DECISION AND ORDER
MARRERO, District Judge.
This document relates to all actions.
Lead plaintiffs in this class action, the State Universities Retirement System of Illinois ("SURS"), the San Diego City Employees' Retirement System ("San Diego ERS"), the Louisiana State Employees' Retirement System ("Louisiana ERS"), the West Virginia Investment Management Board ("West Virginia IMB"), and the International Brotherhood of Electrical Workers, Local 269 ("IBEW") (collectively, the "Lead Plaintiffs," as representatives for "Plaintiffs") filed a Second Consolidated Amended Complaint for Violations of the Federal Securities Laws, dated February 24, 2006 (the "SAC"), following this Court's ruling on the various named defendants' initial motions to dismiss the prior Consolidated Amended Complaint for violations of the Federal Securities Laws (the "First Amended Complaint" or the "FAC").
The Court found that the Plaintiffs had failed to allege sufficient facts related to the ATI Fraud to state a claim for violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. (the "Exchange Act") against defendants Alstom, Alstom USA, Inc. ("Alstom USA"), the former Senior Vice President of ATI, Stephan Rambaud-Measson ("Rambaud-Measson"), and the former Vice President of Finance of ATI, Joseph Janovec ("Janovec") (collectively, "Defendants"). Accordingly, it dismissed those claims. See Alstom 406 F.Supp.2d at 506-07. With regard to Plaintiffs' claims for Defendants' violations of Section 20(a) of Exchange Act ("Section 20(a)"), the Court held that while Plaintiffs had alleged that Janovec and Rambaud-Measson had culpably participated' in the ATI fraud, there were insufficient allegations of Janovec's and Rambaud-Measson's control of ATI to state a claim for a Section 20(a) violation. See id., at 503-06. Although Plaintiffs did not
Following this Court's ruling dismissing the preceding claims, prior to filing the SAC, Plaintiffs took three depositions
The background facts of the case will be repeated here only to the extent that they are relevant to Defendants' renewed motions to dismiss.
Plaintiffs contend that Defendants engaged in an alleged fraud which entailed hiding millions of dollars of costs incurred in connection with railcar contracts performed by ATI, in particular a contract to build Comet V train cars for New Jersey Transit ("NJT"), which ATI allegedly intentionally underbid in 1999. (See SAC ¶¶ 116-17.) These accounting improprieties resulted in an overstatement of income of Q167 million in Alstom's 2003 accounting statements. (See id. ¶ 141.) According to Plaintiffs, after announcing the discovery of the accounting irregularities on June 30, 2003, Alstom initially stated that it would record a Q51 million after-tax charge, but later disclosed that this number was insufficient as the fraud had resulted in an inflation of Q167 million. (See id. ¶¶ 140, 148)
The specific statements which are alleged to have been materially misleading to investors are included in a November 5, 2002 Press Release filed with the November 2002 Form 6-K (see id. ¶ 327), in the November 2002 Form 6-K itself (see id. ¶ 217), and in Alstom's 2003 Annual Report, which was furnished to the SEC on June 2, 2003 on Form 6-K. (See id. ¶ 338-39.) Specifically, the November 2002 press release reported that Alstom's Transport Division's ("Alstom Transport"), of which ATI was a part, operating income and operating margin for the first half of
As noted above, in Alstom III, the Court found that a claim for fraud was stated against ATI on the basis that it had provided, with scienter, overstated financial results to Alstom for incorporation into Alstom's financial results. The Court dismissed the 10(b) claims against Alstom, Alstom USA, Janovec and Rambaud-Measson by reason of the inadequacies of the pleadings with regard to those defendants. Similarly, the Section 20(a) claims against Rambaud-Measson and Janovec were dismissed with leave to replead in relation to the control prong of the alleged Section 20(a) violation. In the SAC, Plaintiffs have made new and more detailed allegations regarding the ATI Fraud and contend that these new allegations support their claims for Sections 10(b) and 20(a) liability against Alstom, Alstom USA, Janovec and Rambaud-Measson.
In particular, Plaintiffs' new allegations focus on the nature of the financial reporting made to Alstom by ATI, and the involvement of Janovec and Rambaud-Measson in gathering, reviewing, and producing the financial data and reports that ATI provided to Alstom. For example, the SAC alleges that "during the class period, Janovec and Rambaud-Measson prepared detailed monthly financial reports regarding ATI's costs and revenues on a contract-by-contract basis," including as related to the NJT Contract. (SAC ¶ 388.) These "monthly management review packages," as they were called by Janovec at his deposition (Jan. Dep. at 18), were provided to certain members of Alstom Transport's management and were discussed in monthly meetings or phone conferences which were attended or participated in by management personnel from both ATI and Alstom Transport, including Alstom's Transport Sector President Michael Moreau ("Moreau") (who reported directly to Alstom's Director and CEO) and Alstom Transport's Chief Financial Officer Roland Kientz ("Kientz"). Janovec testified that the monthly reports were jointly prepared by himself and Rambaud-Measson. (See Jan. Dep. at 26.) In order to create the reports, the vice presidents from each of the divisions of Rolling Stock Americas ("RSA"), which was a segment of ATI, would submit monthly reports to Janovec, which Janovec would then consolidate into one monthly report. He then sent the consolidated report to Rambaud-Measson
The SAC also contains new allegations with regard to Rambaud-Measson and Janovec's positions and roles at ATI. The SAC alleges that Rambaud-Measson, as the Director and Senior Vice President of ATI, had full profit and loss responsibility for RSA, which was the segment of ATI that managed the NJT Comet V project. (See SAC ¶ 155; Jan. Dep at 96.) In addition, it is alleged that Rambaud-Measson was responsible for ATI's financial reports to Alstom, and that Muscato, ATI's corporate representative, identified Rambaud-Measson
Regarding the ATI cost overruns, Janovec testified that during a December 2002 internal monthly review of all ATI contracts, he noted an issue as to the NJT contract involving cost overruns, meaning that the estimated completion costs for the project exceeded the original project targets. (See id. at 57.) Janovec asked an employee to do further research into the overruns issue. The employee's review indicated that there was indeed a very high probability that the project would significantly exceed the originally projected cost targets. According to his testimony, Janovec summarized the employee's findings and provided information on the cost overruns to Rambaud-Measson in January of 2003. (See id. at 58-66.) Subsequently, in the course of ATI's normal monthly management reports, Janovec and Rambaud-Measson prepared a report which included the information about the cost overruns for submission to and discussion with their superiors at Alstom Transport. (See id. at 67.)
