United States District Court, S.D. New York
OPINION AND ORDER
JESSE M. FURMAN, District Judge.
Plaintiffs Kevin Doherty, Raymond Jean Hensley, and Niraj Jetly bring this putative class action against IEC Electronics Corp. ("IEC") and two of its executives, W. Barry Gilbert and Vincent A. Leo (together with IEC, "Defendants"). Plaintiffs, on behalf of purchasers of IEC securities between February 8, 2012, and May 21, 2013 (the "Class Period"), allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78(b), 78(t)(a), and SEC Rule 10b-5, 17 C.F.R. § 240. (Consol. Class Action Compl. For Violations of the Fed. Sec. Laws (Docket No. 24) ("Compl.") ¶¶ 1, 25). Pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, Defendants move to dismiss Plaintiffs' claims. (Docket No. 27). For the reasons stated below, Defendants' motion is GRANTED.
The following facts are taken from the Consolidated Class Action Complaint ("Complaint"); documents referenced therein; and documents of which the Court may take judicial notice, such as filings with the United States Securities and Exchange Commission ("SEC"). See, e.g., Citadel Equity Fund Ltd. v. Aquila, Inc., 168 F.Appx. 474, 476 (2d Cir. 2006) (summary order) ("[J]udicial notice of [an SEC] filing [is] properly within the [district] court's discretion on a motion to dismiss."). The allegations in the Complaint are assumed to be true for purposes of this motion. See, e.g., Kalnit v. Eichler, 264 F.3d 131, 135 (2d Cir. 2001).
IEC is a publicly traded Delaware corporation that provides electronic contract manufacturing services. (Compl. ¶ 35). More specifically, it manufactures custom "complex circuit cards and system-level assemblies, " "cable and wire harness assemblies, " and "precision sheet metal components." ( Id. ¶¶ 2, 35). It has a broad customer base extending across the aerospace, defense, industrial, transportation, medical, metalworking, and wire-and-cableassembly business sectors. ( Id. ¶¶ 3, 35). IEC "focuses on low-to-medium volume, high-mix production." ( Id. ¶ 35; see also id. ¶¶ 45-48). Defendant Gilbert is IEC's Chief Executive Officer ("CEO") and Chairman of its Board of Directors. ( Id. ¶ 31). Defendant Leo, a shareholder at the accounting firm Insero & Company ("Insero"), is IEC's interim Chief Financial Officer ("CFO"), a position he assumed on January 2, 2012. ( Id. ¶¶ 8-9, 58-59). Even after his appointment as CFO, Leo maintained his affiliation with Insero, which provides services to IEC; Leo receives distributions from Insero and was not compensated directly by IEC. ( Id. ¶¶ 9, 59).
In 2008, IEC began acquiring companies that produced relatively small quantities of specialized products at high margins. ( Id. ¶¶ 3-4, 35-40, 47-48). In December 2010, IEC made its largest acquisition, purchasing Southern California Braiding, Inc. ("SCB"), a privately held company based in Los Angeles, for approximately $26 million. ( Id. ¶¶ 4, 40-44). After the acquisition, IEC began to integrate SCB into the company and expressed high hopes for its growth, describing SCB as a "well run company with strong margins." ( Id. ¶¶ 6-7, 43, 49-50, 54-55). On January 4, 2011, at its annual shareholder meeting, IEC described its "[l]ow volume, high value manufacturing" business model and stated that SCB was "[i]mmediately accretive to IEC's shareholders." ( Id. ¶ 48 & n.2). During a quarterly call the following month with investors and analysts, Gilbert reemphasized SCB's "strong margins" and how it would be immediately beneficial to shareholders. ( Id. ¶ 50). During another quarterly call, Gilbert specified that IEC's operating margins were "some of the best in the industry." ( Id. ¶ 52).
SCB showed some signs of trouble in late 2011 and early 2012 ( id. ¶¶ 55-56, 61-63), but from May 2012 through early 2013, IEC and Gilbert made or issued a series of statements indicating that SCB's performance was generally strong and that their expectations for SCB remained high ( id. ¶¶ 69-72, 77-80, 85). On May 1, 2013, however, IEC disclosed that it had discovered "an error in accounting for work-in-process inventory" - that is, inventory in the production process at the end of a reporting period that has not been completed and transferred to inventory available for sale ( id. ¶ 113) - requiring a restatement of the company's consolidated financial statements for the fiscal year 2012 and quarterly reports for the fiscal year 2012 and the first quarter of 2013. ( Id. ¶¶ 14, 96). The company reported that the accounting error resulted in "an aggregate understatement of cost of sales and an aggregate overstatement of gross profit during all such [r]estated [p]eriods, " totaling $2.2 million. ( Id. ¶ 96; see also id. ¶ 14). Among other things, IEC revealed that the net gain reported for the first quarter of fiscal year 2013 was in fact a net loss. ( Id. ¶ 96). The next day, IEC's stock price fell $0.50 per share, or nearly 9%. ( Id. ¶ 97). A day later, it declined another $0.22 per share - an additional 4.23%. ( Id. ).
