IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

PATRICIA LOWRY, individually and on )

behalf of all others similarly situated, )

)

Plaintiff, )

)

vs. ) Case No. 20 C 1939

)

RTI SURGICAL HOLDINGS, INC., )

CAMILLE I. FARHAT, BRIAN K. )

HUTCHINSON, JONATHON M. SINGER, )

ROBERT P. JORDHEIM, and )

JOHANNES W. LOUW, )

)

Defendants. )

MEMORANDUM OPINION AND ORDER

MATTHEW F. KENNELLY, District Judge:

Patricia Lowry filed this suit against RTI Surgical Holdings, Inc. (RTI) and five of 

its current and former officers—Camille Farhat, Jonathon Singer, Brian Hutchinson, 

Robert Jordheim, and Johannes Louw (collectively, the individual defendants)—on 

behalf of a class of individuals who acquired RTI common stock between March 7, 2016 

and March 27, 2020 (the class period). Rosy Yeretsian, who has been appointed as the 

lead plaintiff, asserts that the defendants engaged in improper "revenue smoothing"—a 

practice of shipping products to customers early to hit quarterly revenue targets, in 

violation of RTI's internal policy and without customer authorization. The SEC and the 

company's internal audit committee investigated RTI for its questionable accounting

practices, and RTI subsequently announced that it would restate five consecutive years

of SEC filings. As a result, RTI's share price dropped; it lost one-fourth of its market

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value as a company, causing stockholders significant economic loss. 

Yeretsian alleges that the defendants' improper revenue recognition practice 

during the class period violated sections 10(b) and 20(a) of the Securities Exchange Act 

of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and SEC Rule 10b-5. The defendants have moved 

to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6). For the 

reasons stated below, the Court denies the defendants' motions to dismiss.

Background

RTI is a surgical implant company based in Deerfield, Illinois. It designs, 

develops, manufactures, and distributes surgical implants worldwide. On a quarterly 

basis and at the end of each fiscal year, RTI's management—including the individual 

defendants—updates investors and analysts on the company's performance. Also, the 

SEC requires companies like RTI to submit financial reports on a quarterly basis (Forms

8-K and 10-Q) and for each fiscal year (Form 10-K). RTI routinely files these forms with 

the SEC.

Before and during the class period, RTI had four lines of business—spine, sports, 

original equipment manufacturer (OEM), and international. OEM accounted for the 

largest portion of its business, and during the class period, RTI represented that OEM 

was its most profitable business segment. Yeretsian asserts that as early as 2014—

unbeknownst to RTI investors—RTI was improperly recognizing revenue and reporting 

false information about the performance of its OEM business to the SEC, investors, and 

analysts. 

The individual defendants in this case are current and former RTI officers. 

Yeretsian alleges that each of them directly participated in RTI's management, oversaw 

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day-to-day operations at the highest levels, and were privy to confidential information 

regarding business performance. Defendant Camille Farhat has served as RTI's CEO 

since March 2017. His predecessor, defendant Brian Hutchinson, was RTI's CEO from 

December 2001 to December 2016. Defendant Jonathon Singer has served as CFO 

and administrator since September 2017. His predecessor, defendant Robert 

Jordheim, served as RTI's executive vice president and CFO from July 2013 until 

September 2017, and as interim CEO from December 2016 to March 2017. Defendant 

Johannes Louw served as RTI's vice president of financial planning and analysis from 

September 2018 until he was terminated in April 2020. Defendant Louw had a brief 

stint as CFO in January 2020; at that time, Singer, who was CFO, was promoted to the 

role of COO.

A. RTI's revenue recognition practice

Yeretsian's securities fraud claims are based in part on statements from 

confidential witnesses, three of whom are former RTI employees and one of whom was

employed by a key RTI customer, Medtronic, from 2006 to 2015. Yeretsian alleges that 

during the class period, RTI's management, including some of the individual defendants, 

directed account managers (employees who coordinate product orders and shipments 

with RTI customers) to ask customers to accept early shipments so that RTI could hit its 

monthly and quarterly revenue targets. She asserts that RTI's management also 

directed account managers to ship products early even without the customer's 

authorization. By these practices, Yeretsian contends, RTI misleadingly portrayed 

potential future sales as current sales. 

