United States District Court, S.D. New York
MEMORANDUM OPINION AND ORDER
G. Koeltl United States District Judge.
a securities action purportedly brought on behalf of a class
of all purchasers of publicly traded common stock and/or
exchange-traded options on such common stock of Eaton
Corporation PLC ("Eaton" or the
"Company") between May 21, 2012 and July 28, 2014
(the "class period"), so long as they purchased at
least one share or option from November 13, 2013 through July
28, 2014, inclusive. The lead plaintiff, South Carolina
Retirement Systems Group Trust, asserts violations of Section
10(b) of the Securities Exchange Act of 1934, 15 U.S.C.
§ 78j(b) (the "Exchange Act"), and Rule 10b-5
promulgated thereunder, 17 C.F.R. § 240.10b-5, against
Eaton and two senior executives of the Company, namely,
Alexander M. Cutler and Richard H. Fearon (collectively, the
"individual defendants" and together with Eaton,
the "defendants"). The plaintiff also asserted
control person liability under Section 20(a) of the Exchange
Act, 15 U.S.C. § 78t(a), against the individual
January 13, 2017, the lead plaintiff, South Carolina
Retirement Systems Group Trust (the "plaintiff"),
filed a Consolidated Class Action Complaint (the
"CCAC"). In an Opinion and Order dated September
20, 2017, this Court dismissed the CCAC without prejudice for
failure to plead any material misrepresentations or scienter.
In re: Eaton Sec. Litig., No. 16-CV-5894, 2017 WL
4217146 (S.D.N.Y. Sept. 20, 2017) ("Eaton
8, 2018, the plaintiff filed a Second Amended Consolidated
Class Action Complaint (the "SAC"). The defendants
now move to dismiss the SAC pursuant to Federal Rule of Civil
Procedure 12(b) (6).
following reasons, the motion is granted.
deciding a motion to dismiss pursuant to Rule 12(b)(6) of the
Federal Rules of Civil Procedure, the allegations in the
complaint are accepted as true, and all reasonable inferences
must be drawn in the plaintiff's favor. McCarthy v.
Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir.
2007). The Court's function on a motion to dismiss is
"not to weigh the evidence that might be presented at a
trial but merely to determine whether the complaint itself is
legally sufficient." Goldman v. Belden, 754
F.2d 1059, 1067 (2d Cir. 1985). A complaint should not be
dismissed if the plaintiff has stated "enough facts to
state a claim to relief that is plausible on its face."
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
(2007). "A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to
draw the reasonable inference that the defendant[s] [are]
liable for the misconduct alleged." Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009). While factual
allegations should be construed in the light most favorable
to the plaintiff, "the tenet that a court must accept as
true all of the allegations contained in a complaint is
inapplicable to legal conclusions." Id.
under Section 10(b) of the Securities Exchange Act sounds in
fraud and must meet the pleading requirements of Rule 9(b) of
the Federal Rules of Civil Procedure and of the Private
Securities Litigation Reform Act ("PSLRA"), 15
U.S.C. § 78u-4(b). Rule 9(b) requires that the complaint
"(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." ATSI Commc'ns, Inc.
v. Shaar Fund, Ltd., 4 93 F.3d 87, 99 (2d Cir. 2007).
The PSLRA similarly requires that the complaint "specify
each statement alleged to have been misleading [and] the
reason or reasons why the statement is misleading," and
it adds the requirement that "if an allegation regarding
the statement or omission is made on information and belief,
the complaint shall state with particularity all facts on
which that belief is formed." 15 U.S.C. §
78u-4(b)(1); ATSI, 493 F.3d at 99.
scienter required to support a securities fraud claim can be
"intent to deceive, manipulate, or defraud, or at least
knowing misconduct.'' SEC v. First Jersey Sec,
Inc., 101 F.3d 1450, 1467 (2d Cir. 1996) (internal
citations omitted}. The PSLRA requires that a complaint
alleging securities fraud "state with particularity
facts giving rise to a strong inference that the defendant[s]
acted with the required state of mind." 15 U.S.C. §
78u-4(b)(2). Scienter may be inferred from (i) facts showing
that a defendant had "both motive and opportunity to
commit the fraud," or (ii) facts that constitute
"strong circumstantial evidence of conscious misbehavior
or recklessness." ATSI, 493 F.3d at 99; see
also City of Roseville Emps. Ret. Sys. v. EnergySolutions,
Inc., 814 F.Supp.2d 395, 418-19 (S.D.N.Y. 2011) (same).
order to plead scienter adequately, the plaintiff must allege
facts supporting a strong inference with respect to each
defendant. See Plumbers & Pipefitters Local Union No.
630 Pension-Annuity Trust Fund v. Arbitron Inc., 741
F.Supp.2d 474, 488 (S.D.N.Y. 2010). "[I]n determining
whether the pleaded facts give rise to a 'strong'
inference of scienter, the court must take into account
plausible opposing inferences." Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 323
(2007). A complaint sufficiently alleges scienter when
"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; see also Slayton v. Am. Express
Co., 604 F.3d 758, 766 (2d Cir. 2010); Silsby v.
Icahn, 17 F.Supp.3d 348, 364-65 (S.D.N.Y. 2014). See
also Eaton I, 2017 WL 4217146, at *11.
presented with a motion to dismiss pursuant to Rule 12(b)(6),
the Court may consider documents that are referenced in the
complaint, documents that the plaintiff relied on in bringing
suit and that are either in the plaintiff's possession or
that the plaintiff knew of when bringing suit, or matters of
which judicial notice may be taken. See Chambers v. Time
Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002). The
Court can take judicial notice of public disclosure documents
that must be filed with the SEC and documents that both
"bear on the adequacy" of SEC disclosures and are
"public disclosure documents required by law."
