United States District Court, D. Columbia.
IN RE HARMAN INTERNATIONAL INDUSTRIES, INC. SECURITIES LITIGATION
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Re Document Nos.: 21, 49.
For HARMAN INTERNATIONAL INDUSTRIES, INC. SECURITIES LITIGATION, In Re: Thomas F. Cullen, Jr., LEAD ATTORNEY, Washington, DC.
For CHEOLAN KIM, Individually and on Behalf of All Others Simiarly Situated, Plaintiff: Daniel S. Sommers, Steven J. Toll, LEAD ATTORNEYS, COHEN MILSTEIN SELLERS & TOLL PLLC, Washington, DC.
For CITY OF BOCA RATON GENERAL EMPLOYEES PENSION PLAN, on behalf of itself and all other similarly situated - (CA-07-2175), Plaintiff: Timothy D. Battin, LEAD ATTORNEY, STRAUS & BOIES, LLP, Fairfax, VA; Jayne Arnold Goldstein, Pomerantz Grossman Hufford Dahlstrom & Gross, LLP, Weston, FL.
For HARMAN INTERNATIONAL INDUSTRIES INC., SIDNEY HARMAN, DR., KEVIN BROWN, Defendants: Robert C Micheletto, LEAD ATTORNEY, PRO HAC VICE, Traci L. Lovitt, PRO HAC VICE, JONES DAY, New York, NY; Thomas F. Cullen, Jr., LEAD ATTORNEY, Washington, DC; Michael J. Will, PRO HAC VICE, JONES DAY, Los Angeles, CA.
For SANDRA B. ROBINSON, Defendant: Thomas F. Cullen, Jr., LEAD ATTORNEY, Washington, DC.
For DINESH PALIWAL, Defendant: Thomas F. Cullen, Jr., LEAD ATTORNEY, Washington, DC; Michael J. Will, PRO HAC VICE, JONES DAY, Los Angeles, CA; Traci L. Lovitt, PRO HAC VICE, JONES DAY, New York, NY.
For ARKANSAS PUBLIC EMPLOYEES RETIREMENT SYSTEM (CA-07-2175), Interested Party: Steven J. Toll, LEAD ATTORNEY, COHEN MILSTEIN SELLERS & TOLL PLLC, Washington, DC.
For ARKANSAS PUBLIC EMPLOYEES RETIREMENT SYSTEM, Movant: Daniel S. Sommers, Steven J. Toll, LEAD ATTORNEYS, COHEN MILSTEIN SELLERS & TOLL PLLC, Washington, DC.
For CITY OF BOCA RATON GENERAL EMPLOYEES PENSION PLAN, Movant: Timothy D. Battin, LEAD ATTORNEY, STRAUS & BOIES, LLP, Fairfax, VA.
RUDOLPH CONTRERAS, United States District Judge.
Granting Defendants' Motion to Dismiss
This securities fraud class action litigation comes before the Court on Defendants' motion to dismiss Plaintiffs' consolidated class action complaint. Plaintiffs are shareholders who purchased shares of Harman International Industries, Inc. common stock between April 26, 2007, and February 5, 2008. They have filed a class action lawsuit against the company and its senior executives, alleging that Plaintiffs bought shares during the Class Period in reliance on Defendants' misrepresentations about the company's financial condition, and that they incurred damages as a result. Plaintiffs claim that Defendants engaged in securities fraud in violation of
section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (2012), and its implementing regulation, rule 10b-5, 17 C.F.R. § 240.10b-5 (2012). Plaintiffs also claim that the company's senior executives qualify as control persons under section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a) (2012), and are therefore individually liable for the underlying section 10(b) violation.
Defendants move to dismiss Plaintiffs' claims under Federal Rule of Civil Procedure 12(b)(6), asserting that the complaint does not properly allege a material misrepresentation or omission, scienter under the heightened pleading requirements for private securities fraud lawsuits, loss causation, or control person liability under section 20(a). For the reasons discussed below, the Court will grant Defendants' motion.
