In re A123 Sys., Inc. Sec. Litig.

930 F.Supp.2d 278

In re A123 SYSTEMS, INC. SECURITIES LITIGATION.

Civil Action No. 12–10591–RGS.

United States District Court, D. Massachusetts.

March 14, 2013.

James E. Brandt, Pro Hac Vice, Jeff Hammel, Pro Hac Vice, Elizabeth R. Marks, Pro Hac Vice, Latham & Watkins LLP, New York, NY, Matthew N. Kane, Donnelly, Conroy & Gelhaar, LLP, Boston, MA, for A123 Systems Inc.

Kathleen M. Donovan–Maher, Berman DeValerio, Pease Tabacco Burt & Pucillo, Boston, MA, for Scott Heiss.

Bryan A. Wood, Berman DeValerio, Boston, MA, Mitchell J. Matorin, Matorin Law Office LLC, Needham, MA, for Ronald Hamman.

David Pastor, Pastor Law Office, LLP, Boston, MA, for Stanley Levin.

Ariana J. Tadler, Milberg Weiss LLP, Charles Slidders, Pro Hac Vice, Milberg LLP, Jeremy A. Lieberman, Pomerantz Haudek Block Grossman & Gross LLP, Pro Hac Vice, New York, NY, for Suk Cheung.

MEMORANDUM AND ORDER ON DEFENDANTS' MOTION TO DISMISS THE CONSOLIDATED AMENDED COMPLAINT

STEARNS, District Judge.

This putative class action is brought by Suk Cheung, Scott Heiss, and Michael Zoitas on behalf of all persons and entities who purchased the common stock of A123 Systems, Inc. (A123), between February 28, 2011, and March 26, 2012. The proposed class was allegedly duped by misrepresentations disseminated by defendants in violation of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and Rule 10b–5. Defendants are former high ranking officers of A123: David P. Vieau, Chief Executive Officer; David J. Prystash, Chief Financial Officer; and John R. Granara III, Interim Chief Financial Officer.¹ Defendants now move to dismiss the Consolidated Amended Complaint on the grounds that it fails to allege: (1) any actionable omission or misstatement; (2) scienter; or (3) loss-related causation.

BACKGROUND

The facts, in the light most favorable to plaintiffs as the non-moving parties, are as follows. A123 Systems, Inc. manufactured and sold rechargeable lithium ion batteries and battery systems. Am. Compl. ¶ 2. The bulk of A123's sales were in the transportation sector where its battery systems were designed to power electric vehicles. Id. ¶ 40; Def.'s Ex. B at 1.² A123 supplied batteries to BMW, General Motors, Daimler, and Fisker Automotive, among other manufacturers. Am. Compl. ¶ 40; Def.'s Exs. B & C at 1. The A123 “flagship product” was the AMP20 Lithium Ion Prismatic Cell (prismatic battery). Am. Compl. ¶ 38. Unlike ordinary batteries, prismatic cell batteries are flat and, as the name implies, shaped like a prism. Id. The prismatic cells are wired in a series, which are in turn wired in parallel and welded together. Id. As described by A123, the prismatic battery was “built to deliver high energy and power density combined” and “demonstrates industry-leading abuse tolerance coupled with excellent life performance under the most rigorous duty cycles.” Id. ¶ 39.

In January of 2010, A123 entered into a multi-year contract with Fisker to supply prismatic batteries for the Fisker Karma, a new high-performance sports car. Id. ¶ 42. Fisker chose A123 as the battery supplier “because of the company's ability to meet [its] performance needs and rapidly scale to [its] production volume....” Id.; Def.'s Ex. D. In tandem with the announcement of the supply agreement, A123 invested over twenty million dollars in cash and stock in Fisker to “closely align the interests of both companies.” Def.'s Ex. D. Prior to negotiating the Fisker contract, A123 suffered net losses of $80 million in 2008, $87 million in 2009, and, in 2010, an even larger loss of $153 million. Am. Compl. ¶ 45. Against this backdrop, Fisker became A123's largest customer, expected by A123 to account for nearly one quarter of its anticipated revenue in 2011. Id. ¶ 41. In a press release dated August 4, 2011, defendant Vieau announced that revenue in the second quarter of 2011 had doubled “due largely to the fact that [A123] started shipping prismatic modules and packs in volume to Fisker and Smith Electric Vehicles.” Id. ¶ 88. In a conference call discussing the second quarter results, A123's management professed its belief that the partnership with Fisker was the key to A123's future growth. Id. ¶¶ 90, 92.

