Chow v. Archer-Daniels-Midland Company et al

Filing 109

MEMORANDUM Opinion and Order: For the reasons stated in the attached order, Defendants' motions to dismiss 79 81 83 87 are denied. Signed by the Honorable Thomas M. Durkin on 3/12/2025. Mailed notice. (ecw, )

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
RAYMOND CHOW, individually and on
behalf of all others similarly situated,
Plaintiff,

No. 24 C 634
Judge Thomas M. Durkin

v.
ARCHER-DANIELS-MIDLAND COMPANY;
JUAN LUCIANO; VIKRAM LUTHAR; RAY
YOUNG; AND VINCIENT MACCIOCCHI,
Defendants.

MEMORANDUM OPINION AND ORDER
A class of shareholders of the Archer-Daniels-Midland Company (“ADM”)
allege that ADM and four of its officers made false statements in violation § 10(b) of
the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule
10b-5. They also claim violations of § 20(a) of the Exchange Act. Defendants have
each filed motions to dismiss, with ADM and its CEO, Juan Luciano, filing a joint
motion. All four motions are denied.
Legal Standard
A Rule 12(b)(6) motion challenges the “sufficiency of the complaint.” Gunn v.
Cont'l Cas. Co., 968 F.3d 802, 806 (7th Cir. 2020). A complaint must provide “a short
and plain statement of the claim showing that the pleader is entitled to relief,” Fed.
R. Civ. P. 8(a)(2), sufficient to provide defendant with “fair notice” of the claim and
the basis for it. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). This standard
“demands

more

than

an

unadorned,

the-defendant-unlawfully-harmed-me

accusation.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). While “detailed factual
allegations” are not required, “labels and conclusions, and a formulaic recitation of
the elements of a cause of action will not do.” Twombly, 550 U.S. at 555. The
complaint must “contain sufficient factual matter, accepted as true, to ‘state a claim
to relief that is plausible on its face.’” Iqbal, 556 U.S. at 678 (quoting Twombly, 550
U.S. at 570). “Facial plausibility exists ‘when the plaintiff pleads factual content that
allows the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.’” Thomas v. Neenah Joint Sch. Dist., 74 F.4th 521, 523 (7th Cir.
2023) (quoting Iqbal, 556 U.S. at 678). In applying this standard, the Court accepts
all well-pleaded facts as true and draws all reasonable inferences in favor of the nonmoving party. See Hernandez v. Ill. Inst. of Tech., 63 F.4th 661, 666 (7th Cir. 2023).
In addition to the Rule 12(b)(6) standard, the “[h]eightened pleading
requirements” of Federal Rule of Civil Procedure 9(b) “apply to complaints alleging
fraud.” See Cornielsen v. Infinium Cap. Mgmt., LLC, 916 F.3d 589, 598 (7th Cir.
2019). Under Rule 9(b), a party alleging fraud or mistake “must state with
particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b).
“Rule 9(b) requires a plaintiff to provide precision and some measure of
substantiation to each fraud allegation.” Menzies v. Seyfarth Shaw LLP, 943 F.3d
328, 338 (7th Cir. 2019) (internal quotation marks omitted). In other words, “a
plaintiff must plead the who, what, when, where, and how of the alleged fraud.” Id.
(internal quotation marks omitted).

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Furthermore, the Private Securities Litigation Reform Act of 1995 (“PSLRA”)
imposes additional pleading requirements in securities fraud cases. See Cornielsen,
916 F.3d at 598-99. The PSLRA requires the complaint to “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). The complaint must also “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)(A).
Background
ADM is divided into three business “segments.” They are: (1) Ag Services and
Oilseeds, which focuses on buying, storing, reselling, and processing oilseeds 1 and
soybeans; (2) Carbohydrate Solutions, which focuses on buying, storing, reselling, and
processing corn and wheat; and (3) Nutrition, which makes products animals and
people consume. Many of ADM’s Nutrition products are made from its soybeans,
seeds, corn, and wheat. ADM’s Nutrition segment purchases these ingredients from
the other two segments. ADM reported in SEC filings that it accounted for these
transactions at fair market value in accordance with Generally Accepted Accounting
Principles (“GAAP”). But beginning in 2018, ADM was actually accounting for these
transactions below fair market value. After the SEC initiated an investigation

1 “Oilseeds” are primarily used to make products like canola cooking oil.

