Tung v. Dycom Indus., Inc.

• Decision Date: 14 April 2020
• Docket Number: Case No. 19-cv-81448-SINGHAL/Matthewman
• Citation: Tung v. Dycom Indus., Inc., 454 F.Supp.3d 1244 (S.D. Fla. 2020)
• Parties: Jennifer TUNG, individually and on behalf of all others similarly situated, Plaintiff, v. DYCOM INDUSTRIES, INC., Steven E. Nielsen, and Andrew Deferrari, Defendant.
• Court: U.S. District Court — Southern District of Florida

454 F.Supp.3d 1244

Jennifer TUNG, individually and on behalf of all others similarly situated, Plaintiff,

v.DYCOM INDUSTRIES, INC., Steven E. Nielsen, and Andrew Deferrari, Defendant.

Case No. 19-cv-81448-SINGHAL/Matthewman

United States District Court, S.D. Florida.

Signed April 14, 2020

Cullin Avram O'Brien, Cullin O'Brien Law, P.A., Ft. Lauderdale, FL, for Plaintiff Jennifer Tung/Boston Retirement System.

Christine M. Fox, Pro Hac Vice, Jonathan Gardner, Pro Hac Vice, Labaton Sucharow LLP, New York, NY, Guillaume Buell, Pro Hac Vice, Thornton Law Firm, Boston, MA, Nancy A. Kulesa, Pro Hac Vice, Sebastiano Tornatore, Pro Hac Vice, Shannon Lee Hopkins, Pro Hac Vice, Levi & Korsinsky, LLP, Stamford, CT, for Plaintiff Boston Retirement System.

Frank S. Hedin, Hedin Hall LLP, Miami, FL, for Plaintiff Evan Possick.

JoAnne M. O'Connor, Scott Gardner Hawkins, Jones Foster Johnston & Stubbs, West Palm Beach, FL, Alan S. Goudiss, Pro Hac Vice, Brian H. Polovoy, Pro Hac Vice, Shearman & Sterling LLP, New York, NY, for Defendant.

ORDER DENYING MOTION TO DISMISS

RAAG SINGHAL, UNITED STATES DISTRICT JUDGE

This is a class action against Dycom Industries, Inc. ("Dycom"), its chief executive officer Steven Nielsen ("CEO"), and its chief financial officer Andrew DeFarrari ("CFO") (collectively, "Defendants"), for securities fraud under Sections 10(b) and 20(a) of the Exchange Act of 1934 and Rule 10b-5. The class members all purchased or otherwise acquired Dycom common stock between November 20, 2017 and August 10, 2018 ("Class Period"). Jennifer Tung, one such purchaser, first filed this action on October 25, 2018. See generally Compl. ¶ 5 (DE [1] ). No more than a few days later, a second putative class filed an identical complaint against Defendants. See generally Possick v. Dycom Indus., Inc. , No. 18-cv-81480-RLR (S.D. Fla. Oct. 30, 2018). The two actions were consolidated and Boston Retirement System was appointed lead plaintiff. See Order Appointing Lead Plaintiff (DE [29] ).

As a general overview, Plaintiffs allege Dycom, through CEO and CFO, both intentionally misled the public and intentionally failed to fully inform the market about its financial strength. Plaintiffs point specifically to approximately sixty statements (spanning almost 100 paragraphs in the complaints) Defendants made as intentionally misleading.

The current operative pleading is the Second Amended Complaint ("SAC") (DE [71] ), with the cause before the Court, Dycom's Motion to Dismiss ("Motion to Dismiss") (DE [74] ). The Court has reviewed the Motion to Dismiss, the Response in Opposition (DE [76] ), the Reply in Support (DE [78] ), as well as several affidavits, declarations, and exhibits attached to all the relevant pleadings and briefing (DE [74-1], [74-2], [74-3], [74-4], [75] ). For the reasons further explained below, the Court finds Plaintiffs have pled facts sufficient to withstand a Rule 12(b)(6) motion to dismiss. In coming to this conclusion, the Court has thoroughly analyzed the panoply of statements on which Plaintiffs base their claims. While (unsurprisingly) each side takes divergent positions—Plaintiffs argue all sixty statements are actionable; Defendants insist none are—the answer is more nuanced; some are. However, given the sheer amount, it would be neither sound nor sensible for the Court to parse each and every statement at this juncture. Suffice it to say, at this stage of the proceeding, Plaintiffs have stated a cause of action for securities fraud. At a later time, it can be determined which statements are allowed to be tried before the factfinder. With that established, the Motion to Dismiss is DENIED . This order follows.

I. BACKGROUND

A. Dycom's Business Model

Dycom provides specialty contracting services to telecommunications providers—services like engineering, construction, maintenance, and installation. SAC ¶ 1 (DE [71] ). Over 75% of its revenue comes from business with some of the most well-known companies in the United States, including AT & T, CenturyLink, Charter Communications, Comcast, and Verizon. Id. ¶¶ 1, 52–54. Over the past few years with the increasing ubiquity of cellular data and smartphones, Dycom's work with these telecommunications companies has seen unprecedent growth. Id. ¶ 2.

