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In re Supreme Industries, Inc. Securities Litigation

United States District Court, N.D. Indiana, South Bend Division

May 25, 2018




         This is a class action against Supreme Industries Inc. and two of its officers for alleged violations of federal securities laws. The lead Plaintiff, Kenneth Fishman, purchased shares of Supreme during the relevant time frame. Fishman alleges that the Defendants engaged in a fraudulent scheme to artificially inflate Supreme's stock price by misrepresenting the true nature of the company's order backlog, which he claims is the company's surest indicator of future financial success. Fishman also claims that the Defendants provided a prediction of the company's future backlog even though they knew adverse facts that undermined the prediction. The Defendants seek dismissal of the complaint.


         Here are the facts as told to me by Fishman in his amended complaint (as well as documents incorporated into it and public records), which I accept as true for present purposes. Supreme is a publicly traded company headquartered in Goshen, Indiana. [DE 53 at 10, ¶17.] It manufactures truck body parts for commercial and other speciality vehicles. [Id. at 5, ¶2.] The company is managed by a small cadre of key executives, which includes the individual Defendants in this case - Mark Weber, the Chief Executive Officer, and Matthew Long, the Chief Financial Officer. [Id. at 5, ¶3.]

         Kenneth Fishman alleges that he purchased 3, 000 shares of Supreme common stock in September 2016 at prices of $18.26 and $17.69. [Id. at 9, ¶16; DE 19-2 at 3.] He sold all of his shares on November 9, 2016 at $12.08 and $12.03 per share, for a total loss of $12, 570. [DE 19-3 at 2.] He brings this action on behalf of himself and all similarly situated purchasers of Supreme securities between October 22, 2015 and October 21, 2016 (the “Class Period”). [DE 53 at 4, ¶1.]

         Supreme specializes in building truck bodies “to order, ” completing most of the production after a customer places an order. [Id. at 6, ¶5]. When an order is placed, it enters Supreme's “backlog, ” which is its unfinished work or customer orders that have been received but not yet completed. [Id. at 6, 18, ¶¶5, 42.] When work is completed and shipped, Supreme records it as revenue and reports it as part of its net sales. [Id.] Supreme repeatedly stated that its backlog was a critical indicator of the company's current performance and the surest indicator of future revenue, and it disclosed its backlog figures to investors on a quarterly basis. [Id. at 6, 18, ¶¶5, 42, 44-45.]

         Supreme serves a variety of customers, including national rental fleets, national and regional leasing companies, truck chassis dealers, and fleet operators. [Id. at 15-16, ¶35.] The company divides its customers into three categories: retail, fleet, and other. [Id.] Retail clients account for the most significant percentage of Supreme's annual sales, but these sales are spread across hundreds of accounts that may or may not purchase from Supreme again. [Id.] Fleet customers, on the other hand, which include national truck rental companies such as Budget and Penske, are fewer in number but spend more and typically place orders at regular intervals. [Id.] According to the Defendants, fleet customers include both rental fleet and other fleet operators. [DE 62 at 22 n.5.] Fleet orders are typically reflected in the first half of each year. [DE 53 at 17, ¶39.] Supreme repeatedly conveyed these trends to investors. [Id. at 21-22, 24-26, ¶¶55, 63, 67-69.] Supreme further disclosed this trend in its 2015 Form 10-K, stating that “Seasonality arises due to the Company typically participating in bids for large fleet contracts. If successful, the fleet orders generally require shipment of the truck bodies in the first and second quarters.” [Id. at 17, ¶39.]

         Supreme reports its financial results on a quarterly basis in a press release and SEC filing. These reports include Supreme's backlog at the end of each quarter. [Id. at 18, ¶44.] Supreme does not disclose any granular-level detail about the backlog, including the identity of its customers or the exact composition of the backlog. [Id. at 19, ¶47.] Supreme also holds a quarterly conference call with investors to discuss its results. [Id. at 13-14, ¶¶30-31.] These calls, which include both Weber and Long, begin with prepared remarks, but investors are also given the chance to ask questions during an unscripted question and answer portion. [Id. at 19, ¶48.]

