Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_04-cv-02435/USCOURTS-azd-2_04-cv-02435-0/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 15:78m(a) Securities Exchange Act

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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

In re Swift Transportation Co., Inc.,

Securities Litigation

 

This document relates to all actions.

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No. CV 04-2435-PHX-NVW

ORDER

(Not for publication)

This is a consolidated class action proceeding. Lead Plaintiff ("Plaintiff") claims that

Defendants violated § 10(b) of the Securities Exchange Act of 1934 and Section 20(a) of the

Exchange Act when they made material misrepresentations that artificially inflated the price

of Swift stock in order to protect Swift's Chief Executive Office from a margin call on Swift

stock. 

Defendants bring this motion pursuant to Federal Rules of Civil Procedure 9(b) and

12(b)(6) and the Private Securities Litigation Reform Act of 1995 on the ground that the

Complaint fails to state a claim against Defendants. 

I. Statement of the Case

This case began with separate actions. On May 5, 2005, the court granted a motion

to consolidate the actions, Doc. # 33, and on June 9, 2005, the court appointed a lead plaintiff

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Presumably because of the length of the document, Plaintiff filed three documents

as the amended Complaint, Doc. # 43, Doc. # 44, and Doc. # 45. For the purposes of this

order, Plaintiff’s Complaint will always be referred to as Doc. # 43, even though a particular

paragraph may be located in one of the other two documents. 

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and counsel. Doc. # 35. On August 19, 2005, Plaintiff filed a Consolidated Class Action

Complaint ("Complaint"). Doc. # 43.1

 

As set forth in the Complaint, Swift is a Nevada trucking company with its

headquarters located in Phoenix. Doc. # 43 at ¶ 15. Swift is the largest stand-alone trucking

company in the United States. Id. at ¶ 33. Its stock is traded on the NASDAQ. Id. at 24.

At all relevant times, Defendant Gary R Enzor ("Enzor") was Swift's Chief Financial Officer,

Defendant Patrick J. Farley ("Farley") was an executive vice president, Defendant Jerry C.

Moyes ("Moyes") was Swift's Chairman of the Board and Chief Executive Officer, and

Defendant William F. Riley III ("Riley") was Swift's Senior Executive Vice President,

Secretary, and Director. Id. at ¶¶ 16-19. 

The class period for this action comprises all purchasers of Swift securities between

October 16, 2003, and September 15, 2004. Id. at ¶ 1. At the beginning of the class period,

Swift was reporting high earnings and was optimistic about its ability to continue improving

its earnings over the upcoming year. Id. at 2. 

On October 3, 2003, the Federal Motor Carrier Safety Administration ("FMCSA")

conducted a compliance review of Swift. Id. at ¶ 42. At some point after the audit, FMCSA

recommended downgrading Swift's safety rating to conditional because of a significant

number of falsified driver logs. Id. at ¶ 43. On November 24, 2003, FMCSA's website

displayed Swift's proposed safety rating as conditional. Swift first publicly addressed

FMCSA's proposed safety rating on November 25, 2003. Id. at ¶ 46. At this time, Swift

stated that the safety rating downgrade was a clerical error. Id. On December 18, 2003,

Swift sought a stay to prevent FMCSA from permanently downgrading Swift's safety rating

to conditional, which FMCSA granted. Ultimately, Swift's safety rating was never

downgraded to conditional, but the issue was not resolved until October 7, 2005. 

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Beginning on January 4, 2004, new federal Hours of Service ("HoS") regulations went

into effect, limiting daily driving time of commercial trucks to eleven continuous hours,

requiring drivers to count breaks as driving times, and requiring drivers to take consecutive

hours of off-duty time following each fourteen-hour workday. Id. at ¶ 59. These new HoS

regulations affected Swift because Swift paid its drivers on the basis of miles driven, and the

new HoS regulations effectively reduced the amount of miles that Swift drivers could drive

each day. Id. 

In 2004, fuel prices rose throughout the country, affecting companies such as Swift

that consumed high quantities of gasoline. Id. at 59. In response, Swift attempted to apply

a surcharge to its customers to help minimize the effect of this increased cost. At the end of

the class period, Swift announced an earnings shortfall that was at least partly the result of

escalating fuel prices throughout the summer of 2004. Id. at ¶ 159. 

Between May 21, 2004 and May 24, 2004, Moyes purchased 187,000 shares of Swift

stock. Id. at 147. On May 24, 2004, Swift issued a press release in which it provided that

Swift would repurchase an additional $40 million worth of its common stock. Id. at 148.

Following this announcement, and because of the suspicious nature of Moyes's purchase,

Swift's Board of Directors placed Moyes's profit in a trust account administered by a

committee of Swift's independent directors. Id. at 150. Subsequently, the SEC investigated

Moyes's purchase, and the parties reached a settlement. Doc. # 56, Exhibit 17. 

Plaintiff alleges that Defendants made numerous material misrepresentations about

the financial health of Swift and Swift's ability to cope with obstacles that arose during the

class period. Plaintiff further alleges that Defendants made these misrepresentations to

protect their CEO, Jerry C. Moyes ("Moyes"), from a margin call. Doc. # 43 at ¶ 5. Moyes

and his family owned between 34% and 40% of Swift's outstanding stock, and Moyes had

pledged 96% of his shares, at a value of $15 a share, to secure loans to build the new Coyote

professional ice hockey arena in Glendale, Arizona. Id. at ¶¶ 6, 35, 41. 

