UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW … · 10b-5, plaintiffs must allege facts...

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

-------------------------------------------------------------------x MEMORANDUM DECISION

IN RE CELESTICA INC SECURITIES AND ORDER LITIGATION 07 CV 312 (GBD)

-------------------------------------------------------------------x GEORGE B DANIELS District Judge

In this securities fraud action all of the defendants have moved to dismiss the

consolidated class action complaint for inter alia failure to state a claim pursuant to

FedRCivP 12(b)(6) and for failure to satisfy the heightened pleadings requirements imposed

under both FedRCivP 9(b) and the Private Securities Reform Act of 1995 (PSLRA) 15

USC sect 78u-4(b )(2) The motions are granted

This action was commenced as a purported class action on behalf of all persons and

entities who purchased or otherwise acquired Celestica Inc (Celestica) common stock from

January 272005 through January 302007 (the Class Period) Celestica is a Canadian

corporation whose common stock trades on the New York and Toronto stock exchanges I

Plaintiffs are suing Celestica Celesticas former Chief Executive Officer Stephen Delaney

(Delaney) and its former ChiefFinancial Officer Anthony Puppi (Puppi) (collectively the

Celestica Defendants) Also named as defendants are the Onex Corporation (Onex) and

Onexs Chairman and Chief Executive Officer Gerald Schwartz (Schwartz) (collectively the

Onex Defendants)

Onex is a Canadian corporation alleged to own a controlling block of Celestica shares

giving it voting control over Celestica matters The complaint further alleges that pursuant to a

I Contrary to plaintiffs contentions this Court lacks subject matter jurisdiction over the claims ofpurported class members who acquired Celestica common stock on foreign markets See Morrison v Nat Australia Bank Ltd - - US - - 130 SCt 2869 (June 242010) (holding that Section lOb and Rule lOb-5 do not apply extraterritorially)

Case 107-cv-00312-GBD Document 60 Filed 101410 of 12

Management Services Agreement Onex provides Celestica on a continuing basis with

management administrative strategic planning financial and support services relating to

Celestica (CompI ~ 38) As consideration for such claimed services Celestica alleged paid

Onex $16 million in 2005 and $1 million in 2006 Plaintiffs allege that Schwartz exercised

control over Celestica through his position as a majority shareholder and from his position as a

director of Celestica As allegedly stated in Celesticas 2006 Form 20-F filing with the

Securities and Exchange Commission (SEC) Schwartz owns shares with a majority of the

voting rights of the shares of On ex Mr Schwartz therefore effectively controls [Celesticas]

affairs (rd ~ 315) Additionally plaintiffs allege based upon information and belief and upon

their own purported investigation that Schwartz regularly attended Celesticas executive

committee meetings during the Class Period and was therefore personally involved in virtually

all aspects of Celestica s business and operations beyond his involvement as one ofthe

companys directors

The gravamen ofthe complaint is that throughout the Class Period defendants

disseminated materially false and misleading statements concerning Celesticas earnings

profitability and financial outlook thereby artificially inflating the price of Celestica s shares

Plaintiffs allege that the backdrop of Defendants scheme was a major corporate restructuring

in which defendants failed to reveal that the restructuring plan was costing much more than

anticipated (Id ~ 2) The corporate restructuring was announced on the first day of the Class

Period Investors allegedly met this restructuring announcement with enthusiasm within days

driving Celesticas share price up by six percent In Celesticas March 21 2005 SEC filing

Celestica advised investors that the company had recent operating losses and significant

restructuring charges and may experience losses and restructuring charges in the future periods

2

Case 107-cv-00312-GBD Document 60 Filed 101410 Page 2 of 12

and that the company may not be profitable in future periods (Geraci Decl Ex 4 at 6) Prior

to the Class Period Celestica had undergone a number ofprevious corporate restructures and

had incurred significant losses for the past four years As plaintiffs acknowledge Celestica is a

company with a long history of failures and missteps (PIs Opp Mem at I)

