Thomas v. Shiloh Indus., Inc.
| Decision Date | 19 September 2018 |
| Docket Number | No. 1:15-CV-7449 (KMW),1:15-CV-7449 (KMW) |
| Parties | RAYMOND THOMAS and WILLIAM PORTER, individually and on behalf of all others similarly situated, Plaintiffs, v. SHILOH INDUSTRIES, INC., RAMZI HERMIZ, and THOMAS M. DUGAN, Defendants. |
| Court | U.S. District Court — Southern District of New York |
This case arises from alleged fraudulent financial reporting by Shiloh Industries, Inc. ("Shiloh" or "the Company"), a publicly-traded manufacturer of automotive materials. The Court dismissed Plaintiffs' initial complaint because it failed to plead with particularity that any defendant had the requisite scienter to be held liable for securities fraud. On a motion for reconsideration, the Court declined to vacate the dismissal, but granted Plaintiffs leave to amend their initial complaint for the limited purpose of alleging facts demonstrating that Shiloh (as a corporate defendant) had the requisite scienter. Plaintiffs then filed a Second Amended Class Action Complaint ("SACAC"), which Defendants now move to dismiss. For the reasons stated below, Defendants' motion to dismiss the SACAC is GRANTED.
Shiloh supplies equipment to the automotive and commercial vehicle markets and other industrial customers. It specializes in materials and designs that reduce vehicle weight and increase fuel efficiency, as well as products that mitigate the harshness of vehicles, due to their noise and vibration. Shares of Shiloh, which is headquartered in Ohio, are publicly traded on the Nasdaq Stock Market.
In 2015, an accountant at Shiloh's Wellington, Ohio, Facility ("the Wellington Facility") sounded the alarm on possible fraudulent accounting. In response, Shiloh launched an internal investigation. The investigation revealed that the Wellington Facility's Controller, Eric Halterman, had been intentionally understating the Facility's costs. When Halterman's data was consolidated into the Company's financial reports, the effect was to falsely inflate Shiloh's net income. After Shiloh publicly announced the investigation, its share price fell. The share price dropped again after the Company restated its financials and admitted to investors that its internal controls on reporting were materially weak. A putative class of Shiloh shareholders then filed this suit.
So far, Plaintiffs have failed to convince the Court that they have a plausible claim. Plaintiffs filed their initial complaint on September 21, 2015. (ECF No. 1.) On February 21, 2016, Plaintiffs filed an amended complaint, which they corrected on February 23, 2016. (ECF Nos. 23, 28.) Plaintiffs' Corrected Amended Class Action Complaint, referred to herein as the First Amended Class Action Complaint ("FACAC"), alleged that Shiloh violated Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Securities and Exchange Commission ("SEC") Rule 10(b)-5 by materially misstating its finances to investors in 2014 and 2015. Plaintiffs also named Shiloh's CEO, Ramzi Hermiz, and its Vice President of Finance, Thomas M. Dugan, as defendants, alleging they individually violated SEC Rule 10(b)-5 and Sections 10(b) and 20(a) of the Exchange Act. On March 23, 2017, the Court dismissed the claims against all three defendants because Plaintiffs failed to plead with particularity that either Hermiz or Dugan had the requisite scienter for the alleged violations. See Thomas I, 2017 WL 1102664, at *6. Subsequently, on April 6, 2017, Plaintiffs requested that the Court reconsider the dismissal with respect to the claims against Shiloh as a corporate defendant. (ECF No. 40.) The Court granted Plaintiffs leave to amend the FACAC for the "limited purpose" of "rectify[ing] factual deficiencies and satisfy[ing] the pleading standard with respect to their corporate scienter claim." Thomas v. Shiloh Indus., Inc., No. 15-CV-7449 (KMW), 2017 WL 2937620, at *5 (S.D.N.Y. July 7, 2017) ("Thomas II"). Thus, the sole issue in this round of pleading is whether Plaintiffs have sufficiently alleged corporate scienter so as to state a claim against Shiloh as a corporate defendant; no claims remain with respect to Hermiz or Dugan as individual defendants.
Plaintiffs filed the SACAC on August 4, 2017, which Defendants now move to dismiss. (ECF Nos. 45, 47.) For purposes of deciding the motion to dismiss pursuant to Rule 12(b)(6), the Court assumes that all factual allegations contained in the SACAC are true, but does not apply this principle to legal conclusions. See Wilson v. Dantas, 746 F.3d 530, 535 (2d Cir. 2014) (citing Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).
