In the following guest post, Tim Hoeffner and Paul Ferrillo of the McDermott Will & Emery law firm take a look at Southern District of New York Judge Ronnie Abrams’s April 2, 2020 order granting the defendants’ motion to dismiss in the Adient PLC Securities Litigation. I would like to thank Tim and Paul for allowing me the opportunity to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Tim and Paul’s article.
Two months into the “lockdown” in New York State, one trend we have seen recently in the securities litigation environment involves cases being dismissed for failure to plead false and misleading statements, and the failure to otherwise plead scienter. See Eighth Circuit on Target on Appeal; In re Sketcher’s USA Inc. Sec. Litig., 18 CV 8039 (NRB) (S.D.N.Y. March 12, 2020); In re: General Electric Securities Litigation, case number 1:19-cv-01013 (S.D.N.Y May 7, 2020). Although some decisions relate to event driven litigation, others, like the Southern District of New York’s recent decision in In re Adient PLC Securities Litigation, No. 18 CV 9116 (RA) (SDNY April 2, 2020 ), are more involved. Those decisions discuss the reliance on confidential witness statements attempting to “pin the tail” on the defendant directors and officers for “knowing” of the alleged problems and either failing to disclose them, or omitting to disclose these problems. Despite the existence of multiple confidential witnesses and an opportunity to plead a claim in a Second Amended Complaint, the Court in Adient dismissed the plaintiffs’ complaint with prejudice, finding that it failed to plead actionable false or misleading statements.
On October 31, 2016, Adient was spun off from Johnson Controls and was publicly traded at that time. At the time of the spin off, Adient announced a plan to heavily invest in the automatic seating business (which it called the Metals segment or division) to spur growth and improve margins. Prior to the spin off, the defendants stated that the company “was positioned” to achieve margin expansion by 2020. The basis for this improvement would come from both an immediate reduction in SG&A expenses and improvement in the Metals division’s sales and revenues. This unfortunately did not happen for the Company right from the outset. After continued issues with the Metals division, the company was forced to take a Q4 2018 impairment charge of $787 million (coming two quarters after a Q2 impairment charge of $299 million in the metals segment) for long lived assets with one third of the assets related to the Metals division. The impairment charge wiped out one third of the Metals division’s total assets, and one third of its total property plant and equipment.
Shortly after the Q2 charge, the CEO of the company Bruce McDonald retired as chairman and CEO. Then the plaintiffs filed suit. The complaint concerned, among many other things, statements made by the company with respect to improvements in the projected margins of the company that (1) Adient would have a margin expansion of 200 basis points by 2020, (2) there were efforts to improve the metals business segment of Adient, and (3) the Q2 2018 impairment charge (which plaintiffs’ claim hid the fact that a bigger charge should have been taken).
In sum, the Court found that none of these areas was pled properly under the PSLRA. As the court noted, “notwithstanding the fact that certain operational issues may have existed within Metals, Plaintiffs’ do not show ‘how and why” Defendants’ statements about the Company’s plan to achieve 200 basis points of margin expansion by 2020, its plan to improve its Metals business, or its progress towards either goal were false and misleading at the time the statements were made.” Id. At * 26. The statements of the confidential witness did not help. Here the court noted that “even assuming that all the confidential witness’ statements are true, however, the fact that Adient experienced various challenges in metals does not demonstrate how the Company’s project margin expansion was unreasonable, unrealistic, or reckless at the time it was announced or subsequently discussed.” Id at *27.
Additionally, the court noted that similar statements made in the complaint were also not actionable because they were statements of future-oriented beliefs and opinions, and/or were inactionable puffery. Statements like the below were not actionable because the complaint “does not plausibly allege any special material facts – omitted from the Defendant’s statements – that rendered the opinion false or misleading to reasonable investors…and that the Company’s expectations…were not false or misleading because the complaint failed to alleged any facts that tend to show that the company did not believe the expectations at the time.”
- “We think we have a couple hundred basis points of margin we can deliver; and
- I think we’re solidly on track in terms of delivering the commitments that we’ve made to the investment community; and
- We’re very pleased with what we’ve seen from an operational standpoint; and
- That Adient was not backing away from its commitment to deliver 200 basis points of margin improvement by the end of 2020, and that the Company was currently ‘examining the composition of this 200 basis points.’”
Id. At * 33, 35 and 47.
Finally with respect to the timing of the impairment charge in Q2 2018, the court dismissed this allegation as well, noting that, at the time it was taken, “the Company had already disclosed a multitude of challenges in the Metals division, had ultimately acknowledged that the project margin expansion was no longer achievable, and had specifically tested for additional impairment considerations of other long-lived assets, and found that no further impairments were identified.” The plaintiffs also did not allege, if the Q2 impairment charge should have been larger, “the amount by which such assets should have been written down.” Id. At 51. Lastly with respect to the impairment charges, the Court noted that just because Adient took an additional charge in the fourth quarter does not in and of itself “provide an actionable basis that the failure to do so earlier was fraudulent.” Id. At 52
Ultimately, the complaint in Adient failed for multiple reasons, the least of which was the failure to plead material false and misleading statements when made, and the abject failure to plead scienter. Indeed this is the “safety valve” that the PSLRA provides to management when it “thinks” that an event or a result might occur. We have seen this line of reasoning before in event-driven securities litigation; we see that in this case. Just because management believes some result to be true (which later turns out not to be), doesn’t mean it is securities fraud when the company misses its prior held “expectations” or beliefs. There must be more. We will see if other courts and other jurisdictions feel the same way.