Plaintiff alleges (1) that all Defendants violated Section 10(b) of the Securities

Exchange Act of 1934, 15 U.S.C. § 78j(b), and its implementing regulation, Rule 10b-5

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promulgated in 17 C.F.R. § 240.10b-5(b), and (2) that Swift, Moyes, Enzor, and Riley

violated Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). 

Defendants filed a Rule 12(b)(6) motion for failure to state a claim upon which relief

can be granted, arguing that Plaintiff failed to properly allege (1) loss causation, (2) that any

Defendant made a material misrepresentation, and (3) that Defendants acted with scienter.

II. Legal Standard

A. General Standard Governing Motions to Dismiss

Under Federal Rule of Civil Procedure 12(b)(6), a motion to dismiss should not be

granted "unless it appears beyond doubt that the plaintiff can prove no set of facts in support

of his claims which would entitle him to relief." Barnett v. Centoni, 31 F.3d 813, 816 (9th

Cir. 1994). When analyzing a complaint for failure to state a claim, all factual allegations

are taken as true and construed in the light most favorable to the nonmoving party. See Iolab

Corp. v. Seaboard Sur. Co., 15 F.3d 1500, 1504 (9th Cir. 1994). All reasonable inferences

are to be drawn in favor of the plaintiff. Jacobsen v. Hughes Aircraft, 105 F.3d 1288, 1296

(9th Cir. 1997). When the complaint is dismissed for failure to state a claim, "leave to amend

should be granted unless the court determines that the allegation of other facts consistent with

the challenged pleading could not possibly cure the deficiency." Schreiber Distrib. Co. v.

Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986). Leave to amend is properly

denied "where the amendment would be futile." DeSoto Yellow Freight Sys., 957 F.2d 655,

658 (9th Cir. 1992). 

For the purposes of considering Defendants' Rule 12(b)(6) motion, the court will

consider documents submitted by Defendants and Plaintiff that were referenced by the

Complaint, the authenticity of which has not been questioned. See No. 84 EmployerTeamster Join Council Pension Trust Fund v. Am. W. Holding Corp., 320 F.3d 920, 924 n.2

(9th Cir. 2003). Therefore, the court will consider Doc. # 56, Exhibits 1-9 and Doc. # 59,

Exhibit 1 because Plaintiff referred to those documents in its Complaint and their authenticity

has not been questioned. 

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 Defendants also ask the court to take judicial notice of (1) excerpts from Swift's 10-K

forms that it filed with the SEC on March 29, 220, March 28, 2003, November 14, 2002, and

August 13, 2003; (2) an excerpt from Swift's From 8-K filed with the SEC on September 23,

2005; (3) the SEC Litigation Release No. 19389, September 22, 2005; (4) the SEC's

complaint against Moyes; (5) a Swift press release dated October 10, 2005, (6) a chart of

Swift's share prices from October 16, 2003 to March 11, 2005, and (7) the Department of

Transportation, FMCSA, Hours of Service Regulations dated October 1, 2002. Doc. # 55.

Courts may take judicial notice of matters of public record outside the pleadings.

MGIC Indem. Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir. 1986) (citations omitted). See

also Allison v. Brooktree Corp., 999 F. Supp. 1342, 1353 n.3 (S.D. Cal. 1998) ("Judicial

notice of documents required to be filed by law is appropriate."). Because Defendants ask

the court to take judicial notice of documents of public knowledge, and because Plaintiff has

not challenged Defendants on this issue, the Court takes judicial notice of the documents

listed above. 

 B. Pleading Requirements in Securities Fraud Actions

To state a claim for securities fraud under Section 10(b) of the 1934 Act and Rule

10b-5, a complaint must hurdle three pleading barriers. First, it must comport with Rule 8(a)

of the Federal Rules of Civil Procedure, which requires that complaints provide a short and

plain statement of the claim. 

Second, it must conform with the “particularity” obligations imposed by Rule 9(b) of

the Federal Rules of Civil Procedure. In re GlenFed, Inc. Sec. Litig., 42 F. 3d 1541, 1545

(9th Cir. 1994). Rule 9(b) provides that "in all averments of fraud or mistake, the

circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent,

knowledge, and other condition of mind may be averred generally." Fed. R. Civ. P. 9(b). 

Third, it must meet the pleading requirements provided in the Private Securities

Litigation Reform Act ("PSLRA"). The PSLRA amplifies the “particularity” obligations of

Rule 9(b) by requiring that the complaint specify "each statement alleged to have been

misleading” and by requiring that the complaint specify the reason or reasons why the

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statement was false or misleading. 15 U.S.C. § 78u-4(b)(1). "[I]f 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." Id. Moreover, the PSLRA provides

that the complaint must "state with particularity facts giving rise to a strong inference that

the defendant acted with the required state of mind," or scienter. Id. at (b)(2). The required

state of mind is one of "deliberate recklessness." In re Silicon Graphics Sec. Litig., 183 F.3d

970, 975 (9th Cir. 1999). "Recklessness only satisfies scienter under § 10(b) to the extent that

it reflects some degree of intentional conscious misconduct." Id. at 977. 

