Freedman v. Louisiana-Pacific Corp.

• Decision Date: 14 February 1996
• Docket Number: Civ. No. 95-707-JO.
• Citation: 922 F. Supp. 377
• Parties: Robert FREEDMAN, on behalf of himself and all others similarly situated, et al., Plaintiffs, v. LOUISIANA-PACIFIC CORPORATION, et al., Defendants.
• Court: U.S. District Court — District of Oregon

922 F. Supp. 377

Robert FREEDMAN, on behalf of himself and all others similarly situated, et al., Plaintiffs, v. LOUISIANA-PACIFIC CORPORATION, et al., Defendants.

Civ. No. 95-707-JO.

United States District Court, D. Oregon.

February 14, 1996.

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N. Robert Stoll, Steven Douglas Larson, Timothy S. DeJong, Stoll, Stoll, Berne, Lokting & Shlachter, P.C., Portland, OR, Max W. Berger, Steven B. Singer, Bernstein, Litowitz, Berger & Grossman LLP, New York City, for Plaintiffs.

Douglas M. Ragen, Miller, Nash, Wiener, Hager & Carlsen, Portland, OR, Daniel E. Loeb, Fried, Frank, Harris, Shriver & Jacobson, Washington, D.C., William F. Martson, Jr., Barbee B. Lyon, Jeanne M. Chamberlain, Zachary W.L. Wright, Tonkon, Torp, Galen Marmaduke & Booth, Donald J. Willis, Jill S. Gelineau, Schwabe, Williamson & Wyatt, Garr M. King, Joseph C. Arellano, Kathryn M. Pratt, Kennedy, King & Zimmer, Portland, OR, for defendants.

ROBERT E. JONES, Judge:

This action is brought by several Plaintiffs who purchased Louisiana-Pacific ("L-P") common stock during the period from October 19, 1993 through May 24, 1995. Plaintiffs assert the following two claims: Defendants¹ allegedly violated sections 10(b), 15 U.S.C. § 78j(b), and 20(a), 15 U.S.C. § 78t(a), of the Securities Exchange Act ("Act"), as well as Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated by the Securities and Exchange Commission ("SEC").² This case is before this Court on Defendants' Motions to Dismiss and Strike (# 41, # 43, # 52, # 58),³ and Plaintiffs' Motion for Class Certification (# 45).

SUMMARY OF ALLEGATIONS

Between 1980 and 1995, L-P manufactured and marketed a product called oriented strand board ("OSB") which is composed of compressed wood panel products arranged in layers and bonded with resins and adhesive. This product was used to make siding that was designed to replace ordinary plywood siding. L-P warranted the OSB siding for 25 years. In addition, between 1989 and 1994, L-P obtained approval ratings from the American Plywood Association ("APA")⁴ for its OSB siding, by allegedly falsifying OSB samples submitted to the APA. Plaintiffs claim that both the L-P 25-year warranty and the approval ratings from the APA bolstered sales of the OSB siding, even though, in fact, the siding was defective because it absorbed moisture and deteriorated rapidly.

Plaintiffs further allege that L-P knew or recklessly disregarded that the OSB siding was defective, based upon the following events. First, in 1991, the State Attorney General for Minnesota brought an action claiming that the siding was defective, which L-P settled. Second, also in 1991, the Miller Paint Company in Portland sent a letter to L-P discussing problems with the OSB siding, and then followed up in 1992 with a similar letter. Third, by 1992, L-P paid $22 million in warranty claims for OSB siding. Fourth, from 1989 through 1994, L-P obtained APA approval of the OSB siding by sending falsified samples to the APA. From these incidents, Plaintiffs conclude that L-P knew or recklessly disregarded by the early 1990s that its OSB siding was defective.

Despite having actual or constructive knowledge of the problems with the OSB siding, L-P allegedly failed to disclose that knowledge when it issued statements regarding the financial health of the Company. For instance, L-P announced that record sales and earnings in 1993 were, in part, due to "L-P's emphasis on innovative, affordable building materials made from plentiful, non-controversial timber sources * * *." Compl. ¶ 79 (quoting statement by Defendant Merlo). Furthermore, L-P filed its 1993 Form 10-K with the SEC on February 4, 1994 explaining that OSB siding was a strong performer which contributed to record sales and earnings in 1993. The next month, on March 1, 1994, L-P issued its annual report to shareholders which noted the following: (1) L-P's stock price increased over 38%, in part, as a result of affordable building materials, and (2) the demand for OSB siding was increasing and L-P would continue to construct more OSB plants. L-P concluded that report by predicting that "conditions look good for a continuation of L-P's strong performance." Compl. ¶ 83 (quoting the March 1, 1994 Annual Report to Shareholders). After these announcements, L-P stock increased from $30 per share up to $48 per share.

