Court affirms Horizon suit dismissal
A sharply divided federal appeals court in Philadelphia upheld a lower court’s dismissal of securities fraud suits against Horizon Line that grew out of a price-fixing conspiracy on its U.S.-Puerto Rico container liner service.
Horizon and eight employees were sued by plaintiffs in two suits, one led by the City of Roseville Employees Retirement System, the other by the Police and Fire Retirement System of the City of Detroit (PFRS).
The defendants included the three managers of Horizon’s Puerto Rico business who pleaded guilty in 2008 to price fixing in a criminal case filed by the federal government and five senior executives at the company, including former Chief Executive Officer Charles Raymond, who were not been charged with any crime.
Summarizing the case, the 3rd Circuit said the investors alleged the defendants “made statements about Horizon's financial health, in particular explaining why Horizon was increasing shipping rates and otherwise doing well in a tight Puerto Rico market, and that those statements were false because the company's apparent well-being in Puerto Rico was due to price fixing, not the reasons Horizon and its executives identified.”
The district court held that “the senior executives made materially false statements, but nonetheless dismissed the claims against them because there were insufficient allegations to raise a strong inference that they made those false statements with scienter.”
Scienter is a legal term that the court explained refers to “a mental state embracing intent to deceive, manipulate or defraud, and requires a knowing or reckless state of mind.”
On the other hand the district court held the three Puerto Rico managers “acted with scienter, but that they did not make material false statements on which plaintiff relied.”
Because of this the district court concluded Horizon, the corporation, could not be liable “because there were not sufficient allegations that an individual defendant both made material false statements, on which the plaintiff relied, and acted with scienter.”
Two of the three 3rd Circuit judges agreed with this logic saying “zero plus zero equals zero.”
The majority also said in the context of the case “the standard for recklessness is high,” and that “allegations akin to corporate mismanagement are not sufficient.”
But in a strong dissent, Circuit Court Judge Thomas L. Ambro said he believed the pension funds had “alleged facts sufficient to support a strong inference that the senior executives made false statements with scienter.”
Ambro said he had “no doubt” that the Detroit police and fire retirement system allegations were sufficient to raise a strong inference of scienter as to the senior executives and that the lower court erred.
“Indeed, it is hard to imagine a more compelling confluence of circumstantial evidence in support of this conclusion,” he said. He complained the majority was “demanding precisely what the Supreme Court told it not to require — a ‘smoking-gun.' “
He said the Supreme Court has ruled the “inference that the defendant acted with scienter need not be irrefutable, i.e., of the 'smoking-gun' genre, or even the most plausible of competing inferences. ' The inquiry ' is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard.”
Ambro said he believed the Detroit pension funds had “alleged sufficient facts to raise a strong inference that the senior executives acted with scienter. First, this was not a subtle conspiracy. It persisted for more than six years and involved a shipping market that accounted for more than a third of Horizon's total revenue.
“Although shipping volumes in the Puerto Rico market had been declining steadily for more than a decade, and Horizon had three competitors for an ever-shrinking customer base, it managed to increase its shipping rates, and thus its revenues, every year during the class period,” 2002-2008, he said.
“Moreover, the conspiracy spanned Horizon's initial public offering of its stock, in preparation for which the senior executives assessed the company's business and financial position. Against this ‘array of circumstantial evidence’ it is hard to believe that five of Horizon's most senior officers, including the chief executive officer and the chief financial officer, were not at least reckless in failing to discover the antitrust conspiracy.”
Ambro said, “Senior executives were pressed repeatedly by perplexed investors about how Horizon's regular shipping rate increases in Puerto Rico were possible. In response, they credited a variety of reasons, including a stable competitive environment, responsible competition, market discipline, customer relationships, and good business practices.
“Combined with the nature, scope, and timing of the conspiracy, this is, I believe, sufficient to raise a strong inference that the senior executives were aware of the anomaly presented by Horizon's ever-improving financial situation in a declining market, and were, at best, reckless as to the cause.”
He also pointed to the fact that Mark Urbania, Horizon's former CFO, “announced his resignation, departed, and was replaced just two weeks prior to Horizon's announcement that it was being investigated for antitrust violations. Putting aside the timing of his sudden leaving, Urbania purportedly forfeited $4 million in stock options and, contrary to standard company practice, did not receive a severance package. To say that this is not typical politely understates suspicious circumstances deserving, at least, further inquiry.”
He also pointed to a government sentencing memorandum that said one Puerto Rico manager, R. Kevin Gill, had “provided evidence, in the form of statements and documents, against his superiors within (Horizon), including presently uncharged co-conspirators” and a decision by Horizon to plead guilty to criminal antitrust violations and pay a fine — originally $45 million, but then cut to $15 million because of the company’s week finances.
The appellate court decision and dissent (City of Roseville Employees Retirement System v. Horizon Lines. Nos. 10-2788 and 103815. 3rd Circuit. Aug. 24) can be found here. ' Chris Dupin