Therefore, plaintiffs must "plead, at a minimum, particular facts giving rise to a strong

inference of deliberate or conscious recklessness." Id. at 979. A reasonable inference is not

enough. Id. at 974. A complaint merely alleging that a defendant had the motive and

opportunity to commit fraud is insufficient. Id. In assessing whether a plaintiff has

sufficiently pled scienter, the totality of the allegations is considered. Nursing Home Pension

Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 1230 (9th Cir. 2004). Additionally, all

reasonable inferences must be considered, not just those favorable to the plaintiff. Id. 

III. Analysis

The basic elements of an action involving publicly-traded securities and purchases or

sales in public securities markets are: (1) a material misrepresentation; (2) scienter; (3) a

connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6)

loss causation, which is a causal connection between the material misrepresentation and the

loss. Dura Pharm., Inc. v. Broudo, 125 S. Ct. 1627, 1631 (2005). 

Defendants argue that Plaintiff has failed adequately to allege loss causation, a

material misrepresentation, and that Defendants acted with scienter.

A. Loss Causation

The requirement of loss causation is codified in the PSLRA, which provides that "in

any private action arising under this chapter, the plaintiff shall have the burden of proving

that the act or omission of the defendant alleged to violate this chapter caused the loss for

which the plaintiff seeks to recover damages." 15 U.S.C. § 78u-4(b)(4). 

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The Supreme Court has recently rejected the theory that artificial inflation of a

security's purchase price, without more, is sufficient to establish loss causation. Dura

Pharm., 125 S. Ct. at 1634 (stating that “the 'artificially inflated purchase price' is not itself

a relevant economic loss”). Allowing such a theory to establish loss causation "would allow

recovery where a misrepresentation leads to an inflated purchase price but nonetheless does

not proximately cause any economic loss." Id. at 1633. Moreover, "to establish loss

causation, a plaintiff must allege that the subject of the fraudulent statement or omission was

the cause of the actual loss suffered, i.e., that the misstatement or omission concealed

something from the market that, when disclosed, negatively affected the value of the

security." Lentell v. Merill Lynch & Co., 396 F.3d 161, 173 (2nd Cir. 2005) (alterations

omitted) (citations and internal quotation marks omitted). See also Bennett v. H&R Block

Fin. Advisors, Inc., 2005 U.S. Dist. LEXIS 25273, *7-8 (N.D. Cal. 2005) (applying Dura and

Lentell in concluding that plaintiffs had not pleaded loss causation). 

As was the case in Dura, Plaintiff's Complaint only discusses loss causation in one

paragraph. See Doc. #43 at ¶ 189 ("Lead Plaintiff and the other members of the Class

acquired Swift securities during the Class Period at artificially high prices and were damaged

thereby."). While Plaintiff has alleged numerous misrepresentations, see ¶¶ 88-157, Plaintiff

does not explain how these misrepresentations caused Plaintiff to suffer an economic loss.

It is without question that Swift's stock price was turbulent during 2003 and 2004–the stock

price ranged from a high of $23.93 on October 16, 2003 to a low of $14.83 on May 7, 2004,

and again broke the $20 barrier by November 2004–but Plaintiff only alleges that the

material misrepresentations induced Plaintiff to buy stock at artificially high prices. 

Plaintiff argues that In re Immune Response Secs. Litig., 375 F. Supp.2d 983 (S.D.

Cal. 2005), demonstrates that Plaintiff adequately alleged loss causation. In re Immune

Response involved a securities class action in which the plaintiffs alleged that the defendants

had misrepresented the likelihood of receiving FDA approval for a drug and the likelihood

of continued funding from a large donor. Id. at 1025. The court found that the plaintiffs

adequately alleged loss causation because they alleged that the wrongdoing caused the stock

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prices artificially to inflate and that the prices dropped sharply when the truth became

publicly known. Id. ("[T]he conjunction of these two allegations makes clear that Plaintiffs

claim the disclosures caused the drop in stock price."). In this case, Plaintiff's Complaint

provides the reader with the price of Swift's stock throughout the class period, but Plaintiff

never alleges that any stock-price drops were in response to Swift's revelation of information

that it had previously misrepresented. 

The other cases cited by Plaintiff are equally unpersuasive. See Montalvo v. Tripos,

Inc., No. 03-995, 2005 U.S. Dist. LEXIS 22752, *27 (E.D. Mo. Sept. 30, 2005) (complaint

alleged that stock prices dropped in response to fraud committed when defendants falsely

projected their future earnings in financial statements). Unlike the case here, in Motalvo, the

plaintiffs alleged that specific misrepresentations caused them to suffer an economic loss.

Plaintiff cites In re Parmalat Sec. Litig., 375 F. Supp.2d 278, (S.D.N.Y. 2005), for the

proposition that a plaintiff can adequately allege loss causation when the revelation of the

fraud occurs after the end of the class period. It is unclear why Plaintiff believes this case

is relevant. 

