On March 8, 2019, Judge William H. Pauley of the United States District Court for the Southern District of New York granted a motion to dismiss an action asserting claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against a provider of logistics to automobile manufacturers and certain of the company’s officers. River Birch Capital, LLC, v. Jack Cooper Holdings Corp., No. 17-CV-9193, 2019 WL 1099943 (S.D.N.Y. Mar. 8, 2019). The Court held that plaintiff failed to allege any actionable misstatements or omissions and, further, that plaintiff failed to adequately allege scienter. Because the Court had previously given plaintiff an opportunity to replead, the action was dismissed with prejudice.
Plaintiff alleged that statements in the company’s securities filings and during an investor call were materially misleading because they failed to disclose various risks regarding the strength of its customer relationships. In particular, plaintiff based its allegations on statements such as: “[c]ustomer switching is infrequent,” the company believed it would be able to enter into new contracts and modify existing contracts, in the past the company had successfully extended contracts with major manufacturers, and the company was “too big to fail” due to recent price increases and its unionized work force. Id. at *1-2. Plaintiff alleged that the value of the company’s securities dropped after the company disclosed that its largest customers had expressed concerns about its financial condition and leverage, that it had recently lost business with one major customer due to those concerns, and that it was at risk of losing business with another major customer due to an opt-out provision in a contract that would be triggered based on the company’s leverage. Id. at *2.
The Court categorized the alleged misrepresentations as historical statements of fact, puffery, present statements of fact, and/or opinion statements, none of which were actionable. Id. at *4. First, the Court held that it is not misleading for a company to accurately tout its past success, even where doing so may arguably create an implicit promise of future success. Id. at *4. Second, the Court found statements that the company was “too big to fail” or optimism about its “broad geographic footprint, breadth of services, and operating expertise” were non-actionable puffery. Id. at *5. Third, the Court held that the company’s statements about present facts—such as the infrequency of customer switching and resultant long-term relationships—were not actionable, given that they were not alleged to be false when made and there was no allegation that the company at the time could reasonably have anticipated subsequent customer disruptions. Id. Finally, the Court determined that statements of opinion or value judgments—such as that the company “believed” it would be successful in the future—were non-actionable statements of opinion. Id.
The Court also considered whether plaintiff had adequately alleged that the company omitted material facts concerning its business prospects—in particular, by failing to disclose that it was relatively easy for a customer to terminate its contract based on the company’s financial condition, the large loss that would result from such a termination, and the company’s deteriorating relationships with certain customers. Id. at *6. Plaintiff argued that the company should have made additional disclosures no later than June 2016—instead of in November 2016—given that, for a twelve-month period ending in June, its debt level had been three times higher than that permitted under the contractual provision at issue. The Court rejected this argument, finding that it amounted to a “Jenga tower of assumptions”—that, because the company was in breach of the debt level provision in June 2016, the company would be in breach at the end of the year (when the provision would be triggered) and that customers would take the additional step of terminating their agreements. Id. at *7. Moreover, the Court emphasized that the company “amply and repeatedly” disclosed that its business was highly dependent on its largest customers, and that its debt level could make it difficult for the company to meet its financial obligations. Id. at *8. The Court concluded that it was “unwilling to expand the duty to disclose to a more speculative plane” in light of the disclosures that the company did make, because doing so might make “speak[ing] on a topic” an exception that would “swallow the general rule that the Section 10(b) and Rule 10b-5 impose no affirmative duty to disclose any and all material information.” Id.
Finally, the Court considered whether any of the alleged misstatements were made with scienter. Plaintiff alleged the company waited to make the disclosure as part of an effort to release all bad news at once, with the goal of driving down the price of certain debt notes and being able to reacquire them at a discount. Id. at *9. The Court dismissed these allegations, holding that plaintiff had failed to articulate any concrete benefit that would accrue to the individual defendants from the alleged scheme, and that an inference of non-fraudulent intent was “far more compelling.” Id. at *10.