Opinion ID: 217402
Heading Depth: 4
Heading Rank: 3

Heading: Plaintiffs' allegations support an inference of scienter when viewed holistically

Text: It is uncontested that Burns and Richter made false statements, such as those concerning positive projected earnings, the soundness of Dana's accounting systems, and Dana's ability to continue to prosper in light of the rising cost of materials because of cost efficiencies. The question before us is whether Plaintiffs have adequately alleged that they made those statements with scienter so as to survive a motion to dismiss. We conclude that Plaintiffs have adequately pleaded a strong inference of scienter when viewing the factors holistically. Burns and Richter ask us to infer that failed accounting systems are to blame here, and we find that inference plausible. However, the inference that Burns and Richter recklessly ignored the falsity of their external statements is at least as plausible as the faulty accounting inference. Burns and Richter were the top two executives of an auto parts manufacturer, and they reported gangbuster earnings during a period of time when the entire auto industry was spiraling toward bankruptcy. They filed these reports, made positive public statements, and asserted the veracity of their financials to government authorities all while one of their key product lines was operating at fifty percent of earnings, multiple factories failed to meet their budgets, and the price of steel rose seventy-five to 120 percent. It is difficult to grasp the thought that Burns and Richter really had no idea that Dana was on the road to bankruptcy. From the first public statement that Dana's earnings statements might be false, the company fell to its demise in a matter of nine months. Burns and Richter only appear more culpable when considering the loan obtained by Dana, which almost surely would have been denied if the company's true financial status was publicly reported, and the bonuses that Burns and Richter stood to earn. Accordingly, the inference that Burns and Richter recklessly disregarded the falsity of their extremely optimistic statements is at least as compelling to us as their excuse of failed accounting systems. Plaintiffs have adequately pleaded a strong inference of scienter. Cf. Matrixx Initiatives, Inc., 131 S.Ct. at 1324 (holding that plaintiffs alleged a strong inference when defendant issued a misleading press release suggesting its over-the-counter pharmaceutical product did not cause anosmia, defendant had not tested its product for anosmia, there was insufficient scientific evidence at the time to determine whether it caused anosmia, and defendant had informed an independent scientist that it had hired a consultant to review the product out of concern over anosmia, asked that scientist to participate in animal studies, prohibited another scientist from using the product's name when he presented a study showing that the product caused anosmia, and organized a a panel of physicians and scientists in response to [his] presentation); cf. also Miss. Pub. Emps.' Ret. Sys. v. Boston Scientific Corp., 523 F.3d 75, 79-80, 93 (1st Cir.2008) (holding that plaintiffs alleged a strong inference of scienter when defendant withheld information about its medical stent product, defendant had reports from Europe and the United States that a defect in the stent caused medical problems in patients, defendant corrected the defect in a new model and built up a reserve inventory of the corrected product rather than releasing it, there was a close temporal proximity between the statements and the third recall of the defective products, and there was alleged insider trading before the recalls).