The complaint further alleges that defendants fraudulent scheme hinged on reporting

inflated financial results which rendered an appearance that Celestica was more profitable and

the restructuring more successful than in reality To accomplish this defendants allegedly (I)

manipulated Celesticas inventory resulting in the overstatement of earnings (ii) understated

operating expenses through the manipulation ofCelesticas books (iii) overstated revenues by

booking phony sales and (iv) understated the true cost ofthe announced restructuring by as

much as sixty-eight percent of what defendants had previously told investors Plaintiffs allege

that had defendants complied with generally accepted accounting principles (GAAP) and

taken the charges they were required to properly reflect Celesticas financial conditions earnings

during the Class Period would have been reduced by at least $116 million Plaintiffs further

allege that as a result of the failed restructuring and the resulting inefficiencies Celestica loss

four of its ten key customers Defendants allegedly failed to disclose the loss of these customers

to its investors and instead continued to lie to investors characterizing the restructuring as a

success

Plaintiffs allege that throughout the Class Period defendants were repeatedly infornled

of long-term problems presenting obstacles to the restructuring yet they continued to tell

investors and analysts that the restructuring was proceeding according to plan Early in the Class

Period defendants allegedly learned that the restructuring was failing and was going to be more

costly and time consuming that originally disclosed The complaint alleges that various press

3


releases issued by Celestica during the Class Period conference calls conducted by Puppi and

Delaney as well as Celesticas publicly filed 2005 Fonn 20-F signed by both Puppi and

Delaney contained statements that were materially false and misleading The complaint

attributes the purported misstatements to the defendants in general without specifically

attributing any to either of the Onex Defendants Defendants alleged misstatements concerned

Celesticas projected profitability improvement in operations satisfaction of its customers and

the overall successfulness of the restructuring Plaintiffs allege that when truth of Celestica s

financial condition was disclosed the price ofCelesticas shares plummeted

MOTION TO DISMISS

Two causes of action are pled in the complaint The first accuses all the defendants of

engaging in securities fraud in violation of Section 1 O(b) of the Securities Exchange Act of 1934

(Act) 15 USc sect 78j(b) and of Rule 1Ob-52 To state a claim under Section 10b and Rule

10b-5 plaintiffs must allege facts showing that in connection with the purchase or sale of

securities defendants acting with scienter made a misstatement or omission of a material fact

upon which plaintiffs relied causing plaintiffs to sustain injury Ganino v Citizens Utils Co

228 F3d 154 161 (2d Cir2000) The second cause of action is for violation of Section 20( a) of

the Act and is pled against all the defendants with the exception ofdefendant Celestica

2 Section I O(b) of the Exchange Act makes it unlawful to use or employ in connection with the purchase or sale of any security any manipUlative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe 15 USc sect 78j(b) Rule 10b-5 provides that it shall be unlawful for any person [tJo make any untrue statement of material fact or omit to state a material fact necessary in order to make the statements made in the light of the circumstances under which they were made not misleading 17 CFR sect 2401Ob-5(b)

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Section 20(a) of the Act establishes joint and several liability subject to a good faith exception

for every person who directly or indirectly controls any person liable under any provision of the

Act Slayton v Am Express Co 604 F3d 758 765 (2d Cir201O) see also 15 USC sect 78t

In evaluating a Rule 12(b)(6) motion to dismiss the Court is to is to accept the factual

matters pled in the complaint as true and draw all reasonable inference in plaintiffs favor unless

the allegations are supported by mere conclusory statements Hayden v Paterson 594 F3d 150

157 nA (2d Cir2010) (citations omitted) The Court may also consider statements or

documents incorporated into the complaint by reference legally required public disclosure

documents filed with the SEC and documents possessed by or known to the plaintiff and upon

which [plaintiff] relied in bringing the suit Slayton 604 F3d at 763 n2 (quoting ATSI

Commns Inc v Shaar Funds Ltd 493 F3d 87 98 (2d Cir2007)) To survive a Rule 12(b)(6)

motion to dismiss the complaint must contain sufficient factual allegations to state a claim for

relief that is plausible on its face Ashcroft v Iqbal - - US - - - 129 SCt 19371949

