Southern District Of New York Grants In Part Motion To Dismiss Securities Fraud Claims Against European Airline For Failure To Adequately Allege Falsity, Materiality, And Scienter For Certain Alleged Misstatements
On June 1, 2020, Judge Paul Oetken of the Southern District of New York granted in part and denied in part a motion to dismiss securities claims against an “ultra-low fare” airline company (the “Company”) and its chief executive. City of Birmingham Firemen's and Policemen's Supplemental Pension System v. Ryanair Holdings plc et al., No. 18-cv-10330 (S.D.N.Y. June 1, 2020). Plaintiffs alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), and Rule 10b-5 promulgated thereunder, in connection with alleged misstatements concerning the Company’s labor practices and profitability. The Court granted in part defendants’ motion to dismiss, finding plaintiffs failed to adequately plead falsity, materiality, and scienter for all but one category of alleged misstatements, but granted plaintiffs’ motion for leave to amend.
The Company is a low-cost airline operator based out of Europe. Plaintiffs alleged that, in order to offer competitive pricing, the Company minimized costs in personnel, equipment, customer service, airport access, and handling costs. According to the complaint, defendants misled the market regarding their labor practices, specifically representing that the Company would not unionize and did not face problems with hiring or retention. Plaintiffs alleged that, despite these representations, the Company announced in December 2017 that it would in fact recognize unions for pilots and crew. The Company faced labor disruptions over the following year, leading to flight cancellations, but allegedly maintained that the strikes “would not significantly impact its business model.” Plaintiffs alleged that ultimately, in October 2018, the Company disclosed a “thirty-two percent increase in personnel costs and a twelve percent fall in projected earnings.” According to the complaint, defendants made materially false and misleading statements about the Company’s labor practices, profitability, growth targets, and likelihood of unionization.
Regarding the alleged falsity and materiality of the Company’s statements concerning its labor practices, plaintiffs alleged the Company misrepresented its competitiveness as an employer by representing that it was able to attract pilots and crew with “industry leading job security and pay, excellent working conditions, excellent rosters, and unrivalled career progression” in an attempt to reassure the market given the labor disruptions. The Court, however, agreed with defendants that these statements were inactionable as “quintessential ‘puffery’” and would not have been material as a reasonable investor would not have considered such statements to have “significantly altered the ‘total mix’ of information made available.” Turning to allegations that statements regarding flight cancellations and labor shortages were false based on a letter by an employee to the individual defendant, various analyst reports, and the resignation of the Company’s COO—the Court acknowledged that these statements were “too specific to qualify as puffery,” but nevertheless failed to demonstrate the statements’ falsity. The Court did, however, hold that defendants’ statements regarding unionization—specifically, “the statements indicating a near certainty that [the Company] would not recognize employee unions”—were “impossible to reconcile with [the CEO’s] subsequent admission that he had ‘long anticipated’ unionization.” Noting that such admission was “direct evidence of Defendants’ knowledge of the true likelihood of unionization at the time they made the statements denying the existence of any likelihood,” the Court held that such statements were sufficiently pled to be materially false or misleading.
The Court also addressed the alleged misstatements regarding the Company’s profitability. Plaintiffs contended that defendants misrepresented the effect of two events—a decision by the European Court of Justice holding that the Company’s employees may be entitled to bring their claims in local courts rather than solely in Irish courts, and the Company’s decision to “recognize employee unions”—and their impact on the Company’s profits. The Company allegedly predicted that the European Court of Justice decision “would not require an increase in pay and . . . would not ‘change [the Company’s] cost base by one cent.’” The Court noted that plaintiffs failed to allege any facts specifically indicating that defendants possessed evidence that their predictions were wrong or misleading, and as such failed to demonstrate falsity of such statements. Plaintiffs also alleged that defendants downplayed the costs of unionization, but the Court rejected plaintiffs’ argument holding that plaintiffs failed to plead with requisite specificity that defendants knew such statements were false and cited to “flimsy evidence” such as pilot complaints prior to unionization in an attempt to establish that the Company understood it to be a foregone conclusion that unionization would lead to adverse consequences. The Court held that plaintiffs’ remaining arguments regarding such statements similarly failed to sufficiently allege defendants knew allowing employees to unionize would have a material effect on operational flexibility and therefore affect costs.
Concerning the alleged statements concerning the Company’s growth targets, the Court found that “once more, [plaintiffs] fail[ed] to plead the falsity of these statements.” In particular, the Court found that plaintiffs failed to cite specific evidence demonstrating that the Company issued misleading statements regarding its growth target of 200 million passengers by March 2024 by failing to disclose that unionization would be required to allow expansion into union-friendly markets. The Court observed that the alleged statements to which plaintiffs cited—such as the opinions of financial analysts and post-unionization statements by the individual defendant—failed to demonstrate whether defendants knew when they established the growth target and issued such statements that unionization would be necessary.
As to plaintiffs’ scienter allegations, the Court held that plaintiffs failed to allege defendants had fraudulent motive or opportunity to establish the requisite scienter, noting that the evidence cited by plaintiffs—“the existence of insider stock sales” by the individual defendant—was unconvincing. The Court observed that plaintiffs point only to the individual defendant’s stock sales but not purchases, demonstrating “only gross proceeds without identifying net profits.” In further rejecting the scienter allegations, the Court highlighted that defendant’s sales comprised “only twelve percent of his . . . stock holdings” and he “retained the vast majority of his stock holdings,” thereby undermining plaintiffs’ allegations that the individual defendant “was motivated to commit fraud.”
Separately, the Court considered whether plaintiffs had adequately alleged scienter under the conscious misbehavior or recklessness prong, stressing that such allegations must be particularized and indicate actual intent to commit fraud or conscious recklessness. The Court held that plaintiffs sufficiently alleged scienter regarding defendants’ alleged statements concerning unionization for the same reason such statements were materially false or misleading—namely, that they represented near certainty that the Company would not recognize employee unions, but defendants later admitted that unionization was “long anticipated” and as such was “direct evidence” of defendants’ “knowledge of the true likelihood of unionization at the time they made the statements denying the existence of any likelihood.” However, the Court held that with respect to all other alleged misstatements, plaintiffs “failed to raise a strong inference of intent.” In so holding, the Court rejected plaintiffs’ reliance on the “core operations,” noting that it is “questionable” whether the core operations doctrine is good law after the enactment of the PSLRA, and that the doctrine “standing alone” can at most be “supplemental support” for scienter but “does not independently establish” it. The Court also found plaintiffs’ other arguments for scienter unconvincing and held that evidence of the allegedly “suspicious” resignation of the COO, the “timing and context” of the alleged misstatements, and the “magnitude of the alleged fraud” all failed to adequately support a strong inference of scienter. Accordingly, the Court dismissed all claims relying on these categories of statements, holding that all but the statements regarding the likelihood of unionization were inactionable.
With respect to plaintiffs’ control person liability claims under Section 20(a) of the Exchange Act, the Court dismissed these claims finding that plaintiffs failed to allege a primary violation except those in connection with the alleged misstatements concerning unionization.