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Christine Johnson, Individually and On : Behalf of All Others Similarly Situated v. Siemens Ag

March 31, 2011


The opinion of the court was delivered by: John Gleeson, United States District Judge:



Lead plaintiff 1199 SEIU Greater New Pension Fund ("1199 SEIU") brings this class action against Siemens AG ("Siemens"), Siemens' Chief Executive Officer ("CEO") and President Peter Lascher, and Siemens' Chief Financial Officer ("CFO") and Executive Vice President Joe Kaeser*fn1 pursuant to the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 23 of the Federal Rules of Civil Procedure on behalf of (i) all individuals who purchased Siemens' American Depositary Receipts ("ADRs") on the New York Stock Exchange ("NYSE") between November 8, 2007 and March 17, 2008 (the "class period"), and (ii) all United States citizens or residents who purchased Siemens' common shares on the Frankfurt Stock Exchange ("FSE") during the class period.*fn2 Lead plaintiff alleges that Siemens violated § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, by knowingly or recklessly disseminating or approving false statements about the financial well-being of the company during the class period, which artificially inflated the prices of Siemens' securities and induced class members to purchase those securities at the inflated prices. Lead plaintiff asserts that the individual defendants, Lascher and Kaeser, are jointly and severally liable as control persons pursuant to § 20(a) of the Exchange Act, 15 U.S.C. §78t(a), for Siemens' alleged violations of § 10(b) and Rule 10b-5 by virtue of their positions with the company and their ability to control both the statements and the actions of Siemens and its employees.

Siemens moves to dismiss the amended complaint on four grounds. First, it argues that lead plaintiff has failed to allege scienter with the particularity required by the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4(b)(2). Second, it contends that lead plaintiff's non-accounting claims are not actionable pursuant to the PSLRA safe harbor for forward-looking statements, 15 U.S.C. § 78u-5(c), and the "bespeaks caution" doctrine. Third, Siemens argues that lead plaintiff's accounting claims are barred by the applicable two-year statute of limitations, 28 U.S.C. § 1658(b). Finally, it contends that lead plaintiff cannot bring claims on behalf of purchasers of Siemens AG common shares on the FSE because the Supreme Court's decision in Morrison v. National Australia Bank Ltd., No. 08-1191, 130 S.Ct. 2869 (2010), forecloses these claims, and because lead plaintiff lacks standing to assert them.

For the reasons stated below, the motion to dismiss is granted. Lead plaintiff's claims under § 10(b) and Rule 10b-5 against Siemens are dismissed pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim, as the amended complaint fails to allege facts giving rise to a strong inference of scienter as required under the PSLRA. Lead plaintiff's claims under § 20(a) against Lascher and Kaeser are dismissed also pursuant to Rule 12(b)(6), because an individual defendant cannot be held liable as a control person in the absence of an alleged violation of § 10(b) or Rule 10b-5.


A. Procedural Background

This action was initiated on December 4, 2009 by plaintiff Christine Johnson, who filed a class action complaint against Siemens pursuant to § 10(b) of the Exchange Act on behalf of all persons who purchased or otherwise acquired Siemens securities between November 8, 2007 and April 30, 2008.*fn3 Johnson alleged that between those dates, Siemens falsely represented that it had cleaned up the effects of a years-long, corporation-wide bribery scandal that was the subject of criminal investigations in the United States, Germany and Italy beginning in January 2006. According to Johnson's complaint, between November 8, 2007 and April 30, 2008, Siemens announced optimistic earnings outlooks that fraudulently failed to account for the adverse effects of the bribery scandal and misrepresented the company's ability to meet its projected earnings estimates without engaging in illegal activity to secure contracts.

