No. 84 Employer-Teamster v. America West Holding

• Decision Date: 13 February 2003
• Docket Number: No. 01-16725.,01-16725.
• Citation: 320 F.3d 920
• Parties: NO. 84 EMPLOYER-TEAMSTER JOINT COUNCIL PENSION TRUST FUND, on behalf of itself and all others similarly situated, Plaintiff-Appellant, v. AMERICA WEST HOLDING CORP.; America West Airlines, Inc.; Texas Pacific Group, Inc.; TPG Genpar LP; TPG Partners LP; TPG Advisors, Inc.; Continental Airlines Inc.; William A. Franke; Richard R. Goodmanson; Ronald A. Aramini; John R. Garel; W. Douglas Parker; Michael R. Carreon; C.A. Howlett; Stephen F. Bollenbach; Frank B. Ryan; John F. Fraser; James G. Coulter; Richard P. Schifter, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

320 F.3d 920

NO. 84 EMPLOYER-TEAMSTER JOINT COUNCIL PENSION TRUST FUND, on behalf of itself and all others similarly situated, Plaintiff-Appellant, v. AMERICA WEST HOLDING CORP.; America West Airlines, Inc.; Texas Pacific Group, Inc.; TPG Genpar LP; TPG Partners LP; TPG Advisors, Inc.; Continental Airlines Inc.; William A. Franke; Richard R. Goodmanson; Ronald A. Aramini; John R. Garel; W. Douglas Parker; Michael R. Carreon; C.A. Howlett; Stephen F. Bollenbach; Frank B. Ryan; John F. Fraser; James G. Coulter; Richard P. Schifter, Defendants-Appellees.

No. 01-16725.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 10, 2002.

Filed February 13, 2003.

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Patrick Coughlin (argued), San Francisco, CA; Edward P. Dietrich, Eric A. Isaacson, William S. Lerach, Joseph D. Daley, Daniel S. Drosman, Milberg, Weiss, Bershad, Hynes & Lerach, San Diego, CA; Andrew S. Friedman, Christopher Steiner, Bonnett, Fairborn, Friedman & Balint, Phoenix, AZ, for the plaintiffs-appellants.

Bruce Vanyo (argued), Wilson, Sonsini, Goodrich & Rosati, Palo Alto, CA; Michael

R. Klein (argued), Andrew B. Weissman, C. Russell Clause, Wilmer, Cutler & Pickering, Washington, DC; Charles T. Newton, Jr. (argued), Spencer F. Smith, Vinson & Elkins, Houston, TX, for the defendants-appellees.

Appeal from the United States District Court for the District of Arizona; Owen M. Panner, Senior Judge, Presiding. D.C. No. CV-99-00399-OMP.

Before LAY,^* FERGUSON, and TALLMAN, Circuit Judges.

Opinion by Judge FERGUSON; Dissent by Judge TALLMAN.

OPINION

FERGUSON, Circuit Judge.

Plaintiffs/Appellants ("Plaintiffs"), shareholders of America West Holdings Corp. ("Holdings"), appeal the District Court's dismissal under Rule 12(b)(6) of their second amended consolidated complaint ("Second Amended Complaint") against Defendants/Appellees Holdings; America West Airlines, Inc.; several America West officers; outside directors; and large shareholders (collectively referred to as "Defendants"). In their Second Amended Complaint, Plaintiffs alleged that Defendants violated section 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5. Plaintiffs further alleged that the officers, directors, and controlling shareholders are liable under section 20(a) of the 1934 Act, 15 U.S.C. § 78t(a).

On appeal, Plaintiffs argue that the District Court erred in dismissing their Second Amended Complaint for failure to meet the pleading requirements of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). This Court has jurisdiction pursuant to 28 U.S.C. § 1291, and we reverse.

BACKGROUND

Employer-Teamsters Joint Council No. 84 Pension Trust Fund filed a securities fraud class action in the United States District Court for the District of Arizona on behalf of itself and investors who purchased publicly traded Class B common stock of Holdings during the class period (November 19, 1997 to September 3, 1998). Plaintiffs alleged that Holdings and its subsidiary, America West Airlines, Inc. (collectively referred to as "America West"), made misleading statements to artificially inflate the value of America West's stock while their controlling shareholders engaged in insider trading of over $67 million worth of stock.

Defendants in this case are America West, numerous America West officers and directors,¹ and its two largest shareholders during the class period. The shareholders were Defendants TPG Partners, L.P.; TPG GenPar, L.P.; TPG Advisors, Inc.; and Texas Pacific Group, Inc. (collectively referred to as "TPG") and Defendant Continental Airlines, Inc. ("Continental"). Defendant James G. Coulter was Director and Vice President of TPG and Director of America West. Defendant Richard P. Schifter was Vice President of TPG and Director of America West.