Given the similarity between the complaint discussed in Dura and Plaintiff’s

Complaint, it is clear that Plaintiff has failed to allege loss causation. Despite providing

numerous alleged material misrepresentations, Plaintiff fails to explain how any of those

misrepresentations caused Plaintiff to suffer an economic loss. In addition, the cases Plaintiff

has cited are factually inapposite and unpersuasive. 

B. Material Misrepresentation

While determining that Plaintiff has not sufficiently alleged loss causation requires

the dismissal of Plaintiff's Complaint, the parties have already briefed whether Plaintiff

adequately alleges a material misrepresentation. Therefore, the court addresses this issue.

As discussed above, to comport with the heightened pleading requirements of the

PSLRA, to allege a misrepresentation, “the complaint shall specify each statement alleged

to have been misleading, the reason or reasons why the statement is misleading, and, if an

allegation regarding the statement or omission is made on information and belief, the

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complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C.

§ 78u-4(b)(1)(B). Furthermore, "Rule 9(b) requires particularized allegations of the

circumstances constituting fraud. The time, place, and content of an alleged

misrepresentation may identify the statement or the omission complained of, but these

circumstances do not constitute fraud." In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1547-

48 (9th Cir. 1994) (emphasis in original) (citations and internal quotation marks omitted).

"[M]ateriality depends on the significance the reasonable investor would place on the

withheld or misrepresented information." Basic Inc. v. Levinson, 485 U.S. 224, 240 (1988).

In its Complaint, Plaintiff alleges that Defendants made numerous material

misrepresentations. However, the manner in which Plaintiff presents its allegations makes

it difficult to discern the reasons why each particular statement is materially misleading. For

example, after alleging that Moyes made material misrepresentations to an analyst, Plaintiff

simply provides a list of different reasons why the statement was allegedly false. See Doc.

# 43 at ¶¶ 112-13. Plaintiff makes no effort to specify which reason applies to which portion

of the challenged statement. The court and Defendants are left to take that necessary step.

It appears that Plaintiff submitted twenty-three pages of alleged material misrepresentations,

many in the form of lengthy block quotes, hoping the court would find a particular statement

materially misleading. Nonetheless, rather than dismissing the Complaint for failure to

comply with Rule 8 of the Federal Rules of Civil Procedure, the court has attempted to

determine whether Plaintiff has adequately alleged a material misrepresentation.

Plaintiff alleges that Defendants made material misrepresentations concerning five

topics: (1) Swift’s safety rating, (2) the impact of the revised HOS Regulations, (3) Swift’s

ability to impose a fuel surcharge, (4) Swift's decision to repurchase its shares, and (5) Swift's

financial condition. 

1. Swift’s Safety Rating

On October 3, 2003, the Federal Motor Carrier Safety Administration ("FMCSA")

conducted a compliance review of Swift. As discussed above, as a result of this review,

FMCSA proposed changing Swift’s safety rating from satisfactory to conditional. Doc. # 43

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at ¶¶42-3. Swift successfully petitioned the FMCSA to stay the rating change until a further

review could be conducted. Id. On September 16, 2005, FMCSA completed another safety

review of Swift and concluded that it would not downgrade Swift’s rating. Doc # 59, Exhibit

1. FMCSA then determined that the petition for administrative review of the earlier

conditional rating was moot. Id. Swift’s safety rating was never downgraded from

satisfactory to conditional. 

Plaintiff alleges that Defendants made numerous false statements about the FMCSA

audit. While Plaintiff has attempted in its Opposition to Defendants' motion to proffer

additional explanations why Defendants made these alleged misrepresentations, these

additional arguments are not properly before the court because a motion to dismiss under

Rule 12(b)(6) tests the sufficiency of the complaint alone. Therefore, Plaintiff's additional

arguments will not be considered.

a. November 26, 2003 Conference Call

The first alleged material misrepresentation is a statement made by Moyes to an

analyst regarding FMCSA's safety rating. See Doc. # 43 at ¶ 103. However, Plaintiff failed

to allege any facts establishing why this statement was false or why it was material. 

b. Press Release

Plaintiff alleges that Defendants made a material misrepresentation when they issued

a press release stating that the only point of dispute with the FMCSA was the accuracy of the

driver logs. Id. at ¶ 106. Plaintiff alleges that this statement was false because (1) the

company actually used untrained and unqualified drivers and had a higher-than-reported

accident rate and (2) the safety rating was not a clerical error but was actually a deliberate

rating based on falsified driver logs. Id. at ¶ 107. 

The first explanation for why Moyes's statement was false is irrelevant. The sole issue

is whether Moyes misrepresented the extent of, or the reasons behind, the FMCSA audit.

The fact that Swift may have engaged in other unsafe practices is of no significance in

determining whether the specific statement at issue–the press release–was false. Similarly,

the second explanation also falls short. Nowhere in the press release did Moyes suggest that

the FMCSA decision was a typographical error. 

