In re Supreme Industries Inc Securities Litigation

Filing 76

OPINION AND ORDER: Court GRANTS 61 Motion to Dismiss. All claims against the Defendants are DISMISSED WITHOUT PREJUDICE. Any amended complaint must be filed within 30 days of this Order. Signed by Judge Philip P Simon on 5/23/2018. cc: Laurence M Rosen (tc)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
SOUTH BEND DIVISION
In re SUPREME INDUSTRIES, INC.
SECURITIES LITIGATION

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NO. 3:17CV143PPS-MGG

OPINION AND ORDER
This is a class action against Supreme Industries Inc. and two of its officers for
alleged violations of federal securities laws. The lead Plaintiff, Kenneth Fishman,
purchased shares of Supreme during the relevant time frame. Fishman alleges that the
Defendants engaged in a fraudulent scheme to artificially inflate Supreme’s stock price
by misrepresenting the true nature of the company’s order backlog, which he claims is
the company’s surest indicator of future financial success. Fishman also claims that the
Defendants provided a prediction of the company’s future backlog even though they
knew adverse facts that undermined the prediction. The Defendants seek dismissal of
the complaint.
Background
Here are the facts as told to me by Fishman in his amended complaint (as well as
documents incorporated into it and public records), which I accept as true for present
purposes. Supreme is a publicly traded company headquartered in Goshen, Indiana.
[DE 53 at 10, ¶17.] It manufactures truck body parts for commercial and other speciality
vehicles. [Id. at 5, ¶2.] The company is managed by a small cadre of key executives,
which includes the individual Defendants in this case — Mark Weber, the Chief
Executive Officer, and Matthew Long, the Chief Financial Officer. [Id. at 5, ¶3.]

Kenneth Fishman alleges that he purchased 3,000 shares of Supreme common
stock in September 2016 at prices of $18.26 and $17.69. [Id. at 9, ¶16; DE 19-2 at 3.] He
sold all of his shares on November 9, 2016 at $12.08 and $12.03 per share, for a total loss
of $12,570. [DE 19-3 at 2.] He brings this action on behalf of himself and all similarly
situated purchasers of Supreme securities between October 22, 2015 and October 21,
2016 (the “Class Period”). [DE 53 at 4, ¶1.]
Supreme specializes in building truck bodies “to order,” completing most of the
production after a customer places an order. [Id. at 6, ¶5]. When an order is placed, it
enters Supreme’s “backlog,” which is its unfinished work or customer orders that have
been received but not yet completed. [Id. at 6, 18, ¶¶5, 42.] When work is completed
and shipped, Supreme records it as revenue and reports it as part of its net sales. [Id.]
Supreme repeatedly stated that its backlog was a critical indicator of the company’s
current performance and the surest indicator of future revenue, and it disclosed its
backlog figures to investors on a quarterly basis. [Id. at 6, 18, ¶¶5, 42, 44-45.]
Supreme serves a variety of customers, including national rental fleets, national
and regional leasing companies, truck chassis dealers, and fleet operators. [Id. at 15-16,
¶35.] The company divides its customers into three categories: retail, fleet, and other.
[Id.] Retail clients account for the most significant percentage of Supreme’s annual
sales, but these sales are spread across hundreds of accounts that may or may not
purchase from Supreme again. [Id.] Fleet customers, on the other hand, which include
national truck rental companies such as Budget and Penske, are fewer in number but

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spend more and typically place orders at regular intervals. [Id.] According to the
Defendants, fleet customers include both rental fleet and other fleet operators. [DE 62 at
22 n.5.] Fleet orders are typically reflected in the first half of each year. [DE 53 at 17,
¶39.] Supreme repeatedly conveyed these trends to investors. [Id. at 21-22, 24-26, ¶¶55,
63, 67-69.] Supreme further disclosed this trend in its 2015 Form 10-K, stating that
“Seasonality arises due to the Company typically participating in bids for large fleet
contracts. If successful, the fleet orders generally require shipment of the truck bodies
in the first and second quarters.” [Id. at 17, ¶39.]
Supreme reports its financial results on a quarterly basis in a press release and
SEC filing. These reports include Supreme’s backlog at the end of each quarter. [Id. at
18, ¶44.] Supreme does not disclose any granular-level detail about the backlog,
including the identity of its customers or the exact composition of the backlog. [Id. at 19,
¶47.] Supreme also holds a quarterly conference call with investors to discuss its
results. [Id. at 13-14, ¶¶30-31.] These calls, which include both Weber and Long, begin
with prepared remarks, but investors are also given the chance to ask questions during
an unscripted question and answer portion. [Id. at 19, ¶48.]
On October 22, 2015, Supreme issued a press release announcing its results for
the third quarter of 2015. [Id. at 24-25, ¶65.] This disclosure included Supreme’s
backlog, which was $74.4 million. [Id.] In its Form 10-Q filed with the SEC, Supreme
provided additional information regarding the backlog, including that “[c]ompared
with last year, new order intake was stronger in the third quarter of 2015 across both

