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Sheet Metal Workers Local 32 Pension Fund v. Terex Corp.

United States District Court, D. Connecticut

March 31, 2018

SHEET METAL WORKERS LOCAL 32 PENSION FUND and IRONWORKERS ST. LOUIS COUNCIL PENSION FUND, Individually and on Behalf of All Others Similarly Situated, Plaintiffs,


          Robert N. Chatigny United States District Judge.

         This is a proposed class action under the federal securities laws brought by and on behalf of purchasers of Terex Corporation ("Terex") common stock during the period February 20, 2008 through February 11, 2009 ("the class period"). The amended complaint alleges that during the class period, Terex and the individual defendants made materially false and misleading statements about the company's present and future financial situation, in violation of § 10(b) of the Securities Exchange Act of 1934 (“the Act”), 15 U.S.C. § 78a, et seq., and Rule 10b-5. In addition, it alleges that the individual defendants violated § 20(a) of the Act. 15 U.S.C. § 78a. Defendants have moved to dismiss all the claims. They argue that the amended complaint fails to identify false statements with sufficient particularity and fails to provide facts supporting a reasonable inference that the alleged misstatements caused the plaintiffs' losses. Defendants further argue that the alleged facts do not create a strong inference of fraudulent intent on the part of the company or its officers. They also contend that certain forward-looking statements are protected by safe harbor provisions. Defendants submit that plaintiffs' losses were caused by the 2008 recession.

         For reasons that follow, the motion to dismiss is granted in part and denied in part. The motion is granted with regard to all the claims against the individual defendants except Thomas J. Riordan. Unlike the allegations against Mr. Riordan, the allegations with regard to the other individual defendants do not support a strong inference of scienter. The motion is also granted with regard to claims under § 20(b). The motion is denied with regard to the claims against Terex and Mr. Riordan under § 10(b) and Rule 10b-5.

         I. Facts

         The following facts are drawn from the amended complaint and accepted as true for purposes of this motion. The plaintiffs purchased Terex common stock during the class period. Terex is a global manufacturer of construction products. During the class period, it had five principal business divisions: Aerial Work Platforms (“AWP”); Construction; Materials Processing and Mining (“Mining”); Cranes; and Roadbuilding, Utility Products, and Other (“Roadbuilding”). The individual defendants served as senior directors and officers: Ronald M. DeFeo was Chairman and Chief Executive Officer; Mr. Riordan was President and Chief Operating Officer; Philip Widman was Senior Vice President and Chief Financial Officer; Jonathan D. Carter was Vice President, Controller, and Chief Accounting Officer; and Tim Ford was President of the AWP division.

         According to the complaint, the defendants made statements that concealed declining demand for Terex products, which had the effect of inflating Terex's stock price. To boost reported sales numbers, they employed various improper revenue recognition practices in violation of Generally Accepted Accounting Principles (“GAAP”). In addition, they inflated Terex's reported assets by failing to timely write down impaired goodwill.[1]Despite signs that the slowdown was persistent, the defendants' statements continued to paint a rosy picture. The plaintiffs suffered a loss when Terex's stock price declined following a series of partial revelations revealing the company's true financial situation.

         A. Defendants' Statements

         The complaint includes forty pages setting forth alleged misstatements by the defendants in press releases, conference calls, and financial statements. The alleged misstatements set forth below are representative.

         At the beginning of the class period in February 2008, defendants reported that Terex's financial results for 2007 were mostly positive and expressed enthusiasm about the company's future. In a press release, Mr. DeFeo stated that 2007 was a “very strong year in terms of financial performance” and “[g]lobal infrastructure spending continues to drive increased demand in most of our product categories.” He projected total sales between $10 and $10.5 billion for 2008, and expressed confidence that the company would reach its objective of having $12 billion in sales and a 12% operating margin by 2010 - a goal Terex officers sometimes referred to as “12 by 12 in ‘10.” He stated that Terex was “poised to have another record financial performance in 2008.” The press release and a subsequent Form 10-K filed with the SEC reported net sales increases in all divisions except Roadbuilding.[2] During a conference call in Mr. DeFeo said “[w]e think the fundamentals are strong and the negative market trends in the U.S. and perhaps in some markets in Europe will not overwhelm the positive momentum in our business.” Ford said “into the early part of ‘08, the order pattern has actually been quite encouraging. Orders were reasonably strong in the fourth quarter and into the early part of the first quarter.” Defendants Riordan and Widman also participated in this call.