         On October 22, 2015, Supreme issued a press release announcing its results for the third quarter of 2015. [Id. at 24-25, ¶65.] This disclosure included Supreme's backlog, which was $74.4 million. [Id.] In its Form 10-Q filed with the SEC, Supreme provided additional information regarding the backlog, including that “[c]ompared with last year, new order intake was stronger in the third quarter of 2015 across both retail and fleet work truck product lines.” [DE 63 at 67.]

         Supreme also held its quarterly earnings call. On the call, in his prepared remarks, Weber announced that its 2015 third quarter backlog was 46.7% higher than the 2014 third quarter. [DE 53 at 24-25, ¶¶65, 67.] Weber stated, “The combined performance of our sales and operations teams resulted in strong third quarter orders for trucks and specialty vehicles.” Weber added that this “notable year-over-year growth” was “encouraging.” [Id. at 24-25, ¶65.] Weber noted that they were “picking up some additional demand on the leasing side” from national rental companies including Penske, Ryder, and Budget. [DE 63 at 53.]

         Participants on the call asked questions about the backlog. When asked for “a little color in terms of when your backlog is typically realized, ” Weber explained that lead times are generally longer for rental fleet orders than for retail and normal leasing business. [DE 53 at 25, ¶68; DE 63 at 52.] Weber added “[s]et aside the rental fleet business, because as you know, we typically are quoting that and securing those orders in the fourth quarter and they don't flow through typically until the second quarter ... none of that is really in our backlog right now.” [DE 53 at 25, ¶68; DE 63 at 52.] Another analyst asked for the source of the increased backlog and whether it was attributable to extended lead times on medium-duty chassis availability. Weber responded that it was “a little bit” of the reason, but that “a lot of our growth this year has been in the medium duty side. I would say that our backlog is a little more titled towards medium-duty than light-duty.” [DE 53 at 25-26, ¶69.]

         On February 18, 2016, Supreme announced its results for the fourth quarter of 2015. Supreme reported “significantly improved financial results” for both the fourth quarter and 2015 as a whole. [Id. at 26, ¶71.] In addition, Supreme announced that its backlog as of the end of 2015 was $98.1 million, representing a more than 31% increase from the prior quarter. [DE 63 at 83.] This increase, Supreme said, was because of new order rates for trucks across both retail and national accounts, as Supreme secured new customers and add-on business from national accounts. [Id. at 112.]

         During the fourth quarter earnings call, Supreme noted that the backlog included fleet orders, which were “pretty much flat, ” and it cautioned that “[r]ental fleet demand is expected to moderate somewhat for 2016.” It also said that “rental demand also tends to be more sensitive to near term economic conditions.” [DE 63 at 90.] Moreover, it indicated that because of the “choppy outlook of some economic indicators, we are keeping a vigilant watch on leading indicators and market conditions.” [Id. at 89.]

         Supreme next disclosed, on April 21, 2016, that its first quarter of 2016 results concerning its net sales, income, and gross margin had again improved. It also announced that its backlog had increased to $102 million. [DE 63 at 214.] Weber stated that the backlog provided “additional confidence that our regional sales teams are gaining traction with a broad range of retail end users and leasing channel partners, ” but he noted that “rental fleet orders were mixed, as some accounts are trimming expenditures.” [Id. at 219.]

         On July 21, 2016, Supreme announced its 2016 second quarter results. It reported improved second quarter and first-half results, including improvements in its net sales, net income, and margins. [DE 53 at 26, ¶71; DE 63 at 274, 303.] Supreme's backlog was $75.5 million, which was an increase year-over-year. [DE 63 at 274.]

         During the earnings call the next day, July 22, 2016, the Defendants articulated a somewhat pessimistic outlook for Supreme. They told analysts that Supreme had seen “some indications of demand moderation late in the quarter, ” it “had lower year-over-year fleet business, ” and it had “lost some business on the fleet side.” [DE 53 at 28, ¶77; DE 63 at 280, 296.] The Defendants further disclosed that “ACT data reported that June medium-duty truck orders were down 10% sequentially from May and 1% below June 2015.” [DE 63 at 280.] The Defendants also predicted “some softness in the NTEA numbers in May and June, ” saying that they were going to be “a little weaker.” [Id. at 293.]