For instance, Yeretsian's first confidential witness, Former Employee 1 (FE1), a 

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director of corporate accounts at RTI just before the class period, stated that "on orders 

from top executives, RTI . . . regularly asked its largest customer, Medtronic, to accept 

shipment of orders earlier than planned so that the order would come in before the end 

of a quarter." Am. Compl. ¶¶ 67-68 (dkt. no. 53). At one point, FE1 was instructed to 

ask Medtronic to ship a $2-3 million order early, but when Medtronic refused, RTI 

"shipped the order early anyway." Id. ¶ 69. Former Employee 2 (FE2), a senior 

executive assistant to an RTI executive vice president, stated that they sat in on a 

meeting involving defendant Louw, where "the practice of early shipping to RTI 

customers" was discussed. Id. ¶ 73.

Another confidential witness, Former Employee 3 (FE3), who worked at RTI from 

2002 to 2017 stated that "it was commonplace for RTI to ship orders early to [OEM] 

customers so the Company could meet monthly and quarterly revenue targets." Id. ¶¶ 

75-79, 83. This witness reported to defendant Hutchinson. In another instance, 

defendant Jordheim told an RTI employee that "RTI needed to book additional revenue 

before the end of the quarter and that the Company would be shipping a purchase order 

early to one of [the] . . . product distributors." Id. ¶ 86.

Yeretsian's final confidential witness, Former Employee 4 (FE4), was a Medtronic 

employee from 2006 to 2015 and dealt directly with RTI. FE4 "attest[s]" to RTI's 

"practice of shipping products in months other than the months those products were due 

to arrive," and in some cases, RTI "shipped products early to Medtronic without first 

obtaining permission to do so." Id. ¶¶ 88-90.

B. RTI's financial reporting during the class period

At the start of the class period, on March 7, 2016, RTI filed a Form 10-K for the 

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fiscal year ending on December 31, 2015 with the SEC; defendant Hutchinson (then 

CEO) and defendant Jordheim (then executive vice president and CFO) signed the 

form. In relevant part, RTI's 2015 10-K stated that "Revenue is recognized upon 

shipping, or receipt by the Company's customers of the implant, depending on the 

Company's distribution agreements with the Company's customers or distributors. 

Other revenues are recognized when all significant contractual obligations have been 

satisfied." Id. ¶ 93. The 2015 10-K further stated that RTI's annual revenue had

increased $19.5 million compared to the prior fiscal year (ending on December 31, 

2014). The 10-K also stated that "[o]ur year over year revenue comparisons were 

impacted due to a significant amount of our revenue being derived from large 

commercial stocking distributors, whose timing of orders can vary from year to year." 

Id. ¶ 95. Finally, RTI represented in the 2015 10-K that its "internal control over 

financial reporting is effective." Id. ¶ 96. Yeretsian asserts that all of these statements 

were false and misleading because RTI's revenue recognition practice was improper 

and its internal controls were actually ineffective.

On April 28, 2016, RTI announced Q1 2016 financial results in a Form 8-K with 

the SEC. The form reflected an increase of 18 percent in international revenue 

compared to Q1 2015. That same day, RTI leaders—defendants Jordheim and 

Hutchison—held a conference call with investors and analysts. During the call, 

defendant Hutchison "we've seen revenue from our commercial [OEM] business ebb 

and flow from year-to-year, but trending to growth long-term." Id. ¶ 103. They also 

stated that the OEM business "has achieved compound average annual growth rate of 

7%." Id. RTI filed its Q1 2016 report on Form 10-Q; it was signed by defendants 

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Hutchison and Jordheim and stated that they "concluded that the design and operation 

of our disclosure controls and procedures were effective as of the end of the period 

covered by this report." Id. ¶ 108. Yeretsian contends that all of these statements were 

materially false and misleading.

Yeretsian's remaining allegations of RTI's false statements concern similar 

communications made to external stakeholders and in SEC forms submitted between 

2016 and 2019: RTI's quarterly and annual SEC filings (Form 8-K, Form 10-Q, and 

Form 10-K) and RTI management's communications to investors and analysts on 

quarterly earnings calls. Each filing with the SEC was signed by RTI's CEO and CFO. 

As explained previously, each individual defendant served as CEO or CFO at some 

point during or after the class period. Each of them is alleged to have signed at least 

one SEC filing reflecting RTI's financial results within the class period. Yeretsian also 

alleges that on quarterly earnings calls with investors and analysts, every individual 

defendant, at some point between 2016 and 2019, either made false statements about 

RTI's performance or misrepresented the effectiveness of the company's internal 

controls. Yeretsian contends that the defendants' alleged misrepresentations 

concerned RTI's "most critical segment": the OEM business. Am. Compl. ¶¶ 3, 50.

