Frank v. Dana Corp..

• Decision Date: 01 July 2011
• Docket Number: No. 09–4233.,09–4233.
• Court: U.S. Court of Appeals — Sixth Circuit
• Parties: Howard FRANK, Individually and on behalf of all others similarly situated, Plaintiffs,Plumbers & Pipefitters National Pension Fund; Seiu Pension Plans Master Trust; West Virginia Laborers Pension Trust Fund, Plaintiffs–Appellants,v.DANA CORPORATION, Defendant,Michael J. Burns; Robert C. Richter, Defendants–Appellees.

646 F.3d 954

Howard FRANK, Individually and on behalf of all others similarly situated, Plaintiffs,Plumbers & Pipefitters National Pension Fund; Seiu Pension Plans Master Trust; West Virginia Laborers Pension Trust Fund, Plaintiffs–Appellants,

v.DANA CORPORATION, Defendant,Michael J. Burns; Robert C. Richter, Defendants–Appellees.

No. 09–4233.

United States Court of Appeals, Sixth Circuit.

Argued: Jan. 21, 2011.Decided and Filed: May 25, 2011.Rehearing and Rehearing En Banc Denied July 1, 2011.

ARGUED: Joseph D. Daley, Robbins, Geller, Rudman & Dowd, San Diego, California, for Appellants. Joel W. Sternman, Katten Muchin Rosenman, LLP, New York, New York, for Appellees. ON BRIEF: Joseph David Daley, Robbins, Geller, Rudman & Dowd, San Diego, California, for Appellants. Joel W. Sternman, Katten Muchin Rosenman, New York, New York, for Appellees.Before: MARTIN and STRANCH, Circuit Judges; THAPAR, District Judge. ^*

OPINION

BOYCE F. MARTIN, JR., Circuit Judge.

This is a class-action securities fraud case reaching this Court for the second time. Initially, Plaintiffs filed a consolidated complaint alleging that Michael Burns and Robert Richter, chief executive officer and chief financial officer respectively of Dana Corporation, violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and Rule 10b–5, 17 C.F.R. § 240.10b–5 (2009). Plaintiffs claim that Burns and Richter made false statements regarding Dana's financial health in violation of section 10(b), and were controlling persons regarding false statements made by “Dana and other employees” in violation of section 20(a). Defendants-appellees Burns and Richter filed a motion to dismiss pursuant to Rules 8, 9(b), and 12(b)(6) of the Federal Rules of Civil Procedure and the heightened pleading standard of the Private Securities Litigation Reform Act of 1995.¹ The district court granted the motion based upon this Court's rule in Helwig v. Vencor, Inc., 251 F.3d 540, 553 (6th Cir.2001), which held that securities plaintiffs must plead a strong inference of scienter, meaning that scienter must be the most plausible inference that could be drawn from the facts. Plaintiffs appealed that decision, and this Court remanded to the district court to apply the Supreme Court's then-recent decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007), which held that a strong inference does not mean that scienter must be the most plausible inference, but rather at least as plausible as any other non-culpable inference. Upon remand, Burns and Richter filed another motion to dismiss, which the district court granted by applying the rule from Tellabs. Plaintiffs appeal. For the following reasons, we REVERSE the district court's order granting dismissal. Plaintiffs have adequately pleaded their section 10(b) and section 20(a) claims.

I. BACKGROUND

A detailed explanation of the factual and procedural background in this matter can be found in this Court's earlier opinion in this case. See Frank v. Dana Corp., 547 F.3d 564, 567–69 (6th Cir.2008). Nevertheless, we summarize the pertinent facts and add a few not included in the previous opinion.

Burns was the chief executive officer and Richter the chief financial officer of Dana Corporation, an auto parts manufacturer. As part of their roles, during each fiscal quarter of the class period (April 21, 2004–October 7, 2005), they signed Dana's filings with the Securities and Exchange Commission, announced Dana's quarterly earnings through press releases and conference calls, and signed Dana's section 302 certificates in compliance with the Sarbanes–Oxley Act. Additionally, Burns and Richter assured investors that Dana used sound accounting controls. As all publicly traded companies do, Dana reported its actual and projected earnings per share for quarterly and annual periods. During the class period, both the actual and projected earnings reports were positive. In fact, many of the actual earnings were large improvements over earnings from the previous years. Dana announced that it was able to continue posting profits despite the rapidly increasing price of steel because it had achieved “cost efficiencies.” Relatedly, Burns continuously made positive, optimistic remarks to investors about Dana's profitability and growth during the class period.