On February 17, 2010, I appointed 1199 SEIU -- which purchased Siemens ADRs during the class period -- as lead plaintiff, and on May 17, 2010, 1199 SEIU filed an amended complaint. The amended complaint redefined the class, shortened the class period, attempted to add Lascher and Kaeser as defendants, and revised the complaint's theories of liability. In the latter regard, the amended complaint posits that statements made by defendants during the class period about the company's financial prospects were fraudulent because they failed to account for severe problems plaguing numerous "legacy projects," long-term, fixed-price contracts awarded by Siemens on a competitive bidding basis. Asserting causes of action under Exchange Act §§ 10(b) and 20(a) and Rule 10b-5, the amended complaint seeks class certification pursuant to Fed. R. Civ. P. 23 and an award of damages to all class members, as well as reasonable costs and attorneys fees. Siemens filed its motion to dismiss on July 23, 2010. Oral argument was heard on the motion on November 19, 2010.

B. Factual Background

1. The Defendants

Siemens is an electrical engineering and electronics company that operates in approximately 190 countries and employs more than 400,000 people. ¶¶ 2, 34.*fn4 Throughout the class period, Lascher served as Siemens' CEO and President and as a member of the company's Managing Board. ¶ 19. The Managing Board is responsible for managing the company, preparing its quarterly and half-yearly reports, and overseeing its internal policies and legal compliance. Id. Throughout the class period, Kaeser was also a member of the Managing Board and served as CFO and Executive Vice President of Siemens. ¶ 20. Both Lascher and Kaeser signed Siemens' fiscal 2007 Form 20-F, which was filed with the SEC during the class period.*fn5 ¶¶ 19, 20, 66.

2. The Bribery Investigations and Settlement

Before Lascher assumed his position at Siemens, the company came under investigation by the United States Department of Justice ("DOJ") and the United States Securities and Exchange Commission ("SEC") for suspected violations of the anti-bribery provisions of the Foreign Corrupt Practices Act of 1977 ("FCPA"). Id. Siemens was also investigated by foreign regulatory agencies. Id. In early 2007, also before Lascher joined the company, Siemens initiated an internal investigation, ¶¶ 4, 54, which eventually revealed that the company had systemically employed criminal practices in its dealings worldwide, ¶ 55. During the course of the investigation, many of the Siemens' long-standing directors and officers left the company. ¶ 4. It was against this backdrop that Lascher assumed his position, and his "mission . . . was clear: finish the clean up of the Siemens Bribery Scandal, restore managements' [sic] reputation and credibility and improve Siemens' business." Id. The DOJ and SEC investigations were not resolved until December 15, 2008 -- nine months after the end of the class period -- when Siemens pled guilty to violating the Exchange Act and the FCPA and paid a total of $800 million in fines and penalties. ¶¶ 8,57.

3. The Legacy Projects

Effective January 1, 2008, Siemens reorganized its operations into three sectors, Industry, Energy and Healthcare. ¶ 34. The Energy Sector includes business activities that Siemens had previously classified as Power Generation ("PG"), ¶ 36, and the Industry Sector contains business activities formerly classified as Transportation Systems, or Mobility ("TS"), ¶ 35. Part of the PG and TS business portfolios include long-term construction contracts known as "legacy projects." ¶¶ 3, 42, 72. Legacy projects also make up part of Siemens' IT Service and Solutions ("SIS") business. See ¶ 83. Because legacy projects are multi-year, fixed-price contracts, they subject Siemens to significant financial risk. ¶ 3. Prior to the class period, the legacy projects were hamstrung by construction delays, cost overruns, and supply cost issues. ¶ 40. These problems were attributable in large part to inadequate staffing; many of the legacy projects were staffed with engineers who had insufficient training to manage them, and who were given authority to make key budgetary and planning decisions they were ill-equipped to make. ¶¶ 41, 42, 47-48. Construction delays due to flawed project designs, flawed execution plans and shortages of labor caused the projects to run past their deadlines. ¶¶ 42, 50. This led in turn to supply cost issues because as projects ran past their deadlines for completion, the supply contracts entered into by Siemens at the start of each contract would lapse, forcing the company to negotiate new supply contracts at higher prices. ¶ 50.

