On October 9, 2019, Judge C. Darnell Jones, II of the United States District Court for the Eastern District of Pennsylvania dismissed a putative securities class action asserting claims under the Securities Exchange Act of 1934 against a manufacturer of equipment and tools used to assemble semiconductors and its CEO and CFO.  Kumar v. Kulicke & Soffa Indus., Inc., No. CV 19-0362, 2019 WL 5081896 (E.D. Pa. Oct. 9, 2019).  Based on the company’s disclosure of control deficiencies, improper transactions by an unnamed “senior finance employee,” the resignation of the company’s CFO, and amended financial statements, plaintiffs alleged that the company’s SEC filings and SOX certifications contained material misrepresentations.  Id. at *2.  The Court held that plaintiffs had identified actionable misstatements as to the CFO but had not adequately alleged scienter and, therefore, dismissed the case, while allowing plaintiffs leave to file an amended complaint.

With respect to alleged misrepresentations, the Court determined that the representations made in certifications by the company’s CFO were plausibly false or misleading in light of his resignation and subsequent termination from his next job. Id. at *6. Thus, whether or not the CFO was the unnamed “senior finance employee” at the center of the investigation, there “appear[ed] to be more than a sheer possibility” that the CFO acted unlawfully. Id. In contrast, the Court held that plaintiffs made no allegations that suggested the CEO “knew about or was involved with the misappropriations” at the time of the relevant filings and dismissed the claims against him. Id. at *7.

The Court, however, rejected plaintiffs’ arguments that an inference of scienter against the CFO should be drawn from his resignation and subsequent termination from his next job. The Court explained that “the resignation of corporate officials will not strengthen an inference of scienter if the allegations do not cogently suggest that the resignations resulted from the… executives’ knowing or reckless involvement in a fraud.” Id. at *8 (quoting In re Hertz Global Holdings Inc., 905 F.3d 106, 119 (3d Cir. 2018)). The Court emphasized that the CFO resigned at least four months before the company discovered the improper transactions, and that plaintiffs had failed to allege the CFO “resigned because of his involvement or knowledge of fraud that had yet to be discovered.” Id. The Court also noted that given the timing of the CFO’s resignation, even if plaintiffs’ allegations that the CFO was involved with certain improper transactions were true, it was also plausible that another employee had been involved after the CFO made the requisite certifications for the company’s securities filings. Id. *9. Moreover, since the CFO continued to work at the company for several months after his resignation as CFO, the Court held that a “more compelling inference would be that another employee was responsible for the fraud during the second fiscal quarter, and that same employee was therefore responsible for the fraud in the first fiscal quarter as well.” Id.

In addition, the Court rejected plaintiffs’ argument that “corporate scienter” could still be established against the company based on remedial steps the company took following the discovery of the weaknesses in its internal controls. Id. at *9. The Court noted that the Third Circuit had yet to address whether “corporate scienter” could support a claim under Rule 10b-5 absent sufficient allegations to make out scienter by an individual and that other Circuit Courts of Appeal were divided on the issue. Id. at *10. But even if the Third Circuit were to accept the “corporate scienter” theory, the Court held, the facts alleged did “not support the existence of any type of large-scale cover-up scheme” of the type that had been determined by other courts to support an inference of corporate scienter. Id. at *11. The more reasonable inference was that the company’s remedial measures reflected an attempt to improve its processes to prevent future mistakes. Id. at *9.

Kumar v. Kulicke & Soffa Indus., Inc.