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Therefore, Plaintiff has not sufficiently alleged that this statement was a

misrepresentation.

 c. January 28, 2004

Plaintiff alleges that Moyes made material misrepresentations on January 28, 2004,

when he discussed the FMCSA audit, stated that Swift expected to succeed in maintaining

its satisfactory safety rating, and stated that he believed a safety downgrade would not result

in a loss of customers. Id. at ¶ 112. Plaintiff alleges that this statement was materially

misleading because Swift was in danger of losing its satisfactory safety rating as a result of

an increased number of accidents and because FMCSA’s decision to downgrade Swift’s

safety rating was not a "clerical" error. 

Plaintiff’s proffered explanations fail to show that this statement contained any

material misrepresentations. Moyes’s statement described the company’s “expect[ations]”

and “belie[fs]” concerning the FMCSA audit. Plaintiff has made no effort to show that

Moyes–or Swift–actually harbored different expectations or beliefs. Moreover, Plaintiff has

not alleged any facts establishing that FMCSA's proposed safety downgrade was based on

any reason other than falsified driver logs. 

d. Form 10-K

Plaintiff alleges that Defendants made material misrepresentations concerning the

FMCSA audit review in Swift’s Form 10-K. Id. at ¶ 126. Plaintiff alleges that these

statements were materially misleading because of the same two reasons proffered above: (1)

untrained drivers caused an increase in Swift’s accident rate, and (2) the FMCSA decision

was not an error. Neither reason is relevant here. In its Form 10-K, Swift merely provided

a time-line of the audit and its aftermath. Plaintiff does not dispute that any of these events

occurred or allege that Defendants had a duty to disclose additional information 

e. March 19, 2004 Conference Call

Plaintiff alleges that Moyes materially misrepresented the effect of FMCSA’s

proposed safety downgrade when he spoke with an analyst on March 19, 2004. Id. at ¶ 134.

Moyes stated that there was an approximately 10% chance that Swift's safety rating would

be downgraded to conditional and that, even if such a downgrade occurred, it would not have

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any effect on Swift's finances. Id. Plaintiff alleges that this statement was materially false

because Swift was in severe danger of losing its satisfactory safety rating because it had

under-reported accidents and falsified driver logs. Id. at ¶ 135.

As discussed above, merely alleging that Swift was in danger of losing its satisfactory

safety rating is insufficient under the PSLRA. Plaintiff must allege particularized facts

establishing that this was a material misrepresentation at the time the statement was made.

Instead, Plaintiff has again offered the same generalized references to untrained drivers and

clerical errors without making any real attempt to explain with particularity why the specific

statement at issue was false. 

f. Leave to Amend 

Because it is unclear whether Plaintiff can adequately allege that Defendants made

material misrepresentations about the FMCSA's proposal to downgrade Swift's safety rating,

Plaintiff is granted leave to amend its Complaint regarding this issue. 

2. Impact of the Revised Hours of Service Regulations

In April 2003, the FMCSA promulgated HoS regulations to take effect on January 4,

2004. Doc. # 43 at ¶ 59. These new regulations limited daily driving time, required drivers

to count breaks as driving time, and required drivers to take ten consecutive hours of off-duty

time after each fourteen-hour workday. Id. The HoS regulations required Swift to make

adjustments, as Swift compensated its drivers on the basis of how many miles they drove.

Id. 

Plaintiff alleges that Defendants materially misrepresented the effect that the new HoS

regulations would have on Swift’s finances. 

a. Swift’s November 14, 2003 Form 10-Q

On November 14, 2003, Swift filed its Form 10-Q form, which Plaintiff alleges

included material misrepresentations. The 10-Q form provided:

To the extent the new regulations reduce time available to drive as a result of the

changes to the calculation of the on-duty period, our drivers’ and owner-operators’

pay will be reduced. We expect to work with our shippers to minimize the loss of

driver and owner-operator productivity. In situations where productivity losses occur,

we expect to be compensated by the shippers and compensate our drivers and owneroperators accordingly so as to maintain our existing pay structure. If we are not

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successful in working with our shippers to adjust for the impact these new regulations

will have on our driver and owner-operator productivity, it could have a negative

impact on our financial results.

Doc. # 43 at ¶ 92. Plaintiff alleges that this statement was materially misleading because

Defendants failed to disclose that “[d]espite a severe, industry-wide shortage of qualified

drivers, the Company was underpaying its drivers, relative to its competitors, and was,

therefore, unable to recruit and retain sufficient drivers for its fleet. This put the Company

at a competitive disadvantage which only worsened when it refused to consider raising driver

pay to compensate drivers for the fact that they would be able to log less total drive time

under the HoS regulations.” Id. at ¶ 96(a). 

Plaintiff's explanation is unavailing. Critically, Plaintiff has not alleged that any of

the information or statements contained in the 10-Q Form were false. Instead, Plaintiff seems

to be alleging that Defendants made a misrepresentation because they failed to "consider

raising driver pay." That a defendant’s business strategy may be open to criticism does not

show that the defendant made a misrepresentation. Therefore, Plaintiff has not adequately

alleged that Defendants made any misrepresentations concerning the HOS regulations in the

Form 10-Q. 

b. November 26, 2003 Statements

Plaintiff alleges that Moyes and Riley, when speaking with analysts before the HoS

regulations went into effect, materially misrepresented the effect of the new HoS regulations.

