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Palazzolo v. Fiat Chrysler Automobiles N.V.

United States District Court, E.D. Michigan, Southern Division

December 14, 2017

CARL PALAZZOLO and ALBERT FERRANDI, Individually and On Behalf of All Others Similarly Situated, Plaintiffs,
v.
FIAT CHRYSLER AUTOMOBILES N.V., SERGIO MARCHIONNE, RICHARD K. PALMER, and REID BIGLAND, Defendants.

          OPINION AND ORDER DENYING DEFENDANTS' MOTION TO DISMISS THE CONSOLIDATED CLASS ACTION COMPLAINT

          LINDA V. PARKER U.S. DISTRICT JUDGE

         This is a putative class action securities fraud case, in which investors in Fiat Chrysler Automobiles N.V. (“FCA”) common stock are suing FCA and the following FCA executives: Chief Executive Officer Sergio Marchionne (“Marchionne”), Chief Financial Officer Richard K. Palmer (“Palmer”), and Head of U.S. Sales Reid Bigland (“Bigland”). Court-appointed Lead Plaintiffs Carl Palazzolo and Albert Ferrandi filed a Consolidated Class Action Complaint (“Complaint”) on March 17, 2017. In the Complaint, Lead Plaintiffs allege that Defendants made materially false and misleading statements and/or omissions concerning a streak of increased monthly year-over-year United States retail sales by FCA during the Class Period (i.e., November 3, 2014 and July 26, 2016, inclusive), which Lead Plaintiffs claim was based on “fake” sales. Lead Plaintiffs further allege that Defendants' statements or omissions resulted in the artificial inflation of the price of FCA common stock, which declined when the truth about FCA's U.S. sales emerged. The matter presently is before the Court on Defendants' motion to dismiss, filed pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u-4. The parties have fully briefed the motion. Finding the facts and legal arguments adequately presented in the parties' briefs, the Court is dispensing with oral argument pursuant to Eastern District of Michigan Local Rule 7.1(f). For the following reasons, the Court is denying the motion.

         I. Standard of Review

         A motion to dismiss pursuant to Rule 12(b)(6) tests the legal sufficiency of the complaint. RMI Titanium Co. v. Westinghouse Elec. Corp., 78 F.3d 1125, 1134 (6th Cir. 1996). Under Federal Rule of Civil Procedure 8(a)(2), a pleading must contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” To survive a motion to dismiss, a complaint need not contain “detailed factual allegations, ” but it must contain more than “labels and conclusions” or “a formulaic recitation of the elements of a cause of action . . . .” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). A complaint does not “suffice if it tenders ‘naked assertions' devoid of ‘further factual enhancement.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 557).

         As the Supreme Court provided in Iqbal and Twombly, “[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Id. (quoting Twombly, 550 U.S. at 570). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556). The plausibility standard “does not impose a probability requirement at the pleading stage; it simply calls for enough facts to raise a reasonable expectation that discovery will reveal evidence of illegal [conduct].” Twombly, 550 U.S. at 556.

         In deciding whether the plaintiff has set forth a “plausible” claim, the court must accept the factual allegations in the complaint as true. Erickson v. Pardus, 551 U.S. 89, 94 (2007). This presumption, however, is not applicable to legal conclusions. Iqbal, 556 U.S. at 668. Therefore, “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. (citing Twombly, 550 U.S. at 555).

         Ordinarily, the court may not consider matters outside the pleadings when deciding a Rule 12(b)(6) motion to dismiss. Weiner v. Klais & Co., Inc., 108 F.3d 86, 88 (6th Cir. 1997) (citing Hammond v. Baldwin, 866 F.2d 172, 175 (6th Cir. 1989)). A court that considers such matters must first convert the motion to dismiss to one for summary judgment. See Fed. R. Civ. P 12(d). However, “[w]hen a court is presented with a Rule 12(b)(6) motion, it may consider the [c]omplaint and any exhibits attached thereto, public records, items appearing in the record of the case and exhibits attached to [the] defendant's motion to dismiss, so long as they are referred to in the [c]omplaint and are central to the claims contained therein.” Bassett v. Nat'l Collegiate Athletic Ass'n, 528 F.3d 426, 430 (6th Cir. 2008).