Siemens employees used various methods to monitor the progress of legacy projects and track the problems they encountered. For instance, according to a confidential witness referred to in the amended complaint as "CW2,"*fn6 field engineers working on power plant projects prepared daily reports on the status of their projects. ¶ 45. Confidential witnesses referred to as "CW1"*fn7 and "CW3"*fn8 reported that Siemens employees used a "SAP application" to track various metrics relating to the legacy projects, such as man-hours expended on each project, projected and expended costs, and procurement activity. ¶¶ 110, 112. Information about incurred and expected costs was also analyzed in formal reports prepared at unspecified times and intervals by CW3 and others in similar positions within the company. ¶ 113. When the variance between incurred and expected costs exceeded $50,000, CW3 and his cohorts prepared detailed "Risk and Opportunity Reports" "on a regular basis." Id. In addition, CW1 described "a quite elaborate system to track [the financial] health" of power plant construction projects, by which "flags were put up" and "a recovery plan" adopted if a project fell behind schedule or was projected to be unprofitable. ¶ 111 (brackets in original). CW2 reported that customers of Siemens monitored the progress of projects and sought compensation from Siemens when it missed scheduled project milestone dates. ¶ 46. A confidential witness referred to as "CW4"*fn9 told of quarterly meetings in Germany, where approximately 100 PG Division managers from around the world engaged in comprehensive reviews of the Division's financial and operational performance. ¶ 52. The amended complaint does not specify the time period during which these meetings occurred, but it states that in CW4's opinion, "the light went on" among Siemens senior management in "the winter of 2007"*fn10 that many of the Division's projects were experiencing delays and cost overruns. Id.

Prior to the class period, according to CW4, Siemens routinely accepted contracts with large financial risk and little likelihood of profit. ¶ 51. Also prior to the class period, the company decided to shift its policy away from maintaining a large order backlog to one focused on fulfilling the orders Siemens accepted and decreasing its backlog of uncompleted projects. ¶ 51. In connection with this shift in policy, Siemens undertook a rigorous project-related portfolio analysis within all of its divisions. Id. CW4 reported that this review was begun following the realization among management in the winter of 2007 that many of the legacy projects were in trouble. ¶ 52.

4. The Charges Taken and the Drop in Securities Prices

The massive cost overruns associated with the legacy projects eventually forced Siemens to take substantial charges against its earnings. ¶ 40. According to CW4, senior management in the PG division indicated at some unspecified time that they "wanted to take a big charge and not dribble out bad news," as taking a single charge would allow the PG division to "report only good news" going forward after the single announcement. ¶53. Nonetheless, charges were announced in more than one stage, coupled with statements of caution for the future. On January 24, 2008, Siemens issued a press release announcing its earnings for the first quarter of fiscal 2008, which ended on December 31, 2007. ¶ 72. In the press release, Siemens reported that PG and TS had taken a charge of €200 million "at major projects." Id. On a conference call also held on January 24, 2008, Kaeser explained that the charge reflected problems with "execution and getting a timely project management together" on long-term projects. ¶ 74. Kaeser stated that the PG division had conducted "a very thorough review on all the projects and to all what they've known and what they can think of has been included in the €200 million charge [sic]," but he warned that he was "cautious that whether or not that remains stable till the end. . . . I'd be cautious for fiscal Q2. And then we should exactly know what needs to be done and get it over with." ¶ 74.

Seven and a half weeks later, on March 17, 2008, Siemens announced that increased costs associated with the legacy projects were anticipated to reduce the company's earnings by up to an additional €900 million during the second fiscal quarter of 2008, ending March 31, 2008. ¶¶ 7, 78. Siemens attributed the anticipated charges to problems with major projects in the PG and TS divisions, namely structural changes in the supplier markets, difficulty recruiting experienced project engineers, delays in the awarding of major projects, and ongoing troubles with the Combino business, ¶ 78, which involved the production of lightweight trams, ¶ 83. Siemens further announced that that it would likely take additional charges on the projects during fiscal year 2008. ¶ 7.