C. RTI prepares to sell OEM business 

On January 10, 2020, RTI promoted defendant Singer to COO and promoted 

Louw to CFO, contingent and effective upon RTI's proposed sale of its most profitable 

segment—the OEM business—which RTI reported had record results in Q2 2019. On 

January 13, 2020, RTI announced that it reached an agreement to sell its OEM 

business to a private equity firm. Upon the announcement of the deal, RTI shares 

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jumped over 63 percent. 

D. RTI announces investigation into revenue

recognition practices and related disclosures

On March 16, 2020, RTI issued a press release announcing that it could not file 

SEC Form 10-K for the fiscal year ending on December 31, 2019 because RTI's internal 

audit committee was investigating the company's revenue recognition practices. The 

press release stated, in relevant part: 

The Audit Committee . . . of the Company's Board of Directors, with the 

assistance of independent legal and forensic account advisors, is in the 

process of conducting an internal investigation of current and prior period 

matters relating to the Company's revenue recognition practices regarding 

the timing of revenue with respect to certain contractual arrangements, 

primarily with OEM customers, including the accounting treatment, 

financial reporting and internal controls related to such arrangements.

Am. Compl. ¶ 217. The press release also stated that the internal investigation "was 

precipitated by an ongoing SEC investigation related to the periods 2014 through 2016." 

Id. ¶ 218. Two days after the issuance of the press release, the per-share price of RTI

stock dropped by approximately 27.6 percent. Yeretsian alleges that less than three 

weeks before the March 16, 2020 disclosure, defendant Singer sold 11,450 shares, for 

a gain of approximately $44,444. Yeretsian further asserts that RTI's previous financial 

statements violated generally accepted accounting principles (GAAP). See id. ¶¶ 54-

58.

On March 20, 2020, RTI filed with the SEC a report on a Form 8-K, in which it 

stated that it was not in compliance with the timely filing requirement under the Nasdaq

exchange's listing rules. In that same report, RTI announced that defendant Louw, who 

had recently been promoted to CFO, would no longer be employed at RTI as of April 8, 

2020. The next trading day, the price of RTI's shares fell again, by 19.6 percent.

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On March 30, 2020, RTI announced that it had received a letter stating that it had 

breached the purchase agreement for the OEM sale by failing to file a proxy statement 

with the SEC. In that same report, RTI announced that it was postponing both its 

annual shareholder meeting and a special shareholder meeting; the latter meeting had 

been set for shareholders to vote on various proposals necessary to close the OEM 

business sale. That day, the price of RTI's shares fell 11 percent.

On April 9, 2020, in an SEC Form 8-K filing, RTI disclosed that the internal audit 

committee concluded that the company had to restate the following financial statements 

to the SEC, which RTI had previously issued: annual statements for 2014, 2015, 2016, 

2017, and 2018, as well as quarterly statements for 2016, 2017, 2018, and the first 

three quarters of 2019. Further, RTI stated that

investors should no longer rely upon the Company's previously released 

financial statements as of and for the years ended December 31, 2018, 

2017, 2016, 2015, and 2014, and the reports on the financial statements 

and internal control over financial reporting of the Company's independent 

registered public accounting firm thereon; or the quarterly financial 

statements and other financial data released related to the Relevant 

Periods.

The Company has concluded that the revenue of certain invoices should 

have been recognized at a later date than when originally recognized. In 

response to binding purchase orders from certain OEM customers, goods 

were shipped and received before requested delivery dates and agreedupon delivery windows. In many instances, the OEM customers 

requested or approved the early shipments, but the Company has 

determined that on other occasions, the goods were delivered early 

without obtaining the customers' affirmative approval.

Am. Compl. ¶ 225. RTI also stated that it would "revise its financial statements to 

correct these errors and any others as it finalizes the Investigation." Id. 

On June 8, 2020, RTI filed an amended Form 10-K for 2018, in which it stated 

that revenue should have been recognized at a later date, it had delivered goods 

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without customer approval, and "[s]ome of those unapproved shipments were shipped 

by employees in order to generate additional revenue and resulted in shipments being 

pulled from a future quarter into an earlier quarter." Id. ¶ 226. RTI's amended Form 10-

K also included statements concerning "certain material weaknesses" in RTI's 

"disclosure controls and procedures." Id. ¶ 229. RTI also stated that "[w]e did not 

maintain an effective control environment" and that "[t]he tone from executive 

management was insufficient to create the proper environment for effective internal 

control over financial reporting." Id. That same day, RTI filed Form 10-K for 2019, in 

which it referenced these same errors regarding OEM business revenue. On June 29, 

2020, RTI filed a Q1 2020 report with the SEC, in which it reported the same revenue 

recognition errors. 

