Pirnik v. Automobiles
| Decision Date | 05 October 2016 |
| Docket Number | 15-CV-7199 (JMF) |
| Parties | VICTOR PIRNIK, Plaintiff, v. FIAT CHRYSLER AUTOMOBILES, N.V., et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Plaintiffs in this putative securities fraud class action are investors in Defendant Fiat Chrysler Automobiles, N.V. ("FCA"), a global car company. In brief, Plaintiffs bring claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78(b), 78(t)(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240, alleging that FCA — acting in part through Defendant Sergio Marchionne, the Chief Executive Officer of FCA's largest subsidiary, FCA U.S.; Defendant Richard Palmer, the Chief Financial Officer of FCA U.S.; and Defendant Scott Kunselman, the former head of Vehicle Safety and Regulatory Compliance for FCA U.S. — made false and misleading statements regarding its compliance with vehicle safety laws and improperly accounted for vehicle recall costs. Defendants now move, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, to dismiss the operative complaint. (Docket No. 42). For the reasons that follow, Defendants' motion to dismiss is GRANTED in part and DENIED in part.
The following facts — which are taken from the Second Amended Complaint, documents it incorporates, and matters of which the Court may take judicial notice (including disclosure documents that FCA was required by law to file) — are construed in the light most favorable to Plaintiffs. See, e.g., Kleinman v. Elan Corp., 706 F.3d 145, 152 (2d Cir. 2013); see also, e.g., Silsby v. Icahn, 17 F. Supp. 3d 348, 354 (S.D.N.Y. 2014).
FCA is a holding company that arose from the 2014 merger of Fiat Group Automobiles ("Fiat Group") and Chrysler Group LLC. (Docket No. 38 ("SAC") ¶ 31). FCA's subsidiary in the United States, now known as FCA U.S., is effectively a continuation of Chrysler, the well-known American car company that manufactures motor vehicles under various brand names, including Chrysler, Dodge, Fiat, Jeep, and Ram. (Id. ¶¶ 2, 37).1 At all times relevant to this case, Defendant Marchionne was the CEO of FCA U.S. (and before it, Chrysler); Defendant Palmer was the CFO; and Defendant Kunselman was the head of Vehicle Safety and Regulatory Compliance. (Id. ¶¶ 32-34). (For clarity, and because the distinction between Chrysler and FCA U.S. is immaterial here, the Court will refer to FCA U.S. and Chrysler as simply "Chrysler.")
As a manufacturer of motor vehicles in the United States, Chrysler must comply with the National Traffic and Motor Vehicle Safety Act of 1996 (the "Safety Act"), 49 U.S.C. § 30101 et seq., and its implementing regulations, which are enforced by the National Highway Traffic Safety Administration ("NHTSA"). (SAC ¶ 4). In the period leading up to the creation of FCA,NHTSA conspicuously increased its enforcement of the Safety Act. (Id. ¶ 8-9). In 2010, for example, NHTSA twice levied on Toyota the maximum fine available for Safety act violations in connection with a high-profile defect involving unintended acceleration. (Id. ¶ 8). In June 2013, despite initial public resistance by Marchionne, Chrysler itself agreed to recall certain Jeep vehicles equipped with defective fuel tanks that could ignite in low-impact collisions. (Id. ¶¶ 73-74). The U.S. Secretary of Transportation Ray LaHood recounted in an interview thereafter that Marchionne had agreed to the recall after a meeting with LaHood and NHTSA Administrator David Strickland. Secretary LaHood stated that, as a result of that meeting and other discussions, Marchionne "knew" that NHTSA was "a no-nonsense organization"; "[t]he thing that really set us on a course where people understood that," he continued, "was the Toyota (sudden-acceleration recalls) — the fact that we fined them the maximum fines twice." (Id. ¶ 75). Finally, in May 2014, NHTSA fined General Motors ("GM") $35 million, the maximum permitted, for its failure to timely report a defect in the ignition switches of various vehicles. (Id. ¶ 9). In its Consent Order with GM, NHTSA expressly noted that, in the prior five years, it had fined six different vehicle manufacturers a combined total of $124.5 million. (Id.).
