On April 27, 2017, Judge Madeline Cox Arleo of the United States District Court for the District of New Jersey dismissed a putative securities fraud class action against Hertz Global Holdings, Inc. and certain of its executives, in which plaintiffs alleged that the company knew or consciously disregarded that statements made in multiple financial reports between 2011 and 2013 were false, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”). In re Hertz Global Holdings, Inc. Sec. Litig., 2017 WL 1536223 (D.N.J. Apr. 27, 2017). The Court had already dismissed this case twice without prejudice. This time the Court dismissed the claims with prejudice.

Hertz operates a global car and equipment rental business. In March 2014, the company disclosed that it had identified accounting errors in the amount of $46.3 million that might require adjustments to its 2011–2013 results. Over the ensuing years, the magnitude of the adjustments increased. In July 2015, after two internal investigations, the company issued a final restatement of financials for portions of the 2011–2014 periods. According to the restatement, Hertz had overstated its 2011–13 net income by approximately $132 million. Based on Hertz’s investigations and restatement, Plaintiffs asserted that Hertz had made a series of false historical and forward-looking statements during ten quarters leading up to the July 2015 disclosure.

The Court first held that many of the allegedly false statements were non-actionable puffery. Plaintiffs alleged that statements about the company’s “strong” and “record” results and growth were false. The Court concluded that these were not determinate, verifiable statements upon which reasonable investors could rely.

The Court dismissed plaintiffs’ remaining claims because plaintiffs failed to adequately plead fraudulent intent. While the Court agreed with plaintiffs that a restatement of financial results can be probative of scienter, the fact of a restatement was not alone sufficient. Here, the Court found that Hertz executives may not have known the challenged statements were false due to the diffuse nature of the company’s accounting problems. There was no one precipitous error in Hertz’s accounting; rather, the restatements identified a combination of errors in over fifteen areas of the company that resulted in the misstated financials.

The Court also rejected plaintiffs’ allegation that management’s admittedly “inappropriate tone at the top” led to material weakness in the company’s internal controls and supported a strong inference of scienter. The Court found that allegations of mismanagement, without more, cannot support a strong inference of fraudulent intent. For that, plaintiffs needed to provide additional allegations of wrongdoing—such as specific red flags that management ignored. Here, they did not.

This case serves as a reminder that a strong inference of fraudulent intent is not established by financial restatements (even large ones) or mismanagement alone.

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