In re Eaton Corporation Securities Litigation: Dismissed Consolidated Class Action Complaint Alleging Fraud
In In re Eaton Corp. Sec. Litig., No. 16-cv-5894 (JGK), 2017 BL 332475 (S.D.N.Y. Sept. 20, 2017), the United States District Court for the Southern District of New York granted Alexander M. Cutler, Richard H. Fearon (together the “Individual Defendants”), and Eaton Corporation’s (collectively, the “Defendants”) motion to dismiss the Consolidated Class Action Complaint (“CCAC”) by all purchasers of publicly traded common stock and/or exchange traded options on such common stock of Eaton Corporation between May 21, 2012, and July 28, 2014, (“Plaintiffs”) pursuant to Federal Rule of Civil Procedure 12(b)(6). The court held that the Plaintiffs failed to allege sufficient facts that the defendants made any material misstatements, were subject to a duty to disclose and failed to raise an inference of scienter.
According to the allegations, Eaton Corporation, an Ireland-based manufacturer of engineered products and historically a vehicle component manufacturer, announced plans to merge with Cooper Industries plc. Cutler was Eaton’s Chairman and Chief Executive Officer and Fearon was Eaton’s Vice Chairman and Chief Financial and Planning Officer. Cutler stated the company was not anticipating “any substantial additional change in the portfolio as a result of this transaction.” At various other shareholder meetings and calls Cutler and Freon continued to assure investors that there were no plans for divesture of company assets or any spin-offs planned. The CCAC alleged the merger was completed on November 30, 2012, and because of the acquired company’s electrical products business, there was concern that Eaton would sell off its automotive business. The CCAC alleges that the plaintiffs believed that failing to disclose the possible tax consequences of the spin-off of the automotive business adversely effected the company’s stock prices. The CCAC alleges inquiries regarding Eaton Corporation’s intent to change the business’s portfolio continued to surface, with Defendants claiming they “like[d] the portfolio we’re with” and releasing a press release entitled “Eaton Not in Discussions to Sell Its Automotive Business.” In its CCAC, Plaintiffs argued Defendants misrepresented or omitted the tax consequences of the merger between Eaton Corporation and Cooper plc. Plaintiffs claim this misrepresentation, that a company spin-off of its automotive business was economically prohibitive for the business for a period of 5 years because the spin-off would not be tax free, was materially misleading.
Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder make it “unlawful for any person . . . [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. A claim under Section 10(b) of the Exchange Act is based in fraud and must meet the heightened pleading requirements of Rule 9(b) and the Private Securities Litigation Reform Act. To fulfill those standards a plaintiff must specify each statement alleged to have been misleading and the reasons or reasons why those statements are misleading. A plaintiff must also show the defendant acted with the required state of mind.
The court found that Defendants were under no duty to disclose the hypothetical tax consequences of a potential spin-off of the company’s automotive business because the Defendants themselves repeatedly made clear that the “indicated probability” of such spin-off was zero. Further, the court found no inference of scienter because the CCAC failed to allege sufficient facts that would support it and the Individual Defendants’ stock sales were not unusual or suspicious. The court then found that because the Plaintiffs failed to allege a plausible primary violation of Section 10(b) and Rule 10b-5, Plaintiffs did not satisfy the first element of a Section 20(a) claim.
The court granted Defendants’ motion to dismiss and ordered Plaintiff to file a formal motion including a copy of the proposed amended pleading to be filed within 21 days of the opinion, or all claims would be dismissed with prejudice.
The primary materials for this case may be found on the DU Corporate Governance website.