The new allegations in the SACAC focus on the scienter of Halterman, the Wellington Facility Controller, and on Brian Harvey, Halterman's boss at the time of the alleged fraud. As the Wellington Facility Controller, Halterman was responsible for accounting at the Wellington Facility, overseeing four employees. SACAC ¶ 32. Halterman reported to Group Controller Harvey. Id. In his role as the Wellington Controller, Halterman was tasked with providing updates on the Wellington Facility's financials during weekly two-to-three hour meetings at which controllers from Shiloh's various plants discussed their budgets and financial forecasts with Shiloh's Vice President. Id. ¶¶ 32, 63. According to Plaintiffs, this task meant that Halterman "functionally" reported directly to Shiloh's Vice President. Id. ¶ 32. In 2014 and 2015, Halterman perpetrated an accounting fraud that resulted in Shiloh overstating its net income in public securities filings. Id. ¶¶ 32, 54, 106. He was fired "after it all blew up" at the Wellington Facility. Id. ¶ 32.
Turning now to Harvey, Plaintiffs allege that he was complicit in Halterman's fraud, or at least reckless in not discovering it. Id. ¶ 106. As Group Controller, Harvey worked one step below senior management, reporting directly to Shiloh's Vice President. Id. ¶¶ 29, 33. In his role, Harvey oversaw approximately 25% to 30% of the company's plants, including the Wellington Facility. Id. ¶ 118. His responsibilities included reviewing Halterman's reports. Id. ¶ 33. Plaintiffs allege that the day after an accountant at Wellington confronted Harvey about the fraud, Harvey stated that he was planning to resign; he did so within the month. Id. A confidential witness stated that Harvey left "as a result the investigation into the Wellington Plant." Id.
"To survive a motion to dismiss, a complaint must plead 'enough facts to state a claim to relief that is plausible on its face.'" Progressive Credit Union v. City of New York, 889 F.3d 40, 48 (2d Cir. 2018) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)); see ECA, Local 134 IBEW Joint Pension Tr. of Chi. v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir. 2009) (). When the complaint alleges securities fraud, it must satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act ("PSLRA") and Rule 9(b) of the Federal Rules of Civil Procedure. Under Rule 9(b), a complaint alleging fraud "must state with particularity the circumstances constituting fraud," or otherwise face dismissal. Fed. R. Civ. P. 9(b); see ECA, 553 F.3d at 196; Emps.' Ret. Sys. of Gov't of the V.I. v. Blanford, 794 F.3d 297, 304 (2d Cir. 2015) (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007)). The PSLRA requires Plaintiffs to allege facts that give rise to a "strong inference" that the defendant acted with scienter. 15 U.S.C. § 78u-4(b)(1), (2). For an inference of scienter to be "'strong' [within the meaning of the PSLRA] . . . it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent." Tellabs, 551 U.S. at 324.
Section 10(b) of the Exchange Act and SEC Rule 10b-5 make it "unlawful for any person . . . [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading . . . ." 17 C.F.R. § 240.10b-5(b). To state a claim under Section 10(b) and Rule 10b-5, "a plaintiff must prove (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Pac. Inv. Mgmt. Co. v. Mayer Brown LLP, 603 F.3d 144, 151 (2d Cir. 2010) (quoting Stoneridge Inv. Partners v. Scientific-Atlanta, Inc., 552 U.S. 148, 157 (2008)). The focus here is narrowed to the element of scienter—more precisely, whether the SACAC adequately alleges that Shiloh had the corporate scienter required to state a claim for relief under Section 10(b) and Rule 10b-5.
The law on corporate scienter in the Second Circuit has not changed in the time since the Court dismissed Plaintiffs' FACAC. Under this Circuit's law, a plaintiff can show corporate scienter by pleading facts sufficient to create a strong inference either that "someone whose intent could be imputed to the corporation acted with the requisite scienter," Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 195 (2d Cir. 2008), or that a corporate announcement is so important and "so dramatic" that it "would have been approved by corporate officials sufficiently knowledgeable about the company to know that the announcement was false," id. at 196 (quoting Makor Issues & Rights, Ltd. v. Tellabs, Inc., 513 F.3d 702, 710 (7th Cir. 2008)). Here, Plaintiffs proceed on the first theory. See Mem. Law Opp. Defs.' Mot. Dismiss ( ) 1-3 (ECF No. 49). They argue that Halterman and Harvey intended (or, as to Harvey, at least recklessly overlooked) the fraud, and that Halterman and Harvey's scienter should be imputed to Shiloh. The Company does not dispute that Halterman had the...
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