The issue was then discussed during the monthly management review meeting, with the conversation focused primarily on the causes of the cost overruns. Although Kientz was not present in person or on the phone for the meeting, he called Janovec the following day to discuss his review of the slides that were presented at the meeting and the indication in the slides that there were cost overruns on the NJT contract. (See id. at 73.) Janovec testified that the monthly meeting at which the cost overruns were first discussed took place in February of 2003,
Plaintiffs also allege additional facts to support their claims of agency liability on the part of Alstom and Alstom USA, as discussed in more detail in Section VI below.
III. STANDARD OF REVIEW
In considering a motion under Rule 12(b)(6) to dismiss the complaint for failure to state a claim, the Court should not grant such remedy unless "it appears beyond doubt that the plaintiff can prove no set of facts which would entitle him or her to relief." Sweet v. Sheahan, 235 F.3d 80, 83 (2d Cir.2000). Moreover, at this stage, the Court construes the complaint liberally, and "must accept as true all well-pleaded factual allegations in the complaint and draw all reasonable inferences in favor of the non-moving party." SEC v. Pimco Advisors Fund Mgmt., LLC, 341 F.Supp.2d 454, 463 (S.D.N.Y.2004) (citing Securities Investor Protection Corp. v. BDO Seidman, LLP, 222 F.3d 63, 68 (2d Cir.2000)).
IV. SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5
A. LEGAL STANDARD
When allegations of securities fraud are premised on misleading statements, plaintiffs must plead facts demonstrating a violation of Section 10(b) and Rule 10b-5(b). To state a claim for relief under these provisions, plaintiffs must allege that the defendant "made a materially false statement or omitted a material fact, with scienter, and that the plaintiffs reliance on the defendant's action caused injury to the plaintiff." Ganino v. Citizens Utils. Co., 228 F.3d 154, 161 (2d Cir.2000). A plaintiff can establish a strong inference of scienter in two ways: "either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir.1994). Allegations of motive must "entail concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged." Kalnit v. Eichler, 264 F.3d 131, 139 (2d Cir.2001) (internal citations omitted). Motives that can be ascribed to "virtually all corporate insiders," or "any publicly owned, for profit endeavor" are not sufficient to support a claim of fraud. Chill v. General Elec. Co., 101 F.3d 263, 267 (2d Cir.1996). Plaintiffs can demonstrate recklessness by alleging that the defendant knew facts or had access to information suggesting that their public statements were not accurate, or failed to review or check information that they had a duty to monitor, or ignored obvious signs of fraud. See Novak v. Kasaks, 216 F.3d 300, 308-311 (2d Cir.2000).
Furthermore, Plaintiffs' pleadings must comport with the heightened pleading requirements set forth in Federal Rule of Civil Procedure 9(b) ("Rule 9(b)"), which requires that "in all averments of fraud or mistake, the circumstances concerning fraud and mistake shall be stated with particularity." Fed.R.Civ.P. 9(b). In addition, plaintiffs alleging securities fraud are also required to satisfy the heightened standard of pleading required by the Private Securities Litigation Reform Act (the "PSLRA"). To satisfy the PSLRA's requirements, Plaintiffs must specify each statement that they contend is misleading and the reason that the statement is misleading, and also particularize pleadings as to scienter. See Pub.L. No. 104-67, 109 Stat. 737 (1995) (codified at 15 U.S.C. §§ 77k, 771, 77z-1, 77z-2, 78a, 78j-1, 78t, 78u, 78u-4, 78u-5).
I. Scienter for the ATI Fraud Is Alleged as to Alstom
In Alstom III, the Court determined that Alstom made misleading statements relating to the ATI Fraud in its November 2002 Press Release, its November 2002 Form 6-K, and in its 2003 Annual Report, which was furnished to the SEC on June 2, 2003, twenty-eight days prior to Alstom's June 30, 2003 announcement that it had discovered accounting irregularities
As discussed above, the SAC makes numerous new allegations regarding Alstom's knowledge of the cost overruns at ATI and sets forth additional details regarding who at Alstom was told about the cost overruns, the means by which financial data was communicated from ATI to Alstom, and the nature of the communications. In the Court's initial assessment of Alstom's scienter with regard to the ATI Fraud, the Court relied largely on the Second Circuit precedent set forth in Chill, which found that a parent corporation's failure to investigate further into reports of "success, [or] even the extraordinary success" of one of its subsidiaries whose financial results it had publically reported was not sufficient to allege scienter. 101 F.3d at 270.
