Alaska Electrical Pension Fund v. Flowserve Corp., 061909 FED5, 08-10071
|Docket Nº:||07-11303, 08-10071|
|Party Name:||ALASKA ELECTRICAL PENSION FUND; MASSACHUSETTS STATE CARPENTERS PENSION FUND, Plaintiffs - Appellants v. FLOWSERVE CORPORATION; C SCOTT GREER; RENEE J HORNBAKER; BANC OF AMERICA SECURITIES LLC; PRICEWATERHOUSECOOPERS LLP; CREDIT SUISSE FIRST BOSTON LLC, Defendants - Appellees|
|Case Date:||June 19, 2009|
|Court:||United States Courts of Appeals, Court of Appeals for the Fifth Circuit|
Appeal from the United States District Court for the Northern District of Texas
Before O'CONNOR, Associate Justice (Ret.),[*] and WIENER and STEWART, Circuit Judges.
Plaintiffs-Appellants Alaska Electrical Pension Fund and Massachusetts State Carpenters Pension Fund (collectively, "Alaska") brought a putative class action against Defendants-Appellees Flowserve Corporation, Scott Greer, Renee Hornbaker, Banc of America Securities LLC, PricewaterhouseCoopers LLP, and Credit Suisse First Boston LLC (collectively, "Flowserve") for violations of §§ 10 and 20 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j and 78t, and §§ 11 and 15 of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. §§ 77k and 77o. The district court denied Alaska's motion for class certification, which ruling is before us in appeal number 07-11303, and granted the defendants summary judgment on all claims, which ruling is before us in appeal number 08-10071.
In 07-11303, Alaska claims that the district court erred when it refused to certify Alaska's proposed class, because in reaching its decisions the court (1) conducted the Federal Rule of Civil Procedure 23 certification hearing under a preponderance-of-the-evidence standard, rather than under a reasonable-trier-of-fact standard, and (2) applied an incorrect standard of loss causation to Alaska's Exchange Act claims, resulting in an erroneous "predominance" determination under Rule 23(b)(3). In 08-10071, Alaska asks us to reverse the district court's grant of Flowserve's motion for summary judgment on the merits of Alaska's actions, contending that the court (1) was precluded from acting on the merits of Alaska's claims during the pendency of its class-certification appeal in 07-11303, (2) erroneously concluded that the merits of Alaska's Exchange Act claim were resolved by the court's own resolution of loss causation for class-certification purposes, and (3) ignored the presumption of loss causation for Securities Act claims. Flowserve counters that even if the district court thus erred, its judgment should be affirmed because (1) the safe-harbor provision of the Private Securities Litigation Reform Act (the "PSLRA"), 15 U.S.C. § 78u-5(c)(1)(A)-(B), applies to the forward-looking projections at issue, and (2) the Securities Act's one-year statute of limitation, 15 U.S.C. § 77m, bars Alaska's §§ 11 and 15 claims. We reverse in part, vacate in part, and remand for further proceedings in the district court.
I. FACTS AND PROCEEDINGS
Flowserve Corporation manufactures pumps, seals, and valves, along with providing flow management services. In January 2000, the company made C. Scott Greer its CEO. Any honeymoon for Greer was brief: On February 9, 2000, Flowserve reported net earnings of $12.2 million for fiscal year ("FY") 1999, a 70% decline from its 1998 earnings, after which its stock closed at a 52-week low.
To help address its financial difficulties, Flowserve undertook acquisitions in 2000 and 2002 that were designed to create synergies and to yield other benefits in a consolidating industry. Flowserve acquired Ingersoll Dresser Pump Company ("IDP") in August 2000 for $775 million and the Flow Control Division of Invensys plc ("IFC") in May 2002 for $535 million. To finance these acquisitions, Flowserve entered into a $1.1 billion credit agreement and twice offered public stock, once in November 2001 and again in April 2002.1
The parties' versions of Flowserve's conduct diverge from there. Alaska claims that Greer, Renee J. Hornbaker, the CFO during the class period, and Flowserve Corp. through its officers schemed to misrepresent the company's financial condition by making "inextricably related" false statements concerning (1) earnings forecasts, (2) historical financial performance, (3)past and future integration costs and savings related to the acquisitions of IDP and IFC, and (4)debt-covenant compliance. Flowserve disputes this characterization.
