Lewis v. YRC Worldwide Inc.

CHRISTINA LEWIS; CITY OF WARWICK RETIREMENT FUND; and PETER SZABO, Plaintiffs, v. YRC WORLDWIDE INC.; JAMES L. WELCH;JAMIE G. PIERSON; STEPHANIE D. FISHER; and DARREN D. HAWKINS, Defendants.

1:19-CV-0001 (GTS/ATB)

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF NEW YORK

March 27, 2020

APPEARANCES:

THE ROSEN LAW FIRM

Counsel for Plaintiff Christina Lewis

275 Madison Avenue, 40th Floor

New York, NY 10016

KAPLAN FOX & KILSHEIMER LLP

Counsel for Plaintiff City of Warwick Ret. Fund

850 Third Avenue, 14th Floor

New York, NY 10022

BOND SCHONECK & KING, PLLC

Co-Counsel for Plaintiff City of Warwick Ret. Fund

One Lincoln Center

Syracuse, NY 13202

POMERANTZ LLP

Counsel for Plaintiff Peter Szabo

600 Third Avenue, 20th Floor

New York, NY 10016

GLANCY PRONGAY & MURRAY LLP

Co-Counsel for Plaintiff Peter Szabo

230 Park Avenue, Suite 530

New York, NY 10128

PROSKAUER ROSE LLP

Counsel for Defendants

1001 Pennsylvania Avenue, N.W., Suite 600 S.

Washington, D.C. 20004

BARCLAY DAMON LLP

Co-Counsel for Defendants

125 East Jefferson Street

Syracuse, NY 13202

OF COUNSEL:

PHILLIP KIM, ESQ.

JEFFREY P. CAMPISI, ESQ.

DONALD R. HALL, ESQ.

JASON URIS, ESQ.

GEORGE H. LOWE, ESQ.

JONATHAN B. FELLOWS, ESQ.

EMMA GILMORE, ESQ.

JEREMY A. LIBERMAN, ESQ.

JOSEPH A. HOOD, II, ESQ.

MICHAEL J. WERNKE, ESQ.

SAMUEL ADAMS, ESQ.

VERONICA MONTENEGRO, ESQ.

VILLI A. SHTEYN, ESQ.

GARTH SPENCER, ESQ.

ANN M. ASHTON, ESQ.

JONATHAN E. RICHMAN, ESQ.

RALPH C. FERRARA, ESQ.

DANIEL J. FRENCH, ESQ.

DAVID G. BURCH, JR., ESQ.

ANNELIESE ALIASSO, ESQ.

GLENN T. SUDDABY, Chief United States District Judge

DECISION and ORDER

Currently pending before the Court, in this securities action filed by Christina Lewis, individually and on behalf of all others similarly situated, the City of Warwick Retirement Fund, and Peter Szabo ("Plaintiffs") against YRC Worldwide Inc. ("Defendant YRC"), James L. Welch ("Defendant Welch"), Jamie G. Pierson ("Defendant Pierson"), Stephanie D. Fisher ("Defendant Fisher"), and Darren D. Hawkins ("Defendant Hawkins") (collectively "Defendants"), is Defendants' motion to dismiss Plaintiffs' Amended Complaint for failure to state a claim. (Dkt. No. 81.) For the reasons set forth below, Defendants' motion is granted.

I. RELEVANT BACKGROUND

A. Summary of Plaintiff's Amended Complaint

Generally, liberally construed, Plaintiffs' Amended Complaint alleges that, from March 10, 2014, through December 14, 2018, Defendants repeatedly violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act") and SEC Rule 10b-5. (See generally Dkt.No. 75 [Plfs.' Amend. Compl.].) In particular, Plaintiffs' Amended Complaint alleges that Defendant YRC maintained a company-wide re-weigh system that overcharged customers ("Overcharge Scheme"), and thereby reaped approximately $24 million a year for weight/freight it never transported. (Id.) Plaintiff's Amended Complaint also alleges that Defendants failed to disclose a Department of Justice ("DOJ") investigation into Defendants' alleged re-weigh system that was initiated through a qui tam civil complaint, and that Defendants made false and misleading statements about their pricing strategy, internal controls, and compliance with the Generally Accepted Accounting Principles ("GAAP") and other laws. (Id.)

Generally, based on these factual allegations, Plaintiffs' Amended Complaint asserts the following two claims: (1) a claim that Defendants violated Section 10(b) of the Exchange Act, 15 U.S.C. § 78(j)(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, during the class period; and (2) a claim that Defendants violated Section 20(a) of the Exchange Act, 15 U.S.C. § 78(t)(a). (Id.) Familiarity with these claims, and the factual allegations supporting them, is assumed in this Decision and Order, which is intended primarily for the review of the parties. (Id.)

B. Defendants' Motion to Dismiss

1. Summary of Defendants' Arguments in Their Memorandum of Law

Generally, in their motion to dismiss, Defendants assert three arguments. (Dkt. No. 81-24.) First, Defendants argue that Plaintiffs have not stated a claim for a violation of Section 10(b) of the Exchange Act or SEC Rule 10b-5. (Id. at 6-36.) More specifically, Defendants argue that Plaintiffs have not alleged facts plausibly suggesting a material misstatement or omission because, based on the Amended Complaint's own factual allegations (and the documents incorporated by reference in the Amended Complaint), Defendants made (1) nomisstatements about reported financial results, (2) no misstatements about accounting policies, (3) no misstatements about loss contingencies, (4) no misstatements about conformance to GAAP, and (5) no other material misstatements or omissions. (Id. at 8-28.)