On August 12, 2014, Chrysler announced the establishment of a new office of Vehicle Safety and Regulatory Compliance that would "help intensify the Company's continuing commitment to vehicle safety and regulatory compliance." (Id. ¶ 184). Defendant Kunselman was assigned to head the office and report directly to Marchionne, "ensuring a high level of information flow and accountability." (Id. ¶¶ 11, 184, 263). At the time, Chrysler was in the midst of the recall with respect to Jeep fuel tanks. (See id. ¶¶ 72-88). In addition, Chrysler was one of ten vehicle manufacturers undertaking recalls of vehicles with Takata airbags, which could explode upon deployment, propelling metal fragments and debris into the passengercompartment. (See id. ¶¶ 89-108). In combination, that recall "constituted the largest and most complex safety recall in U.S. history with more than 28 million [airbag] inflators under recall in the United States." (Id. ¶ 90).
In October 2014, Chrysler and Fiat Group merged to create FCA, and FCA began trading on the New York Stock Exchange. (Id. ¶ 36). On November 12, 2014, FCA filed disclosure forms with the Securities and Exchange Commission ("SEC") that contained the following representation (a representation that would be repeated in disclosures through June 2015):
Our vehicles and the engines that power them must also comply with extensive regional, national and local laws and regulations and industry self-regulations (including those that regulate vehicle safety, end-of-life vehicles, emissions and noise). We are substantially in compliance with the relevant global regulatory requirements affecting our facilities and products. We constantly monitor such requirements and adjust our operations to remain in compliance.
(Id. ¶¶ 198, 203, 222, 234, 236 (emphasis added)). Shortly thereafter, at a United States Senate hearing prompted by the Takata airbag recall, Kunselman stated that Chrysler had "the highest recall completion rate of all major U.S.-market auto makers," that "NHTSA regards [Chrysler's] customer-notification protocols as 'industry-best,'" and that Chrysler's "average per-campaign vehicle volume is among the lowest in the industry — well below the industry average," which was a "testament to [Chrysler's] transparency and demonstrates clearly the robustness of [Chrysler's] fleet-monitoring and [Chrysler's] rapid response when issues arise." (Id. ¶ 200).
Naturally, FCA soon faced questions about the costs of the recalls. For example, in a January 28, 2015 earnings call, an analyst asked Defendant Palmer if Chrysler had "reflect[ed] the cost of the Takata airbag recall at year end or is this coming in 2015" and to "give . . . some sense of this industrial cost going into 2015, are there likely to be less of a headwind versus 2014"? (Id. ¶ 210). Palmer answered: (Id.). On the same call, Marchionne said that the prior year's recalls reflected "a changing paradigm for the auto sector" and that Chrysler was "adjusting [its] internal structures to deal with this new state of affairs." (Id. ¶ 212). "It is my expectation," he continued, "that this cost will come down as we progress through reconstitution of the management process of what's going on here." (Id.).
Notably, around the time that FCA first filed its regulatory compliance statement with the SEC and Kunselman testified before the Senate, NHTSA Administrator David Friedman sent letters to Chrysler alleging shortcomings with respect to the two high-profile recalls. (Id. ¶¶ 14-15). On October 29, 2014, for example, Administrator Friedman sent what appears to have been a form letter to Steve Williams, Head of Vehicle Safety Compliance and Product Analysis at Chrysler, emphasizing the "critical imperative" of "aggressive and proactive action" to remedy the "defective Takata air bags." (Id. ¶ 272; Docket No. 43 ("Monahan Decl."), Ex. 6). On November 25, 2014, Friedman sent directly to Marchionne a follow-up letter specific to Chrysler. "Chrysler," Friedman wrote, "has consistently maintained its position at the rear of the pack," and its "delay in notifying consumers and taking other actions necessary to address the safety defect identified is unacceptable and exacerbates the risk to motorists' safety." (SAC ¶ 15; Monahan Decl., Ex. 7). A letter from Administrator Friedman to Marchionne, dated November 19, 2014, sounded similar notes with respect to the Jeep fuel tank recall. Specifically, Friedman expressed concern "about the results of Chrysler's October 2014 recall update reports showing a woeful three percent repair rate out of more than 1.5 million affected vehicles," and asserted that Chrysler's actions were "unacceptable." (SAC ¶ 14). On November 21, 2014, Marchionne and Kunselman each sent a letter in response; Kunselman's letter acknowledged thatChrysler's actions were "not satisfactory." (Id. ¶¶ 87-88). On February 26, 2015, NHTSA sent a letter to Chrysler regarding a recall with a decidedly lower profile (a transmission issue in a certain model year car); it too highlighted Chrysler's delays in executing the recall and suggested that those delays were at odds with Chrysler's Safety Act duties. (Monahan Decl., Ex. 8).
Prompted by Chrysler's apparent shortcomings, on May 18, 2015, NHTSA announced that it would hold a public hearing on July 2, 2015, to determine whether Chrysler had complied with its Safety Act...
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