Over the next few weeks, the disclosures continued. On May 13, 2013, for example, IEC reported that "[t]he same error was made during the Company's fiscal year ended September 30, 2011 (FY 2011'), and the quarterly periods ended during FY 2011, but did not have a material impact on the Company's consolidated financial statements." ( Id. ¶ 98). One week later, IEC announced that it had delayed its restatement because "the Audit committee" had "determined further review of the facts and circumstances giving rise to the restatement [was] necessary." ( Id. ¶ 99). That day, IEC's price decreased $0.67 per share, or nearly 14%. ( Id. ¶ 100). The next day - after the company announced that it had received a notice from the New York Stock Exchange that "the Exchange [was] authorized to suspend and remove the Company's securities from the Exchange unless prompt corrective action [was] taken" ( id. ¶ 101) - IEC's shares dropped another $0.68, or more than 16% ( id. ¶ 102).
On June 3, 2013, IEC filed a restatement explaining that "the Company overcapitalized labor and overhead costs in SCB's work-in-process inventory." ( Id. ¶ 103). It maintained that the overcapitalization error was the "result of failure to accurately factor in the stage of completion for the work-in-process inventory." ( Id. ). In an amended Form 10-K/A, issued the same day, IEC wrote that its "Chief Executive Officer and Chief Financial Officer [had] concluded that the Company did not maintain effective internal control over financial reporting as of September 30, 2012, " and that "material weakness[es] in [IEC's] internal control over financial reporting resulted in the restatement[s]." ( Id. ). They had "identified control deficiencies related to the Company's reconciliation and review of work-in-process inventory as well as financial review and analysis." ( Id. ). IEC "implemented certain remedial measures" to cure those material weaknesses, but "the material weakness[es could not] be considered fully remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively." ( Id. ).
On June 28, 2013, Hensley commenced this lawsuit, on behalf of purchasers of IEC securities during the Class Period (between February 8, 2012, and May 21, 2013), seeking to recover damages for Defendants' alleged violations of Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5. (Class Action Compl. (Docket No. 1) ¶¶ 1, 12). On September 17, 2013, the Court consolidated Henley's case with another - Jetly v. IEC Electronics Corp., 13-CV-5864 (JMF) - and appointed Kevin Doherty as the Lead Plaintiff. (Docket No. 21). Approximately two months later, on November 15, 2013, Plaintiffs filed a Consolidated Class Action Complaint, which alleges that Defendants, "through material representations and/or omissions" during the Class Period, "deceive[d] the investing public" and "cause[d] Plaintiff and other members of the Class to purchase IEC securities at artificially inflated prices" in violation of Section 10(b) of the Exchange Act. (Compl. ¶¶ 169-78). It further alleges that the individual Defendants, Gilbert and Leo, violated Section 20(a) of the Exchange Act "by their acts and/or omissions" through "their positions as controlling persons." ( Id. ¶ 182).
A motion pursuant to Rule 12(b)(6) challenges the sufficiency of the allegations in the complaint. See ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007). To survive such a motion, the plaintiff's complaint must, as a general matter, "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 556). More specifically, the plaintiff must allege sufficient facts to show "more than a sheer possibility that a defendant has acted unlawfully." Id. If the plaintiff has not "nudged [his or her] claims across the line from conceivable to plausible, [the] complaint must be dismissed." Twombly, 550 U.S. at 570.
Because they allege securities fraud, Plaintiffs must also satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4(b), which requires that scienter - that is, a defendant's "intention to deceive, manipulate, or defraud" - be pleaded with particularity, Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007) (internal quotation marks omitted). To meet that requirement, a complaint must, "with respect to each act or omission alleged to [constitute securities fraud], state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.'" ATSI Commc'ns, 493 F.3d at 99 (quoting 15 U.S.C. § 78u-4(b)(2)). The "strong inference" must be "more than merely plausible or reasonable." Tellabs, 551 U.S. at 314 (internal quotation marks omitted). The necessary inquiry is "inherently comparative." Id. at 323. That is, the Court "must consider plausible nonculpable explanations for the defendant's conduct, as well as inferences favoring the plaintiff." Id. at 323-24. A complaint alleging securities fraud will survive "only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged." Id. at 324.
In this Circuit, a plaintiff may satisfy the scienter pleading requirement in either of two ways "by alleging facts (1) showing that the defendants had both motive and opportunity to commit the fraud or (2) constituting strong circumstantial evidence of conscious misbehavior or recklessness." ATSI Comm'cns, 493 F.3d at 99. Plaintiffs effectively concede that they have not adequately pleaded scienter under the first theory. (Lead Pl.'s Mem. Law Opp'n Defs.' Mot. To Dismiss Consol. Am. Compl. (Docket No. 31) ("Pls.' Mem.") 19-21; see Reply Mem. Supp. Defs.' Mot. To Dismiss Consol. Am. Compl. (Docket No. 33) ("Defs.' Reply Mem.") 2-3). That concession is well founded. Plaintiffs do not allege that either Gilbert or Leo sold shares of IEC stock during the Class Period. See, e.g., Rombach v. Chang, 355 F.3d 164, 177 (2d Cir. 2004) (finding "no personal interest sufficient to establish motive" where "[p]laintiffs [did] not allege that defendants sold stock or profited in any way during the relevant period"). And while they do allege that Defendants had an interest in keeping IEC's stock price high and an opportunity to commit fraud by virtue of their positions, those sorts of generic allegations are insufficient to satisfy the scienter requirement. See, e.g., South Cherry Street, LLC v. Hennessee Grp. LLC, 573 F.3d 98, 108-09 (2d Cir. 2009) ("[I]n attempting to show that a defendant had fraudulent intent, it is not sufficient to ...