Doshi v. Gen. Cable Corp.

• Decision Date: 24 May 2016
• Docket Number: No. 15-5621,15-5621
• Citation: 823 F.3d 1032
• Parties: Satish Doshi, Plaintiff, City of Livonia Employees' Retirement System, individually and on behalf of all others similarly situated, Plaintiff–Appellant, v. General Cable Corporation; Gregory B. Kenny; Brian J. Robinson, Defendants–Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

823 F.3d 1032

Satish Doshi, Plaintiff

City of Livonia Employees' Retirement System, individually and on behalf of all others similarly situated, Plaintiff–Appellant

v.General Cable Corporation; Gregory B. Kenny; Brian J. Robinson, Defendants–Appellees.

No. 15-5621

United States Court of Appeals, Sixth Circuit.

Argued: March 16, 2016

Decided and Filed: May 24, 2016

Rehearing En Banc Denied July 19, 2016

ARGUED: Joseph D. Daley, Robbins Geller

Rudman & Dowd, LLP, San Diego, California, for Appellant. Marc J. Sonnenfeld, Morgan, Lewis & Bockius, LLP, Philadelphia, Pennsylvania, for Appellees. ON BRIEF: Joseph D. Daley, James A. Caputo, Steven F. Hubachek, Robbins Geller Rudman & Dowd, LLP, San Diego, California, for Appellant. Marc J. Sonnenfeld, Karen Pieslak Pohlmann, Morgan, Lewis & Bockius, LLP, Philadelphia, Pennsylvania, David F. Fessler, Fessler, Schneider & Grimme, LLP, Fort Thomas, Kentucky, for Appellees.

Before: SILER, COOK, and DONALD, Circuit Judges.

OPINION

COOK

, Circuit Judge.

In October 2012, and again a year later, General Cable Corporation announced that it would reissue several public financial statements because they included material accounting errors. Soon after, City of Livonia Employees' Retirement System (“Livonia”) initiated this class-action suit against General Cable, its CEO Gregory Kenny, and its CFO Brian Robinson (collectively Defendants) for violating §§ 10(b) and 20(a) of the 1934 Securities Exchange Act, 15 U.S.C. §§ 78j(b)

, 78t(a), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5. Livonia asserts that each defendant acted at least recklessly in issuing or approving General Cable's materially false public financial statements. The Defendants counter that General Cable's misstatements resulted from accounting errors and a theft scheme in its Brazilian operations of which the Defendants were unaware and that they promptly sought to remediate upon discovering them. Agreeing with the Defendants, the district court dismissed Livonia's complaint with prejudice because it failed to plead scienter adequately. The district court then denied Livonia's Rule 59(e) motion to amend the judgment, which included a request to file an amended complaint. Livonia appeals both decisions. We AFFIRM.

I.

General Cable manufactures and sells industrial cable and wire for use worldwide. During the class period, Kenny served as General Cable's CEO, and Robinson as CFO. As such, Kenny and Robinson both had access to General Cable's confidential financial information, and signed its SEC filings and Sarbanes–Oxley (SOX) certifications.

In 2007, General Cable acquired Phelps Dodge International Corporation as a privately held subsidiary. Phelps Dodge had operations in Brazil. Following the acquisition, General Cable realigned its management and financial reporting structure into three regions, including Rest of World (ROW), where General Cable placed Phelps Dodge. General Cable chose Mathias Sandoval, Phelps Dodge's CEO, to head ROW.

In October 2012, General Cable announced that its previous 22 public financial statements (Forms 10-Q and 10-K) included material accounting errors and that investors should no longer rely on them. These errors required General Cable to restate its 2009 through 2011 Forms 10-Q and 10-K, as well as its first two 2012 Form 10-Qs. General Cable cited as the primary reasons for the restatement “a complex theft scheme in Brazil and, to a somewhat lesser extent, accounting errors, primarily in Brazil.”

While preparing its first restatement, General Cable discovered additional problems requiring a second restatement, which it announced in October 2013. The second restatement covered the same financial documents as the first, plus General Cable's 2008 Forms 10-Q and 10-K, its third-quarter 2012 Form 10-Q, its 2012 Form 10-K, and its first-quarter 2013 Form 10-Q. This time, however, General Cable pointed to improperly recognized bill-and-hold sales¹ and unrecoverable value-added-tax assets associated with the goods stolen in Brazil as prompting the restatement.

