Minneapolis Firefighters' Relief Ass'n v. Memc Elec. Materials Inc.

• Citation: 641 F.3d 1023
• Decision Date: 17 June 2011
• Docket Number: No. 10–1761.,10–1761.
• Parties: MINNEAPOLIS FIREFIGHTERS' RELIEF ASSOCIATION, on behalf of itself and all others similarly situated, Plaintiff,Mahendra A. Patel, Plaintiff/Appellant,v.MEMC ELECTRONIC MATERIALS, INC.; Nabeel Gareeb; Kenneth H. Hannah, Defendants/Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

641 F.3d 1023

MINNEAPOLIS FIREFIGHTERS' RELIEF ASSOCIATION, on behalf of itself and all others similarly situated, Plaintiff,Mahendra A. Patel, Plaintiff/Appellant,

v.MEMC ELECTRONIC MATERIALS, INC.; Nabeel Gareeb; Kenneth H. Hannah, Defendants/Appellees.

No. 10–1761.

United States Court of Appeals, Eighth Circuit.

Submitted: April 12, 2011.Filed: June 17, 2011.

David A.P. Brower, argued, New York, NY, Charles J. Piven, Stevenson, MD, and John E. Campbell, St. Louis, MO, on the brief, for appellant.David H. Kistenbroker, argued, Chicago, IL, Thomas Blumeyer Weaver and F. Scott Galt, St. Louis, MO, Jonie Sue Jacobsen, Heather J. O'Toole and Laura A. Brake, Chicago, IL, on the brief, for appellee.Before RILEY, Chief Judge, BENTON and SHEPHERD, Circuit Judges.RILEY, Chief Judge.

Mahendra A. Patel is the lead plaintiff in this consolidated, but uncertified, class action securities lawsuit against MEMC Electronic Materials, Inc. (MEMC) and its former president and chief executive officer, Nabeel Gareeb (collectively, defendants). Patel's proposed class action alleges violations of § 10(b) and § 20(a) of the Securities Exchange Act of 1934, 48 Stat. 891 (codified as amended at 15 U.S.C. §§ 78j(b) and 78t(a)). The district court ¹ dismissed Patel's lawsuit, reasoning (1) the defendants did not have a duty to announce production failures to MEMC's investors immediately and, in any event, (2) Patel failed to allege “facts giving rise to a strong inference” of scienter, as required by § 21D(b) of the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. § 78u–4(b)(2). Patel appeals, and we affirm.

I. BACKGROUNDA. Patel's Allegations

MEMC produces silicon wafers used in the semiconductor industry. MEMC produces polysilicon, the base material in MEMC's production process, from manufacturing plants in Pasadena, Texas, and Merano, Italy. A disruption of polysilicon processing at MEMC's Pasadena or Merano facilities would be “a catastrophic event resulting in days or weeks of lost production.” The Pasadena plant generates more than two-thirds of MEMC's polysilicon.

On February 29, 2008, MEMC filed a Form 10–K (10–K) with the Securities Exchange Commission (SEC) disclosing risks associated with its business. Among other things, the 10–K revealed “a decrease in [MEMC's] manufacturing throughput or yields could have a material adverse effect on [MEMC's] operating results”; “interruption of operations at [the Pasadena plant] could adversely affect [MEMC's] wafer manufacturing throughput and yields and could result in [MEMC's] inability to produce certain qualified wafer products, delays or cancellations of shipments of wafers and a loss of product volume”; and, “[s]imilarly, an interruption [at the Merano plant] could adversely affect [MEMC's] results of operations.”

1. Pre–Class Period Disclosures

Production problems at the Pasadena plant periodically have adversely impacted MEMC's financial results. Historically, MEMC updated investors about its problems.

On September 4, 2007, MEMC filed an SEC Form 8–K (8–K) to disclose a construction incident at the Pasadena plant which would negatively impact MEMC's financial results for the period ending September 30, 2007, by approximately 5%. On October 25, 2007, MEMC filed another 8–K to state the previously disclosed construction incident “caused [MEMC] to lose well over a week's worth of production, miss [MEMC's] cost projections by the double digit millions, and delay [MEMC's] expansion.”

On January 24, 2008, MEMC held an earnings call in conjunction with the filing of another 8–K. At the earnings call, Gareeb indicated maintenance issues at the Pasadena plant would adversely impact earnings for the quarter ending March 31, 2008.

On April 3, 2008, MEMC filed an 8–K indicating MEMC's Pasadena plant needed premature maintenance to remove chemical deposits. MEMC disclosed the maintenance “resulted in much lower than anticipated output, and caused the company to not achieve the financial targets for the first quarter as disclosed on January 24, 2008.” On April 24, 2008, MEMC filed an 8–K and commented on its first quarter results. MEMC opined, “given the unplanned issues” at the Pasadena plant, “it is prudent to be extra cautious regarding our polysilicon output expectations.”