Second, Defendants argue that Plaintiffs have not alleged facts plausibly suggesting a strong inference of scienter because (1) there are no factual allegations plausibly suggesting conscious misbehavior or recklessness, and (2) Plaintiffs' allegations of motive to commit fraud are insufficient to plausibly suggest such a strong inference. (Id. at 29-36.)

Third, Defendants argue that Plaintiffs have not stated a control-person liability claim under Section 20(b) of the Exchange Act because they have failed to allege facts plausibly suggesting a primary violation of Section 10(b). (Id. at 37.)

2. Summary of Plaintiffs' Arguments in Their Opposition

Generally, in opposition to Defendants' motion, Plaintiffs assert three arguments. (Dkt. No. 83.) First, Plaintiffs argue that they have stated a claim for a violation of Section 10(b) of the Exchange Act, SEC Rule 10b-5, and Section 20(b) of the Exchange Act by alleging that Defendants provided false and misleading statements and omissions. (Dkt. No. 83.) More specifically, Plaintiffs argue that they have alleged that (1) Defendants' overcharge scheme occurred during the class period, (2) Defendants had an affirmative duty to disclose the overcharge scheme and DOJ investigation, (3) Defendants made materially false and misleading statements and omissions about their reported financial results, (4) Defendants failed to disclose the DOJ investigation as a loss contingency in violation of GAAP, (5) Defendants understated YRC's re-rate reserves, (6) Defendants made material misstatements and omissions in YRC's Sarbanes-Oxley ("SOX") Certifications, and (7) Defendants made materially false andmisleading statements about their conformance to GAAP and compliance with all laws. (Id. at 12-30.)

Second, Plaintiffs argue that their Amended Complaint alleges facts plausibly suggesting a strong inference of scienter by alleging that (1) Defendant Welch had actual knowledge of the Overcharge Scheme, (2) all individual Defendants knew of the DOJ investigation, (3) Defendants failed to disclose information they had a clear duty to disclose, (4) Defendants repeatedly made statements about YRC's re-rating pricing strategy, (5) the facts in question pertained to YRC's core operations (rendering it apparent that knowledge of them may be attributed to the company and its key officers), (6) Defendants had the motive and opportunity required for scienter, and (7) at the very least, someone whose intent could be imputed to the corporation acted with the requisite scienter. (Id. at 31-39.)

Third, Plaintiffs argue that the Amended Complaint states a control-person liability claim under Section 20(b) of the Exchange Act because it has sufficiently alleged a violation of Section 10(b) of the Exchange Act and SEC Rule 10b-5. (Id. at 40.)

3. Summary of Defendants' Arguments in Their Reply

Generally, in reply to Plaintiffs' opposition, Defendants repeat their argument that the Amended Complaint has not alleged facts plausibly suggesting a material misrepresentation. (Dkt. No. 84.) Specifically, Defendants argue that there was (1) no duty to disclose the alleged "overcharge scheme" or DOJ investigation, (2) no misrepresentation about pricing or reported financial results, (3) no GAAP violations from non-disclosure of the DOJ investigation, (4) no misstatements about YRC's re-rate reserves, (5) no misstatements in YRC's SOX Certifications, and (6) no misstatements about conformance to GAAP or compliance with laws. (Id. at 18-25.)In addition, Defendants argue that Plaintiffs have not pled a strong inference of scienter because there is (1) no factual allegation plausibly suggesting conscious misbehavior or recklessness, (2) no scienter from the knowledge of the DOJ investigation, (3) no scienter from the alleged disclosure duties, (4) no scienter under the "core operations" theory, (5) no scienter from the SEC filings or SOX certifications, and (6) no scienter based on motive or opportunity. (Id. at 2-14). Finally, Defendants argue that Plaintiffs have not alleged facts plausibly suggesting that any misconduct occurred during the class period. (Id. at 15.)

4. Subsequent Letter-Briefs

After the completion of briefing on their motion, Defendants submitted a letter-brief directing the Court's attention to a Second Circuit decision published on December 10, 2019: Gamm v. Sanderson Farms, Inc, 944 F.3d 455 (2d Cir. 2019). (Dkt No. 87.) Defendants argue that, pursuant to this decision, Plaintiffs have failed to plead facts of the alleged underlying illegal activity with sufficient particularity under Fed. R. Civ. P. 9(b) and the PSLRA. (Id.)

In response, Plaintiffs argue that Gamm is inapposite because their Amended Complaint is based on information provided by several confidential informants, and the alleged underlying illegal activities were pleaded with sufficient particularity. (Dkt. No. 88.)

II. GOVERNING LEGAL STANDARDS

A. General Legal Standard Governing Dismissal for Failure to State a Claim

It has long been understood that a dismissal for failure to state a claim upon which relief can be granted, pursuant to Fed. R. Civ. P. 12(b)(6), can be based on one or both of two grounds: (1) a challenge to the "sufficiency of the pleading" under Fed. R. Civ. P. 8(a)(2); or (2) a challenge to the legal cognizability of...