In re Harman Int'l Indus., Inc.
| Decision Date | 17 January 2014 |
| Docket Number | Civil Action No.: 07–1757RC |
| Citation | 27 F.Supp.3d 26 |
| Court | U.S. District Court — District of Columbia |
| Parties | In re Harman International Industries, Inc. Securities Litigation |
This securities fraud class action litigation comes before the Court on Defendants' motion to dismiss Plaintiffs' consolidated class action complaint. Plaintiffs are shareholders who purchased shares of Harman International Industries, Inc. common stock between April 26, 2007, and February 5, 2008. They have filed a class action lawsuit against the company and its senior executives, alleging that Plaintiffs bought shares during the Class Period in reliance on Defendants' misrepresentations about the company's financial condition, and that they incurred damages as a result. Plaintiffs claim that Defendants engaged in securities fraud in violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (2012), and its implementing regulation, rule 10b–5, 17 C.F.R. § 240.10b–5 (2012). Plaintiffs also claim that the company's senior executives qualify as control persons under section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a) (2012), and are therefore individually liable for the underlying section 10(b) violation.
Defendants move to dismiss Plaintiffs' claims under Federal Rule of Civil Procedure 12(b)(6), asserting that the complaint does not properly allege a material misrepresentation or omission, scienter under the heightened pleading requirements for private securities fraud lawsuits, loss causation, or control person liability under section 20(a). For the reasons discussed below, the Court will grant Defendants' motion.
Harman International Industries, Inc. (“Harman”) is a manufacturer of high-quality, high-fidelity audio products and electronic systems for the automotive, consumer, and professional markets in the Americas, Europe, and Asia.See Consol. Class Action Compl. ¶ 2, ECF No. 20.1 Shares of Harman's common stock are publicly traded on the New York Stock Exchange. See id. Plaintiffs are shareholders who purchased shares of Harman common stock between April 26, 2007, and February 5, 2008 (the “Class Period”). See id. ¶ 9. They allege that throughout the Class Period, Harman and several of its officers knowingly or recklessly propped up Harman's stock price by issuing false and misleading disclosures regarding the company's financial state and failing to disclose material adverse facts about its true financial condition. See id. ¶ 3. Specifically, the alleged misrepresentations fall into three broad categories: statements related to Harman's anticipated acquisition by two private equity firms; statements related to the sales and quality of its mid-level infotainment systems; and statements related to the sales of its aftermarket personal navigation devices in Europe. See generally id. ¶¶ 28–56.
On April 26, 2007, the beginning of the Class Period, Harman announced that it would be acquired by Kohlberg Kravis Roberts & Co. L.P. (“KKR”) and an affiliate of Goldman Sachs & Co. (“Goldman”) (collectively, the “Purchasing Companies”) in a merger valued at approximately $8 billion. See Consol. Class Action Compl. ¶ 5, ECF No. 20. Pending completion of the transaction, Harman and the Purchasing Companies entered into an agreement (the “Merger Agreement”) that would govern the period leading up to the close of the deal. Harman stated in a press release that the acquisition would allow shareholders the opportunity to participate in Harman's future growth. See id. ¶ 30. Over seven million shares of Harman stock were traded that day, with the stock closing at $122.50 per share, 19 percent higher than the previous day's close. See id.
However, on September 21, 2007, the Purchasing Companies abandoned the acquisition, stating that they believed that Harman had experienced a “material adverse change” in violation of the Merger Agreement. See id. ¶ 6. That day, Harman's share price fell to $85.00, a drop of $27.34. See id. ¶ 7. According to Plaintiffs' allegations, Harman had engaged in excessive capital spending and “burn[ed] through cash” in order to ramp up its new plant in Missouri to manufacture its new mid-level infotainment system. See id. ¶ 72; see also infra Part II.B. Plaintiffs allege that the resulting cost overruns at this and other facilities caused Harman to breach a Merger Agreement covenant (the “CapEx Covenant”) that prohibited Harman from making capital expenditures exceeding the capital expenditure budget before the merger. See Consol. Class Action Compl. ¶¶ 33, 72. In addition, the Merger Agreement included a clause (the “MAC Clause”) that allowed the Purchasing Companies to terminate the acquisition in the event of a material adverse change in Harman's business. See id. ¶¶ 34–35. According to Plaintiffs, Harman “binged” on capital spending in June of 2007, spending $60 million in one month, causing Harman's capital expenditures to exceed $90 million in the fourth quarter of FY2007, violating the CapEx Covenant. See id. ¶ 72. Plaintiffs also allege that the capital spending was a material adverse change that violated the MAC Clause. See id. ¶ 71.
According to Plaintiffs' allegations, Defendants made the following misrepresentations during the Class Period regarding the merger, or failed to disclose material facts necessary to make the following statements about the merger not misleading:
According to Plaintiffs' allegations, these statements were materially false or misleading when made because Defendants knew—but failed to disclose—that Harman had breached the CapEx Covenant and MAC Clause, giving the Purchasing Companies an opportunity to terminate the Merger Agreement. See id. ¶¶ 71, 79, 96.
Plaintiffs also allege that Defendants violated securities laws in issuing statements about Harman's “MyGIG radio” product—an infotainment system made to be installed in personal vehicles. In 2005, prior to the Class Period, Dr. Sidney Harman personally negotiated a contract between Harman and automotive corporation DaimlerChrysler (“Chrysler”), whereby Harman would manufacture MyGIG radios for installation in many Chrysler vehicles. See Consol. Class Action Compl. ¶ 36, ECF No. 20. However, Plaintiffs allege that, despite being touted as a state-of-the-art infotainment system, the MyGIG radio was “problematic from a profitability standpoint” and was “plagued with various technical and cosmetic issues,” which led to a one–year delay in producing the radios and Harman's inability to fulfill production needs. See id. ¶¶ 39, 41. Chrysler subsequently decreased its order for the radios. See id. ¶ 42. This reduced the need for parts required to make the radios, which, in turn, decreased the number of parts that Harman ordered, causing the parts suppliers to raise their prices. See id. Further, the contract with Chrysler failed to include costs for integrated circuits—very expensive electronic devices that were essential to operating the MyGIG radio. See id. ¶ 47. This omission left the contract underbid and generated losses for the company. See id. ¶ 13. The combination of these factors meant that Harman would lose $164 on each of the 200,000 radios that it had committed to sell to Chrysler, for a total annual loss of $32 million from MyGIG production and sales. See id. ¶¶ 43–44. Plaintiffs claim that this scenario also caused Harman's relationship with Chrysler to “deteriorate[ ] beyond repair.” Id. ¶ 13.
According to Plaintiffs' allegations, Defendants made the following misrepresentations during the Class Period regarding the MyGIG radios, or failed to disclose material facts necessary to make the following statements about the MyGIG radios not misleading:
According to Plaintiffs' allegations, these statements were materially false or misleading when made because Defendants knew—but failed to disclose—that Harman's relationship with Chrysler was strained due to the quality and delays in producing its MyGIG radios, and that the Chrysler contract required Harman to sell MyGIG radios at a net loss. See id. ¶¶ 64,...
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