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Oklahoma Firefighters Pension and Retirement System v. Xerox Corp.

United States District Court, S.D. New York

February 28, 2017

OKLAHOMA FIREFIGHTERS PENSION AND RETIREMENT SYSTEM, individually and on behalf of all other similarly situated, Plaintiff,
v.
XEROX CORPORATION, URSULA M. BURNS, LUCA MAESTRI, KATHRYN A. MIKELLS, LYNN R. BLODGETT, and ROBERT K. ZAPFEL, Defendants.

          OPINION & ORDER

          PAUL A. ENGELMAYER, District Judge

         Plaintiff Oklahoma Firefighters Pension and Retirement System brings this putative class action, claiming that defendant Xerox Corporation ("Xerox") and five of its officers committed securities fraud by making false and misleading statements and by failing to disclose material adverse information about their business and outlook between April 23, 2012 and October 23, 2015 (the "Class Period"). Plaintiff brings claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78(t)(a), along with Rule 10b-5 promulgated by the Securities and Exchange Commission ("SEC"), 17 C.F.R. § 240.10b-5. Plaintiff specifically faults defendants for not disclosing that projects within Xerox's Health Enterprise business were experiencing significant delays and cost overruns, and that Xerox would be unable to offer Health Enterprise products at sustainable profits. After Xerox eventually made corrective disclosures, plaintiff alleges, Xerox's stock price dropped, harming plaintiffs.

         Before the Court are motions from two competing movants, each seeking appointment as lead plaintiff and appointment of their respective attorneys as lead counsel. These are (1) the Arkansas Public Employees Retirement System (“APERS”), an institutional investor, and (2) IWA Forest Industry Pension Plan (“IWA Forest”), a pension plan.

         For the following reasons, the Court appoints APERS as lead plaintiff, appoints APERS's attorney, Kessler Topaz Meltzer & Check, LLP, as lead counsel, and Labaton Sucharow LLP as class liaison counsel.

         I. Background[1]

         Xerox is a global provider of printing machines and document processing services. It is listed on the New York Stock Exchange with the ticker symbol “XRX.” The five individual defendants were Xerox officers within the class period. Complaint ¶¶ 18-23.[2] These officers, plaintiffs allege, had the authority to control the contents of Xerox's submissions to the SEC, press releases, and presentations to market participants such as securities analysts, money portfolio managers, and institutional investors. Id. ¶ 24.

         Xerox has two primary business divisions for reporting purposes: Services, which accounted for about 55 percent of Xerox's total revenue in 2015; and Document Technology, which includes the sale and support of printing and copying machines, and which accounted for about 40 percent of Xerox's total revenue in 2015. Id. ¶ 2. Xerox's Services division offers a “Health Enterprise” service, a software management product designed to help state agencies administer Medicaid programs in accordance with federal regulations. Id. ¶ 3. Before and during the Class Period, Xerox sold this product to states. Id.

         During the Class Period, Xerox promoted its Health Enterprise business as a valuable growth area, with low costs and high profit margins. Plaintiff alleges, however, that defendants' statements about the profitability and growth potential of the Health Enterprise business were materially false and misleading. Specifically, plaintiff alleges, defendants did not disclose that (1) Xerox's then-existing Health Enterprise projects were experiencing significant delays and cost overruns; and (2) Xerox would be unable to deliver Health Enterprise products at sustainable profits. These omissions made defendants' optimistic statements about Xerox's Health Services business, operations, and potential inaccurate and unreasonable. Id. ¶ 4.

         Plaintiff identifies four announcements within the Class Period revealing problems associated with its Health Enterprise product that allegedly caused Xerox's stock price to drop.

         On October 22, 2014, Xerox issued a press release announcing its third-quarter 2014 results, which revealed disappointing margins in the Health Services segment. Xerox blamed the low margins on high costs resulting from the prolonged implementation of its existing Health Enterprise projects. Notwithstanding these “mounting costs, ” plaintiffs allege, “Xerox assured investors that these costs were ‘more contained in the third quarter' and [Xerox] was making ‘good progress' within Health Enterprise.” Id. ¶ 5. That day, Xerox's common stock fell $0.94 per share, a decrease of 7.5 percent, to close at $11.57 per share on October 22, 2014. Id. ¶ 6.

         On April 24, 2015, Xerox announced its first quarter 2015 financial results, which again reflected disappointing margins in the same business, again due to higher costs associated with the continued implementation of Health Enterprise projects. Nonetheless, plaintiffs allege, “defendants continued to assure investors that [Xerox's] Services business segment was performing well.” Id. ¶ 7. That day, Xerox's common stock fell $1.10 per share, a decrease of 8.75 percent, and closed at $11.48. Id. ¶ 8.

         On October 13, 2015, Xerox issued a press release announcing that it would be taking a $385 million pre-tax charge with its third quarter 2015 results. This charge related to assets and unrecoverable costs part of the implementation of Health Enterprise projects. Xerox disclosed, too, that it would not complete its Health Enterprise projects in California and Montana. Id. ¶ 9. The following day, Xerox common stock fell by $0.32 per share, a decrease of 3.17 percent, closing at $9.83 per share on October 14, 2015. Id. ¶ 10.

         Finally, on October 26, 2015, Xerox released its financial results for the third quarter of 2015. These results fell short of analysts' estimates, partly because of revenues lost as a result of the termination of the projects in California and Montana. Xerox admitted it would experience lower revenues as a result of the loss of these contracts. It also announced that its directors had authorized a strategic review of Xerox's business portfolio. Id. ¶ 11. That day, Xerox's common stock fell $0.30 per share, a decrease of 3 percent, closing at $9.73 per share on October 26, 2015. Id. ¶ 12.

         Plaintiffs bring two claims. The first, against all defendants, is for a violation of Section 10(b) of the Exchange Act and Rule 10b-5, based on Xerox's dissemination and/or approval of false and misleading statements and material omissions concerning Health Enterprise. Id. ΒΆΒΆ 71- 75. The second, against only the individual defendants, is for a violation of Section 20(a) of the Exchange Act, claiming that the individual defendants had the power and ability ...


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