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retail and fleet work truck product lines.” [DE 63 at 67.]
Supreme also held its quarterly earnings call. On the call, in his prepared
remarks, Weber announced that its 2015 third quarter backlog was 46.7% higher than
the 2014 third quarter. [DE 53 at 24-25, ¶¶65, 67.] Weber stated, “The combined
performance of our sales and operations teams resulted in strong third quarter orders
for trucks and specialty vehicles.” Weber added that this “notable year-over-year
growth” was “encouraging.” [Id. at 24-25, ¶65.] Weber noted that they were “picking
up some additional demand on the leasing side” from national rental companies
including Penske, Ryder, and Budget. [DE 63 at 53.]
Participants on the call asked questions about the backlog. When asked for “a
little color in terms of when your backlog is typically realized,” Weber explained that
lead times are generally longer for rental fleet orders than for retail and normal leasing
business. [DE 53 at 25, ¶68; DE 63 at 52.] Weber added “[s]et aside the rental fleet
business, because as you know, we typically are quoting that and securing those orders
in the fourth quarter and they don’t flow through typically until the second quarter ...
none of that is really in our backlog right now.” [DE 53 at 25, ¶68; DE 63 at 52.] Another
analyst asked for the source of the increased backlog and whether it was attributable to
extended lead times on medium-duty chassis availability. Weber responded that it was
“a little bit” of the reason, but that “a lot of our growth this year has been in the
medium duty side. I would say that our backlog is a little more titled towards mediumduty than light-duty.” [DE 53 at 25-26, ¶69.]

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On February 18, 2016, Supreme announced its results for the fourth quarter of
2015. Supreme reported “significantly improved financial results” for both the fourth
quarter and 2015 as a whole. [Id. at 26, ¶71.] In addition, Supreme announced that its
backlog as of the end of 2015 was $98.1 million, representing a more than 31% increase
from the prior quarter. [DE 63 at 83.] This increase, Supreme said, was because of new
order rates for trucks across both retail and national accounts, as Supreme secured new
customers and add-on business from national accounts. [Id. at 112.]
During the fourth quarter earnings call, Supreme noted that the backlog included
fleet orders, which were “pretty much flat,” and it cautioned that “[r]ental fleet demand
is expected to moderate somewhat for 2016.” It also said that “rental demand also
tends to be more sensitive to near term economic conditions.” [DE 63 at 90.] Moreover,
it indicated that because of the “choppy outlook of some economic indicators, we are
keeping a vigilant watch on leading indicators and market conditions.” [Id. at 89.]
Supreme next disclosed, on April 21, 2016, that its first quarter of 2016 results
concerning its net sales, income, and gross margin had again improved. It also
announced that its backlog had increased to $102 million. [DE 63 at 214.] Weber stated
that the backlog provided “additional confidence that our regional sales teams are
gaining traction with a broad range of retail end users and leasing channel partners,”
but he noted that “rental fleet orders were mixed, as some accounts are trimming
expenditures.” [Id. at 219.]
On July 21, 2016, Supreme announced its 2016 second quarter results. It reported

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improved second quarter and first-half results, including improvements in its net sales,
net income, and margins. [DE 53 at 26, ¶71; DE 63 at 274, 303.] Supreme’s backlog was
$75.5 million, which was an increase year-over-year. [DE 63 at 274.]
During the earnings call the next day, July 22, 2016, the Defendants articulated a
somewhat pessimistic outlook for Supreme. They told analysts that Supreme had seen
“some indications of demand moderation late in the quarter,” it “had lower year-overyear fleet business,” and it had “lost some business on the fleet side.” [DE 53 at 28, ¶77;
DE 63 at 280, 296.] The Defendants further disclosed that “ACT data reported that June
medium-duty truck orders were down 10% sequentially from May and 1% below June
2015.” [DE 63 at 280.] The Defendants also predicted “some softness in the NTEA
numbers in May and June,” saying that they were going to be “a little weaker.” [Id. at
293.]
One analyst on the call noted the “slowing industry,” and he asked for “a little
kind of color in the best way for us with gross margin in the back half of the year” and
2017. [DE 53 at 27, ¶73; DE 63 at 284] Long’s response to that question forms much of
the sum and substance of this case. Long told the analyst that “without giving guidance
... we had some serious leverage on our fixed cost with the increased volume as you
look at the backlog, the backlog is going to settle more towards the way it looked Q3
last year. So I wouldn’t expect the same level of leverage on fixed cost.” [DE 53 at 27,
¶73.] Long went on to say that this “depends on how the volume comes out in the
current quarter.” [DE 63 at 284.] It is the italicized portion of this quote that is claimed

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to be actionable.
On October 20, 2016, Supreme reported its third quarter 2016 results. Although
higher net income and sales were reported, Supreme also disclosed that the backlog was
$58.1 million, which was down from $74.4 million the previous quarter. [DE 53 at 28-29,
¶78.] Comparing third quarter 2016 backlog to the previous year (third quarter 2015), it
had decreased 22%. [Id. at 8, 22, 28-29, 40, ¶9, 56, 78, 115.] In explaining the reason for
the year-over-year decline in the backlog, Weber provided two reasons: first, although
backlog at the start of the third quarter of 2016 was actually higher than at the same
point the previous year, net sales were about $10 million higher this year versus last;
second, the higher backlog from last year was due to “two large fleet replacement
orders and the timing of an annual fleet account order.” [Id. at 8, 26, 29, ¶9, 70, 81.] The
Defendants acknowledged that the lack of orders from fleet customers weighed heavily
on backlog. [Id. at 30, ¶84.] A corresponding press release stated that, “The timing of
several large orders increased backlog at the end of the third quarter 2015.” [Id. at 2829, ¶78.] In the press release, Weber also acknowledged that “industry-wide growth in
commercial truck sales decelerated during the summer months.” [Id. at 29, ¶79.]
On the earnings call, Weber also explained that the “economy remains choppy,”
and that “[e]conomic indicators had turned more bearish during the summer months
with several cross-currents resulting in delayed purchase decisions” by customers. [DE
63 at 353, 361.] Weber provided some reasons that optimism had been dampened,
including “the lack of small business confidence, several weak manufacturing sectors,