         Despite growing signs of an impending global economic slowdown, the defendants continued to describe Terex's financial situation in positive terms through March and April. In March, Mr. DeFeo maintained his projection of between $10 and $10.5 billion in sales for 2008, and stated that Terex was “on the growth curve, probably a little ahead of the sales trajectory.” He also said “[a]ll is not doom and gloom in our markets.” An April press release reported net sales increases in the first quarter of 2008 in all divisions except Roadbuilding. Commenting on the results, Mr. DeFeo characterized the results as “excellent” for the AWP and Cranes divisions, “favorable” for the Mining division, and “somewhat disappointing” for the Roadbuilding and Construction divisions. Nonetheless, he stated “the near term outlook is positive for the Construction segment” and “[i]n general, we think that all of our operations continue to have solid prospects heading into the remainder of the year.” The press release projected sales for the rest of the year of between $10.5 and $10.9 billion and raised Terex's estimated earnings per share. During a conference call in which four of the individual defendants participated, [3] Mr. DeFeo said that despite signs the U.S. housing market was in decline, “we continue to view the current market place more as an opportunity than as a near-term risk.” Mr. Riordan said that the “markets continue to be reasonably strong on average as most regions continue to improve their infrastructure which drives demand for our products.”

         From the beginning of the class period to May 6, 2008, Terex's stock price increased from $62.21 to $74.80. On that date, Terex filed a first quarter Form 10-Q with the SEC that revealed the Roadbuilding division did not meet its forecasted business performance.[4] The Form stated that the company had updated its forecast and performed a goodwill impairment test for the Roadbuilding division.[5] The test found that the amount of goodwill for the Roadbuilding division was $34.4 million, indicating goodwill was not impaired. On May 7, 2008, Terex's stock price declined to $71.91. Defendants' statements about Terex's financial situation were positive throughout May 2008 despite growing issues in the Roadbuilding division. Mr. DeFeo characterized the situation as “overall, some really strong segments and a couple that are laggards.” He described strong demand in the Construction, AWP, and Cranes divisions. He said Terex had a “fairly strong and diversified revenue base, ” and reported a net increase in first quarter income of 28% based on 17% higher sales.

         Terex's stock price remained in the low $70s through May 2008 but declined to below $60 by late June 2008, and it continued to decline thereafter. On June 25, 2008, Oshkosh Corporation, a competitor of Terex's AWP division, announced that it expected to report a third quarter loss. Terex's stock price declined from $59.17 on June 25 to $53.64 on June 26. After the Oshkosh announcement, defendants publicly maintained a positive outlook for Terex. Mr. DeFeo reported increasing income and revenue, and stated, regarding the 12 by 12 in ‘10 goal, “one might say we're ahead of [the] course that we set out from a revenue point of view.” Regarding the Oshkosh announcement and what it meant for Terex's AWP division, he said business “may slow down . . . but, frankly, that's going to be more than offset, in our view at this stage, by a very strong performance from our Crane and Mining business.”

         Terex's stock price fluctuated through June and July 2008, settling at $50.12 on July 23. On that date, Terex issued a press release revealing its second quarter financial results, including slowdowns in the AWP and Construction divisions. During a conference call the next day, Mr. Riordan revealed that order rates had slowed for AWP sales in Europe. He also said that the company had “too much inventory” and was decreasing production in the Construction and AWP divisions “in order to get our inventories in line.” Nonetheless, he said AWP had a “very solid Q2 performance” and across all divisions Terex had “a record revenue quarter in the US.” Mr. DeFeo continued to maintain that strength in other divisions would “offset the obvious slow downs” in Construction and AWP, and continued to project between $10.5 to $10.9 billion in sales for 2008. Terex's stock price declined to $46.72, and it fluctuated between $43 and $50 throughout the rest of July and August.

