Meitav Dash Provident Funds v. Spirit Aerosystems

79 F.4th 1209

MEITAV DASH PROVIDENT FUNDS AND PENSION LTD.; Gary Smith, individually and on behalf of all others similarly situated; City of Miami Fire Fighters' and Police Officers' Retirement Trust, Plaintiffs-Appellants, and Jacob Goldman, individually and on behalf of all others similarly situated; Employees' Retirement System of the City of Providence, Plaintiffs, v. SPIRIT AEROSYSTEMS HOLDINGS, INC.; Thomas C. Gentile, III; Jose Garcia; John Gilson; Shawn Campbell, Defendants-Appellees.

No. 22-5013

United States Court of Appeals, Tenth Circuit

FILED August 21, 2023

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF OKLAHOMA (D.C. No. 4:20-CV-00054-SPF-JFJ)

Irina Vasilchenko, Labaton Sucharow LLP, New York, New York (Brian Calandra, and Jeremy A. Lieberman, Pomerantz LLP, New York, New York; Patrick V. Dahlstrom, Pomerantz LLP, Chicago, Illinois; James W. Johnson, David J. Schwartz, Geoffrey C. Jarvis, Kessler Topaz Meltzer & Check, LLP, Radnor, Pennsylvania; John W. Dowdell and James M. Reed, Hall Estill Law Firm, Tulsa, Oklahoma; Peretz Bronstein, Bronstein, Gewirtz & Grossman, New York, New Yok, with her on the briefs), for Plaintiffs-Appellants.

John Wander, Vinson & Elkins, LLP, Dallas, Texas (C. Austin Birnie and R. Richard Love, III, Conner & Winters, LLP, Tulsa, Oklahoma; Michael Holmes and Robert Ritchie, Vinson & Elkins, LLP, Dallas, Texas; Mary Quinn Cooper, Jessica L. Dickerson and Spencer F. Smith, McAfee & Taft P.C., Tulsa, Oklahoma; Patrick Smith and Andrew Rodgers, Smith Villazor LLP, New York, New York; John Christopher Davis, Johnson & Jones, Tulsa, Oklahoma; Daniel Gold, Shearman & Sterling LLP, Dallas, Texas, with him on the brief), for Defendants-Appellees.

Before BACHARACH, PHILLIPS, and MORITZ, Circuit Judges.

BACHARACH, Circuit Judge.

This appeal involves claims for securities fraud against Spirit AeroSystems, Inc., and four of its executives. Spirit produced shipsets of components for jetliners, including Boeing's 737 MAX. But Boeing stopped producing the 737 MAX, and Spirit's sales tumbled. At about the same time, Spirit acknowledged an unexpected loss from inadequate accounting controls.

After learning about Spirit's downturn in sales and the inadequacies in accounting controls, some investors sued Spirit and four executives for securities fraud. See 17 C.F.R. § 240.10b-5. The district court dismissed the suit, and the investors appealed.

For claims involving securities fraud, pleaders bear a stiff burden when alleging scienter. In our view, the investors have not satisfied that burden. So we affirm the dismissal.

1. Spirit reassures investors, but Boeing then halts production of the 737 MAX.

When two jetliners crashed, the Federal Aviation Administration grounded flights for the 737 MAX. After the grounding, Boeing reduced production of the 737 MAX from 52 jetliners per month to 42. But Boeing kept purchasing the same monthly number of shipsets (52) from Spirit.

These purchases proved critical to Spirit, which obtained roughly half of its yearly revenue from sales of the shipsets to Boeing. So investors nervously monitored Boeing's continued purchases from Spirit.

Spirit's chief executive officer (Thomas Gentile, III) allegedly reassured investors in a call on October 31, 2019, stating that Spirit would "be at 52 [shipsets of components produced per month] for an extended period of time."¹ Appellants' App'x vol. 2, at 244. On the same day, Mr. Gentile, Spirit's chief financial officer (Jose Garcia), and Spirit's corporate controller (John Gilson) filed documents with the Securities and Exchange Commission, stating that Spirit expected to continue selling Boeing 52 shipsets every month.

On November 24, 2019, a market observer reported on "takeaways" from a meeting with Spirit executives. This report suggested that Spirit would continue monthly sales of 52 shipsets until at least May 2020. On December 16, 2019, Boeing announced that it would soon temporarily stop producing the 737 MAX.

Image materials not available for display.

Three days later, Boeing told Spirit to stop delivering shipsets for the 737 MAX. The next day, Spirit disclosed that it would stop producing the shipsets.²

More bad news followed, this time about Spirit's method of accounting for contingent liabilities. Spirit had filed documents on October 31, 2019, certifying the adequacy of its accounting controls. Months later, Spirit disclosed that

• material weaknesses had existed in the accounting controls and

• two executives (Jose Garcia and John Gilson) had quit.

