Court Opinion

ID: 619972
Source: CourtListenerOpinion
Date Created: 2011-12-29 15:24:23+00
Date Added: 2024-06-11T17:50:50.356504
License: Public Domain

10-4702-cv
New Orleans Emps. Retirement Sys. v. Celestica, Inc.

                                  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 Circuit, held
at the Daniel Patrick Moynihan United States Courthouse, 500 Pearl Street, in the City of
New York, on the 29th day of December, two thousand eleven.

PRESENT: GUIDO CALABRESI,
         REENA RAGGI,
         RAYMOND J. LOHIER, JR.,
                  Circuit Judges.

-------------------------------------------------------------------------------------
THE NEW ORLEANS EMPLOYEES RETIREMENT
SYSTEM, MILLWRIGHT REGIONAL COUNCIL OF
ONTARIO PENSION TRUST FUND, CARPENTER’S
LOCAL 27 BENEFIT TRUST FUND, THE DRY WALL
ACOUSTIC LATHING AND INSULATION LOCAL 675
PENSION FUND,
                    Movants-Appellants,

                                v.                                                      No. 10-4702-cv

CELESTICA, INC., STEPHEN W. DELANEY,
ANTHONY P. PUPPI,
                   Defendants-Appellees,

CHAIRMAN GERALD W. SCHWARTZ, and CHIEF
ADMINISTRATOR OF ONEX CORPORATION, ONEX
CORPORATION,
                   Defendants,

RUSSELL HENNING, individually and all others
similarly situated, SHERRY SAYOR, PENSION FUND
GROUP,
                          Plaintiffs.
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APPEARING FOR APPELLANTS: JOSEPH FONTI (Stephen William Tountas, on the brief),
                          Labaton Sucharow LLP, New York, New York.

APPEARING FOR APPELLEES:                             PHILLIP A. GERACI (Frederic W. Yerman, on
                                                     the brief, Robert Grass, Michael S. Bullerman,
                                                     Aaron F. Miner, of counsel), Kaye Scholer LLP,
                                                     New York, New York.

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

of New York (George B. Daniels, Judge).

        UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND

DECREED that the judgment entered on October 19, 2010, is REVERSED and the case is

REMANDED for further proceedings consistent with this order.

        Plaintiffs, the New Orleans Employees Retirement System, Millwright Regional

Council of Ontario Pension Trust Fund, Carpenter’s Local 27 Benefit Trust Fund, and the

Dry Wall Acoustic Lathing and Insulation Local 675 Pension Fund, appeal the dismissal of

their putative consolidated class action complaint against defendants Celestica, Inc., Stephen

W. Delaney, and Anthony P. Puppi.1 See Fed. R. Civ. P. 12(b)(6). We review the grant of

a motion to dismiss de novo, accepting all well-pleaded, non-conclusory allegations in the

complaint as true and drawing all reasonable inferences in plaintiffs’ favor. See SEC v.

        1
           Plaintiffs do not appeal the district court’s dismissal of their claims against
defendants Gerald W. Schwartz and Onex Corporation. We, therefore, do not discuss
plaintiffs’ claims against those defendants.

                                                         2
Gabelli, 653 F.3d 49, 57 (2d Cir. 2011). To survive a motion to dismiss, plaintiffs must

allege sufficient facts to state a claim for relief that is plausible on its face, which means that

plaintiffs must plead “factual content that allows the court to draw the reasonable inference

that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 129

S. Ct. 1937, 1949 (2009). We assume the parties’ familiarity with the facts and record of

prior proceedings, which we reference only as necessary to explain our decision to reverse

and remand.

1.     Scienter

       Plaintiffs contend that the district court erred in dismissing their complaint for failure

to plead the requisite scienter to establish defendants’ liability under § 10(b) of the Securities

Exchange Act of 1934, see 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, see

17 C.F.R. § 240.10b-5(b).2 See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308,

319 (2007). We agree.

       Under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Pub. L. No.