         One analyst on the call noted the “slowing industry, ” and he asked for “a little kind of color in the best way for us with gross margin in the back half of the year” and 2017. [DE 53 at 27, ¶73; DE 63 at 284] Long's response to that question forms much of the sum and substance of this case. Long told the analyst that “without giving guidance ... we had some serious leverage on our fixed cost with the increased volume as you look at the backlog, the backlog is going to settle more towards the way it looked Q3 last year. So I wouldn't expect the same level of leverage on fixed cost.” [DE 53 at 27, ¶73.] Long went on to say that this “depends on how the volume comes out in the current quarter.” [DE 63 at 284.] It is the italicized portion of this quote that is claimed to be actionable.

         On October 20, 2016, Supreme reported its third quarter 2016 results. Although higher net income and sales were reported, Supreme also disclosed that the backlog was $58.1 million, which was down from $74.4 million the previous quarter. [DE 53 at 28-29, ¶78.] Comparing third quarter 2016 backlog to the previous year (third quarter 2015), it had decreased 22%. [Id. at 8, 22, 28-29, 40, ¶9, 56, 78, 115.] In explaining the reason for the year-over-year decline in the backlog, Weber provided two reasons: first, although backlog at the start of the third quarter of 2016 was actually higher than at the same point the previous year, net sales were about $10 million higher this year versus last; second, the higher backlog from last year was due to “two large fleet replacement orders and the timing of an annual fleet account order.” [Id. at 8, 26, 29, ¶9, 70, 81.] The Defendants acknowledged that the lack of orders from fleet customers weighed heavily on backlog. [Id. at 30, ¶84.] A corresponding press release stated that, “The timing of several large orders increased backlog at the end of the third quarter 2015.” [Id. at 28-29, ¶78.] In the press release, Weber also acknowledged that “industry-wide growth in commercial truck sales decelerated during the summer months.” [Id. at 29, ¶79.]

         On the earnings call, Weber also explained that the “economy remains choppy, ” and that “[e]conomic indicators had turned more bearish during the summer months with several cross-currents resulting in delayed purchase decisions” by customers. [DE 63 at 353, 361.] Weber provided some reasons that optimism had been dampened, including “the lack of small business confidence, several weak manufacturing sectors, limited export support, and the uncertainty of the November elections.” [Id. at 363.] He further explained that the trucking industry was slowing and there was research suggesting that sales in 2016 would drop and projected growth for 2017 had been lowered from predictions of 1.8% to only 0.6%. [Id. at 354.] Weber also disclosed that Supreme had seen “some of the rental accounts pull back pretty hard, ” and he noted that his own discussions with multiple leasing companies and end users confirmed the caution created by the economic cross-currents. [Id. at 357-58.]

         The day after the earnings were reported (October 21, 2016), a short seller named Cliffside Research issued a “Flash Alert, ” rating Supreme's stock as a “Strong Sell.” [DE 53 at 21, 33-34, ¶¶52, 90-93.] The report noted the cyclical nature of the trucking industry and Supreme's valuation after experiencing “explosive earnings growth over the past year.” [DE 63 at 469-88.] Supreme's stock price fell by $4.28 per share that day, or nearly 24%, from $17.96 to $13.98. [DE 53 at 32, ¶88.] The next trading day, the stock fell again in price by another $2.38, to $11.30 per share. [Id. at 32, ¶89.] But the stock rebounded rather quickly; by January 23, 2017, the stock was selling at the pre-decline price. [DE 63 at 498.]


         The defendants have moved to dismiss the first amended complaint under Federal Rule of Civil Procedure 12(b)(6). The standard for deciding this motion is not the typical standard that applies in ordinary motions to dismiss. Rather, the Private Securities Litigation Reform Act (“PSLRA”) provides that the complaint in a securities fraud action must do two things: first, the complaint must “specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading.” 15 U.S.C. § 78u-4(b)(1). Second, it must, “with respect to each act or omission, ... state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Id. § 78u-4(b)(2). Here, the required state of mind is scienter, meaning a mental state that involves an intent to deceive or defraud. Tellabs, Inc. v. Makor Issues and Rights, Ltd., (Tellabs II), 551 U.S. 308, 319 (2007).

         The Supreme Court has established three guideposts in deciding ...

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