On March 23, 2020, plaintiff Lowry filed a complaint against RTI and senior 

management personnel alleging violations of federal securities laws. Several other 

similar lawsuits followed. On August 31, 2020, after her appointment as lead plaintiff,

Yeretsian filed a consolidated amended complaint. In count 1, Yeretsian alleges that 

the defendants violated section 10(b) of the Securities Exchange Act and SEC Rule 

10b-5. Specifically, she alleges that the misstatements RTI made during the class 

period—primarily concerning its OEM business—and later disclosed as erroneous were 

material. Further, she contends these statements were made by RTI and the individual 

defendants with scienter: intentionally, knowingly, or, at minimum, with deliberate 

recklessness. Yeretsian alleges that these actions caused her and the class members

economic loss because the price of RTI common stock they purchased was artificially 

inflated, and its value declined significantly when RTI made its corrective disclosures. 

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Accordingly, Yeretsian and the other members of the class assert that that the 

defendants are liable to the putative class for damages.

In count 2 of the amended complaint, Yeretsian alleges—based on the same 

factual allegations—that each of the individual defendants, as RTI corporate officers in 

positions of control and authority during the class period, are liable under section 20(a) 

of the Securities Exchange Act on the ground that they were "controlling persons" of 

RTI within the meaning of the Act.

Discussion

The defendants have moved to dismiss Yeretsian's claims under Federal Rule of 

Civil Procedure 12(b)(6) for failure to state a claim and for failure to plead fraud with 

particularity under Rule 9(b) and the Private Securities Litigation Reform Act of 1995 

(PSLRA), 15 U.S.C. § 78u-4(b)(1). In deciding a motion to dismiss for failure to state a 

claim, the Court must accept as true all well-pleaded factual allegations in the complaint 

and must draw all reasonable inferences in the plaintiff's favor. NewSpin Sports, LLC v. 

Arrow Elecs., Inc., 910 F.3d 293, 299 (7th Cir. 2019). To survive a motion to dismiss for 

failure to state a claim, the plaintiff must allege facts sufficient for a court to draw a 

plausible inference that the defendant is liable for the alleged misconduct. Ashcroft v. 

Iqbal, 556 U.S. 662, 678 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).

Both of Yeretsian's claims against the defendants are based on fraud and are 

therefore subject to heightened pleading standards. Rule 9(b) requires a plaintiff to 

allege "with particularity" the circumstances that constitute fraud, which is the "who, 

what, when, where, and how" of the deceptive conduct. United States ex rel. Presser v. 

Acacia Mental Health Clinic, LLC, 836 F.3d 770, 776 (7th Cir. 2016). This standard 

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requires a plaintiff to allege fraud with precision and "some measure of substantiation." 

Id. (internal quotations omitted). Yeretsian's section 10(b) claim must also meet the 

more stringent standard set forth in the PSLRA, which requires a plaintiff to plead with 

particularity:

each statement alleged to have been misleading, the reason or reasons 

why the statement is misleading, and the basis for the belief that the 

defendants' statements were misleading, and, if an allegation regarding 

the statement or omission is based on information and belief, the 

complaint shall state with particularity all facts on which that belief is 

formed.

15 U.S.C. § 78u-4(b)(1)(B); Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588, 

594 (7th Cir. 2006), vacated and remanded on other grounds, 551 U.S. 308 (2007). 

And unlike Rule 9(b), the PSLRA also requires plaintiffs to "state with particularity facts 

giving rise to a strong inference that the defendant acted with the requisite state of 

mind." 15 U.S.C. § 78u-4(b)(2)(A).

The defendants argue that Yeretsian has failed to allege facts sufficient under 

these standards to support any of their fraud claims. The elements of a claim under 

section 10(b) and SEC Rule 10b-5 are: (1) a material misrepresentation or omission by 

the defendant; (2) scienter; (3) a connection between the misrepresentation or omission 

and the purchase or sale of a security; (4) justifiable reliance by the plaintiff; (5) 

economic loss; and (6) loss causation. Pension Tr. Fund for Operating Eng'rs v. Kohl's 

Corp., 895 F.3d 933, 936 (7th Cir. 2018) (quoting Pugh v. Tribune Co., 521 F.3d 686, 

693 (7th Cir. 2008)). Specifically, the defendants contend that Yeretsian has not 

adequately alleged two elements of her securities fraud claim: material 

misrepresentation and scienter. The individual defendants have also moved to dismiss 

Yeretsian's section 20(a) claim. They contend that because there is no primary violation 

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under section 10(b) of the Securities Exchange Act, there can be no control person 

liability under section 20(a). See Pugh, 521 F.3d at 693.

