Constr. Workers Pension Fund v. Navistar Int'l Corp.

• Decision Date: 10 July 2015
• Docket Number: No. 13 C 2111,13 C 2111
• Citation: 114 F.Supp.3d 633
• Parties: Construction Workers Pension Fund—Lake County and Vicinity, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. Navistar International Corporation, et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

114 F.Supp.3d 633

Construction Workers Pension Fund—Lake County and Vicinity, Individually and on Behalf of All Others Similarly Situated, Plaintiff,

v.Navistar International Corporation, et al., Defendants.

No. 13 C 2111

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

Signed July 10, 2015

Matthew Thomas Heffner, Susman Heffner & Hurst LLP, Chicago, IL, for Plaintiff.

Robin M. Hulshizer, Sean M. Berkowitz, Cary R. Perlman, Eric Robert Swibel, Matthew Lawrence Kutcher, Latham & Watkins LLP, Chicago, IL, for Defendants.

OPINION AND ORDER

SARA L. ELLIS, United States District Judge

Believing that Navistar International Corporation ("Navistar") and certain of its officers and directors perpetrated a fraud on the market by making false and misleading statements with regard to Navistar's engine design and development efforts to meet new Environmental Protection Agency ("EPA") emission requirements, which caused Navistar's stock price to be artificially inflated, Lead Plaintiff Central States Southeast and Southwest Areas Pension Fund ("Central States") brought this putative securities class action on behalf of themselves and all others who purchased Navistar securities from March 10, 2010 through August 1, 2012 (the "Class Period"). Central States alleges that through their false and misleading statements, Defendants Navistar, Daniel C. Ustian, Andrew J. Cederoth, and Jack Allen violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("SEA"), codified at 15 U.S.C. § 78j(b) and t(a), and SEC Rule 10b–5, 17 C.F.R. § 240.10b–5.¹ The Court previously dismissed Central States' Consolidated Amended Complaint ("CAC"), finding that Central States had improperly engaged in puzzle pleading by quoting Defendants' statements at length and alleging that all of the quoted statements were false or misleading. The Court dismissed Central States' CAC without prejudice and granted Central States leave to file a second amended complaint ("SAC") to cure the deficiencies noted. Now before the Court is Defendants' motion to dismiss the Second Amended Complaint ("SAC"). Because Central States adequately pleaded § 10(b) and Rule 10b–5 claims regarding two of Ustian's statements, Defendants' motion to dismiss [132] is granted in part and denied in part.

BACKGROUND²

I. The Parties

The Court appointed Central States to serve as Lead Plaintiff in this case on July 30, 2013. Central States is a "multiemployer, collectively–bargained pension fund ... which administers benefits for hundreds of thousands of participants, dependents and retirees." Doc. 128 ¶ 26. The last day on which Central States purchased Navistar stock during the Class Period was October 27, 2011.

Navistar produces commercial and military trucks, buses, diesel engines, recreational vehicles, and chassis, and provides parts and service for trucks and trailers. Its stock is listed on the New York Stock Exchange. Navistar's North American truck and engine market is a core segment of its business. In 2009, $8.6 billion of Navistar's $11.5 billion net sales derived from its North American truck and engines market. Of that $8.6 billion in sales, over 50% was attributable to Navistar's heavy duty vehicles, which use 11, 13, and 15–liter diesel engines.

During the Class Period, Ustian served as Navistar's President, Chief Executive Officer, and Chairman of the Board of Directors. Cederoth held the title of Executive Vice President and Chief Financial Officer, as well as other minor temporary titles. Allen was also an Executive Vice President, as well as Chief Operating Officer.

II. Factual Allegations

Various EPA regulations apply to Navistar's truck and engine business. In 2001, pursuant to the Clean Air Act, the EPA issued a rule that required a 95% reduction in nitrogen oxide ("NOx") emissions from heavy-duty diesel engines. Specifically, the EPA limited NOx emissions to a rate of no more than 0.2 g/bhp-hr ("0.2 NOx") by 2010 for new engines. To obtain EPA certification, a manufacturer had to demonstrate compliance with the 0.2 NOx standard. Recognizing that manufacturers might require additional time to develop their emissions control technology, the EPA initially allowed certification to be obtained through a 0.3–0.5 NOx engine and banked emission credits. For a period of time, the EPA also allowed manufacturers to achieve certification through the payment of nonconformance penalties ("NCPs").