104-67, 109 Stat. 737, plaintiffs alleging securities fraud must “state with particularity facts

       2
           Plaintiffs also pleaded control person liability under § 20(a) of the Securities
Exchange Act of 1934 against Delaney and Puppi. See 15 U.S.C. § 78t. Because that claim
is derivative of plaintiffs’ § 10(b) claim, we do not discuss it separately. We note, however,
that plaintiffs have pleaded with particularity that Delaney and Puppi were culpable
participants in the alleged fraud because they personally executed and oversaw Celestica’s
restructuring, were informed of the resulting inventory buildup, and made misstatements to
the public regarding the company’s inventory management. See SEC v. First Jersey Sec.,
Inc., 101 F.3d 1450, 1472–73 (2d Cir. 1996) (setting forth elements of § 20(a) control person
claim).

                                                3
giving rise to a strong inference that the defendant acted with the required state of mind,” 15

U.S.C. § 78u-4(b)(2)(A) (emphasis added), i.e., knowingly or with reckless disregard of the

truth, see S. Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98, 109 (2d Cir. 2009). In

deciding whether plaintiffs satisfied this requirement, we assess whether “all of the facts

alleged, taken collectively,” permit an inference of scienter that is “more than merely

‘reasonable’ or ‘permissible,’” but also “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.

at 323–24.

       Plaintiffs submit that they pleaded with particularity circumstantial allegations giving

rise to a strong inference that Delaney, Celestica’s chief executive officer, and Puppi,

Celestica’s chief financial officer, knowingly or recklessly gave public statements about

Celestica’s financial performance and restructuring progress that were at odds with the

company’s actual condition.       In particular, Delaney and Puppi allegedly recklessly

misrepresented the rising volume of unsold inventory in Celestica’s North American

facilities. See ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007)

(holding that plaintiffs may meet PSLRA’s standard for scienter “by alleging facts . . .

constituting strong circumstantial evidence of conscious misbehavior or recklessness”); see

also ECA & Local 134 IBEW Joint Pension Trust of Chi. v. JP Morgan Chase Co., 553 F.3d

187, 198–99 (2d Cir. 2009) (holding that if plaintiffs cannot show defendants had motive and

opportunity to commit fraud, they can “raise a strong inference of scienter under the strong

                                              4
circumstantial evidence prong, though the strength of the circumstantial allegations must be

correspondingly greater if there is no motive” (internal quotation marks omitted)). Plaintiffs

rely on statements by former Celestica employees who occupied positions in the company

that afforded them direct knowledge of Celestica’s inventory buildup during the class period.

Three of those confidential witnesses—Celestica’s former Business Development Director

(“CW1”); former Director of Operations for the Austin, Texas facility (“CW2”); and former

General Manager of the Monterrey, Mexico facility (“CW3”)—either provided information

about rising inventory levels to Delaney and Puppi directly or participated in meetings where

they heard Delaney and Puppi informed by others about the company’s inventory

management problems. According to the complaint, these confidential witnesses:

       . . . participated in a ‘monthly operational review’ conference call with
       Celestica’s senior management, including [Celestica President of the Americas
       Michael] Homer (who reported directly to Delaney), wherein defendants,
       senior management, and plant managers discussed all of the operational
       metrics for their facilities.

       In particular, CW2 recalls that these detailed discussions often concerned
       levels of obsolete inventory, problems affecting sales, profit and loss margins,
       customer satisfaction, and on-time deliveries. Indeed, CW3, who participated
       in these monthly calls in order to relay the inventory crisis at [Celestica’s]
       Monterrey[, Mexico facility], prepared spreadsheets for senior
       management—including Delaney and Puppi—detailing the extent of excess
       and obsolete inventory in Monterrey.

Compl. ¶¶ 84–85; see also id. ¶ 126 (confirming that Delaney and Puppi “personally

participated” in those operations conference calls).

                                              5
       Although the witnesses are not identified by name in the complaint, plaintiffs’

descriptions of these persons are sufficiently particular to permit the strong inference of

scienter necessary for plaintiffs to sustain their burden on a motion to dismiss. See Novak

v. Kasaks, 216 F.3d 300, 314 (2d Cir. 2000) (“[E]ven if personal sources must be identified,

there is no requirement that they be named, provided they are described in the complaint with

sufficient particularity to support the probability that a person in the position occupied by the

source would possess the information alleged.”); see also Makor Issues & Rights, Ltd. v.