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limited export support, and the uncertainty of the November elections.” [Id. at 363.] He
further explained that the trucking industry was slowing and there was research
suggesting that sales in 2016 would drop and projected growth for 2017 had been
lowered from predictions of 1.8% to only 0.6%. [Id. at 354.] Weber also disclosed that
Supreme had seen “some of the rental accounts pull back pretty hard,” and he noted
that his own discussions with multiple leasing companies and end users confirmed the
caution created by the economic cross-currents. [Id. at 357-58.]
The day after the earnings were reported (October 21, 2016), a short seller named
Cliffside Research issued a “Flash Alert,” rating Supreme’s stock as a “Strong Sell.” [DE
53 at 21, 33-34, ¶¶52, 90-93.] The report noted the cyclical nature of the trucking
industry and Supreme’s valuation after experiencing “explosive earnings growth over
the past year.” [DE 63 at 469-88.] Supreme’s stock price fell by $4.28 per share that day,
or nearly 24%, from $17.96 to $13.98. [DE 53 at 32, ¶88.] The next trading day, the stock
fell again in price by another $2.38, to $11.30 per share. [Id. at 32, ¶89.] But the stock
rebounded rather quickly; by January 23, 2017, the stock was selling at the pre-decline
price. [DE 63 at 498.]
Analysis
The defendants have moved to dismiss the first amended complaint under
Federal Rule of Civil Procedure 12(b)(6). The standard for deciding this motion is not
the typical standard that applies in ordinary motions to dismiss. Rather, the Private
Securities Litigation Reform Act (“PSLRA”) provides that the complaint in a securities

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fraud action must do two things: first, the complaint must “specify each statement
alleged to have been misleading [and] the reason or reasons why the statement is
misleading.” 15 U.S.C. § 78u-4(b)(1). Second, it must, “with respect to each act or
omission, ... state with particularity facts giving rise to a strong inference that the
defendant acted with the required state of mind.” Id. § 78u-4(b)(2). Here, the required
state of mind is scienter, meaning a mental state that involves an intent to deceive or
defraud. Tellabs, Inc. v. Makor Issues and Rights, Ltd., (Tellabs II), 551 U.S. 308, 319 (2007).
The Supreme Court has established three guideposts in deciding motions to
dismiss under the PSLRA:
(1) Courts must “accept all factual allegations in the complaint as true.”
(2) Courts must “consider the complaint in its entirety, as well as other sources
courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in
particular, documents incorporated into the complaint by reference, and matters
of which a court may take judicial notice ... The inquiry is whether all of the facts
alleged, taken collectively, give rise to a strong inference of scienter, not whether
any individual allegation, scrutinized in isolation, meets that standard.”
(3) Courts must, in determining whether the pleaded facts give rise to a ”strong”
inference of scienter, “take into account plausible opposing inferences.”
Id. at 322-23. A “strong” inference of scienter is one that is “powerful or cogent.” Id. at
323. It is not enough for the plaintiff to allege facts from which an inference of scienter
rationally could be drawn. Id. The inquiry into whether the plaintiff has pleaded
sufficient facts to infer scienter is “inherently comparative,” and I must assess “[h]ow
likely is it that one conclusion, as compared to others, follows from the underlying
facts?” Id. To answer this question, I must consider “plausible, nonculpable

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explanations for the defendant’s conduct, as well as inferences favoring the plaintiff,”
bearing in mind, however, that the inference of scienter need not be irrefutable or even
the most plausible of competing inferences. Id. at 324. A complaint in a Section 10(b)
action will survive “only if a reasonable person would deem the inference of scienter
cogent and at least as compelling as any opposing inference one could draw from the
facts alleged.” Id.
There are different standards for evaluating allegedly false statements depending
upon whether the statement is one of historical fact as opposed to a forward-looking
prediction. With respect to the former — statements of historical or present fact —
scienter means “knowledge of the statement’s falsity or reckless disregard of a
substantial risk that the statement is false.” Higginbotham v. Baxter Int’l, Inc., 495 F.3d
753, 756 (7th Cir. 2007). By contrast, forward-looking statements are evaluated under
an even stricter standard. In those cases, scienter requires “actual knowledge of falsity
on the part of defendants,” not merely reckless indifference. City of Livonia Emps.’ Ret.
Sys. & Local 295/Local 851 v. Boeing Co., 711 F.3d 754, 756 (7th Cir. 2013) (citing 15 U.S.C.
§ 78u-5(c)(1)(B)).
The amended complaint asserts two claims. The first claim arises under
Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule
10b-5, 17 C.F.R. § 240.10b-5. To state a claim for securities fraud under these provisions,
the plaintiff must plead: “(1) a material misrepresentation or omission by the defendant;
(2) scienter; (3) a connection between the misrepresentation or omission and the

