Opinion ID: 4013501
Heading Depth: 3
Heading Rank: 1

Heading: Spirit’s July 2012 Recovery Plan

Text: According to the plaintiffs, Spirit adopted a “recovery plan” in July 2012 to put the Boeing 787 project back on schedule. The plaintiffs argue that the existence of this plan shows that Spirit executives knew that their 28 subsequent representations about the Boeing 787 project were false or misleading. Between implementing the recovery plan in July 2012 and announcing a forward loss on the Boeing 787 project in October 2012, Spirit executives issued multiple public statements on the status on the project. The plaintiffs argue that these statements in August and September 2012, summarized below, materially misrepresented the project’s progress: August 2, 2012  Spirit is “focused on continued reliability, capability, and teamwork to align the business for long-term value creation.”  Spirit continues to see progress as the Boeing and Spirit teams are focused on identifying and implementing improvements on cost and production for the Boeing 787 project.  Spirit continues to improve its unit-cost performance as planned. Appellants’ App’x, vol. I at 70-71. August 7, 2012  Spirit anticipates that it will continue to make efficiency gains on the Boeing 787 project. Id. at 73-74. September 12, 2012  Spirit is doing reasonably well in meeting the Boeing 787 plan.  The project plan for the Boeing 787 “looks okay.” Id. at 74. 29 September 13, 2012  Spirit is seeing improvement on all of the component parts for the Boeing 787 project.  Spirit continues to be optimistic that it can reduce marginal costs for the Boeing 787 project. Id. at 75. The plaintiffs argue that the Spirit executives knew that these statements were false or misleading because a recovery plan was already underway to bring the delivery schedule up to date with initial forecasts for the Boeing 787 project. Id. at 79. Spirit later reported that it had learned, when implementing the recovery plan, that future costs would increase dramatically if Spirit were to adhere to the required delivery schedule. We may assume, without deciding, that the statements in August and September 2012 were materially false or misleading. To infer scienter, however, we must compare the parties’ dual explanations for Spirit’s overly optimistic reports on the status of the Boeing 787 project. The plaintiffs attribute the statements to the executives’ recklessness or intent to mislead investors; the defendants attribute the statements to an honest belief that Spirit’s recovery plan would reduce costs and accelerate production. The plaintiffs provide little reason to question the executives’ explanation. 30 The eventual announcement of a forward loss suggests that Spirit had placed too much confidence in the recovery plan. But the same can always be said when a company delays announcement of a forward loss based on remedial efforts to increase profitability or production. We addressed an analogous issue in In re Zagg, Inc. Sec. Litig., 797 F.3d 1194 (10th Cir. 2015). There, a corporation allegedly failed to disclose that a chief executive officer had pledged approximately half of his shares in the corporation as collateral in a personal margin account. 797 F.3d at 1198-99. The chief executive officer was eventually forced to resign, and the corporation adopted a corrective policy restricting executives’ pledges of corporate shares. Id. at 1199. The plaintiffs argued that adoption of the policy showed that the corporation had a fraudulent intent. Id. at 1203, 1205. We rejected this argument, concluding that the new policy showed only that the corporation had “identified a better way of doing things moving forward.” Id. at 1205. In re Zagg is instructive. Spirit’s July 2012 recovery plan shows that Spirit identified an interim step to reduce costs and expedite production on the Boeing 787 project. The plaintiffs suggest that Spirit executives wanted to mislead investors. That is possible, but the plaintiffs’ theory presupposes that Spirit executives knew that the recovery plan could not accomplish the plan’s stated objectives. There is nothing in the complaint to support that logical leap. The stronger inference is that the Spirit 31 executives thought that they had “identified a better way of doing things.” Id. As a result, we regard the defendants’ “innocent inference” as more cogent and compelling than the plaintiffs’ “scienter inference.” B. The Chief Executive Officer’s Statements Explaining the Forward Loss After Spirit announced the forward loss, Spirit’s chief executive officer explained the forward loss on the three projects by stating that  the projects had progressed too slowly to meet initial cost targets,  project costs had exceeded initial forecasts, “particularly in [the] supply chain,”  the complexity in growth at Spirit’s Tulsa facility had contributed to increased costs,  Spirit had delayed implementation of some measures designed to reduce costs for the Boeing 787 project, and  cost-reduction efforts for the three projects had not met projections. Appellants’ App’x, vol. I at 81-82. The chief executive officer added that  he had underestimated the “organizational learning” necessary for Spirit to meet initial projections of the projects’ learning curves,  Spirit could not meet cost projections for some of the projects, and  Spirit had incurred extra costs because of production delays for required component parts on the Boeing 787 project. Id. at 81-83. 32 The plaintiffs argue that these statements show that Spirit recklessly ignored production delays and cost overruns. This argument is not supported by what the chief executive officer said. He acknowledged that Spirit had mistakenly projected Spirit’s ability to improve efficiency and that Spirit ultimately learned that it could not meet projections. But the chief executive officer did not suggest that Spirit executives had knowingly or recklessly misevaluated earlier data. His statements simply show that Spirit ultimately learned that it could not meet the company’s forecasts. The plaintiffs allege that  a disconnect existed between the chief executive officer’s statements on August 7, 2012, and Spirit’s forward-loss announcement on October 25, 2012, and  this disconnect showed an intent to deceive investors. On August 7, 2012, the chief executive officer stated that Spirit was meeting its cost estimates for the Boeing 787 project and would continue to do so. Id. at 73-74. Over two months later, Spirit announced a forward loss on the Boeing 787 project, and the chief executive officer acknowledged that (1) Spirit could no longer meet its cost estimates and (2) Spirit had recently fallen behind on production for the wing components on the Boeing 787 project. Id. at 80-82. The plaintiffs argue that the October acknowledgments prove that the August prediction had been designed to mislead investors. We disagree: 33 The statements were made over two months apart, and the complaint does not allege that the chief executive officer was aware in August 2012 that Spirit was not meeting its cost estimates. See La. Sch. Emps.’ Ret. Sys. v. Ernst & Young, LLP, 622 F.3d 471, 484-85 (6th Cir. 2010) (holding that statements made after the end of the class period, recognizing that “there was a problem,” did not contribute to an inference of scienter because the statements did not provide a sufficient basis to assume that the defendant had known that events would turn out badly simply because they eventually did). In our view, the chief executive officer’s statements suggest an honest mistake in predicting Spirit’s future production and costs, not an inference of scienter. C. Spirit’s Disclosures of Risks Throughout the class period, Spirit warned investors about risks from the three projects: November 2011  Spirit’s 10-Q for the quarter ending September 29, 2011, stated that the three projects posed a significant risk of forward-loss charges based on cost pressures throughout 2011. Spirit explained that the next twelve to eighteen months would be critical, with a significant risk of forward-loss charges. February 2012  Spirit’s 10-K for the fiscal year ending December 31, 2011, acknowledged a significant risk of forward-loss 34 charges, which depended on Spirit’s market forecast, ability to perform, achievement of forecasted cost reductions, and ability to successfully resolve claims.  Spirit’s chief executive officer reported that the “production side” of one Gulfstream project was “disturbed” and “over the cost forecast.” May 2012  Spirit’s 10-Q for the quarter ending on March 29, 2012, stated that the three projects posed a risk of forward-loss charges based on existing cost pressures. Spirit explained that the next year would again be critical, with a significant risk that Spirit would need to recognize forward-losses. August 2012  Spirit’s 10-Q for the quarter ending on June 28, 2012, stated that the three projects “continue[d] to pose a risk of additional charges [or] forward-loss.”  Spirit’s chief executive officer stated that the Gulfstream projects were “risky.” The plaintiffs argue that these warnings suggest a culpable mental state because the four executives must have known that the risks had already materialized: “the more a defendant speaks about a topic, the likelier it is that [the defendant] knows about the topic.” Appellants’ Opening Br. at 65. We disagree. Ordinarily, a defendant’s warnings weaken an inference of scienter. Ezra Charitable Tr. v. Tyco Int’l, Ltd., 466 F.3d 1, 8 (1st Cir. 2006). The plaintiffs argue the opposite, relying solely on Reese v. Malone, 747 F.3d 557 (9th Cir. 2014). In Reese, a group of shareholders sued BP for 35 securities fraud after one of BP’s pipelines leaked 200,000 gallons of oil onto the Alaskan tundra. Id. at 563. The plaintiffs alleged that BP had made false and misleading statements about company practices in an annual report post-dating the spill. Id. The Ninth Circuit Court of Appeals held that the plaintiffs’ allegations of scienter were sufficient, in part because the attention given to the spill in the annual report underscored the importance of the oil spill to BP management. Id. at 579-80. But the court did not suggest that the mere existence of warnings established knowledge by BP management that the statements were untrue. Instead, the court inferred that the company knew that the statements were untrue because (1) BP was not in compliance when publishing the false report and (2) the spill had been prominently discussed in the report. Id. Throughout the class period, Spirit was working on multiple projects and warned of the risks that many of them posed. For example, during the class period, Spirit warned about a significant risk of additional forwardloss charges on the Sikorsky CH-53K helicopter project and a possibility of significant cost growth and technical problems for the Airbus A350 XWB project. These warnings would not have suggested that the Sikorsky or Airbus projects were particularly important to Spirit executives or that Spirit executives knew that the risks on these programs were certain to result in a forward loss. Instead, the warnings simply reflected an awareness of risks that led Spirit to discuss the risks in its public filings. 36 The same is true of the filings expressing potential risks for the Gulfstream and Boeing projects involved here. D. Alleged Accounting Violations The plaintiffs argue that Spirit violated generally accepted accounting principles and internal accounting policies by delaying announcement of the forward loss. We disagree, for this argument is simply another variation of “fraud by hindsight.” Even if we assume that Spirit had violated established accounting principles or internal policies, these violations would not have been enough to state a valid cause of action. City of Philadelphia v. Fleming Cos., 264 F.3d 1245, 1261 (10th Cir. 2001). “Only where such allegations are coupled with evidence that the violations or irregularities were the result of the defendant’s fraudulent intent to mislead investors may they be sufficient to state a claim.” Id. No such evidence exists here, and the plaintiffs do not identify particularized facts showing that the Spirit executives had known, before Spirit publicly announced the forward loss, that the three projects would fall behind forecasts on cost or production. The defendants’ purported accounting violations are based on “fraud by hindsight”; and even if we assume the existence of accounting violations, the plaintiffs have not alleged facts indicating the executives’ knowledge, fraudulent intent, or recklessness. 37 E. The Magnitude of the Forward Loss In October 2012, Spirit announced a forward loss of $434.6 million on the three projects. 15 The plaintiffs argue that because the forward loss was so large, the executives must have known long before October 2012 that Spirit would incur a loss. But this argument relies on hindsight review based on the size of Spirit’s eventual loss and does not include particularized allegations that the four executives knew before October 2012 that Spirit would lose money on the three projects. The loss of $434.6 million was undoubtedly significant. And the three projects were presumably large enough to capture the attention of the four Spirit executives. No one suggests otherwise. For scienter, however, the question is whether these executives (1) had known that their public disclosures were too encouraging or (2) had recklessly failed to heed red flags from potentially problematic reports. The size of the loss does not suggest that the four executives knew or recklessly disregarded the risks that Spirit was eventually going to lose money on the three projects.