This post is the one of two posts discussing claims brought against International Business Machines Corporation (“IBM”) in 2016 regarding a seventeen percent drop in the company's stock price. This post will specifically focus on claims made under the federal securities laws. The other post covers claims made under the Employee Retirement Income Security Act (“ERISA”).
In Int’l Assoc. of Heat & Frost Insulators & Asbestos Workers Local #6 Pension Fund v. Int’l Business Machines Corp., No. 1:15-cv-02492-WHP, (S.D.N.Y. Sept. 7, 2016), the United States District Court for the Southern District of New York granted IBM’s (“Defendants”) motion to dismiss for failure to state a claim. The District Court held International Association of Heat and Frost Insulators and Asbestos Workers Pension Fund (“Plaintiffs”) did not support an inference of scienter under Fed. R. Civ. P. 9(b) and the heightened pleading requirements under the Private Securities Litigation Reform Act (“PSLRA”).
According to the Plaintiffs allegations, Defendants in 2010 established a strategy to double its earnings per share (“EPS”) to $20 within five years. The strategy included divesting IBM of unprofitable business segments. On October 20, 2014, IBM announced it would pay GlobalFoundries $1.5 billion to accept Microelectronics, a business unit within IBM’s Software Systems and Technology business segment. Between 2012 and 2013 Microelectronics suffered operating losses of $1.358 billion. On the same day as the announcement of the deal to sell Microelectronics, IBM disclosed disappointing third-quarter financial results and the stock price dropped more than 17 percent.
Plaintiffs alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and rule 10b-5 promulgated thereunder. Plaintiffs claimed: 1) Generally Accepted Accounting Principles (“GAAP”) required IBM and its corporate officers to record an earlier impairment to its microelectronics business unit; and 2) IBM’s stock price was overvalued and fell as a result of the divestiture announcement.
Under Fed. R. Civ. P. 9(b), a securities fraud complaint must state with particularity the facts giving rise to a strong inference of scienter. To plead a strong inference of scienter, plaintiffs must allege: 1) facts showing the defendant had both motive and opportunity to commit the fraud; or 2) constituting strong circumstantial evidence of conscious misbehavior or recklessness. In order to survive a motion to dismiss an allegation of a violation of rule 10b-5, a plaintiff must allege that the defendant: 1) made misstatements or omissions of material fact; 2) with scienter; 3) in connection with the purchase or sale of securities; 4) upon which the plaintiff relied; and 5) the plaintiff’s reliance was the proximate cause of its injury.
The court held Plaintiffs’ complaint failed to raise a strong inference of scienter. Specifically, the court stated the complaint did not demonstrate a strong inference that a failure to write down Microelectronics’ business unit earlier amounted to fraud. Furthermore, the court ruled forward looking statements regarding Defendant’s projection for operating EPS of at least $20 in 2015 were within the “safe harbor” rule of the PSLRA for forward looking statements. Plaintiffs failed to explain how allegations that Defendants knew the $20 EPS mark would not be reached was supported by an inference of actual knowledge and lacked a reasonable basis of knowledge when Defendants stated they were on track to reach the $20 EPS mark.
Accordingly, the District Court granted Defendants’ motion to dismiss for failure to state a claim.
The primary materials for this case may be found on the DU Corporate Governance Website.