Vrakas v. U.S. Steel Corp., Civil Action No. 17-579

• Decision Date: 29 September 2018
• Docket Number: Civil Action No. 17-579
• Parties: CHRISTAKIS VRAKAS, et al., Plaintiffs, v. UNITED STATES STEEL CORPORATION, et al., Defendants.
• Court: U.S. District Court — Western District of Pennsylvania

CHRISTAKIS VRAKAS, et al., Plaintiffs,
v.
UNITED STATES STEEL CORPORATION, et al., Defendants.

Civil Action No. 17-579

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA

September 29, 2018

Judge Cathy Bissoon

MEMORANDUM ORDER

Pending before the Court are two motions to dismiss Plaintiffs' Amended Class Action Complaint for Violations of the Federal Securities Laws (hereinafter "Amended Complaint," Doc. 58) filed by separate groups of Defendants. The first Motion to Dismiss (Doc. 109), filed by Defendants Mario Longhi, David Burritt, Dan Lesnak, (the "Individual Defendants" or "the Individual U.S. Steel Defendants") and United States Steel Corporation ("U.S. Steel" or the "Company") (all collectively, the "U.S. Steel Defendants"), argues that the Amended Complaint fails to satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act and Federal Rule of Civil Procedure 9(b). The second Motion to Dismiss (Doc. 114), filed by a number of entities that served as underwriters for U.S. Steel's secondary public offering on August 15, 2016, namely, Defendants J.P. Morgan Securities LLC, Goldman Sachs & Co. LLC, Barclays Capital Inc., Wells Fargo Securities, LLC, Credit Suisse Securities (USA) LLC, Morgan Stanley & Co. LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, PNC Capital Markets LLC, Scotia Capital (USA) Inc., Citizens Capital Markets, Inc., SunTrust Robinson Humphrey, Inc., BNY Mellon Capital Markets, LLC, Citigroup Global Markets Inc., Commerz Markets LLC, The Huntington Investment Company, SG Americas Securities, LLC, The

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Williams Capital Group, L.P., and ING Financial Markets LLC (collectively, the "Underwriter Defendants"),¹ argues that Plaintiffs have failed to plead adequate statutory standing and have failed to allege any material misrepresentations or omissions, among other arguments.

Plaintiffs have filed an Omnibus Brief in Opposition to Defendants' Motions to Dismiss, (hereinafter "Plaintiffs' Response," Doc. 121), to which all Defendants have filed an Omnibus Reply in Support of their Motions to Dismiss (hereinafter "Defendants' Reply," Doc. 126). Plaintiffs and the U.S. Steel Defendants have also filed respective requests for judicial notice and respective oppositions to their counterparties' requests for judicial notice (Docs. 111, 119, 120, 127-1). Two requests for judicial notice are now pending before the Court.

For the reasons that follow, the Court will grant the U.S. Steel Defendants' Request for Judicial Notice (Doc. 111) and take notice of the documents accompanying the supporting declaration (Doc. 112). The Court will also grant Plaintiffs' Request for Judicial Notice (Doc. 119) and take notice of Exhibits 1 and 2 accompanying the supporting declaration (Doc. 122).² Defendants' motions to dismiss will be granted in part and denied in part.

BACKGROUND

Lead Plaintiff Christakis Vrakas and Plaintiffs Leeann Reed and Robert Myer ("Plaintiffs") bring this putative securities fraud class action on behalf of themselves and the

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class of people, other than Defendants, who purchased or acquired U.S. Steel securities between January 27, 2016 and April 25, 2017 (the "Class Period"), or otherwise acquired shares pursuant to or traceable to the August 15, 2016 Secondary Public Offering ("SPO"). (Id. at 1.) Defendant U.S. Steel is a Delaware-incorporated and Pittsburgh-based company with operations in North America and Europe that produces flat-rolled and tubular steel products for customers worldwide. (Amended Complaint ¶¶ 1, 31.) The Individual Defendants are Mario Longhi, U.S. Steel's Chief Executive Officer ("CEO") from June 2013 to May 8, 2017, and its President from June 2013 to February 2017; David Burritt, U.S. Steel's President and CEO since May 2017 who served as U.S. Steel's President and Chief Operating Officer from February 2017 to May 2017 and its Executive Vice President and Chief Financial Officer between September 2013 and February 2017; and Dan Lesnak, U.S. Steel's General Manager of Investor Relations at all times relevant to this lawsuit. (Id. at ¶¶ 32, 36, 38.) The Underwriter Defendants, listed above, provided underwriting services to U.S. Steel for its SPO. (Id. at ¶ 41.)