The prismatic batteries were manufactured at A123's Livonia, Michigan facility. Id. ¶ 83; Def.'s Ex. D. The Livonia plant, one of two new A123 facilities located in Michigan, opened on September 13, 2010. Throughout 2010 and 2011, the plant was in the process of “ramp[ing] up” its prismatic cell production capacity, in part to meet the demands of the Fisker supply agreement. Def's. Br. at 3; Def's Ex. C at 77. During this period, the Livonia facility increased battery production from 1,000 to 11,000 cells per day. Am. Compl. ¶ 54.

On November 4, 2011, A123 revised its 2011 revenue guidance downward by twenty-two percent “due to an unexpected reduction in orders for battery packs from Fisker for the fourth quarter as it balances inventory levels from all suppliers.” Def.'s Ex. O. Vieau characterized the reduction as “temporary,” and stated that “[A123's] relationship with Fisker remains strong....” Id. A123's stock price dropped another ten percent after the revision was made public. Am. Compl. ¶ 94. On December 21, 2011, the National Highway Transport Safety Association announced that Fisker was recalling all of the 239 Karma vehicles manufactured between July 1, 2011, and November 3, 2011, because of a defect in a hose clamp in the A123 battery. Id. ¶ 103.

On March 8, 2012, Consumer Reports issued a critical review of a prototype of the Fisker Karma, noting that during testing the vehicle's “dashboard flashed a message and sounded a ‘bing’ showing a major default,” and that despite attempts at repair, the Karma proved inoperable and had to be towed. Id. ¶ 108; Def.'s Ex. H. Further investigation pinpointed the prismatic battery as the cause of the breakdown. Am. Compl. ¶ 114. On March 26, 2012, A123 issued a press release stating that it had “discovered that some prismatic cells made in [its] Livonia facility may contain a defect which can result in premature failure of a battery pack or module that includes a defective cell.” Id. The company announced that it had “launched a field campaign to replace battery modules and packs that may contain defective prismatic cells produced at A123's Livonia, Mich. manufacturing facility.” Id. The cost of the recall was estimated at $55 million, approximately one quarter of A123's projected annual revenue for 2012. Id. A123's stock price dropped twelve percent on the day of this disclosure. Id. ¶ 117. Two days later, the stock fell another thirteen percent after Deutsche Bank downgraded A123's rating from a “buy” to a “hold.” Id. ¶¶ 118, 119. This lawsuit was filed one week later.

DISCUSSION

To sustain a claim for securities fraud under Section 10(b) and Rule 10b–5 a plaintiff must satisfactorily plead six elements: “(1) a material misrepresentation or omission; (2) scienter, or a wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation.” City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Waters Corp., 632 F.3d 751, 756 (1st Cir.2011). In addition to these skeletal requirements, allegations of securities fraud must also meet the heightened pleading standard set out in the Private Securities Litigation Reform Act of 1995 (PSLRA) and Federal Rule of Civil Procedure 9(b). The PSLRA standard is “congruent and consistent” with the First Circuit's “rigorous” interpretation of the pleading requirements of Rule 9(b). Greebel v. FTP Software, Inc., 194 F.3d 185, 193 (1st Cir.1999).

A. PSLRA Pleading Requirements

The PSLRA requires that a complaint alleging a material misrepresentation or omission “specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading.” 15 U.S.C. § 78u–4(b)(1). In explaining why a statement or omission is misleading, a complaint “must provide some factual support for the allegations of fraud.” Greebel, 194 F.3d at 193 (internal quotation marks and citation omitted). This means that a plaintiff must offer “factual allegations that would support a reasonable inference that adverse circumstances existed at the time of the offering [of the alleged misrepresentation], and were known and deliberately or recklessly disregarded by defendants.” Id. at 193–194 (internal quotation marks and citation omitted).

The PSLRA further requires that a securities fraud complaint “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u–4(b)(2). This required state of mind is known as scienter, a “mental state embracing intent to deceive, manipulate, or defraud.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007) (internal quotation marks and citation omitted). To make out scienter, a plaintiff must establish that “defendants consciously intended to defraud, or that they acted with a high degree of recklessness.” New Jersey Carpenters Pension & Annuity Funds v. Biogen IDEC Inc., 537 F.3d 35, 44 (1st Cir.2008) (internal quotation marks and citation omitted). Scienter under the recklessness standard requires “a highly unreasonable omission, involving not merely simple, or even inexcusable, negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious the actor must have been aware of it.” Greebel, 194 F.3d at 198, quoting Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir.1977). Moreover, an inference of scienter will “not survive if [it is] merely reasonable.” Id. at 195. A “strong” inference of scienter “must be more than merely plausible or reasonable—it must be cogent and at least as compelling as any opposing inference of...