Dycom and these partner companies enter into "master service agreements" ("MSAs"). Id. ¶ 52–56. One issue with these contracts is that they do not guarantee a specific amount of volume of work or services, and can be cancelled by the partner company at any time without penalty. Id. ¶ 57. Dycom refers to the estimated value for the work generated by entering into an MSA as its "backlog." See Mot. to Dismiss 5–6 (DE [74] ). During the Class Period, Dycom states its backlog was worth approximately $6 billion. Id. at 6.

As Plaintiffs recognize, because Dycom's revenue is highly concentrated to only five partner companies, the loss of just one could have a serious impact on Dycom's operations and revenue. SAC ¶ 58. And this cautious outlook proved prescient. Despite several multimillion-dollar contracts with these partner companies over the past few years, Dycom faced difficulty in maintaining MSAs, lost customers and money, and experienced substantial delays in deploying the projects. Id. ¶ 4. Forming the basis of this class action, Plaintiffs contend Dycom hid these workload and financial problems from the market. Id. According to Plaintiffs, because of difficulty in obtaining permits and issues completing contracted projects within the allotted time, Dycom suffered loss of MSAs, resulting in under-absorption of labor costs, and insufficient amount of work. Id. ¶¶ 70–71. By way of example, Dycom was experiencing substantial delays in deploying Verizon's One Fiber Project and AT & T's FTTX Project due to its failure to secure utility and work permits. Id. ¶ 4. Consequently, Verizon and AT & T, among several other customers, repudiated millions of dollars' worth of contracts, costing Dycom lost revenue and business-relationship goodwill. Id. ¶¶ 4, 129–35, 159

B. False and Misleading Statements

According to Plaintiffs, Dycom hid from the market and its investors, all of the foregoing issues with obtaining permits and maintaining its relationships with partner companies. SAC ¶ 4. Beginning on November 20, 2017—the opening bookmark date of the Class Period—CEO and CFO began what Plaintiffs describe as a coordinated campaign to make false statements, mislead the market and investors, and hide Dycom's issues. E.g. , id. ¶ 189. Specifically, again, Plaintiffs identify nearly sixty. As stated above, the Court finds it unnecessary and imprudent to repeat and analyze each and every statement identified by Plaintiffs.

On November 20, 2017, Dycom held an earnings call to discuss its financial and operating results for the fiscal quarter ending in October 2017 ("November 2017 Call"). Id. ¶ 192. It was during this call that CEO and CFO, according to Plaintiffs, made the first of many false or misleading statements about Dycom's financial situation. Id. They point to the following statement made by CEO as the first:

As with prior initiations of large-scale network deployments, we expect some normal timing volatility and customer spending modulations as network deployment strategies evolve and tactical considerations, primarily permitting impact timing .

Id. (emphasis in original). A few months later, during an investor call on February 28, 2018 ("February 2018 Call"), CEO repeated this outlook of "expect[ing] some normal timing volatility." Id. ¶ 194. Doubling down on this theme, on the November 2017 Call, CEO addressed the permitting issues accordingly:

[W]hen you show up at a number of cities and you come with large programs, it always takes the permitting authorities a little bit of time to gear up and we're working aggressively with our customers to help them gear up. It is not anything unusual .... So I think it'll get better, it always does.

Id. ¶ 196. Plaintiffs further allege CEO and CFO misled the public in Dycom's Form 10-Q for the period ending in October 2017 by representing Dycom was "not experiencing any material project delays or other circumstances that would impact the realizability of the [costs and estimated earnings in excess of billings] balance as of October 28, 2017 or July 29, 2017." Id. ¶ 197.

According to Plaintiffs, the November 2017 Call and February 2018 Call demonstrate the materially false and misleading statements because the permit delays were not "normal," but rather the result of issues specific to Dycom. Id. ¶ 200. Basically, Defendants failed to disclose that Dycom was already experiencing substantial and material nationwide permit delays as a direct result of its failure to: file necessary permits in advance of commencing customer projects; provide municipalities with information that was specifically requested in order for the permits to be completed, processed and approved; obtain the requisite workers compensation insurance for its subcontractors in order to satisfy rudimentary permit requirements; and hire sufficient and competent staff to file and obtain project permits. Id.

Plaintiffs allege Defendants also made false and misleading statements about the progress made on its projects and demand by its partner companies. Id. ¶ 205. During the November 2017 Call, CEO stated Dycom was experiencing "an increase in demand from three key customers as we deployed 1 gigabit wireline networks." Id. ¶ 206. However, according to Plaintiffs, this was materially false and misleading because the 1 gigabit deployment actually were not being actively deployed, and Dycom would not begin new projects because it failed to obtain the required permits to commence and complete such jobs. Id. ¶ 212. This was just one of many such related statements. See id. ¶¶ 213–25.

Defendants also made statements and omissions regarding how quickly its projects were being accelerated. Id. ¶ 226. For instance, during the February 2018 Call, CEO...