In Affirming Dismissal of Putative Securities Class Action, Third Circuit Provides Important Guidance for Evaluating Sufficiency of Scienter Allegations

In Affirming Dismissal of Putative Securities Class Action, Third Circuit Provides Important Guidance for Evaluating Sufficiency of Scienter Allegations

A recent precedential decision from the Third Circuit may make it more difficult for putative securities class actions to withstand motions to dismiss and provides useful guidance for district courts in making the often difficult determination whether a complaint adequately pleads the strong inference of scienter necessary to sustain a federal securities fraud claim. In In re Hertz Global Holdings, Inc., certain pension funds brought a securities fraud class action alleging that Hertz Global Holdings, Inc. and certain of its current and former executives violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. Plaintiffs’ complaint relied heavily on a financial restatement Hertz issued with its fiscal year 2014 Form 10-K, which corrected errors to Hertz’s 2011, 2012, and 2013 financial statements. According to the restatement, Hertz had overstated its pre-tax income by a total of $215 million and its net income by a total of $132 million during the three-year period. The restatement explained that “an inconsistent and sometimes inappropriate tone at the top was present under then existing senior management” which “resulted in an environment which in some instances may have led to inappropriate accounting decisions and the failure to disclose information critical...

Enough Said: Southern District of New York Decision Reiterates Limits of Disclosure Obligations Under Securities Laws

Enough Said: Southern District of New York Decision Reiterates Limits of Disclosure Obligations Under Securities Laws

The Southern District of New York’s recent decision in Employees Retirement System of the City of Providence v. Embraer S.A. may provide useful guidance for companies struggling with disclosure obligations in the midst of ongoing investigations into potential unlawful conduct. Defendant Embraer, S.A., a Brazilian aircraft manufacturer, made a series of disclosures regarding external and internal investigations into potential U.S. Foreign Corrupt Practices Act (FCPA) violations. Specifically, in November 2011, Embraer disclosed investigations by the U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) and advised that it had retained outside counsel to conduct an internal investigation. Although the company repeatedly warned that it may be required to pay substantial fines or incur other sanctions, it also stated early in the investigation that it did not believe there was a basis to estimate reserves or quantify any loss contingency. In July 2016, Embraer announced that settlement negotiations with the DOJ and SEC had progressed to a point warranting recognition of a $200 million loss contingency. Nearly three months later, the company announced a settlement that included a fine of over $107 million and disgorgement of nearly $84 million in profits. On December 13, 2016, Employees’ Retirement System of the...