(2009) (quoting Bell Atl Corp v Twombly 550 US 544 570 (2007)) A claim has facial

plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable

inference that the defendant is liable for the misconduct alleged Id

A complaint alleging securities fraud must additionally satisfy the heightened pleading

requirements ofboth FedRCivP 9(b) and the PSLRA 15 USC sect 78u-4(b)(1-2) To satisfy

Federal Rule of Civil Procedure 9(b)s requirement that a complaint alleging fraud state the

circumstances constitut[ing] fraud with particularity a security fraud claim based on

misstatements must (1) specify the statements that the plaintiff contends were fraudulent (2)

identify the speaker (3) state where and when the statements were made and (4) explain why

the statements were fraudulent Bay Harbour Mgmt LLC v Carothers 282 FedAppx 71 74

5


(2d Cir2008) (quoting ATSI Commns Inc 493 F3d at 99)

The allegations pled against the Onex Defendants fail to comply with Rule 9(b) The

complaint does not specifically attribute any ofthe alleged material misstatements to either of

the Onex Defendants Plaintiffs rely upon the group pleading doctrine which is an exception

to the requirement ofRule 9(b) that the plaintiff must identify the speaker of the purportedly

fraudulent statement A disagreement exists among the circuits as to whether the group pleading

doctrine survived the PSLRA Tellabs Inc v Makor Issues amp Rights Ltd 551 US 308 326

n6 (2007) The Second Circuit Court of Appeals has not foreclosed the possibility that the

group pleading doctrine is still viable notwithstanding the strict pleading requirements ofthe

PSLRA See Illinois State Bd onnv v Authentidate Holding Corp 369 FedAppx 260 266

(2d Cir2010) see also Yung v Lee 160 FedAppx 3742 (2d Cir2005)

The group pleading doctrine enables plaintiffs to circumvent the general pleading rule

requiring allegations as to specific attribution of a misstatement to a particular defendant and

instead allows the complaint to allege that the misleading statements were made by the group of

defendants who were responsible for creating reviewing or approving the purportedly false

statement of material fact prior to its dissemination3 To apply the group-published information

3 Secondary actors such as accountants lawyers and other parties not employed by the issuing company cannot be held liable for a statement not attributable to them at the time of its dissemination See Stoneridge Inv Partners LLC v Scientific-Atlanta Inc 552 US 148 (2008) Central Bank ofDenver NA v First Interstate Bank of Denver NA 511 US 164 191 (1994) The Second Circuit Court of Appeals has questioned whether the attribution rule is applicable to a defendant who is a corporate insider Although the Second Circuit did not resolve the issue it nevertheless observed that [t]here maybe a justifiable basis for holding that investors rely on the role corporate executives play in issuing public statements even in the absence of explicit attribution Pacific Illv Mgmt Co LLC v Mayer Brown LLP 603 F3d 144 158 n6 (2d Cir201O)

6


must be the collective work of those defendants who are corporate insiders or affiliates having

direct involvement in the everyday business of the issuing company Ouaknine v

MacFarlane 897 F2d 76 80 (2d Cir1990) DiVittorio v Equidyne Extractive Indus Inc 822

F2d 1242 1248-49 (2d Cir1987) Adelphia Recovery Trust v Bank ofAm NA 624

FSupp2d 292316 (SDNY 2009) (citations omitted)

The complaint at bar fails to allege that either of the Onex Defendants made any of the

alleged material misrepresentations or had any role in the preparation issuance or dissemination

of the subject statements by the Ce1estica Defendants The allegation that the Onex Defendants

significant holdings of Celestica securities enabled them to effectively control Celestica is

insufficient to hold them potentially liable for the alleged misstatements of the Celestica

Defendants In re Refco Inc Sec Litig 503 FSupp2d 611 641 (SDNY 2007)

Moreover plaintiffs conclusory allegation that defendant Schwartz regularly attended

