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Southern District Of Florida Dismisses Exchange Act Claims Alleging Untimely Impairment, Considering Indications Of Non-Fraudulent Intent
02/14/2017On February 8, 2017, Judge Robin Rosenberg of the United States District Court for the Southern District of Florida dismissed with prejudice a putative shareholder class action against KLX Inc. and certain of its senior officers under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder. In re KLX Inc. Sec. Litig., No. 9:16-CV-80023, slip op. (S.D. Fla. Feb. 8, 2017). Plaintiffs alleged that KLX made misstatements and omissions (i) regarding the financial health of KLX’s energy services division and its employment figures and (ii) as a result of recognizing a good will and long-term asset impairment charge later than it should have. In a complete and thorough opinion, the Court reiterated that neither puffery nor optimism provides grounds for a fraud claim, that forward looking statements are entitled to safe-harbor protection even when combined with representations that arguably refer to current facts, that GAAP violations alone are not sufficient for fraud, and that scienter should be judged with consideration of indications of non-fraudulent intent.
First, plaintiffs’ allegations that KLX created a false impression that the company was faring well despite a downturn in the oil and gas industry were rejected by the Court, which relied on the company’s clear disclosures that it was being negatively impacted by that downturn and held that the company’s expressions of optimism and confidence were not actionable. Slip op. at 7 (citing Harris v. IVAX Corp., 182 F.3d 799, 802 n.2 (11th Cir. 1999); id. at 8 (citing In re Royal Caribbean Cruises Ltd. Sec. Litig., No. 1:11-22855-CIV, 2013 WL 3295951, at *12 (S.D. Fla. Apr. 19, 2013)). Second, the Court held that statements regarding steps KLX had taken to allow it to take advantage of its liquidity position during the downturn were further protected as forward looking statements because, among other things, statements with a “forward looking basis (e.g., ‘maximizing future revenue growth’) combined with historical or present facts” are protected. Id. at 14 (citing Harris, 182 F.3d at 807).
Third, the Court rejected plaintiffs’ allegations that KLX should have recognized an impairment charge in the first quarter of 2015 instead of the third quarter of 2015. Plaintiffs argued that the same oil price and rig count declines that ultimately necessitated the charge were already evident by the first quarter. The Court held, however, that even if the impairment charge had been untimely and thus a GAAP violation, such a violation—without evidence of actual awareness of fraud—would be insufficient to plead a securities fraud claim. Id. at 12 (citing Ziemba v. Cascade Int’l, Inc., 256 F.3d 1194, 1208-09 (11th Cir. 2001)). The Court ruled there were no particularized factual allegations that KLX was aware of fraud and, in fact, that KLX’s ongoing disclosures of negative underlying information regarding oil prices and rig counts, its press release explaining the reasons for its recording of an impairment, and the lack of allegations of improper stock sales or objections by KLX’s auditors to the timing of the impairment further undermined any allegation of scienter. Id. at 17-18.
This decision will be useful to defendants in emphasizing that alleged GAAP violations alone do not establish a case for fraud, that puffery, optimism, and forward looking statements—even when combined with current representations—do not provide grounds for a fraud claim, and that scienter should be judged considering indications of non-fraudulent intent.
