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Pirnik v. Fiat Chrysler Automobiles, N.V.

United States District Court, S.D. New York

August 1, 2017

VICTOR PIRNIK, Plaintiff,
v.
FIAT CHRYSLER AUTOMOBILES, N.V., et al., Defendants.

          OPINION AND ORDER

          JESSE M. FURMAN, United States District Judge.

         Plaintiffs in this putative securities fraud class action - brought pursuant to 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 Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240 - are investors in Defendant Fiat Chrysler Automobiles, N.V. (“FCA NV”), a global car company. Plaintiffs initially alleged that FCA NV and several officers of its largest subsidiary, FCA U.S. (collectively with FCA NV, “FCA”), made false and misleading statements regarding FCA's substantial compliance with applicable safety regulations and recall reserve estimates. In an earlier opinion, familiarity with which is assumed, the Court granted Defendants' motion to dismiss the claims regarding the recall reserve estimates, but allowed Plaintiffs' claims with respect to safety regulation compliance to proceed. See Pirnik v. Fiat Chrysler Automobiles, N.V., 15-CV-7199 (JMF), 2016 WL 5818590, at *4, *10-11 (S.D.N.Y. Oct. 5, 2016). Thereafter, Plaintiffs amended their complaint, adding claims that Defendants made false and misleading statements regarding FCA's compliance with certain federal and state emissions regulations. Defendants now move, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, to dismiss those new claims. (Docket No. 91) For the reasons that follow, the motion is granted, but Plaintiffs are granted leave to amend.

         BACKGROUND

         The Court laid out the general background of this action in its prior opinion, see Pirnik, 2016 WL 5818590, at *1-4, and will not rehash it here. A few months after the Court's earlier decision, on January 12, 2017, the United States Environmental Protection Agency (“EPA”) and the California Air Resources Board (“CARB”) issued Notices of Violation to FCA for failing to disclose certain engine management software that could alter the emissions output in light-duty model year 2014, 2015, and 2016 Jeep Grand Cherokees and Dodge Ram 1500 trucks with 3.0 liter diesel engines. (Docket No. 69 (“Third Am. Compl.”) ¶ 29). On this news, FCA's stock dropped $1.35 per share, closing roughly twelve percent below its opening price that day. (Id. ¶ 319). Soon thereafter, Plaintiffs sought and were granted leave to amend their complaint to incorporate allegations regarding FCA's purportedly material misrepresentations regarding compliance with emissions regulations. (See Docket Nos. 61, 62). The operative complaint (the “Complaint”) now alleges that throughout the class period - October 14, 2014, through February 6, 2017 - FCA NV; Sergio Marchionne, the Chief Executive Officer of FCA NV and US; and other individual Defendants repeatedly misled investors as to FCA's compliance with applicable emissions regulations for diesel vehicles. (See Third Am. Compl. ¶¶ 193-223, 242-43, 279-82, 302-324). As noted, Defendants now move to dismiss those claims, arguing that the Complaint contains insufficient particularized facts to support a strong inference that Defendants acted with the necessary intent to defraud its investors. (Docket No. 92 (“FCA Mem.”), at 1-4).

         APPLICABLE LEGAL STANDARDS

         “In reviewing a motion to dismiss pursuant to Rule 12(b)(6), the Court must accept the factual allegations set forth in the complaint as true and draw all reasonable inferences in favor of the plaintiff.” Cohen v. Avanade, Inc., 874 F.Supp.2d 315, 319-20 (S.D.N.Y. 2012) (citing Holmes v. Grubman, 568 F.3d 329, 335 (2d Cir. 2009)). The Court will not dismiss any claims pursuant to Rule 12(b)(6) unless the plaintiff has failed to plead sufficient facts to state a claim to relief that is facially plausible, see Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007), that is, one that contains “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). Because they allege securities fraud, Plaintiffs here must also satisfy the heightened pleading requirements of both Rule 9(b), which requires that the circumstances constituting fraud be “state[d] with particularity, ” Fed.R.Civ.P. 9(b), and 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” - also be pleaded with particularity, Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007) (internal quotation marks omitted).

         To satisfy Rule 9(b), a plaintiff “must ‘(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.'” Anschutz Corp. v. Merrill Lynch & Co., 690 F.3d 98, 108 (2d Cir. 2012) (quoting Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004)). To satisfy the PSLRA, 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, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007) (quoting 15 U.S.C. § 78u-4(b)(2)(A)). A plaintiff may do so 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.” Id. For an inference of scienter to be “strong, ” a reasonable person must “deem [it] cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” Tellabs, 551 U.S. at 324.

         DISCUSSION

         Defendants move to dismiss the new emissions-related claims on the ground that Plaintiffs fail to allege with particularity facts giving rise to a strong inference of scienter. Notably, although the Complaint could be read to include allegations that Defendants had both the motive and opportunity to commit the alleged fraud (see FCA Mem. 11-12 (citing examples)), Plaintiffs do not respond to Defendants' arguments regarding the adequacy of those allegations. That is for good reason, as Plaintiffs fail to allege that any of the Defendants sold shares of FCA stock during the class period. See Pirnik, 2016 WL 5818590, at *6 n.3; see also Rombach v. Chang, 355 F.3d 164, 177 (2d Cir. 2004). To prevail, therefore, Plaintiffs must allege either actual intent or “conscious recklessness - i.e., a state of mind approximating actual intent, and not merely a heightened form of negligence.” Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 106 (2d Cir. 2015).