In response to the new EPA standard, the heavy-duty truck industry, with the exception of Navistar, invested in selective catalytic reduction ("SCR") technology, which uses an after-treatment device to reduce emissions.³ These manufacturers met the 0.2 NOx standard on time. Navistar decided to pursue a different technology—exhaust gas recirculation ("EGR"), an in-cylinder solution that does not require after-treatment. However, as early as 2008, Navistar engineers were experiencing issues in the development of EGR technology which called into question whether it was capable of achieving 0.2 NOx in a commercially viable engine. These issues continued throughout the Class Period and were repeatedly brought to the attention of senior-level management, including Ustian and Cederoth. Nevertheless, Navistar ordered the engineers to continue pursuing the EGR technology. And while Navistar initially had engineers developing SCR technology as a backup plan, by February or March of 2009 Navistar halted this work.

Because the EGR technology was still being developed, Navistar's initial strategy to comply with EPA's regulation involved using engines certified at 0.5 NOx in combination with banked emission credits. In late 2009 and into early 2010, Navistar launched trucks with 0.5 NOx EGR engines. It did so despite the fact that these engines failed road tests prior to launch. Nevertheless, Navistar proceeded to production because it would have been unable to sell trucks otherwise. After the launch, Navistar began receiving complaints from customers regarding the performance of the 0.5 NOx engine. As a result, Navistar halted sales for a period before restarting sales of these engines.

Because Navistar's North American heavy duty truck sales comprised such a large portion of its overall business, investors and analysts were particularly focused on Navistar's development of EGR technology and its progress toward obtaining certification at 0.2 NOx. Despite all of the issues Navistar encountered on the road to accomplishing that task, Defendants repeatedly made public statements touting Navistar's progress in developing its EGR technology and achieving a 0.2 NOx–compliant engine. These statements caused Navistar's stock price to be artificially inflated.

2010 Statements

On March 10, 2010, Ustian participated in a conference call with analysts to discuss Navistar's first quarter 2010 financial results. During the call, Ustian assured analysts that Navistar was ready to meet the 2010 emission standards:

And we're ready for emission standards. Our products are being certified today. Some of them have already passed ... We do have some already in the marketplace. If you remember right, we had 100 or so buses that went into the marketplace at 2010 emissions levels. Those are running great. We have had no quality problems with it to speak of. So we believe that our technology is already proven.

Doc. 128 ¶ 127. Yet several weeks later, Navistar confirmed through a brief filed in connection with litigation against the EPA that it was "still maturing Advanced EGR technology" and would be able to meet 2010 emission standards only "through a combination of Advanced EGR technology and ‘banked’ emissions credits." Id. ¶ 128. In other words, as of April 2010, Navistar had certified only 0.5 NOx engines and was utilizing its emission credits to meet the 0.2 NOx standard.

On June 9, 2010, Navistar conducted a conference call with analysts to discuss its second quarter 2010 financial results. During this call, Ustian attempted to dispel rumors calling into question Navistar's ability to satisfy emission requirements with EGR technology that had concerned investors, or created "worry beads" for investors. Ustian told analysts "we're at the point now that every one of these worry beads is behind us." Id. ¶ 130. Later, during the same call, Ustian told the analysts that Navistar had "engines running—we have vehicles running that meet those standards of 0.2." Id.

Then, on August 27, 2010, Navistar's Chief Engineer for heavy-duty engines authored a report called "Go Fast 0.2 NOx In—Cylinder Solution—Scope." Id. ¶ 52. This report predicted that the 0.2 NOx EGR engine would not go into production until the first quarter of 2014 for the 13–liter engine, the third quarter of 2014 for the 11–liter engine, and the first quarter of 2015 for the 15–liter engine. Outside consultants hired by Ustian had initially set a launch date for the 0.2 NOx EGR engine of January 2012. Navistar engineers told their supervisors that this was not realistic given the issues they were encountering, and bumped the launch date to 2014. With the new timeline, Navistar projected that there would be a 1.75 year gap between when Navistar exhausted its emission credits and when it would have a certified 0.2 NOx engine.

A few months later, Navistar held a press briefing at one of their facilities in Alabama. Fleet Owner magazine published an article the following day, November 4, 2010, which discussed the ongoing question of whether Navistar would be able to meet the 2010 emission standards without the use of emission credits. The article quoted Ustian's statement from the press briefing—"[w]e're 100% there in terms of our ability to do it," i.e., achieve 0.2 NOx emissions with the EGR technology. Id. ¶ 133. The article also quoted a Navistar VP who said that he expected that Navistar would submit 0.2 NOx engines to the EPA for certification "within the next few months." Id. On the same day, Today's Trucking published a similar article stating that...