Even though Burns's and Richter's statements painted a publicly rosy picture, some divisions of Dana were wilting. Fifty percent of the company's drive shaft division was operating at a loss, and its light axle division was also suffering. Additionally, the price of steel, one of the company's biggest supply costs, jumped seventy-five to 120 percent in late 2004, but Burns and Richter demanded that each factory grow earnings by six percent.

Then, on September 15, 2005, Burns and Richter announced that Dana would be reducing its earnings projections by fifty percent because of the rising cost of steel, likely restating its financial statements for the second quarter of 2005, and possibly writing down tax-deferred assets. With this announcement, Dana's stock fell twenty percent that day and continued to decline thereafter.

On October 10, Burns and Richter announced that investors should no longer rely upon Dana's financial statements for 2004 and the first half of 2005, those statements would be restated, and Dana had discovered “material weaknesses” in its accounting systems. With this announcement, Dana's stock fell thirty-five percent that day and continued to decline thereafter.

On December 30, Dana restated its earnings for the first two quarters of 2005, reducing net income by $44 million. On January 17, 2006, Dana reported a $1.27 billion loss for the third quarter of 2005 and a reduction of its tax-deferred assets by $918 million through a “valuation allowance.”

In February 2006, the Securities and Exchange Commission began a formal investigation into Dana's accounting methods. Dana defaulted on millions of dollars of debt near that time before ultimately filing for bankruptcy on March 3, the same day that Richter retired.

II. DISMISSAL OF PLAINTIFFS' CLAIMS

Following our earlier remand in this case, the district court granted Burns and Richter's second motion to dismiss, again finding that Plaintiffs had failed to adequately plead scienter for their section 10(b) claim. The district court also dismissed the section 20(a) claim, finding that Plaintiffs had failed to plead a requisite underlying claim and that they had failed to plead that Burns and Richter did not act in good faith. On appeal, Plaintiffs argue that their claims were adequately pleaded to survive a motion to dismiss, and also that the district court improperly denied their request to file an amended complaint.

A. Standard of Review

We review grants of Rule 12(b)(6) motions de novo. Courie v. Alcoa Wheel & Forged Prods., 577 F.3d 625, 629 (6th Cir.2009). “To survive a motion to dismiss, [plaintiffs] must allege ‘enough facts to state a claim to relief that is plausible on its face.’ ” Traverse Bay Area Intermediate Sch. Dist. v. Mich. Dep't of Educ., 615 F.3d 622, 627 (6th Cir.2010) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). All facts in the complaint must be accepted as true. Courie, 577 F.3d at 629 (citing Ashcroft v. Iqbal, ––– U.S. ––––, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009)).

B. Section 10(b) Claims

“To state a securities fraud claim under Section 10(b), a plaintiff ‘must allege, in connection with the purchase or sale of securities, the misstatement or omission of a material fact, made with scienter, upon which the plaintiff justifiably relied and which proximately caused the plaintiff's injury.’ ” Frank, 547 F.3d at 569 (quoting In re Comshare Inc. Sec. Litig., 183 F.3d 542, 550 (6th Cir.1999)). Regarding the scienter requirement, the Private Securities Litigation Reform Act requires that “plaintiffs must ‘state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.’ ” ² Konkol v. Diebold, Inc., 590 F.3d 390, 396 (6th Cir.2009) (citing 15 U.S.C. § 78u–4(b)(2)). Scienter may take the form of “knowing and deliberate intent to manipulate, deceive, or defraud, and recklessness.” Id. “Recklessness is defined as ‘highly unreasonable conduct which is an extreme departure from the standards of ordinary care. While the danger need not be known, it must at least be so obvious that any reasonable man would have known of it.’ ” PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 681 (6th Cir.2004) (quoting Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017, 1025 (6th Cir.1979)). Recklessness is not negligence, but more “ ‘akin to conscious disregard.’ ” Id. (quoting In re Comshare, 183 F.3d at 550).

The Supreme Court recently explained three steps a court must follow when faced with a 12(b)(6) motion in a section 10(b) action. See Tellabs, 551 U.S. at 322–324, 127 S.Ct. 2499. First, all of the plaintiff's factual allegations must be accepted as true. Id. at 322, 127 S.Ct. 2499. Second, the complaint and other sources normally considered by a court when ruling on a 12(b)(6) motion must be considered in their entirety, including “documents incorporated into the complaint by reference, and matters of which a court may take judicial notice.” Id. “The inquiry ... is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard.” Id. at 322–23, 127 S.Ct. 2499. Third, “the court must take into account plausible opposing inferences” when determining whether there is a strong inference of scienter. Id. at 323, 127 S.Ct. 2499. “A complaint will survive ... only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could...