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purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5)
economic loss; and (6) loss causation.” Pugh v. Tribune Co., 521 F.3d 686, 693 (7th Cir.
2008). The second claim arises under Section 20(a) of the Securities Exchange Act of
1934, and it is brought against the Individual Defendants, Mark Weber and Matthew
Long. Under Section 20(a), “[e]very person who, directly or indirectly, controls any
person liable under any provision of this title or of any rule or regulation thereunder
shall also be liable jointly and severally with and to the same extent as such controlled
person is liable...” 15 U.S.C. § 78t(a).
Section 10(b) and Rule 10b-5
Broadly speaking, the first amended complaint alleges that two statements
constitute material misrepresentations in violation of Section 10(b) and Rule 10b-5. The
first are the statements concerning Supreme’s backlog from the third quarter of 2015, in
that they failed to disclose that the increase in the backlog was due, in part, to
anomalous fleet orders and statements by the defendants creating the impression that,
in fact, there were no fleet orders in the backlog at that time. The second category
occurred on July 22, 2016 when Long told analysts in a conference call that Supreme’s
backlog would likely “settle more towards the way it looked Q3 last year.” I will take
up each of these in turn.
1. Third Quarter 2015 Statements
Liability under Section 10(b) requires the plaintiff to prove that the defendant
either made a false statement of material fact or failed to make a statement of material

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fact thereby rendering the statements that were made misleading. Searls v. Glasser, 64
F.3d 1061, 1065 (7th Cir. 1995). A fact is material if a substantial likelihood exists that a
reasonable investor would have viewed the disclosure of the fact as having significantly
altered the “total mix” of information available. TSC Indus. Inc. v. Northway, 426 U.S.
438, 449 (1976).
The lead Plaintiff, Fishman, claims that, although the third quarter of 2015
backlog disclosures were technically accurate, the statements were misleading because
they mischaracterized the source of the backlog as ordinary business, when in reality it
was due to atypical fleet orders. He also alleges that the Defendants made several
additional statements on calls that were false or misleading because they still had not
disclosed the true source of the “anomalous” third quarter of 2015 results.
The Defendants counter this theory on several grounds. They argue that they
did, in fact, disclose that the increased backlog included fleet orders, that fleet orders
are not anomalous because they can be received sporadically throughout the year, and
Fishman has not alleged why the backlog number reported would have been rendered
misleading by the purported failure to disclose that the backlog contained fleet orders.
Simply alleging that, because the Defendants failed to disclose the source of the
backlog, the statements they made regarding the backlog were rendered misleading is
not enough. Omitting one detail – even a significant one – doesn’t render the whole
story inaccurate or misleading. Failing to include the breakdown of the backlog does
not render the backlog figure “so incomplete as to be misleading.” See In re Harley

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Davidson Inc. Sec. Litig., 660 F. Supp. 2d 969, 985 (E.D. Wis. 2009). Nor is the source of
the backlog a fact that is inconsistent with, or calls into question, the report of the
indisputably accurate backlog figure. See Silverman v. Motorola, Inc., 2008 WL 4360648,
at *10 (N.D. Ill. Sept. 23, 2008) (“[O]mitting smaller details, even if investors might care
about them, is not necessarily misleading.”). In other words, Fishman fails to allege
precisely how the backlog figure was rendered misleading, as opposed to simply
lacking detail.
Related to the purportedly material omission, Fishman alleges that other
statements by Weber on the call were false or misleading and painted a picture that the
increase in backlog was due to “ordinary business.” In particular, Weber stated “[s]et
aside the rental fleet business, because as you know, we typically are quoting that and
securing those orders in the fourth quarter and they don’t flow through typically until
the second quarter ... none of that is really in our backlog right now.” [DE 53 at 25, ¶68.]
I fail to see Fishman’s point. Weber’s statement that there was no rental fleet
business in the backlog right now doesn’t preclude there being other fleet business in
the backlog. Moreover, the SEC filings and public release expressly stated that “new
order intake was stronger in the third quarter of 2015 across both retail and fleet work truck
product lines.” [DE 63 at 43 (emphasis added); id. at 111.]
But let’s suppose for the moment that the omission was material and rendered
the other statements misleading. There is another problem with the amended
complaint, in any event. There is not a strong inference of scienter alleged. Recall that in

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a securities fraud action, the Plaintiff must “with respect to each act or omission ... 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). “That ‘required state of mind’ is an
intent to deceive, demonstrated by knowledge of the statement’s falsity or reckless
disregard of a substantial risk that the statement is false.” Higginbotham, 495 F.3d at 756.
The inference of scienter must be cogent and at least as compelling as any opposing
inference of nonfraudulent intent.
In an attempt to adequately plead scienter, Fishman alleges that the Defendants
have presented backlog as a critical measure for investors and the surest indicator of
performance. Accordingly, when the Defendants represented that the 2015 third
quarter backlog has increased and this increase was attributable to ordinary business,
they knew that this information was material to investors. This is enough, according to
Fishman. The Defendants disagree. They claim that Fishman must show that
Defendants knew that by not disclosing this material information their disclosures
would be rendered misleading. The Defendants have the better argument.
It is not enough to say that the Defendants knew an investor would think a fact is
material and they still failed to disclose it. A lot of facts may be material to an investor,
but the company does not disclose them for one reason or another. Absent a duty to
disclose, it’s when the failure to disclose these material facts renders what the company
has told investors misleading that the omission becomes actionable. See Anderson v.
Abbott Labs., 140 F. Supp. 2d 894, 903 (N.D. Ill. 2001). One way such a duty can arise is if