         Thus in a securities fraud case, the court may consider the full text of filings with the United States Securities and Exchange Commission (“SEC”) when deciding a Rule 12(b)(6) motion, even if they are not attached to the complaint. Bovee v. Coopers & Lybrand C.P.A., 272 F.3d 356, 360-61 (6th Cir. 2001). Nevertheless, “[i]t would be improper for the [c]ourt to rely upon these documents to determine disputed factual issues” or to “make any determination as to the truth of any of the facts alleged or otherwise asserted in the documents themselves.” In re Unumprovident Corp. Sec. Litig., 396 F.Supp.2d 858, 875-76 (E.D. Tenn. 2005). “Such documents should be considered only for the purpose of determining what statements the documents contain, not to prove the truth of the documents' contents.” In re Direct Gen. Corp. Sec. Litig., 398 F.Supp.2d 888, 893 (M.D. Tenn. 2005) (citing Lovelace v. Software Spectrum Inc., 78 F.3d 1015, 1018 (5th Cir. 1996)).

         Where fraud is alleged, Rule 9(b)'s pleading requirements also must be satisfied. Fed.R.Civ.P. 9(b). Under Rule 9(b), “the circumstances constituting fraud or mistake” must be “state[d] with particularity[.]” Fed.R.Civ.P. 9(b). In the Sixth Circuit, this means the plaintiff must, “at a minimum, … allege the time, place, and content of the alleged misrepresentation on which he or she relied; the fraudulent scheme; the fraudulent intent of the defendants; and the injury resulting from the fraud.” Coffey v. Foamex LP, 2 F.3d 157, 161-162 (6th Cir. 1993) (internal quotation marks and citation omitted).

         Additional heightened pleading requirements apply to claims arising under the PSLRA. See 15 U.S.C. § 78u-4(b)(1), (2). The Court discusses those heightened requirements in detail in Sections III and IV.

         II. Factual and Procedural Background

         FCA is a worldwide automotive designer, manufacturer, and retailer. (Compl. ¶ 1.) FCA operates in the United States through its wholly-owned subsidiary FCA U.S. LLC (“FCA US), which was formerly known as Chrysler Group LLC (“Chrysler”). (Id.) FCA operates through six business segments, with its North America segment comprising about 90% of FCA's earnings. (Id. ¶ 22.) Chrysler and Fiat S.p.A (“Fiat”) consolidated after Chrysler experienced extensive financial difficulties, reorganized, and emerged from bankruptcy in 2009. (Id. ¶ 2.) Marchionne, Chairman and Chief Executive Officer (“CEO”) of Fiat, began overseeing the consolidated entity in June 2009. (Id.)

         During the Class Period, Marchionne was responsible for the day-to-day management of FCA and controlled and directed its business and activities. (Id. ¶ 24.) When he began overseeing FCA, Marchionne instituted, what has been referred to as, “a flat organization with him at the top” in that “all key nerve systems run[] directly to [him].” (Id. ¶ 37.) In a July 2, 2015 article, The Detroit News described Marchionne as being at the “epicenter” of FCA's management matrix: “everyone is directly or indirectly connected to Marchionne, who has 38 executives reporting directly to him as CEO and chief operating officer of North America ….” (Id. ¶ 38.) Marchionne supervises each of these executives individually. (Id. ¶ 39.)

         During the Class Period, Marchionne certified the periodic financial reports FCA filed with the SEC and spoke regularly with investors and securities analysts regarding the company. (Id. 24.) He also has led FCA's Group Executive Council, its highest management body. (Id. ¶ 24.)

         In November 2009, soon after Marchionne began overseeing FCA, he and other company executives announced a five-year plan to increase the company's U.S. retail sales by greater than 50% and its U.S. market share from less than 9% in 2009 to greater than 13% by 2014. (Id. ¶ 3.) In February 2010, Chrysler reported its first positive monthly U.S. sales results in 26 months. (Id. ¶ 4.) When Chrysler became a wholly-owned subsidiary of FCA in October 2014, Chrysler had reported year-over-year monthly U.S. sales growth for fifty-four months. (Id.)