Celesticas executive committee meetings fails to support a reasonable inference that either of

the Onex defendants had the direct day-to-day involvement in Celesticas business affairs and

operations necessary for attribution Plaintiffs failure to allege a direct connection between the

Onex Defendants and the subject statements bars plaintiffs reliance on the group pleading

doctrine

Even if the alleged misstatements could be attributed to the Onex Defendants the

complaint nevertheless fails to adequately plead scienter under the PSLRAs heightened

pleading standard with regard to all of the defendants See 15 USC sect 78u-4(b)(2) While

ordinarily in reviewing a Rule 12(b)( 6) motion the Court is to draw all reasonable inferences in

plaintiffs favor the PSLRA establishes a more stringent rule for inferences involving scienter

because the PSLRA requires particular allegations giving rise to a strong inference of scienter

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ECA amp Local 134 IBEW Joint Pension Trust of Chicago v JP Morgan Chase Co 553 F3d

187 196 (2d Cir2009) (quoting Teamster Local 445 Freight Div Pension Fund v Dynex

Capital Inc 531 F3d 190 194 (2d Cir2008)) Under the PSLRA the complaint must state

with particularity facts giving rise to a strong inference that the defendant acted with the required

state of mind Id (internal quotation marks omitted) Under Section lOb and Rule 10b-5 the

required mental state is scienter a mental state embracing intent to deceive manipulate or

defraud Tellabs 551 US at 319 (quoting Ernst amp Ernst v Hochfelder 425 US 185 193-94

amp n12 (1976))

To have a strong inference of scienter the inference must be such that a reasonable

person would deem the inference of scienter cogent and at least as compelling as any opposing

inference one could draw from the facts alleged First New York Sec LLC v United Rentals

Inc 2010 WL 3393757 at 2 (2d Cir Aug 302010) (quoting Tellabs 551 US at 324)

Plaintiffs may meet their burden of showing a strong inference of scienter by alleging facts (1)

showing that the defendants had both motive and opportunity to commit the fraud or (2)

constituting strong circumstantial evidence ofconscious misbehavior or recklessness W

Virginia Inv Mgmt Bd v Doral Fin Com 344 FedAppx 717 719 (2d Cir2009) (quoting

ATSI Commns Inc 493 F3d at 99)

Plaintiffs allege that defendants Delaney and Puppi Celesticas CEO and CFO

respectively were motivated to engage in the alleged fraudulent scheme because throughout the

Class Period their compensation was based largely upon Celesticas Board of Directors

assessment of their individual performance Celesticas stock price and the companys relative

performance with respect to its peers Plaintiffs allege that the Onex Defendants motive to

8


engage in the claimed fraudulent scheme was their controlling stack in Celestica4 Plaintiffs

assert that Celesticas purported artificially inflated earnings also inflated Onexs and thus

Schwartzs bottom line (CompI ~ 141) Plaintiffs general allegations of defendants

respective economic self interests are insufficient to plead scienter

To raise a strong inference of scienter through motive and opportunity to defraud

plaintiffs must allege that the defendants benefitted in some concrete and personal way from

the purported fraud ECA 553 F3d at 198 (quoting Novak v Kasaks 216 F3d 300 307-08

(2d Cir2000)) Motives commonly possessed by virtually all corporate insiders such as the

desire for the corporation to appear profitable the desire to maintain a high stock price to

increase executive compensation or desire to prolong the holding of ones corporate position do

not constitute the requisite motive for purpose of securities fraud scienter Novak 216 F 3d at

307 (citations omitted) see also Kalnit v Eichler 264 F3d 131 139-40 (2d Cir2001) An

inference of an intent to defraud shareholders cannot be drawn merely from a director or

officers desire to maximize corporate profits Earning profits for the shareholders is the

essence of the duty of loyalty and therefore it would be an unusual case where accomplishment

of this objective constitutes the requisite motive to defraud the shareholders 553 F3d at

