The opinion of the court was delivered by: Michael A. Telesca United States District Judge
This Document Relates to ALL ACTIONS
Plaintiffs bring this class-action lawsuit against Hardinge Inc. ("Hardinge" and/or the "Company), J. Patrick Ervin ("Ervin), and Charles R. Trego ("Trego") ("Individual Defendants") (collectively "defendants") pursuant to sections 10(b) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. §§ 78j(b), Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 and Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a).*fn1 Plaintiffs base their claim on defendants' alleged nondisclosure of certain information during the class period, January 16, 2007 through February 21, 2008 (the "Class Period"). The primary information at issue deals with Hardinge's efforts to add direct sales employees and lessen dependence on distributors in certain regions in an effort to improve the Company's market penetration and increase sales. In addition, plaintiffs plead that the alleged omitted information rendered certain statements that defendants made during the class period misleading. Plaintiffs claim that they purchased Hardinge stock at inflated prices, and suffered economic losses when the stock rapidly lost value in 2008 when the true facts were revealed and became known to the market.
Defendants move to dismiss plaintiffs' Amended Complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure, and the Private Securities Litigation Reform Act of 1995 ("PSLRA"). Defendants claim that the plaintiffs' Amended Complaint fails to state a claim upon which relief may be granted. For the reasons set forth below, I hereby grant defendants' motion and dismiss plaintiffs' Complaint with prejudice.
Unless otherwise noted, the following facts are taken from plaintiffs' Amended Complaint For Violation of the Federal Securities Laws ("Amended Complaint"), including documents incorporated by reference or upon which plaintiffs relied in drafting the Complaint, as well as from public documents which the Company filed with the Securities and Exchange Commission ("SEC").*fn2
Hardinge is a global designer, manufacturer, and distributor of machine tools, specializing in precision computer, numerically controlled, material-cutting machines. See Amended Complaint ("Am. Compl.") ¶23. Defendant Ervin was the Chairman of the Board of Directors, President, and CEO of Hardinge during the Class Period. See id. ¶24. Defendant Trego was Senior Vice President and Chief Financial Officer (CFO) of Hardinge during the Class Period. See id. ¶25. Lead Plaintiff, Paul J. Campbell is an individual who allegedly purchased Hardinge stock during the Class Period. See id. ¶22.*fn3 Hardinge sold its products worldwide primarily in the United States, Canada, United Kingdom, Germany and China and whose headquarters are located in Elmira, New York. See id. ¶27. In addition, the Company sells its products through a combination of independent distributors, and a direct sales force. See id.
II. Independent Distributors and Direct Sales
At the beginning of the Class Period, approximately 70% of Hardinge's sales were through distributors and 30% were made through a direct sales force. See id. ¶69.*fn4 According to the pleadings, in better economic times, i. e., when demand was high for the Company's products, Hardinge increased its direct sales force and decreased use of distributors. This resulted in increased gross margins and profitability. See id. ¶30.*fn5 When demand constricted, it was more profitable to sell through distributors and layoff direct sales persons, as the Company incurred fewer fixed costs, such as employee salaries, not associated with distributors. See id. As reported in the Company's 2006 Proxy, 2006 was very profitable for the machine tool industry as a whole. See id. ¶31. Defendants anticipated that 2007 would be even better than 2006 and forecasted a 20% increase in sales orders in 2007. See id. ¶61. According to plaintiffs the Company wished to take advantage of this perceived increase in demand and decided before the beginning of the Class Period to replace distributors in as many geographic regions as it could with direct sales personnel. See id. ¶¶117, 121. Further, in 2007 in an effort to increase its direct sales presence, Hardinge implemented a pilot program, known as the Juniors Sales Program (the "JSP"), whereby certain new Hardinge employees would be placed with distributors to focus on developing new customer leads for Hardinge products. See id. ¶¶5,95.