Tellabs Inc., 513 F.3d 702, 712 (7th Cir. 2008) (“[T]he absence of proper names does not

invalidate the drawing of a strong inference from informants’ assertions.”); accord

Institutional Investors Grp. v. Avaya, Inc., 564 F.3d 242, 262–63 (3d Cir. 2009) (confirming

that, after Supreme Court’s Tellabs decision, plaintiffs may rely on confidential witnesses

to establish defendants’ scienter for § 10(b) claims). Further, even if plaintiffs could have

described the content of the spreadsheets that CW3 created for Delaney and Puppi in more

detail, they provided sufficient facts as to who prepared the spreadsheets, how frequently

they were prepared, who reviewed them, and the issues they addressed to satisfy the

particularity requirement of the PSLRA. See In re Scholastic Corp. Sec. Litig., 252 F.3d 63,

73 (2d Cir. 2001).

       That Delaney and Puppi were informed about the inventory buildup and the subpar

inventory management in Celestica’s North American facilities is consistent with plaintiffs’

theory of the underlying fraud. According to plaintiffs, Celestica’s restructuring plan

                                               6
provided for the transfer of Celestica’s North American sites from the United States to

Mexico. See Compl. ¶¶ 2, 63–64, 118. Delaney and Puppi ordered and executed the

restructuring, and Michael Homer, Director of Celestica’s North American operations,

monitored the restructuring and reported its progress to Delaney. See id. ¶¶ 120–24.

Moreover, Delaney and Puppi had reason to focus on Celestica’s inventory levels: inventory,

especially when taken in relation to the company’s overall sales, was key to measuring

Celestica’s financial performance and was a subject about which investors and analysts often

inquired. See id. ¶¶ 70–72, 213, 231, 253–55, 258. Thus, the complaint not only alleges that

Delaney and Puppi received information about the inventory buildup in Celestica’s North

American plants, but also explains why Delaney and Puppi would have been alert to

information concerning increases in the company’s unsold inventory, a fact that reinforces

the inference of scienter. See In re Scholastic Corp. Sec. Litig., 252 F.3d at 76–77 (stating

that pleaded facts establishing significance of inventory levels to company’s financial

performance supported allegation that defendants acted recklessly when they failed publicly

to acknowledge company’s decreased sales and increased returns).3

       3
         Because we conclude that plaintiffs have adequately pleaded scienter on the basis
of the confidential witnesses’ statements, we need not address defendants’ arguments that
plaintiffs’ allegations regarding Celestica’s core operations, violations of generally accepted
accounting principles (“GAAP”), and public admission of its inventory buildup immediately
following Delaney’s and Puppi’s departures from the company are insufficient by themselves
to establish scienter. Both parties, however, appear to agree that allegations of a company’s
core operations, GAAP violations, and removal of its executives can provide supplemental
support for allegations of scienter, even if they cannot establish scienter independently. That
view finds support in decisions by this court and district courts within this circuit. See, e.g.,

                                               7
       These allegations give rise to an inference of Delaney and Puppi’s scienter that is at

least as strong as the competing inferences that could be drawn. See Tellabs, Inc. v. Makor

Issues & Rights, Ltd., 551 U.S. at 324. As this court has reminded litigants, “[e]ven with the

heightened pleading standard under Rule 9(b) and the Securities Reform Act we do not

require the pleading of detailed evidentiary matter in securities litigation.” In re Scholastic

Corp. Sec. Litig., 252 F.3d at 72. Here, the particular allegations that Delaney and Puppi

were specifically informed, and had reason to know, of the growing inventory stockpile in

Celestica’s Mexican and American facilities are sufficient to establish the individual

defendants’ scienter. Moreover, those allegations are sufficient to establish corporate

scienter on behalf of Celestica.4 See Teamsters Local 445 Freight Div. Pension Fund v.

Dynex Capital, Inc., 531 F.3d 190, 195 (2d Cir. 2008) (“In most cases, the most

straightforward way to raise such an inference for a corporate defendant will be to plead it

for an individual defendant.”).

