Born v. Quad/Graphics, Inc.

521 F.Supp.3d 469

Dennis BORN, Marilynn Born, and Valerie Bloom, individually and on behalf of all others similarly situated, Plaintiffs,

v.QUAD/GRAPHICS, INC., J. Joel Quadracci, and David J. Jonan, Defendants.

19-CV-10376 (VEC)

United States District Court, S.D. New York.

Signed February 25, 2021

Gregory Bradley Linkh, Glancy Prongay & Murray LLP, New York, NY, Lesley Frank Portnoy, Glancy Prongay & Murray LLP, Los Angeles, CA, for Plaintiffs Dennis Born, Marilynn Born.

David Stein, Gibbs Law Group, Oakland, CA, Eric H. Gibbs, Girard, Gibbs & De Bartolomeo, San Francisco, CA, Javier Bleichmar, Ross Mitchell Shikowitz, Bleichmar Fonti & Auld LLP, New York, NY, for Plaintiff Hani Anklis.

Javier Bleichmar, Bleichmar Fonti & Auld LLP, New York, NY, for Plaintiff Valerie Bloom.

Joseph S. Allerhand, Stacy Nettleton, Nicole Elizabeth Prunetti, Tania Matsuoka, Weil Gotshal & Manges LLP, New York, NY, for Defendants.

OPINION AND ORDER

VALERIE CAPRONI, United States District Judge:

Plaintiffs in this putative securities fraud class action are on a fruitless endeavor to manufacture a fraud case out of a stock drop that followed a company (in a struggling if not dying industry) announcing that it would not meet its 2019 financial projections and was reducing its dividend. Plaintiffs have sued Quad/Graphics, Inc. ("Quad") and two of its senior executives, J. Joel Quadracci, Quad's Chairman, President, and Chief Executive Officer, and David J. Honan, Quad's Executive Vice President and Chief Financial Officer, on behalf of themselves and all others who purchased or otherwise acquired Quad's publicly traded class A common stock between February 21, 2018, and October 29, 2019 (the "Class Period"), alleging claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and related regulations. Plaintiffs’ claims concern alleged misrepresentations and omissions touching on: Quad's corporate transformation plan; Quad's attempted acquisition of a competitor, LSC Communications, Inc.; and the nearly contemporaneous sale of a subsidiary and settlement of SEC charges for Foreign Corrupt Practice Act ("FCPA") violations. On May 15, 2020, after having been appointed lead plaintiff, see Dkt. 53, Alaska Electrical Pension Fund filed an Amended Complaint ("AC" or "Complaint"). See Dkt. 67. On July 14, 2020, Defendants moved to dismiss the Complaint. See Notice of Mot., Dkt. 70. For the following reasons, Defendants’ motion is GRANTED.

BACKGROUND¹

Quad has long had a large footprint in the printing business, with a significant presence in the magazine, catalog, and book printing markets. See AC ¶¶ 2, 23.

Starting around 2017, Quad, which until this time had been focused on building scale and breadth in its printing business, recognized that it was in a declining business sector; to respond to broad and accelerating declines in the industry, Quad launched a transformation plan to position itself as a "multi-channel," "marketing services provider." Id. ¶¶ 2–3, 36–37, 42–43. Quad represented to investors that this transformation strategy, called Quad 3.0, would allow it to compete more effectively amid a shifting industry landscape and would provide additional opportunities for its foundational print business. See id. ¶¶ 2–3, 42–43. By expanding into other forms of media while continuing to leverage its strong print business, Quad sought to provide clients an "integrated stack of marketing services" in a dynamic industry with an "ever-expanding choice of media channels." Id. ¶¶ 2–3, 42. In support of its transition, throughout the Class Period, Quad acquired or increased its stake in several marketing firms. Id. ¶¶ 5, 44–48.

Despite its transition to a marketing services firm, during the Class Period, Quad's printing business remained its primary source of revenue and a critically important part of its business. See, e.g. , id. ¶¶ 3, 38, 42. In addition to difficulties caused by broad declines in the printing business, Quad was engaged in intense competition with LSC Communications, Inc. ("LSC"), the other significant player in the magazine, catalog, and book printing sectors, with executives at both companies describing the competition as particularly intense and resulting in a "price war." See id. ¶¶ 6, 40, 53–55, 67. On or around October 31, 2018, Quad announced that it had agreed to acquire LSC in an all-stock transaction valued at $1.4 billion, positioning the combined company to be one of the, if not the, largest printing companies in the nation. Id. ¶¶ 7, 56–58, 65. Quad disclosed that it expected to achieve "net synergies" from the acquisition worth approximately $135 million within two years, with the majority of the benefits coming from "capacity rationalization" and "administrative efficiencies." Id. ¶¶ 57, 63.