Lead plaintiff alleges that as a result of this announcement on March 17, 2008, the price of Siemens' securities dropped precipitously. ¶ 119. Between Friday, March 14, 2008 and Monday, March 17, 2008, the price of Siemens' ADRs fell 15%, causing real economic loss to investors who had purchased the securities during the class period. ¶ 121. More specifically, Siemens alleges that the price of Siemens' securities had been artificially inflated throughout the class period, as defendants fraudulently misrepresented the company's financial performance and future business risk by expressing optimism without disclosing the problems with the legacy projects. ¶ 119-121. When the truth about the company's exposure to cost overruns on the legacy projects was finally revealed on March 17, 2008, the inflationary effect of the misrepresentations was eliminated, and stock prices plummeted. Id.

5. The Alleged Misstatements

Lead plaintiff identifies seven statements -- including press releases, SEC filings, slide presentations, and statements to the press -- made by Siemens during the class period that it alleges were materially false and misleading because they overstated the company's financial performance and failed to disclose, or misrepresented the nature of, the problems and risks associated with the legacy projects. In addition, lead plaintiff alleges that Siemens improperly accounted for revenue and costs associated with the legacy projects throughout the class period, thereby misrepresenting the company's financial performance. ¶ 3. Each allegedly misleading statement and the alleged accounting irregularities are described in detail below.

a. November 2008 Statements

On November 8, 2007, Siemens published a Form 6-K with the SEC. The filing included press releases that contained allegedly fraudulent statements concerning the company's financial results for fiscal 2007 and its financial outlook for future years. ¶ 58. Lead plaintiff highlights portions of these press releases in which the company and Lascher announced that Siemens expected its volume and profit to grow in fiscal 2008, that it was raising its target margins, and that it would exceed the performance goals that had been set for 2010. Id. Lascher predicted with respect to fiscal 2008: "Specifically, we anticipate volume growth that is twice as high as the rate of global GDP growth, and that our operating profit will grow at least twice as fast as our volume."

On the following day, November 9, 2007, Siemens issued slides for a conference call with securities analysts in London; one slide is alleged to have contained fraudulent statements. ¶ 63. That slide presented "Siemens Outlook 2008," predicting for the company as a whole:

 Quality growth and earnings conversion  Revenue growth > 2x GDP  Earnings growth of Operations Groups [excluding Strategic Equity Investments and Other Operations] twice top-line growth Id. The slide also presented an "outlook" for each of the company's three sectors: "[r]evenue growth at 'GDP [squared]'" and "[m]argin increase despite of low margin project backlog [sic]" were projected for the Energy sector; the Industry sector was expected to "[d]ouble market growth in Industry Automation (A&D Group)" and "[l]everage global sales and distribution network"; and "2x GDP revenue growth in constant US $terms" and "[i]nnovations driv[ing] market share gains in the US and globally" were anticipated in the Healthcare sector. Id.

On November 28, 2007, Siemens filed its fiscal 2007 Form 20-F, which contained financial statements for the year. ¶ 66. Lead plaintiff does not reference any specific items in the 2007 Form 20-F, but it does allege that the financial statements made on the form were represented to have been prepared in accordance with IFRS. Id.

Lead plaintiff alleges that the statements made in the November 8, 2007 press releases and the November 9, 2007 slide were materially false and misleading because defendants failed to disclose six adverse facts: (1) that Siemens was experiencing more than $1 billion in cost overruns on a large number of legacy projects; (2) that defendants commissioned "quite a large amount of people" to conduct an extensive "review and audit" of dozens of legacy projects that were facing extensive management, cost, and execution problems; (3) that as a result of these problems, defendants commissioned "a technology engineering team" to understand whether technology related matters were giving rise to such delays and/or failures; (4) that many of the legacy projects had severe supply cost issues; (5) that the company's financial results were materially overstated, as the company had ...

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