City of Pontiac Gen. Employees' Ret. Sys. v. Lockheed Martin Corp.

• Decision Date: 13 July 2012
• Docket Number: No. 11 Civ. 5026 (JSR).,11 Civ. 5026 (JSR).
• Citation: 875 F.Supp.2d 359
• Parties: CITY OF PONTIAC GENERAL EMPLOYEES' RETIREMENT SYSTEM, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. LOCKHEED MARTIN CORPORATION, Robert Stevens, Bruce Tanner, and Linda Goo Den, Defendants.
• Court: U.S. District Court — Southern District of New York

875 F.Supp.2d 359

CITY OF PONTIAC GENERAL EMPLOYEES' RETIREMENT SYSTEM, Individually and on Behalf of All Others Similarly Situated, Plaintiff,

v.LOCKHEED MARTIN CORPORATION, Robert Stevens, Bruce Tanner, and Linda Goo Den, Defendants.

No. 11 Civ. 5026 (JSR).

United States District Court, S.D. New York.

July 13, 2012.

Evan Jay Kaufman, Samuel Howard Rudman, Mark Samuel Reich, Michael Gerard Capeci, Robbins Geller Rudman & Dowd LLP, Melville, NY, Darryl J. Alvarado, Jonah H. Goldstein, Patrick Joseph Coughlin, Theodore J. Pintar, Robbins Geller Rudman & Dowd LLP, San Diego, CA, Randi Dawn Bandman, Robbins Geller Rudman & Dowd LLP, Los Angeles, CA, Robert R. Henssler, Jr., Robbins Geller Rudman & Dowd LLP, San Francisco, CA, for Plaintiff.

John Michael Hillebrecht, DLA Piper U.S. LLP, New York, NY, James E. Anklam, James D. Wareham, DLA Piper U.S. LLP, Washington, DC, for Defendants.

MEMORANDUM

JED S. RAKOFF, District Judge.

Plaintiff City of Pontiac General Employees' Retirement System (the “Retirement System”) brings this securities class action suit on behalf of purchasers of the common stock of defendant Lockheed Martin Corp. between April 21, 2009 and July 21, 2009 (the “Class Period”) alleging that defendant Lockheed Martin Corp. and three of its executives, Chief Executive Officer Robert Stevens, Chief Financial Officer Bruce Tanner, and Executive Vice President Linda Gooden, intentionally made false and misleading statements about the performance of Lockheed Martin's Information Systems & Global Systems division (“IS & GS”), and failed to disclose that there were serious problems with the performance and growth of the division. Count I of the Amended Complaint asserts a claim of securities fraud against all four defendants, pursuant to Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b–5 promulgated thereunder, 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b–5. Counts II and III of the Amended Complaint assert claims of control person liability against the individual defendants, pursuant to Sections 20(a) and 20(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a)-(b).

Defendants jointly and severally moved to dismiss all counts. After full consideration of the parties' written submissions and oral arguments, the Court, by “bottom-line” Order dated February 15, 2012, dismissed Counts II and III, but denied defendants' motion to dismiss Count I. This Memorandum sets forth the reasons for those rulings.

The pertinent factual allegations, drawn from plaintiff's Amended Complaint, are as follows. On April 21, 2009, Lockheed Martin issued a press release announcing its financial results for the first quarter of 2009 (“Q1”). Am. Compl. ¶ 67. The release reported the Q1 results for IS & GS and for Lockheed Martin as a whole. It showed increases in net sales and operating profit for IS & GS compared to Q1 2008, but a decline in operating margins. The release also reported an increase in Lockheed Martin's firm-wide 2009 financial projections for earnings before “income taxes” of $5 million and an increased projection of diluted earnings per share from a range of $7.05–$7.25 per share to $7.15–$7.35 per share. Id.

Defendant Stevens commented on the results, stating:

The Corporation is off to a solid start in the first quarter of 2009. Our team of 146,000 dedicated employees continues to focus on enhancing shareholder and customer value by utilizing the depth and breadth of our capabilities as the world's premier global security company.

Id.

Plaintiff argues that these statements were materially false and misleading, first, because Lockheed Martin had overstated its projections for IS & GS, and, second, because Lockheed Martin had failed to disclose numerous material adverse facts regarding IS & GS that the defendants knew or recklessly disregarded. Id. ¶ 68. The latter included that: (1) IS & GS had submitted “lowball” bids to win contracts at the expense of margin and profits; (2) there were performance problems with major IS & GS projects during the Class Period; and (3) because of these performance issues, Lockheed Martin would not be receiving anticipated fee awards. Id.¹

The same day that Lockheed Martin issued the press release, defendant Tanner held a conference call with analysts and investors, during which he made the following positive statements about the IS & GS division:

