City of Omaha Police & Fire Ret. Sys. v. Evoqua Water Techs. Corp.
| Decision Date | 30 March 2020 |
| Docket Number | 18-cv-10320 (AJN) |
| Citation | 450 F.Supp.3d 379 |
| Parties | CITY OF OMAHA POLICE AND FIRE RETIREMENT SYSTEM, et al., Plaintiffs, v. EVOQUA WATER TECHNOLOGIES CORP., et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Jeremy Patrick Robinson, Jai Kamal Chandrasekhar, Hannah Elizabeth Ross, Bernstein Litowitz Berger & Grossmann LLP, Joseph Alexander Hood, II, Jeremy Alan Lieberman, William Curtis Fredericks, Randy Moonan, Thomas Livezey Laughlin, IV, Scott + Scott, L.L.P., New York, NY, for Plaintiffs.
Audra Jan Soloway, Paul Weiss, Agnes Dunogue, Shearman & Sterling LLP, Scott Brian Luftglass, Peter L. Simmons, Samuel Pianko Groner, Fried, Frank, Harris, Shriver & Jacobson LLP, New York, NY, Michael Dockterman, Steptoe & Johnson LLP, Chicago, IL, for Defendants
This is a securities class action brought on behalf of all persons and entities who purchased or acquired the publicly traded common stock of Evoqua Water Technologies between November 1, 2017 and October 30, 2018 (the Class Period). Lead Plaintiffs City of Omaha Police and Fire Retirement System and Louisiana Sheriffs' Pension & Relief Fund allege that they purchased Evoqua's common stock during this period at an artificially inflated price. Defendants have moved to dismiss Plaintiffs' Complaint for failure to state a claim. For the reasons that follow, the Court GRANTS the motion in part and DENIES it in part.
The following facts are drawn from the allegations in Plaintiffs' Amended Class Action Complaint, Dkt. No. 42, which are taken as true at this stage of the litigation. See DiFolco v. MSNBC Cable L.L.C. , 622 F.3d 104, 110-11 (2d Cir. 2010).
The Court also considers "(1) documents attached to or incorporated by reference in the complaint, (2) documents integral to and relied upon in the complaint, even if not attached or incorporated by reference, (3) public disclosure documents required by law to be, and that have been, filed with the SEC, and (4) facts of which judicial notice properly may be taken." Bd. of Trs. of Ft. Lauderdale Gen. Emps.' Ret. Sys. v. Mechel OAO , 811 F. Supp. 2d 853, 865 (S.D.N.Y. 2011), aff'd sub nom., Frederick v. Mechel OAO , 475 F. App'x 353 (2d Cir. 2012). For the purposes of this motion, Defendants have submitted numerous SEC filings ranging from October 3, 2017 to June 20, 2018, and Plaintiffs do not dispute that the Court may rely on these documents. See Def. Br. at xii-xiv (listing these documents).
Plaintiffs bring claims against numerous Defendants under both the Securities Act of 1933, 15 U.S.C. § 77a et seq. , and the Exchange Act of 1934, 15 U.S.C. § 78a et seq. Defendants Evoqua, Ronald Keating, and Benedict Stas are subject to claims under both statutes.
Evoqua Water Technologies is a Delaware corporation with its principal place of business in Pennsylvania. Compl. ¶ 22. It specializes in water technology and treatment. "Evoqua purports to be a leading provider of mission-critical water-treatment solutions, offering services, systems, and technologies to support a client's full water lifecycle needs." Id. ¶ 22. The corporation that is now Evoqua has gone through several acquisitions and renamings. It was once known as U.S. Filter, and it eventually became Siemens Water. Id. ¶ 35. In 2013, AEA, a private-equity fund, acquired Siemens Water and renamed the company Evoqua. Id. ¶¶ 2, 34-35. Plaintiffs also name as Defendants AEA and various funds affiliated with AEA; collectively, these are the AEA Fund Defendants. Id. ¶ 31.
During the time period at issue, Defendant Ronald Keating served as Evoqua's CEO and President. Id. ¶ 24. He also served as a member of Evoqua's Board of Directors. Id. Defendant Benedict Stas served as its Executive Vice President, CFO, and Treasurer. Id. ¶ 25. Defendant Kenneth Rodi served as Executive Vice President, Products Segment President. Id. ¶ 26. "Prior to joining Evoqua in May 2016, Rodi served as Chief Executive Officer of Neptune-Benson," a corporation that Evoqua acquired, "from 2013 to 2016."
Id. Defendant Anthony Webster served as Evoqua's Executive Vice President, Chief Human Resource Officer. Id. ¶ 27. These individuals are collectively the Executive Defendants.