To summarize the relevant narrative,³ Plaintiffs allege that U.S. Steel engaged in extreme cost cutting measures, beginning in 2015, leading to a total lack of preventative maintenance and eventually to mounting unplanned outages of plant equipment. (Id. at ¶ 4.) Due to these outages, Plaintiffs allege that U.S. Steel's production consistently fell short during the Class Period. (Id. at ¶¶ 4-5.) Meanwhile, Plaintiffs claim that U.S. Steel implemented a "sham" initiative, called the Carnegie Way, which pretended to involve measures other than cost cutting, but which was ultimately a façade for cost cutting by 2015. (Id. at ¶¶ 3-4.) Plaintiffs' Complaint centers on the claim that the U.S. Steel Defendants repeatedly misled investors concerning the

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true purpose of the Carnegie Way as well as the true extent and causes of the unplanned shut-downs of steel production equipment in various flat-rolled steel production facilities. (Id. at ¶¶ 150, 156, 218.) Plaintiffs contend that these misrepresentations artificially inflated U.S. Steel's stock price, allowing Defendants Longhi and Burritt to sell their personal shares while the stock price was inflated. (Id. at ¶¶ 24, 219.)

Specifically, throughout the Amended Complaint, Plaintiffs claim that the U.S. Steel Defendants misled investors by engaging in four general categories of material misstatements:⁴ (1) falsely claiming that critical elements of the Carnegie Way initiative, such as Reliability Centered Maintenance ("RCM")—defined as proactive rather than reactive maintenance—were being implemented, and with positive results, (e.g., id. at ¶¶ 106, 156, 188, 249);⁵ (2) falsely reporting the amount of "realized" cost savings attributable to the Carnegie Way by including, for example, savings for projects that were not yet implemented, (e.g., id. at ¶¶ 152-55, 222, 248, 266); (3) falsely claiming that U.S. Steel's capital spending was appropriate, (e.g., id. at ¶¶ 156, 191); and (4) falsely claiming that the purpose of the SPO was broader than providing capital to invest in plant repairs and maintenance, (e.g., id. at ¶ 195).

ANALYSIS

Plaintiffs assert four securities fraud claims in the Amended Complaint: in Count I, Plaintiffs assert a claim under Section 10(b) of the Securities Exchange Act of 1934 (the

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"Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, against the U.S. Steel Defendants; in Count II, Plaintiffs assert a claim under Section 20(a) of the Exchange Act, 15 U.S.C. § 78t, against the U.S. Steel Defendants; in Count III, Plaintiffs assert a claim under Section 11 of the Securities Acts of 1933 (the "Securities Act"), 15 U.S.C. § 77k, against the Individual and Underwriter Defendants; and in Count IV, Plaintiffs assert a claim under Section 15 of the Securities Act, 15 U.S.C. § 77o, against the Individual Defendants. (Amended Complaint ¶¶ 429-467.)

As to all of Plaintiffs' claims, the existence of a material misrepresentation or omission is a necessary element. In addition, as to claims under Section 10(b) of the Exchange Act, scienter is a necessary element. As discussed below, several of Plaintiffs' alleged theories of liability fail to satisfy the applicable pleading standards—either because they fail to plead a material misrepresentation or omission or fall within the protections of the safe harbor provision of the Private Securities Litigation Reform Act ("PSLRA"). The only theories that survive are those stemming from Defendants' alleged affirmative misrepresentations concerning past proactive maintenance at steel production facilities, and misleading statements concerning the Company's then-current capacity to meet demand.

The Court will address the relevant pleading standards and the required elements of the statutory claims, address the parties' respective requests for judicial notice, and then apply the pleading requirements to each alleged misrepresentation in turn to assess falsity. For the allegations that survive the Court's falsity analysis, the Court will address whether Plaintiffs have sufficiently pleaded scienter. Finally, relying on the Court's resolution of falsity, the Court will turn to the Securities Act claim against the Underwriter Defendants.

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I. Legal Standards

A. Pleading Standards under the PSLRA and Rule 9(b)

In securities fraud cases under Section 10(b), heightened pleading rules apply under the PSLRA. OFI Asset Mgmt. v. Cooper Tire & Rubber, 834 F.3d 481, 490 (3d Cir. 2016). To survive a motion to dismiss, the complaint must first "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1)(B); see also In re Suprema Specialties, Inc. Secs. Litig., 438 F.3d 256, 276 (3d Cir. 2006). The complaint must also "state with particularity the facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2)(A); see also Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007). These pleading requirements are "[e]xacting." Id. at 313. Congress enacted these requirements "[a]s a check against abusive litigation by private parties," which "impose[s] substantial costs on companies and individuals whose conduct conforms to the law." Id.

The PSLRA also contains a safe harbor provision, 15 U.S.C. § 78u-5(c), for situations in which plaintiffs allege that forward-looking statements were false or misleading. Inst'l Investors Grp. v. Avaya, Inc., 564 F.3d 242, 254 (3d Cir. 2009)...