Opinion
Civil No. 02-1821 (DWF/SRN), CLASS ACTION
August 15, 2003
Garrett D. Blanchfield, Jr., Esq., Reinhardt Anderson, St. Paul, MN, William S. Lerach, Esq., Darren J. Robbins, Esq., and Randall H. Steinmeyer, Esq., Milberg, Weiss, Bershad, Hynes Lerach, San Diego, CA, Reed R. Kathrein, Esq., Stanley S. Mallison, Esq., and James W. Oliver, Esq., Milberg, Weiss, Bershad, Hynes Lerach, San Francisco, CA, on behalf of Matt L. Brody, Keith Hewlett, Jr., Keith Hewlett, Sr., and on behalf of all other similarly situated Plaintiffs.
Peter W. Carter, Esq., Daniel J. Brown, Esq., and Anna E. Shimanek, Esq., Dorsey Whitney, Minneapolis, Minnesota, on behalf of Defendants.
MEMORANDUM OPINION AND ORDER
Introduction
The above-entitled matter came on for hearing before the undersigned United States District Judge on July 25, 2003, pursuant to Defendants' Motion to Dismiss the [Corrected] Consolidated Class Action Complaint and Plaintiffs' Motion to Substitute Marlene K. Shurson, or, in the alternative, Defendant Gregory S. Lea, in place of Defendant Karl Shurson. By their Complaint, Plaintiffs allege securities fraud against Pemstar and the Individual Defendants in violation of sections 10(b) and 20(a) of the Securities and Exchange Act of 1934. In addition, Plaintiffs allege claims against Defendants for violations of section 11 of the Securities Act of 1933, individually and as "controlling person[s] of the Company" as defined under section 15.
On July 24, 2002, a putative class action was filed against Pemstar. After six other identical actions were filed, the cases were consolidated into the current action, naming Matt L. Brody, Keith Hewlett, Jr., and Keith Hewlett, Sr. ("Plaintiffs") as the lead plaintiffs pursuant to § 21D(a)(3)(B) of the Securities Exchange Act of 1934 ("Exchange Act"), § 27(a)(3)(B) of the Securities Act of 1933 ("Securities Act"), and 15 U.S.C. § 78u-4(a)(3)(B). On January 7, 2003, Plaintiffs filed the Consolidated Class Action Complaint on behalf of all persons who purchased Pemstar securities from June 8, 2001, through May 3, 2002.
Defendants bring the current motion seeking to dismiss the Complaint against them, contending that Plaintiffs have failed to plead with sufficient particularity so as to establish the requisite element of scienter. Defendants also contend that the alleged misrepresentations or omissions are not material as a matter of law, that Plaintiffs' Complaint fails to plead the necessary elements of a section 11 claim, that any alleged representations are entitled to Safe Harbor protection under 15 U.S.C. § 77z-2 and 7878u-5, and that Plaintiffs' remaining claims should be dismissed for failing to adequately plead section 10(b) and 11 claims. For the reasons outlined below, the Court denies Defendants' Motion to Dismiss. Plaintiffs' Motion to Substitute Parties is granted.
Background 1. Pertinent Facts Set Forth in the Amended Complaint
Defendants have moved to dismiss this action pursuant to Federal Rule of Civil Procedure ("FRCP") 12(b)(6) and under the Private Securities Litigation Reform Act of 1995 ("PSLRA"). The Court will set forth the factual allegations in the Complaint as if true to determine whether Plaintiffs have stated a claim on which relief can be granted and whether the claims have pleaded fraud with sufficient particularity.
The Defendants include Pemstar, Inc. ("Pemstar"), a Minnesota corporation that provides manufacturing, engineering, and fulfillment services to high-tech industries. In addition to the above-named corporate Defendant, there are eleven Individual Defendants who served as directors and/or executives during the class period.