At about the same time, Spirit fired another executive (Shawn Campbell).

When investors learned of Boeing's halt in production and the inadequacy of Spirit's accounting controls, Spirit's stock price plummeted.

2. The plaintiffs must plead facts giving rise to a strong inference of scienter.

When considering the district court's grant of the defendants' motion to dismiss, we conduct de novo review. Nakkhumpun v. Taylor, 782 F.3d 1142, 1146 (10th Cir. 2015). When conducting that review, we credit the allegations in the complaint and view them in the light most favorable to the plaintiffs. Moore v. Guthrie, 438 F.3d 1036, 1039 (10th Cir. 2006).

Though we view the allegations favorably to the plaintiffs, federal law creates a heavy burden on claimants alleging securities fraud. See In re Level 3 Commc'ns, Inc. Sec. Litig., 667 F.3d 1331, 1333 (10th Cir. 2012) ("A plaintiff suing under Section 10(b) [of the Exchange Act] bears a heavy burden at the pleading stage."). This burden requires the plaintiffs to "state with particularity facts giving rise to a strong inference that the defendant[s] acted with" scienter. Smallen v. W. Union Co., 950 F.3d 1297, 1305 (10th Cir. 2020) (emphasis & alteration in original) (quoting In re Level 3, 667 F.3d at 1333); see 15 U.S.C. § 78u-4(b)(2)(A) (requiring the pleader to "state with particularity facts giving rise to a strong inference" of scienter).

To assess the strength of this inference, we "consider ... competing inferences rationally drawn from the facts alleged." Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308, 314, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). An inference of scienter is considered "strong" only if proof of the allegations would lead a reasonable factfinder to determine that an inference of fraudulent intent or recklessness is at least as compelling as an innocent inference. See Smallen, 950 F.3d at 1305 (fraudulent intent); In re Zagg, Inc. Sec. Litig., 797 F.3d 1194, 1200-01 (10th Cir. 2015) (recklessness). "Conduct is considered reckless only if the defendants (1) acted in 'an extreme departure from the standards of ordinary care' and (2) presented 'a danger of misleading buyers or sellers' that was [] known to the defendants or [] so obvious that the defendants must have been aware of the danger." Anderson v. Spirit Aerosystems Holdings, Inc., 827 F.3d 1229, 1237 (10th Cir. 2016) (quoting In re Level 3, 667 F.3d at 1343 n.12).

The dissent suggests that a plaintiff can allege fraudulent intent or recklessness through executives' access to information that contradicts their statements. Dissent at 1236. For this suggestion, the dissent relies solely on a Second Circuit opinion: Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir. 2000). But some other circuits regard allegations of access to contradictory information as inadequate to plead scienter. See PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 688 (6th Cir. 2003) (stating that "fraudulent intent cannot be inferred merely from the [two corporate officers'] positions in the Company and alleged access to information"), abrogated on other grounds by Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007); Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051, 1063 (9th Cir. 2014) ("Mere access to reports containing undisclosed sales data is insufficient to establish a strong inference of scienter."); see also Anderson, 827 F.3d at 1246 ("[M]ere attendance at meetings does not contribute to an inference of scienter.").

For the sake of argument, we can assume that access to contradictory information can sometimes contribute to a strong inference of scienter. Even with that assumption, however, the plaintiffs would need particularized allegations that, if proven, would show a speaker's knowledge or reckless disregard of contradictory information. See City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605, 620 (9th Cir. 2017) (concluding that the plaintiff failed to adequately allege the speaker's direct knowledge of flawed accounting even though access to the disputed information could contribute to a strong inference of scienter). For example, it's not enough for the plaintiffs to allege briefings to a speaker on the underlying data or the speaker's access to internal reports. See Anderson, 827 F.3d at 1246 (briefings and attendance at meetings); In re Level 3 Commc'ns, Inc. Sec. Litig., 667 F.3d 1331, 1344-45 (10th Cir. 2012) (internal reports).

Through briefings and internal reports, Spirit's top executives presumably had access to a broad swath of information shared among subordinates within Spirit. But an executive's position in the company doesn't show knowledge of specific facts. See Anderson, 827 F.3d at 1245 ("We cannot infer scienter based only on a defendant's position in a company."); In re Zagg, Inc. Sec. Litig., 797 F.3d 1194, 1205 (10th Cir. 2015) (rejecting "the notion that knowledge may be imputed solely from an individual's position within a company" (quoting Wolfe v. Aspenbio Pharma, Inc., 587 F. App'x 493, 497 (10th Cir. 2014))). So it would make little sense to draw a strong inference of scienter from access to information. If access alone were enough, a strong inference of scienter would exist for high-level executives whenever they make a public statement contradicting something in the company's files.

A...