Chill involved allegations against General Electric ("GE") arising out of a fraud that occurred at one of GE's subsidiaries, the financial firm of Kidder Peabody. A Kidder Peabody employee allegedly conducted a scheme in which he generated false profits by entering nonexistent trades into Kidder's computer system in order to inflate his productivity and thus his year-end bonus. The trades were designed to be hidden from Kidder's management and auditors, and resulted in inflated financial results for Kidder Peabody. GE reported the fraudulently inflated financial results of Kidder Peabody to investors in its financial statements. The plaintiffs in that case argued that GE's reporting of the false earnings was highly unreasonable or reckless because GE had failed to investigate the validity of the subsidiary's extremely favorable financial results.
The Second Circuit rejected the plaintiffs' argument, finding that fraud could not "be inferred simply because GE might have been more curious or concerned about the activity at Kidder." In assessing the sufficiency of the allegations in Alstom III, this Court found Chill to be controlling. See 406 F.Supp.2d at 472. In particular, this Court found that the FAC lacked specific allegations that Alstom had sufficient information about the cost overruns or any fraudulent activity to be found reckless in failing to further investigate the financial results reported to it by ATI.
In its current motion to dismiss, Alstom argues that the SAC bears the same deficiencies as the FAC in its lack of specific allegations of scienter. Despite the SAC's allegations that Janovec and Rambaud-Measson met with and discussed the overruns with Kientz and Moreau of Alstom Transport, Alstom again points to Chill as controlling, contending that the SAC's allegations as to Alstom's actual knowledge of the potential cost overruns remain too vague to support an inference that Alstom knowingly or recklessly adopted ATI's allegedly false financial results. Contrary to Alstom's arguments, however, Chill is no longer analogous to facts of this case as alleged in the pleadings. In Chill, the fraud was perpetuated by an individual employee who entered fictitious trades into the company's computer system. The opinion specifically noted that the trades were designed to remain hidden from management. See 101 F.3d at 265. Thus, in that case, the plaintiffs' theory of recklessness rested entirely on GE's failure to investigate the unusual profitability and success of its subsidiary.
In Alstom III, the Court found this analysis controlling because the FAC failed to allege sufficient specific facts to establish that Alstom had enough information about the cost overruns at ATI to render it highly unreasonable for Alstom to incorporate ATI's positive financial results into its own reports without ensuring that the results were accurate. It was the Court's view that, like the plaintiffs in Chill, Plaintiffs here had failed to support a claim of deliberate blindness on the part of Alstom. See 406 F.Supp.2d at 472; Chill, 101 F.3d at 270.
However, with the additional details alleged by Plaintiffs in the SAC regarding the communications to Alstom about the ATI cost overruns, Plaintiffs' allegations have crossed the line from charges amounting to no more than possible negligent oversight or mismanagement by Alstom to allegations of sufficient scienter to support a claim of fraud. At least as of February of 2003, when Janovec and Rambaud-Measson allegedly presented information about the overruns to members of Alstom Transport's management, and Kientz and Janovec discussed the overruns, Alstom had been directly alerted at its highest corporate levels as to this potentially adverse issue and a reasonable fact finder could conclude that it was reckless for Alstom to report to the public financial results that did not accurately reflect profits in light of the unexpected costs.
In Chill, only the extraordinary profits of the subsidiary could have put the parent on notice of potential fraud. To sustain plaintiffs' claim would have imposed an affirmative obligation on the parent not only to suspect wrongdoing by reason of the reported profits alone, but to undertake investigation into matters that were actually concealed by the misconduct of the employee. Hence, the Second Circuit found that this factual basis was not enough. By contrast, here the parent company was specifically notified of a significant accounting irregularity within its subsidiary that could have had a material effect on the parent's profitability. Though Defendants contend that the additional pleadings and circumstances are still not sufficient to allege scienter because the precise amount of the cost overruns are not alleged, the Court finds that the specific allegations describing the communications between Janovec and Rambaud-Measson with Alstom management with regard to the overruns, including their providing management with a written presentation as part of monthly reporting that contained information about the cost overruns, present an entirely different situation from the allegations made in Chill, and are also far more specific than those asserted in the FAC. Cf. In re Marsh & McLennan Companies Inc. Sec. Litig., No. 04 CV 8144, 2006 WL 2057194, *24 (S.D.N.Y. July 20, 2006) (rejecting parent corporation defendant's claim that Chill precluded a finding of scienter on its part because Chill, in regard to the parent scienter issue, stood only for the proposition that "parent corporations may not be held liable for reliance on the subsidiary's internal controls," and plaintiffs had alleged far more than the parent's mere reliance on the subsidiaries' internal controls; rather they had alleged the parent corporation's "awareness, reckless disregard, and complicity in the misbehavior [at the subsidiary]").
It is true, as the Defendants contend, that even assuming, as the Court must, that all of the factual allegations of the SAC are true, the precise mechanism of the fraud at ATI is still far from clear. The SAC alleges that there were cost overruns relating to the NJT project, which were discussed with the management of Alstom Transport and by Janovec and Rambaud-Measson. It further alleges that these overruns caused Alstom's financial reports to be materially misleading by overstating profits. The SAC does not allege details explaining the means through which Alstom created its financial reports, or the review process for those reports. It is possible that the litigation
Nonetheless, Alstom's own language in statements to the public regarding ATI suggest that the company itself came to the conclusion that fraud was the reason for the earnings restatement. In October of 2003, Alstom filed its 2003 20-F form with the SEC, which described the problem at ATI as one of "accounting improprieties." (SAC ¶ 151.) That language was also used in Alstom's initial June 30, 2003 press release announcing its results restatement following an internal review. That press release stated that the "accounting improprieties" included the "nonrecognition of costs incurred in anticipation of shifting them to other contracts." (SAC ¶ 139.) Furthermore, in November of 2003, Patrick Kron (the then CEO of Alstom (see SAC ¶ 40)) referred to the adjustments made in Alstom's 2003 financial results by stating that: "we had to take into account a fraud (ph) that was discovered in our unit [in] New York." (SAC ¶ 152.)