Moyes again predicted that the new regulations would not affect Swift’s productivity and that

any increase in costs because of the regulations would be passed on to customers. Id. at ¶

100. Riley suggested that Swift’s large size would result in drivers of smaller carriers

switching to Swift, further strengthening Swift’s finances. Id. at ¶ 101. 

Plaintiff alleges that these statements were misleading because “Swift did not have

the power to aggressively maximize fee income from its contracts with its customers, and it

was not able to adequately recompense its drivers for the increased cost of HoS regulations

out of such fee income.” Id. at ¶ 102. 

While Plaintiff claims that Swift would be unable to transfer the increased costs to its

customers, Plaintiff has not alleged any facts–such as examples of customers who refused

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to pay the fee–supporting this allegation. Such conclusory statements fail to allege

adequately a material misrepresentation. See Lain v. Evans, 123 F. Supp. 2d 344, 348 (D.

Tex. 2000) ("The Complaint fails to explain how these statements were false and misleading

to potential investors, instead proposing in a conclusory manner that the statements were

'false and misleading when made.'"). 

c. January 28, 2004 Conference Call

Plaintiff alleges that Moyes and Enzor materially misrepresented Swift’s financial

future during a January 28, 2004 conference call. Plaintiff alleges that Moyes made a

material misrepresentation when he stated: "'Our customers have been very receptive to

providing rate compensation to offset any additional pay that we're having to give our drivers

. . . [.] So I think what we said on our conference call pertaining to hours of service is right

on track.'" Id. at ¶ 109. Enzor promised analysts that Swift would keep seeking rate

increases from its customers, which it had been successful in receiving to date. Id. at ¶ 110.

Plaintiff alleges that these statements were material misrepresentations because the

“Company had not been successful with imposing the additional fees sufficient to

compensate it for the loss caused by the HoS regulations or to allow it to compensate its

drivers for pay lost as a result of the driving limitations imposed by the HoS regulations, for

the reasons set forth in ¶¶ 59-60.” 

Plaintiff's allegation suffers from several shortcomings. First, it is unclear to which

"conference call" Moyes is referring, making it difficult to know the breadth of Moyes's

statement. Second, Moyes and Enzor were discussing Swift's ability to increase rates to pay

drivers higher wages while Plaintiff is alleging that additional accessorial fees–loading and

drop-off charges–were insufficient to compensate Swift for increased costs as a result of the

HoS regulations. It is therefore questionable whether Plaintiff's explanation for why Moyes

and Enzor made a material misrepresentation even applies to what each actually stated.

Third, Plaintiff has not alleged any facts suggesting that customers had not been receptive

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In fact, Plaintiff's Complaint alleges that on February 12, 2004, Moyes reiterated that

Swift had effectively made the HoS regulations cost-neutral for January 2004. See Id. at ¶

118. 

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to providing increased rate compensation or that Swift had been unable to render the HoS

regulations cost-neutral in January.2

 

Plaintiff claims that a statement made by Enzor supports its argument that Defendants

were unable to render the HoS regulations cost-neutral. In July 2004, Enzor stated that the

Company did have to raise pay for its drivers in response to the HoS regulations. Id. at 60.

It is unclear how Enzor's statement establishes the falsity of Moyes's statement because

Moyes stated that Swift was successful in offsetting increased driver pay by receiving higher

rates from its customers. Moyes did not state that Swift had not increased driver pay, which

is what Enzor's statement addressed. 

Plaintiff has therefore failed to allege adequately the falsity of Moyes's or Enzor's

statements. 

d. April 22, 2004 Press Conference

On April 21, 2004, Swift announced its results for the end of the first quarter of 2004,

reporting its net income as $6.4 million, or eight cents a share, down from the previous year’s

first quarter financial results of $8.9 million, or 10 cents a share. Id. at ¶ 139. On April 22,

2004, Moyes held a conference call with analysts during which, according to Plaintiff's

Complaint, he "stated that" what we've said on HoS is pretty well in line with what's going

on,' that unmanned trucks had cost the Company 'about 5 cents in earnings damage' and that

Swift had decided on a driver pay increase after all. Moyes still insisted that '[w]e’re very

positive that our pricing is up 5.7% - or 5.8% . . . .'" Id. 

Plaintiff alleges that Moyes materially misrepresented the effect of the HoS

regulations because "the Company had not been successful in imposing the additional fees

that would compensate it for the loss caused by the HoS regulations and because the

Company's earnings for the first quarter were inflated due to the reasons set forth in ¶¶ 72-85

[referring to the portion of Plaintiff's Complaint that was dedicated to Swift's alleged

accounting violations].” This criticism is puzzling. Moyes admitted during the conference

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call that the HoS regulations had resulted in unmanned trucks and required Swift to raise

driver pay despite its earlier belief that an increase would be unnecessary. These are

precisely the facts that Plaintiff claims were omitted. 

e. Leave to Amend

Because it is unclear whether Plaintiff can adequately allege that Defendants

materially misrepresented the effect of the HoS regulations, Plaintiff is granted leave to

amend its Complaint regarding this issue. 

3. Fuel Surcharge

In 2004, the price of fuel went up, negatively affecting companies such as Swift that

operate trucks that run on gasoline. Plaintiff alleges that Moyes and Enzor made false

statements about Swift’s ability to collect a fuel surcharge from its customers in response to

rising fuel costs. 

