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In re KLX, Inc. Securities Litigation

United States District Court, S.D. Florida

February 7, 2017

IN RE KLX, INC. SECURITIES LITIGATION,

          ORDER GRANTING DEFENDANTS' MOTION TO DISMISS

          Hon. Robin L. Rosenberg United States District Judge

         THIS MATTER is before the Court on Defendants' Motion to Dismiss [DE 47], Plaintiffs' Response in Opposition [DE 49] and Defendants' Reply [DE 51]. The Court has also considered Plaintiffs' Motion to Strike [DE 50], Defendants' Response in Opposition [DE 52], and Plaintiffs' Reply [DE 53], and denied Plaintiffs' Motion to Strike on August 17, 2016 [DE 54]. The Court held oral argument on the Motion to Dismiss on January 25, 2017. For the reasons discussed below, the Motion to Dismiss is GRANTED. The case is DISMISSED WITH PREJUDICE. The Clerk is ordered to CLOSE the case.

         I. BACKGROUND

         On May 18, 2016, Lead Plaintiffs International Brotherhood of Electrical Workers Local No. 38 Pension Fund Pension Plan and Steamfitters Local 449 Pension Fund (“Plaintiffs”) filed their Amended, Consolidated Class Action Complaint (the “Amended Complaint”) against Defendants KLX Inc. (“KLX”), Amin Khoury (“Khoury”) and Michael Senft (“Senft”) (Khoury and Senft, collectively, the “Individual Defendants, ” and together with KLX, the “Defendants”) [DE 44]. Plaintiffs brought this action on behalf of themselves and a putative class of others who acquired KLX's common stock between March 9, 2015 and November 11, 2015 (the “Class Period”). Plaintiffs' two-count complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.

         KLX is organized under the laws of Delaware and maintains its principal place of business in Wellington, Florida. (Compl. ¶ 18.) Throughout the Class Period, Mr. Khoury served as Chief Executive Officer and Director, as well as Chairman of the Board of Directors of KLX. (Id. ¶ 19.) Mr. Senft served as Vice President-Chief Financial Officer and Treasurer. (Id. ¶ 20.) Each continues in these roles. (See 2016 Q3 10-Q at 27.)[1]

         KLX traces its roots to B/E Aerospace, Inc. (“B/E”), the “world's leading manufacturer of aircraft cabin interior products, ” that Mr. Khoury co-founded in 1987. (Compl. ¶¶ 19, 27.) In 2013 and 2014, B/E acquired seven energy services sector companies to form an energy group within B/E. (Id. ¶ 34.) In December 2014, through a spin off from B/E, KLX was formed as an independent, publicly traded company. (Id. ¶¶ 29, 32.) KLX has two divisions: the Aerospace Solutions Group (“ASG”), and the Energy Services Group (“ESG”). (Id. ¶ 2.) ESG, at issue here, provides technical services and rentals to oil and natural gas exploration and drilling companies. (Id.) During the Class Period, ESG contributed 15-20% of KLX's revenues, while ASG contributed the other 80-85%. See 2015 Q110-Q at 13; 2015 Q3 10-Q at 14 .

         II. THE ALLEGATIONS

         The Amended Complaint points to three categories of disclosures which Plaintiffs allege constitute misrepresentations, contain omissions, or create a false impression of KLX's true condition: first, that Defendants spoke in an overly-positive manner about the Company's financial health (see, e.g., Compl. ¶ 48); second, that Defendants made false and misleading statements about employment figures (see, e.g., id. ¶ 96(a)); and third, that the Company made various misrepresentations in its public disclosures as a result of failing to recognize a good will and long-term asset impairment charge at an earlier point in time (see, e.g., id. ¶¶ 8, 125). At oral argument, Plaintiffs' counsel limited these allegations to “the [C]ompany's failure to recognize an impairment in the first quarter of 2015 versus the third quarter” by “recklessly fail[ing] to disclose that its ESG assets [were impaired], ” and stated that “[t]here is no disagreement that the Defendants regularly and consistently disclosed to investors that the market was in dire straits and that it was having a negative impact on the [C]ompany.” (Hr'g Tr. 21:1-7, 20:19-22.) While Plaintiffs thus backed away from the first two groups of allegations at oral argument, the Court will nonetheless discuss each of these categories below.