Taken together, what is alleged is that there were cost overruns that were known of and discussed by ATI and Alstom management prior to the filing of the June 2003 Form 6-K, and that despite this awareness of the overrun irregularities at least as early as February of 2003, Alstom ultimately had to announce that it would record an after-tax charge of Q167 to account for ATI's, and thus Alstom Transport's, overstated income for Fiscal Year 2003 — an adjustment that Alstom's own CEO would later state had to be made because of a fraud that had occurred within the company.
2. Rambaud-Measson and Janovec
a. The SAC Alleges Sufficient New Facts to State a Claim that Rambaud-Measson and Janovec Primarily Liable for the Misleading Statements Issued by Alstom
Rambaud-Measson and Janovec argue that despite the more detailed allegations in the SAC regarding their role in reviewing, revising, consolidating and transmitting the monthly management reports and the Comshare financial information to Alstom, the additional pleadings still fail to allege that they made a misleading statement, as is required for liability under Section 10(b). As this Court discussed at length in Alstom III, the Second Circuit has held that "a defendant must actually make a false or misleading statement in order to be held liable under Section 10(b)." Wright v. Ernst & Young LLP, 152 F.3d 169, 175 (2d Cir.1998). This holding followed the Supreme Court's decision in Central Bank NA v. First Interstate Bank, N.A., 511 U.S. 164, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994), which held that under Section 10(b) there is no private right of action against aiders and abettors. Thus, actors who did not definitively make a statement, but rather only assisted or aided in the making of a statement by another person, could not be subject to Section 10(b) liability in a private cause of action. Wright, 152 F.3d at 175. In Alstom III, this Court analyzed at length both the Wright holding and subsequent cases applying that decision in this district, and ultimately found that ATI could be held liable for making a statement in the form of the financial results that it communicated to Alstom, which were allegedly consolidated into Alstom's financial results and public filings. The Court reached this conclusion even though ATI did not issue the alleged misleading statements to the public directly. See Alstom III, 406 F.Supp.2d at 466-67.
The Court was unwilling at that time, however, to find that Janovec or Rambaud-Measson had made a statement within the meaning of Wright. The Court found that the FAC was lacking "specific allegations regarding either Janovec's or Rambaud-Measson's role in the preparation of ATI's financial statements or reports, or alleging that these officers signed any financial reports." See id. at 467. The Court further concluded that the FAC did not support a logical inference that Janovec and Rambaud-Measson "were responsible for the drafting, production, reviewing, or dissemination of the information communicated by ATI to Alstom." Id.
The SAC remedies many of the failings of the FAC's pleadings identified in Alstom III. Indeed, the SAC does state additional facts regarding the roles of both Janovec and Rambaud-Measson in the preparation, production and review of ATI's financial reports, including information related to cost overruns. Specifically, the SAC alleges that these defendants prepared a monthly financial report, which summarized the financial data for current projects, and that Janovec, after receiving the approval and input of Rambaud-Measson, submitted the reports and data to Alstom Transport's management. (SAC ¶ 165, 388.) Janovec's deposition testimony indicates that the reports were compiled primarily by Janovec, but that Rambaud-Measson took an active role in reviewing, editing, and sometimes altering the information. (See Jan. Dep. at 28, 31-32.) Furthermore, as is discussed above, the SAC alleges that these two
The Court notes that two recent district court decisions in this Circuit have similarly concluded that officers of subsidiaries, whose corporate parent, and not the subsidiary, issued statements directly to the public, could be held primarily liable under Section 10(b). See In re Marsh & McLennan, non, 2006 WL 2057194 at *21; Menkes, 2006 WL 1699603, at *8, 2006 U.S. Dist. LEXIS 42644, at *22. In Marsh, the Court rejected the defendant's claim that group pleading could not extend to the former President and Chief Operating Officer of a subsidiary, as there were allegations demonstrating that the defendant, who had not signed any SEC filings, had "participated in drafting, preparation and/or approval of misstatements, and that [he] controlled the context of the various SEC filings containing misstatements." See Marsh, 2006 WL 2057194 at *21.
In Menkes, the Court declined to dismiss a Section 10(b) claim against officers of a subsidiary that allegedly had engaged in anti-competitive behavior that rendered the corporate parent's statements regarding its results misleading. See Menkes, 2006 WL 1699603, at *8, 2006 U.S. Dist. LEXIS 42644. The Court found that the subsidiary's officers could be held primarily liable as their participation went "well beyond simply enabling or turning a blind eye to" the parents's fraud. Id. Rather, the officers were allegedly aware of the anti-competitive behavior long before it was revealed to the public, and they therefore could have disclosed the conduct to the parent and render the parent's statements truthful, "but, at best, they failed to do so, or at worst, they conspired with [the parent] to mask and conceal the improper activities implemented by [the subsidiary] in connection with its antitrust measures." Menkes, 2006 WL 1699603, at *8, 2006
In the instant case, a reasonable inference can similarly be drawn from the allegations of the SAC that Janovec and Rambaud-Measson were either primarily responsible for the misstatements in ATI's financial results, or that they agreed with their supervisors, with whom they discussed the cost overruns, to include artificially inflated financial results into Alstom's consolidated financial results for dissemination to investors. As was discussed in Section IV.B.1., it may be too early to discern the precise mechanism of the ATI Fraud theory alleged in the SAC, but the allegations are not so lacking in specificity that dismissal is warranted at the pleadings stage.
