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In re Eaton Corporation Securities Litigation

United States District Court, S.D. New York

July 25, 2018

IN RE EATON CORPORATION SECURITIES LITIGATION

          MEMORANDUM OPINION AND ORDER

          John G. Koeltl United States District Judge.

         This is 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 defendants.

         On 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 I").

         On June 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).

         For the following reasons, the motion is granted.

         I.

         In 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.

         A claim 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.

         The 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).

         In 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.

         When 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 (S.D.N.Y. 2017).

         II.

         The 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.

         Eaton 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.

         The 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 ¶ 90.

         Generally, 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.

         In the 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.

         The 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.

         Second, 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.

         The SAC 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, 158-160, 162.

         The SAC 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 ...


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