245 F.R.D. 560 (N.D.Tex. 2007), C. A. 3:03-CV-1769-B ECF, Ryan v. Flowserve Corp.
|Docket Nº:||Civil Action 3:03-CV-1769-B ECF.|
|Citation:||245 F.R.D. 560|
|Opinion Judge:||JANE J. BOYLE, District Judge.|
|Party Name:||Jerry RYAN, et al., Plaintiffs, v. FLOWSERVE CORPORATION, et al., Defendants.|
|Attorney:||Robert J. Hill, Claxton & Hill, Dallas, TX, Joe Kendall, Willie Briscoe, Hamilton Lindley, Provost Umphrey Law Firm, Dallas, TX, Andrew C. Allen, Whatley, Drake & Kallas LLC, Birmingham, AL, Dennis J. Herman, Jeffrey W. Lawrence, Lauren M. Winston, Lesley E. Weaver, Maria V. Morris, Sanford, Svet...|
|Case Date:||November 13, 2007|
|Court:||United States District Courts, 5th Circuit, Northern District of Texas|
[Copyrighted Material Omitted]
This is a private securities fraud action. Two pivotal issues face the court. First, is the class certification motion by lead plaintiff, Alaska Electrical Pension Fund (" Alaska Electrical" ), and named plaintiff, Massachusetts State Carpenters Pension Plan (" Massachusetts Carpenters" ), (collectively, " the Funds" or " the Plaintiffs" ) against Flowserve Corporation (" Flowserve" ); C. Scott Greer (" Greer" ), its CEO during the class period; Renee J. Hornbaker (" Hornbaker" ), its CFO during the class period; 1 PricewaterhouseCoopers LLP (" PwC" ), its auditors; and Banc of America Securities LLC (" BofA" ) and Credit Suisse First Boston LLC (" CSFB" ), two of the underwriters of Flowserve's stock offerings that were made during the class period.2 Second, are four summary judgment motions: Defendants Banc of America Securities LLC's and Credit Suisse First Boston LLC's Motion for Summary Judgment (doc. 588), Defendant PricewaterhouseCoopers LLP's Motion for Summary Judgment (doc. 590), Defendant C. Scott Greer's Motion for Summary Judgment (doc. 596), and Defendants Flowserve Corporation's and Renee J. Hornbaker's Motion for Summary Judgment (doc. 640). The Court has combined its resolution of the certification and summary judgment motions in this order. Brief descriptions of the two motions and the Court's rulings follow.
In their Motion for Class Certification (doc. 239), filed May 30, 2006. Plaintiffs move the Court to certify a plaintiff class of:
All persons who purchased the publicly-traded equity [ ] 3 securities of Flowserve Corporation between February 6, 2001 and September 27, 2002. Excluded from the Class are defendants and members of their immediate families, any entity in which a defendant has a controlling interest and the legal representatives, heirs, successors or assigns of any excluded party.
(Mot. for Class Certification (" Class Cert." ) at 2) The Court has reviewed all of the briefing on certification as well as the parties' supplemental submissions on loss causation. Because Plaintiffs cannot demonstrate loss causation on their § 10(b) and Rule 10b-5 claims, the Court DENIES their motion for class certification.
In their motions for summary judgment, Defendants raise numerous grounds for relief, all converging on the contention that Plaintiffs' loss causation evidence with respect to their § 11 claims is fatally flawed. More precisely, the Defendants uniformly maintain that Plaintiffs' § 11 claims cannot survive their affirmative defense of negative causation because they cannot demonstrate a causal connection between the alleged misstatements underlying Plaintiffs' § 11 claims and the corresponding losses those misstatements are supposed to have caused. The Court agrees and, for the reasons detailed below, GRANTS the Defendants' motions for summary judgment on Plaintiffs' § 11 claims and confines its summary judgment analysis to the negative causation issue.