The "Individual Defendants" in this case are: Allen J. Berning, Robert R. Murphy, Steve V. Petracca, Karl D. Shurson, Robert D. Ahmann, Hargopal Singh, and William B. Leary (both officers and directors during the class period), Thomas A. Burton, Bruce M. Jaffe, and Gregory S. Lea (non-management, non-employee directors during the class period), and William Kullback (Chief Financial Officer during the class period).
As previously stated, Pemstar provides engineering and manufacturing services to the high-tech sector. Pemstar has pursued a strategy of expanding its business operations in these areas by acquiring competing companies and facilities. Operations at two of Pemstar's acquired facilities, the Quadrus, Inc., acquisition in San Jose, California, (the "San Jose facility") and the U.S. Assemblies New England, Inc. ("U.S. Assemblies"), acquisition in Taunton, Massachusetts, (the "Taunton facility") and the actions taken by the Individual Defendants concerning these facilities are at the heart of this dispute.
Plaintiffs allege that by January 2001, the San Jose facility began operating well below its capacity. (See Compl. ¶ 78.) By April 2001, the facility had begun to lose money. (See id. ¶ 82.) Pemstar instituted measures to slow or stop the losses at the San Jose facility, including a reduction in the work force and a salary freeze as of June 1, 2001. (See id. ¶ 81.) Although Pemstar was experiencing difficulties at the San Jose facility, the company continued to acquire other companies and facilities including the Taunton facility.
On June 8, 2001, Pemstar launched its secondary public offering raising $79. million for the company and $7.1 million for the Individual Defendants on the sale of 6.9 million shares. (See id. ¶ 42.) The Individual Defendants sold between 3% and 22% of their shares with the exception of Mr. Petracca, who sold 83% of his shares. (Defs'. Mem. in Supp. of Mot. to Dismiss at 18.)
Defendants assert that Plaintiffs fail to provide a factual basis for this claim, but e-mails amongst Pemstar executives seem to indicate that certain customers refused to sign master agreements requiring them to purchase finished goods. (See Complaint ¶¶ 127-128.)
Plaintiffs allege that over the next 12 months Pemstar's San Jose and Taunton facilities lost money as customers cancelled orders and new customers could not be found. (See Compl. ¶¶ 81-92 and 102-108.) The cancellation issue was exacerbated by the fact that Pemstar did not have agreements with its customers that required them to purchase finished goods.4 The number of orders cancelled not only led to anxiety among executives over future revenues at the facilities, but also to concerns about the amount of excess inventory on-hand at the facilities. (See id. ¶¶ 115-123.) Plaintiffs also allege that Pemstar was having trouble collecting on accounts receivable from the remaining customers of these facilities. (See id. ¶¶ 159-164.)
During this period, Pemstar executives communicated with one another on a regular basis trying to resolve the excess capacity, inventory, and accounts receivable issues. Pemstar eventually took measures to reduce loses by shifting product lines to other facilities and laying off workers at the San Jose facility, but internal reports show that, as early as January 2002, losses were expected at the San Jose and Taunton facilities for the remainder of the year. (See id. ¶¶ 91-92.)
Pemstar filed its quarterly and annual reports without noting any difficulties until February 14, 2002. In its 3rd quarter Form 10-Q, Pemstar stated that gross profit had fallen due to "industry wide reduction in demand that led to under-utilized facilities, write-downs of inventory, costs associated with shifting certain manufacturing programs from higher-cost to lower-cost facilities and severance costs resulting from reduction in the workforce." February 14, 2002, 10-Q at 10. Pemstar did not write-off any goodwill on its San Jose or Taunton facilities at this time; however, on May 3, 2002, Pemstar issued a press release stating that earnings had come in below expectations as a result of inventory write-downs and accounts receivable write-offs. The press release also noted that the company was completing an audit of its goodwill associated with certain acquisitions. On May 6, 2002, Pemstar stock dropped 60% of its value on word of Pemstar's earnings. Pemstar would later write-off almost 90% of the goodwill associated with the San Jose and Taunton facilities. Plaintiffs state that the write-off amounted to almost 25% of the company's then-current market capitalization.
