
The pandemic officially ended well over a year ago, but the pandemic’s effects continue to ripple through the economy and affect company’s operations and financial results. Moreover, these effects continue to translate into securities class action litigation. The latest example is the lawsuit filed earlier this week against the Canadian defense software company CAE, Inc., which was sued after the disruptive effects of the pandemic caused certain of its fixed-price long-term contracts to be more costly and less profitable, notwithstanding the company’s assurances that it was managing the “ongoing challenges posed by the pandemic.” A copy of the July 16, 2024, complaint in the lawsuit can be found here.
Background
CAE is a software company providing training services. Its Defense segment provides training and simulation services for defense and security forces. The new lawsuit involves the defendants’ alleged “misrepresentations concerning significant cost overruns in CAE’s Defense segment caused by several fixed-price, long-term Defense contracts entered into prior to the COVID-19 pandemic.” Because the contracts are fixed price, CAE must absorb cost overruns, which can erode profit margins.
On August 10, 2022, the company announced $28.9 million in unfavorable profit adjustments, which were the result, among other things, of “staffing shortages and supply chain pressures.” However, management assured investors that “notwithstanding the additional volatility” from “acute short-term headwinds,” management “maintains a highly positive view of its growth potential over a multi-year period.” In February 2023, the company’s CEO assured investors that labor and supply chain headwinds were “getting better each quarter.”
However, in November 2023, the company announced that certain legacy contracts continued to be plagued by cost overruns, and in announcing the company’s fiscal third quarter results on February 14, 2024, the company identified “eight distinct legacy contracts” that suffered from severe cost overruns due to supply chain disruptions, inflationary pressures, and the availability of labor. Finally, on May 21, 2024, the company announced its was “re-baselining its Defense business,” as it recorded a $568 million non-cash impairment of goodwill and $90.3 million in unfavorable defense contract adjustment, as well as other financial impairments. The complaint alleges that the company’s share price declined on this news.
The Lawsuit
On July 16, 2024, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against CAE and certain of its executives. The complaint purports to be filed on behalf of a class of investors who purchased the company’s securities between February 11, 2022, and May 21, 2024.
The complaint alleges that the reassuring statements the defendants made during the class period were “materially false and misleading” because “several of CAE’s pre-COVID fixed-priced Defense contracts had incurred severe cost overruns due to supply chain and labor issues – as the segment was significantly impacted by the pandemic – which dented the company’s profit and operating margin. What’s more, the Company had failed to reduce hard costs and achieve a sufficient level of operational efficiency, particularly with respect to such contract, necessitating a re-baselining of the Defense business and significant associated charges.”
The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the class.
Discussion
Since the earliest days of the COVID-19 outbreak in the U.S., the pandemic has disrupted companies’ operations and financial results, in many cases leading to securities class action litigation. As I have also noted in the intervening period, several macroeconomic factors have also disturbed companies’ operations and financial results, including in particular such factors as supply chain and labor supply disruptions.
As this case shows, even though the pandemic has officially ended and even though many of the macroeconomic challenges have eased, these disruptions continue to affect companies’ financial results. As a result, even though the pandemic is over, pandemic-related securities lawsuits continue to be filed.
It is particularly noteworthy to me that this lawsuit involves a number of specific, express allegations relating to supply chain and labor supply disruptions. In my year-end round-up of the top D&O stories of 2023, I noted as one of the factors that drove the volume of securities class action lawsuit filings during the year were certain macroeconomic factors, including supply chain and labor supply disruptions. So far in 2024, these macroeconomic factors have been much less of a factor in driving the volume of securities litigation. This lawsuit is a reminder that even though the disruption that these macro factors had been causing has eased more recently, the effects from the disruption continue to affect some companies’ financial results in ways that could (as this case shows) translate into securities litigation.
One last observation is that even though we are now well into the fifth year since the initial COVID-19 outbreak in the U.S. in March 2020, COVID-related securities suits continue to be filed, and in significant numbers. By my count, this lawsuit is the eighth COVID-related suit to be filed this year (as compared to nine for the full year 2023). Since the initial COVID outbreak in March 2020, a total of 79 COVID-related securities suits filed have been filed. The pandemic has been and apparently continues to be a significant factor in the number of securities class action lawsuit filings.