EMPLOYEES'RETIREMENT SYSTEM v. HORIZON LINES

• Citation: 686 F. Supp.2d 404
• Decision Date: 13 November 2009
• Docket Number: Civil Action No. 08-969.
• Parties: CITY OF ROSEVILLE EMPLOYEES' RETIREMENT SYSTEM, et al. v. HORIZON LINES, INC., et al.
• Court: U.S. District Court — District of Delaware

686 F.Supp.2d 404

CITY OF ROSEVILLE EMPLOYEES' RETIREMENT SYSTEM, et al. v. HORIZON LINES, INC., et al.

Civil Action No. 08-969.

United States District Court, D. Delaware.

November 13, 2009.

Andre G. Bouchard, Sean M. Brennecke, Bouchard, Margules & Friedlander, P.A., Wilmington, DE, David E. Kovel, Lauren A. McMillen, Sean O'Dowd, Steven D. Cohn, Pro Hac Vice, for City of Roseville Employees' Retirement System, et al.

Anthony W. Clark, Paul J. Lockwood, Nicole A. Disalvo, Skadden, Arps, Slate, Meagher & Flom, Steven L. Caponi, Blank Rome LLP, Kevin F. Brady, Jeremy Douglas Anderson, Connolly, Bove, Lodge & Hutz, William M. Lafferty, Morris, Nichols, Arsht & Tunnell, Wilmington, DE, Joseph O. Click, Pro Hac Vice, for Horizon Lines, Inc., et al.

MEMORANDUM

BARTLE, Chief Judge.

This is a putative securities class action against the following defendants: Horizon Lines, Inc. ("Horizon"); its subsidiaries, Horizon Lines, LLC and Horizon Lines of Puerto Rico, Inc. (collectively, "Horizon" or "corporate defendants"); and its executives or former executives Charles Raymond ("Raymond"), Mark Urbania ("Urbania"), John Keenan ("Keenan"), Gabriel Serra ("Serra"), R. Kevin Gill ("Gill"), and Gregory Glova ("Glova"). Before the court is the motion of defendants Horizon, Raymond, Urbania, and Keenan to dismiss the consolidated class action complaint ("Complaint") for failure to satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. §§ 78u-4 et seq.¹

I.

On June 18, 2009, we awarded lead plaintiff status to Police and Fire Retirement System of the City of Detroit, which seeks to represent all those who acquired the common stock of Horizon Lines, Inc. during the period from March 2, 2007 through April 25, 2008 (the "class period"), excluding defendants and certain related persons or entities.

Plaintiffs aver, in Count I of their Complaint, that defendants deceived investors by making materially false or misleading statements in violation of § 10(b) of the Securities Exchange Act of 1934 ("Securities Exchange Act"), 15 U.S.C. § 78j(b) ("§ 10(b)"), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 ("Rule 10b-5"). Specifically, plaintiffs contend that defendants falsely attributed Horizon's increased revenue during the class period to legitimate business practices when, in fact, it was an illegal rate-fixing scheme within the Puerto Rican cabotage market² that propelled its success. In Count II, based on the same factual allegations, plaintiffs seek to hold Horizon Lines, Inc. liable as a controlling person under § 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t ("§ 20(a)"). Finally, Count III alleges that defendants Raymond, Urbania, Keenan, Serra, and Gill are also liable as controlling persons under § 20(a).

II.

In reviewing defendants' motion to dismiss, we "accept all factual allegations in the complaint as true," and consider any "exhibits attached thereto and matters of public record." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007); Beverly Enters. Inc. v. Trump, 182 F.3d 183, 190 n. 3 (3d Cir.1999).

According to the Complaint, Horizon Lines, Inc. is a publicly-traded commercial container shipping and logistics company whose principal place of business is Charlotte, North Carolina. Horizon Lines, Inc. operates as a holding company of various wholly-owned subsidiaries, including defendants Horizon Lines, LLC and Horizon Lines of Puerto Rico, Inc. During the relevant class period, defendant Raymond was Chairman, President, and Chief Executive Officer ("CEO") of Horizon Lines, Inc. as well as President and CEO of Horizon Lines, LLC; defendant Keenan was President of Horizon Lines, LLC and an officer of Horizon Lines, Inc.³; and, until April 4, 2008, defendant Urbania was Executive Vice President and Chief Financial Officer ("CFO") of Horizon Lines, Inc. Also named as defendants, though not parties to the instant motion, are: Serra, former Senior Vice President and General Manager for Horizon Lines, Inc. and Horizon Lines, LLC, Puerto Rico division; Gill, former Vice President of Marketing for Horizon Lines, Inc., Puerto Rico division⁴ and Glova, former Marketing and Pricing Director for Horizon Lines, LLC, Puerto Rico division.

