Okla. Firefighters Pension & Ret. Sys. v. Xerox Corp., 16 Civ. 8260 (PAE)

300 F.Supp.3d 551

OKLAHOMA FIREFIGHTERS PENSION AND RETIREMENT SYSTEM, individually and on behalf of all others similarly situated, Plaintiff,

v.XEROX CORPORATION, Ursula M. Burns, Luca Maestri, Kathryn A. Mikells, Lynn R. Blodgett, Robert K. Zapfel, David H. Bywater, and Mary Scanlon, Defendants.

16 Civ. 8260 (PAE)

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

Signed March 20, 2018

Eric James Belfi, Francis Paul McConville, Christopher J. Keller, Labaton & Sucharow LLP, New York, NY, for Plaintiff.

Sandra C. Goldstein, Joe Wesley Earnhardt, Stefan H. Atkinson, Cravath, Swaine & Moore LLP, Anna Karin Furer Manalaysay, Charles Bergin, James M. Adrian, Adrian-Cassidy & Associates, LLC, New York, NY, for Defendants.

OPINION & ORDER

PAUL A. ENGELMAYER, District Judge:

The lead plaintiff in this putative class action claims that Xerox Corporation ("Xerox") violated federal securities laws by dissembling about the challenges it faced as it struggled to make profitable a new business venture. Xerox had purchased Affiliated Computer Services, Inc. ("ACS") in 2010, and then sought to develop ACS's Medicaid Management Information System, known as Health Enterprise, into a platform Xerox could profitably market to state governments. The putative plaintiff class consists of purchasers of Xerox's common stock between April 23, 2012 through October 27, 2015 (the "Class Period"). Lead plaintiff the Arkansas Public Employees Retirement System ("APERS") alleges that Xerox falsely claimed that it had a replicable, "plug-and-play" "platform" that could be readily reused by Xerox's state clients; that implementation of the Health Enterprise system was "going well"; and that implementation of Health Enterprise was profitable. APERS alleges that Xerox's share price was artificially inflated for more than three-and-a-half years by these alleged falsehoods and that, when Xerox eventually revealed, over several disclosures, that implementation of Health Enterprise was going badly, Xerox's share price dropped from a high of $14.32 to $9.29 on the last day of the Class Period. APERS sues Xerox as well as corporate officers Ursula M. Burns, Luca Maestri, Kathryn A. Mikells, Lynn R. Blodgett, Robert Zapfel, David H. Bywater, and Mary Scanlon (the "individual defendants," and, with Xerox, the "defendants").

Xerox and all individual defendants except Zapfel have filed a joint motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). Zapfel has separately moved to dismiss under Rule 12(b)(6).

For the reasons that follow, the Court grants both motions to dismiss.

I. Background¹

A. The Parties

1. The Lead Plaintiff

APERS is a public pension fund providing retirement benefits for certain public employees of the state of Arkansas. Am. Compl. ¶ 32. As of June 2016, APERS managed assets exceeding $7.3 billion on behalf of approximately 93,000 members. Id. APERS purchased Xerox common stock during the Class Period. Id.

2. The Defendants

Xerox is a New York corporation with its principal place of business in Norwalk, Connecticut. Its common stock is listed on the NYSE. Id. ¶ 33. Xerox provides document management solutions—including its eponymous copying machines—as well as business process outsourcing services. Id.

Ursula M. Burns became Xerox's Chairman of the Board and CEO on July 1, 2009, and remained CEO throughout the Class Period. Id. ¶ 34.

Luca Maestri was Xerox's Chief Financial Officer between February 16, 2011 and February 28, 2013. Id. ¶ 35. Maestri was succeeded by Kathryn A. Mikkels, who served as CFO and Executive Vice President between May 2, 2013 and the end of the Class Period. Id. ¶ 36.

Lynn R. Blodgett was ACS's President and CEO until Xerox acquired ACS in 2010. Id. ¶ 37. He then served as President of Xerox's Business Services division between February 2010 and April 1, 2014. Id.

Robert Zapfel succeeded Blodgett as President of Business Services on April 1, 2014, and served in that role through the end of the Class Period. Id. ¶ 38.

David H. By water was Xerox's Chief Operating Officer of State Government between February 2010 and July 2013 and Corporate Vice President between February 2012 and July 2013. Id. ¶ 39.

Mary Scanlon served as Xerox's Senior Vice President of National Sales and Business Development for Government Health Care Solutions between August 2009 and October 2014. Id. ¶ 40.

B. Xerox Buys ACS

In February 2010, Xerox acquired ACS for $6.4 billion. Id. ¶¶ 3, 59. ACS specialized in business-process outsourcing. This entailed providing for clients various back-office services, including call centers, claims processing, and information technology. Id. ¶ 4.

