On April 2, 2020, Judge Ronnie Abrams of the United States District Court for the Southern District of New York dismissed a putative class action asserting claims under the Securities Exchange Act of 1934 against a manufacturer of automotive seating and certain of its executives.  In re Adient PLC Sec. Lit., No. 18-CV-9116 (RA) (S.D.N.Y. Apr. 2, 2020).  Plaintiffs alleged that the company made false and misleading statements with respect to improvements in the projected margin of “Adient,” a business spun off of its parent company, and in a particular Adient business segment (the “Metals” segment).  The Court held that plaintiffs failed to adequately allege an actionable misstatement or scienter, and, noting that plaintiffs had already voluntarily amended their complaint after defendants filed a previous motion to dismiss, denied leave to amend.

The Court grouped the company’s alleged misrepresentations into two main categories: (1) statements about the company’s projection that Adient would have a margin expansion of 200 basis points by 2020; and (2) statements about efforts to improve the Metals business segment of Adient.  Slip op. at 16.  Plaintiffs also based their claims on statements relating to impairment charges, Item 303 of Regulation S-K, and Sarbanes-Oxley Act of 2002 (SOX) certifications.  Id.  The Court held that plaintiffs failed to sufficiently allege any materially false or misleading statements or omissions with respect to any of these categories of statements.  Id. at 26.

With respect to statements regarding Adient’s margin expansion and Metals segment improvements, the Court concluded that plaintiffs failed to show “how and why” the statements were false and misleading when made.  Id.  The Court observed that, even crediting confidential witness statements regarding problems in the Metals segment, Adient’s projected margin improvement relied on efforts outside of that segment, and plaintiffs failed to demonstrate that allegations of problems in the Metals segment rendered the margin projections false or even “unreasonable” at the time they were made.  Id. at 26–27.  Similarly, plaintiffs’ allegation that statements of contemporaneous facts were misleading, such as statements that machine utilization was “improving and . . . trending in the right direction,” could not support a claim for securities fraud because, the Court held, plaintiffs failed to allege facts suggesting that those metrics were not in fact improving at the time.  Id. at 29–30.

The Court also rejected plaintiffs’ allegations that the company failed to disclose material information that contradicted opinions offered by the individual defendants, such as “we think we have a couple hundred basis points of margin expansion we can deliver.”  Id. at 32.  In dismissing those allegations, the Court concluded that plaintiffs failed to allege that material information was omitted.  Instead, plaintiffs relied on the subjective opinions of confidential witnesses; but these were insufficient to demonstrate that the statements were false or misleading at the time they were made and, moreover, did not constitute facts supporting a conclusion that defendants did not actually hold the opinions when made.  Id. at 32–34. 

The Court further determined that the alleged misstatements fell under the PSLRA’s safe harbor for forward-looking statements that are either accompanied by meaningful cautionary language or are not shown to have been made with “actual knowledge” that they were false or misleading.  The Court first found that any “present-tense” portion of the forward-looking statements were too vague to be actionable, as they provided no specific information about current circumstances and instead concerned “information related only to its future projections.”  Id. at 40.  The Court then determined that plaintiffs had offered only a conclusory assertion that defendants had actual knowledge of falsity, meaning that the forward-looking statements qualified under the PSLRA safe harbor based on that factor alone.  Id. at 42.  Thus, while plaintiffs argued that purported cautionary language was not “meaningful” because the disclosures did not mention the business unit in question, and although the Court agreed that the disclosures “could have identified . . . more specific risks,” the Court concluded that it was ultimately unnecessary to rule on the risk disclosures because plaintiffs failed to show defendants’ “actual knowledge” of falsity.  Id. at 43–44.

In addition, the Court observed that many of the alleged misstatements were non-actionable puffery.  For example, statements about what defendants “expected” to see, “felt confident” about, and were “comfortable” with, were “too general for a reasonable investor to have relied on them.”  Id. at 47. 

The Court similarly dispensed with plaintiffs’ allegations related to impairment charges, Item 303 of Regulation S-K, and SOX certifications.  With respect to plaintiffs’ allegation that the company should have recorded an impairment in the second quarter of 2018 instead of in the fourth quarter, the Court held that plaintiffs did not plead specific facts showing that the “failure to take an earlier impairments charge was so clearly required by accounting principles that the failure to take such a charge was fraudulent,” particularly given the company’s actual disclosures of ongoing poor performance.  Id. at 51.  Regarding Item 303, which requires disclosure of “known trends” that the company reasonably expects will be material to revenues or income, the Court noted that plaintiffs’ theory failed due to plaintiffs’ failure to sufficiently plead material misstatements or omissions.  Id. at 51–52.  The Court also concluded that plaintiffs’ assertion that defendants “falsely certified” SEC filings in violation of SOX failed for the same reasons.  Id. at 53–54.

Further, the Court rejected both theories of scienter put forward by plaintiffs—a “motive and opportunity” theory and a “conscious misbehavior or recklessness” theory.  Id. at 55.  Regarding the “motive and opportunity” theory, the Court concluded that plaintiffs merely alleged that the company’s executives received incentive-based compensation, which was insufficient to show scienter.  Id. at 56.  The Court also determined that the “conscious misbehavior or recklessness” theory failed because plaintiffs failed to allege that defendants had attended meetings or received documents containing information contradicting their public statements.  Id. 59–60. 

Plaintiffs also made additional scienter allegations based on the importance of the Metals segment to the company, the “abrupt ouster” of the CEO in 2018, and senior management’s close tracking of the segment’s problems.  Id. at 63.  The Court concluded that the business segment was not a large enough portion of the company to satisfy the “core operations” doctrine, which some courts have found can support an inference that senior executives had knowledge of certain information, but “typically applies only where the operation in question constitute[s] nearly all of a company’s business.”  Id. at 63–64.  Regarding the CEO’s departure, the Court held that plaintiffs alleged no facts to suggest that it was “highly unusual or suspicious.”  Id. at 64.  And the Court held that it was not clear how allegations that senior management “closely tracked” the Metals segment supported an inference of scienter, given defendants’ disclosures about problems they encountered.  Id. at 65.  Because plaintiffs failed to adequately allege scienter with respect to any individual, the Court also rejected plaintiffs’ argument that scienter should be imputed to the company itself.  Id. at 66.

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