In Alstom III, the Court did not directly reach the question of scienter as to Janovec and Rambaud-Measson as it determined that Plaintiffs had failed to plead that these defendants has made a statement for the purposes of Section 10(b) liability. However, in the section of Alstam, III addressing Plaintiffs' Section 20(a) control liability claims, the Court found that Plaintiffs had sufficiently alleged recklessness on the part of Janovec and Rambaud-Measson, thus fulfilling the culpable participation requirement to support a finding of liability under Section 20(a). See 406 F.Supp.2d at 502-06.
In the SAC and in their supporting brief, Plaintiffs argue that the new allegations demonstrate motive and opportunity to commit fraud on the basis of Janovec and Rambaud-Measson's bonus compensation schemes. They also contend that the SAC's more specific allegations as to these officers' roles and functions at ATI further bolster the already sufficient basis identified by the Court in Alstom III to draw a strong inference of recklessness or worse on the part of these officers. Both defendants counter that the motive and opportunity allegations are legally insufficient. Further, they claim that the additional discovery taken by Plaintiffs and new allegations in the SAC undermine the Court's earlier finding of scienter in Alstom III and instead demonstrate that these officers acted conscientiously in reporting cost overruns to their supervisors.
(i) The SAC'S Allegations Fall Far Short of Demonstrating Motive and Opportunity
The Court agrees with Janovec and Rambaud-Measson that the SAC's new allegations regarding the structure of their bonus compensation are insufficient to demonstrate motive and opportunity from which a strong inference of scienter is raised. Plaintiffs contend that during the 2003 fiscal year, both Rambaud-Measson and Janovec received incentive based compensation that was tied to ATI meeting certain financial targets which were impacted by ATI's costs. (SAC ¶¶ 370-374.) These allegations are flatly insufficient to demonstrate motive. The Second Circuit has held that bonuses are inadequate as a matter of law to establish motive for the purpose of Section 10(b) liability. See Kalnit, 264 F.3d at 139 (stating that "`incentive compensation can hardly be the basis on which an allegation of fraud is predicated.'") (quoting Acito, 47 F.3d at 54); see also In re LaBranche Sec. Litig., 405 F.Supp.2d 333, 353. While there may be cases of extraordinary or unusual executive compensation in which this rule does not hold, see, e.g., In re Computer Assocs. Class Action Sec. Litig., 75 F.Supp.2d 68,
(ii) Conscious. Misbehavior or Recklessness of Janovec and Rambaud-Measson
As is noted above, the Court has already determined, in Alstom III, that the facts as alleged in the FAC were sufficient to satisfy the recklessness standard on the part of Janovec and Rambaud-Measson.
The new additional facts alleged regarding Janovec's and Rambaud-Meassoli's roles at ATI, including the far greater specificity as to their functions as the most senior financial officer and top executive at ATI, respectively, further bolster the Court's finding in Alstom III that sufficient facts have been alleged to support a strong inference of scienter on the part of these defendants. In addition, the SAC alleges that not only were Janovec and Rambaud-Measson suspended pending the internal investigation of the ATI accounting improprieties, but these officers were both ultimately "involuntarily terminated" by Alstom sometime after their initial suspension pending investigation. (SAC ¶¶ 44, 45, 360.)
Janovec and Rambaud-Measson argue, however, that the evidence that came to light during Plaintiffs' discovery regarding these two ATI executives reveals new facts which actually negate any inference of scienter. For example, Janovec argues that the new allegations charge that Janovec acted responsibly and conscientiously with regard to the cost overruns by disclosing the issue to his superiors, Kientz and Rambaud-Measson, as is alleged in the SAC. (SAC ¶ 133, 135.) He argues that in light of these new allegations, it is equally plausible to infer from the facts alleged that he acted without scienter, and in fact that this is the more reasonable inference. As such, Janovec argues, the Court cannot find that Plaintiffs have demonstrated a strong inference of scienter.
The Court agrees with Janovec and Rambaud-Measson that the facts alleged in the SAC are subject to another plausible interpretation: that these defendants did not act with scienter because it was they who reported the overruns to Alstom. However, this theory is sustainable only if the facts asserted in the SAC are read in light most favorable to these defendants, which is not the applicable standard at the motion to dismiss stage. In this regard, the Court's task is to assess the sufficiency of the pleadings, and not to resolve the merits of any material issues of fact or weigh the evidence. In the Court's view, the scienter requirement here does not rest solely on the actions of Janovec and Rambaud-Measson in reporting ATI's cost overruns to Alstom. Very material to that determination is what preceded and came after those disclosures, and how much time elapsed in between — in other words, what the defendants did or did not do both before and after their reports of ATI's financial results which were then incorporated by Alstom into false or misleading public statements about the company's financial results.
