U.S. Sec. & Exch. Comm'n v. Ustian

• Decision Date: 24 January 2017
• Docket Number: No. 16 C 3885,16 C 3885
• Citation: 229 F.Supp.3d 739
• Parties: UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Daniel C. USTIAN, Defendant.
• Court: U.S. District Court — Northern District of Illinois

229 F.Supp.3d 739

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.Daniel C. USTIAN, Defendant.

No. 16 C 3885

United States District Court, N.D. Illinois, Eastern Division.

Signed January 24, 2017

Eric M. Phillips, Amy Flaherty Hartman, Jonathan Stephen Polish, Timothy Jon Stockwell, Anne Graber Blazek, U.S. Securities and Exchange Commission, Chicago, IL, for Plaintiff.

Stephen C. Neal, Cooley & Godward LLP, Palo Alto, CA, Aarti G. Reddy, Benjamin Hansel Kleine, Jeffrey M. Gutkin, Karen L. Burhans, Kathleen Howard Goodhart, Cooley LLP, San Francisco, CA, Cary R. Perlman, Robin M. Hulshizer, Sean M. Berkowitz, Latham & Watkins LLP, Laurence Harvey Levine, Chicago, IL, for Defendant.

OPINION AND ORDER

SARA L. ELLIS, United States District Judge

Navistar International Corporation ("Navistar"), whose stock is listed on the New York Stock Exchange (ticker symbol NAV) produces, among many things, diesel engines regulated by the Environmental Protection Agency ("EPA"). The United States Securities and Exchange Commission ("SEC") alleges that Defendant Daniel C. Ustian, Navistar's former Chief Executive Officer ("CEO") and President, was so driven by a desire to produce an engine that the EPA would approve and customers would buy, he engaged in securities fraud and misled investors to think that Navistar had such an engine despite knowing that Navistar could not produce an engine that could satisfy both the EPA and Navistar's customers, violating Section 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. § 77q(a) ]; Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78j(b) ] and its Rule 10b–5 [17 C.F.R. § 240.10b–5 ]; and Rule 13a–14 of the Exchange Act [17 C.F.R. § 240.13a–14 ]. Ustian moves to dismiss the SEC's complaint [26] and asks the Court to consider exhibits he attaches to his motion to dismiss [28]. Ustian attaches many exhibits, of which the Court can take judicial notice or that are incorporated by reference in the complaint, so the Court grants in part Ustian's motion to consider his extra exhibits. Because the SEC sufficiently alleges that Ustian's statements were misleading and material to the investing public and that Ustian knew this, the SEC sufficiently states a claim for securities fraud. The SEC also sufficiently alleges that Navistar violated the securities laws and that Ustian is liable for Navistar's violations. But the SEC fails to support its allegation that Ustian is liable for February 2012 statements at an analyst conference call or that Ustian aided and abetted Navistar's violations of Section 13(a) or Rules 12–b20, 13a–1, 13a–11, or 13a–13; thus, the SEC cannot proceed on those claims. Therefore, the Court grants in part and denies in part Ustian's motion to dismiss, dismissing with prejudice the SEC's claim that Ustian's February 2012 statements are actionable and Count V of the complaint.

BACKGROUND¹

Navistar makes trucks, buses, and diesel engines. Between 2010 and 2012, Ustian served as President and CEO of Navistar. He first served as Navistar's Group Vice President and General Manager of its Engine & Foundry Group from 1993 to 1999. He then was President of Navistar's Engine Group from 1999 through 2002. In 2002, he joined Navistar's board of directors and became chairman of the board in 2003, a position he held until 2012.

Navistar's engines must meet EPA regulations, including regulations on engine emissions such as the discharge of nitrogen oxide ("NOx"). As the EPA tightened NOx discharge rules, requiring engines to emit less and less NOx during operation, Navistar worked to produce truck engines that met the EPA's tightening standards. Navistar's solution for engine emissions were unique in the market—while competitors treated exhaust with chemicals to reduce the amount of NOx emitted from their engines using selective catalytic reduction ("SCR"), Navistar used exhaust gas recirculation ("EGR") to reduce NOx emissions by capturing some of the engine's exhaust, mixing it with fresh air, and then recirculating that air mixture back into the engine (hence EGR's other common name, "in-cylinder" technology).

In 2001, the EPA issued a rule that pushed its requirements for NOx emissions further towards 0.00 grams per brake horsepower hour,² requiring NOx emissions of 0.20g ("0.20 NOx") or less by January 1, 2010 (the "0.20 NOx Rule"). Navistar's major competitors again chose to use SCR in their engines to meet the 0.20 NOx Rule by the EPA's 2010 deadline. Navistar decided to design another EGR engine. Ustian was actively involved in this decision and development process his entire time at Navistar: he picked the engineering team to design the engine, received updates on the project, helped the development team solve problems, and motivated the team.

