Int'l Ass'n of Heat v. Int'l Bus. Machs. Corp.

• Decision Date: 07 September 2016
• Docket Number: 15cv2492
• Citation: 205 F.Supp.3d 527
• Parties: INTERNATIONAL ASSOCIATION OF HEAT and Frost Insulators and Asbestos Workers Local #6 Pension Fund, individually and on behalf of all others similarly situated, Plaintiff, v. INTERNATIONAL BUSINESS MACHINES CORPORATION, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

205 F.Supp.3d 527

INTERNATIONAL ASSOCIATION OF HEAT and Frost Insulators and Asbestos Workers Local #6 Pension Fund, individually and on behalf of all others similarly situated, Plaintiff,

v.INTERNATIONAL BUSINESS MACHINES CORPORATION, et al., Defendants.

15cv2492

United States District Court, S.D. New York.

Signed September 7, 2016

Christopher J. Keller, Rachel Ann Avan, Labaton Sucharow, LLP, Michael Walter Stocker, Labaton & Sucharow LLP, New York, NY, for Plaintiff.

City of Sterling Heights Police and Fire Retirement System, pro se.

Lawrence Jay Portnoy, John Stanley Barrett, III, William Trent Thompson, Davis Polk & Wardwell, Michael S. Flynn, Davis Polk & Wardwell LLP, New York, NY, for Defendants.

OPINION & ORDER

WILLIAM H. PAULEY III, District Judge:

In October 2014, International Business Machines Corp. ("IBM") announced that it was taking a $2.4 billion write-down in connection with transferring its microelectronics business to another company. Following that announcement—which coincided with the disclosure of disappointing third-quarter operating results—IBM's share price dropped by approximately 17%. Two separate cases pending before this Court allege that Generally Accepted Accounting Principles ("GAAP") required IBM and its corporate officers to record an earlier impairment of its microelectronics assets, and that IBM's stock price was overvalued and fell as a result of the divestiture announcement.

This action is brought under Section 10(b) of the Securities Exchange Act and its implementing rule, 10b–5, on behalf of a putative class of investors in IBM common stock between January 22, 2014 and October 17, 2014. The International Association of Heat and Frost Insulators and Asbestos Workers Local #6 Pension Fund filed the original complaint in this action. Subsequently, this Court appointed KBC Asset Management NV and the Operating Engineers Trust Fund as lead plaintiffs. The Amended Complaint names IBM as a defendant, along with Virginia M. Rometty (IBM's President and CEO), Martin Schroeter (IBM's CFO) and James J. Kavanaugh (IBM's Controller).¹

Defendants move to dismiss the Amended Complaint for failure to state a claim. Defendants' motion to dismiss is granted.

BACKGROUND

The allegations in the Amended Complaint are presumed true for purposes of this motion. In 2010, IBM established a "2015 Roadmap" strategy to double its earnings per share ("EPS") to $20 within five years. Rometty spearheaded that strategy with Schroeter and Kavanaugh's assistance, and sought to divest IBM of unprofitable business segments.

IBM's microelectronics unit ("Microelectronics")—housed within its Software, Systems and Technology ("STG") business segment—designed and produced microchips at plants (the "Fabs") in East Fishkill, New York and Essex Junction, Vermont. Plaintiffs allege that IBM failed to update the Fabs to be competitive in the market. They marshal confidential witnesses from both facilities to buttress those allegations. For example, a former East Fishkill Senior Engineering Manager states that IBM stopped investing in the facility after 2010 and failed to make necessary infrastructure improvements. Similarly, a former contractor represented that the Essex Junction facility was outdated and no longer produced chips at a profitable scale. Notably, chips manufactured at East Fishkill were used almost exclusively in IBM's mainframes and servers, which were sold by the STG business segment.

Beginning in 2012, Microelectronics suffered significant operating losses. Specifically, between 2012 and 2013, Microelectronics lost $1.358 billion. Toward the end of 2013, STG suffered pretax losses of $507 million, driven by Microelectronics' pretax loss of $720 million. At that point, IBM decided to divest itself of the Microelectronics business segment.

In 2014, IBM engaged Goldman Sachs to assist in its sale of Microelectronics. Of four potential buyers, GlobalFoundries—a competing microchip manufacturer—emerged as the leading candidate. And while it was reported that IBM had initially sought to sell Microelectronics for $2 billion, GlobalFoundries—which was primarily interested in IBM's engineers and intellectual property—wanted to be paid $2 billion to take the Fabs off IBM's hands. Disputes over Microelectronics' value led talks to break off for a period of time as late as July 2014.