III. Transition to a Direct Sales Force
In an effort to increase market share and improve sales, in late 2006 or early 2007 Hardinge attempted a transition toward a more direct sales-based model in major regions including, but not limited to, the U.S, Canada, and Germany. See id. ¶¶46,54,69,81,83,98. The plaintiffs claim that the Company initially only notified the public of its intentions to "go direct" in Canada via a press release issued January 16, 2007. Also, the press release left the false impression that defendants would maintain and/or increase sales by replacing distributors with "trained and experienced" Hardinge direct sales persons. See id. ¶¶8,46.*fn6
Moreover, there was no mention of the defendants' intention to go direct into any other region or of the risks associated with such a move in the January 16, 2007 release, as disclosed only after the Offering. See id. ¶46. Defendants argue that the press release discussed developments exclusively-related to Canada, without reference to other areas. Plaintiffs claim that confidential witnesses ("CW") informed plaintiffs that the transition was much more expansive. It included, inter alia, the JSP, which had an adverse impact on United States' sales, and the termination of several North American distributors to be replaced by direct sales employees that already was taking place by January 16, 2007. See id. ¶¶93,116-121. The pleadings state that (a) the transition of the North American sales channel had been taking place for the six months prior to the January 16, 2007 announcement; (b) the investments in Germany to transition it to a more direct sales channel had begun in or around the same time as the January 16, 2007 release; and (c) North American sales orders for the first quarter of 2007 were being negatively impacted by the reorganization by at least $2 million. See id. ¶¶75,98.
IV. Defendants' Statements
Hardinge reported its earnings for the fourth quarter and full-year 2006 on February 22, 2007 and on the same day held a conference call with analysts. See id. ¶¶49,50-54. Hardinge's release stated, inter alia, that "SG&A expense as a percentage of sales continues to decrease as the company is able to leverage against increased sales volume. The primary drivers for that SG&A increase for 2006 as compared to 2005 were volume related commission expense..." See id. ¶49. Accordingly, plaintiffs claim that the release provided no hint of the transition from distributorship to a direct sales force. In fact, it left the opposite impression that more sales were taking place with distributorships and SG&A expenses were up only because demand was up. See id. ¶¶50-51. In addition, Ervin responded to a question by an analyst regarding Hardinge's investment in its Canadian operations, but failed to disclose that there was a transition of the United States and German sales force, including extended training periods for new sales persons. See id. ¶¶52,54. As it relates to the Canadian transition, plaintiff asserts that details were concealed. See id. In addition, defendants failed to disclose that as it relates to its Chinese operations, it was adding untrained factory workers that were adversely affecting production and sales "since the first quarter." See id. ¶95.*fn7
V. The April 2007 Offering
In April 2007, Hardinge completed a public stock offering, through which the Company raised approximately $55.9 million. See id. ¶7. Hardinge use these funds to pay down debts of the company. See id.
¶¶7,68. The final offering increased the number of shares of the Company's stock issued and outstanding by 2.2 million or more than 25%.
¶¶7,23,66. However, plaintiffs claim that defendants later admitted that the Company made a deliberate "business decision" to build inventory during the transition, knowing that it could not sell the products during the transition period, resulting in an "inability to generate improved cash flow in the first nine months of 2007 from operating activities [which] has been directly tied to our increase in inventories of $26.3 million." See ¶¶ 42,59,64,73,83,85,92.*fn8
Defendant Ervin sold or otherwise disposed of 15,671 shares of the Company's stock on September 4, 2007. See id. ¶126. On the same day, as part of the same transaction, he also exercised options and acquired 26,000 shares of the Company stock. See Declaration of Paul Stecker ("Stecker Decl."), Ex. D. After these transactions, Ervin beneficially owned 110,675 shares of Hardinge stock. See id. On January 3, 2008, Ervin sold or otherwise disposed of 2,135 shares of the Company's stock. See Am. Compl. ¶126., Stecker Decl., Ex. E.
