United States District Court, N.D. Indiana, South Bend Division
In re SUPREME INDUSTRIES, INC. SECURITIES LITIGATION
OPINION AND ORDER
PHILIP
P. SIMON, JUDGE
In this
securities fraud case, Defendants, Supreme Industries Inc.,
Mark Weber, and Matthew Long, have filed a motion to dismiss
the second amended class action complaint. [DE 81.] I
previously dismissed an earlier complaint but allowed the
lead Plaintiff, Kenneth Fishman, to file an amended complaint
which he timely did. After thoroughly reviewing the amended
complaint I have again concluded that Fishman has failed to
sufficiently allege, under the heightened pleading standards
applicable to securities fraud cases, that Defendants made
false or misleading statements, and he has also failed to
raise a strong inference of scienter. I will therefore again
dismiss the complaint but this time the dismissal will be
with prejudice.
Background
Much
of the factual basis of this case has already been set out in
my order dated May 23, 2018, [1] and for expediency sake, I will
not repeat it here. During my analysis of this motion, I
principally will focus on the new allegations in the second
amended complaint. For present purposes, it is enough to say
that Supreme is a company in the business of manufacturing
truck body parts. The company manufactures specialized
commercial vehicles that are attached to truck chassis which
Supreme purchases from large manufacturers such as General
Motors or Navistar. According to the second amended
complaint, an important predictor of company performance is
the size of its backlog. Generally speaking,
“backlog” refers to unfinished work or to
customer orders that have been received but are either
incomplete or in the process of completion.
Broadly
speaking, there are two public statements at issue in this
case that were made by either Supreme or its executives that
allegedly constitute material misrepresentations in violation
of Section 10(b) and Rule 10b-5: (1) a third quarter 2015
announcement by Supreme Industries regarding its backlog
which Fishman claims was misleading because they did not
specify the composition of the backlog; and (2) a July 2016
prediction made by Supreme's Chief Financial Officer that
the backlog for the second half of 2016 was “going to
settle more towards the way it looked Q3 last year.”
[SAC, ¶ 94.][2] I will take up each of these claims in
order below.
Discussion
Before
getting into the details of the allegedly false statements,
let's begin with a brief primer on the law that is
applicable to this matter. As more fully set out in my May
2018 order, pursuant to the Private Securities Litigation
Reform Act (“PSLRA”), the complaint must first
specify each misleading statement and spell out why it is
misleading; and second, it must state with particularity
facts giving rise to a strong inference that the defendant
acted with the requisite state of mind. 15 U.S.C.
§§ 78u-4(b)(1), (b)(2). Why is the standard so
onerous? It's because “Congress passed the PSLRA in
response to perceived abuses in which issuers of securities
would be sued based on little more than a significant drop in
their stock prices after announcing bad news.”
Schleicher v. Wendt, 529 F.Supp.2d 959, 969 (S.D.
Ind. 2007). As a result, the heightened pleading requirements
are aimed at discouraging claims of “so-called
‘fraud by hindsight.'” In re Midway
Games, Inc. Sec. Litig., 332 F.Supp.2d 1152, 1155 (N.D.
Ill. 2004) (quoting In re Brightpoint, Inc. Sec.
Litig., No. IP99-0870-C-H/G, 2001 WL 395752, at *3 (S.D.
Ind. Mar. 29, 2001)).
In a
case of securities fraud like this one, the plaintiff has to
allege that the defendant made the false statements with an
intent to deceive or to defraud. In other words, that is the
“scienter” that must be alleged. Tellabs,
Inc. v. Makor Issues and Rights, Ltd.
(“Tellabs II”), 551 U.S. 308, 319
(2007); see also Higginbotham v. Baxter Int'l,
Inc., 495 F.3d 753, 756 (7th Cir. 2007) (holding the
required state of mind that must be pled is “an intent
to deceive, demonstrated by knowledge of the statement's
falsity or reckless disregard of a substantial risk that the
statement is false.”).
