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Norfolk County Retirement System v. Ustian

April 13, 2010


The opinion of the court was delivered by: Magistrate Judge Nan R. Nolan

Judge Robert W. Gettleman


Plaintiffs Norfolk County Retirement System, Plumbers Local Union 519 Pension Trust and Brockton Contributory Retirement System have filed this securities fraud class action lawsuit on behalf of everyone who purchased Navistar International Corporation ("Navistar") securities from February 14, 2003 through July 17, 2006 (the putative "Class Period"). Plaintiffs charge Navistar; its President and Chief Executive Officer Daniel C. Ustian; its former Chief Financial Officer Robert C. Lannert; its former Senior Vice President, Controller, and principal accounting officer Mark T. Schwetschenau; and its former outside auditor Deloitte & Touche, LLP ("Deloitte"), with systemic accounting fraud in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. The district court has dismissed the complaint as to Deloitte, and referred the matter to this court for discovery supervision. Norfolk County Retirement Sys. v. Ustian, No. 07 C 7014, 2009 WL 2386156 (N.D. Ill. July 28, 2009).

Currently before the court is Lead Plaintiffs' motion to compel production of documents. For the reasons set forth here, the motion is granted in part and denied in part.


At all relevant times, Navistar was a publicly traded company specializing in the manufacture and distribution of trucks, buses, and diesel engines in the United States, Canada, Mexico and Brazil. In October 2002, Navistar's stock reached a nearly ten-year low, prompting the company to attempt a restructuring plan designed to reduce operating costs and increase net income. The plan proved a failure, but Plaintiffs claim that Navistar engaged in a scheme to inflate its reported financial results to disguise continuing losses. From February 14, 2003 through July 17, 2006, Navistar allegedly overstated its net income by $677 million, reporting a net income of $361 million when the company had actually lost $316 million. Navistar also reported positive stockholder equity when, in truth, there was an enormous deficit ($1.8 billion in 2003 and $1.85 billion in 2004).

The complaint identifies numerous misstatements Navistar allegedly made during the Class Period as part of its scheme to defraud. According to Plaintiffs, "Navistar's publicly reported financial results created the impression that it was in a positive business cycle, marked by increasing profit and controlled operating costs." In truth, "Navistar's ability to meet or exceed guidance and consensus estimates was predicated entirely on the Defendants' improper accounting manipulations." (Cmplt. ¶ 297.) By February 2005, Navistar was under informal inquiry from the Securities and Exchange Commission ("SEC").

Plaintiffs claim that beginning in December 2005, Defendants gradually started releasing information into the market regarding the alleged fraud. Between December 14, 2005 and July 17, 2006, Navistar reported that there would be (1) delays in the filing of its 2005 Form 10-K; (2) restatements of its financial results from fiscal years 2003, 2004 and the first three quarters of 2005; and (3) no further reliance on the representations of Mr. Schwetschenau. By the time Defendants made their final partial corrective disclosure on July 17, 2006, Navistar common stock had fallen by $9.33 (30%).

On December 10, 2007, Navistar finally filed its 2005 Form 10-K, which described the results of the restatement and re-audit of Navistar's financial statements for 2003, 2004, and the first three quarters of 2005 (the "Restatement"). The Restatement disclosed that over that three-year period, Navistar had misstated its financial position and results of operations by billions of dollars. Three days later, on December 13, 2007, Plaintiffs filed this class action securities lawsuit. The district court appointed Norfolk County Retirement System and Plumbers Local Union 519 Pension Trust to serve as lead plaintiffs in the case. (Order of 3/18/08, Doc. 60.)

At a hearing on September 10, 2009, the district court denied Defendants' motion to bifurcate discovery, but directed the parties to "avoid taking discovery that is . . . related solely to non-class certification issues until the class motion is briefed and decided by the Court." (Tr. of 9/10/09, at 8.) The parties have agreed to participate in the Seventh Circuit's E-Discovery Pilot Program and are currently working on class discovery. (Minute Order of 9/30/09, Doc. 119.)

On December 9, 2009, Lead Plaintiffs filed a motion to compel the production of documents they claim are relevant to their impending motion for class certification. The matter was stayed while the parties attempted to settle their dispute, but the court understands that the March 9, 2010 mediation was unsuccessful. The court thus turns once again to the motion to compel. Lead Plaintiffs seek (1) documents provided to the SEC; (2) non-public documents relating to loss causation; and (3) documents Defendants agreed to produce. Defendants insist that they have now produced all documents as promised, and object that the other documents at issue are irrelevant and overly burdensome to produce.


The Federal Rules permit discovery regarding any matter, not privileged, that is relevant to the claim or defense of any party. FED. R. CIV. P. 26(b)(1). "Mutual knowledge of all the relevant facts gathered by both parties is essential to proper litigation. To that end, either party may compel the other to disgorge whatever facts he has in his possession." In re Thomas Consolidated Indus., Inc., No. 04 C 6185, 2005 WL 3776322, at *6 (N.D. Ill. May 19, 2005), aff'd 456 F.3d 719 (7th Cir. 2006) (quoting Hickman v. Taylor, 329 U.S. 495, 507 (1947)).

It appears that Defendants have now produced documents responsive to First Request for Production of Documents ("Request") Nos. 44, 45, 53-55, and 59-61. (Pl. Reply, at 1 n.2.) The court thus focuses on ...

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