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 ...