It is
my job to determine whether the facts as alleged give rise to
a “strong” (or powerful or cogent) inference of
scienter. Tellabs II, 551 U.S. at 322-23. A
“strong inference” is one that is “strong
in light of other explanations.” Id. at 324.
In determining whether a strong inference of scienter has
been sufficiently alleged, I may not only draw on
“inferences urged by the plaintiff” but must
engage in a “comparative evaluation” and thus
examine and consider “competing inferences rationally
drawn from the facts alleged.” Id. at 314. I
must consider the totality of the facts alleged in
determining whether “a reasonable person would deem the
inference of scienter cogent and at least as compelling as
any opposing inference one could draw from the facts
alleged.” Id. at 324. Forward-looking
statements - in other words, predictions - have a
particularly strict standard, in which case scienter requires
“actual knowledge of falsity on the part of defendants,
” not merely reckless indifference. City of Livonia
Emps.' Ret. Sys. & Local 295/Local 851 v. Boeing
Co., 711 F.3d 754, 756 (7th Cir. 2013) (citing 15 U.S.C.
§ 78u-5(c)(1)(B)).
Like
the first amended complaint, there are two claims asserted in
the second amended complaint. The first claim arises under
Section 10(b) of the Securities Exchange Act of 1934, 15
U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. §
240.10b-5. To state a claim for securities fraud under these
provisions, Plaintiff must plead: “a material
misrepresentation or omission by the defendant; (2) scienter;
(3) a connection between the misrepresentation or omission
and the purchase or sale of a security; (4) reliance upon the
misrepresentation or omission; (5) economic loss; and (6)
loss causation.” Pugh v. Tribune Co., 521 F.3d
686, 693 (7th Cir. 2008).
The
second claim, brought against the individual Defendants, Mark
Weber and Matthew Long, arises under Section 20(a) of the
Securities Exchange Act of 1934. Under this section,
“[e]very person who, directly or indirectly, controls
any person liable under any provision of this chapter or of
any rule or regulation thereunder shall also be liable
jointly and severally with and to the same extent as such
controlled person is liable . . . .” 15 U.S.C. §
78t(a).
Before
turning to the new allegations, I pause to address
Fishman's comment that Defendants have attached 56
documents to the Appendix. [DE 84 at 13 n.3.] Fishman
initially implies that this is an “unscrupulous
practice” on a motion to dismiss a securities case.
[Id.] Nonetheless, he has not moved to strike any
documents or identified any specific exhibit which I should
not consider. Additionally, Fishman does not object to the
documents incorporated into the second amended complaint and
doesn't object to Defendants' references to SEC
filings provided that they are not relied on for the truth of
the matters asserted therein. [Id.] See In re
Shopko Sec. Litig., No. 01-C-1034, 2002 WL 32003318, at
*2 (E.D. Wis. Nov. 5, 2002) (finding on a motion to dismiss
securities fraud claims that courts may consider SEC filings
“only to determine what disclosures the defendants
made, ” not “for the truth of the disclosures
contained therein”). This is appropriate because
typically, when courts take notice of documents in securities
fraud cases, courts “consider the documents for a
non-hearsay purpose -i.e., for the notice that
statements in the documents provided concerning certain
risks, as it relates to fraud or reliance questions - as
opposed to for the substantive truth of statements in the
documents.” ABN AMRO, Inc. v. Capital Intern.
Ltd., No. 04 C 3123, 2007 WL 845046, at *8 (N.D. Ill.
Mar. 16, 2007). Therefore, I will not consider the attached
documents for the truth of the matters asserted within, but I
will consider them for non-hearsay purposes.
The
Third Quarter 2015 Statements
1.
Were the Third Quarter 2015 Statements False or
Misleading?