Chief among ACS's customers were government clients, from which ACS generated approximately 40 percent of its revenue. Id. ¶¶ 4, 6, 62. ACS provided a range of services to such clients, including—relevant here—developing, designing, and implementing Medicaid Management Information Systems ("MMIS"). Id. ¶ 6. As described by APERS, an MMIS is a computer system that manages the processing of payments to healthcare providers, the storing of beneficiary information, and all other aspects of a state's Medicaid program. Id. ¶ 7. States are required by law to have such a system, id. ¶ 62; these allow states to process payments to healthcare providers participating in the state Medicaid program, id. ¶ 67. The federal government provides 90 percent of the financing for the design and development of a state's MMIS and 75 percent of the financing for its operation. Id.

ACS offered to state governments a proprietary software product—known as Health Enterprise—that served as a replacement for states' existing MMISs. Id. ¶¶ 8, 69. Health Enterprise was intended to perform four key functions for state governments: (1) benefit plan administration, (2) financial management, (3) information storage and retrieval, and (4) reporting. Id. ¶ 9.

The acquisition of ACS helped transform Xerox—historically a manufacturer and distributor of photocopiers and other hardware—into a service business. Id. ¶ 53. Of Xerox's two primary business segments—Document Technology, home to the company's hardware business, and Services—the service segment became, after the acquisition of ACS, the largest segment in the company, accounting for between 52 and 56 percent of total revenue per year during the Class Period. Id. Within the Services segment, Xerox offered three distinct services (1) business process outsourcing, (2) information technology outsourcing, and (3) document outsourcing. Id. ¶ 54. Business process outsourcing—which represented a significant majority of the total Services revenue—included Xerox's "Government Healthcare Solutions" offering. Id. ¶ 56.

C. Implementation Issues in Six States

At the time of Xerox's acquisition of ACS, ACS had contracted to provide its Health Enterprise software to New Hampshire, North Dakota, and Alaska. Id. ¶¶ 9, 70. Pursuant to its acquisition of ACS, Xerox took control of these contracts. Id. ¶ 65. Plaintiffs allege that ACS, and from 2012 forward Xerox, experienced delays and cost overruns as they performed these contracts.

In late 2005, ACS contracted with New Hampshire to provide the state a new MMIS system. Id. ¶ 73. ACS initially projected that the MMIS would be implemented by 2008; the system was completed (after Xerox had acquired ACS) in April 2013. Id. ¶ 75. ACS had proposed that implementation of the New Hampshire MMIS would cost $60 million; the actual cost exceeded $117 million. Id. ¶ 76.

Also in late 2005, ACS contracted with North Dakota to implement the state's MMIS. Id. ¶ 77. The North Dakota MMIS was scheduled to be completed by July 2009. Id. ¶ 78. ACS—and later Xerox—missed that deadline, see id. ¶¶ 79–83; Xerox instead completed the North Dakota MMIS in October 2015, id. ¶ 87. This six-year delay was attributable to Xerox's efforts to conform the computer code from the New Hampshire MMIS for use in North Dakota. Id. ¶ 89. The cost of implementing the North Dakota MMIS increased from $37 million, as projected in June 2006, to $65 million as of its 2015 completion. Id. ¶ 91.

In October 2007, ACS contracted with Alaska to replace the state's MMIS. Id. ¶ 93. Implementation of that MMIS, too, suffered from delays and cost overruns. Implementation was scheduled to conclude on June 1, 2010. Id. But the MMIS first went "Live" on October 1, 2013. Id. ¶ 97. Through 2014, Xerox continued to address ongoing defects in the MMIS. Id. ¶¶ 97–100. The cost of implementation grew from an original estimate of $32 million to a final cost of approximately $146 million. Id. ¶ 102.

In March 2010—shortly after acquiring ACS in February 2010—Xerox was awarded a $1.7 billion contract to implement a MMIS for California. Id. ¶ 119. The California MMIS Independent Project Oversight Consultant (IPOC)—a third-party observer—issued several reports detailing Xerox's progress on the project. See id. ¶ 121–31. These described a series of delays . See id. As a result, as of May 2015, California had not paid Xerox for its work on the project. Id. ¶ 131. In April 2016, California terminated its contract with Xerox. Id. ¶ 134. Xerox and California reached a settlement of their claims against each other, under which Xerox was required to pay the state $123 million. Id. ¶ 135.

In April 2012, Xerox was awarded a contract to implement a MMIS for Montana. Id. ¶ 105. That process, too, was marked by delays. The MMIS was originally scheduled to be implemented by February 2015. Id. But throughout 2013 and 2014, Xerox missed milestones and Montana refused to make interim milestone payments. Id. ¶¶ 106–112. On July 18, 2014, Xerox and Montana renegotiated their contract and set a May 2017 completion deadline. Id. ¶ 113. Through 2015, Xerox continued to miss interim milestone deadlines. Id. ¶¶ 114–15. Xerox did not complete implementation of the Montana MMIS. Id. ¶ 116.

Finally, in April 2015, Xerox was awarded a $564 million contract to implement a MMIS for New York. Id. ¶ 138. Xerox never completed the...