Horizon conducts its shipping operations in a few highly regulated, oligopolistic markets, the most important of which, for the purposes of this litigation, is the Puerto Rican cabotage.⁵ This cabotage consists of commercial shipping between Puerto Rico and the continental United States.

On April 17, 2008, Horizon announced that it was the subject of a federal investigation related to its pricing practices in Puerto Rico. On October 1, 2008, the Department of Justice ("DOJ") charged defendants Serra, Gill, and Glova—as well as Peter Baci, an executive of Horizon's competitor, Sea Star—with conspiracy to suppress and eliminate competition by rigging bids, fixing prices, and allocating customers in violation of the Sherman Act, 15 U.S.C. § 1.⁶ Serra, Gill, and Glova pleaded guilty on October 28, 2008⁷ and are now in prison. According to their confessions, the illegal conspiracy began as early as May 2002 and continued until April 2008. (Compl. ¶ 46). The DOJ investigation apparently remains ongoing.

The price of the publicly traded stock of Horizon Lines, Inc. dropped precipitously after the DOJ investigation came to light. On April 17, 2009, the day Horizon disclosed the investigation to the public, the price of the stock fell from $18.23 to $14.70 per share. When Horizon downgraded its earnings forecast on April 25, 2008, its shares again tumbled from a $15.08 per share closing price on April 24 to $11.25 per share at closing on the 25th. In total, the price of Horizon Lines, Inc.'s stock declined by more than 38% in little over a week. (Compl. ¶ 177-79).

Defendants contend, in their motion to dismiss, that plaintiffs failed to plead the necessary elements of their claims with the particularity required under the PSLRA. Specifically, defendants maintain that the referenced statements were not false or misleading and, in any event, the requisite state of mind of defendants has not been adequately set forth.

In deciding defendants' motion, we must examine closely the allegedly false or misleading statements. They can be grouped into the following categories: (1) those contained in Horizon's Code of Business Conduct and Ethics; (2) those related to revenue, pricing, and competition, and (3) those made as part of Sarbanes-Oxley certifications.

According to the Complaint, Horizon maintains a Code of Business Conduct and Ethics ("Code of Ethics") in order to "provide guidance and set common ethical standards" within the company and "avoid acts that might be unlawful ... and to the detriment of ... stockholders." (Compl. ¶¶ 84, 87). The Code includes a section entitled "U.S.A. Antitrust Laws," which proclaims "our policy is to comply with all applicable antitrust laws." (Compl. ¶ 85). The section identifies and condemns certain conduct that would violate federal antitrust law: "it is a `per se' violation for rates to be fixed among two or more competitors," and "two or more competitors cannot agree among themselves as to the customers, markets or territories which each will serve." (Compl. ¶ 86). This Code of Ethics is made available on Horizon's website and was attached to or referenced in a number of documents filed with the SEC.⁸

Plaintiffs contend Horizon's Code of Ethics was materially misleading during the class period because it led shareholders to believe that the company was complying with federal antitrust laws when, in reality, there was an ongoing rate-fixing scheme between Horizon and at least one competitor in the Puerto Rican cabotage. Plaintiffs also identify in their Complaint a number of allegedly false or misleading statements by defendants Raymond, Keenan, and Urbania relating to Horizon's revenue, pricing, and competition.

On March 2, 2007, Horizon issued its annual report with the SEC on Form 10-K. In this annual report, Horizon emphasized its strong customer relationships as a key competitive advantage. The report explained that Horizon services its customers through "confidential negotiated transportation service contracts" and that the rates charged in such contracts are "based on the length of inland and ocean cargo transportation hauls, type of cargo and other requirements, such as shipment timing and type of container." (Compl. ¶ 93). The Report also noted an 11.8% increase in operating revenue from year-end 2004 to year-end 2005 and attributed this grown to "rate improvements resulting from favorable changes in cargo mix, general rate increases, increased bunker and intermodal fuel surcharges to help offset increases in fuel costs, and revenue increases from non-transportation and other revenue services." (Compl. ¶ 117). Although recognizing "soft market conditions" in Puerto Rico, the report reassured stockholders that the decrease in "revenue container volume" was "offset by higher margin cargo mix in addition to general rate increases." Id.

Horizon held a conference call⁹ concerning its fourth quarter 2006 performance on March 2, 2007 in conjunction with its SEC filings. During that call, Raymond responded to a question regarding Horizon's pricing power in Puerto Rico: "I believe we're still gaining in terms of real dollar increases in our prices in Puerto Rico. I don't see that stopping. I believe we still have a little bit of a ways to go there." (Compl. ¶ 92). Finally, in a press release issued on the same day, Horizon touted a 3% increase in 2006 fourth quarter operating revenue as compared to that in fourth quarter 2005. It explained that this growth was "fueled by cargo mix upgrades, rate increases and higher fuel recovery, more than offsetting some volume softness." (Compl. ¶ 116).

Horizon disclosed its...