A. Section 10(b) claim

1. Material misstatements

"To satisfy the material misrepresentation element of a § 10(b) claim, a plaintiff

must allege that the defendant made a statement that was 'misleading as to a material 

fact.'" In re Akorn, Inc. Sec. Litig., 240 F. Supp. 3d 802, 814 (N.D. Ill. 2017) (quoting 

Basic Inc. v. Levinson, 485 U.S. 224, 238 (1988)). "A misrepresentation is material if a 

reasonable investor would view it as significantly alter[ing] the total mix of information 

available and important to deciding whether to buy or sell a security." Twin Master 

Fund, Ltd. v. Akorn, Inc., No. 19 C 3648, 2020 WL 564222, at *5 (N.D. Ill. Feb. 5, 2020) 

(Kennelly, J) (citing Appert v. Morgan Stanley Dean Witter, Inc., 673 F.3d 609, 616 (7th 

Cir. 2012)).

The defendants contend that Yeretsian has not adequately alleged material 

misstatements. They argue that the original reports were not materially false because 

the restatement increased RTI's reported revenue for certain financial periods and

otherwise had an "insignificant overall quantitative effect on the Company's key 

metrics." RTI's Mem. in Support of Mot. to Dismiss at 25 n.56 (dkt. no. 60); 

Hutchinson's Mem. in Support of Mot. to Dismiss at 8-9 (dkt. no. 67). Defendants also 

contend that Yeretsian's allegations lack "specificity" about "how any particular early 

shipment, in any particular quarter, rendered a particular revenue figure false." 

Jordheim's Mem. in Support of Mot. to Dismiss at 8 (dkt. no. 63); see also RTI Mem. in 

Support of Mot. to Dismiss at 9-11. The defendants also assert that revenue smoothing 

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is not necessarily deceptive because a customer could return products that RTI shipped 

early. Hutchinson's Mem. at 5-6. Finally, the defendants contend that the Court should 

"discount" Yeretsian's allegations because they "rest[] exclusively on conclusory 

allegations" from confidential witnesses. RTI's Mem. at 10. 

The Court concludes Yeretsian has adequately alleged that the defendants made 

material misstatements. She alleges that RTI and its management reported inaccurate 

financial results to the SEC for at least five consecutive years; RTI's filings violated 

GAAP requirements; RTI was subject to an investigation by the SEC as well as an 

internal audit committee for its erroneous revenue recognition practices in the OEM 

business and ineffective internal controls; RTI's improper activities led it to resubmit five 

years' worth of financial reports. A company's restatement of previously reported 

financial results is likely enough by itself to show materiality. The reason for this is that 

under GAAP, previously-issued financial statements should be restated only to correct 

material accounting errors. See Akorn, 240 F. Supp. 3d at 816 (citing In re BISYS Sec. 

Litig., 397 F. Supp. 2d 430, 437 (S.D.N.Y. 2005); Roth v. OfficeMax, Inc., No. 05 C 236, 

2006 WL 2661009, at *4 (N.D. Ill. Sept. 13, 2006) ("Plaintiffs have adequately alleged 

that [the company's] statements [regarding its financial results] were false or misleading 

because the Company restated its financial results . . . ."). 

In addition, the fact that RTI's stock price dropped by a significant amount within one 

trading day of corrective disclosures tends to "confirm[] that [its] misstatements were 

material." Akorn, 240 F. Supp. 3d at 816; see also Ross v. Career Educ. Corp., No. 12 

C 276, 2012 WL 5363431, at *6 (N.D. Ill. Oct. 30, 2012) (concluding that "[t]he market's 

negative reaction further tends to show that defendants' alleged misstatements were 

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material") (Kennelly, J.); Anderson v. Abbott Labs., 140 F. Supp. 2d 894, 902 (N.D. Ill. 

2001) (observing that even "a little" reaction from the market may indicate materiality). 

Taken together, Yeretsian's allegations plausibly indicate "a substantial likelihood" that 

RTI's disclosures were "viewed by the reasonable investor as having significantly 

altered the total mix of information made available." Matrixx Initiatives, Inc. v. 

Siracusano, 563 U.S. 27, 38 (2011) (discussing the materiality requirement) (internal 

quotation marks omitted). At the pleading stage, Yeretsian's allegations are sufficient; 

the defendants' alleged misstatements about RTI's financial results between 2015 and 

2019—in SEC filings of Form 8-K, Form 10-K, and Form 10-Q, as well as quarterly 

earnings calls—"qualify as material misrepresentations." Id.

