Opinion ID: 217402
Heading Depth: 4
Heading Rank: 1

Heading: Plaintiffs' allegations supporting an inference of scienter

Text: Plaintiffs claim that Burns and Richter received internal reports and information showing that Dana was under financial distress, yet they continually made false, positive statements regarding Dana's financial health. They allege that several internal reports and meetings should have informed Burns and Richter that their statements were false. First, they point to tracker reports that were compiled daily and weekly by accountants at each of Dana's factories and detailed sales, cost of materials, and inventory. These reports showed that some of Dana's factories were not meeting their budgets. Additionally, in order to meet the required mark of six percent growth, some factory-level accountants falsified these tracker reports. Next, these reports were consolidated into production reports every month and sent to various controllers at Dana headquarters. Then, these production reports were the subject of weekly meetings conducted by Richter. Second, Plaintiffs refer to financial and operational reports, which Richter helped prepare for monthly and annual meetings, listing total revenues, total inventory, total returns on sales, variances in forecasted versus actual income, and earnings growth. Third, Plaintiffs claim that quarterly SAD reports showed the variances in the projected and actual performances of Dana's factories. These reports were also sent to controllers at headquarters, with whom Richter met regularly. Fourth, Plaintiffs cite the failing drive shaft division, for which earnings were down fifty percent. Along with the rising cost of steel and fuel and other distressed product divisions, Plaintiffs assert that these conditions should have alerted Burns and Richter that their extremely positive earnings statements were incorrect. Finally, Plaintiffs point to Burns's and Richter's positions as chief executive officer and chief financial officer respectively as evidence that they had access to accounting systems and internal information that were contrary to their positive external statements.
Plaintiffs find fault with Burns's statements that he and Richter had evaluated Dana's accounting systems and found them to be sound, and that he and Richter were receiving direct reports of accounting information, when the accounting systems were actually functioning improperly.
Plaintiffs argue that the size of Dana's false accounting statements adds to the inference of scienter when viewed with the other factors. Dana amended its financial statements to account for a loss of $44 million and eventually had to reduce its tax-deferred assets by $918 million. The company overstated its net income for the first quarter of 2004 by twelve percent, the second quarter of 2004 by ten percent, the fourth quarter of 2004 by 3.6 percent, the first quarter of 2005 by 12.5 percent, and the second quarter of 2005 by seventy percent.
Plaintiffs claim that Burns and Richter were reckless in making their false statements because the statements were quickly followed by contrary company announcements. Up until September 15, 2005, Burns's and Richter's statements regarding Dana and its financial performance had been positive. On September 15, however, Burns and Richter announced that Dana would be reducing its earnings projections by fifty percent, likely restating its financial statements for the second quarter of 2005, and possibly writing down tax-deferred assets. Other similarly negative announcements followed until March 3, 2006, when Dana filed for bankruptcy.
Plaintiffs claim that Burns and Richter were motivated by bonuses and job security to make Dana appear to be financially healthy when it was not. More specifically, Plaintiffs claim that Burns and Richter stood to gain millions in bonuses that were directly tied to reported net income and earnings, and that Dana was able to use positive earnings projections to obtain loans imperative for its survival.
Plaintiffs argue that Richter's retirement from Dana supports a strong inference of scienter because it occurred within months of the time that Dana first discovered its accounting errors and at the same time as Dana's bankruptcy filing.
Plaintiffs argue that Burns and Richter signing Sarbanes-Oxley certifications that accompanied Dana's false financial filings supports a strong inference of scienter.
Plaintiffs claim that the investigation into Dana's accounting practices by the Securities and Exchange Commission supports a strong inference of scienter.