2. Allegations of Fraud
Plaintiffs allege that, during the class period, Defendants continued to represent that the San Jose and Taunton facilities would remain profitable by maintaining over $24 million in goodwill valuation for these facilities. (See Compl. ¶¶ 75-76.) Plaintiffs also allege that Defendants made false statements about the company's levels of inventory, accounts receivable, and revenue and earnings projections. Plaintiffs allege Defendants were motivated to make these false statements because of Defendants' desire to maintain an inflated stock price, conform with credit agreement covenants with creditors, and continue Pemstar's aggressive growth by acquisition strategy. (See id. ¶¶ 36-40.)
According to Plaintiffs, Defendants knew that statements being made to the public regarding Pemstar were false, given the problems at the San Jose and Taunton facilities. Plaintiffs allege that the Defendants failed to properly review and recognize goodwill write-offs even though the Defendants were aware of significant changes in the extent and manner of use and the realized and expected losses at the facilities during the class period.
Plaintiffs specifically allege that Defendants were aware of losses at the San Jose facility beginning in April 2001. (See id. ¶ 82.) In May of 2001, Pemstar began to layoff employees at the San Jose facility. (See id. ¶ 81.) On June 1, 2001, Pemstar announced a salary freeze at the facility. (See Compl. ¶ 81.) Despite the actions taken to cut costs, the San Jose facility continued to lose money for the remainder of 2001. (See id. ¶ 88.) In January 2002, Defendants made plans to transfer certain product lines and inventory to other facilities. (See id. ¶ 94.) Plaintiffs allege that all of these facts show an awareness by Defendants of the need for a goodwill write-off well before the May 3, 2002, press release put investors on notice of the goodwill audit being conducted by the company.
Plaintiffs make similar allegations concerning the goodwill valuation of the Taunton facility. Plaintiffs allege that U.S. Assemblies was nearly bankrupt when purchased by Pemstar. (See id. ¶ 99.) Pemstar attempted to attract new customers to the Taunton facility, but was unable to do so. (See Compl. ¶ 105.) In order to cut losses at the facility, Pemstar laid off several employees, asked the remaining employees to take a pay cut, and reduced the work week from 5 days to 4 days. (See id. ¶¶ 106-108.) Despite the actions taken by Pemstar to reduce losses at the Taunton facility, the facility operated at a loss for the latter half of 2001. (See id. ¶ 102.) In January 2002, Pemstar further reduced the number of employees on staff at the Taunton facility, but the facility continued to operate at a major loss. (See id. ¶ 108.) Plaintiffs allege that these facts show an awareness by Defendants of the need for a goodwill write-off well before the May 3, 2002, press release put investors on notice of the goodwill audit being conducted by the company.
Plaintiffs also allege that Defendants knowingly made false statements concerning the levels of excess inventory on-hand at the San Jose and Taunton facilities in order to delay writing off or reserving for the inventory. Plaintiffs point to internal communications among Pemstar executives dating back to June 12 or 13, 2001, that state that Pemstar "Will sit on inventory to reduce loss." (See Compl. ¶ 125.) Plaintiffs also point to a series of communications amongst Pemstar executives from June 2001 to February 2002 that would indicate that Pemstar was aware of, and trying to deal with, its excess inventory issues. (See id. ¶¶ 127-145.) Nonetheless, Pemstar did not disclose its excess inventory problem to the public until February 14, 2002, and only effectuated a write-off of the property on May 3, 2002.
In addition, Plaintiffs allege that Defendants made false statements concerning the accounts receivable at the San Jose facility. In support of their allegations, Plaintiffs point to internal communications amongst Pemstar executives that show that some accounts were past due by as much as 2 years. (See id. ¶ 164.) Plaintiffs also point to e-mails stating that certain accounts should be considered as "collections" accounts. (See id. ¶ 163.) Plaintiffs allege that the communications among the Pemstar executives are evidence that Defendants were aware of accounts receivable issues for a long period of time before writing the accounts off on May 3, 2002.