         On September 4, 2008, Terex issued a press release lowering its estimated earnings per share and its projected sales, now to between $10.2 and $10.6 billion. During a conference call, Mr. DeFeo attributed the lowered expectations to “softness” in the AWP and Construction divisions. He no longer believed the Cranes and Mining divisions would offset these declines. Despite these changes, he expressed confidence that the company would meet its 12 by 12 in ‘10 goal. Terex's stock price declined from $47.32 on September 3 to $38.02 on September 4. It continued to decline throughout September and October.

         On October 22, Terex issued a press release announcing several negative pieces of news. The Company again revised downward its estimated earnings per share and projected sales, which were projected to be between $10 and $10.3 billion. It announced actions to reduce costs and inventories, including layoffs and reduced production. And it announced that, effective January 2009, the Roadbuilding business would be dissolved and its operations moved into the Construction and AWP divisions. During a conference call the next day, Mr. DeFeo stated that the “depression scenario for Terex would have all these segments roll over all at once and we do not see this, nor do our customers and competitors. The only group that seems to believe this is the traders of our common stock. Someone is wrong here and we do not think it is us, although we readily admit uncertainty remains in this environment.” Mr. Riordan stated that the Roadbuilding division's business “continued to gradually improve, with some exceptions.” Terex's stock price decreased from $16.72 on October 22 to $12.69 on October 24.

         On November 3, 2008, Terex filed its third quarter Form 10-Q with the SEC. The Form noted that the world economy was in the midst of a financial crisis with “no historical precedent with which to compare, ” but expressed confidence that Terex's “strategy of product and geographic diversity is the right one to deliver positive shareholder returns through this period.” The Form reported net sales increases in all divisions except for AWP. Terex's stock price increased from $15.69 on November 3 to $17.57 on November 4, and fluctuated between $10 and $20 throughout November, December, and January.

         On February 3, 2008, Terex issued another press release announcing negative news. It described layoffs, curtailed production schedules, temporary and permanent factory shutdowns, and reduced executive compensation. It also stated that “[a]lthough not yet finalized, the Company expects to record a non-cash impairment charge of certain of the Company's goodwill, identifiable intangibles, and other non current assets principally related to its Construction, Roadbuilding and Utilities businesses, ” in the amount of “approximately $600 million.” Terex's stock price increased from $11.78 on February 2 to $12.59 on February 4.

         On February 11, 2008, Terex issued a press release announcing a net loss for the fourth quarter of 2008 of $421.5 billion, or $4.46 per share. The company recorded a goodwill impairment charge of $459.9 million, attributed to the Construction and Roadbuilding divisions. Net sales had declined 20% and total sales for 2008 were only $9.89 billion. The company also withdrew its 12 by 12 in ‘10 goal.

         During a conference call the next day, Mr. DeFeo stated that the 12 by 12 in ‘10 goal would “not be achieved without an unlikely miracle turnaround.” He said that “[g]iven the continued decline in customer demand and continuation of slow market conditions, our annual impairment test in the fourth quarter of this year indicated the need to fully impair the goodwill” in the Construction and Roadbuilding divisions. After these disclosures, Terex's stock declined from $13.62 on February 11 to $9.45 on February 12.

         B. Terex's True Financial Situation

         Despite the mostly positive public comments defendants continued to make until near the end of the class period, Terex's true financial situation was dire. According to confidential witnesses (“CWs”) who worked at Terex, sales began to decline precipitously before the class period and continued to decline throughout the class period. Defendants contend that the information provided by the CWs should be discounted. However, in this Circuit, plaintiffs may rely on unnamed sources to satisfy pleading requirements. See Novak v. Kasaks, 216 F.3d 300, 314 (2d Cir. 2000); New Orleans Emps. Retirement Sys. v. Celestica, Inc., 455 Fed.Appx. 10, *14 (2d Cir. 2011) (relying on Novak after Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007)). “In such a situation, the confidential sources must be ‘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.'” In re Ambac Fin. Group, 693 F.Supp.2d 241, 268 n.31 (S.D.N.Y. 2010) (quoting Novak, 216 F.3d at 314). Plaintiffs describe each CW's position in the complaint. When the complaint provides a basis for inferring that a CW had personal knowledge of the facts, the CW's allegations are credited for purposes of this motion.

