United States District Court, N.D. Illinois, Eastern Division
CONSTRUCTION WORKERS PENSION FUND -- LAKE COUNTY AND VICINITY, Individually and on Behalf of All Others Similarly Situated, Plaintiff,
NAVISTAR INTERNATIONAL CORPORATION, et al., Defendants
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For Construction Workers Pension Trust Fund -- Lake County and Vicinity, Individually and on Behalf of All Others Similarly Situated, Plaintiff: James E Barz, LEAD ATTORNEY, Robbins Geller Rudman & Dowd LLP, Chicago, IL; Danielle S. Myers, Robbins Geller Rudman & Dowd LLP, San Diego, CA.
For Jacksonville Police and Fire Pension Fund, Plaintiff: Matthew Thomas Heffner, Susman Heffner & Hurst LLP, Chicago, IL.
For Navistar International Corporation, Daniel C. Ustian, Andrew J. Cederoth, Defendants: Robin M. Hulshizer, Sean M. Berkowitz, LEAD ATTORNEYS, Eric Robert Swibel, Matthew Lawrence Kutcher, Latham & Watkins LLP, Chicago, IL.
For Central States, Southeast and Southwest Areas Pension Fund, Movant: Carol V Gilden, LEAD ATTORNEY, Cohen Milstein Sellers & Toll PLLC, Chicago, IL; Kenneth Mark Rehns, PRO HAC VICE, Cohen Milstein Sellers & Toll Pllc, New York, NY.
For Arkansas Teacher Retirement System, Sheet Metal Workers' National Pension Fund, Movants: Michael W. Stocker, LEAD ATTORNEY, Labaton Sucharow LLP, New York, NY; Badge Humphries, Joshua C Littlejohn, PRO HAC VICE, Motley Rice LLC, Mt. Pleasant, SC; Brian O O'Mara, Robbins Geller Rudman & Dowd LLP, San Diego, CA.
OPINION AND ORDER
SARA L. ELLIS, United States District Judge.
Believing that Navistar International Corporation (" Navistar" ) and certain of its officers and directors perpetrated a fraud on the market by making false and misleading statements with regard to Navistar's engine design and development efforts to meet new Environmental Protection Agency (" EPA" ) emission requirements, which caused Navistar's stock price to be artificially inflated, Lead Plaintiff Central States Southeast and Southwest Areas Pension Fund (" Central States" ) brought this putative securities class action on behalf of themselves and all others who purchased Navistar securities from March 10, 2010 through August 1, 2012 (the " Class Period" ). Central States alleges that through their false and
misleading statements, Defendants Navistar, Daniel C. Ustian, Andrew J. Cederoth, and Jack Allen violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (" SEA" ), codified at 15 U.S.C. § 78j(b) and t(a), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. The Court previously dismissed Central States' Consolidated Amended Complaint (" CAC" ), finding that Central States had improperly engaged in puzzle pleading by quoting Defendants' statements at length and alleging that all of the quoted statements were false or misleading. The Court dismissed Central States' CAC without prejudice and granted Central States leave to file a second amended complaint (" SAC" ) to cure the deficiencies noted. Now before the Court is Defendants' motion to dismiss the Second Amended Complaint (" SAC" ). Because Central States adequately pleaded § 10(b) and Rule 10b--5 claims regarding two of Ustian's statements, Defendants' motion to dismiss  is granted in part and denied in part.
I. The Parties
The Court appointed Central States to serve as Lead Plaintiff in this case on July 30, 2013. Central States is a " multiemployer, collectively--bargained pension fund...which administers benefits for hundreds of thousands of participants, dependents and retirees." Doc. 128 ¶ 26. The last day on which Central States purchased Navistar stock during the Class Period was October 27, 2011.
