17

‐ 743

‐ cv

Wyche v. Advanced Drainage Sys., Inc., et al.

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT.

CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007 IS

PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE

PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A

SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY

MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC

DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING

TO A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT

REPRESENTED BY COUNSEL.

At a stated term of the United States Court of Appeals for the Second 1

Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley 2

Square, in the City of New York, on the 13 th day of October, two thousand 3

seventeen. 4

5

PRESENT: RAYMOND J. LOHIER, JR., 6

CHRISTOPHER F. DRONEY, 7

Circuit Judges, 8

JED S. RAKOFF, 9

District Judge. * 10

‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ ‐‐‐ 11

12

CHRISTOPHER WYCHE, INDIVIDUALLY, ON 13

BEHALF OF ALL OTHERS SIMILARLY 14

SITUATED, 15

16

Plaintiff

‐ Appellant

, 17

18

v. No. 17

‐ 743

‐ cv 19

20

ADVANCED DRAINAGE SYSTEMS, INC., 21

JOSEPH A. CHLAPATY, MARK B. STURGEON, 22

23

Defendants

‐ Appellees

. 24

‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ ‐‐‐ 25

* Judge Jed S. Rakoff, of the United States District Court for the Southern District of New

York, sitting by designation.2 FOR APPELLANT: J ACOB A. G OLDBERG

, The Rosen Law 1

Firm P.A., Jenkintown, PA. 2

3

FOR APPELLEES: J OSEPH C. W EINSTEIN (Victor Genecin, 4

Sean L. McGrane, on the brief ), Squire 5

Patton Boggs (US) LLP, New York, 6

NY, and Cleveland, OH, for 7

Advanced Drainage Systems, Inc. 8

9

Robert A. Scher, Bryan B. House, 10

Foley & Lardner LLP, New York, NY, 11

and Milwaukee, WI, for Joseph A. 12

Chlapaty. 13

14

Peter J. Pizzi, Walsh Pizzi O’Reilly 15

Falanga LLP, New York, NY, Roger 16

P. Sugarman, Kegler Brown Hill + 17

Ritter, Columbus, OH, for Mark B. 18

Sturgeon. 19

20

Appeal from a judgment of the United States District Court for the 21

Southern District of New York (Katherine Polk Failla, Judge ). UPON DUE 22

CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND DECREED 23

that the judgment of the District Court is AFFIRMED. 24

Christopher Wyche appeals from a judgment of the District Court (Failla, J.) 25

dismissing his claims against Advanced Drainage Systems, Inc. (“ADS”) and two 26

of its employees, Joseph A. Chlapaty and Mark B. Sturgeon (collectively, 27

“Defendants”), for violations of Sections 10(b) and 20(a) of the Securities 28

Exchange Act of 1934. We assume the parties’ familiarity with the facts and 29

record of the prior proceedings, to which we refer only as necessary to explain our 303 decision to affirm. 1

With respect to Wyche’s claims under Section 10(b) and Rule 10b

‐ 5, the 2

only question we are asked to consider is whether Wyche has adequately alleged 3

that Defendants acted with scienter. Wyche’s securities fraud claims are subject 4

to the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil 5

Procedure and the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 6

U.S.C. § 78u

‐ 4(b), which “require[] plaintiffs to state with particularity both the 7

facts constituting the alleged violation, and the facts evidencing scienter, i.e., the 8

defendant’s intention to deceive, manipulate, or defraud,” Tellabs, Inc. v. Makor 9

Issues & Rights, Ltd., 551 U.S. 308, 313 (2007) (quotation marks omitted); see ECA 10

& Local 134 IBEW Joint Pension Tr. of Chi. v. JP Morgan Chase Co., 553 F.3d 187, 11

198 (2d Cir. 2009). 12

Wyche first alleges that Defendants had a motive to engage in fraudulent 13

accounting practices because ADS would have breached financial covenants with 14

its lenders had it complied with Generally Accepted Accounting Principles 15

(“GAAP”). Assuming without deciding that the motivation to comply with debt 16

covenants is sufficient to support an allegation of scienter, we agree with the 17

