Another class action attempt by investors in aerospace and defense contractor L3 over the company’s 2014 accounting fraud faced defeat Thursday. U.S. District Judge Valerie Caproni of the Southern District of New York dismissed Employee Retirement Income Security Act of 1974 claims against the company, finding, as she did in an earlier suit, that plaintiffs failed to allege plausible claims against the company’s executives.
In April 2016, Caproni ruled in Patel v. L-3 Communications Holdings 14-cv-06038 that individual claims against L3 executives Michael Strianese and Ralph D’Ambrosio should be dismissed over a failure by plaintiffs to show, under the heightened securities fraud standards, the required scienter on behalf of defendants.
While the suit was ultimately settled after other allegations went forward, Caproni noted that the new suit, Price v. Strianese 17-cv-00652, relied heavily on arguments made in the previous case, with “numerous” paragraphs copied “verbatim. Plaintiffs allege that the executives did or should have known that investing in the company’s own stock ahead of the fraudulent accounting activity becoming known was imprudent.
Caproni, referencing the two suits, said, “Price fares no better than Patel.”
Despite the more “generous” standards under an ERISA claim, plaintiff was unable to show that the two executives knew or should have known that the company’s stock was inflated and therefore a bad bet.
Caproni noted that the allegations rely “somewhat inexplicably” on a cease and desist order and nearly $2 million fine issued by the U.S. Securities and Exchange Commission in early 2017. A November 2013 whistleblower complaint about potential fraud—the details of which are absent from both the SEC’s actions and plaintiff’s complaint—led to an internal investigation by the company and, ultimately, the uncovering of the accounting fraud.
According to Caproni, the failure to detail what that ethics complaint actually said, it was “particularly implausible to infer” that defendants knew about the accounting fraud based on the November 2013 ethics complaint “because, according to the SEC, the fraud did not occur until December 2013.”
Plaintiff likewise failed to allege that ERISA duty prudence claim. Halting stock purchases, as plaintiff suggests, could have done more harm than good, as it may have signaled problems inside the company. Issuing a statement could have similar dire consequences. Investment in a hedging product was likewise inadequately pleaded “because the description of the hedging product is simply too vague for the Court to conclude that it reflects a viable option.”
Simpson Thacher & Bartlett partners Michael Garvey and Paul Curnin led the defense for Strianese and D’Ambrosio. Through a spokesman they declined to comment.
Counsel for the plaintiff, Zamansky LLC partner Sam Bonderoff said in a statement that, though they disagree with Caproni’s dismissal, they intend to amended the complaint.
“To the millions of American employees whose retirement savings are invested in employer stock plans, it is vitally important that the Supreme Court’s ‘more harm than good’ standard be applied in a way that does not strip those employees of their statutory right to seek compensation from those plans’ fiduciaries when those fiduciaries are derelict in their duties,” Bonderoff said.