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Norfolk County Retirement System v. Ustian

July 28, 2009


The opinion of the court was delivered by: Robert W. Gettleman United States District Judge

Judge Robert W. Gettleman


Plaintiffs Norfolk County Retirement System and Plumbers Local Union 519 Pension Trust have brought a three-count, 200-page, 542-paragraph, putative consolidated class action complaint against defendants: Navistar International Corporation ("Navistar"); its President and Chief Executive Officer Daniel C. Ustian ("Ustian"); its former Chief Financial Officer Robert C. Lannert ("Lannert"); its former Senior Vice President, Controller, and principal accounting officer Mark T. Schwetschenau ("Schwetschenau") (together, the "individual defendants," and with Navistar the "Navistar defendants"); and its former outside auditor, the accounting firm of Deloitte & Touche, LLP ("Deloitte"). Plaintiffs allege violations of §§10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a), and Securities Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. 24.10b-5. Plaintiffs' claims stem from purported losses suffered by purchasers of Navistar securities from February 14, 2003, through July 17, 2006, (the "Class Period") as a result of alleged systematic accounting fraud.

Defendants have moved to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) and 9(b). For the reasons explained below, the Navistar defendants' motion to dismiss is denied, and Deloitte's motion to dismiss is granted.


Navistar specializes in the manufacture and distribution of trucks, buses, and diesel engines, and primarily operates in the United States, Canada, Mexico, and Brazil. During the Class Period, Navistar was a publically traded company listed on the New York Stock Exchange and was required to make annual filings with the Securities and Exchange Commission ("SEC").

On December 10, 2007, Navistar filed its fiscal year 2005 report with the SEC on Form 10-K (the "2005 10-K"). The 2005 10-K described the results of a restatement and re-audit of Navistar's financial statements for 2003, 2004, and the first three quarters of 2005 (the "Restatement"), and disclosed that over this three year period, Navistar had misstated its financial position and results of operations by billions of dollars. The Restatement stated that an internal company investigation uncovered numerous accounting errors, weaknesses in its internal controls, and intentional conduct aimed at improving the reported financial results of certain business segments. During the Class Period, Navistar overstated its net income by $677 million, reporting a net income of $361 million, whereas the company had actually lost $316 million.*fn1

Additionally, Navistar overstated stockholder equity. The company originally claimed stockholder equity of $292 million in 2003 and $531 million in 2004, whereas the restated numbers revealed that stockholders actually held a deficit of $1.8 billion and $1.85 billion, respectively. The Restatement also disclosed that Navistar had replaced defendants Lannert and Schwetschenau.

Deloitte provided Navistar with audit opinions for its 2003 and 2004 annual consolidated financial statements. Plaintiffs allege that while Deloitte was employed by Navistar, Deloitte knowingly or recklessly: (1) ignored "red flags" of Navistar's generally accepted accounting principles ("GAAP") violations; (2) disregarded that Navistar's financial statements materially misstated the Company's true financial position; and (3) represented that its audits of Navistar were conducted in accordance with generally accepted auditing standards ("GAAS"). Deloitte was later replaced by the accounting firm KPMG LLP ("KPMG") in April 2006 for purposes of re-auditing Navistar's 2003, 2004, and 2005 financial statements.

The complaint alleges that defendants gradually released information into the market about the alleged securities fraud in a series of partial corrective disclosures, beginning in December 2005. These disclosures included:*fn2

1.* On December 14, 2005, Navistar disclosed that it had postponed a scheduled meeting with securities analysts and shareholders because its external audit for fiscal year 2005 was not complete. Stock prices dropped $2.11 per share that day, to close at $28.17.

2.* On January 17, 2006, Navistar announced that the filing of its 2005 10-K would be further delayed as a result of continuing unresolved accounting items. By close of market on January 19th, Moody's Investor Service ("Moody's"), Standard & Poors Rating Service, and Fitch Ratings, had issued statements downgrading their respective ratings of Navistar and attributing the changes to concerns with the financial statements/audits. Stock prices fell by $1.03 per share from January 17, 2006 to January 20th, to close at $25.87.

3.* On February 3, 2006, Navistar issued a Form 8-K informing investors that is was in default on its 4.75% Subordinated Exchangeable Notes due in 2009. By midday, Moody's issued a statement that it was downgrading Navistar's ratings because of uncertainty about release of the financial statements and ongoing audit related issues. Stock prices fell by $0.66 per share that day, closing at $27.13.

4. On February 16, 2006, Navistar issued an update on the progress on the 2005 10-K. The press release revealed that Schwetschenau, the company's principal accounting officer, had been reassigned to another position within the company to facilitate the completion of the audit.

5. On February 21, 2006, Navistar issued another press release updating the accounting review. The statement detailed many items being reviewed, informed investors that outside consultants had been hired to assist with the efforts (including Huron Consulting Group and Skadden, Arps, Slate, Meagher & Flom, LLP), and included the first mention of the possibility of a restatement of previously issued financial statements. Stock prices fell by $0.51 from February 17, 2006, to February 21st, closing at $28.40.

6. On March 17, 2006, Navistar issued a Form NT 10-Q Notice of Late Filing stating that it would not file its Form 10-Q for the quarter ending January 31, 2006, by the March 17, 2006, deadline because it had "several unresolved and complex accounting issues" from the first three quarters of 2005 under review. Stock prices fell by $0.40 the following week.

7. On April 7, 2006, Navistar issued a press release announcing that it would be restating its financial results for the fiscal years 2003, 2004, and the first three quarters of 2005, and detailing the items under review. The press release also announced that Navistar was replacing Deloitte with KPMG as external auditors.

8. On April 12, 2006, Navistar issued a Form 8-K addressing its change in auditors, making several disclosures about the state of its financial statements, and informing shareholders that it was no longer willing to rely on the representations of Schetschenau.

9. On April 28, 2006, Navistar issued a Form 8-K/A amending its Form 8-K of April 12, 2006. The amended form disclosed a letter from Deloitte to the SEC regarding its view of the content Navistar's Form 8-K. Deloitte reported that it had found significant deficiencies in Navistar's internal controls.

10.* On May 3, 2006, a Credit Suisse analyst downgraded Navistar's rating, citing "confidence issues" related to accounting problems. Stock prices fell $1.38 per share in two days, closing at $24.41 on May 4th. From April 7, 2006 to May 4, 2006, the stock declined $3.70 per share.

11. On May 30, 2006, Bear Stearns downgraded Navistar's rating and highlighted its outstanding accounting problems. That day stock prices fell by $2.37, to close at $26.64.

12.* On June 2, 2006, Navistar issued a press release announcing its plan to file its 2006 Form 10-K by mid-January 2007, disclosing that Navistar had conducted an investigation into "the propriety of accounting and auditing confirmation matters relating to vendor rebates." That day stock prices fell by $0.87, to close at $26.48.

13. On June 7, 2006, Navistar held a conference call to discuss its financial result for the first six months of fiscal year 2006.

14.* On July 17, 2006, Moody's announced it would withdraw its ratings of Navistar's debt, revealing to investors the severity of Navistar's accounting problems and the resulting credit rating implications. That day stock prices fell $0.06 per share.

During this seven-month period, Navistar common shares lost ...

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