I now want to turn to our fastest growing business, our Information Systems & Global Services. The IS & GS team continues to lead the corporation in top line sales growth again this quarter. The new business win rate of IS & GS differentiates them from competitors and enabled expansion of their revenues by 10% above last year's level. Key awards this quarter included a contract from the U.S. Special Operations Command to provide full scope logistic support to Special Operations troops around the globe. This 10 year IDIQ contract has a potential value of up to $5 billion. Although this award has been placed under protest by a competitor, we look forward to successful protest resolutions to work and proceed and enable us to provide critical logistic support to this key customer. Other IS & GS wins include a $400 million award by the General Services Administration to provide systems support to the Federal acquisition service. These wins add to IS & GS's solid backlog and we expect this to continue generating the highest revenue growth of all of our business areas this year. Before leaving IS & GS, I wanted to reiterate our press release disclosure earlier today announcing the realignment of IS & GS's three lines of business effective January 1st. This realignment to civil, defense and intelligence, better aligns the segment based on its core customers and business activities. Current quarter and historical financial results have been realigned to provide comparative financial data.

Id. ¶ 71 (emphasis in original). The Amended Complaint alleges that that these statements were materially false and misleading. Id. ¶ 72. It alleges that Tanner's comments describing IS & GS as Lockheed's “fastest growing business” and its “business win rate” failed to disclose that IS & GS had grown by underbidding for contracts, which was not a sustainable path to long-term growth. Id. It further alleges that Tanner's comment regarding IS & GS's “solid backlog” was false, as defendants knew that defendant Gooden had artificially inflated the IS & GS backlog. Id.

On the conference call, Tanner also fielded several questions from financial analysts, and allegedly made materially misleading statements concerning performance issues in IS & GS and expectations of future growth. Among other things, Tanner, in response to an analyst's question specifically inquiring about “Red” ( i.e., troubled) programs, failed to disclose that several IS & GS programs had “Red” classifications for performance issues. See id. ¶¶ 73–78. ²

Two days later, on April 23, 2009, Lockheed Martin filed its 10–Q quarterly report with the Securities and Exchange Commission. Id. ¶ 79. This 10–Q stated, in pertinent part:

Operating profit for IS & GS increased by 5% for the first quarter of 2009 compared to the first quarter of 2008. Operating profit increases in Defense partially were offset by declines in Civil. The increase in Defense mainly was due to volume and improved performance in mission and combat systems, as well as readiness and stability operations. The decrease in Civil primarily was attributable to the absence in 2009 of a benefit recognized in 2008 for a contract restructuring.

Id. Plaintiff alleges this 10–Q was likewise false and misleading for failing to disclose the problems in IS & GS discussed above. Id. ¶ 80.

A little over a month later, on May 28, 2009, defendant Stevens appeared at a conference to discuss Lockheed Martin and its business. At the conference, he stated that he expected IS & GS would “meet and honor [its] commitment” to double-digit growth for the year. Id. ¶ 82. Defendant Stevens also described how IS & GS was staffed with “individuals who are intimately familiar with complex systems infrastructure,” without disclosing, according to the Amended Complaint, that IS & GS had terminated many highly qualified individuals and was instead left with low-paid, inexperienced employees working on projects. Id. ¶¶ 39, 83.

On July 21, 2009, Lockheed issued its earnings results for the second quarter of 2009 (“Q2”), which, for IS & GS, were below expectations. Operating profit in IS & GS decreased by 9% for the quarter, id. ¶ 84, which defendant Stevens stated was due to “performance challenges” in IS & GS. Id. Following the press release, Lockheed held an earnings conference call, and revised IS & GS sales projections for 2009 from $12.5–$12.75 billion to $12.4–$12.65 billion; IS & GS operating profit projections from $1.17–$1.195 billion to $1.035–$1.06 billion; and company-wide operating profit projections from $5.175–$5.275 billion to $5.075–$5.175 billion. Id. ¶ 86. During the conference call, defendant Tanner stated that “protests by losing competitors” had hurt IS & GS's sales rate, id. ¶ 87, and that he recognized that by May or June IS & GS was going to earn lower award fees for the quarter, id. ¶¶ 88–89.

On the day (July 21, 2009) those revisions to Lockheed's financial results and disclosures concerning IS & GS were made, the price of Lockheed Martin common stock declined from $82.11 per share on July 20, 2009 to $75.13 per share on July 21, 2009, on extremely heavy trading volume. Id. ¶ 92. According to the Amended Complaint, analysts expressed surprise at the sudden negative news regarding IS & GS, with one report stating, “The sell-off in [Lockheed Martin] shares may reflect a heightened level of investor frustration regarding IS & GS since the company had recently pointed to this area of the business as a potential source of outperformance relative to the industry.” Id. ¶ 93; see also id. ¶ 94 (alleging IS & GS ...