In addition, as in Alstom III, the Court also considers the involuntary suspension, and ultimate termination of these individuals after Alstom's investigation, as well as the incident mentioned above in which the CEO of Alstom subsequently referred to the events leading up to ATI's understatement of costs at ATI as a fraud. While this termination in and of itself would not necessarily support a strong inference of scienter, as one consideration weighed in the totality of circumstances presented, it does provide further reason for the Court to find that the SAC pleads sufficient facts from which a strong inference could reasonably be drawn, that fraudulent intent, and not simple negligence, or — as the defendants would have it — conscientious efforts on the part of Janovec and Rambaud-Measson, were the cause of the understated costs that caused Alstom's financial results to be misleading.
As the Court noted in Alstom III, while the cost overruns arising out of ATI's contracts were not, in and of themselves, deceptive, the deliberate non-disclosure of those overruns could give rise to a sufficient inference supporting a reasonable finding of fraud. Plaintiffs have alleged that the cost overruns were known to both Janovec and Rambaud-Measson, and that these individuals were responsible for ATI's financial reporting. Furthermore, it is not disputed that Alstom ultimately had
3. Alstom USA
There are no sufficient allegations in the SAC from which the Court could draw a sufficient inference that Alstom USA either had a role in the making of the misleading statements related to the ATI fraud or that this entity had scienter as to this fraud. Thus, Alstom USA can be held liable as a primary violator for the ATI fraud only pursuant to an agency liability or veil-piercing theory. The arguments pertaining to this issue are discussed in Section VI, infra.
V. CONTROL LIABILITY PURSUANT TO SECTION 20(A)
A. LEGAL STANDARD
Section 20(a) provides:
15 U.S.C. § 78t(a).
In order to establish a prima facie case of liability under Section 20(a), a plaintiff must show: "(1) a primary violation by a controlled person; (2) control of the primary violator by the defendant; and (3) `hat the controlling person was in some meaningful sense a culpable participant' in the primary violation.'" Boguslavsky v. Kaplan, 159 F.3d 715, 720 (2d Cir.1998) (quoting SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1472 (2d Cir. 1996), cert. denied, 522 U.S. 812, 118 S.Ct. 57, 139 L.Ed.2d 21 (1997) (internal quotation marks and citations omitted)); see also Ganino, 228 F.3d at 170 (reiterating First Jersey standard). In order to plead control, plaintiffs must allege facts demonstrating that the defendants not only had control over the primary violator, but also that they had actual control over the transaction in question. See Alstom III, 406 F.Supp.2d at 487.
Because the Court has already determined, in Alstom III, that Plaintiffs have stated a claim for a primary violation against ATI, the first element of the Section 20(a) claim is not at issue. See id. at 466-47. In addition, the Court's determinations as to the scienter of Alstom, Janovec and Rambaud-Measson with regard to the ATI Fraud also establish that, as to these parties, the SAC's pleadings contain enough facts to demonstrate that the culpable participation requirement for Section 20(a) liability is sufficiently stated. That standard is "similar to the scienter requirement of Section 10(b), [in that it] requires plaintiffs to plead with particularity facts giving rise to a `strong inference that the controlling person knew or should have known that the primary violator, over whom that person had control, was engaging
Control may be pleaded in accordance with the notice pleading standard prescribed in Federal Rule of Civil Procedure Rule 8(a) ("Rule 8(a)"). Where Rule 8(a)'s pleading standard governs, dismissal is improper as long as the complaint furnishes adequate notice of the basis of the plaintiffs claim (a requirement clearly satisfied here) and "relief could be granted under [some] set of facts consistent with the allegations." In re Global Crossing, No. 02 CIV. 910, 2005 WL 2990646, at *8 (S.D.N.Y. Nov. 7, 2005) ("Global Crossing III") (quoting Swierkiewicz v. Sorema N.A., 534 U.S. 506, 514, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002)) (internal quotation marks omitted). Thus, applying this standard, even if the specific facts alleged by Plaintiffs, taken alone, would not be enough to establish actual control over the primary violator (ATI and/or Janovec and Rambaud-Measson), "dismissal is improper as long as it is at least plausible that Plaintiffs can develop some set of facts that would pass muster." Id.
1. Plaintiffs Are Permitted to Plead that Both Alstom and Alstom USA, and Janovec and Rambaud-Masson Controlled ATI
Defendants argue that because the SAC alleges both that Alstom directed and controlled the fraud, and also that Janovec and Rambaud-Measson controlled the fraud, the pleadings amount to allegations of contradictory fact and for this reason should be dismissed by the Court. Defendants argue that the SAC's pleadings amount to contradictory facts as opposed to alternative theories of the case which are permitted pursuant to Fed. R.Civ.P. 8(e)(2). Defendants are correct in that Plaintiffs do allege that both Janovec and Rambaud-Measson, and Alstom are primarily responsible for the fraud and that each of these parties controlled the transactions at issue. For example, with regard to Janovec's and Rambaud-Measson's control, the SAC alleges that Rambaud-Measson was the "major, the top player" at ATI and that Janovec was "in charge of the entire finance organization at ATI, was the most senior financial person at ATI and was responsible for financial reporting for ATI." (SAC ¶¶ 456, 156.) With regard to Alstom and Alstom USA, the SAC alleges that "Alstom SA actively controlled ATI in its operations and financial reporting, including the improper accounting fo the NJT contract. Similarly, Alstom SA actively controlled Janovec in connection with ATI's financial reporting." (See id. ¶ 186.) There are a myriad of additional allegations that Alstom controlled ATI as well as its financial reporting. (See, e.g., id. ¶¶ 175, 179, 182, 183.)
