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Thomas v. Shiloh Industries, Inc.

United States District Court, S.D. New York

March 23, 2017

RAYMOND THOMAS and WILLIAM PORTER, individually and on behalf of all others similarly situated, Plaintiffs,

          OPINION & ORDER


         Lead Plaintiff Raymond Thomas and Plaintiff William Porter (“Plaintiffs”) bring this putative class action against Shiloh Industries (“Shiloh”) and two of its individual directors, Ramzi Hermiz and Thomas M. Dugan (“Individual Defendants”; collectively, “Defendants”).

         Plaintiffs assert claims under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 (the “Exchange Act”), and Section 20(a) of the Exchange Act. Corrected Amended Complaint (“CAC”) ¶¶ 126-36, 137-140. Plaintiffs allege that Defendants perpetrated an accounting fraud at Shiloh's manufacturing facility in Wellington, Ohio. Plaintiffs contend that as a result, this fraudulent accounting artificially inflated Shiloh's net income. After management was alerted to potential accounting misconduct, Shiloh launched an internal investigation. Subsequently, in late 2015, Shiloh issued a restatement of its financial results for the first two fiscal quarters of 2015, caused by this accounting discrepancy at the Wellington facility. Plaintiffs allege that when this purported fraud was revealed, Shiloh's stock price plummeted.

         Defendants have moved to dismiss the CAC under Rule 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act (“PSLRA”). For the reasons stated below, because Plaintiffs fail to state with particularity facts giving rise to scienter, Defendants' motion is GRANTED in its entirety.

         I. BACKGROUND

         The facts stated here, alleged in the Corrected Amended Complaint, are assumed to be true for the purpose of this motion. See, e.g., Witt v. Vill. of Mamaroneck, N.Y., 639 F. App'x 44, 45 (2d Cir. 2016). Plaintiffs represent a class of all purchasers of Shiloh securities between January 12, 2015, and September 14, 2015 (the “Class Period”), who are seeking remedies under the Exchange Act. CAC ¶ 1. Defendant Shiloh, incorporated in Delaware with its principal offices located in Ohio, is a supplier of lightweighting equipment to various automotive and commercial vehicle industries. Id. ¶ 35. Lightweighting enables manufacturers to build vehicles in a more cost and weight efficient manner. Shiloh also provides noise, vibration, and harshness solutions to manufacturers. Id. Shiloh maintains twenty-one manufacturing facilities, and is headquartered in Valley City, Ohio. Id. ¶ 15.

         Shiloh's securities are actively traded on the NASDAQ Global Market. Id. ¶ 113. Defendant Ramzi Hermiz has been President and CEO of Shiloh since 2012. Defendant Thomas Dugan was Vice President of Finance and Treasurer “at all relevant times.” Id. ¶ 29.

         A. Allegations in the Complaint

         Plaintiffs allege that Defendants intentionally perpetrated the fraud of which Plaintiffs complain. Id. ¶ 6. They claim that Defendants effected this alleged fraud by allowing misallocated steel surcharges on the balance sheet to remain uncorrected, which had the effect of understating the cost of goods sold and inflating inventory. Id. ¶ 7-8. Plaintiffs further allege that Defendants touted their financial success to investors for the first and second quarters of 2015, id. ¶ 9, but that on September 9, 2015, Shiloh revealed that it was conducting an internal investigation into the accounting at its Wellington facility. Id. ¶ 10. Specifically, Shiloh indicated that there was a potential issue regarding accounting for inventoried costs. Id. ¶ 16. Plaintiffs claim that this disclosure, as well as the Company's report to the SEC amending its financial results for the fiscal year 2014 and the first and second quarters of 2015, caused Shiloh's stock price to fall. Id. ¶¶ 11-14. The amended report, called the Restatement, “confirmed that the Company understated cost of sales, overstated gross margin, and overstated net income for Q1 2015 and Q2 2015.” Id. ¶ 13.

         Plaintiffs seek compensatory damages for the injuries sustained as a result of Defendants' alleged wrongdoing. Id. p. 50.


         A. Rule 9b and PSLRA

         To survive a motion to dismiss a complaint alleging securities fraud, the complaint must satisfy the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure and the PSLRA.

         A complaint alleging fraud “must state with particularity the circumstances constituting fraud, ” or otherwise face dismissal. Fed.R.Civ.P. 9(b). See also Ganino v. Citizens Utils. Co., 228 F.3d 154, 168 (2d Cir. 2000); Chill v. Gen. Elec. Co., 101 F.3d 263, 267 (2d Cir. 1996). Rule 9(b) also allows that “[m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally, ” but per the PSLRA, the plaintiff must also allege facts that support a strong inference of fraudulent intent. 15 U.S.C. § 78u-4(b)(2); Ganino, 228 F.3d at 169; Acito v. FMCERA Grp., Inc., 47 F.3d 47, 52 (2d Cir. 1995).

         B. Rule 10b-5 and Section 10(b)

         To state a claim for securities fraud under section 10(b) and Rule 10b-5, Plaintiffs must allege (1) a material misrepresentation or omission; (2) scienter; (3) connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation. In re China Mobile Games & Entm't Grp., Ltd. Sec. Litig., 2016 WL 922711, *3 (Mar. 7, 2016) (Wood, J.).


         Plaintiffs' claims arise from the series of accounting misstatements that took place at Shiloh's Wellington facility. Defendants do not dispute that these misstatements occurred. Defendants informed investors in September of 2015 that an ongoing internal investigation would prevent Shiloh from timely filing its quarterly financial statements to the SEC, as required. Defendants admit that the misstatements on the balance sheet reflected an understatement of the cost of sales by $1.7 million in the first fiscal quarter of 2015 and $1.1 million in the second quarter, which overstated the ...

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