2. Scienter

The defendants also argue that Yeretsian has not adequately alleged that each 

of them had the requisite mental state. For a section 10(b) claim, scienter is 

"knowledge of the statement's falsity or reckless disregard of a substantial risk that the 

statement is false." Pugh, 521 F.3d at 693; Makor Issues & Rights, Ltd. v. Tellabs Inc., 

513 F.3d 702, 704-05 (7th Cir. 2008) ("Tellabs III"). Under the PSLRA's stringent 

pleading standard, the plaintiff's allegations must support "a strong inference" of 

scienter. 15 U.S.C. § 78u-4(b)(2)(A). In the Seventh Circuit, "[p]leading 'collective 

scienter' for a group of defendants does not meet the PSLRA's particularity standard, 

and a plaintiff must plead a defendant's scienter as to each statement or omission 

underly a section 10(b) claim.'" Twin Master Fund, Ltd., 2020 WL 564222, at *13 

(quoting Cornielsen v. Infinium Capital Mgmt., LLC, 916 F.3d 589, 600 (7th Cir. 2019)). 

Yeretsian advances several arguments in support of her contention that she has

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adequately alleged facts giving rise to a strong inference of the defendants' scienter. 

Pl.'s Resp. Mem. at 23-40. Her factual allegations indicate that it was RTI's 

management—including each of the individual defendants—who, as corporate officers, 

"acted, at a minimum, recklessly" when they repeatedly asserted in SEC filings and on 

earnings calls between 2015 and 2019 that RTI's internal controls were effective during 

the class period, yet admitted in corrective disclosures issued in 2020 that these same 

controls were ineffective. Id. at 24. Yeretsian further contends that the "magnitude" and 

"sheer number of inaccurate financial reports filed by RTI"—five years' of inaccurate

reporting to the SEC, investors, and analysts—"is a robust indicator" of the defendants' 

recklessness. Id. at 27-28. Moreover, RTI openly admitted in corrective disclosures 

that it violated its own revenue recognition practice by shipping goods to customers 

early without their authorization. Id. at 29. Yeretsian also relies on plausibly reliable 

statements from confidential witnesses, including three former employees, each of 

whom appear to have personal knowledge of (1) it being "commonplace for RTI [to] ship 

orders early . . . so the Company could meet monthly and quarterly revenue targets" 

and (2) management's awareness, and perhaps encouragement, of "improper practices 

that led to the massive Restatement." Id. at 31. 

In reviewing the amended complaint, the Court finds that Yeretsian has included 

specific factual allegations plausibly implicating RTI's management—namely the 

individual defendants—as the key personnel responsible for designing and maintaining

RTI's internal controls; these same individuals later acknowledged RTI's internal control

deficiencies. Am. Compl. ¶ 247. Yeretsian has also alleged specific facts plausibly 

indicating that at least some of the individual defendants directed account managers to 

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ship products early (or were aware of and condoned this practice) and that each 

defendant signed SEC filings attesting to the accuracy of RTI's financial reports even 

though those reports were erroneous. See Am. Compl. ¶ 86 ("Jordheim told . . . RTI 

needed to book additional revenue before the end of the quarter"), ¶ 73 (Louw attended 

meeting where "practice of early shipping to RTI customers" was discussed), ¶ 75 

(confidential witness who reported to Hutchison and managed revenue confirmed that "it 

was commonplace for RTI to ship orders early to customers so the Company could 

meet monthly and quarterly revenue targets").

In response, the defendants urge this Court to dismiss the section 10(b) claim on

the ground that Yeretsian's factual allegations do not sufficiently indicate scienter. For 

instance, RTI contends that Yeretsian has not alleged "a cogent motive" for fraud. RTI's 

Mem. at 13-15. In particular, RTI and the individual defendants suggest that if the 

individual defendants wanted to commit fraud, they would have sold their RTI stock at 

"supposedly artificially inflated prices." Id. 