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regarding ADM’s intracompany transactions, it eventually admitted the erroneous
accounting in a corrected 10-K filing in March 2024.
By accounting for these transactions at below fair market value, ADM’s
Nutrition segment reported much higher profit than it was actually experiencing.
This allegedly caused ADM’s stock price to increase from $35 to $90 between 2020
and 2022. When ADM filed its corrected report with the SEC, its stock price fell to
$50.
Two years after ADM began improperly accounting for the Nutrition segment’s
transactions, ADM’s board altered the compensation of its officers so that it was tied
to the growth of the Nutrition segment. In this way, ADM’s officers, including the
four Individual Defendants in this case, directly benefited from the inaccurate
accounting of the Nutrition segment’s profits. 2 The Individual Defendants also took
advantage of ADM’s inflated stock price by selling millions of dollars’ worth of ADM
stock during this time period. By contrast, the Individual Defendants did not sell any
ADM stock before the Nutrition segment began to show inflated profits.
Plaintiffs allege that Defendants’ reports to the SEC that the Nutrition
segment made intracompany purchases at fair market value was a false statement.
Plaintiffs also allege that the violations of GAAP with regard to the Nutrition
The “Individual Defendants” are the following four people: (1) Juan Luciano is
ADM’s Chief Executive Officer, President, and Chairman of the Board; (2) Vikram
Luthar was ADM’s Chief Financial Officer from 2022 until 2024, and had worked for
ADM in various positions since 2004; (3) Ray Young was ADM’s Chief Financial
Officer from 2010 until 2022; and (4) Vincient Macciocchi was ADM’s former
President of Nutrition from 2015 until 2023, and also served as Chief Sales and
Marketing Officer from 2020 until 2023.

2

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segment accounting resulted in Defendants making false statements about the
Nutrition segment’s profits and growth. Additionally, Plaintiffs allege that
Defendants falsely stated that ADM’s “internal controls” were effective when they
knew that the Nutrition segment accounting was incorrect.
Analysis
Plaintiffs claim that these false statements violated § 10(b) of the Securities
Exchange Act and SEC Rule 10b-5. The elements of a claim under § 10(b) and Rule
10b-5 are: “(1) a material misrepresentation or omission by the defendant; (2)
scienter; (3) a connection between the misrepresentation or omission and the
purchase or sale of a security; (4) reliance upon the misrepresentation or omission;
(5) economic loss; and (6) loss causation.” Stoneridge Inv. Partners, LLC v. Sci.Atlanta, 552 U.S. 148, 157 (2008).
I.

Falsity
Defendants argue that Plaintiffs have failed to plausibly allege that

Defendants’ statements about the Nutrition segment’s profits and growth and ADM’s
internal controls were false. But Defendants do not argue that ADM’s misstatements
in its SEC reports regarding the Nutrition segment’s accounting of intracompany
transactions were accurate. In other words, Defendants implicitly concede that the
statements about the intracompany transactions being accounted for in accordance

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with GAAP were plausibly false. This is likely because ADM admitted as much in the
corrected 10-K filing of March 2024.
Plaintiffs allege that this implicit concession is sufficient to plausibly allege
with particularity a false statement for purposes of their § 10(b) claim, such that it is
unnecessary for the Court to reach Defendants’ arguments that Plaintiffs have failed
to plausibly allege the falsity of the other categories of statements. Defendants
disagree and argue that Plaintiffs are required to plausibly allege the falsity of every
statement on which they base a claim for a § 10(b) violation.
But whether the statements regarding the Nutrition segment’s profits and the
statements regarding ADM’s internal controls are plausibly false is dependent upon
the falsity of the statements regarding the Nutrition segment’s accounting. ADM
conceded in its corrected 10-K that it misstated its accounting practices in its reports
to the SEC. This concession by ADM is sufficient to plausibly establish with
particularity the falsity of the statements regarding the Nutrition segment’s
accounting. If Defendants plausibly knew the statements about the accounting were
false, then Defendants plausibly also knew that their statements about the Nutrition
segment’s profits and ADM’s internal controls were also false. This is because it
cannot be true that a company conducting fraudulent accounting (1) can be said to
have sufficient internal controls, and (2) can be said to have legitimate reported
profits. Defendants’ arguments about “partial truth” and “puffery” are irrelevant if
they plausibly knew the accounting was incorrect. Thus, if Plaintiffs have plausibly

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alleged “scienter” they have plausibly alleged the falsity of the statements regarding
the Nutrition segment’s profits and ADM’s internal controls.
II.

