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From Securities Regulation Daily, August 26, 2013

Company’s “cascade of disclosures” renders fraud complaint meritless

By Rodney F. Tonkovic, J.D.

An amended complaint failed to allege scienter or any material misstatements or omissions “and, indeed, borders on the absurd,” concluded Judge Buchwald of the Southern District of New York. This was, the court remarked, a case brought by a frustrated investor and was not enough to state an actionable securities fraud claim. In dismissing the complaint with prejudice, the judge also noted its “total lack of even arguable merit” (City of Taylor General Employees Retirement System v. Magna International Inc., August 22, 2013, Buchwald, N.).

Background. The action was brought by investors in the common stock of automotive supplier Magna International Inc. The investors claimed that Magna downplayed the magnitude of operational problems faced by four of its European facilities and that this artificially inflated Magna’s stock prices in violation of the antifraud provisions of the Exchange Act. The investors alleged further that, when the truth came out, Magna’s stock price “plummeted” from a high of $59.99 per share to $39.42.

In all, Magna had over 100,000 employees in 286 facilities worldwide. Throughout the class period, Magna repeatedly warned investors that four of its European facilities were experiencing operational inefficiencies that resulted in the outsourcing of some work and would take years to resolve. Magna also reported twice during the class period the losses generated by the underperforming units.

In dismissing the complaint, the judge remarked that the length of its order did not reflect the court's opinion that the complaint had “any merit whatsoever.” On the contrary, the judge “extensively quoted the disclosures to highlight the total lack of even arguable merit to plaintiff's claims.”

Misrepresentations and omissions. The court concluded that the complaint failed to allege any actionable misrepresentations or omissions. The court first quoted from statements made by Magna or senior executives on eight dates between August 2010 and August 2011. The plaintiffs claimed that these positive statements about Magna’s European operations and financial results and omissions of the problems facing the four facilities at issue misleadingly conveyed that Magna's operational issues were known and manageable.

The court found, however, that Magna clearly “made a cascade of disclosures.” According to the court, Magna revealed both the existence and nature of the operational inefficiencies and its outlook and progress in addressing the issues. “It is hard to fathom,” the court said, “precisely what more information defendants could have disclosed to render their statements not misleading.”

Magna made numerous disclosures concerning the nature and existence of the operational inefficiencies at the European facilities. According to the court, Magna was also “transparent” about the relative significance of the problems. The court concluded that the investors failed to allege particularized facts supporting the conclusion that the Magna defendants knew or had access to information that either contradicted their public statements or that would have allowed them to say anything about these issues earlier than they actually did. There was no “lack of detail,” the court added, in the disclosures that could form the basis of an actionable fraud claim.

Magna also continually updated investors on its progress in addressing the operational problems. The plaintiffs asserted that Magna misleadingly claimed that the problems were under control, but there was no support for this claim, the court stated. Magna repeatedly warned not only that the problems would take time to resolve but also that the underperforming facilities were “a drag on profitability.” Even if any of the statements were misrepresentations, the court continued, they were limited to the company’s optimism about future results and thus not actionable.

Scienter. Finally, even if the complaint alleged an actionable misrepresentation, it failed to plead scienter, the court concluded. First, the plaintiffs failed to show motive and opportunity through alleged insider stock sales. The sales, the court found, were not suspicious in circumstances or timing and were tied to, among other events, retirement and the expiration of employee stock options. The complaint also failed to show conscious misbehavior or recklessness because it impermissibly asserted fraud by hindsight.

The case is No. 12 Civ. 3553 (NRB).

Attorneys: David Avi Rosenfeld (Robbins Geller Rudman & Dowd LLP) for Boilermaker-Blacksmith National Pension Trust and City of Taylor General Employees Retirement System. Andrew W. Stern (Sidley Austin LLP) for Magna International Inc., Donald J. Walker and Vincent J. Galifi. Jay B. Kasner (Skadden, Arps, Slate, Meagher & Flom LLP) for Frank Stronach.

Companies: Magna International Inc.

MainStory: TopStory FraudManipulation NewYorkNews

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