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Northern District Of Illinois Narrows Putative Class Action Against Airplane Manufacturer
10/11/2023On September 18, 2023, Judge Manish S. Shah of the United States District Court for the Northern District of Illinois narrowed a putative class action asserting claims under the Securities Exchange Act of 1934 against an airplane manufacturer and its former CEO and CFO. College Ret. Equities Fund v. Boeing Co., 2023 WL 6065260 (N.D. Ill. Sept. 18, 2023). Plaintiffs alleged the company made misrepresentations regarding two crashes of a new model of plane and the company’s responsive measures in an effort to return the fleet to service. The Court held that various challenged statements were not actionable because plaintiffs failed to adequately allege falsity or scienter. With respect to the remaining challenged statements, the Court further pared the claims by holding that loss causation was not sufficiently alleged in connection with certain purported corrective disclosures.
The Court first explained that challenged statements made before the accidents were not actionable, because plaintiffs either failed to allege falsity or failed to adequately allege scienter. For example, the Court held that while the Company’s statement that the airplane’s “FAA certification affirms that the airplane’s handling, systems and overall performance all comply with required aviation regulations” omitted material detail, plaintiffs failed to allege that those who made and approved that statement knew at the time it was made that it was false. Id. at *5–6. The Court further determined that statements touting that the plane had built-in “superior capabilities” and was “designed to offer customers exceptional performance” were mere puffery and that plaintiffs in any event again failed to adequately allege scienter. Id. at *6.
The Court then assessed the company’s statements in connection with the first plane crash. The Court explained that statements affirming the Company’s core values were not actionable because they were optimistic statements that were unimportant when compared to the total mix of information available in the market (i.e., that a plane had crashed). Id. at *7. While the CEO noted the revamped plane was “designed to make the airplane behave the same” as prior models with which pilots were familiar, the Court determined that this statement was not alleged to be false. Id. at *8. And while the Court agreed that plaintiffs plausibly alleged that the CEO’s statements about referring pilots to existing procedures following the crash were misleading—because they suggested erroneously that the crash was merely the result of pilot error—the Court nevertheless concluded that plaintiffs failed to establish that defendants acted with scienter. Id. at *8–9. The Court determined that, while making these statements despite concerns voiced by the company’s safety review board might “support a strong inference of negligence,” that was not enough to show scienter because “[t]he much more plausible inference is that, like [the company’s] safety engineers and the FAA, [the CEO] believed the airplane remained safe to fly.” Id. at *9.
The Court also explained that statements the company made concerning its production rate of the revamped plane were not actionable, since they were forward-looking statements accompanied by meaningful cautionary language. The Court emphasized that an accurate report of past success does not contain a promise of future performance. Id. at *11–12. The Court also noted that, with respect to challenged statements made by the CFO, plaintiffs failed to plead with particularity that the CFO was specifically informed that a safety review board within the company believed it would require over two years to redesign the plane, which weighed against an inference of scienter. Id. at *12.
The Court then explained that certain statements the company made in the wake of the second airplane crash were actionable. For example, as to statements suggesting that a defective component did not “control the airplane in normal flight; it improves the behavior of the airplane in a non-normal part” of its operations, the Court agreed the Company materially omitted that the component could be activated erroneously during a normal flight. Id. at *13. The Court also agreed that the company’s statements touting its existing operations manual and procedures were misleading because those procedures were insufficient. Id. at *14. The Court determined that these statements were plausibly made with scienter, because, given the seriousness of the events that had by then transpired, it was “impossible” for senior executives not to have been involved in making these statements, and it was implausible to believe that in the wake of the second crash, they were not aware of issues involving the component at issue, and may have been aware of related misstatements made to the FAA. Id. at *14–15.
The Court also explained that the company’s statement after the second crash that all of its “airplanes are certified and delivered to the highest levels of safety consistent with industry standards” was materially misleading. Id. at *17–18. The Court determined that, because the statement was made in the wake of a “damning” article in the New York Times that revealed inadequacies in the company’s procedures contributing to the plane crashes, this suggested corporate officials were involved in making the statement and were at this time aware of certain misstatements by its chief technical pilot to the FAA. Id. The Court similarly concluded that statements made by the CEO that essentially stated nothing out of the ordinary happened in the course of the FAA’s review of the plane were actionable and that the scienter was adequately alleged for the same reasons. Id. at *18–19.
The Court also agreed that specific statements about the revamped plane’s return to service were false and actionable in light of a meeting the CEO allegedly had with the FAA’s acting administrator, where the administrator asked the CEO to “slow down” the company’s suggestions of progress in returning the revamped plane into service. Id. at *21. While the Company argued the CEO genuinely believed the company was making progress consistent with the at-issue statements, the Court found the inference of scienter was just as cogent and compelling to withstand a motion to dismiss, because the CEO had access to government officials who disagreed with the company’s statements. Id. at *22.
However, the Court rejected claims regarding certain challenged statements following the second crash. For example, the Court held that statements downplaying the importance of the plane’s defective component were misleading but nevertheless held that these statements were not actionable because plaintiffs did not adequately allege loss causation or scienter. Id. at *16–17. As to loss causation, the alleged corrective disclosure with respect to these statements was a news article published the day before the company downplayed the significance of the defective component. Id. at *17. The Court reiterated that plaintiffs failed to establish the CFO knew about the chief technical pilot’s conduct such that it could be said that any false statements by the CFO were made with scienter. Id. at *20. The Court also found statements in the Company’s annual reports about the effectiveness of its internal controls were immaterial and nothing that reasonable investors would rely upon as representations of satisfactory compliance with regulatory obligations. Id. at *23.
The Court also explained that only two of ten alleged corrective disclosures could be said to have corrected any of the company’s actionably false statements—specifically, the release of internal text messages sent by the company’s chief technical pilot and the production halt of the plane. The text messages were sufficiently alleged to have corrected prior statements that the company’s training materials sufficiently provided pilots information they needed to operate the plane and respected the integrity of the FAA’s certification of the plane. Id. at *24–25. The suspension in production was sufficiently alleged to have revealed that the plane would not be returned to service on the timeline that the company had promoted. Id. at *25. The Court concluded that, for those two disclosures, plaintiffs sufficiently provided “some indication of the loss and the causal connection that plaintiff has in mind.” Id.