Scienter
The state of mind necessary to state a claim under § 10(b) is described as

“scienter,” which “means an intent to deceive, demonstrated by knowledge of the
statement’s falsity or reckless disregard of a substantial risk that the statement is
false.” Cornielsen, 916 F.3d at 601 (7th Cir. 2019). Like falsity, “scienter,” must be
alleged with “particularity” by identifying “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)(A). The
allegation of scienter “must be more than merely plausible or reasonable—it must be
cogent and at least as compelling as any opposing inference of nonfraudulent intent.”
Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308, 314 (2007). To satisfy the
PSLRA’s specificity requirements in multi-defendant cases, a plaintiff “must create a
strong inference of scienter with respect to each individual defendant.” Pugh v.
Tribune Co., 521 F.3d 686, 693 (7th Cir. 2008); see also Cornielsen, 916 F.3d at 602.
Corporate scienter cannot be established in the absence of any individual corporate
official’s scienter. See Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702, 708
(7th Cir. 2008).
Here, although Plaintiffs do not allege direct evidence that Defendants knew
the statements to the SEC about the accounting were false, the allegations of
circumstantial evidence of their knowledge are strong. The primary evidence of
scienter centers on the Individual Defendants’ pecuniary interests. Two years after

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the false accounting practice was implemented, Defendants changed their
compensation structure to benefit from it. Specifically, under the new structure,
Defendants’ compensation was directly tied to the profits of the Nutrition segment
specifically, rather than that of ADM as a whole. This chain of events plausibly
suggests a motive to at least maintain the fraudulent practice. Further, Defendants
then took advantage of the Nutrition segment’s allegedly fraudulent profit reports by
selling stock during the class period.
Additionally, the Individual Defendants, as ADM’s highest-ranking officers,
had direct responsibility for entering into, monitoring, and publicly reporting on the
Nutrition segment’s profits. Indeed, the Individual Defendants made public
statements describing their knowledge and responsibility for the Nutrition segment’s
profits. See R. 67 ¶¶ 255-258, 268-272. And Courts have frequently held that
“[o]fficers of a company can be assumed to know of facts ‘critical to a business’s core
operations or to an important transaction that would affect a company’s
performance.’” In re Sears, Roebuck & Co. Sec. Litig., 291 F. Supp. 2d 722, 727 (N.D.
Ill. 2003); see also Azar v. Grubhub, Inc., 2021 WL 4077327, at *6 (N.D. Ill. Sept. 7,
2021) (same). There are many allegations in the complaint showing that ADM and
its officers considered the Nutrition segment to be at the “core” of ADM’s growth plan.
See, e.g., R. 67 ¶¶ 40-41, ¶ 56-57.
Furthermore, the accounting fraud did not involve complex accounting
standards or require the exercise of judgment. See id. ¶ 276. Rather, ADM had a longstanding policy of booking inter-segment sales at market rates, and GAAP required

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only that ADM follow that publicly-disclosed policy. See id. ¶¶ 275-277. ADM followed
this GAAP policy for sales between its other two business segments but violated the
same GAAP policy for transfers to the Nutrition segment. See id. ¶¶ 277-279. Further,
the Individual Defendants made many public statements demonstrating their
knowledge about the Nutrition segment and its profits. See id. ¶¶ 124-57, 281-293.
In this context, the apparent simplicity of the accounting fraud provides further
support for a strong inference of knowing or deliberate disregard. Other court have
reached similar findings in similar circumstances. See In re MicroStrategy, Inc. Sec.
Litig., 115 F. Supp. 2d 620, 637 (E.D. Va. 2000) (finding scienter where a company
violated GAAP and its own publicly stated accounting method); In re Medicis Pharm.
Corp. Sec. Litig., 2010 WL 3154863, at *6-*7 (D. Ariz. Aug. 9, 2010) (same).
To top it all off, several of the Individual Defendants left their positions after
the false reports were disclosed, and ADM is the subject of government investigations
based on the false reports to the SEC. See Heavy & Gen. Laborers’ Loc. 472 & 172
Pension & Annuity Funds v. Fifth Third Bancorp, 2022 WL 1642221, at *22 (N.D. Ill.
May 24, 2022) (“Government investigations can help to reinforce allegations of
scienter[.]”); In re Akorn, Inc. Sec. Litig., 240 F. Supp. 3d 802, 820 (N.D. Ill. 2017)
(finding that officer resignations can “reinforce” allegations of scienter); In re OSG
Sec. Litig., 12 F. Supp. 3d 622, 632-633 (S.D.N.Y. 2014) (finding that “resignations”
can “suggest a higher level of wrongdoing approaching recklessness or even conscious
malfeasance”); San Antonio Fire & Police Pension Fund v. Dentsply Sirona Inc., 2024
WL 1898512, at *11 (S.D.N.Y. May 1, 2024) (same). Both these facts cement the