Plaintiffs final allegations concern statements made by the Defendants regarding lay-offs within the company and the level of capital at Pemstar. Plaintiffs point to statements made by Pemstar executives to the public on October 23, 2001, to the effect that Pemstar was not "laying off hundreds of employees." (See Compl. ¶ 178.) Plaintiffs contend this statement was false, because Defendants had already laid off a number of employees at its San Jose and Taunton facilities and knew that future lay-offs would be necessary unless additional customers could be found for these facilities. (See id. ¶ 179.) Plaintiffs allege that, during the same meeting, Pemstar executives made false statements about the earnings at Pemstar and the level of capital at the company. (See id. ¶ 180.)
As previously stated, the primary focus of Plaintiffs' suit is on allegedly false statements made by Pemstar executives concerning the company's goodwill, inventory, and accounts receivable. Plaintiffs allege each of these categories was accounted for in violation of Generally Accepted Accounting Principles ("GAAP"). (See id. ¶ 61.) Plaintiffs further allege that Defendants made the false statements in order to: benefit themselves via stock sales during the secondary offering at inflated prices, benefit the company by selling shares at an inflated price, keep Pemstar in compliance with financial covenants, and allow Pemstar to continue its aggressive acquisition strategy.
3. Disclosures of Risk
Defendants cite to various portions of public disclosure documents that discuss the risks associated with investing in Pemstar in defense of statements made by Pemstar executives. In particular, Defendants quote portions of Pemstar's June 7, 2001, Registration Statement, Pemstar's November 9, 2001, Form 10-Q, and Pemstar's February 14, 2002, Form 10-Q.
The Registration Statement contains a section entitled "Risk Factors," that contains warnings related to the company's profitability, sales, inventory, and goodwill. The Registration Statement notes that equipment manufacturers in the industry "have publicly announced that they have experienced a reduction in demand for their products." Registration Statement at 8. The Registration Statement states that if customers cancelled orders, the result would be lower than expected net sales and "could result in us holding excess inventories of components and materials." Id. The Registration Statement also notes that with regard to recent acquisitions, the "limited history of owning and operating our acquired businesses" made Pemstar unable to ensure it would be able to "successfully integrate our acquired businesses on a timely basis." Id.
Pemstar's November 9, 2001, Form 10-Q discloses additional risks that might affect statements contained within its financial disclosures. In a section of the document titled "Forward-looking Statements," Pemstar describes that everything from the "changes in the demand for electronics manufacturing services" to "the effects of September 11, 201" and "the engagement of military forces of the United States and its allies in Afghanistan" could produce results much different than those described in the financial statement. November 9, 2001, 10-Q at 11.
Pemstar's February 14, 2002, Form 10-Q contains the first statements from the company regarding difficulties actually occurring at the company's San Jose and Taunton facilities. Pemstar cites an "industry-wide reduction in demand that led to under-utilized facilities, write-downs of inventory, costs associated with shifting certain manufacturing programs from high-cost to lower-cost facilities and severance costs" as factors contributing to the company's decrease in gross profits. February 14, 2002, Form 10-Q at 10.