Plaintiff alleges that on April 20, 2004, Moyes made a material misrepresentation

when he stated that Swift was being very aggressive in imposing a west coast fuel surcharge.

Id. at ¶ 139. Yet Plaintiff does not allege any facts in its Complaint establishing that Moyes's

statement was a material misrepresentation. Therefore, Plaintiff has not adequately alleged

facts establishing that this statement was a material misrepresentation. 

Plaintiff also alleges that Enzor and Moyes materially misrepresented the fuel

surcharge problem during an April 21, 2004 conference call, when both defendants stated

that the fuel increase had not had a significant impact on Swift’s finances. Id. at ¶ 143

(Enzor stating that “this year we were very active in going out and getting the West Coast

Fuel surcharge" and Moyes estimating that Swift had recovered approximately 75% of the

increased fuel costs). Plaintiff alleges that these statements were materially false because

“Swift was not successful in imposing sufficient fuel surcharges in contracts that had been

signed earlier in the year, to which Swift was locked in for the remainder of the year, and

there was no lag effect that would permit Swift to ignore the express terms of its contracts

and impose sufficient surcharges on all of its contracts.” Id. at ¶ 144. 

Plaintiff’s allegations again fall short of establishing a material misstatement. First,

it is not clear from Moyes's statement that Swift was attempting to negotiate its already-inCase 2:04-cv-02435-NVW Document 71 Filed 03/31/06 Page 16 of 21
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place customer contracts. Rather, it appears that Moyes stated that Swift would attempt to

recover a fuel surcharge outside of its existing contracts. Second, Swift’s 10-Q forms belie

Plaintiff's allegation. Moyes made his statement on April 22, 2004, immediately following

Swift’s first-quarter financial results. Between the 2003 fourth-quarter report and the first

quarter of 2004, Swift’s fuel costs went up by approximately $5.9 million. Doc. # 56,

Exhibit 6. During that same period, Swift’s revenues from its fuel surcharge increased by

approximately $4.9 million, meaning that Swift recovered approximately 83% of the

increased fuel cost with its fuel surcharge. Id. Therefore, Swift had performed exactly as

Moyes stated, undermining any allegation that Moyes made a material misrepresentation

when he stated that the company would seek fuel surcharges and that the company had thus

far recovered about seventy-five percent of its increased fuel costs. 

Because it is unclear whether Plaintiff can adequately allege that Swift misrepresented

its ability to offset any fuel price increases with a fuel surcharge, Plaintiff is granted leave

to amend its Complaint with regard to this issue. 

4. Swift's Share Repurchases

On February 11, 2004, March 23, 2004, and May 24, 2004, Swift announced that it

would repurchase its shares because Swift’s board of directors believed this was a smart

investment in light of prevailing market prices. Doc. # 43 at ¶ 115, 138, 148. Plaintiff

alleges that these were material misrepresentations because the real reason behind the

decision to repurchase Swift stock was to prevent a margin call on the stock that Moyes had

pledged to fund construction of the Coyotes’ stadium. 

Plaintiff has not alleged any facts supporting this conclusory allegation. They have

not alleged that any of the board of directors ever admitted to such a motive. Furthermore,

"[i]n a case involving multiple defendants, Rule 9(b) mandates that the complaint inform

each defendant of his alleged role in the deception." Kolbeck v. LIT America, Inc., 923 F.

Supp. 557, 569 (S.D.N.Y. 1996). Instead, Plaintiff only alleges that all of the Board of

Directors, which includes some of the Defendants, acted in concert to defraud the company

in order to protect Moyes, its CEO. Plaintiff fails to allege the facts necessary to comport

with the PSLRA’s heightened pleading requirements. See id. ("Broad allegations that several

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defendants participated in a scheme, or conclusory assertions that one defendant controlled

another, or that some defendants are guilty because of their association with others, do not

inform each defendant of its role in the fraud and do not satisfy Rule 9(b)."). 

It is unclear whether Plaintiff can adequately allege that Swift materially

misrepresented the reasons behind Swift's decision to repurchase its shares, and therefore

Plaintiff is granted leave to amend its Complaint regarding this issue. 

 5. Swift’s Financial Reports

a. Insurance and Claims Expense

Plaintiff alleges that Defendants did not prepare their financial reports in accordance

with GAAP because they inaccurately reported their insurance and claims expenses. See

Doc. # 43 at ¶¶ 63, 67, 72-78. When a plaintiff alleges a GAAP violation, “a general

allegation that the practices at issue resulted in a false report of company earnings is not a

sufficiently particular claim of misrepresentation.” In re Daou Sys., 411 F.3d 1006, 1016

(9th Cir. 2005). Plaintiff must allege particularized facts establishing how the company

engaged in an accounting violation. 

To support Plaintiff's allegation that Defendants falsely reported their insurance claims

and expenses, Plaintiff points to the fact that, historically, Swift’s reported insurance and

claims expenses amounted to 4-5% of its operating budget. Plaintiff alleges that during the

class period, Swift reported insurance and claims expenses closer to 3%, and that this

reduction demonstrates that Swift made an accounting mistake. Doc. # 43 at ¶ 76. 

