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Budde v. Global Power Equipment Group, Inc.

United States District Court, N.D. Texas, Dallas Division

December 27, 2017

MARGARET BUDDE, Lead Plaintiff, and DANIEL REAM, Individually and on Behalf of All Others Similarly Situated, Plaintiffs,



         Before the Court is Defendants' Motion to Dismiss the Second Amended Class Action Complaint. (ECF No. 81). For the reasons stated below, the Motion is GRANTED.

         I. Factual and Procedural Background

         Defendant Global Power Equipment Group, Inc. (“Global Power”) is a public corporation that provides equipment and services to the energy industry. (2d. Am. Compl. ¶ 3, ECF No. 76). In 2015, Global Power announced that some of its prior financial reports were inaccurate. (Id. ¶¶ 53, 55, 61, 67). On May 15, 2017, Global Power issued a restatement that corrected several reports and identified causes for the errors. (Id. ¶ 77). Most relevant here, Global Power acknowledged that it prematurely recognized revenues in its Electrical Solutions (“ES”) segment, had deficiencies in internal control over financial reporting, and incorrectly accounted for goodwill upon the sale of a subsidiary company, Deltak. (Id. at Ex. Y).

         Margaret Budde and Daniel Ream, on behalf of all persons who acquired Global Power stock between September 7, 2011, and May 6, 2015, filed a class action lawsuit against Global Power and some of its former officers-Raymond K. Guba, Luis Manuel Ramirez, and David L. Willis. Guba was Global Power's Senior Vice President and CFO from November 2013 to September 2015. (2d. Am. Compl. ¶ 31). Ramirez was the President and CEO from July 2012 to March 2015. (Id. ¶ 29). Willis was the CFO from January 2008 to November 2013. (Id. ¶ 34). Plaintiffs assert that Defendants issued false and misleading financial reports[1] in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a). Defendants move to dismiss for failure to state a claim.

         II. Legal Standard

         A pleading must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). The pleading standard Rule 8 announces does not require “detailed factual allegations, ” but it does demand more than an unadorned accusation devoid of factual support. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). To survive a motion to dismiss, a complaint must contain sufficient factual matter to state a claim for relief that is plausible on its face. Twombly, 550 U.S. at 570. The Court must accept all of the plaintiff's factual allegations as true, but it is not bound to accept as true “a legal conclusion couched as a factual allegation.” Id. at 555. Where the facts do not permit the Court to infer more than the mere possibility of misconduct, the complaint has stopped short of showing that the pleader is plausibly entitled to relief. Iqbal, 556 U.S. at 678.

         To state a claim under Section 10(b), Plaintiffs must plead: (1) a material misrepresentation or omission, (2) scienter, (3) a connection with the purchase or sale of a security, (4) reliance, (5) economic loss, and (6) loss causation. See Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341 (2005) (citing 15 U.S.C. 78j(b)). To adequately plead scienter, Plaintiffs must meet the heightened standard required under the Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u-4(b)(2). The PSLRA instructs Plaintiffs to “state with particularity facts giving rise to a strong inference” that each Defendant acted with scienter, i.e., with “intent to deceive, manipulate, or defraud or [with] severe recklessness.” Id.; Owens v. Jastrow, 789 F.3d 529, 535 (5th Cir. 2015) (citation omitted). Severe recklessness is limited to those “highly unreasonable . . . misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standard of ordinary care.” Jastrow, 789 F.3d at 535 (citation omitted). Scienter must exist at the time the misrepresentation occurred. See Magruder v. Halliburton Co., 2009 WL 854656, at *8 (N.D. Tex. Mar. 31, 2009).

         To qualify as “strong, ” the inference of scienter must be “more than merely plausible or reasonable-it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007). This requires the Court to “engage in a comparative evaluation, ” weighing “not only inferences urged by [Plaintiffs] . . . but also competing inferences rationally drawn from the facts alleged.” Id. Conclusory allegations are not sufficient. See Indiana Elec. Workers' Pension Tr. Fund IBEW v. Shaw Grp., Inc., 537 F.3d 527, 538-39 (5th Cir. 2008) (“[G]eneral allegations and conclusory statements, such as stating [defendants] knew . . . adverse material” cannot support a strong inference of scienter.). Overall, the Court must “assess all the allegations holistically, ” not each in isolation. Tellabs, 551 U.S. at 326.

         Some of Plaintiffs' allegations are from confidential sources. The Court must discount allegations from confidential sources. See Shaw Grp., 537 F.3d at 535 (“[J]udges [must] weigh the strength of plaintiffs' favored inference in comparison to other possible inferences; anonymity frustrates that process.”) (citation omitted). Confidential sources must also be described “with sufficient particularity to support the probability that a person in the position occupied by the source . . . would possess the information pleaded.”[2] Id. (citation omitted).

         III. Analysis of Plaintiffs' Section 10(b) Claim

         Defendants argue that Plaintiffs have failed to adequately plead scienter and loss causation. The Court addresses each in turn.

         a. Scienter

         As a corporation, Global Power is deemed to have scienter if the officer that made the misrepresentation has scienter. See Southland Sec. Corp. v. INSpire Ins. Sols., Inc., 365 F.3d 353, 366 (5th Cir. 2004). The Court accordingly analyzes the sufficiency of allegations against each of the officer Defendants-Guba, Ramirez, and Willis-who made the misrepresentations at issue.

         i. Raymond K. Guba and Luis Manuel Ramirez

         The mere publication of inaccurate accounting figures, without more, does not establish scienter. See Shaw Grp., 537 F.3d at 534 (citation omitted). Plaintiffs must show that Defendants knew that they were publishing materially false information or were severely reckless in publishing such information.[3]See Abrams v. Baker Hughes Inc., 292 F.3d 424, 432 (5th Cir. 2002). In particular, Plaintiffs must allege what facts each Defendant knew-such as specific accounting or internal control problem-in addition to when and how they learned these facts to support a strong inference of scienter. See Magruder, 2009 WL 854656, at *9, *14 n.121. Plaintiffs allege that Guba and Ramirez knew or ...

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