As
noted above, liability under Section 10(b) requires the
plaintiff to prove that the defendant either made a false
statement of material fact or failed to make a statement of
material fact thereby making the statements that were made
misleading. Searls v. Glasser, 64 F.3d 1061, 1065
(7th Cir. 1995). A fact is material if a substantial
likelihood exists that a reasonable investor would have
viewed the disclosure of the facts as having significantly
altered the “total mix” of information available.
TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438,
449 (1976).
With
the second amended complaint, Fishman attempts to shore up
his argument that the third quarter 2015 backlog
announcements were misleading because they did not disclose
further details about the backlog composition. In other
words, while Fishman has to acknowledge that the backlog
disclosures were technically accurate, he continues to
contend they were misleading because of what the defendants
did not disclose: that the anomalous backlog was the
result of “two large fleet replacement orders and the
timing of an annual fleet account order received during the
third quarter.” [DE 84 at 15-16; SAC ¶¶ 10,
90, 101.]
I
already directly addressed this argument in my May order and
found:
Simply alleging that, because the Defendants failed to
disclose the source of the backlog, the statements they made
regarding the backlog were rendered misleading is not enough.
Omitting one detail - even a significant one - doesn't
render the whole story inaccurate or misleading. Failing to
include the breakdown of the backlog does not render the
backlog figure “so incomplete as to be
misleading.” See In re Harley Davidson Inc. Sec.
Litig., 660 F.Supp.2d 969, 985 (E.D. Wis. 2009). Nor is
the source of the backlog a fact that is inconsistent with,
or calls into question, the report of the indisputably
accurate backlog figure. See Silverman v. Motorola,
Inc., 2008 WL 4360648, at *10 (N.D. Ill. Sept. 23, 2008)
(“[O]mitting smaller details, even if investors might
care about them, is not necessarily misleading.”). In
other words, Fishman fails to allege precisely how the
backlog figure was rendered misleading, as opposed to simply
lacking detail.
[Op. at 12-13.]
The
additional allegations in the second amended complaint do
nothing to cure this problem and Fishman still has not
sufficiently alleged that the report of an accurate backlog
number was misleading. More allegations showing that the
investors cared about Supreme's backlog, and sometimes
asked questions about the backlog composition, have been
added. [SAC, ¶¶ 46-52.] Yet, the first amended
complaint contained similar allegations that
“Defendants recognized that the Company's backlog
provided insight into current and future performance, ”
and during earnings calls, Supreme “drew direct
connections between reported backlog and the Company's
operations, ” Supreme focused on and discussed its
quarterly backlog which gave the “metric a higher level
of materiality to investors, ” and the backlog was a
“primary indicator” of Supreme's current and
future performance. [FAC, ¶ 45.][3]
The
first amended complaint also alleged that “investors
consistently pushed” Supreme to provide additional
backlog details during earnings calls, and that investors
asked questions regarding the composition of the backlog.
[Id. ¶¶ 48-50.] Merely piling on more
allegations that the investors cared about the backlog does
nothing to fix the problems with the first amended complaint
- the true statement about the backlog is still not
misleading. As I found earlier, just “knowing
that one metric is material and not disclosing it” does
not “lead[] to the conclusion that the Defendants must
have known, or should have known, that this failure to
disclose would mislead investors.” [Op. at 15.]
Fishman
argues that some of the second amended complaint's new
allegations highlight Defendants' previous willingness to
disclose the source of an anomalous backlog, thus trying to
call into question the decision not to break down the backlog
in the statements at issue. [DE 84 at 16.] Specifically,
Fishman points to the disclosure of the third quarter of 2013
backlog to demonstrate Supreme's “ability and
willingness to describe the source of anomalous
backlog.” [Id.] That disclosure reported
“strong order intake in the third quarter led by
significant fleet business and improved retail demand for the
Company's truck bodies.” [SAC, ¶ 53.] I'm
not sure why this is held up as an example of a superior
disclosure. It is very similar to the Q3 2015 SEC filings and
...