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strong inference that can be drawn from the allegations reviewed above that the
Individual Defendants were aware that ADM had misstated its accounting process.
Defendants pick apart Plaintiffs’ allegations and point to cases finding that
each type of allegation Plaintiffs include in their complaint is insufficient in isolation
to establish a strong inference of scienter. But this case is different. Here, Plaintiffs
have made strong allegations of motive, public statements, the core nature of the
Nutrition segment, and the straightforward nature of the fraud. These allegations
combined with the suspicious departures and government investigations create a
strong inference of scienter. Defendants cite no case with allegations this robust
where a court granted a motion to dismiss.
Defendants’ argument regarding the allegation of motive is a case in point.
Defendants argue that “courts consistently decline to infer scienter from . . . a generic
corporate incentive.” R. 80 at 18. But there is nothing generic about the incentives at
issue here. A “generic” incentive would be the commonplace incentive structure in
which officer compensation is linked to the profits of a company as a whole. Here, the
Individual Defendants’ compensation was linked to a specific segment of the
company. The traditional compensation structure was changed in the wake of ADM
beginning the fraudulent accounting practices. Defendants’ compensation structure
enabled them to directly benefit from the fraudulent accounting practices.

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Defendants then allegedly took advantage of these circumstances further by selling
ADM stock after it doubled in value when they had not sold stock previously.
Defendants argue, both in their briefs and at oral argument, that the two years
between the beginning of the accounting fraud and the compensation structure
change cuts against the compensation structure change being evidence of scienter.
See R. 92 at 9. Certainly, if the accounting fraud and compensation structure change
had begun simultaneously it would have been a very strong indication that the two
actions were connected. However, the temporal separation does not necessarily
undercut the strength of the allegations that the compensation structure indicates
knowledge of the fraud. This is because the decision to tie the Individual Defendants’
compensation to the Nutrition segment’s performance suggests that the Individual
Defendants would have closely examined the Nutrition segment’s financial records.
ADM’s board ultimately made the decision to change the compensation structure, but
the Individual Defendants were all either board members or high-ranking officers
who had responsibility for advising the board on such an important decision. It is
highly unlikely that the Individual Defendants did not closely review the planned
change in compensation structure and examine the underling relevant financial
information. And Plaintiffs allege that a close examination of the accounting would
have revealed the fraud. See R. 67 ¶¶ 275-78. Instead, the Individual Defendants
allegedly decided to perpetuate and take advantage of the fraud. So, while the twoyear separation might indicate that the change in compensation structure does not
necessarily indicate knowledge of the fraud, it just as easily can be understood the

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other way. And in light of the allegation that the accounting fraud was not
complicated, the Court finds that the change in compensation structure makes it
more likely that the Individual Defendants, and by extension ADM itself, were aware
of the fraud.
As in all cases, there are potential alternative explanations for these facts.
Defendants urge the Court to find that the alternative explanations outweigh the
inferences Plaintiffs ask the Court to draw. But this series of events is highly
suspicious and can hardly be described as “generic.” Common sense says that the
change in incentive structure is as close as circumstantial evidence can be to direct
evidence that Defendants knew about the accounting misstatements.
Lastly, Defendants’ only argument that the § 20(a) claims should be dismissed
is because they are dependent on the same factual allegations at the § 10(b) claims.
Having denied the motions to dismiss the § 10(b) claims, the motions to dismiss the
§ 20(a) claims are denied as well.
Conclusion
Therefore, Defendants’ motions to dismiss [79] [81] [83] [87] are denied.
ENTERED:
______________________________
Honorable Thomas M. Durkin
United States District Judge

Dated: March 12, 2025

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