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omitting some particular fact makes an existing statement misleading. Id. “The critical
question” then is whether the material omission is the result of “an intent to deceive or
a reckless indifference to whether the statements were misleading.” Makor Issues &
Rights, Ltd. v. Tellabs, Inc. (“Tellabs III”), 513 F.3d 702, 709 (7th Cir. 2008). Thus, the
Plaintiff must show that the Defendants either intended to deceive or were recklessly
indifferent to the fact that their omissions would make their representations misleading
– not just that the Defendants knew, or should have known, they were withholding
material information.
Based on this standard, I don’t see any evidence suggesting a strong inference of
scienter. The only evidence of scienter is that the Defendants repeatedly designated
backlog as a critical metric and were aware that the investors relied on backlog in
assessing the company’s performance. I can’t see how knowing that one metric is
material and not disclosing it leads to the conclusion that the Defendants must have
known, or should have known, that this failure to disclose would mislead investors.
That just doesn’t follow.
It’s completely plausible to infer that the Defendants, even assuming the
omission was material and they knew it, didn’t think, nor should they have thought,
that omitting the breakdown of the backlog would mislead anyone. After all, as
Fishman acknowledges, the Defendants never disclosed granular detail concerning the
backlog’s component parts. [DE 53 at 6, ¶5.] And it’s not as though the Defendants were
omitting some fact that was directly in opposition to what they were reporting. See

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Anderson, 140 F. Supp. 2d at 911 (“The perpetrator would probably omit something that
is more likely to affect the market.”).
In sum, based on the failure to detail how the statement was made misleading by
omission and to adequately plead a strong inference of scienter, the claim against
Supreme as it relates to the third quarter 2015 backlog statement must be dismissed.
2. Second Quarter 2016 Prediction
Fishman also claims that a later statement made by Long is actionable. On the
second quarter of 2016 earnings call, in response to a question concerning the “slowing
industry,” Long stated “the backlog is going to settle more towards the way it looked
Q3 last year.” It seems obvious to me that Long’s choice of words – “is going to...” –
speak directly to the future. It’s a prediction. This is important because, as noted
above, forward-looking statements are subjected to a heightened scienter requirement:
actual knowledge, not just reckless indifference. 15 U.S.C. § 78u-5(c)(B).1
“Forward-looking statements” include, among other things, statements
containing a projection of revenues, income, earnings per share, and other financial
items, as well as statements of future economic performance. 15 U.S.C. § 78u-5(i)(1)(A),
(C). Some courts have analyzed the issue by asking whether the statements concern
things about the present – the time at which the statement is made – (not forward-

1

There’s another reason this determination is important. If the statement is
forward-looking, then, under the PSLRA, it is not actionable so long as it is
accompanied by meaningful cautionary language. Although the Defendants have
raised this argument, addressing it here is not necessary.
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looking) as opposed to projections about the future (forward-looking). Compare Panasuk
v. Steel Dyanmics, 2009 WL 5176193, at *8 (N.D. Ind. Dec. 21, 2009) (a projection based on
incomplete information is forward-looking) with Takara Trust v. Molex Inc., 429 F. Supp.
2d 960, 974 (N.D. Ill. 2006) (lies about things a company already knows are not forwardlooking).
Recall that Long’s statement was made on July 22, 2016. In his off-the-cuff
comment in the conference call, he is predicting what the backlog will be at the end of
September, two and a half months later. This is the epitome of a “forward-looking
statement” — a statement whose truth or falsity is discernible only by reference to
future performance. Stavros v. Exelon Corp., 266 F. Supp. 2d 833, 843 n.7 (N.D. Ill. 2003)
(citing Harris v. Ivax Corp., 182 F.3d 799, 805 (11th Cir. 1999)). In other words, it was
only after the company knew the third quarter 2016 backlog numbers could anyone
possibly know whether Long’s prediction that “the backlog is going to settle more
towards the way it looked Q3 last year” was correct or not.
“[T]here is no securities fraud by hindsight.” Fulton Cty. Emps.’ Ret. Sys. v. MGIC
Inv. Corp., 675 F.3d 1047, 1050 (7th Cir. 2012) (quoting Denny v. Barber, 576 F.2d 465, 470
(2d Cir. 1978)). Nor is there any Monday morning quarterbacking of a company’s
opinions. See Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 135 S. Ct.
1318, 1327 (2015). Predictions are inherently uncertain, and no prediction has a 100
percent probability of being correct. City of Livonia, 711 F.3d at 758. An opinion
statement “is not necessarily misleading when an issuer knows but fails to disclose,

