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Tenth Circuit Affirms Dismissal Of Securities Fraud Claims For Failure To Adequately Plead Intent
07/11/2016On July 5, 2016, the Tenth Circuit Court of Appeals affirmed the dismissal of a putative securities fraud class action complaint filed by shareholders of airplane part manufacturer Spirit AeroSystems, Inc. See Anderson et al. v. Spirit AeroSystems Holdings et al., No. 15-3142 (10th Cir. July 5, 2016). Plaintiffs asserted claims under Section 10(b) of the Securities Exchange Act of 1934. In the wake of defendants’ October 2012 announcement of a forward loss of $434.6 million in connection with specified projects, plaintiffs alleged that defendants had knowingly overstated the success of their efforts to cut costs and meet production deadlines for those projects in more than 40 statements in 2011 and 2012. The Court held that plaintiffs’ complaint was properly dismissed because they had failed to allege facts creating an inference of scienter that was cogent and compelling in light of the alternative inference that defendants had merely been overly optimistic.
The Court acknowledged that it was “possible,” as plaintiffs alleged, that defendants had failed to adequately communicate the problems Spirit was encountering in containing costs and meeting production deadlines on the projects because they intentionally misrepresented or recklessly ignored economic realities. But, the Court observed, it was also possible, considering the competing inferences that could rationally be drawn from the facts alleged, that defendants were merely overly optimistic and failed to give adequate weight to financial red flags. Faced with these competing possibilities, the Court concluded that plaintiffs’ allegations of scienter were inadequate because they “suppl[ied] little reason to suspect malevolence over benign optimism.” Slip op. at 8. In particular, the Court held that the size of the $434.6 million forward loss, while significant, could not be used in hindsight to suggest that the executives “knew or recklessly disregarded the risks that Spirit was eventually going to lose money.” Id. at 38.
Circuit Judge Carlos F. Lucero concurred in part and dissented in part, on the basis that an inference of intent was appropriate for certain misstatements and omissions that concerned present facts, rather than optimistic future projections. In particular, Judge Lucero was of the view that plaintiffs had adequately alleged that certain statements about costs being “on plan” were knowingly false at the time they were made, based on confidential witness allegations regarding quarterly reports of actual costs.