Kramer v. Time Warner, Inc., 937 F.2d 767, 773-74
(2d Cir. 1991); see also Schwab v. E*Trade Fin.
Corp., 285 F.Supp.3d 745, 749-50 (S.D.N.Y. 2018); In
re Eletrobras Sec. Litig., 245 F.Supp.3d 450, 457-58
following facts are accepted as true for the purposes of the
defendants' motion to dismiss. Familiarity with this
Court's decision on the prior motion to dismiss and the
underlying factual allegations is presumed.
is an Ireland-based manufacturer of engineered products --
such as hydraulic equipment, fluid connectors, electrical
distribution equipment, and engine components -- that are
marketed to customers in the industrial, agricultural,
construction, aerospace, and vehicle markets. SAC ¶ 2.
Cutler was Eaton's Chairman and Chief Executive Officer
("CEO") from August 2000 until his retirement in
May 2016. SAC ¶ 40. Fearon is Eaton's Vice Chairman
and Chief Financial and Planning Officer ("CFO").
SAC ¶ 41.
plaintiff alleges that Eaton has historically been a vehicle
component manufacturer based in the United States, but in the
past few decades has been making strategic shifts away from
its vehicle and automotive business. SAC ¶ 3. On May 21,
2012, the Company announced plans to merge with
Irish-headquartered Cooper Industries plc.
("Cooper"), an electrical products manufacturer,
and reincorporate in Ireland. SAC ¶ 4, 18. Upon
announcement of the merger, analysts began speculating as to
whether there would be a "potential, future spin-off or
other divestiture of Eaton's vehicle business." SAC
the CCAC alleged that Cutler and Fearon made misleading
statements following the merger regarding whether Eaton was
able to spin-off the vehicle business on a tax-free basis.
The CCAC alleged that Cutler and Fearon misled the market
into believing that there were no restrictions on Eaton's
ability to spin-off the automotive business when in reality
Eaton could not complete a tax-free spin-off for five years
following the merger.
SAC, the plaintiff asserts the same theory of fraud, namely
that the defendants misled the plaintiff and the market when
they failed to disclose that the automotive business could
not be spun-off on a tax-free basis for five years following
Eaton's merger with Cooper. However, the SAC includes
several new allegations, including additional alleged
misstatements, additional references to analyst reports, and
two expert opinions.
plaintiff adds two statements that it alleges are material
misstatements or omissions. First, on a February 5, 2013
earnings call, Cutler was asked by an analyst: "[C]ould
you just address big picture how to think about the portfolio
going forward? . . . Anything you could share there about
what's next for the Eaton portfolio?" SAC ¶
207. Cutler responded: "Nothing different . . . than
I've said in numerous forums really since we announced
the Cooper transaction .... But it doesn't presage any
other moves at this point. We like the portfolio we're
with." SAC ¶ 207.
on June 10, 2013, a news article titled "Eaton Said to
Consider Sale of Auto-Parts Business" reported that the
Company was "weighing a sale of its auto parts
unit." SAC ¶ 212. On June 12, 2013, the Company
responded by issuing a press release titled "Eaton Not
in Discussions to Sell Its Automotive Business." SAC
¶ 213. It stated that "there was no basis for
published reports involving speculation on the sale of
Eaton's automotive business." SAC ¶ 213. The
press release further quoted Cutler as stating that the
Company was "not, and ha[s] not been in the process of
discussions to sell [the] automotive business," that
Cutler had "answered this question repeatedly since
[Eaton] did the acquisition of Cooper," that the
"vehicle business" was "a very important part
of Eaton," "a very strong franchise," and that
it was "a very strong profit-producing portion of [the]
[C]ompany." SAC ¶ 213.
also adds references to, and quotes from, additional analyst
reports discussing a potential spin-off of the automotive
business. For example, the SAC alleges that a news report
issued on June 4, 2012 by Crain's Cleveland Business
discussing a May 12, 2012 conference call with Eaton
explained that Eaton "might turn to the sale of assets
to help repay debt" and noted that the merger
"le[ft] open the possibility that Eaton will need to
sell pieces of its past as it pursues its future." SAC
¶¶ 100-101. The SAC also alleges additional
statements from analyst reports issued by Wells Fargo,
KeyBanc, MKM Partners, Vertical Research Partners, Morgan
Stanley, and Deutsche Bank, which the plaintiff asserts
demonstrate that the market "continued to believe that a
divestiture of the vehicle business remained feasible
throughout the Class Period." SAC ¶¶ 141-143,
also includes opinions from two experts regarding the
economic viability of a taxable sale of the automotive
business. The SAC alleges that a tax expert, Mark Baran,
concluded that a sale of the vehicle business would likely
have been subject to the highest statutory U.S. federal
corporate tax rate of 35%, resulting in taxes of up to $2
billion. SAC ¶¶ 74-76. The SAC also alleges that a
consulting investment banking expert, James Miller, conducted
an analysis to determine the impacts of a taxable or tax-free
sale of Eaton's vehicle business. SAC ¶ 77. Miller
concluded that a tax-free spin-off would create an 8.8%
increase in Eaton's value, but a taxable sale would cause
a 7.9% decrease. SAC ¶ 81. Based on this analysis,
Miller "concluded that the tax liability on a potential
sale rendered the transaction economically unworkable."
SAC ¶ 77. Miller also reviewed the analysis in a report