Navistar produces commercial and military trucks, buses, diesel engines, recreational vehicles, and chassis, and provides parts and service for trucks and trailers. Its stock is listed on the New York Stock Exchange. Navistar's North American truck and engine market is a core segment of its business. In 2009, $8.6 billion of Navistar's $11.5 billion net sales derived from its North American truck and engines market. Of that $8.6 billion in sales, over 50% was attributable to Navistar's heavy duty vehicles, which use 11, 13, and 15--liter diesel engines.
During the Class Period, Ustian served as Navistar's President, Chief Executive Officer, and Chairman of the Board of Directors. Cederoth held the title of Executive Vice President and Chief Financial Officer, as well as other minor temporary titles. Allen was also an Executive Vice President, as well as Chief Operating Officer.
II. Factual Allegations
Various EPA regulations apply to Navistar's truck and engine business. In 2001, pursuant to the Clean Air Act, the EPA issued a rule that required a 95% reduction in nitrogen oxide (" NOx" ) emissions from heavy-duty diesel engines. Specifically, the EPA limited NOx emissions to a rate of no more than 0.2 g/bhp-hr (" 0.2 NOx" ) by 2010 for new engines. To obtain EPA certification, a manufacturer had to demonstrate compliance with the 0.2 NOx standard. Recognizing that manufacturers might require additional time to develop their emissions control technology, the EPA initially allowed certification to be obtained through a 0.3-0.5 NOx engine and banked emission credits. For a period of time, the EPA also allowed manufacturers
to achieve certification through the payment of nonconformance penalties (" NCPs" ).
In response to the new EPA standard, the heavy-duty truck industry, with the exception of Navistar, invested in selective catalytic reduction (" SCR" ) technology, which uses an after-treatment device to reduce emissions. These manufacturers met the 0.2 NOx standard on time. Navistar decided to pursue a different technology--exhaust gas recirculation (" EGR" ), an in-cylinder solution that does not require after-treatment. However, as early as 2008, Navistar engineers were experiencing issues in the development of EGR technology which called into question whether it was capable of achieving 0.2 NOx in a commercially viable engine. These issues continued throughout the Class Period and were repeatedly brought to the attention of senior-level management, including Ustian and Cederoth. Nevertheless, Navistar ordered the engineers to continue pursuing the EGR technology. And while Navistar initially had engineers developing SCR technology as a backup plan, by February or March of 2009 Navistar halted this work.
Because the EGR technology was still being developed, Navistar's initial strategy to comply with EPA's regulation involved using engines certified at 0.5 NOx in combination with banked emission credits. In late 2009 and into early 2010, Navistar launched trucks with 0.5 NOx EGR engines. It did so despite the fact that these engines failed road tests prior to launch. Nevertheless, Navistar proceeded to production because it would have been unable to sell trucks otherwise. After the launch, Navistar began receiving complaints from customers regarding the performance of the 0.5 NOx engine. As a result, Navistar halted sales for a period before restarting sales of these engines.
Because Navistar's North American heavy duty truck sales comprised such a large portion of its overall business, investors and analysts were particularly focused on Navistar's development of EGR technology and its progress toward obtaining certification at 0.2 NOx. Despite all of the issues Navistar encountered on the road to accomplishing that task, Defendants repeatedly made public statements touting Navistar's progress in developing its EGR technology and achieving a 0.2 NOx--compliant engine. These statements caused Navistar's stock price to be artificially inflated.
On March 10, 2010, Ustian participated in a conference call with analysts to discuss Navistar's first quarter 2010 financial results. During the call, Ustian assured analysts that Navistar was ready to meet the 2010 emission standards:
And we're ready for emission standards. Our products are being certified today. Some of them have already passed...We do have some already in the marketplace. If you remember right, we had 100 or so buses that went into the marketplace at 2010 emissions levels. Those are running great. We have had no quality problems with it to speak of. So we believe that our technology is already proven.