         FCA common stock began trading on the New York Stock Exchange on October 13, 2014. (Id. ¶ 5.) Thereafter, starting on November 3, 2014, FCA issued a monthly press release, which was filed with the SEC on Form 6-K, announcing its U.S. retail sales for the preceding month. (See, e.g., id. ¶¶ 174, 194, 202, 211, 218, 223, 270, 276, 291.) From November 3, 2014 through June 1, 2016, these press releases claimed an increase in FCA's U.S. sales compared to the same month the year earlier and an extension of FCA US' consecutive sales streak of year-over-year sales. (Id.) The press releases routinely included quotes from Bigland about the increased sales and/or the sales streak. (Id.) Palmer signed all but one of the press releases. (Id.; see also id. ¶ 25.)

         Bigland is and, throughout the Class Period, was FCA's Head of U.S. Sales, a position he has held since June 2011. (Id. ¶ 26.) In that position, Bigland has full responsibility for sales strategy, dealer relations and operations, order facilitation, incentives and field operations. (Id.) He reports directly to Marchionne. (Id.) Bigland became a member of FCA's Group Executive Council in September 2011 (Id.) During the Class Period, Bigland regularly spoke with investors and securities analysts regarding FCA. (Id. ¶ 26.)

         Palmer, FCA's Chief Financial Officer (“CFO”) since September 2011, also spoke regularly with investors and securities analysts regarding the company during the Class Period. (Id. ¶ 25.) In September 2011, Palmer also became a member of FCA's Group Executive Council. (Id.) He also has served as CFO of FCA U.S. since June 2009. (Id.) In that capacity, he is responsible for all FCA U.S. finance activities. (Id.) Palmer also sits on the Board of Directors of FCA US. During the Class Period, Palmer certified FCA's periodic financial reports filed with the SEC. (Id.)

         In its April 1, 2016 press release, announcing U.S. retail sales for March 2016, FCA claimed that increased sales for the month extended its year-over-year monthly sales gains to six full years. (Id. ¶ 306.) In the next two months' press releases, FCA did not mention the sales streak but claimed continued increased year-over-year sales. (Id. ¶¶ 313, 319.) The streak apparently reached 75 months by July 2016. (Id. ¶ 6.)

         FCA recognizes revenue when it ships vehicles to dealerships, not when the dealerships in turn sell vehicles to retail customers. (Id. ¶ 59.) Nevertheless, Defendants frequently referred to FCA's U.S. retail sales streak in public statements as evidence of the company's growth and success. (See, e.g., id. ¶¶ 95, 98, 149, 174, 194, 200, 202, 207, 211, 218, 223, 224, 270, 276, 291.) Media outlets regularly reported on FCA's consecutive streak of increased year-over-year monthly U.S. sales, noting at times that FCA continued to report growth even when its competitors experienced declining sales and analysts predicted losses. (See, e.g., id. ¶¶ 49, 54, 79, 81-86, 92, 96, 153.) Lead Plaintiffs allege in the Complaint that retail sales “provide the investing public, creditors, and partners in potential acquisitions with an important indicator of the underlying health of FCA's business.” (Id. ¶ 60.) A series of revelations starting in January 2016, however, began to uncover that FCA's increased year-over-year sales streak actually ended in September 2013, and that FCA's claimed increased sales were made possible by “fake” sales reported by franchised dealerships allegedly at the encouragement of executives at FCA headquarters. (See, e.g., Id. ¶ 173.)

         More specifically, Lead Plaintiffs allege in their Complaint that FCA officials encouraged and even bribed dealers with factory cash bonuses, expense reimbursements, and other incentives to carry out sales for which there was no actual buyer-typically at the end of the month to meet the month's sales volume objective. (See, e.g., Id. ¶¶ 10, 105.) FCA collected retail sales data from dealers through New Vehicle Delivery Reports (“NVDRs”). (Id. ¶ 63.) A dealer who submitted an NVDR for a new sale also could cancel the transaction and return the vehicle to the dealer's unsold inventory. (Id.) Dealerships would “unwind” the sales before the vehicle warranty went into effect. (Id. ¶¶ 99, 113, 333.) While “unwound” sales would be reflected in NVDRs (see id. ...


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