Analysis 1. Defendants' Motion to Dismiss A. Standard of Review
Generally speaking, in deciding a motion to dismiss, the Court must assume all facts in the Complaint to be true and construe all reasonable inferences from those facts in the light most favorable to the complainant. Morton v. Becker, 793 F.2d 185, 187 (8th Cir. 1986). However, in the context of a case raising claims of securities fraud on behalf of a class, the Court must also consider the complaint in light of the heightened pleading standard established by the Private Securities Litigation Reform Act ("the Reform Act"), 15 U.S.C. § 78u-4 and 78u-5. Under 15 U.S.C. § 78u-4(b)(2), a complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." As such, the Court must "disregard `catch-all' or `blanket' assertions that do not live up to the particularity requirements of the statute." Florida State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 660 (8th Cir. 2001). And, while a plaintiff is generally entitled, under Fed.R.Civ.P. 12(b)(6), to all reasonable inferences that may be drawn from the complaint, a claim of securities fraud can only survive if the allegations "collectively add up to a strong inference of the required state of mind." Id.Given the differing bases of the numerous counts alleged by the Plaintiffs, it is necessary for the Court to discuss and analyze each of the above-stated standards in the context of this case. For the sake of clarity, each count, and the applicable standards thereunder, are addressed separately.
2. Section 10(b) Claim
Plaintiffs have alleged a claim of securities fraud under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), which states:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person in connection with the purchase or sale of any security.17 C.F.R. § 240.10b-5 (2001). In order to bring a successful claim of securities fraud, a plaintiff must establish the following elements: (1) material misrepresentations or omissions; (2) made with scienter; (3) in connection with the purchase or sale of securities; (4) upon which Plaintiff relied; and (5) that proximately caused Plaintiff's injuries. Alpern v. UtiliCorp United, Inc., 84 F.3d 1525, 1533-34 (8th Cir. 1996).
A. Scienter
"Scienter" is "the intent to deceive, manipulate, or defraud." Florida State Bd. of Admin., 270 F.3d at 653 (citations omitted). Scienter may be established by evidence of knowing or intentional practices to deceive, manipulate, or defraud. In re K-Tel Int'l, Inc. Sec. Litig., 300 F.3d 881, 893 (8th Cir. 2002) (citations omitted). Mere negligence or even gross negligence is not sufficient to establish scienter; however, a showing of recklessness may also satisfy the scienter requirement. See id. In addition, allegations of unusual or heightened motive and opportunity are sufficient to meet the Reform Act standard. See id. at 894.
The issue of whether a particular intent existed is generally a question of fact for the jury. See In re K-Tel, 300 F.3d at 894 (citing Press v. Chemical Inv. Servs. Corp., 166 F.3d 529, 538 (2d Cir. 1999)). Under Federal Rule of Civil Procedure 9(b), however, the complaint must provide a factual basis for the allegations of scienter. See id. (citations omitted). In addition, plaintiffs must assert "concrete and personal benefit to the individual defendants" as a result of the fraud. In re K-Tel, 300 F.3d at 894 (citing Kalnit v. Eichler, 264 F.3d 131, 139 (2nd Cir. 2001)).
The Court finds that Plaintiff's allegations create a strong inference that Defendants knowingly made misrepresentations of material fact in connection with the sale of securities. Defendant maintains that Plaintiff's allegations are conclusory and lack the specificity that could establish a finding of scienter on the part of the Defendants. The Court finds that Plaintiffs' allegations, if proved to be true, could establish otherwise.
Plaintiffs have alleged that: (1) as early as January 2001, the San Jose facility began operating well below capacity; (2) as early as April 2001, the San Jose facility began to lose money; (3) Pemstar was forced to reduce staff at the San Jose and Taunton facilities from mid-2001 to the beginning of 2002; (4) by January 2002, Pemstar began to move product lines and inventory from the San Jose facility to other Pemstar facilities; (5) the reduction in operations at the San Jose and Taunton facilities led to excess inventory issues at Pemstar; (6) efforts to collect on accounts receivable from customers of the two facilities led to certain accounts being designated as "problem" accounts; (7) Pemstar officers and directors were aware of these issues and discussed them via internal communications; (8) Pemstar and the Individual Defendants were able to materially benefit themselves as a result of the shares sold during the second offering; and (9) Pemstar did not inform public investors of a write-off, write-down, or any additional reserves being set aside to deal with these issues until its May 3, 2002, press release.