4 Plaintiffs also claims that the Management Agreement between Onex and Celestica provides an additional basis upon which to infer motive Plaintiffs however fail to allege any facts to show that the purportedly artificially inflated price of Celestica s stock had a direct bearing on the compensation received by Onex for services rendered pursuant to that agreement As further evidence of the Onex Defendants scienter plaintiffs allege that during the early months of the Class Period before Celesticas stock price was fully inflated Onex cashed out on two hedging strategies that Schwartz had designed which made it more profitable to the Onex Defendants ifCelesticas share price was low The allegations in the complaint however indicate that immediately following the announcement of the final restructuring the price of Celestica shares soared six percent It would be reasonable to infer motive had Onex executed the strategies immediately prior to the restructuring announcement rather than waiting for its purported fraudulent scheme to take effect

9


200

Plaintiffs also attempts to establish scienter by alleging facts constituting strong

circumstantial evidence of defendants conscious misbehavior and recklessness Conscious

misbehavior and recklessness can be established by showing inter alia that defendants knew

facts or had access to information suggesting that their public statements were not accurate In

re Centerline Holding Co Sec Litig 2010 WL 2303312 at 2 (2d Cir June 9 2010) (internal

quotation marks omitted) Recklessness can also be pled by alleging facts demonstrating

defendants failed to review or check information that they had a duty to monitor or ignored

obvious signs of fraud Novak 216 F3d at 308 Scienter cannot however be inferred solely

from the fact that due to the defendants board membership or executive managerial position

they had access to the companys internal documentation as well as any adverse information

See In re Sec Capital AssUf Ltd Sec Litig - - FSupp2d - - 2010 WL 1372688 at 25

(SDNY Mar 312010) In re Sothebys Holdings Inc Sec Litig 2000 WL 1234601 at 7

(SDNY Aug 31 2000) In re Health Mgmt Sys Inc Sec Litig 1998 WL 283286 at 6

(SDNY June 1 1998) However [k]nowledge of the falsity ofa companys financial

statements can be imputed to key officers who should have known of facts relating to the core

operations of their company that would have led them to the realization that the companys

financial statements were false when issued In re Atlas Air Worldwide Holdings Inc Sec

324 FSupp2d 474 489 (SDNY 2004)

Plaintiffs allege that defendants had access was in possession of or had been apprised of

information that would demonstrate that they had no reasonable basis to believe that their subject

statements were truthful The complaint however fails to particularize the information

allegedly provided directly to the defendants that was contrary to their public statements

10


Plaintiffs allege generally that Puppi and Delaney were made aware of numerous issues

impacting Celesticas performance including issues of inventory and internal control Such

matters however would typically be shared with the senior management of a company The

allegations pled fail to disclose that any of the defendants were apprised of the specifics

regarding the nature of such issues that would have been directly contradictory to any of their

claimed statements Plaintiffs allegations of intentional inventory manipulation is not standing

alone sufficient to demonstrate scienter See Bay Harbour 282 FedAppx at 77 Moreover

plaintiffs reliance on a confidential witnesses uncorroborated assertion that all the way to the

top senior management had visibility ofwhat was happening is insufficient to infer actual

knowledge on the part of Delaney or Puppi (Compl ~ 84) Nor can scienter be established by

allegations of GAAP violations or other accounting irregularities alone where as here there is

no evidence ofa corresponding fraudulent intent See Novak 216 F3d at 309 The fact that

the cost of the corporate restructure exceeded the publicly conveyed initial estimate does not

suggest a fraudulent intent plaintiffs cannot plead fraud by hindsight

Defendants alleged serious mismanagement of Celesticas affairs and operations was not

so wantonly egregious as to give rise to an inference ofrecklessness To qualify as reckless the

defendants conduct must have been highly unreasonable and an extreme departure from the

standards of ordinary care to the extent that the danger was either known to the defendant or

so obvious that the defendant must have been aware of it In re Scholastic Corp Sec Litig