         Plaintiffs fail to do so. On the whole, their allegations boil down to general claims about the importance of certain diesel-engine vehicles to the company, the unremarkable fact that Marchionne received regular reports regarding emissions tests and that the company had audited its vehicles for emissions compliance, FCA's awareness that other automobile manufacturers were facing regulatory scrutiny for using illegal “defeat devices, ”[1] and vague statements by confidential witnesses that emissions reports were “forwarded up” through “senior” management to reach Marchionne. (See, e.g., Docket No. 96 (“Pls.' Opp'n”), at 2-3). Conspicuously absent, however, are any allegations that FCA officials or Marchionne ever received test results, reports, or other communications indicating that FCA vehicles were not in compliance with relevant emissions regulations prior to the EPA's and CARB's notices on January 12, 2017. That dooms Plaintiffs' case for scienter here. See, e.g., Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 196 (2d Cir. 2008) (dismissing claims where the plaintiffs failed to “specifically identif[y] any reports or statements that would have come to light in a reasonable investigation and that would have demonstrated the falsity of the allegedly misleading statements” (internal quotation marks and citation omitted)); Plumbers & Steamfitters Local 773 Pension Fund v. Canadian Imperial Bank of Commerce, 694 F.Supp.2d 287, 299 (S.D.N.Y. 2010) (dismissing claims where the complaint made “no reference to internal CIBC documents or confidential sources discrediting [the d]efendants' assertions” and the plaintiffs “should, but [did] not, provide specific instances in which [the d]efendants received information that was contrary to their public declarations”); Steinberg v. Ericsson LM Telephone Co., No. 07-CV-9615 (RPP), 2008 WL 5170640, at *13 (S.D.N.Y. Dec. 10, 2008) (dismissing claims where the complaint stated only “generically” that adverse information “was contained in various 'internal corporate documents, conversations and connections with other corporate officers and employees, attendance at management and Board of Directors meetings and committees thereof, and via reports' and ‘internal non-public reports' provided to [d]efendants”); cf. Pirnik, 2016 WL 5818590, at *2, *7 (denying Defendants' motion to dismiss Plaintiffs' safety-regulation-related allegations in part based on letters from the National Highway Traffic Safety Administration (“NHTSA”) expressing concerns with respect to certain FCA recalls, as Defendants assured investors regarding FCA's safety-related compliance and accountability despite “knowledge of the company's noncompliance with respect to at least some recalls”).

         Plaintiffs point to multiple purported misrepresentations - made in FCA's securities filings and during earnings calls with shareholders - dating from the beginning of the class period in October 2014 through April 2016. (See, e.g., Third Am. Compl. ¶¶ 242-44, 279-82, 302-317, 387-88). But, even on a generous read, the earliest allegation that FCA might have known that it was not in compliance with the emissions regulations at issue is a May 23, 2016 report (the “Report”) published by Germany's Transportation Ministry following its investigation of Volkswagen for that company's widespread use of defeat devices (see Id. ¶¶ 27-28) and excerpts from several news articles examining the implications of that report. (Id. ¶ 313). According to Plaintiffs, the Report concluded there was “sufficient evidence of an impermissible defeat device.” (Id. ¶ 27). In fact, however, that conclusion applied only to Volkswagen; with respect to other car manufacturers, including FCA, the report expressed some “doubts regarding” the devices used to control emissions, but stated that “further investigation[]” was required. German Federal Ministry of Transport and Digital Infrastructure, Report by the “Volkswagen” Commission of Inquiry (May 23, 2016), http://www.bmvi.de/SharedDocs /EN/publications/bericht-untersuchungskommission-volkswagen.html?nn=188294.[2] Specific to FCA, the Report found that the four vehicle models studied all “complied” with emissions regulations during cold tests, but exhibited variations under warmer temperatures - findings that FCA “substantiated” as “necessary to protect the engine from damage, ” which could make such variances permissible. See, e.g., id. at 78 (Fiat Ducato 3.0); id. at 90 (Jeep Cherokee 2.0). The Complaint also points to “some evidence” in the Report that “some” FCA models would switch off emissions controls after twenty-two minutes (i.e, only two minutes after the end of the standard EPA twenty-minute emissions test), but the Report ultimately concluded: “As matters stand at present, the field investigations do not indicate any further defeat devices [beyond Volkswagen] that are based on a test cycle recognition.” Id. at 18.[3]