         In the Roadbuilding division, there were signs of trouble before the class period began. In 2007, Riordan hired a “strategy expert” to analyze all five of Terex's divisions. Based on the expert's report, Riordan secretly decided to put the Roadbuilding division up for sale, in an effort dubbed “Project Cowboy.” Terex received an offer between $180 million and $190 million. Mr. Riordan and other Terex executives rejected the offer on the ground that it was far too low to cover the $514.5 million in assets, including $78.1 in goodwill, that the company attributed to the Roadbuilding division. During monthly meetings after the failed sale, George Ellis, the Vice President and General Manager of Roadbuilding, often stated that Roadbuilding was not an attractive business because of all the goodwill Terex wanted to include in the selling price.

         By the time the class period began, the Roadbuilding division was at risk of collapsing. Sales of advanced concrete mixers, which represented 40% of Roadbuilding revenue, declined dramatically from as much as three hundred sales per month in prior years to just two sales per month by October 2008. By mid- to late-2008, sales of Reclaimer/Soil Stabilizers and asphalt plants each were down 50%. Sales of Trashmaster compactors, which had sold for hundreds of thousands of dollars, declined so much that the company eliminated the product line. Declining sales resulted in employees “standing around doing nothing.” Factories were not operating at capacity, and eventually, as Terex announced in October 2008, assembly lines were shut down, employees were laid off, and the division was dissolved.

         The fate of the Roadbuilding division was a subject of discussion among Terex's top executives. By the first quarter of 2008, Roadbuilding executives were holding weekly meetings to figure out how to utilize excess capacity. A CW in charge of development reported sales data up the chain to Mr. Ellis and, before he took over as General Manager of Roadbuilding in March 2008, to Dale Jones. Mr. Riordan made multiple trips to an Oklahoma City facility and, along with Mr. DeFeo, watched Roadbuilding's financials “very closely.” A CW who was Roadbuilding's Director of Operations met with Mr. Riordan during his trips, conducted quarterly reviews of sales data, and described Mr. Riordan as “very hands on with the numbers.” Mr. Ellis told one CW that “Roadbuilding has been bleeding red ink for more than a year and we have to stop the bleeding.”

         Declining sales were not limited to the Roadbuilding division. By mid-2008, sales of AWP products had “tanked.” Inventory had been building up since 2007 as employees “kept making stuff but not selling it.” Employee parking lots and other property were used to store excess inventory. By summer 2008, Crane units were being returned to the company and purchasing of materials used by the Cranes division had declined 33%. Construction sales were also poor. According to a CW, because the Construction division was Mr. DeFeo's “little pet project, ” Terex would not eliminate the division despite consistently losing money. The annual fourth quarter impairment test found Construction's goodwill was impaired 100%.

         C. Improper Revenue Recognition Practices

         To generate the false sales numbers that the company reported throughout the class period - which, as discussed above, showed generally increasing sales with some moderate declines in the Roadbuilding and AWP divisions - Terex employees engaged in a number of improper revenue recognition practices. One such practice, dubbed the “truck-stop-two-step, ” involved prematurely recognizing revenue at the end of each quarter by moving products to off-site locations and reporting them as sold.[6] According to several CWs, the practice was “pervasive” in the Roadbuilding and Mining divisions. Instructions came from the “top down” that at the end of each quarter, employees were to “ship and invoice anything not bolted down.” Both Mr. Jones and Mr. Ellis told Roadbuilding employees to ensure these products were counted as bona fide sales. Mr. Jones told one CW, “we need sales this month. Get it up there and make it happen.” Mr. Riordan told Mr. Jones and a ...

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