252 F3d 63 76 (2d Cir200l) (quoting Rolfv Blyth Eastman Dillon amp Co 570 F2d 38 47 (2d

Cir1978)) The facts pled in the complaint do not constitute strong circumstantial evidence of

any of the defendants conscious misbehavior or recklessness

Plaintiffs failure to meet the heightened pleading requirements ofFedRCivP 9(b) and

11


the PSLRA warrants the dismissal of the first cause of action against all defendants

The remaining cause of action pleads a violation of sect 20(a) of the Exchange Act 15

USc sect 78t and is asserted against all defendants with the exception of Celestica Any claim

for control person liability under sect 20(a) of the Exchange Act must be predicated on a primary

violation of securities law Pacific Inv 603 F3d at 160 Since the allegations in the complaint

are insufficient to establish a primary violation against any of the defendants plaintiffs sect 20(a)

cause of action must also be dismissed rd see also Slayton 604 F3d at 778

Accordingly the defendants respective motions to dismiss to the complaint for failure to

state a claim are granted The complaint is hereby dismissed and the Clerk of the Court is

directed to close this case

Dated New York New York October 142010

SO ORDERED

12


Management Services Agreement Onex provides Celestica on a continuing basis with

management administrative strategic planning financial and support services relating to

Celestica (CompI ~ 38) As consideration for such claimed services Celestica alleged paid

Onex $16 million in 2005 and $1 million in 2006 Plaintiffs allege that Schwartz exercised

control over Celestica through his position as a majority shareholder and from his position as a

director of Celestica As allegedly stated in Celesticas 2006 Form 20-F filing with the

Securities and Exchange Commission (SEC) Schwartz owns shares with a majority of the

voting rights of the shares of On ex Mr Schwartz therefore effectively controls [Celesticas]

affairs (rd ~ 315) Additionally plaintiffs allege based upon information and belief and upon

their own purported investigation that Schwartz regularly attended Celesticas executive

committee meetings during the Class Period and was therefore personally involved in virtually

all aspects of Celestica s business and operations beyond his involvement as one ofthe

companys directors

The gravamen ofthe complaint is that throughout the Class Period defendants

disseminated materially false and misleading statements concerning Celesticas earnings

profitability and financial outlook thereby artificially inflating the price of Celestica s shares

Plaintiffs allege that the backdrop of Defendants scheme was a major corporate restructuring

in which defendants failed to reveal that the restructuring plan was costing much more than

anticipated (Id ~ 2) The corporate restructuring was announced on the first day of the Class

Period Investors allegedly met this restructuring announcement with enthusiasm within days

driving Celesticas share price up by six percent In Celesticas March 21 2005 SEC filing

Celestica advised investors that the company had recent operating losses and significant

restructuring charges and may experience losses and restructuring charges in the future periods

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MOTION TO DISMISS










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doctrine







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amp n12 (1976))















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324 FSupp2d 474 489 (SDNY 2004)





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SO ORDERED

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success






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MOTION TO DISMISS










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doctrine







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amp n12 (1976))















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9


200


















324 FSupp2d 474 489 (SDNY 2004)





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SO ORDERED

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MOTION TO DISMISS










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doctrine







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amp n12 (1976))















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9


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324 FSupp2d 474 489 (SDNY 2004)





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SO ORDERED

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doctrine







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amp n12 (1976))















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9


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324 FSupp2d 474 489 (SDNY 2004)





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SO ORDERED

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doctrine







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amp n12 (1976))















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324 FSupp2d 474 489 (SDNY 2004)





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SO ORDERED

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doctrine







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amp n12 (1976))















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9


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324 FSupp2d 474 489 (SDNY 2004)





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SO ORDERED

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amp n12 (1976))















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9


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324 FSupp2d 474 489 (SDNY 2004)





10

























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SO ORDERED

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9


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324 FSupp2d 474 489 (SDNY 2004)





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SO ORDERED

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324 FSupp2d 474 489 (SDNY 2004)





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SO ORDERED

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SO ORDERED

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SO ORDERED

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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW … · 10b-5, plaintiffs must allege facts...

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