Novak v. Kasaks, 216 F.3d at 309 (stating that allegations of GAAP violations must be
“coupled with evidence of corresponding fraudulent intent” to establish scienter (internal
quotation marks omitted)); In re Wachovia Equity Sec. Litig., 753 F. Supp. 2d 326, 353
(S.D.N.Y. 2011) (considering “‘core operations’ allegations to constitute supplementary but
not independently sufficient means to plead scienter”); In re Vivendi Universal, S.A. Sec.
Litig., 381 F. Supp. 2d 158, 176–77 (S.D.N.Y. 2003) (accepting that inference of scienter
could be drawn from, among other sources, company’s recording of loss immediately
following executives’ departures).
       4
         Because we conclude that plaintiffs have alleged corporate scienter by adequately
pleading Delaney and Puppi’s individual scienter, we do not decide whether the complaint
sufficiently alleges corporate scienter independent of the individual defendants’ mental states
or whether that issue has been preserved for appellate review.

                                              8
2.     Safe Harbor

       In further support of dismissal, defendants invoke the PSLRA’s “safe harbor,” which

shields a person from liability “with respect to any forward-looking statement . . . [that is]

identified as a forward-looking statement, and is accompanied by meaningful cautionary

statements identifying important factors that could cause actual results to differ materially

from those in the forward-looking statement.” 15 U.S.C. § 78u-5(c)(1)(A)(i). We are not

persuaded.

       Although some of defendants’ statements were forward-looking, others reported on

past or present circumstances. Specifically, defendants are alleged to have represented

repeatedly that the restructuring was going according to plan or, if not, was slowed because

of problems unrelated to inventory management. See Compl. ¶¶ 211, 236, 246. Moreover,

when asked directly about the company’s inventory levels, defendants responded either that

Celestica was managing its inventory well or that any inventory problems were aberrations.

See id. ¶¶ 213, 231, 254, 258. In sum, defendants “did more than just offer rosy predictions”;

they allegedly stated that present inventory was under control or omitted it as a contributor

to the company’s costs, despite recklessly disregarding that the opposite was true. Novak v.

Kasaks, 216 F.3d at 315. Thus, defendants’ cannot obtain dismissal under the PSLRA safe

harbor.

                                              9
3.     Materiality

       Defendants contend that any purported misstatements were immaterial because the

inventory buildup, which resulted in an eventual $30 million writeoff of inventory at the

Monterrey plant, see Compl. ¶ 266, and an additional $60 to $80 million in restructuring

charges, see id. ¶ 269, were minuscule in comparison to Celestica’s global assets and annual

revenues. An omitted fact is “material” for purposes of § 10(b) if there is a “substantial

likelihood” that its disclosure “would have been viewed by the reasonable investor as having

significantly altered the total mix of information made available.” Matrixx Initiatives, Inc.

v. Siracusano, 131 S. Ct. 1309, 1318 (2011) (internal quotation marks omitted).

Misstatements of income, such as Celestica’s net earnings statements based on incorrect

inventory valuations, can be material “because earnings reports are among the pieces of data

that investors find most relevant to their investment decisions.” Ganino v. Citizens Utils.

Co., 228 F.3d 154, 164 (2d Cir. 2000) (internal quotation marks omitted).

       We conclude that materiality is satisfied as to the misstatements at issue by allegations

of (1) their distortion of Celestica’s assets and earnings and concealment of the company’s

failure to meet analysts’ expectations, (2) the significance of the restructuring effort to the

company’s operations and profitability, and (3) the precipitous decrease in share price that

occurred after Celestica disclosed the true state of its inventory. See ECA & Local 134

IBEW Joint Pension Trust of Chi. v. JP Morgan Chase Co., 553 F.3d at 204–05; SEC Staff

Accounting Bulletin No. 99, 64 Fed. Reg. 45150, 45152 (1999). These qualitative factors

                                              10
are sufficient to support an inference at this stage that Celestica’s inventory accounting was

relevant to investors’ investment decisions, defeating defendants’ immateriality argument.

4.     Conclusion

       Because plaintiffs adequately pleaded scienter under the PSLRA, the district court

erred in dismissing the complaint for failure to state a claim. We have considered

defendants’ remaining arguments for affirmance and find them to be without merit. The

judgment of the district court is REVERSED and the case is REMANDED for further

proceedings consistent with this order.

                            FOR THE COURT:
                            CATHERINE O’HAGAN WOLFE, Clerk of Court

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