After careful consideration, however, the Court concludes that these claims may go forward as the permissible pleading of alternate theories of the case at this early stage in the litigation. The law is clear
In the instant case, it is alleged that there was a bifurcated process for the reporting of ATI's financial results: first ATI issued financial reports and information (in the form of monthly financial reports as well as the Comshare information to Alstom), and then Alstom included ATI's financial results in the information it reported to its investors. (See SAC ¶ 135.) It remains a factual question at precisely which point in this process the alleged ATI Fraud occurred. In these circumstances, the Court does not find allegations that both Janovec and Rambaud-Measson and Alstom and Alstom USA controlled ATI's financial reporting to be necessarily contradictory, as the officers could have controlled one stage of this reporting process while the corporate entities controlled the other phase. Alternatively, it may be that either only the officers controlled the transaction causing the fraud or that the corporate entities, Alstom and Alstom USA, were entirely in control. Without knowing the exact numbers reported by ATI to Alstom, and the numbers used by Alstom to generate Alstom's financial reports — both pieces of information that are uniquely within the defendant's purview at this point in the litigation — it is unclear whether Janovec and Rambaud-Measson, or Alstom and ATI, or both sets of parties, controlled the reporting of the fraudulently misleading financial results. As the allegations of the SAC could support any of these alternative theories, the Court does not find them to be so contradictory as to be nonsensical and thus do not warrant dismissal of the claims on this basis.
2. Control of ATI, Janovec and Rambaud Measson Is Adequately Alleged as to Alstom
As noted above, because allegations of control for Section 20(a) need only meet Rule 8's notice pleading standard,
3. Plaintiffs Have Adequately Alleged that Janovec and Rambaud-Measson Controlled ATI
Plaintiffs also allege facts sufficient to support a finding of control of ATI by Janovec and Rambaud-Measson. The SAC alleges that Rambaud-Measson was the most senior executive at ATI and also that he was responsible for ATI's financial reports to Alstom. (See id. ¶¶ 155-156.) In addition, it is alleged that Rambaud-Measson created a task force of ATI employees to specifically evaluate and address the NJT Contract cost overruns situation, indicating his control over this particular reporting issue. (See id. ¶ 158.) As to Janovec, the SAC alleges that he was the most senior finance executive at ATI, and also had specific control as to the NJT contract cost overruns question, as demonstrated by him assigning another ATI employee to investigate into the overruns issue. (See id. ¶¶ 163-164.) Janovec was also responsible for the internal controls that were in place to assure the accuracy of the financial information reported by Rolling Stock America Units, within which the management of the Comet V contract fell. (See id. ¶ 164.) The allegations as to both of these defendants are far more specific than those in the FAC, and are also sufficient to meet the Rule 8 notice pleading threshold.
4. Alstom USA
There are no sufficient allegations from which the Court could infer that Alstom USA culpably participated in the ATI Fraud. Thus, Alstom USA can be held liable as a primary violator for the ATI fraud only pursuant to an agency liability or veil-piercing analysis. The arguments
VI. LIABILITY OF ALSTOM USA PURSUANT TO A VIEL PIERCING ANALYSIS
In Alstom III, the Court briefly addressed Plaintiffs' claim that Alstom USA was liable for the ATI Fraud because ATI was its agent. The Court concluded that this claim had not been sufficiently pled to meet the Rule 8 notice pleading standard that is required for pleading an agency relationship. See 406 F.Supp.2d at 469. However, the Court noted that under federal securities laws, principals may be held liable for the acts of their agents. See id. at 468 (citing In re Parmalat Sec. Litig., 375 F.Supp.2d at 290).
In the SAC, Plaintiffs allege that both Alstom and Alstom USA should be held liable for the ATI fraud under a respondeat superior or agency theory. (See SAC ¶¶ 175-76.) Alstom and Alstom USA contend that, as a matter of law, agency principles have not and should not be applied to hold a parent liable for the securities fraud of its subsidiary. In support of this contention, Alstom and Alstom USA argue that such a proposition would represent a novel use of common law agency principles because it would problematically allow Plaintiffs to sidestep the individualized inquiry into the parent corporation's scienter required by the Second Circuit as set forth in Chill, 101 F.3d 263, and also because the imposition of liability under agency principles would conflict with Section 20(a), which sets forth a specific mechanism to demonstrate the controlling person relationship sufficient to establish liability. They further argue that even if such agency principles were applicable, Plaintiffs have not pled sufficient facts to establish an agency relationship between Alstom and Alstom USA and ATI.
In support of their claims, Plaintiffs have alleged, with regard to Alstom, that: it owned all of the stock in Alstom USA, which in turn wholly owned ATI (see SAC ¶ 175); Alstom exercised direct control over the operations and financial reporting of ATI, including reporting as to the NJT Contract, and did not treat ATI as a separate self-managed corporation (see id. ¶¶ 179, 183, 186); Alstom exercised direct control over the ATI board of directors (see id. ¶ 180); ATI disregarded corporate formalities when the ATI Board, following the disclosure of the fraud, executed a consent of directors dated July 1, 2003 (days after Janovec had already been notified of his suspension by Kientz) reciting that the Board members were the only directors and suspending Janovec and Rambaud-Measson, ignoring that Rambaud-Measson was also a director of ATI (see id. ¶ 185). With regard to Alstom USA, the SAC alleges that throughout the class period, "Alstom USA . . . was a wholly owned subsidiary of Alstom SA that owned all of ATI's stock, elected all of its directors, and selected all of its officers." (SAC ¶ 175.) It further alleges that according to a former officer of Alstom USA, "the same officers who ran ATI were also the officers of Alstom USA," and that Alstom USA "through its control over ATI, Janovec, and Rambaud-Measson, caused ATI, Janovec and Rambaud-Measson to carry out the improper accounting for the Comet V Contract." (Id.)