Next, RTI argues that the Court should disregard the confidential witnesses' 

statements because they do not "set forth individualized allegations as to the purported 

state of mind of each Defendant." Id. at 17 & n.35. The defendants challenge reliance 

on confidential witnesses because some were not employed during the class period or

are otherwise unreliable. RTI's Mem. at 17. RTI also asserts that "[t]he fact that RTI 

restated its financial statements and had to improve its internal controls does not, 

without more, support an inference . . . [of] scienter." Id. at 19. Finally, RTI contends 

that the factual allegations support a more compelling "non-culpable inference": 

"negligent oversight of overzealous accounting" or some other "breakdown lower in the 

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corporate hierarchy." Id. at 23-24 (quoting Kohl's Corp., 895 F.3d at 939, 941). The 

individual defendants offer similar arguments to support the contention that Yeretsian's 

factual allegations are insufficient to show scienter. See, e.g., Hutchinson's Mem. at 10-

11 (arguing that the scienter allegations lack specificity, are conclusory, and improperly 

rely on confidential witnesses); Jordheim's Mem. at 11-14; Louw's Mem. in Support of 

Mot. to Dismiss at 9-14 (dkt. no. 61).

The defendants' arguments are unsupported by the law and misconstrue 

Yeretsian's contentions. Her allegations are sufficient to give rise to a compelling 

inference of scienter regarding each individual defendant. First, as Yeretsian argues, 

she is not required to plead facts regarding the defendants' motive to commit fraud to 

establish scienter; a plaintiff need only plead facts indicating an "intent to deceive or 

reckless disregard for the truth." Costello v. Grundon, 651 F.3d 614, 634 (7th Cir. 

2011); Pl.'s Resp. Mem. at 37. Second, as Yeretsian points out, RTI's "clean audit" 

from an external accounting firm does not negate her factual allegations of scienter. 

Pl.'s Resp. Mem. at 30. Also, Yeretsian has alleged facts plausibly indicating that each 

of the individual defendants-- all of whom served as RTI's CEO, CFO, or other highlevel roles during the class period—was responsible for designing and supervising RTI's 

internal controls over financial reporting. See Akorn, 240 F. Supp. 2d at 819. 

For these reasons, the defendants' argument that Yeretsian's allegations 

improperly rely on group pleading, see Cornielsen, 916 F.3d at 600, lacks merit. The 

Seventh Circuit's analysis in Tellabs III is instructive: "it is possible to draw a strong 

inference of corporate scienter without being able to name the individuals who 

concocted and disseminated the fraud." Tellabs III, 513 F.3d at 710. In this case, 

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Yeretsian has not alleged that RTI's "management" or "each corporate officer" should 

be liable for securities fraud based merely on "group-published documents" like "annual 

reports and press releases." See id. Rather, Yeretsian has pleaded several facts 

indicating that each individual defendant repeatedly mischaracterized RTI's OEM 

business revenue to the SEC, investors, and analysts, condoned business practices 

that violated internal RTI policies, and directed individual employees and customers to 

engage in business activities in order to smooth RTI's revenue on a monthly and 

quarterly basis. Moreover, RTI admitted that the "tone from executive management" 

specifically prevented the company from exercising effective internal controls. Am. 

Compl. ¶ 229.

Further, statements from Yeretsian's confidential witnesses—former employees

whose work responsibilities made them aware of RTI's deficient internal controls—

include facts plausibly indicating that it was "commonplace" for RTI to flout its own 

revenue recognition policies during the class period and leading up to it. See id.; Pl.'s 

Resp. Mem. at 31; see Van Noppen, 136 F. Supp. 3d at 934-35 (if the plaintiff 

"describe[s] the witnesses with enough detail," the "Court can determine that the 

confidential witnesses have a foundation for their allegations"). 

In Tellabs III, the Seventh Circuit suggested that it is appropriate for courts to rely 

on statements from "confidential sources" who "consist of persons who from the 

description of their jobs [are] in a position to know at first hand the facts to which they 

are prepared to testify." Tellabs III, 513 F.3d at 712. In this case, Yeretsian's 

confidential witnesses—three former RTI employees and one RTI customer—each 

provide detailed, firsthand accounts of RTI's improper practices.

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In addition, "the nature and extent of Defendants' misrepresentations" regarding 

RTI's performance and internal controls makes "the inference of scienter even more 

reasonable." See Akorn, 240 F. Supp. 3d at 820. Each individual defendant in this

case was in a leadership position that made him privy to RTI's operations at the highest 

levels and accountable for RTI's internal business practices, especially with regard to its 

most important business segment that RTI, at a certain point, was preparing to sell. 