In addition to L-P's own statements regarding the OSB siding and the Company's health, Plaintiffs allege that favorable predictions by analysts were based on misleading information provided by L-P. For example, on October 23, 1993, an analyst from Paine-Webber, Inc. upgraded L-P to "attractive" from neutral because the OSB siding products were very popular and L-P was significantly expanding its capacity to make OSB. Similarly, on February 1, 1994, an analyst from Black and Co. predicted that L-P stock would earn $3.56 per share in 1994, in part, from the success of OSB products. Lastly, an analyst from Duff & Phelps stated on October 24, 1994 that L-P had a strong market position in lumber and structural panels, based upon information received by L-P. Plaintiff contends that L-P was responsible for these statements because it provided information to those analysts but failed to disclose that OSB siding was defective.

Problems regarding the siding began to publicly surface on March 1, 1994 when a Florida newspaper, the Orlando Sentinel, wrote that residents in a Florida subdivision had experienced disintegration of the OSB siding on their houses after exposure to water. The same newspaper published two related articles in August and September 1994 which also discussed rotting by the OSB siding. After each article, L-P denied that the siding was defective, and instead blamed troubles on improper maintenance.

On November 14, 1994, L-P filed its third quarter Form 10-Q which disclosed that L-P was being sued in a class action by Florida homeowners who installed the OSB siding which then deteriorated prematurely. The plaintiffs sought more than $150 million in damages, as well as an injunction barring L-P from selling and using OSB siding material in Florida. L-P also disclosed in the Form 10-Q, allegedly for the first time, that from 1985 through September 30, 1994, L-P paid approximately $35 million to settle OSB siding warranty claims on approximately 14,000 dwellings. Though L-P admitted to settling warranty claims, Plaintiffs allege that L-P gave no indication in 1994 that the defects in the OSB siding could have a material adverse impact on L-P's financial health.

On January 24, 1995, L-P reported record sales and earnings for 1994. L-P explained that a major factor contributing to the Company's success was the "outstanding performance" of OSB panel products. Two months later, in its 1994 Form 10-K, filed in March 1995, L-P assured investors that "the ultimate outcome of all the siding related matters will not have a material adverse effect on the business, financial position, or results of operation of L-P." Compl. ¶ 109 (quoting 1994 Form 10-K). However, the Form did disclose that L-P was the subject of a government investigation regarding the submission of unrepresentative OSB samples to the APA.

Finally, on May 15, 1995, L-P filed its Form 10-Q for the first quarter of 1995, in which it disclosed the following facts: (1) the Attorney General for the State of Washington issued a formal civil investigation demand relating to alleged unfair deceptive acts or practices involving the manufacture and sale of OSB siding; (2) a class action had been filed against L-P in Washington seeking damages for a nationwide class of persons who purchased defective OSB siding; (3) L-P stated that resolution of siding matters could have a materially adverse impact on the Company; and (4) L-P would likely be indicted in Colorado for both environmental and APA-relating matters involving the OSB siding, and that the Company could be adversely affected by the resolution of these matters. These facts were published nationally by The Wall Street Journal on May 25, 1995. Thereafter, L-P stock dropped from $26.75 to $20.875 per share.

During the Class Period, each Individual Defendant was an officer of L-P and sold several thousand shares of L-P stock. First, Defendant Merlo was the Chairman of the Board, Director and President of L-P, and sold 116,308 shares for $3,828,071. Second, Defendant Eisses was the Director, Executive Vice President, and General Manager of the Northern Division of L-P, and sold 55,476 shares for $1,992,902. Third, Defendant Hebert was the Chief Financial Officer and Treasurer of L-P, and sold 16,614 shares for $638,015. Lastly, Defendant Paul was Director, Vice President of Operations, and General Manager of the Southern District of L-P, and sold 78,448 shares for $2,756,484. Plaintiffs allege that the Individual Defendants had a duty to disclose material adverse information regarding the siding because they were officers of L-P and knew or recklessly disregarded the fact that OSB siding was defective. Moreover, through their acts and omissions, the Individual Defendants allegedly engaged in a common course of conduct to artificially inflate the price of L-P stock, thereby benefitting themselves when they sold their shares.

Based upon these allegations, Plaintiffs assert one claim under section 10(b) of the Act and Rule 10b-5 against all Defendants, and a second claim under 20(a) of the Act against only the Individual Defendants. Defendants allegedly violated § 10(b) and Rule 10b-5 because they failed to disclose material adverse information regarding OSB siding and overstated the financial health of L-P. In support of this claim, Plaintiffs also cite violations of both Item 303 of Regulation S-K, 17 C.F.R. § 229.303(a)(1)-(3), promulgated by the SEC, and § 202.05 of the New York Stock Exchange ("NYSE") Manual. SK-303 imposes a duty...