As an example of this alleged scheme, Alaska points to a press release issued on the date that it selected to begin the putative class period, February 6, 2001. Flowserve's release reported earnings of $13.2 million for FY2000, in which its true earnings were $5.4 million (140% lower than reported), a fact not known publicly until Flowserve restated its earnings in 2004. The same press release announced reduced fourth-quarter 2000 earnings and a FY2001 projection lower than analysts' expectations. According to Alaska, the FY2001 projection included fraudulent misstatements designed to increase expectations about integration synergies from the IDP acquisition; yet, Flowserve's stock price declined 8% in response to the inflated earnings estimate.
In addition to a variety of Flowserve's other public statements that Alaska claims were fraudulent, it highlights an April 24, 2001 announcement of positive first-quarter 2001 earnings that overstated earnings and understated costs, in response to which Flowserve's stock climbed 8%. The second-quarter 2001 earnings statement, released on July 24, 2001, was inflated as well, but also reduced 2001 earnings guidance, causing the stock to slip 10.8% (although it rebounded by 7.7% the next day). According to Alaska, Flowserve again engaged in fraud when it knowingly released overly optimistic FY2002 earnings guidance on October 22, 2001, the same day that it released inaccurate third-quarter 2001 results.2 Flowserve's stock rose 6.8% in response to these releases.
After repeating the same FY2002 guidance on February 4, 2002 — the same day that it had released misstated fourth-quarter 2001 results, including a 600% understatement of loss — Flowserve downwardly revised its FY2002 guidance in July and September 2002.3 After the July downward revision of the FY2002 guidance, Flowserve's stock declined 37.4%, and declined another 38.3% after the September disclosure. Both releases blamed the reduced earnings on industry and market factors and did not disclose facts that Alaska contends were the real reasons for the decline, namely Flowserve's failure to comply with debt covenants, misstated historical financial performance, and problems in extracting synergies from Flowserve's acquisitions. Alaska introduced expert testimony to show that statistically significant proportions of those declines in share price were attributable to company-specific factors, not to market-wide factors.
On February 3, 2004, Flowserve announced that it would downwardly restate earnings for 2000-2003 by $11 million. No statistically significant decline in share price occurred after this disclosure. The actual amount of the eventual restatement totaled almost $60 million, and Flowserve admitted that it had not been in compliance with its debt covenants.
Alaska filed suit in federal district court against Flowserve Corp., Greer, and Hornbaker on August 7, 2003. An amended complaint filed on May 14, 2004 named as additional defendants (1) Banc of America and Credit Suisse First Boston, two of Flowserve's underwriters for the stock offerings made during the class period, and (2) PricewaterhouseCoopers, Flowserve's auditor during the class period. Alaska filed its final amended complaint on February 22, 2005, suing Flowserve, Greer, and Hornbaker under § 10 of the Exchange Act and 17 C.F.R. § 240.10b-5; suing Greer and Hornbaker under § 20 of the Exchange Act and § 15 of the Securities Act as controlling persons; and suing all defendants under § 11 of the Securities Act for making stock offerings under a defective registration statement.
All defendants moved to dismiss Alaska's complaint under Federal Rules of Civil Procedure 9(b) and 12(b)(6). The district court denied these motions and, in a detailed opinion, denied the defendants request to file an interlocutory appeal. Ryan v. Flowserve, 444 F.Supp.2d 718, 730 (N.D. Tex. 2006). Alaska then moved to certify a class on May 30, 2006. It defined the class as "[a]ll persons who purchased the publicly-traded equity securities of Flowserve Corporation between February 6, 2001 and September 27, 2002," subject to the customary exclusions. The district court conducted a class-certification hearing after which it denied certification in an opinion filed on November 13, 2007. Ryan v. Flowserve, 245 F.R.D. 560, 577 (N.D. Tex. 2007). In that same opinion, the court granted the defendants' pending summary-judgment motions, thereby resolving the case on the merits as well.4 On December 26, 2007, we granted Alaska's timely motion in 07-11303 for permission to appeal the denial of class certification under Rule 23(f). On January 4, 2008, the district court entered final judgment on the merits, dismissing all of Alaska's claims, from which judgment Alaska timely appealed in 08-10071. We consolidated the two appeals here.
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