Doc. 128 ¶ 127. Yet several weeks later, Navistar confirmed through a brief filed in connection with litigation against the EPA that it was " still maturing Advanced EGR technology" and would be able to meet 2010 emission standards only " through a combination of Advanced EGR technology and 'banked' emissions credits." Id. ¶ 128. In other words, as of April 2010, Navistar had certified only 0.5 NOx engines and was utilizing its emission credits to meet the 0.2 NOx standard.
On June 9, 2010, Navistar conducted a conference call with analysts to discuss its second quarter 2010 financial results. During this call, Ustian attempted to dispel rumors calling into question Navistar's ability to satisfy emission requirements with EGR technology that had concerned investors, or created " worry beads" for investors. Ustian told analysts " we're at the point now that every one of these worry beads is behind us." Id. ¶ 130. Later, during the same call, Ustian told the analysts that Navistar had " engines running--we have vehicles running that meet those standards of 0.2." Id.
Then, on August 27, 2010, Navistar's Chief Engineer for heavy-duty engines authored a report called " Go Fast 0.2 NOx In--Cylinder Solution -- Scope." Id. ¶ 52. This report predicted that the 0.2 NOx EGR engine would not go into production until the first quarter of 2014 for the 13--liter engine, the third quarter of 2014 for the 11--liter engine, and the first quarter of 2015 for the 15--liter engine. Outside consultants hired by Ustian had initially set a launch date for the 0.2 NOx EGR engine of January 2012. Navistar engineers told their supervisors that this was not realistic given the issues they were encountering, and bumped the launch date to 2014. With the new timeline, Navistar projected that there would be a 1.75 year gap between when Navistar exhausted its emission credits and when it would have a certified 0.2 NOx engine.
A few months later, Navistar held a press briefing at one of their facilities in Alabama. Fleet Owner magazine published an article the following day, November 4, 2010, which discussed the ongoing question of whether Navistar would be able to meet the 2010 emission standards without the use of emission credits. The article quoted Ustian's statement from the press briefing--" [w]e're 100% there in terms of our ability to do it," i.e., achieve 0.2 NOx emissions with the EGR technology. Id. ¶ 133. The article also quoted a Navistar VP who said that he expected that Navistar would submit 0.2 NOx engines to the EPA for certification " within the next few months." Id. On the same day, Today's Trucking published a similar article stating that Navistar was on the verge of submitting a 13--liter engine that met 0.2 NOx for certification. A Navistar representative was quoted as saying that the " 0.2g NOx MaxxForce 13 we mentioned in the release yesterday and plan to submit to the EPA for certification will achieve emissions 'in-cylinder.' Stay tuned." Id. ¶ 134.
On December 22, 2010, Navistar held a call with analysts to discuss fourth quarter and full year 2010 financial results. During the call, Ustian told the analysts that Navistar was the only company that " meet[s] emissions in the cylinder." Id. ¶ 135. When an analyst asked Ustian when the 13--liter engine would be certified at 0.2 NOx, Ustian stated that he believed that Navistar would submit the engine to the EPA within the next couple of months. But Ustian told the analysts that they could expect to see the 0.2 NOx 13-liter engine at a trade show on the 25th and that Navistar would " be able to show [them] the data, that it meets 0.2, and show [them] how [Navistar is] able to meet it."  Id.
In mid-2011, Navistar began experiencing warranty issues with its 0.5 NOx EGR engines. Normally, newly--developed engines experience warranty issues; however, the cost of these warranty issues exceeded Navistar's reserves. The issues stemmed from short development periods that eliminated the necessary time to appropriately test and validate the engine programs prior to launch. As the engines incurred more mileage, the warranty issues began to appear. In late 2011, Navistar was able to re--engineer an EGR valve, which was believed to be the primary source of the warranty issues. Despite these issues, Navistar continued to move forward with the development of the 0.2 NOx EGR engines. Navistar did so ignoring data that seemed to indicate that the engines would not be commercially viable in terms of performance and durability at that emissions level. Specifically, during testing, the engines revealed issues with fuel economy and acceleration, and would sometimes simply break down. Ustian received all of this information.