Harman International Industries, Inc. (" Harman" ) is a manufacturer of high-quality, high-fidelity audio products and electronic systems for the automotive, consumer, and professional markets in the Americas, Europe, and Asia. See Consol. Class Action Compl. ¶ 2, ECF No. 20. Shares of Harman's common stock are publicly traded on the New York Stock Exchange. See id. Plaintiffs are shareholders who purchased shares of Harman common stock between April 26, 2007, and February 5, 2008 (the " Class Period" ). See id. ¶ 9. They allege that throughout the Class Period, Harman and several of its officers knowingly or recklessly propped up Harman's stock price by issuing false and misleading disclosures regarding the company's financial state and failing to disclose material adverse facts about its true financial condition. See id. ¶ 3. Specifically, the alleged misrepresentations fall into three broad categories: statements related to Harman's anticipated acquisition by two private equity firms; statements related to the sales and quality of its mid-level infotainment systems; and statements related to the sales of its aftermarket personal navigation devices in Europe. See generally id. ¶ ¶ 28-56.
A. Acquisition by KKR and Goldman
On April 26, 2007, the beginning of the Class Period, Harman announced that it would be acquired by Kohlberg Kravis Roberts & Co. L.P. (" KKR" ) and an affiliate of Goldman Sachs & Co. (" Goldman" ) (collectively, the " Purchasing Companies" ) in a merger valued at approximately $8 billion. See Consol. Class Action Compl. ¶ 5, ECF No. 20. Pending completion of the transaction, Harman and the Purchasing Companies entered into an agreement (the " Merger Agreement" ) that would govern the period leading up to the close of the deal. Harman stated in a press release that the acquisition would allow shareholders the opportunity to participate in Harman's future growth. See id. ¶ 30. Over seven million shares of Harman stock were traded that day, with the stock closing at $122.50 per share, 19 percent higher than the previous day's close. See id.
However, on September 21, 2007, the Purchasing Companies abandoned the acquisition, stating that they believed that Harman had experienced a " material adverse change" in violation of the Merger Agreement. See id. ¶ 6. That day, Harman's share price fell to $85.00, a drop of $27.34. See id. ¶ 7. According to Plaintiffs' allegations, Harman had engaged in excessive capital spending and " burn[ed]
through cash" in order to ramp up its new plant in Missouri to manufacture its new mid-level infotainment system. See id. ¶ 72; see also infra Part II.B. Plaintiffs allege that the resulting cost overruns at this and other facilities caused Harman to breach a Merger Agreement covenant (the " CapEx Covenant" ) that prohibited Harman from making capital expenditures exceeding the capital expenditure budget before the merger. See Consol. Class Action Compl. ¶ ¶ 33, 72. In addition, the Merger Agreement included a clause (the " MAC Clause" ) that allowed the Purchasing Companies to terminate the acquisition in the event of a material adverse change in Harman's business. See id. ¶ ¶ 34-35. According to Plaintiffs, Harman " binged" on capital spending in June of 2007, spending $60 million in one month, causing Harman's capital expenditures to exceed $90 million in the fourth quarter of FY2007, violating the CapEx Covenant. See id. ¶ 72. Plaintiffs also allege that the capital spending was a material adverse change that violated the MAC Clause. See id. ¶ 71.
According to Plaintiffs' allegations, Defendants made the following misrepresentations during the Class Period regarding the merger, or failed to disclose material facts necessary to make the following statements about the merger not misleading:
o In an August 14, 2007, press release: " We anticipate completing the transaction during the third or fourth quarter of this calendar year." Id. ¶ 70.
o In Harman's August 29, 2007, Form 10-K: " We presently anticipate that the merger will be completed in the fourth quarter of calendar year 2007." Id. ¶ 78.
o In a September 21, 2007, press release: " Harman disagrees that a material adverse change has occurred or that it has breached the merger agreement." Id. ¶ 87.
According to Plaintiffs' allegations, these statements were materially false or misleading when made because Defendants knew--but failed to disclose--that Harman had breached the CapEx Covenant and MAC Clause, giving the Purchasing Companies an opportunity to terminate the Merger Agreement. See id. ¶ ¶ 71, 79, 96.
B. MyGIG Radio
Plaintiffs also allege that Defendants violated securities laws in issuing statements about Harman's " MyGIG radio" product--an infotainment system made to be installed in personal vehicles. In 2005, prior to the Class Period, Dr. Sidney Harman personally negotiated a contract between Harman and automotive corporation DaimlerChrysler (" Chrysler" ), whereby Harman would manufacture MyGIG radios for installation in many Chrysler vehicles. See Consol. Class Action Compl. ¶ 36, ECF No. 20. However, Plaintiffs allege that, despite being touted as a state-of-the-art infotainment system, the MyGIG radio was " problematic from a profitability standpoint" and was " plagued with various technical and cosmetic issues," which led to a one-year delay in producing the radios and Harman's inability to fulfill production needs. See id. ¶ ¶ 39, 41. Chrysler subsequently decreased its order for the radios. See id. ¶ 42. This reduced the need for parts required to make the radios, which, in turn, decreased the number of parts that Harman ordered, causing the parts suppliers to raise their prices. See id. Further, the contract with Chrysler failed to include costs for integrated circuits--very expensive electronic devices that were essential to operating the MyGIG radio. See id. ¶ 47. This omission left the contract underbid and generated losses for the company. See id. ¶ 13. The combination
of these factors meant that Harman would lose $164 on each of the 200,000 radios that it had committed to sell to Chrysler, for a total annual loss of $32 million from MyGIG production and sales. See id. ¶ ¶ 43-44. Plaintiffs claim that this scenario also caused Harman's relationship with Chrysler to " deteriorate beyond repair." Id. ¶ 13.