Following the restatements, Livonia sued on behalf of purchasers of General Cable securities from November 3, 2010, to October 14, 2013. Livonia asserts that the restatements demonstrate that General Cable's original public financial statements were materially false in violation of the securities laws. Specifically, Livonia claims that the Defendants publicly misstated General Cable's financial data and erroneously certified both the data's accuracy and the effectiveness of General Cable's internal controls. Livonia alleges these misstatements occurred in business news publications, on calls with investors, and in public financial filings and SOX certifications. These misstatements artificially inflated prices for General Cable securities causing Livonia's investments to lose value.

As for scienter, Livonia's complaint identifies facts in seven categories that it argues support inferring that each defendant acted at least recklessly in making or authorizing the materially false statements.

First , Livonia claims that the Defendants failed to integrate Phelps Dodge and ROW into General Cable's internal control structure and shielded ROW from meaningful financial review. Relying largely on confidential witnesses,² Livonia alleges that these actions led General Cable's corporate controller to struggle to get acceptable financial information from ROW, especially “details.” Kenny justified this lack of integration by asserting that ROW “[is] a successful organization.” He also directed the General Cable finance department to back off when ROW management resisted attempts by General Cable employees to obtain “information concerning the new ROW operations.” And ROW's CEO went “ballistic” when “anyone attempted to interact with any of the units in [the ROW CEO's] group.” Kenny and Robinson also knew that General Cable had previously experienced material weaknesses in its financial controls.

Second , Livonia alleges that General Cable recognized revenue from bill-and-hold sales in Brazil that failed to meet four of the SEC's criteria. Despite these failures, Robinson personally approved each bill-and-hold sale in Brazil via email.

Third , Livonia asserts that Kenny and Robinson recklessly reviewed, evaluated, and certified the effectiveness of General Cable's internal controls. This is so, says Livonia, because despite Kenny and Robinson using the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework in their original review of General Cable's internal controls, they failed to discover weaknesses in those controls until applying the COSO framework a second time while preparing the first restatement. Livonia thus claims that Kenny and Robinson acted at least recklessly in not discovering the internal control weaknesses during their original COSO review. Moreover, Kenny and Robinson violated the COSO's mandate that information flow freely throughout an organization by allowing ROW's CEO to withhold information from corporate compliance officers.

Fourth , Kenny and Robinson recklessly made SOX certifications because General Cable's internal controls failed to prevent the accounting errors that necessitated the restatements.

Fifth , Livonia posits that the size and duration of the accounting errors support an inference of recklessness. For fiscal years 2009 to 2012, General Cable cumulatively overstated net income to common shareholders by $60.5 million. Similarly, for fiscal years 2009 to 2011, General Cable overstated net income attributable to common shareholders, earnings per share, and operating income by as much as 53.76%, 53.92%, and 15.6%, respectively. The accounting errors covered slightly more than six years, and required two restatements and 449 days to fix. All the errors artificially inflated General Cable's reported financials.

Sixth , Livonia claims that General Cable's incentive compensation plans tied bonuses to earnings per share and stock price thereby motivating Kenny and Robinson to overlook errors. Both received millions in incentive compensation from 2007 to 2013.

Seventh , Livonia highlights that ROW executive management—i.e. , Sandoval—“overrode controls” leading to delays in reporting inventory accounting issues and allegations of theft to General Cable's executive management. As General Cable admitted:

ROW executive management did not report the inventory accounting issues to [General Cable's] executive management until late September 2012, even though ROW executive management was aware of the issues no later than January 2012. In this regard, ROW executive management did not investigate the matter promptly, did not report findings in its belated inquiry on a timely basis, [and] discouraged Brazilian personnel from disclosing the matters....

(R. 97-2, General Cable 2012 Form 10-K/A.) ROW executive management overemphasized the meeting of business plan goals at the expense of proper financial reporting.

The Defendants moved to dismiss the complaint, contesting only the adequacy of Livonia's scienter allegations. The district court granted the motion and dismissed the complaint with prejudice, determining that Livonia's complaint failed to create a strong inference that any defendant acted with scienter.

Livonia then moved under Federal Rule of Civil Procedure 59(e)

to alter or amend the judgment and “to permit the filing of [an] ... Amended Complaint,” which it attached to its motion. In it, Livonia added allegations to further support inferring scienter. First, in 2014, General Cable disclosed potential Foreign Corrupt Practices Act (FCPA) liability resulting from improper payments to officials in government-owned utilities in Portugal, Thailand, Angola, and India. Second, in its public financial documents, General Cable failed to disclose that it recognized revenue from bill-and-hold sales despite SEC guidelines requiring disclosure. Third, the fear of losing incentive compensation...