There are two problems with Plaintiff's allegation. First, during the class period, Swift

reported insurance and claims expenses of 4.6% (Q303), 2.9% (Q403), 4.1% (Q104), and

3.1% (Q204) of its total operating budget. The average was 3.675% over the entire class

period. Therefore, Plaintiff’s allegation that the average of the period was “closer to 3%” is

factually incorrect. Second, while Plaintiff’s Complaint refers to GAAP, Plaintiff has made

no showing that GAAP requires companies to calculate insurance claims and expenses based

on historical figures rather than actual figures. 

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In addition, at oral argument, Plaintiff's counsel agreed that it probably could not

adequately allege loss causation. 

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Therefore, Plaintiff has failed adequately to allege that Swift materially

misrepresented its financial report by undervaluing its insurance and claims expenses.

b. Depreciation of Swift's Tractors

In 2003, Swift decided to increase, from three to five years, the length of time for

which it would keep individual tractors in use, and thus began depreciating its tractors at a

slower rate. Plaintiff alleges that this decision resulted in improper depreciation and inflated

financial results. See Doc. # 43 at ¶¶ 67, 96(b), 130. 

While Plaintiff attempts to couch the issue as an issue of materiality, see Doc. # 58

at 16, this assumes that there was an accounting error. However, Plaintiff fails adequately

to allege an accounting error under the PLSRA’s heightened pleading requirements. 

Plaintiff also fails to allege any facts establishing why this business decision was

improper. For example, Plaintiff has not identified any GAAP principle establishing that a

company cannot change the life of an asset after it acquires or uses that asset. Without more

particular facts, Plaintiff has failed to allege that Defendants violated GAAP when they

decided to extend the life of their tractors and depreciate them accordingly.

c. Leave to Amend

Plaintiff's Complaint falls far short of adequately alleging that Swift made material

misrepresentations in its financial reports. Plaintiff has not alleged with specificity how

Swift violated any established accounting principles. Moreover, Swift has never restated any

of its financial reports or otherwise suggested that it violated any accounting principles. And

most importantly, as discussed above, Plaintiff has only alleged that these accounting

violations caused Swift's stock to be financially inflated. Plaintiff has not alleged any facts

suggesting that, even if granted leave to amend this issue, it will be able to establish "loss

causation" with respect to the alleged accounting violations.3

 

Given these clear shortcomings in Plaintiff's Complaint, it would be futile to allow

Plaintiff the opportunity to amend this portion of its Complaint. Plaintiff's claims that

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Defendants made accounting violations that resulted in material misrepresentations are

therefore dismissed with prejudice. 

C. Scienter

Where a plaintiff has failed to allege adequately falsity, it is unnecessary to determine

whether they have alleged scienter with sufficient particularity. See Karacand v. Edwards,

53 F. Supp. 2d 1236, 1252 (D. Utah 1999) ("Where plaintiffs fail to plead falsity, a fortiori

they have not established that defendants knew those statements were false."). Therefore,

the court at this time does not consider Defendants' argument that Plaintiff has not adequately

alleged scienter. 

IV. Section 20(a) Claim

To prevail on a Section 20(a) claim, "plaintiffs must first allege a violation of § 10(b)

or Rule 10b-5." Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1035 (9th Cir. 2002). Because

Plaintiff failed to do so, the Section 20(a) claim is also dismissed without prejudice. 

V. Conclusion 

Plaintiff has failed to allege facts establishing that any of the misrepresentations or

omissions caused Plaintiff to suffer an economic loss. Plaintiff has also failed to allege

particularized facts establishing that Defendants made any material misrepresentations or

omissions. Plaintiff may submit a further amended complaint as to all of its alleged

misrepresentations except for its allegation that Defendants made material misrepresentations

in their financial reports because they violated generally accepted accounting principles. 

Plaintiff's claims that Defendants improperly calculated its insurance claims and expenses

and improperly depreciated the lives of its tractors, which allegedly resulted in material

misrepresentations in Swift's financial reports, are dismissed with prejudice. 

Should Plaintiffs choose to file a further amended complaint, they need to allege facts

establishing the falsity of each alleged misrepresentation or omission. Conclusory

allegations are insufficient under the PSLRA. 

IT IS THEREFORE ORDERED that Defendants' Motion to Dismiss, Doc. # 54, is

granted. 

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IT IS FURTHER ORDERED that Defendants' Request for Judicial Notice, Doc. # 55,

is granted. 

IT IS FURTHER ORDERED that Plaintiff's Amended Complaint, Doc. # 43, is

dismissed for failure to comply with the PLSRA's pleading requirements with leave to file

a further amended complaint by April 28, 2006, submitting both clean and red-lined versions

in compliance with Local Rule LRCiv 15.1.

IT IS FURTHER ORDERED that any motion to dismiss a further amended complaint

must be filed within 28 days of service of the further amended complaint, any response

within 28 days of service of the motion, and any reply within 15 days of service of the

response. Oral argument on any motion to dismiss will be set for July 28, 2006, at 1:30 p.m.

This briefing schedule will not be extended absent extraordinary circumstances.

DATED this 29th day of March 2006.

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