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some fact cutting the other way.” Omnicare, 135 S. Ct. at 1329 (analyzing opinion
statements in the context of a Section 11 securities claim); see also Tongue v. Sanofi, 816
F.3d 199, 212 (2d Cir. 2016) (applying Omnicare’s reasoning to a projection).
It is true, however, that if the maker of the prediction knows, to a reasonable
certainty, that the prediction is false, such predictions may be actionable. See City of
Livonia, 711 F.3d at 759. The same goes for predictions in which the defendant is aware
of factual information that would undermine their accuracy. Lionheart Partners v. MWave, Inc., 923 F. Supp. 1085, 1089 (N.D. Ill. 1996). But, to repeat, the required state of
mind for forward-looking statements is higher than for those of historical facts. With
respect to a prediction, the plaintiff must plead facts giving rise to a strong inference
that the person making the prediction had “actual knowledge” that the prediction was
false or misleading when made. 15 U.S.C. § 78u-5(c)(1)(B)(1).
Fishman points to three pieces of evidence suggesting an inference of scienter: (1)
the high-ranking positions of Weber and Long; (2) allegations made by a confidential
witness; and (3) suspicious insider stock sales. I will analyze each piece of evidence
individually, as well as a whole.
The Plaintiff first claims that the Defendants’ high-ranking positions at Supreme
support an inference that Long knew the prediction was false or misleading. They
invoke the “core operations” doctrine. Under this doctrine, “officers 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.” Jones v. Corus Bankshares, Inc.,

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701 F. Supp. 2d 1014, 1028 (N.D. Ill. 2010). While there is no “group pleading doctrine”
and, as a result, the Plaintiff “must create a strong inference of scienter with respect to
each individual defendant,” Pugh, 521 F.3d at 693, an individual defendant’s position
within the company is not irrelevant, Jones, 701 F. Supp. 2d at 1028-29. So, although I
cannot presume scienter, “a strong inference of scienter may still be credited where it is
almost inconceivable that an individual defendant would be unaware of the matters at
issue.” Id. at 1029.
Fishman claims that Weber and Long were intimately involved in the operations
of the company, and this supports that they knew the true nature of the 2015 third
quarter backlog. [DE 53 at 36-37, ¶¶99-103.] In addition, it is alleged that Weber and
Long were aware of the company’s successes and failures, including sales shortfalls. [Id.
at 37, ¶103.] According to Fishman, because of this knowledge, the individual
Defendants recognized that similar backlog figures were unlikely to be replicated
during 2016, despite predicting this to be the case. [Id. at 37, ¶102.] He says this allows
for in inference of scienter.
This analysis fails to connect the dots. Even if I presume that Weber and Long
knew the true makeup of the third quarter 2015 backlog and of the sales shortfalls, that
doesn’t suggest that Long knew the prediction concerning the third quarter 2016
backlog was false when he made it. The context is also important here. Long was
predicting a decline in backlog from the previous quarter – prefaced with comments
about the “slowing industry” and “demand moderation.” It’s completely plausible that

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his prediction accounted for these trends and for the fact that the 2015 third quarter
backlog included orders that were perhaps atypical for that quarter. There is no
allegation that, even in light of sales shortfalls and the individual Defendants’ intimate
knowledge about the company’s operations, it was impossible for Supreme to match
third quarter 2015 backlog numbers.
Plaintiff’s second basis for inferring scienter is the allegations made by the
confidential witness in this case. For starters, allegations from unnamed confidential
sources “require a heavy discount.” City of Livonia, 711 F.3d at 759. This is because such
sources “may be ill-informed, may be acting from spite rather than knowledge, may be
misrepresented, may even be nonexistent.” Id. Nevertheless, confidential sources are
often “important sources for the allegations not only of falsity but also of scienter.”
Tellabs III, 513 F.3d at 711. The Seventh Circuit has approved of confidential sources as
providing an inference of scienter and has identified several factors which strengthen
the inference, including a large number of confidential witnesses, descriptions of their
jobs that indicate they had first-hand knowledge of the facts to which they are
testifying, corroboration by other sources, and the inclusion of their real names. See id.
at 712.
Here’s what we know about the confidential witness: she is unnamed and was
allegedly employed as a Production Scheduler at Supreme’s Texas facility during the
Class Period. Her duties included production scheduling, managing operations,
procurement, and working with the General Manager to prepare monthly budget and

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goals. [DE 53 at 23, ¶59.] The confidential witness’ work included tracking backlog for
the Texas division. [Id.] According to the confidential witness, there were “signs in July
of a sales shortfall.” The confidential witness also described management at the Texas
facility as “kind of shady” and “fudging the numbers” by “moving things in and
pushing [things] out.” [Id.] According to Fishman, Weber and other senior executives
participated in weekly sales calls with the regional offices where sales shortfalls were
discussed. [Id. at 37, ¶103.] He says that this observation, in conjunction with the
individual Defendants’ degree of involvement, undercut Long’s prediction that
“backlog is going to settle more towards the way it looked Q3 last year.”
It’s also worth noting that this unnamed confidential witness left the company in
August 2016. [Id. at 23, ¶60.] She stated that she and others were concerned about the
outlook for 2016 third quarter results because the Director of Sales for the Texas region
was not “coming up with his numbers”; however, she “could not say exactly how far
below his projections [the Director] had been” at the time of her departure. [Id.] There
also is no allegation that the confidential witness had any knowledge of company-wide
numbers, or even numbers that extended beyond this one facility in Texas. Nor is there
any suggestion that the numbers in Texas are indicative of the numbers in other regions
or for the company as a whole.
Looking to the factors that the Seventh Circuit has identified as strengthening the
inferences I can draw from a confidential witness, some discounting of the import of the
confidential witness’ allegations is warranted. First, there is only one confidential