A. Factual Background²

1. Bankruptcy Reorganization of America West

On June 27, 1994, America West filed for Chapter 11 bankruptcy reorganization. Several investors, including TPG and Continental, were involved in the reorganization plan. In return for their equity, the investors received several million shares of Class A and Class B stock, as well as warrants to purchase Class B common stock. Although the economic rights were identical between the two, Class A stock entitled the shareholder to 50 votes per share, whereas publicly-traded Class B common stock entitled the shareholder to one vote per share.

Under the reorganization plan, TPG obtained nearly 800,000 shares of Class A stock, more than 5 million shares of Class B stock, and approximately 1.5 million warrants to purchase additional Class B stock. Consequently, TPG held 49% of the Class A stock, and Continental held 8.3% of the Class A stock. Both TPG and Continental entered into a Stockholder's Agreement with America West, which contained a "lock-up" provision, requiring that the investors retain two shares of Class B publicly-traded stock for every share of Class A stock until May 20, 1998. Class A stock could be converted to Class B stock at any point.

The Stockholder's Agreement also provided that the shareholders would select nine out of the fifteen board directors.³ By virtue of their ownership of the "supervoting" Class A stock, TPG and Continental constituted a majority of the stockholders. TPG and Continental allegedly chose directors who were favorable to their interests. For example, Coulter, a TPG officer, was appointed a director of America West and served on its Executive Committee, which exercised all powers of the Board of Directors between the full Board meetings. Schifter, another TPG officer, was also appointed to the Board of Directors and served on the Compensation Committee, which determined the promotion, salaries, and bonuses of American West officers.⁴

2. Outsourcing of Aircraft Maintenance & Related Operational Problems

On January 1, 1994, Defendant William A. Franke became Chief Executive Officer ("CEO") of America West. Plaintiffs allege that aircraft maintenance deteriorated dramatically during his term as CEO and later as President of the company. Plaintiffs assert that Franke instituted a policy known as "don't gold plate the plane" (i.e., maintenance workers should only do the minimum) and discontinued "open-door" and "self-disclosure" practices with the Federal Aviation Administration ("FAA").

In December 1995, America West fired 375 aircraft mechanics, half of the maintenance work force, and out-sourced its maintenance to Tramco. In an internal email dated June 22, 1998, an FAA officer described the "maintenance saga" that began in December 1995. The FAA officer stated that "Tramco was not properly doing maintenance" and that the FAA was fighting an "ongoing battle to educate [the] upper management" of America West that it "was, in fact, responsible for oversight." The FAA began an aggressive enforcement program, which included inspections, warning letters, and meetings. Some of these efforts included:

•A December 27, 1995 letter from the FAA to America West stating that Tramco was not in compliance with the Maintenance Policies and Procedures Manual;

•A series of incident reports regarding use of improper lubricant, failure to complete all maintenance check requirements, and operation of aircraft without installation of needed equipment such as hydraulic system pressure lights;

•A February 20, 1996 meeting between Thomas Derieg, America West's Senior Vice President of Operations, and the FAA to discuss concerns regarding Tramco;

•Subsequent meetings between America West, Tramco, and the FAA regarding Tramco's failure to follow proper procedures;

•A July 18, 1996 FAA report, in which the FAA discussed the results of its "in-depth main base inspection" of America West and cited faulty procedures and multiple violations; and

•A December 10, 1996 FAA letter to Aramini, Senior Vice President of Operations of America West, stating that "Senior Management of America West must understand and take seriously their complete and total responsibility for the administration, oversight, and control of their continuous airworthiness maintenance program."

Throughout 1997, the FAA continued to conduct inspections, find violations, and issue warnings to America West regarding its maintenance operations. In a meeting with America West, the FAA described these maintenance issues as a "systematic problem." America West's "incident rate"⁵ was above average for the industry in the second and third quarters of 1997. By the fourth quarter of 1997, the number of Service Difficulty Reports ("SDRs")⁶ had increased from 50 to 80 per quarter, in contrast to other major carriers' average of 40 SDRs per quarter.

America West's maintenance issues led to operational problems, including canceled or delayed flights and slower maintenance cycles, and resulted in sub-level performance compared to the S & P index of other airline stocks. For example, America West suffered a third-quarter loss of $45.7 million in 1996. During this quarter, the company's stock fell to $11-1/4, half the previous value of the shares. By October 1997, the stock was trading at about $14 to $15 per share.

Throughout this period, America West assured investors that the maintenance issues were being addressed. In its 1996 Annual Report, the company reported that it had improved its "operational reliability by establishing two new overnight maintenance facilities operations, hiring approximately 60 new mechanics and acquiring an additional spare aircraft," as well as committing additional funds for parts. In June 1997, Goodmanson, then President and CEO of America West, assured investors that the company had "explored in great detail what went well and what went wrong, and we have fixes in place."

3. Beginning of Class Period

The low performance of America West's stock obviously affected both its shareholders and officers who held stock...