City of Livonia Employees' Ret. Sys. v. Boeing Co.

• Court: U.S. District Court — Northern District of Illinois
• Writing for the Court: Chief Judge Rubén Castillo
• Decision Date: 21 August 2014
• Docket Number: No. 09 C 7143,09 C 7143
• Citation: City of Livonia Employees' Ret. Sys. v. Boeing Co., No. 09 C 7143 (N.D. Ill. Aug 21, 2014)
• Parties: CITY OF LIVONIA EMPLOYEES' RETIREMENT SYSTEM, individually and on behalf of all others similarly situated, Plaintiff, v. THE BOEING COMPANY, W. JAMES MCNERNEY, JR., and SCOTT E. CARSON, Defendants.

CITY OF LIVONIA EMPLOYEES' RETIREMENT SYSTEM,individually and on behalf of all others similarly situated, Plaintiff, v. THE BOEING COMPANY, W. JAMES MCNERNEY, JR., and SCOTT E. CARSON, Defendants.

No. 09 C 7143

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

August 21, 2014

Chief Judge Rubén Castillo

MEMORANDUM OPINION AND ORDER

City of Livonia Employees' Retirement System ("Plaintiffs") brought this putative class action securities fraud case against The Boeing Company ("Boeing"), its chairman, president, and chief executive officer W. James McNerney, Jr., and its former executive vice president, president, and chief executive officer of the commercial airplanes segment Scott E. Carson (collectively, "Defendants"), under 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. (R. 1, Compl.) Judge Conlon dismissed Plaintiffs' second amended complaint with prejudice and entered judgment on March 7, 2011. (R. 200, Min. Order; R. 201, Mem. Op. & Order; R. 202, Judgment.) Plaintiffs appealed the dismissal, and on May 6, 2013, the Seventh Circuit affirmed the dismissal of the suit with prejudice, but vacated and remanded the judgment for consideration of whether to impose sanctions on Plaintiffs' attorneys, pursuant to Federal Rule of Civil Procedure 11 and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. §§ 78u-4(c)(1), (2).That question is presently before this Court. For the reasons stated below, the Court imposes sanctions on Plaintiffs' attorneys.

BACKGROUND

The Court assumes familiarity with the facts of this case as set forth in Judge Conlon's opinions dismissing Plaintiffs' first amended complaint and second amended complaint. See City of Livonia Employees' Ret. Sys. v. The Boeing Co. ("City of Livonia I"), No. 09 C 7143, 2010 WL 2169491 (N.D. Ill. May 26, 2010); City of Livonia Employees' Ret. Sys. v. The Boeing Co. ("City of Livonia II"), No. 09 C 7143, 2011 WL 824604 (N.D. Ill. March 7, 2011). The facts are repeated here only as they pertain to the Court's decision on whether to impose sanctions. On November 13, 2009, Robbins Geller Rudman & Dowd LLP ("Robbins Geller"), as counsel for Plaintiffs, filed its original securities fraud complaint against Defendants. (R. 1, Compl.) On February 16, 2010, Ramsey Stewart, an investigator retained by Robbins Geller, interviewed Bishnujee Singh, Plaintiffs' one and only confidential witness, over the telephone. (R. 264, Pls.' Sealed Resp. at 5.) Singh told Mr. Stewart that he worked for Boeing from 2004 through mid-January 2010 and that he reported to vice president Larry Hall. (R. 152, Ramsey Stewart Decl. ¶ 10.) Singh said that he worked on the 787-8 and 787-9 test planes and had knowledge of the stress testing on the 787 wing. (Id.) On February 19, 2010, investigator Elizabeth Stewart, also retained by Robbins Geller, interviewed Singh at his home for two hours. (R. 264, Pls.' Sealed Resp. at 5.) Two days later, Ms. Stewart documented her interview with Singh in an e-mail-memorandum to Plaintiffs' lead attorney, Thomas Egler. (R. 153, Ex. A, Feb. 21, 2010 E-Mail at 19-22.) Ms. Stewart reported that Singh told her that he worked for Boeing in 2009 as a Chief Engineer for the Mid-Body Fuselage/Wing Integration Team on the 787 Program. (Id. at 19.) Ms. Stewart noted in her e-mail-memorandum that her follow-up research on the 787 wingmanagement team that Singh had identified revealed that Singh's information was not reliable. (Id.) On February 22, 2010, the day after Ms. Stewart sent her e-mail-memorandum to Egler, Robbins Geller filed an amended complaint adding vague references to internal e-mails among Boeing employees and the individual defendants, suggesting that the individual defendants knew about the poor wing stress test results. (R. 23, First Am. Compl. ¶ 75.)

On April 13, 2010, via telephone, Singh told Ms. Stewart that he no longer wished to cooperate with Plaintiffs' investigation because he was currently working on a project involving Boeing. (R. 264, Pls.' Sealed Resp. at 6.) Ms. Stewart claims that despite ceasing his cooperation, Singh did not deny the information he previously provided. (Id.)