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witness, as opposed to a larger number. Second, while some weight should be given to
the confidential witness based on her job description, which certainly indicates that she
had first-hand knowledge of some facts relevant to the claim, it’s clear that she doesn’t
have first-hand knowledge that’s sufficient to support scienter. In particular, she was
aware of sales shortfalls at the Texas facility, but the complaint doesn’t include any
allegation that she knew company-wide numbers. Third, there is no corroboration by
other sources. Finally, the confidential witness remains unnamed. Despite these
shortcomings, the Seventh Circuit has implicitly approved of a single, unnamed
confidential witness as supporting an inference of scienter, see City of Livonia, 711 F.3d at
759-60, though as described below, that case is vastly different from this one.
Even taking into account the confidential witness’ allegations, their value is
undercut by the Defendants’ other statements on the second quarter 2016 earnings call.
As Fishman would have it, the confidential witness’ allegations support inferring that
the company was having trouble meeting its sales numbers, and Long knew it. But the
Defendants did disclose facts supporting the confidential witness’ allegations. There
were all sorts of things said in the conference call that suggested that caution should be
taken. They said there was “some softness,” that there had been “indications of demand
moderation late in the [second] quarter,” that the company had “lost some business on
the fleet side,” in addition to a slew of other comments painting a less-than-optimistic
picture. [DE 63 at 280, 293, 296.]
What really undermines the value of the confidential witness’ allegations is that

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none is inconsistent with what Long predicted. There is no allegation that, even given
the shortfall of tens of thousands of dollars at the Texas facility, Supreme would be
unable, or even unlikely, to obtain the backlog numbers that Long predicted. Or that
Long knew this. Indeed, Supreme’s backlog in the second quarter of 2016 was $75.5
million. It’s a stretch to say that a shortfall of tens of thousands of dollars would call
into a question a prediction concerning a backlog of that size.
This stands is stark contrast to the confidential witness’ allegations in City of
Livonia, a federal securities suit against Boeing and two of its executives. The
allegations of scienter in that case included those made by a confidential witness who
was a Boeing employee with first-hand knowledge of product testing of a new Boeing
airplane. The new plane had failed the testing, but the defendants continued to
represent to the public that they believed the plane would fly soon. That confidential
witness, according to the complaint, had direct access to internal communications
regarding the test results, which included the defendants in that case. The
communications purportedly demonstrated that the defendants knew the plane’s first
flight would be delayed, despite saying otherwise to the public. 711 F.3d at 758-60. The
district court in that case denied the defendants’ motion to dismiss, which the Seventh
Circuit appears not to take issue with. Id. at 759-60 (noting that the complaint was
eventually dismissed when it became clear that the confidential witness’ allegations
were actually false). All of this is to say that the confidential witness’ allegations in our
case – even if true – do not at all call into question Long’s prediction – let alone, support

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inferring that he knew it was false or misleading when he made it.
What’s more, as the Defendants observe, the confidential witness’ allegation that
the management at the Texas facility were “kind of shady” may actually undercut the
inference that Weber and Long knew about the shortfall. To the extent that the Texas
facility management was “fudging the numbers,” this could plausibly suggest that they
were in fact hiding information from senior management, not providing it.
Finally, Fishman points to several insider stock sales that it claims strengthen the
inference of scienter. “Trading by insiders during the class period, by itself, does not
raise an inference of scienter.” Vallabhaneni v. Endocyte, Inc., 2016 WL 51260, at *18 (S.D.
Ind. Jan. 4, 2016); Silverman, 2008 WL 4360648, at *13. However, a stock sale that is
suspicious in scope and timing may support such an inference. Pugh, 521 F.3d at 695;
Vallabhaneni, 2016 WL 51260, at *18. The key is that the trading was “unusual.” City of
Austin Police Ret. Sys. v. ITT Ed. Servs., Inc., 388 F. Supp. 2d 932, 950-51 (S.D. Ind. 2005).
“Unusual” in this context means that the trading was “well beyond the normal patterns
of trading by those defendants.” Id. (quoting Greebel v. FTP Software, Inc., 194 F.3d 185,
197-98, 206 (1st Cir. 1999)). Moreover, the fact that the insiders retained significant
holdings weighs against any inference of scienter. City of Austin, 388 F. Supp. 2d at 951
(citing In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970, 987 (9th Cir. 1999)).
It is alleged that the individual Defendants and other Supreme insiders – who are
not named as defendants in this case – realized over $11 million in proceeds from their
sales of Supreme stock during the Class Period, and that approximately $9.3 million of

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that resulted from transactions during the three-month period corresponding to the
sales slowdown. With respect to Weber and Long in particular, the Plaintiff notes that
neither had sold a single share in the year preceding the Class Period. [DE 53 at 39,
¶110.] However, in the Class Period, Weber sold 50,000 shares, netting $752,058; Long
sold 10,000 shares, netting $166,100. [Id. at 38, ¶108.]
Despite selling stock, both Weber and Long retained large amounts of Supreme
shares. Weber ended the Class Period with 146,310 shares, and Long with 83,667
shares. As the Defendants point out, Long actually ended the Class Period with greater
holdings than at the beginning, and Weber’s holdings were 8.37% lower. [DE 63 at 501.]
That both defendants retained significant holdings undermines the inference of scienter.
City of Austin, 388 F. Supp. 2d at 951.
What is suspicious is that neither Weber nor Long sold any stock in the previous
year before the Class Period. This strikes me as somewhat “unusual” and might bolster
the relevance of Weber and Long’s sales of stock during the Class Period for purposes
of scienter. See Davis v. SPSS, Inc., 385 F. Supp. 2d 697, 715 (N.D. Ill. 2005). But this fact,
standing alone, is not sufficient to support a strong inference of scienter. Beyond the
one year prior to the Class Period, I have no information before me about Weber and
Long’s selling history, even though Long has been with Supreme since 2011 and Weber
since 2013. [DE 63 at 424-25.] It may be the case that the previous year in which they
sold no stock was actually unusual. And I can’t say that selling some stock in one year,
after having sold no stock in the prior year, is so “dramatically out of line with prior