Defendants support their position by citing individual paragraphs of the Complaint and explaining why each is insufficient to establish the requisite element of scienter. Defendants are correct in arguing that the position of the individual Defendants within the company is insufficient to establish the requisite scienter. See, e.g., Chill v. General Elec. Co., 101 F.3d 263, 270-71 (2d Cir. 1996). Defendants are also correct that the mere fact that GAAP violations may have occurred is insufficient, on its own, to establish the requisite scienter. See id. To the extent that the Court finds merit in any of Defendants' positions with respect to individual allegations, however, the Court must take the Complaint as a whole, and, in doing so, the Court finds that the totality of the allegations raises a sufficient specter of scienter so as to meet the threshold under the Reform Act.
In summary, Plaintiffs have provided internal communications circulated among Pemstar officers and directors that establish a strong inference that the Individual Defendants were aware of the goodwill, inventory, and accounts receivable issues. Plaintiffs bolster their showing of scienter by suggesting a number of motives that might have been the basis for Defendants' actions. Plaintiffs contend that the primary motivation of the Defendants was in benefitting the company and the Individual Defendants through the secondary offering. The Court, therefore, finds that Plaintiffs have alleged sufficiently specific information that, if proven to be true, establishes the element of scienter.
B. Materiality
Defendants also contend that the alleged misstatements or omissions identified by the Plaintiffs fail to meet the test for materiality as a matter of law. A misrepresentation or omission is material if there is a "substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available." Parnes v. Gateway 2000, Inc., 122 F.3d 539, 546 (8th Cir. 1997) (citing Basic Inc. v. Levinson, 485 U.S. 224, 238 (1988)). In many cases, the question of materiality is a factual question for a jury to decide. See id. In those cases where the alleged misrepresentation could not have swayed a reasonable investor, a court may determine, as a matter of law, that the alleged misrepresentation is immaterial. See id. (citation omitted).Defendants contend that the disclosures of risk included in Pemstar's registration statement rendered any alleged misrepresentations immaterial as a matter of law. Defendants rely on Parnes v. Gateway 2000, Inc., 122 F.3d 539 (8th Cir. 1997) in support of this assertion. In Parnes, the U.S. Court of Appeals for the Eighth Circuit held that dismissal of a securities fraud complaint should be granted on the basis of cautionary language in financial disclosures only when there exists "enough cautionary language or risk disclosure that reasonable minds could not disagree that the challenged statements were not misleading." Id. at 548 (quoting Fecht v. Price Co., 70 F.3d 1078, 1082 (9th Cir. 1995) (emphasis in the original)).
In this case, the Court agrees with the Plaintiffs that the risk disclosures included in Pemstar's financial statements were not sufficient to render the alleged misstatements immaterial as a matter of law. In Parnes, the 8th Circuit affirmed the district court's dismissal of certain claims brought by the plaintiffs, because a reasonable investor that was aware of the risk disclosures provided by the defendants would not have been misled to believe that the defendants did not "face potential problems in these areas." Parnes, 122 F.3d at 539. The Court finds that Defendants' risk disclosures do not render immaterial as a matter of law the present-fact misrepresentations comprising Plaintiffs' claims. Plaintiffs allege that Defendants were aware of problems at the San Jose and Taunton facilities before the secondary offering and throughout the class period. Although Defendants' risk disclosures warned investors of potential risks that could occur in the future, such language is insufficient to render immaterial presently known facts about the problems at the company. By failing to reference problems that they had already been made aware of at the company, Defendants' disclosures could be materially misleading even though these disclosures contained information regarding certain future risks.