Plaintiffs also bring Securities Act claims against members of Evoqua's Board of Directors: Ronald Keating, Martin Lamb, Nick Bhambri, Garry Cappeline, Judd Greg, Brian R. Hoesterey, Vinay Kumar, Peter M. Wilver. Id. ¶¶ 348-354. These are collectively the Director Defendants. And Plaintiffs bring their Security Act claims against eleven underwriters of Evoqua's common stock offerings, including J.P. Morgan and Goldman Sachs. Id. ¶¶ 356-366. These are collectively the Underwriter Defendants.
In 2017, Evoqua took steps to conduct an initial public offering (IPO) and thus become a publicly traded corporation. Id. ¶ 3. As part of that going-public transaction, it was required to file various paperwork with the SEC. In October 2017, Evoqua filed a Form S-1 Registration Statement for IPO of shares of its common stock. Id. ¶ 40. Evoqua also filed a Prospectus, dated November 1, 2017. Id. It then announced the offering of about 28 million shares of common stock, priced at $18.00 per share. Id. The offering closed on November 7, 2017. Id. In the offering, AEA sold about 25% of its Evoqua shares, retaining about 40% of the company's common stock. Id. ¶ 41.
A few months later, Evoqua filed paperwork for a secondary public offering (SPO) of its common stock. ¶ 131. The final Registration Statement for the SPO was filed on March 12, 2018. The SPO Prospectus was filed on March 16, 2018. Id. The SPO materials announced that specified stockholders would sell 17,500,000 shares of common stock at $22.00 per share. Id. As part of the SPO, AEA sold about 24% of its Evoqua shares, "retaining about 30.9% of the Company's common stock and approximately 52.5% of the voting power of the Company's outstanding common stock." Id. ¶ 132.
"Unbeknownst to investors, in the period leading up to the IPO and the start of the Class Period, Evoqua was struggling to derive as much net income from its operations as Defendants had hoped in order to maximize the proceeds from the IPO." Compl. ¶ 45. In this period, therefore, Evoqua took "two significant cost-cutting measures" in order to improve short-term profitability. Id. First, Evoqua fired or forced into retirement experienced employees in sales and integration management, and then replaced them with less experienced, lower paid staff. Second, Evoqua artificially inflated its income through various accounting tricks, such as reporting anticipated income years before it should have appeared in financial statements. This financial chicanery successfully boosted pre-IPO revenues. But it all but guaranteed Evoqua would perform poorly after the offerings. The Court reviews these allegations in detail.
In the years leading up to the IPO, "Evoqua implemented a wide-scale program to terminate (either voluntarily or involuntarily) its most experienced sales personnel." Id. ¶ 46. "Evoqua management believed that this would reduce costs and improve Evoqua's net income and short-term financial performance, and make the Company more attractive to potential investors, prior to a hoped for sale or IPO in or around the second half of 2017." Id. Evoqua went about this by offering early-retirement packages to older and experienced employees. Id. ¶ 52. And for those employees who remained, it set sales quotas that were practically impossible to achieve. These inflated quotas achieved "dual objectives": they reduced the commissions Evoqua paid to its sales staff, and the resulting decline in total compensation caused many employees to leave. Id. ¶ 47; see also id. ¶ 66 ( Evoqua's commission structure). All in all, "Evoqua ‘retired’ or otherwise terminated about 600 people in the years immediately preceding the IPO." ¶ 57. Evoqua internally referred to this policy, at least in part, as the Voluntary Separation Plan (VSP).
Evoqua then replaced these experienced sales employees with "far less experienced (and less qualified and less effective) employees." Id. ¶ 48. This decision had pernicious effects: it "resulted in an exodus of information and institutional knowledge from the Company, which adversely affected existing customer relations and had a significant negative impact on its ability (a) to generate new sales before the IPO, and (b) to generate revenue after the IPO." Id. ¶ 46. The replacement employees "fell far short of having the kind of extensive experience, understanding of the market for Evoqua products and services, proven sales skills and established relationships with customers that were necessary to maintain (let alone increase) sales compared to what their terminated predecessors had generated." Id. ¶ 47.
According to Plaintiffs, these problems were magnified by the nature of Evoqua's business. The sales cycle in the water-treatment industry, especially for the sorts of "larger and more expensive municipal or other custom projects" that Evoqua often engaged in, could take several years. Id. ¶ 49. From start to finish, public water-work projects often require bidding, government hearings, environmental assessments, community-group involvement, and post-project services. Id. "A sales person who has stayed with the customer through the complete cycle would be much better equipped to handle the ins-and-outs of such a lengthy project, and to anticipate and address the customer's requirements with respect to ensuring the success of the project." Id. By eliminating its experienced sales staff, Evoqua "lost [the] significant institutional knowledge" required to effectively manage these projects. Id.
Evoqua did not just nudge sales employees into retirement—it did the...
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