City of Roseville Employees’ Retirement System v. Horizon Lines, Inc., No. 08-969 (D.Del., Nov. 13, 2009), read opinion here.
The U.S. District Court for the District of Delaware dismissed a putative class action lawsuit alleging that Horizon Lines Inc. and its senior officers misled investors by attributing the Company’s earnings and financial growth during the class period to legitimate business practices instead of to the illegal price-fixing and bid-rigging scheme. The court held that the plaintiffs failed to plead with particularity that Horizon Lines’ executives Raymond (CEO), Urbania (CFO) and Keenan knowingly made false and misleading statements under the securities laws.
The opinion features quotes from then-Senator (now Vice President) Joe Biden during the Senate floor debate regarding the intent of the Sarbanes-Oxley Act.
The securities fraud claims in this case arise out of an April 2008 investigation by the Department of Justice relating to Horizon’s pricing practices in Puerto Rico. Horizon is a publicly-traded commercial shipping and logistics company whose principal place of business is in Charlotte, North Carolina. The day Horizon disclosed the investigation to the public, the price of its publicly traded stock fell from $18.23 to $14.70 per share. The stock dropped again shortly thereafter when Horizon downgraded its earnings forecast – from $15.08 to $11.25. In total, the price of the stock was down 38% in little over a week. On October 1, 2008, the DOJ charged three Horizon employees with violating the antitrust laws by conspiring to suppress competition, rigging bids, fixing prices, and allocating customers. All three Horizon employees pled guilty to the charges and are now in prison.
Class Action Complaint
The Complaint alleged that the corporate officers violated the anti-fraud provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act, in the following ways. They omitted in: (1) Horizon’s Code of Ethics, (2) conference calls with analysts, and (3) Sarbanes-Oxley certifications , that Horizon executives were engaged in a fraudulent price-fixing scheme. Regarding the Code of Ethics (which appeared on Horizon’s website and was referenced in multiple Annual Statements), the court found that it was not false and misleading even though some of the employees were violating it. The court explained that “ [w ]ere we to accept plaintiff’s position, any company with a code of ethics in compliance with [SEC regulations] would be required to disclose all violations of that code or face liability under federal securities law. Such a result is untenable.”
However, the corporate officer’s statements in press releases and conference calls with analysts regarding revenue, pricing and competition were false and misleading — even though the statements may have accurately depicted Horizon’s financial performance –because “attributing such performance to only lawful conduct falls below the level of honesty required by the securities laws.” Similarly, Raymond and Urbania’s Sarbanes-Oxley certifications, “though numerically accurate, did not fairly present a complete picture of Horizon’s financial condition.” Nonetheless, the court recognized that Sarbanes-Oxley does not mandate that officers certify that their company’s reports are completely devoid of any misleading statements or omissions. “Officers are not guarantors of their truth. Instead, they must certify that they personally have no knowledge of such misleading statements or omissions.”
Plaintiffs Fail to Show Scienter
The court held that plaintiffs did not plead with particularity facts giving rise to a strong inference that the corporate officers knew their statements were false. Scienter could not be inferred from the corporate officer’s positions with the company, the DOJ’s statements that the guilty employees colluded with unnamed Horizon executives, or because the shipping rates in the Puerto Rican market were so important to Horizon’s overall revenue that the corporate officers must have known that the rates were unlawfully inflated (or were reckless in not knowing). Nor did the corporate executives’ statements to analysts about the Company’s revenues and rates, or their predetermined monthly sales of stock pursuant to the 10b5-1 plans imply scienter.
In conclusion, the court reasoned that “[b]y its nature, this conspiracy, though expansive, was shrouded in secrecy. There are simply no particularized facts articulated in the complaint demonstrating that Raymond or Keenan or Urbania either participated in or knew about the conspiracy.”