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trading practices” that it rises to the level of inferring scienter. See Johnson v. Tellabs,
Inc., 262 F. Supp. 2d 937, 956 (N.D. Ill. 2003) (quoting In re Silicon Graphics, Inc., 183 F.3d
at 986).
It’s also somewhat suspicious that Weber and Long both sold stock in late July of
2016, when the Plaintiff alleges signs of a sales shortfall were starting to materialize –
but after Long made his prediction. [DE 63 at 501.] Weber sold 30,000 shares over three
days from July 27 to July 29, 2016, and Long sold 10,000 shares on July 29, 2016. [Id.] But
Weber sold almost as much – 20,000 shares – in May of 2016, before the Plaintiff alleges
that there were any signs of a shortfall. [Id.] But again, viewing these sales in context,
and keeping in mind that Weber’s holdings were greater at the end of the Class Period
than at the beginning, and Long’s were only 8.37% lower, I don’t see a strong inference
of scienter based on the timing of these sales.
Even if no one allegation of scienter is particularly strong, it may be the case that,
taking all of the pieces together, the inference rises to the level of strong, cogent, or
compelling. See Tellabs II, 551 U.S. at 322-23 (“The inquiry ... is whether all of the facts
alleged, taken collectively, give rise to a strong inference of scienter, not whether any
individual allegation scrutinized in isolation, meets that standard.”) (emphasis in
original). However, considering the high-ranking positions of the individual
Defendants, the confidential witness’ allegations, the insider stock sales, and all of the
other facts as a whole, I still don’t find this to be the case.
It is also worth considering the context of the statement at issue here. The off-

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the-cuff statement was made in an unscripted portion of an earnings call in response to
a question that the Defendants were not told in advance. This is different than a
statement made in, say, a registration statement, a formal document that investors
reasonably expect will not contain off-the-cuff judgments. See Omnicare, 135 S. Ct. at
1330. What’s more, prior to making the statement, the Defendants disclosed a myriad
of negative indicators, suggesting to investors that the outlook was choppy. These
types of disclosures cut against an inference of scienter. See Owens v. Jastrow, 789 F.3d
529, 540 (1st Cir. 2015) (“[R]ed flags were disclosed to the public, which negates the
inference that defendants acted with scienter.”). Finally, the prediction at issue strikes
me as imprecise, not definite. Long’s words – “settle,” “more towards” and “the way it
looked” – are vague enough that I suspect no reasonable investor hearing those
statements would expect Long’s prediction to be dead on. See Searls, 64 F.3d at 1067
(vague statements do not affect the mix of more detailed information upon which a
reasonable investor typically relies). My point is that the context matters. Indeed,
taking into account all of the facts leads me to conclude that the inference of scienter is
neither compelling nor cogent.
The same is true when I consider whether the two broad types of statements at
issue combine to paint a deceptive or misleading portrait of Supreme’s business and
prospects. Even this “holistic” view urged by Fishman fails to support a strong
inference of scienter. Particularly when viewed comparatively to other plausible
inferences I may draw, it does not appear that the inference of scienter is cogent.

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Rather, the non-culpable inference – that Defendants withheld information that they
had no reason to believe would mislead anyone and that, after accounting for and
providing to the public a substantial amount of bad information, they made a
prediction which turned out simply to not be quite true – is far more compelling.
Because I find that there exists no strong inference of scienter, Fishman’s claim as
it relates to the prediction must be dismissed.
Section 20 Claim
Section 20(a) creates vicarious liability for a person who actually or potentially
controlled the primary violator’s acts. 15 U.S.C. § 78t(a); Harrison v. Dean Witter
Reynolds, Inc., 974 F.2d 873, 876 n.1, 881 (7th Cir. 1992). In order to state a claim under
Section 20(a), plaintiffs must allege, among other things, a primary securities violation.
Harrison, 974 F.2d at 881. I have already found that there is no primary violation.
Therefore, Plaintiff’s Section 20(a) claim must also be dismissed.
Leave to Replead
The only remaining question is whether the dismissal of this case should be with
or without prejudice. Given the demanding pleading requirements of PSLRA, the most
prudent approach is to give Fishman and his lawyers an opportunity to amend the
complaint in an effort to address the shortcomings in the present complaint as described
in this opinion. Any amended complaint must be filed within 30 days. If Fishman
chooses not to file an amended complaint, he can so notify the Court, and I will at that
point convert the dismissal of the present complaint from a dismissal without prejudice

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to one with prejudice so that an appeal can be taken if Fishman so chooses.
Conclusion
Based on the foregoing, Defendants’ Motion to Dismiss [DE 61] is GRANTED.
All claims against the Defendants are DISMISSED WITHOUT PREJUDICE. Any
amended complaint must be filed within 30 days of this Order.

SO ORDERED.
ENTERED: May 23, 2018.
_s/ Philip P. Simon
PHILIP P. SIMON, JUDGE
UNITED STATES DISTRICT COURT

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