On September 7, 2011, Navistar conducted a conference call with analysts to discuss its third quarter financial results. During the call, Ustian stated that Navistar's EGR technology was " on par with the best SCR competitors." Id. ¶ 138. A slide presentation, discussing Navistar's continued strategy of utilizing EGR technology to achieve emissions standards, accompanied the call. One slide posed the question of what Navistar was doing to meet the 0.2 NOx emissions once its credits were exhausted and provided the following response:
[EGR] technology is proving extremely viable providing fuel economy and performance on par with the best SCR competitors...As [Navistar] develop[s] 0.20g of NOx capability [Navistar's] goal of continuing to improve performance and fuel economy at this emissions level is being realized.
Id. Navistar's Form 10-Q, filed around the same time, stated that Navistar did not expect for its " rate of usage of emissions credits to have a material adverse effect on [its] business." Id. ¶ 139. Yet as of October 2011, Navistar was unable to submit an engine and truck for certification at 0.2 NOx. This meant that Navistar would not be able to start production on the engines before March 2012. And while it was impossible to provide an exact date when Navistar would exhaust its emission credits, as it depended on Navistar's rate of sales, Navistar predicted that it would likely be sometime in February of 2012. Navistar did not notify the public or its investors of this information.
Ultimately, Navistar did not achieve the 0.2 NOx emissions requirements through EGR technology and never was certified as meeting that requirement independent of banked emissions credits. As it became clear to the market that Navistar was unlikely to do so, its stock price began to drop. On February 14, 2012, Navistar's share price declined after an internet article reported that the EPA would fine Navistar for shipping back-dated engines during its 2010 engine transition. The anticipated value of the fines was $285 million. Then, in February 28, 2012 letters to counsel for Daimler Trucks, Mack Trucks, and Volvo, the EPA indicated its initial concerns that Navistar would be unable to certify its engine at 0.2 NOx and that even if it could be certified, Navistar
would not be able to introduce it until June 15, 2012. The EPA also opined on the possible economic impact its declining to certify Navistar's engines could have on Navistar's business.
On June 7, 2012, before the markets opened, Navistar reported a $172 million loss for its second fiscal quarter ending April 30, 2012, due in part to increased warranty expenses for repairs to 2010 and 2011 vehicles. On the same day, Navistar filed a Form 10-Q that stated that Navistar had yet to obtain certification at 0.2 NOx and would continue to meet 2010 emissions standards through its use of 0.5 NOx engines and emissions credits or paying non-conformance penalties. This news caused Navistar's stock price to drop by $4.04 per share (14.35%) that day. Then, on July 6, 2012, Navistar announced that it was abandoning EGR technology in favor of the SCR strategy the rest of the heavy--duty truck industry had already adopted. Navistar's stock price dropped by $4.37 per share (15.18%) that day. Finally, on August 2, 2012, Navistar issued a press release announcing that it was withdrawing its full year fiscal 2012 guidance until releasing its third quarter 2012 results in September. Navistar also disclosed an SEC formal letter of inquiry into accounting and disclosure matters dating back to November 2010. Navistar's stock price fell $3.33 per share (13.44%) that day. On August 30, 2012, Navistar disclosed that Ustian had resigned from Navistar effective August 26, 2012. These continual drops in stock price caused injury to Central States and the Class members.
Ustian's Stock Sales
During 2010 and 2011, Ustian sold a total of 84,192 shares of Navistar stock for a profit of $5,180,102. Specifically, on September 27, 2010, Ustian sold 10,000 shares of Navistar common stock for total proceeds of $456,000. Approximately one week later, on October 5, Ustian sold an additional 18,723 shares of Navistar common stock for a total value of $864,009. On April 5, 2011, Ustian sold 55,469 shares of Navistar stock at an average price of $69.59 a share, for a value of $3,860,087.71.
Cederoth's Stock Sales
On March 29, 2011, Cederoth sold 9,548 shares of Navistar stock at an average price of $67.34 a ...