3. Section 11 Claim
Plaintiffs have alleged a claim of securities fraud under § 11 of the Securities Exchange Act of 1933, 15 U.S.C. § 77(k). In order to establish a § 11 claim, Plaintiffs need only show that they "bought the security and that there was a material misstatement or omission." Romine v. Acxiom Corp., 296 F.3d 701, 704 (8th Cir. 2002) (quoting In re NationsMart Corp. Sec. Litig., 130 F.3d 309, 315 (8th Cir. 1997), cert. denied, 524 U.S. 927 (1988)). Once Plaintiffs have proven the two elements, the issuer's liability is "virtually absolute, even for most innocent misstatements." Romine, 296 F.3d at 704 (quoting Herman MacLean v. Huddleston, 459 U.S. 375, 382 (1983)
A. Standing
Defendants argue that Plaintiff Matthew Brody lacks standing to bring the § 11 claim, because he did not purchase Pemstar stock during the secondary offering. Plaintiffs admit their mistake in bringing the claim under Mr. Brody's name, but argue the claim should not be dropped as Keith Hewlett, Jr. has standing after having been given power of attorney to sue on behalf of his father-in-law, Richard Truax, by the executor of Mr. Truax's estate. The Court finds that Plaintiffs lack standing to bring this claim based on the present Complaint; however, the Court will allow Plaintiffs 30 days to amend their complaint for the sole purpose of substituting Mr. Hewlett, Jr. for Mr. Brody.
B. Materiality
Defendants also contend that Plaintiffs fail to identify alleged misstatements that are material and were false when made. In support of their claim, Defendants argue this case is analogous to Oxford Asset Management, Ltd. v. Jaharis, 297 F.3d 1182 (11th Cir. 2002). In Oxford Asset Mgmt., the Court of Appeals for the Eleventh Circuit considered whether defendants had violated § 11 by omitting six weeks' worth of data regarding sales of a new product. See id. Plaintiffs alleged the information was vital to investors, but the 11th Circuit held that the district court properly dismissed plaintiffs' claims. See id. at 1192. The court held that defendants had no duty to disclose the information in their prospectus, because the information represented "only a very preliminary indication" that the product would be slow to find acceptance in the marketplace. Id. Defendants also find the Parnes case to be "strikingly similar" to this case because the Parnes case also included risk disclosures regarding inventory and accounts receivable.
Plaintiffs argue that their Complaint details a number of false statements made by Defendants in Pemstar's Registration Statement. Plaintiffs specifically point to alleged misstatements regarding the company's goodwill, inventory, and accounts receivable. Plaintiffs counter the argument put forth by the Defendants regarding analogies between this case and Oxford Asset by asserting that this case involves false financial reports, whereas Oxford Asset involved the failure to report a trend in business.
The Court finds that Plaintiffs have alleged sufficient facts to allow their section 12 claim to survive the motion to dismiss. Plaintiffs have alleged that prior to the June 6, 2001, filing of Pemstar's Registration Statement, Defendants were aware that some of the information contained in the financial portion of the Registration Statement was false based on events taking place at the San Jose and Taunton facilities over the prior 6 months. The Court finds that the facts of Oxford Asset are not analogous to this case, because in Oxford Asset the court was looking only at preliminary sales information obtained 6 weeks prior to the filing, 297 F.3d at 1182, whereas here, Plaintiffs allege Pemstar executives were aware of some of the problems at the facilities a full 6 months prior to the filing of the Registration Statement. The Court also finds Parnes inapplicable. As previously stated, the court in Parnes dealt with disclosures of future risk. 122 F.3d at 539. Here, the Plaintiffs allege that those risks had already become reality by the time the Registration Statement had been filed. Those misstatements that the court in Parnes did not find to be covered by the risk disclosures were dismissed as immaterial as a matter of law because they amounted to only 2% of the company's total assets. 122 F.3d at 547. Here, however, the alleged misstatements amount to 25% of the then-current capital of Pemstar. The Court finds that Plaintiffs have sufficiently alleged misrepresentations in Pemstar's financial disclosures that were material to public investors.