See Jones v. Corus Bankshares, Inc., 701 F. Supp. 2d 1014, 1029 (N.D. Ill. 2010) 

("[W]hile a court cannot presume scienter, a strong inference of scienter may still be 

credited where it is almost inconceivable that an individual defendant would be unaware 

of the matters at issue."). Moreover, each individual defendant signed his name on 

SEC filings—including Form 8-K, Form 10-Q, Form 10-K—containing misleading 

information about RTI's revenue. See Twin Master Fund, Ltd., 2020 WL 564222, at *13-

14 (concluding that "[t]he plaintiffs' allegations are . . . sufficient" in part because they 

are based on "allegedly fraudulent" information in "Forms 8-K and 10-Q" that that the 

defendant signed); see also SEC v. Sys. Software Assocs., Inc., 145 F. Supp. 2d 954, 

958 (N.D. Ill. 2001) (concluding that the SEC sufficiently alleged securities fraud against 

corporate officers based on inaccurate financial statements that they each signed).

The fact that each defendant attested to the accuracy of information in quarterly 

and annual SEC filings yet failed to even once detect a risk of erroneous financial 

reporting during the class period is more than sufficient at the pleading stage to indicate 

recklessness. SEC v. Fisher, No. 07 C 4483, 2012 WL 3757375, at *13 (N.D. Ill. Aug. 

28, 2012) ("[I]t is long settled that a magnitude of reporting errors lend weight to 

allegations of recklessness where defendants were in a position to detect the errors."). 

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Finally, the fact that the SEC and RTI's internal audit committee initiated an 

investigation into RTI's revenue recognition practices and internal controls "provides 

additional support for finding that scienter has been adequately pleaded." See Akorn, 

240 F. Supp. 3d at 820.

On these facts, "a reasonable person would deem the inference of scienter 

cogent and at least as compelling as any opposing inference one could draw from the 

facts alleged." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007) 

("Tellabs II"). Thus Yeretsian's allegations of the defendants' scienter satisfy the 

PSLRA's heightened pleading standard for the section 10(b) claim.

B. Section 20(a) claim

In count 2, Yeretsian alleges that the individual defendants—each of whom 

"participated in the operation and management of RTI"—knew, "[b]ecause of their 

senior positions," the "adverse non-public information about RTI's current financial 

position and future business prospects." Am. Compl. ¶ 279. Further, Yeretsian asserts 

that they each "acted as a controlling person of RTI," "had the power to direct the 

actions of [RTI]" and caused the company "to engage in the unlawful acts and conduct" 

described earlier in the complaint. Id. ¶ 282. Accordingly, Yeretsian contends, the 

individual defendants, each of whom was a "control person" of RTI during the class 

period, are liable under section 20(a) of the Securities Exchange Act. Id. ¶ 283.

The defendants do not present any meaningful argument to defeat Yeretsian's 

argument in support of control person liability under section 20(a) of the Securities 

Exchange Act. See, e.g., RTI's Mem. at 25 (one-sentence argument to dismiss section 

20(a) claim); Hutchinson's Mem. at 15 ("The complaint does not state a primary 

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securities violation for the time when Mr. Hutchinson could have been a control person . 

. . ."); Jordheim's Mem. at 15 ("Because the AC has not alleged any primary violation, 

the control person claim against Mr. Jordheim also should be dismissed."); Louw's 

Mem. at 15 n.5 (relegating argument requesting dismissal of section 20(a) claim to a 

footnote). In their opening briefs and reply briefs, the defendants summarily reject 

Yeretsian's contention that they are liable under section 20(a) on the basis that she 

failed to allege a plausible section 10(b) claim. But the Court has determined that 

Yeretsian has adequately alleged a section 10(b) claim and therefore survives the 

motions to dismiss. No defendant has advanced any other argument in support of 

dismissing count 2. The Court therefore denies all of their motions to dismiss the 

section 20(a) claim.

Conclusion

For the foregoing reasons, the Court denies the motions to dismiss submitted

collectively by defendants RTI, Farhat, and Singer [dkt. no. 59], defendant Hutchinson's 

motion to dismiss [dkt. no. 65], defendant Jordheim's motion to dismiss [dkt. no. 62], 

and defendant Louw's [dkt. no. 61] motion to dismiss. The defendants are directed to 

answer the amended complaint by no later than April 29, 2021. The parties are also 

directed to confer regarding a discovery and pretrial schedule to propose to the Court 

and are to submit a joint status report containing an agreed or separate proposals by no 

later than April 22, 2021. The Court also assumes that it may dismiss the related cases 

(Case Nos. 20 C 3464, 20 C 3347, and 20 C 3953) and directs the parties to address 

this point in the status report as well. The case is set for a telephonic status hearing on 

May 3, 2021 at 8:40 a.m., using call-in number 888-684-8852, access code 746-1053. 

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Counsel should wait for the case to be called before announcing themselves.

________________________________

MATTHEW F. KENNELLY

 United States District Judge

Date: April 1, 2021

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