         Thus, the Report is far from conclusive and provides little or no support for Plaintiffs' claim that Marchionne and other FCA officials “must have known” that FCA cars had illegal defeat devices. See, e.g., Sinay v. CNOOC Ltd., 554 F. App'x 40, 42 (2d Cir. 2014) (holding that the plaintiffs “had not sufficiently pleaded scienter based on allegations that [the defendant] ‘must have known' that its statements to investors were false”); Wyche v. Advanced Drainage Sys., Inc., 15-CV-5955 (KPF), 2017 WL 971805, at * (S.D.N.Y. Mar. 10, 2017) (“[T]o the extent that [p]laintiff is alleging [d]efendants had access to facts indicating that their representation of the Company's finances was false, his allegation fails. Plaintiff has not identified contemporaneous facts, reports, or statements to which [d]efendants had access and which contained information contrary to the information [d]efendants conveyed to the public.”). What is more, the Report did not discuss Jeep Grand Cherokees and Dodge Ram 1500 trucks with 3.0 liter diesel engines - the two kinds of vehicles that were the subjects of the Notices of Violation from the EPA and CARB. And even if the Report were sufficient to establish that FCA, as of May 2016, knew or should have known that some of its vehicles were using defeat devices, the only allegation in the Complaint regarding statements made by FCA after that date is the remarkably vague allegation that, during a July 27, 2016 earnings call, “Marchionne discussed in depth his opinions concerning the emissions regulations in Europe.” (Third Am. Compl. ¶ 390). Such conclusory allegations are insufficient to meet Rule 9(b)'s particularity standard.

         Plaintiffs' confidential witness allegations do not get them across the goal line either. Confidential Witness 1 merely observed that emissions tests “are super important” to ensure proper certification by the EPA, while Confidential Witness 2 noted that there is “a difficult balancing act” between “emissions, fuel economy and engine performance” and cited pressuring from FCA officials to continually improve performance. (Third Am. Compl. ¶¶ 358, 364). Confidential Witness 2 also stated that he or she was “not surprised” that FCA was being investigated for potential defeat devices because “all auto manufacturers have to cheat.” (Id. ¶ 370). But “confidential source allegations must show that individual defendants actually possessed the knowledge highlighting the falsity of public statements; conclusory statements that defendants ‘were aware' of certain information, and mere allegations that defendants ‘would have' or ‘should have' had such knowledge is insufficient.” Glaser v. The9, Ltd., 772 F.Supp.2d 573, 591 (S.D.N.Y. 2011) (emphasis added); see also Local No. 38 Intern. Broth. of Elec. Workers Pension Fund v. Am. Exp. Co., 724 F.Supp.2d 447, 461 (S.D.N.Y. 2010) (“Notably, these [confidential witness] allegations do not establish what specific contradictory information the Individual Defendants received or when they received it . . . . Indeed, if ‘detailed' reports were circulated regularly among AMEX's senior management, CW12 should be able to identify the names and contents of these documents, or recount specific meetings at which the Individual Defendants actually received contradictory information. Here again, bland assertions that they ‘would have received' such information offer nothing concrete and are not allegations of fact.”). Neither of Plaintiffs' confidential witnesses alleges that Marchionne reviewed tests or reports that actually revealed the vehicles at issue were using impermissible defeat devices.

         Ultimately, aside from the January 2017 Notices of Violations (which, again, are not necessarily as damning as Plaintiffs suggest, as the EPA found only that “one or more” of the undisclosed devices “may be defeat devices” and that “further investigation” was necessary (Docket No. 93 (“Levy Decl.”), Ex. 4, at 6 (emphasis added))), there are no allegations in the Complaint inconsistent with the alternative inference proffered by FCA: that the company, in good faith, believed these 104, 000 vehicles (which constituted less than one percent of its global sales) were in compliance with the law. FCA's disclosure of software other than the devices for which the company is now being prosecuted (see Docket 106 (taking judicial notice of the May 23, 2017 prosecution initiated by the Department of Justice against FCA for the alleged use of defeat devices)) provides some common sense support for Plaintiffs' argument. But it is no less (and arguably more) plausible to think that FCA believed itself to be in compliance - as it consistently represented - given the myriad of harsh consequences, financial and otherwise, the company knew it would suffer if the devices were found to be illegal. See Tellabs, 551 U.S. at 324 (defining a “strong” inference of scienter as “at least as compelling as any opposing inference one could draw from the facts”). Without any allegations that Marchionne or other FCA officials received contradictory information or knew that the devices were not in compliance prior to statements made during the class period, Plaintiffs' allegations must be dismissed. Cf., e.g. Vancouver Alumni Asset Holdings Inc. v. Daimler AG, No. 16-CV-2942 (SJO), 2017 WL 2378369, *16 (C.D. Cal. May 31, 2017) (“[T]he Complaint alleges not only that these defendants were in a position to receive information about BlueTEC's inability to produce consistent ‘clean diesel' emissions, but also that they in fact did receive such information, and thus made knowing material misrepresentations to investors.”); In re Volkswagen ‘Clean Diesel' Mktg. Sales Practices & Prods. Liab., 2017 WL 66281, at *12 (N.D. Cal. Jan. 4, 2017) (finding that a ...


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