VI. Hardinge Discloses the Transition and its Impact on Sales Orders and SG&A Expenses
On a conference call with analysts on May 10, 2007, Ervin stated that North American sales were down 5.0% for the first quarter due in part to the Company's transition from distributors to a direct sales force in Canada.*fn9 In response to a question: "Any other markets you might go direct into?," Ervin responded:
We will look and determine what is the best method [in a region], whether it's a distributor, and agent or a combination or direct. So that is constantly on our radar screen worldwide to determine what is the best distribution network for our Company...So, I mean yes, always review, I would never say no...
See Am. Compl. ¶78. Plaintiff claims that this statement was false and misleading as defendants knew that there was a Companywide restructuring, transitioning from distributorship to direct sales. See id. ¶79. Further, plaintiffs assert that on August 9, 2007, the Company issued a press release stating that "North American orders decreased due to lower market demand for machine tools as well as the company's decision to terminate several distributors." See id. ¶81. Hardinge also disclosed that the "restructuring actions affected second-quarter orders by approximately $3 million and year-to-date orders by about $5 million." See id. Moreover, in a conference call that took place on the same day, Ervin told analysts that Hardinge was "restructuring [its] North American sales channel," and disclosed that the Company was eliminating sales through distributors in parts of the U.S. and adding direct sales people. See id. ¶¶83,85. In addition, defendants stated that during this transition, the Company "made a business decision not to reduce production as the North American markets slowed," thus the Company had a "$19 million increase in inventories." See id.*fn10
On November 8, 2007 Hardinge held the third quarter 2007 earnings call with analysts where Trego stated that the Company's deficient cash flow for the first nine months of 2007 was due to its "increase in inventories of $26.3 million." See id. ¶92. According to plaintiffs it was also the first-time Ervin told analysts about the problems associated with training people in China who were "coming off the farms" to work in the factories, resulting in Hardinge's Chinese facilities operating at only 40% of their target production levels since "the end of the first quarter" of 2007. See id. ¶95. In addition, Ervin informed analysts that the Company began scaling back production while it built up the sales force, so that it could "start turning that inventory and turning it into cash." See id. Further, Ervin disclosed the Company's efforts to "put some of [its] own people working with distributors in North America," i.e., the JSP. See id. However, in this regard plaintiffs claim that Ervin failed to disclose that the JSP was having an adverse impact on sales and the Company's relationships with its distributors. See id. ¶¶93,117-120. Defendants stated that they were going more "direct" in the U.K. and Germany for the first time as well. See id. ¶95.*fn11
Hardinge conducted a conference call with analysts on February 21, 2008 and issued a press release announcing the 2007 fourth quarter and full-year results for the Company. See id. ¶98. Ervin told analysts that the Company was changing back where it was not getting the benefit, when describing the effect of the transition Hardinge had "been making over the last now year or so, 18 months." See id. ¶97.*fn12
He also stated that: (a) Germany was an area where the Company had been investing over the last year, and they would continue "to grow and make more of a direct operation;" (b) the Company's distribution model was having an adverse affect on the inventory build; (c) the composition of the North American sales force was still "probably 70% distribution and 30% direct," while the goal was 50--50; and (d) there were "very few, if any, current distributors in the world who could adequately handle the [Company's] current product line." See id.
VII. Post-Class Period Disclosures
Plaintiffs claim that the Company's public disclosures immediately following the Class Period further revealed the known adverse impact of the sales force "restructuring." ¶¶101-102. On April 10, 2008, Ervin told shareholders in a letter that:
[T]he strengthened distribution strategy won't occur overnight, and will require some near-term sacrifice as SG&A expenses will increase as we add and train additional sales staff. In addition, it's likely that while this effort continues through the ramp-up phase some sales will be lost as we move through the transition period.
Moreover, Ervin while speaking on the first quarter 2008 earnings call, stated to analysts that at least "25%" of the poor financial results was "self-inflicted," attributable to the change ...