can’t pull it back up.” According to the article, neither airline managers nor pilots had been told such a system had been added to the new 737 model, “and therefore aviators typically weren’t prepared to cope with the possible risks.”
According to a November 27, 2018 New York Times article (here), information stored on the flight’s data recorder showed that during the fatal 11-minute flight, the flight-control system forced the plane’s nose downward over two dozen times. Each time the pilots managed to pull the nose back up until finally losing control. Investigators are looking into whether the flight control system was responding to incorrect information fed into the system by sensors on the plane’s fuselage. Investigators are also examining why the plane was in service on the day of the crash, in view of the fact that in the next to last flight of the aircraft prior to the crash the flight crew had also experienced malfunctioning data readings. The article quotes representatives of Boeing as saying that the proper steps for pulling out of an incorrect activation of the flight control system were in the flight manuals under existing procedures.
The Securities Lawsuit
On November 28, 2018, a Boeing shareholder filed a securities class action lawsuit in the Northern District of Illinois against the company, its CEO, and its CFO. The complaint purports to be filed on behalf of Boeing shareholders who purchased their shares between February 8, 2017 and November 13, 2018. (The significance of the November 13 date is apparently that that is the date of the Wall Street Journal article cited above).
The complaint refers to the Journal article in which the newspaper reported that the company had “withheld information about potential hazards.” The complaint alleges that the defendants failed to disclose that “(i) the Company’s new 737 MAX automated stall-prevention system was susceptible to deadly malfunctions; (ii) Boeing maintained inadequate internal controls to ensure the timely reporting and dissemination of such malfunctions; and (iii) as a result, the Company’s public statements were materially false and misleading at all relevant times.” The complaint alleges the company’s share price declined 3.4% on the first trading day following the publication of the Journal article, and fell an additional 12.5% in the 11 following trading days.
As the basis for its allegation that the defendants made material misrepresentations or omissions, the complaint cites numerous company statements and securities filings in which the company reported on the progress of its efforts to develop and produce the new 737 MAX model line; about the complexity of aircraft development and manufacturing; about the importance of the aircraft safety and performance; and the consequences to the company of satisfying customer performance and reliability requirements.
In a series of prior posts, I have described what I have called event driven securities litigation. Other commentators have adopted this description. Unlike more traditional securities lawsuits, these event-driven lawsuits do not involve allegations of financial or accounting misrepresentations. Rather these event-driven suits alleged that the defendant company has experienced a negative and significantly disruptive incident arising out of the company’s business operations, and that the company failed to inform investors that if it experienced that incident that the company would be negatively impacted.
In recent days, I have noted the filing of event-driven securities lawsuits filed against electrical utilities in connection with the California wildfires. Another example of this kind of lawsuit is the suit filed last year against Arconic, which manufactured the building cladding material used on the Grenfell Tower apartment building.
One thing these lawsuits have in common, beyond the basic fact that they are examples of event-driven litigation, is that all there of these lawsuits (and most of the other event-driven lawsuits) were filed by the same plaintiffs’ law firm. The law firm in question is one of what has been described as the “emerging firms.” The activity of this firm and the other emerging firms go a long way to explain why securities lawsuit filings both last year and this year have been at historically high levels. A significant component of the recent surge of lawsuit filings has been proliferation of event-driven suits.
The new lawsuit against Boeing was only just filed, and it remains be seen how it will fare. The plaintiff’s allegation that the company made misleading misrepresentation or omissions relies heavily on the press reports that the company withheld information about its new flight-control system from airlines or pilots. Whether or not the company withheld information from the airlines and their pilots is of course a different thing from saying the information was withheld from investors in violation of the federal securities laws.
Even if withholding this information from investors is an omission of information required under the securities laws to be disclosed to investors, the omission is still not actionable unless the defendants acted with scienter. The allegations of scienter in the complaint are not, shall we say, extensive. Basically, the complaint just alleges that the defendants knew the allegedly misleading statements and omissions were false.
The stock price drop on which the plaintiff’s rely is also not large. A three percent stock drop is not exactly the kind of “precipitous plunge” to which securities class action complaint’s typically refer. The 12.5% stock drop in the following days, at a time when the stock markets generally were exceedingly volatile, and involving a company whose plane was just involved in a fatal air disaster, may or may not be relevant for loss causation purposes.