On October 20, 2014, IBM announced that it would pay GlobalFoundries $1.5 billion to accept Microelectronics. IBM further disclosed that it would take a $2.4 billion write-down of the entire vale of Microelectronics' assets, as well as $800 million of other unspecified costs. As part of the deal, GlobalFoundries agreed to be the exclusive supplier of certain semiconductors to IBM for the next decade. On the same day that deal was announced, IBM disclosed disappointing third-quarter financial results: sales were down 4%, and operating profits per share were down 10%. Following these announcements, IBM's stock dropped more than 17% from its class-high price of $197.77 per share.

Throughout the class period, Defendants stated consistently that their long-lived assets were tested for impairment, that there were no material impairments of non-financial assets, and IBM was on track to reach its goal of $20 EPS.

LEGAL STANDARD

To withstand a motion to dismiss, pleadings "must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). Courts must accept as true all well-pleaded factual allegations. See Hooks v. Forman, Holt, Eliades & Ravin, LLC , 717 F.3d 282, 284 (2d Cir.2013). Additionally, courts may consider "legally required public disclosure documents filed with the SEC" as well as documents "incorporated into the complaint by reference" or relied upon by the plaintiff "in bringing suit." ATSI Commc'ns, Inc. v. Shaar Fund, Ltd. , 493 F.3d 87, 98 (2d Cir.2007). However, "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937.

Under Fed. R. Civ. P. 9(b), securities-fraud complaints must satisfy heightened pleading requirements, "stating with particularity the circumstances of fraud." Employees' Ret. Sys. of Gov't of the Virgin Islands v. Blanford , 794 F.3d 297, 304 (2d Cir.2015) (citation omitted). Securities-fraud claims are also subject to the "[e]xacting pleading requirements" of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Tellabs, Inc. v. Makor Issues & Rights, Ltd. , 551 U.S. 308, 313, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007), which provides that a complaint shall state with particularity "all facts on which [the] belief [that a statement is misleading] is formed," 15 U.S.C. § 78u4(b)(1)(B), and "facts giving rise to a strong inference that the defendant acted with the required state of mind," 15 U.S.C. § 78u–4(b)(2)(A).

DISCUSSION

Rule 10b–5, promulgated under Section 10(b) of the Securities Exchange Act, prohibits the "mak[ing] [of] any untrue statement of material fact" in connection with the purchase or sale of a security. 17 C.F.R. § 240.10b–5(b). Plaintiffs must allege that the defendant "(1) made misstatements or omissions of material fact, (2) with scienter, (3) in connection with the purchase or sale of securities, (4) upon which the plaintiff relied, and (5) that the plaintiff's reliance was the proximate cause of its injury." Blanford , 794 F.3d at 305 (citation omitted).

Among other arguments, Defendants assert that Plaintiffs fail to: (1) identify any material misrepresentations or omissions; (2) plead scienter; or (3) plead loss causation.

I. Material Misrepresentations or Omissions

The statements that Plaintiffs allege were materially false or misleading fit broadly into three categories: (1) representations that there were no material impairments of non-financial assets; (2) representations that IBM's financials had been prepared in accord with GAAP, and that long-lived assets were properly tested for impairment; and (3) representations that IBM was on track to reach its 2015 Roadmap goal of $20 EPS. Defendants argue that the Amended Complaint does not identify any material misrepresentations because Plaintiffs' assertion that the write-down of Microelectronics' assets should have been recorded earlier rests on a misapplication of GAAP. The relevant GAAP standards for assessing the impairment of long-lived assets are compiled in the Financial Accounting Standards Board's ("FASB's") Accounting Standards Codification ("ASC") 360-10-35.

A. Whether Microelectronics Constituted an Asset Group Under GAAP

The ASC establishes that "for purposes of recognition and measurement of an impairment loss, a long-lived asset or assets shall be grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of other assets and liabilities." ASC 360-10-35-23. Thus, a threshold issue is whether Microelectronics constituted an "asset group" under GAAP for purposes of impairment testing. Defendants argue that it did not.

"Varying facts and circumstances will inevitably justify different groupings of assets for impairment review. While grouping at the lowest level for which there are identifiable cash flows for recognition and measurement of an impairment loss is understood, determining that lowest level requires considerable judgment." ASC 360-1-055-35. According to Defendants, Microelectronics was "vertically integrated" into STG because STG's product lines were dependent on Microelectronics' manufacturing activity. Thus, because the specialized chips manufactured by Microelectronics were primarily used in STG's products, which were used across business segments, Microelectronics could not be isolated as a stand-alone asset group.

Plaintiffs...