District Court that Wyche’s complaint does not plead facts to support this 184 allegation with adequate particularity—for example, facts indicating that default 1

was imminent or inevitable. 2

The District Court also correctly rejected Wyche’s second argument, that 3

the individual defendants were motivated to inflate stock prices for bonuses tied 4

to ADS’s preliminary financial performance. Bonus compensation is not the type 5

of “concrete and personal” benefit upon which a finding of motive to commit 6

securities fraud can be based. Kalnit v. Eichler, 264 F.3d 131, 139 (2d Cir. 2001). 7

That Chlapaty and Sturgeon allegedly returned their bonuses does not persuade 8

us otherwise. 9

Wyche also claims that motive can be inferred from Sturgeon’s sale of 10

shares between May 18 and May 26, 2015. While motive may be “sufficiently 11

pleaded where [a] plaintiff alleged that defendants misrepresented corporate 12

performance to inflate stock prices while they sold their own shares,” id., the 13

defendant’s stock sales must be “unusual” to support such an allegation, Acito v. 14

IMCERA Grp., Inc., 47 F.3d 47, 54 (2d Cir. 1995). The District Court correctly 15

concluded that Sturgeon’s sales were not unusual because, as alleged, the 16

percentage of shares sold was small, the timing was not suspicious, and no other 17

insiders were alleged to have sold stock. 185 In the absence of a showing of motive, “it is still possible to plead scienter 1

by identifying circumstances” indicative of “conscious misbehavior” or 2

recklessness on the part of the defendant, “though the strength of the 3

circumstantial allegations must be correspondingly greater.” Kalnit, 264 F.3d at 4

142 (quotation marks omitted); see In re Carter

‐ Wallace, Inc. Sec. Litig., 220 F.3d 5

36, 39–40 (2d Cir. 2000). We agree with the District Court that Wyche’s 6

allegations of conscious misbehavior or recklessness were insufficient to support 7

an inference of scienter that is “at least as compelling as any opposing inference 8

one could draw from the facts alleged.” Tellabs, 551 U.S. at 324. First, the 9

complaint did not allege that any former employee communicated any relevant 10

accounting concerns to an individual defendant, or that an individual defendant 11

requested that any of the former employees engage in fraudulent conduct on 12

ADS’s behalf. Second, the alleged GAAP violations, which govern the 13

calculation of inventory costs and the classification of equipment and 14

transportation leases as either “operating” or “capital” leases, do not suggest the 15

requisite “fraudulent intent.” Novak v. Kasaks, 216 F.3d 300, 309 (2d Cir. 2000) 16

(quotation marks omitted). 2 17

2 For the first time on appeal, Wyche argues that an investigation conducted by Deloitte6 Substantially for the reasons provided by the District Court, we agree that 1

the allegations in the complaint were insufficient to impute ADS’s corporate 2

scienter. “When the defendant is a corporate entity,

. . . the pleaded facts must 3

create a strong inference that someone whose intent could be imputed to the 4

corporation acted with the requisite scienter.” Teamsters Local 445 Freight Div. 5

Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 195 (2d Cir. 2008). 6

Finally, Wyche’s derivative claim under Section 20(a) fails because he has 7

not stated a primary violation under Section 10(b) and Rule 10b

‐ 5. See ATSI 8

Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 108 (2d Cir. 2007). 9

We have considered Wyche’s remaining arguments and conclude that they 10

are without merit. For the foregoing reasons, the judgment of the District Court 11

is AFFIRMED. 12

FOR THE COURT: 13

Catherine O’Hagan Wolfe, Clerk of Court 14

uncovered well

‐ founded evidence of fraud, and that this creates a compelling inference

of scienter. Wyche has forfeited this argument because he did not raise it in the District

Court. Bogle

‐ Assegai v. Connecticut, 470 F.3d 498, 504 (2d Cir. 2006).