The Sun May Not Rise Tomorrow

The Boeing securities class action related to its development of its 787-8 Dreamliner plane continues to provide some drama. In 2011, as noted on this blog, the district court granted the company’s motion to dismiss (on a motion for reconsideration) after it was determined that a key confidential witness denied being the source of the allegations attributed to him in the complaint, denied having worked for Boeing, and claimed to have never met plaintiffs’ counsel until his deposition. The plaintiffs appealed this decision to the U.S. Court of Appeals for the Seventh Circuit.

In City of Livonia Employees’ Retirement System and Local 295/Local 851, IBT v. Boeing Company, 2013 WL 1197791 (7th Cir. March 26, 2013), the court affirmed the dismissal based on the complaint’s failure to establish a strong inference of scienter. The opinion, authored by Judge Posner, contains some interesting commentary.

(1) Motive – The plaintiffs alleged Boeing had failed to disclose in a timely manner that the Dreamliner’s first test flight would be cancelled. The court noted that the law does not require the disclosure of the mere risk of failure. Indeed, “[n]o prediction – even a prediction that the sun will rise tomorrow – has a 100 percent probability of being correct . . . If a mistaken prediction is deemed a fraud, there will be few predictions, including ones that are well-grounded, as no one wants to be held hostage to an unknown future.” Moreover, it was unclear what motive Boeing would have had to put off the announcement, with the court wryly concluding that the main effect would be to “undermine Boeing’s credibility with its customers and expose the company to a multi-hundred million dollar lawsuit for securities fraud.”

(2) Confidential Witness – The court found that the recantation of the key confidential witness was fatal to the plaintiffs’ claims, because his supposed evidence provided the only basis for concluding that the company knew (at an earlier date) that the first flight test would be cancelled. Moreover, the confidential witness would no longer be useful because “[e]ither he had told the investigator the same thing he said in his deposition, which would be of no help to the plaintiffs and would expose the investigator as a liar, or he had had made the opposite assertions on the two occasions, in which event he was the liar, which wouldn’t help the plaintiffs either.”

(3) Sanctions – The defendants had cross-appealed for sanctions. The court strongly suggested that sanctions were appropriate in the case, noting that the plaintiffs’ lawyers “failure to inquire further [about the supposed evidence from the confidential witness] puts one in mind of ostrich tactics – of failing to inquire for fear that the inquiry might reveal stronger evidence of their scienter regarding the authenticity of the confidential source than the flimsy evidence of scienter they were able to marshal against Boeing.” Nevertheless, the court remanded the case to the lower court to determine whether sanctions should be imposed.

Holding: Dismissal affirmed, but case remanded for consideration of whether to impose Rule 11 sanctions.

Leave a comment

Filed under Appellate Monitor

Comments are closed.