         III. APPLICABLE LAW

         A securities fraud claim under Section 10(b) has six elements: (1) a material misrepresentation or omission; (2) made with scienter; (3) a connection with the purchase or sale of a security; (4) reliance on the misstatement or omission; (5) economic loss; and (6) a causal connection between the material misrepresentation or omission and the loss, commonly called “loss causation.” Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1236-1237 (11th Cir. 2008); see also 15 U.S.C. § 78j(b) and Rule 10b-5 17 C.F.R. § 240.10b-5.

         To state a claim under Section 20(a), Plaintiffs must allege that: (1) KLX committed a primary violation of the securities laws; (2) the Individual Defendants had the power to control the general business affairs of KLX; and (3) the Individual Defendants “had the requisite power to directly or indirectly control or influence the specific corporate policy which resulted in primary liability.” Theoharous v. Fong, 256 F.3d 1219, 1227 (11th Cir. 2001) (citation omitted). If a plaintiff fails to adequately plead a violation of Section 10(b) and Rule 10b(5), a claim under Section 20(a) necessarily fails as well. See Garfield v. NDC Health Corp., 466 F.3d 1255, 1261 (11th Cir. 2006).

         Defendants moved to dismiss the Amended Complaint based on Federal Rules of Civil Procedure 12(b)(6) and 9(b), and the Private Securities Litigation Reform Act (“PSLRA”).

         A. General Motion to Dismiss

         Under Rule 12(b)(6), the Court accepts Plaintiffs' factual allegations as true and draws inferences from the Amended Complaint in the light most favorable to Plaintiffs. Ashcroft v. Iqbal, 556 U.S. 662, 696 (2009). However, “conclusory allegations, unwarranted deductions of facts or legal conclusions masquerading as facts will not prevent dismissal.” Oxford Asset Mgmt., Ltd. v. Jaharis, 297 F.3d 1182, 1188 (11th Cir. 2002).

         B. Rule 9(b) and the Private Securities Litigation Reform Act

         The Amended Complaint is subject to the heightened pleading requirements of Rule 9(b) and the PSLRA. Mizzaro, 544 F.3d at 1238. Rule 9(b) requires that a complaint set out “(1) precisely what statements were made in what documents or oral representations or what omissions were made, and (2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making) same, and (3) the content of such statements and the manner in which they misled the plaintiff, and (4) what the defendants obtained as a consequence of the fraud.” Id. at 1237.

         In addition, in 1995, Congress enacted the PSLRA “[a]s a check against abusive litigation in private securities fraud actions, ” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 308 (2007). The PSLRA made two key changes to securities fraud cases. First, it shifted the particularity requirement, mandating that a complaint “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). Second, it raised the pleading requirement for scienter such that, under the PSLRA, a “complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). These changes were designed to stop baseless suits at the earliest stage in a litigation. See Waterford Twp. Gen. Emps. Ret. Sys. v. BankUnited Fin. Corp., No. 08-CIV-22572, 2010 WL 1332574, at *13 (S.D. Fla. Mar. 30, 2010).

         The Eleventh Circuit has observed that “putting the PSLRA and [its] substantive scienter case law together yields the following stringent standard” to survive a motion to dismiss: In addition to pleading all other requisite elements, the complaint must “plead with particularity facts giving rise to a strong inference that the defendants either intended to defraud investors or were severely reckless when they made the allegedly materially false or incomplete statements.” Mizzaro, 544 F.3d at 1238. In reviewing an alleged violation of securities law, a court must ask itself: “When the allegations are accepted as true and taken collectively, would a reasonable person deem the inference of scienter at least as strong as any opposing inference?” Id. at 1239.

         C. Judicial Notice

         In analyzing a motion to dismiss in a securities fraud case, the Court may consider the full text of documents incorporated by reference into the complaint and other documents as to which the Court may take judicial notice. Tellabs, 551 U.S. at 322. In particular, the Court may consider the full text of securities filings alleged to contain misstatements. Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1276-81 (11th Cir. 1999) (noticing SEC filings). Documents incorporated by reference may be considered if they are central to plaintiff's claim and undisputed. Day v. Taylor, 400 F.3d 1272, 1276 (11th Cir. 2005); see also Harris v. Ivax Corp., 182 F.3d ...


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