A. Factual Background
As recounted in numerous filings by the parties, Flowserve manufactures pumps, seals, and valves and provides a variety of flow management services to the " process industries." (Fifth Am. Compl. (" Compl." ) ¶ 51) Flowserve's financial slide and resulting legal problems, according to Plaintiffs, began in fiscal year 2000 when the company " went on a massive acquisition binge more than doubling its size but saddling itself with immense debt." (Class Cert. at 3) In particular, the company purportedly faced extreme difficulties with its August 2000 acquisition of Ingersoll-Dressor Pump Co. (" IDP" ) and its May 2002 acquisition of the Invensys Flow Control Division (" IFC" ). (Compl.¶ 4) Such difficulties purportedly led to negative cash flow, a need for equity infusion, and violations of Flowserve's various debt covenants. ( Id. at ¶ ¶ 7-8) Defendants Greer and Hornbaker allegedly issued overly optimistic predictions of earnings per share (" EPS" ) to conceal the fraud. ( Id. at ¶ 6) Flowserve's ensuing fiscal problems and stock plummet, Plaintiffs say, led to the instant suit. ( Id. at ¶ ¶ 3-4)
The proposed class period begins on February 6, 2001 with Flowserve's report of its net income for the year 2000 as $13.2 million. (Class Cert. at 5-6) Plaintiffs contend that the overstatement of Flowserve's financial position caused the company's stock to trade at inflated levels. ( Id. at 6) Moreover, Plaintiffs assert that Flowserve's continued concealment of inventory issues and overall mischaracterization of the company's financial status enabled Flowserve's stock price to remain inflated throughout the class period. ( Id. ) The class period ends on September 27, 2002 when Flowserve reduced its earnings guidance for 2002, which Plaintiffs maintain:
substantially reduced investors' reliance on the prior allegedly false representations by Flowserve and substantially reduced investors' inflated expectations regarding the future prospects of the Company .... substantially reduced the inflationary impact of the alleged false and misleading statements .... [and] alerted investors to the fact that Flowserve might be in violation of its debt covenants.
( Id. ) 4
In August 2000, Flowserve chose PwC to serve as its independent external auditors, and PwC still serves in that capacity today.
(PwC's Br. in Supp. of Mot. for Summ. J. (" PwC's Br." ) ¶ 1 5) Subsequently, PwC audited and issued unqualified opinions on Flowserve's annual financial statements for 2000 and 2001, and these were incorporated into registration statements for two of Flowserve's public offerings. ( Id. ¶ 2)
On April 24, 2001, Defendant Greer advised investors that the integration of IDP would have " temporarily [sic] inefficiencies [and] tend to sag a bit as we transfer production and inventory, move people and extend the learning curve at the receiving plants." (Ex. 110, Pls.' Consolidated Opp.App. 1805) In Flowserve's earnings announcement on July 24, 2001, Defendant Greer later admitted that " various temporary operating inefficiencies related to the integration of IDP have prevented facilities from ramping up." (Ex. 149, Pls.' Consolidated Opp.App. 2462-63; Steinholt Damages Rep. ¶ ¶ 39-40, Pls.' Suppl. App. 17-19) Analysts continued to track these integration issues. One commented that " [d]ifficulties mentioned last quarter at two of the IDP-imposed facilities are being addressed and management changes have been made. Flowserve is confident that these integration issues will be behind the company by year end. No new difficulties were reported." (Steinholt Damages Rep. ¶ 44, Defs.' Suppl. App. 161-62)
On May 31, 2001 Flowserve filed a Shelf Registration Statement with the Securities and Exchange Commission that would later become the basis for their November 2001 and April 2002 public offerings. (PwC's Br. ¶ 3) Flowserve amended the Shelf Registration Statement on July 2, 2001. ( Id. ) Several months later, on November 16, 2001, Flowserve filed a Prospectus Supplement with the SEC.6 ( Id. ¶ 4) That day, pursuant to the November 2001 Registration Statement, Flowserve held a public offering of its common stock at $23.50 per share. ( Id. ) Incorporated into the November 2001 Registration Statement were Flowserve's 2000 Form 10-K-consisting of, among other things, a " Report of Management," attesting to the adequacy of Flowserve's internal controls, and Flowserve's audited 2000 year-end financial statements-and the unqualified audit opinion that PwC provided as to those financial statements. (PwC's Br. ¶ 5; Compl. ¶ 422) As mentioned, BofA and CSFB underwrote this offering along with several other underwriters. (Underwriter Defs.' Br. in Supp. of Mot. for Summ. J. (" Underwriters'...
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