In February 2019, Quad announced its 2019 financial guidance, anticipating net sales of $4.05 to $4.25 billion, adjusted EBITDA of $360 to $400 million, and free cash flow of $145 million to $185 million, while touting Quad's quarterly dividend of $0.30 per share. Id. ¶ 8. Quad made explicit that its 2019 financial guidance did not reflect the pending LSC acquisition. Id. Even as it announced disappointing results for the first and second quarters of 2019, Quad reaffirmed its original 2019 guidance and noted that it expected to achieve superior financial results in the second half of the year. Id.

Shortly after Quad announced the planned acquisition of LSC, the Department of Justice ("DOJ") began reviewing the transaction. Defendants provided periodic public updates on DOJ's review, indicating that it was going "as expected" and that they anticipated that the deal would be approved. See id. ¶¶ 182, 194. On June 20, 2019, however, DOJ announced that it had sued to block Quad's acquisition of LSC. See id. ¶¶ 67–71. Defendants immediately announced that they were "fully committed to defending the DOJ's lawsuit in court" and intended to "vigorously defend" the acquisition. Id. ¶ 72. Quad and LSC jointly asked the federal district court hearing DOJ's suit to expedite the trial schedule to permit a decision to be made in advance of the acquisition's "drop-dead date." See Dkt. 71-23; Dkt. 71-22. The district court declined to do so. See Dkt. 71-22. Shortly thereafter, on July 23, 2019, Quad announced that it was abandoning the LSC acquisition due to the added costs and uncertainty from the delay, explaining that the delay caused by the litigation "would have likely eroded a considerable amount of the expected benefits of the merger." AC ¶¶ 72–73. In the wake of the aborted acquisition, LSC cut its financial guidance and warned of anticipated poor financial performance; Quad, on the other hand, reaffirmed its original 2019 financial guidance and stated that it was on track to meet its projections. Id. ¶ 73.

Separately, on September 4, 2019, Quad announced that it was selling its heavy-duty industrial wood crating business, Transpak Corporation ("Transpak"), for approximately $10 million. Id. ¶ 75. Quad attributed the sale to the 3.0 transition plan and stated that the net proceeds from the sale would be "used to reduce debt." Id. Three weeks later, on September 26, 2019, Quad announced that it had agreed to pay approximately $10 million to settle SEC charges that it had violated the FCPA when its Peru and China-based subsidiaries engaged in bribery schemes. Id. ¶ 76.

On October 29, 2019, Quad announced that it had missed its 2019 third-quarter ("3Q19") projections, was reducing its 2019 financial guidance, and was cutting its quarterly dividend by 50% to $0.15 per share.² See id. ¶¶ 13, 132. Quad further announced that it had decided to divest its book business and to engage in additional cost-reduction actions to accelerate Quad 3.0. Id. The following day, October 30, 2019, Quad's stock price dropped $6.42 per share and closed at an all-time low of $4.85 per share, despite steady results across the rest of the market. Id. ¶ 133. Market analysts expressed surprise at Quad's announcement, especially given Quad's affirmance of its guidance a quarter earlier. See id. ¶ 134.

DISCUSSION

I. Standard of Review and Elements of a Section 10(b) Claim

To survive a motion to dismiss under Rule 12(b)(6), "a complaint must allege sufficient facts, taken as true, to state a plausible claim for relief." Johnson v. Priceline.com, Inc. , 711 F.3d 271, 275 (2d Cir. 2013) (citing Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555–56, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). In general, "a complaint does not need to contain detailed or elaborate factual allegations, but only allegations sufficient to raise an entitlement to relief above the speculative level." Keiler v. Harlequin Enters. Ltd. , 751 F.3d 64, 70 (2d Cir. 2014) (citation omitted). The Court accepts all factual allegations in the complaint as true and draws all reasonable inferences in the light most favorable to the plaintiff. See Gibbons v. Malone , 703 F.3d 595, 599 (2d Cir. 2013). The Court is not, however, "bound to accept as true a legal conclusion couched as a factual allegation." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Twombly , 550 U.S. at 555, 127 S.Ct. 1955 ).

Section 10(b) of the Securities Exchange Act makes it unlawful to "use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe." 15 U.S.C. § 78j(b). The SEC's implementing rule, Rule 10b–5, makes it unlawful to "make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b–5. To state a claim under these provisions, a plaintiff must plead six elements: "(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a...