Also on April 24, 2008, the Pasadena plant suffered a gas leak, interrupting polysilicon production. MEMC immediately issued a press release disclosing the leak and assuring investors that MEMC did “not anticipate any impact to the financial targets provided earlier today as a result of this incident.” On April 29, 2008, MEMC issued a follow-up press release, confirming the Pasadena plant resumed production on April 25, 2008.

2. Class Period

On June 13, 2008, a fire at the Pasadena plant halted production for a week. Also in June 2008, a heat exchanger failed at the Merano plant, interrupting production overseas as well. MEMC did not immediately disclose either incident.

On July 23, 2008, the company filed an 8–K. Despite increased net sales, MEMC announced its financial results were “a bit below the bottom end of our targeted range” because of the previously undisclosed incidents at the Pasadena and Merano plants. At a contemporaneous conference call, a financial analyst from Oppenheimer asked Gareeb “what the reasoning was for not doing a pre [-]announce this time as you served down on in the past.” Gareeb explained MEMC did not pre-announce the incidents because the estimated anticipated loss—2% below the bottom end of MEMC's second quarter projections—was immaterial. Gareeb also said MEMC “wanted to provide a second half up date that we would not have been ready to provide” and “have the demonstrated recovery both from the fire as well as the replacement of the equipment in Merano to ensure that we had a pretty solid set of numbers in our head” for the rest of the year.

Analysts from Deutsche Bank and Credit Suisse expressed surprise that MEMC had not pre-disclosed the financial consequences resulting from the incidents at the Pasadena and Merano plants. Credit Suisse concluded “[f]ear of the unknown” and “low disclosures make it difficult to evaluate if [MEMC] has the right team in place to execute.” Oppenheimer opined “the magnitude of the miss [in results] was significant” because, “[h]ad it not been for [the incidents], MEMC would have exceeded the high-end of guidance.”

On July 23 and 24, 2008, there was unusually heavy trading in MEMC's stock. MEMC's shares fell 21.51%, closing on July 24, 2008 at $42.23 per share, down from $53.80 per share. Patel lost over $383,000 as a result of his transactions in MEMC stock.

3. Post–Class Period Disclosures

On August 5, 2008, MEMC issued a press release to warn that an impending tropical storm was “currently anticipated to have approximately a two day effect on polysilicon production” at the Pasadena plant. MEMC promised to issue another press release if circumstances changed.

On September 11, 2008, MEMC “issued a press release ... reporting that it would be shutting down the Pasadena facility until early next week” due to an impending hurricane. On September 15, 2008, MEMC issued another press release about the hurricane. Gareeb told investors there was no major structural damage to the Pasadena plant and “restart activities commenced as planned over the weekend,” but there were some delays caused by MEMC's suppliers' “own startup difficulties.” On September 24, 2008, Gareeb cautioned investors that the suppliers' startup difficulties were lasting longer than MEMC had anticipated. Gareeb expressed hope that normal production would resume within the next few days but said, “we now expect the cumulative impact of these delays to be approximately 15 days worth of production instead of the 5 days originally forecasted.”

On November 17, 2008, MEMC filed an 8–K. MEMC indicated “the weak macroeconomic environment has continued to deteriorate ... causing negative effects ... quickly cascading backward through global supply chains, and we cannot expect to be immune.” On December 17, 2008, the company filed another 8–K revising downward its fourth quarter outlook.

B. Dismissal

Patel filed suit in September 2008. In April 2009, the defendants moved to dismiss the complaint, contending Patel's § 10(b)/Rule 10b–5 claim should be dismissed for three alternative reasons: Patel failed sufficiently to allege (1) an actionable omission; (2) scienter; or (3) materiality. See Fed.R.Civ.P. 12(b)(6). The defendants argued Patel's § 20(a) claim should be dismissed because the § 20(a) claim was derivative of his § 10(b)/Rule 10b–5 claim. In March 2010, the district court granted the defendants' motion, holding Patel failed to plead a material omission or scienter. Patel appeals.

II. DISCUSSIONA. Standard of Review

We review the district court's dismissal of Patel's complaint de novo. See Lustgraaf v. Behrens, 619 F.3d 867, 872 (8th Cir.2010). We accept as true Patel's factual allegations in the complaint and grant all reasonable inferences in Patel's favor. See id. at 872–73. We do not defer to the district court's “legal conclusions or ‘formulaic recitation[s] of the elements of a cause of action.’ ” Id. at 873 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).

Patel's “complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. ––––, ––––, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955). “The plausibility of a complaint turns on whether the facts alleged allow us to ‘draw the reasonable inference that the defendant is liable for the misconduct alleged.’ ” Lustgraaf, 619 F.3d at 873. B. Section 10(b)/Rule 10b–5

Section 10(b) makes it unlawful “[t]o use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or...