Dempsey v. Vieau: Motion to Dismiss Granted; Insufficient Allegations of Scienter

In Dempsey v. Vieau, 2015 BL 289745 (S.D.N.Y. Sept. 08, 2015), the United States District Court for the Southern District of New York granted David Vieau (“Vieau”), David Prystash (“Prystash”), John Granara III (“Granara”), and Jason Forcier’s (“Forcier”) (collectively, “Defendants”) motion to dismiss the Amended Complaint (“Complaint”) filed on behalf of all purchasers of A123 Systems, Inc. (“A123”) securities for securities fraud pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5.

According to the allegations, A123 contracted with Fisker Automotive, Inc. (“Fisker”) to manufacture lithium-ion batteries for Fisker’s battery operated vehicle, the Fisker Karma. Plaintiffs alleged Defendants knew of defects in A123’s batteries but issued public statements contradicting this knowledge. Further, Plaintiffs alleged Defendants knew Fisker defaulted on the loan agreement from the Department of Energy (“DOE”), which was essential to Fisker’s business. A123 filed bankruptcy after it failed to deliver acceptable batteries to Fisker.

Plaintiffs alleged that Defendants deceived investors about A123’s inability to produce and ship adequate batteries to Fisker, and about Fisker’s inability to pay A123 for the batteries.

The court found Plaintiffs did not sufficiently demonstrate a material misrepresentation with regard to the defective batteries. The court also concluded that Plaintiffs insufficiently alleged scienter, which is “an intent to deceive, manipulate, or defraud.” A “strong inference of scienter” may be alleged through facts that either “defendants had both motive and opportunity to commit the fraud” or there was “strong circumstantial evidence of conscious misbehavior or recklessness.”

Scienter based on stock sales by insiders requires evidence of transactions unusual or suspicious in timing or amount. Plaintiffs alleged Defendants inflated the value of A123 stock by stating Fisker would purchase the batteries while knowing Fisker was “effectively insolvent.” Since Prystash and Granara had not sold A123 shares during the class period and Vieau and Forcier sold shares pursuant to a Rule 10b5-1 plan which “does not give rise to a strong inference of scienter,” the court held Plaintiffs failed to plead the transactions were unusual or suspicious in amount or timing.

The court dismissed Plaintiffs’ allegation of scienter based upon conscious misbehavior or recklessness. Plaintiffs argued Defendants knew or should have known Fisker would be unable to purchase batteries from A123. The court, however, found that Plaintiffs did not plead facts demonstrating that Fisker’s business was “plainly unsalvageable.” As a result, “the nonculpable inference that Defendants believed that Fisker would eventually recover and contribute to A123's revenue is more compelling than the alternative version asserted by Plaintiffs.”

Finally, the court found that Plaintiffs did not sufficiently claim a “strong inference” of scienter with respect to alleged violations of Generally Accepted Accounting Principles (“GAAP”).  Plaintiffs alleged that A123 failed to file an “other than temporary impairment” (“OTTI”) report of its investment in Fisker. The court, however, found that it was “more likely that Defendants believed that Fisker would be able to secure the necessary funds to continue production of the Karma and uphold its contract with A123 and that, therefore, there was no OTTI to report.”

Additionally, the court dismissed the § 20(a) claim because Plaintiffs failed to adequately plead a predicate Exchange Act violation.

Accordingly, the court granted Defendants’ motion to dismiss the Amended Complaint in its entirety.

The primary materials for the post are available on the DU Corporate Governance website.