The Court, having considered the allegations and the arguments of the parties, finds that the facts pled in the SAC, when viewed in the light most favorable to Plaintiffs, allege a veil-piercing theory of liability. Though the parties' arguments focus on the applicability of respondeat superior and agency liability, in the Court's view the allegations of domination and control of ATI by Alstom and Alstom
Thus, while the Court is mindful that the parties have considered Plaintiffs' claims only in the context of a claim for liability pursuant to respondeat superior or agency,
In New York, to pierce the corporate veil, plaintiffs must generally show two things: "(1) the owners exercised complete domination of the corporation in respect to the transaction attacked, and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiffs injury." See Astroworks, Inc. v. Astroexhibit, Inc., 257 F.Supp.2d 609, 614 n. 8 (S.D.N.Y.2003) (quoting Morris v. New York State Dep't of Taxation and Fin., 82 N.Y.2d 135, 141, 603 N.Y.S.2d 807, 623 N.E.2d 1157 (1993)).
The proper pleading standard for a claim of alter ego liability has been a "knotty question" in this district. In re Parmalat Sec. Litig., 375 F.Supp.2d at 292 (internal citations omitted). However, as was outlined in Parmalat, which also addressed veil-piercing in the context of a securities claim, in such cases "the fraud allegations therefore are governed by Rule 9(b) and the PSLRA," while "the domination and control elements of the claim . . . need comply only with Rule 8." Id.; see also Soft Classic S.A. DE C.V. v. Hurowitz, 05 Civ 9986, 2006 WL 2266302 at *6 (S.D.N.Y. August 7, 2006) ("[A]llegations of dominance and control . . . are not subject to the heightened pleading standard, even where the veil-piercing claim is based on an allegation that the corporate form was abused to perpetrate fraud.").
Plaintiffs' allegations as to both Alstom and Alstom USA are sufficient to plead a veil-piercing claim under a Rule 8 standard. Plaintiffs have alleged facts supporting
VII. ALLEGATIONS RELATING TO PREVIOUSLY DISMISSED CLAIMS SHOULD RE STRICKEN FROM THE SECOND AMENDED COMPLAINT
The SAC contains many allegations relating to claims and parties the Court dismissed in Alstom I, Alstom II, and/or Alstom III. The Court agrees with Defendants that such claims should be stricken from the SAC pursuant to Federal Rule of Civil Procedure 12(f), as they are immaterial to the currently pending allegations that survived Defendants' initial motion to dismiss, and render an already lengthy complaint all the more unwieldy. Plaintiffs argue that because they are not pursuing any of the dismissed claims and have included them in the SAC only in "an abundance of caution" to preserve their rights for appeal, the question of striking the claims is moot. Plaintiffs' acknowledgment that they are not at this time pursuing these claims does not moot, but rather provides further basis for Defendants' request that the claims be stricken from the SAC. Furthermore, there is no need for Plaintiffs to maintain the allegations in the complaint in order to preserve their rights on appeal. See P. Stolz Family Partnership L.P. v. Daum, 355 F.3d 92, 96 (2d Cir.2004) ("As a preliminary issue,
For the foregoing reasons, it is thereby
ORDERED that the motions of Joseph Janovec and Stephan Rambaud-Measson [Doc. 168 and 181] to dismiss are DENIED; and it is further
Based on this Court's review, in the majority, if not all, of the other cases in this district in which subsidiaries have been held liable for the financial information they provide to their parent "there [was] no dispute that [the subsidiary] provided [the parent] with financial data on a quarterly basis and that the data was incorporated in [the parent's] financial statements and quarterly and annual reports" and therefore the parent was a "mere conduit" of the particular data. In re Kidder Peabody Sec. Litig., 10 F.Supp.2d 398, 407 (S.D.N.Y.1998); see also In re LaBranche Sec. Litig., 405 F.Supp.2d 333, 351 (S.D.N.Y.2005) (finding it reasonable to infer that subsidiary's financial data were incorporated directly into parent's public statements regarding earnings in subsidiary's areas of business and finding that statements could be "constructively attributed" to subsidiary); In re Van der Moolen Holding Sec. Litig., 405 F.Supp.2d at 403; but see In re Sotheby's Hldgs., Inc., No. 00 Civ. 1041, 2000 WL 1234601, at *8 (S.D.N.Y. Aug. 31, 2000) (declining to infer, under heightened pleading standard, that parent's public statements relating to subsidiary's area of business were endorsed by the subsidiary). In the instant case, the SAC alleges in numerous places that ATI's financial data was either consolidated, incorporated, or included in Alstom's public statements. (SAC ¶¶ 173, 389, 447.) The relevant factual issue is to what extent Alstom incorporated ATI's results wholesale or substantially readjusted or manipulated them before disclosing them to the public, a matter that is uniquely within Alstom's knowledge. Though still a very close call, and particularly because the issue arises at the pleadings stage of the litigation at which the Court must draw reasonable inferences and resolve doubts in Plaintiffs' favor, the Court again concludes that the facts pled in the SAC are sufficient in this regard to survive a motion to dismiss. Because the allegations are sufficient to state a claim that ATI made a statement within the meaning of Section 10(b), Janovec and Rambaud-Measson may be held liable for the statements if the evidence establishes their active participation in the preparation and dissemination (to Alstom) of any such statements.