4. Safe Harbor Protections
Congress limited liability for forward-looking statements by providing a Safe Harbor provision to the PSLRA. 15 U.S.C. § 78u-5(c)(1) and (2). Forward-looking statements are not actionable if they are identified and accompanied by risk disclosures, if they are immaterial, or if the Plaintiffs fail to prove that the person or persons making the statements made it with actual knowledge that the statement was false or misleading. 15 U.S.C. § 78u(c)(1)(A). The Safe Harbor provision "does not insulate statements that misrepresent historical/hard or current facts." In re Ceridian Corp. Sec. Litig., Civ. No. 97-2044, 1999 U.S. Dist. LEXIS 15611, at *19 (D. Minn. Mar. 29, 1999) (citing Gross v. Medaphis Corp., 977 F. Supp. 1463, 1473 (N.D.Ga. 1997)).Defendants assert the alleged misstatements set forth by the Plaintiffs in their Complaint are nearly all forward-looking. Plaintiffs counter this argument by pointing out that the alleged misstatements were historical financial facts at the time the statements were made. The Court agrees with the Plaintiffs and finds that the alleged misstatements were not projections, but instead concerned past or current issues at the company's San Jose and Taunton facility.
5. Section 20(a) and Section 15 Claims
By its Complaint, Plaintiffs also allege claims against the Individual Defendants for violations of § 20(a) of the Securities Exchange Act of 1934 and § 15 of the Securities Act of 1933. The parties agree that the Court's ruling on whether to dismiss Plaintiffs' § 10(b) and § 11 claims dictates its ruling on whether to dismiss its §§ 20(a) and 15 claims. Because the Court has found Plaintiffs' §§ 10(b) and 11 claims sufficient, it declines to dismiss Plaintiffs' §§ 20(a) and 15 claims.
6. Motion to Substitute
Federal Rules of Civil Procedure 25(a)(1) provides that "[i]f a party dies and the claim is not thereby extinguished, the court may order substitution of the proper parties." Failure to present a motion for substitution within 90 days after the death is suggested results in the dismissal of the action with regard to the deceased party.Plaintiffs brought a Motion to Substitute Marlene K. Shurson, or, in the alternative, Defendant Gregory S. Lea, in place of Defendant Karl Shurson. Defendants argue that the request should not be granted because Plaintiffs' motion was brought outside of the 90-day window proscribed by Federal Rules of Civil Procedures 25. Plaintiffs counter that the motion is timely, and that Defendants' Suggestion of Death is invalid for failing to identify the estate's representative or successor.
The Court can find no prior Eighth Circuit or District of Minnesota decisions regarding the need to identify the representative or successor who may be substituted as a party in a Suggestion of Death. In examining this issue, the Court finds the cases cited by the Plaintiffs to be more persuasive. The Court agrees with the rationale of the court in Akil Al-Jundi v. Rockefeller, 88 F.R.D. 244, 246-47 (W.D.N.Y. 1980). The court in Akil Al-Jundi stated that failure to identify the representative or successor to an estate rendered the Suggestion of Death invalid because "an opposing party could be put to an unfair burden of locating and serving the representatives before the ninety-day period expired." Id. The Court agrees with Plaintiffs that the Suggestion of Death should have included the identity of the representative or successors of the estate of the deceased individual. The Court finds that failure of the Defendants to provide such information renders the Suggestion of Death invalid insofar as it would deny Plaintiffs the opportunity to substitute parties.
The Court also finds that Plaintiffs have presented a valid substitute in the person of Marlene K. Shurson for Defendant Karl Shurson. As noted in Plaintiffs' brief, Mrs. Shurson owned Pemstar stock jointly with her husband and is the primary beneficiary of his estate. The Court finds that Mrs. Shurson is an appropriate substitute in this case for Mr. Shurson and grants Plaintiffs' motion to substitute her for her deceased husband.
Conclusion
Based on the foregoing, the submissions of the parties, and all of the files, records, and proceedings herein, IT IS HEREBY ORDERED:
1. Defendants' Motion to Dismiss is DENIED.
2. Plaintiffs' Motion to Substitute Marlene K. Shurson in Place of Defendant Karl Shurson is GRANTED.