On May 26, 2010, Judge Conlon granted Defendants' motion to dismiss Plaintiffs' first amended complaint and dismissed the complaint without prejudice for failure to adequately plead scienter. City of Livonia I, 2010 WL 2169491, at *7. Judge Conlon found that the amended complaint failed to plead any particularized facts about the confidential sources and therefore held that Plaintiffs' generalized reliance on confidential source information was insufficient to establish Defendants' scienter. Id. at *5-*7.

On June 22, 2010, Robbins Geller filed Plaintiffs' second amended complaint, which added paragraphs 139-142, pleading details about one confidential source (who turned out to be Singh) and the basis for his knowledge. (R. 63, Second Am. Compl. ¶¶ 139-42.) Ms. Stewart's e-mail-memorandum supplied the basis for the new allegations in the second amended complaint. (R. 264, Pls.' Sealed Resp. at 5.) On August 10, 2010, Judge Conlon denied Defendants' motion to dismiss the second amended complaint, finding that the added details in the complaint satisfied the pleading requirements of the PSLRA. (R. 73, Min. Order.) Defendants filed a motion for certification of an interlocutory appeal, (R. 75, Defs.' Mot.Interlocutory Appeal), and a hearing on that motion was held on August 30, 2010, (R. 211, Tr. Aug. 30, 2010 Hr'g). At the hearing, Plaintiffs' counsel, Egler, defended the confidential source and the source's personal knowledge of the documents that pointed to Defendants' scienter. (R. 211 Tr. Aug. 30, 2010 Hr'g at 10:15-11:15, 13:06-22.) Judge Conlon "expressly relied on the new allegations in paragraphs 139-142 concerning the confidential source's insider position at Boeing and representations by plaintiffs' counsel that the confidential source had firsthand knowledge about the 787's test results in documents circulated to top executives" in denying Defendants' motion for certification of an interlocutory appeal. See City of Livonia II, 2011 WL 824604, at *2.

After the August 30, 2010 hearing, Plaintiffs disclosed Singh as their confidential source to Defendants. (R. 263, Defs.' Mem. at 10.) Defendants conducted a preliminary investigation and discovered that Singh had never been a Boeing employee and instead had been employed by an outside contractor to perform low-level engineering work on a different airplane months after the events at issue in this case. (Id. at 10-11.) Singh had never worked on any wing project tied to the lawsuit, and he had no access to any test files or e-mails sent to Defendants. (Id. at 11.) After discovering this information, on September 24, 2010, Defendants filed a renewed motion to dismiss the second amended complaint with prejudice, arguing that Plaintiffs' counsel had committed a fraud on the court. (R. 90, Defs.' Mot. Dismiss for Fraud.) At a hearing on October 14, 2010, Judge Conlon, relying on the investigator's notes to conclude that there was a good faith basis for the allegations in paragraphs 139-142, denied Defendants' renewed motion to dismiss. (R. 107, Min. Entry; R. 141, Tr. Oct. 14, 2010 H'rg.)

After the October 14, 2010 hearing, Defendants served Singh with a subpoena for documents. (R. 263, Defs.' Mem. at 12.) After meeting with defense counsel, Singh signed asworn declaration on November 2, 2010, where he repudiated each of the allegations attributed to him in the second amended complaint. (Id. at 13; R. 160, Ex. 2, Singh Decl. at 23.) Singh was deposed two weeks later, where he again denied Plaintiffs' allegations about his position at Boeing, his personal knowledge of the wing and test files, and his knowledge of any communications to the individual defendants regarding the tests. (R. 263, Defs.' Mem. at 13-14; R. 142, Singh Dep.) Singh met Plaintiffs' counsel for the first time at his deposition and saw the second amended complaint for the first time when defense counsel gave him a copy six months after the complaint was filed. (R. 263, Defs.' Mem. at 13.)

On December 12, 2010, Defendants moved for reconsideration of the court's orders denying their motions to dismiss. (R. 157, Defs.' Mot. Reconsideration.) On March 7, 2011, Judge Conlon granted Defendants' motion and dismissed the second amended complaint with prejudice. (R. 200, Min. Entry.) In her Memorandum Opinion and Order, Judge Conlon stated that her two prior orders denying dismissal "relied on false information concerning Singh's position and his personal knowledge," which was "manifest factual error." City of Livonia II, 2011 WL 824604, at *5. Judge Conlon noted that "[w]ithout verifying the facts, plaintiffs' counsel represented to the court that the confidential source was a former Boeing senior structural analyst and chief engineer who worked on the 787 team," and that Plaintiffs' counsel "led the court to believe that the confidential source had direct access to and firsthand knowledge about the 787 test files and the distribution of the information to defendants." Id. at *3. At the time of her earlier rulings, Judge Conlon was unaware of these factual inaccuracies, was unaware "that plaintiffs' counsel never met with Singh before adding the confidential source allegations to the second amended complaint," and was unaware that "counsel apparently never verified the hearsay reports of their investigators concerning Singh's position at Boeing or the basis of hispurported personal knowledge." Id. at *2. Judge Conlon stated that "[i]f these facts were disclosed while the dismissal motions were pending, the court would have not have concluded that the confidential source allegations were reliable, much less cogent and compelling." Id. at *4. Judge Conlon dismissed Plaintiffs' argument that "Singh told their investigators...