According to Plaintiffs' allegations, Defendants made the following misrepresentations during the Class Period regarding the MyGIG radios, or failed to disclose material facts necessary to make the following statements about the MyGIG radios not misleading:
o In Harman's May 10, 2007, Form 10-K: " We anticipate that DaimlerChrysler, Toyota/Lexus, Audi/VW, and BMW will continue to account for a significant portion of our net sales and accounts receivable for the foreseeable future." Id. ¶ 66.
o On Harman's August 14, 2007, earnings release conference call: " Our dominance in the automotive space was solidified through the past year . . . . With earlier awards to us from PSA, Audi and Chrysler, we established our leadership in the mid-range and entry levels, with last year's major awards from BMW, we erased any remaining questions." Id. ¶ 74.
o On Harman's September 27, 2007, earnings release conference call: " We expect Automotive sales to increase approximately 15% during the quarter, primarily due to the ramp-up of an infotainment system program . . . " Id. ¶ 100.
o Also on Harman's September 27, 2007, earnings release conference call: " [W]e are bringing additional business on-stream at Chrysler as we ramp up our Missouri plant . . . ." Id. ¶ 101.
o In Harman's November 9, 2007, Form 10-Q: " New introductions of infotainment systems including Chrysler's MyGIG infotainment systems in North America, the roll-out of [other systems] were primary factors contributing to higher sales." Id. ¶ 105.
According to Plaintiffs' allegations, these statements were materially false or misleading when made because Defendants knew--but failed to disclose--that Harman's relationship with Chrysler was strained due to the quality and delays in producing its MyGIG radios, and that the Chrysler contract required Harman to sell MyGIG radios at a net loss. See id. ¶ ¶ 64, 69, 76, 86, 102, 106.
In early 2006, Harman began selling personal navigation devices (" PNDs" ) in Europe and sold 35,000 units between January and April of that year. See Consol. Class Action Compl. ¶ 49, ECF No. 20. The company then launched a new model, expecting that it would double or triple sales. See id. By October 2006, the fourth month of FY2007, Harman had sold an additional 95,000 units. See id. ¶ 50. Dr. Harman stated then that the company anticipated selling well over 500,000 total units in Europe during that fiscal year. See id. In January 2007, Dr. Harman reported that almost 250,000 units had been sold in the previous six months, from July through December of 2006. See id. ¶ 51. He stated that the company's PND sales were accelerating, and that Harman expected PND sales to exceed 650,000 in Europe for FY2007. See id.
Plaintiffs contend, however, that Harman was in a " dire situation" regarding its PNDs. See id. ¶ ¶ 51-52. It was not selling PNDs in the numbers that it had anticipated in 2006, and thus many units were being stored in a warehouse. See id.
¶ 53. This was partly because Harman released five versions of the same PND between March 2006 and July 2007, which priced the units too high to compete with other PNDs and thereby slowed sales. See id. ¶ 54. The company was therefore one year late in releasing a saleable PND. See id. Further, in early 2007, Harman dropped the price of its PNDs substantially and made a modification that rendered obsolete the growing inventory in the warehouse. See id. ¶ 53. Consequently, the company missed projected PND sales by more than 200,000 units in FY2007. See id. ¶ 56. In June 2007, Harman agreed to sell 100,000 PNDs to a customer named Paragon at a significant discount from the prices that it had originally disclosed at the beginning of the Class Period. See id.
According to Plaintiffs' allegations, Defendants made the following misrepresentations during the Class Period regarding Harman's PNDs, or failed to disclose material facts necessary to make the following statements about the PNDs not misleading:
o On Harman's April 26, 2007, earnings release conference call: " The plan forecasts total unit sales of 618,000 units for the fiscal '07 year, and that plan ...