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PSLRA Class Action Defense Cases–Ley v. Visteon: Sixth Circuit Affirms Dismissal Of Class Action Against Company, Individuals And Outside Auditor Holding Class Action Complaint Failed To Meet PSLRA’s Heightened Pleading Requirements

Securities Fraud Class Action Properly Dismissed by District Court because Class Action Complaint Failed to Adequately Allege Failure to Disclose and because Class Action Complaint Failed to Create Strong Inference of Scienter Sixth Circuit Holds

Plaintiffs filed a class action against Visteon Corporation and certain officers and directors of Visteon, and against its outside auditor, Pricewaterhousecooper, alleging violations of federal securities law; specifically, the class action complaint asserted claims for violations of § 11 of the Securities Act of 1933, § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and § 20(a) of the Exchange Act. Ley v. Visteon Corp., 543 F.3d 801, 804-05 (6th Cir. 2008). The class action complaint followed the disclosure by Visteon of “$108 million in accounting errors which understated net losses by in excess of $60 million,” id., at 805. According to the class action, this disclosure “shocked the market” and caused Visteon’s stock to drop dramatically. Id., at 804-05. Defense attorneys moved to dismiss the class action complaint, id., at 804. Defense attorneys moved to dismiss the class action’s § 11 claim as barred by the statute of limitations, id., at 806. The defense motion as to the remaining class action claims focused on the failure of the class action complaint to meet the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 (PSLRA). The district court granted the motion and dismissed the class action complaint in its entirety, id., at 805. Plaintiffs appealed but did not challenge the dismissal of the class action’s § 11 claim, id., at 806; accordingly, the Sixth Circuit affirmed that portion of the district court’s order without discussion and focused its analysis only on the remaining claims. The Sixth Circuit affirmed.

After discussing briefly the rules governing its review of the dismissal of the class action complaint, see Ley, at 805-06, the Sixth Circuit summarized the law governing securities fraud claims and the heightened pleading requirements necessitated by the PSLRA, see id., at 806-07. The § 10(b)/Rule 10b-5 class action claim against Visteon alleged that it failed to disclose certain information; specifically, Visteon, a spin-off of Ford Motor, “failed to disclose that ‘Ford so dominated the day to day business affairs of Visteon via the contracts between the two and beholden Visteon management, such that Visteon was essentially no more than a repository for operations of Ford that had built in losses.’” Id., at 807. In the words of the Circuit Court, “Essentially, Plaintiffs argue that Defendants failed to adequately disclose that Visteon may have difficulty shedding unprofitable business lines.” Id. The Sixth Circuit disagreed finding the company’s disclosure to be “rife with such information.” Id. And the Circuit Court similarly rejected plaintiffs’ other claims regarding Visteon’s failure to disclose material information, see id., at 807-08. In fact, the Court found that defendants made numerous disclosures and that Visteon was under no duty to disclose information relative to its competitors, id., at 808. As the Sixth Circuit explained at page 808:

Here, Defendants provided investors with plenty of information to determine whether Visteon could operate as a viable independent company. That Plaintiffs would like even more disclosure misses the point that a violation of § 10(b) and Rule 10b-5 requires that the company have a duty to disclose information that is material. Defendants had no duty to disclose what Plaintiffs suggest and such information would not be considered material in any event.

The Sixth Circuit then addressed whether plaintiffs had adequately pleaded a strong inference of scienter as required by the PSLRA to avoid dismissal. Ley, at 809. The Circuit Court examined each of the six factors advanced by plaintiffs as evidence of scienter, and rejected each in turn. See id., at 809-14. Because the class action complaint failed to adequately allege scienter, the Circuit Court affirmed the dismissal of plaintiffs’ claims against Visteon and its officers and directors. Id., at 814.

Finally, the Sixth Circuit addressed the class action claims against Visteon’s outside auditor, which the district court had dismissed for failure to plead the required strong inference of scienter. Ley, at 814. After noting that the auditor’s liability “is limited to its making misstatements or omissions, not simply giving aid to a person making a material misstatement or omission,” id. (citation omitted), the Circuit Court summarized at page 814 plaintiffs’ three arguments concerning the strong inference of the auditor’s scienter: “(1) PwC’s failure to maintain its professional independence; (2) the nature and magnitude of Visteon’s GAAP violations known to PwC; (3) PwC’s unqualified audits to Visteon’s related party transactions with Ford in violation of [Generally Accepted Auditing Standards (‘GAAS’) ]; and (4) PwC’s intimate knowledge of Visteon’s internal financial information.” The Sixth Circuit rejected each of these arguments, see id., at 814-18.

Because no predicate violation of §§ 11, 10(b), or Rule 10b-5 existed against any defendant, the district court’s dismissal of the class action’s § 20(a) claim against each of the individual defendants. Id., at 818. Accordingly, the Sixth Circuit affirmed the dismissal of the class action complaint, id.

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