By 2010, the EPA had granted certificates of conformity to Navistar's competitors' engines, indicating that the engines met the 0.20 NOx Rule. At the same point, Navistar had yet to submit an application for a certificate of conformity for a diesel engine that produced emissions of 0.20 NOx or less. But even though 2010 had arrived, and the 0.20 NOx Rule along with it, Navistar was still receiving regulatory credit for its prior engines that had exceeded older emissions standards (the "Emission Credits") and did not yet need to produce an engine that met the 0.20 NOx Rule. Navistar, however, could no longer accrue new Emission Credits with its older engines, but it could begin using the Emission Credits to continue producing the older engines.

Navistar's plan for developing an engine that met the 0.20 NOx Rule started with a 13–liter diesel engine (a "13–liter 0.20 NOx engine"). Navistar planned to produce various 0.20 NOx-capable diesel engines, but it focused on its "big bore" engines—11–liter, 13–liter, and 15–liter engines—because the Emission Credits for those engine sizes would come to an end first. After developing and receiving a certificate of conformity for a 13–liter 0.20 NOx engine, Navistar planned to apply the same development technology to 11–liter and 15–liter engines. Navistar wanted to produce a 13–liter engine that met the 0.20 NOx Rule and offered improved fuel economy, acceleration, and power compared to the 13–liter 0.50 NOx engine it would replace. In late 2010, Navistar engineers and executives informed Ustian that Navistar could not produce a competitive engine complying with the 0.20 NOx Rule until the end of 2012. It appeared that, under conservative estimates, Navistar might exhaust its Emission Credits by February 2012.

The First 13–Liter 0.20 NOx Engine Prototype

On November 3, 2010, Navistar issued a press release (the "November 2010 Press Release"), quoting and approved by Ustian, stating that Navistar had a submitted certification to the EPA for a 15–liter 0.50 NOx engine and "plan [ned] to submit for EPA certification of its MaxxForce 13 at 0.2g NOx in the next few months, far ahead of when high volume production of the 0.2g NOx-certified MaxxForce 13 would be required." Doc. 1 ¶ 47. The 15–liter engine described by the press release, which emitted NOx above 0.20g, was competitive with other 15–liter engines sold by competitors, and Navistar intended to and did sell the engine after the EPA granted a certificate of conformity to the engine. The 13–liter engine described in the announcement met the 0.20 NOx Rule but was still under development and, at the time of the announcement, "lacked competitive fuel economy and other performance features compared to other 13–liter engines being sold in the marketplace." Id. ¶ 50. At the time of the press release, Ustian knew that even if the 13–liter 0.20 NOx engine received a certificate of conformity, Navistar would not be able to sell the engine in the marketplace.

On December 22, 2010, Navistar conducted a conference call with securities analysts to report on its annual report for the 2010 fiscal year (the "December 2010 Analyst Call"). Ustian and other Navistar executives participated, and the investing public was allowed to listen on a phone line. An analyst asked for Navistar's timeline for certifying a 13–liter 0.20 NOx engine, and Ustian replied:

... [Navistar] will submit that over the next couple of months I believe. We will show you that product, by the way in Melrose Park on the 25th. We will show you the modifications. It won't be a great drama to you because you won't be able to see anything other than—we would be able to show you the data that it meets [the 0.20 NOx Rule] and show you how we are able to meet it. But as far as the customers, he is not going to know the difference. Nothing looks any different.

Doc. 27–20 at 21; see also Doc. 1 ¶ 55. Asked by another analyst about the fuel efficiency of a 13–liter 0.20 NOx engine versus a competitor-SCR engine, Ustian said, "[t]he fuel economy of the [13–liter 0.20 NOx] will be better and there will be no change in heat rejection at the same time. So this product will be even better." Doc. 1 ¶ 55. Asked by a third analyst whether Navistar's 13–liter 0.20 NOx engine would be better than a comparable SCR engine, Ustian said, "Well, our strategy has been we will be equal to any SCR—the best of any SCR product that is out there. So we are assuming the SCR product gets a little better too, and that is what were are going to be able to do with getting to 0.2." Id. When Ustian spoke during the call, he knew Navistar did not yet have a 13–liter engine that both met the 0.20 NOx Rule and also (1) offered better fuel economy than and comparable performance features to competitor-SCR engines or (2) fuel economy and performance that matched Navistar's existing engines that produced a 0.50g NOx. Ustian also knew that in the coming months, Navistar would not be able to submit a certification application to the EPA for a 13–liter 0.20 NOx engine that offered competitive performance features and could be produced and sold.

On February 21, 2011, Navistar submitted an...