In re Polaris Industries, Inc. Securities Litigation
ORDER: IT IS HEREBY ORDERED that Defendants' Motion to Dismiss 73 is GRANTED and the Amended Complaint 64 is DISMISSED with prejudice. LET JUDGMENT BE ENTERED ACCORDINGLY. (Written Opinion) Signed by The Hon. Paul A. Magnuson on 10/13/2017. (LLM)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
In re Polaris Industries, Inc.
Civ. No. 16-3108 (PAM/SER)
This matter is before the Court on Defendant Polaris Industries, Inc.’s Motion to
Dismiss. For the following reasons, the Motion is granted.
Plaintiffs in this putative class action are several individual investors and one
institutional investor, Lead Plaintiff City of Atlanta Police Officers’ Pension Fund. (Am.
Compl. (Docket No. 64) ¶¶ 11-12.) Plaintiffs seek to represent a class of investors who
invested in the common stock of Defendant Polaris Industries, Inc. between February 20,
2015, and September 11, 2016. (Id. ¶ 1.) Plaintiffs claim that Polaris made false and
misleading public statements about defects in its off-road vehicles (“ORV”). Polaris
recalled hundreds of thousands of ORVs during the class period after well-publicized
incidents in which Polaris ORVs caught fire, resulting in more than one fatality.
According to Plaintiffs, when Polaris finally revealed the truth about the extent and effect
of the defects, Polaris was forced to adjust its stock guidance—which tells investors how
much the stock might earn in a given time period—to cut the company’s earnings
prediction by nearly 50 percent. (Id. ¶ 7.) Plaintiffs allege that they either bought Polaris
stock at an inflated price or retained it through declines in market prices because of
Defendants’ allegedly false and misleading statements. (Id. ¶ 214.)
Polaris first issued a recall for some of its ORVs in July 2015, when it recalled
4,300 Youth RZR model-year 2015 vehicles. (Id. ¶ 48.) But according to Plaintiffs,
consumers had complained of fire problems with Polaris’s ORVs going back to 2012.
(Id. ¶¶ 43-44.) Indeed, several individuals posted videos on YouTube showing their
Polaris RZR models on fire. (Id.) The Amended Complaint lists nine instances of
YouTube videos of RZR fires, and two instances of another model, the Ranger, catching
fire, before the July 2015 Youth RZR recall. (Id.)
In October 2015, Polaris issued another recall for two models of the 2015 RZR,
comprising 53,000 vehicles. (Id. ¶ 48.) In December 2015, Polaris recalled more than
2,000 RZR XP Turbo vehicles. (Id.) In April and June 2016, Polaris recalled more than
200,000 additional RZR and Ranger vehicles. (Id.) On July 25, 2016, Polaris issued a
stop ride/stop sale advisory for 2016 models of the RZR XP Turbo, and recalled all of
those vehicles on September 1, 2016, ten days before the end of the class period here.
On September 12, 2016, Polaris announced that it was cutting its 2016 earnings
predictions because of the “thermal-related issues” in the RZR model and the damage
those issues were causing to sales of all Polaris ORVs. (Id. ¶ 89.) Polaris estimated that
earnings per share for 2016 would be $3.30 to $3.80, when it had previously predicted
earnings at $5.80 to $6.50 per share, and announced that sales were expected to be down
more than previously anticipated. (Id.) Polaris ultimately had to recall another 56,000
ORVs in September 2016 and March 2017.
(Id. ¶ 48.)
The September 12, 2016,
announcement caused Polaris stock to decline 5%, although more serious stock-price
declines happened after the July 2015 recall.
Plaintiffs do not list the price of Polaris shares in the Amended Complaint, but
rather chart the dollar amount of declines and percentage declines for the various
company announcements. (Id. ¶ 216.) An Internet search reveals that at the beginning of
the class period, February 20, 2015, Polaris stock had a per-share price of $155.57. This
was near the all-time high price for Polaris’s shares. By the end of July 2015, the price
was down to $137.06, and at the end of January 2016 Polaris’s shares were trading at
$73.84. Although the price rose to around $100 per share during parts of 2016, the price
fell to $70.50 on September 16, 2016. By late November 2016, however, the share price
had rebounded to around $90 and is currently trading at around $104 per share. See N.Y.
Stock Exch., Polaris Industries Inc. (PII), https://www.nyse.com/quote/XNYS:PII (last
visited October 13, 2017).
The Amended Complaint alleges that Defendants violated §§ 10(b) and 20, and
Rule 10b-5, of the Securities and Exchange Act of 1934. 15 U.S.C. §§ 78j(b), 78t(a); 17
C.F.R. § 240.10b-5. Section 10(b) makes it unlawful “[t]o use or employ, in connection
with the purchase or sale of any security . . .[,] any manipulative or deceptive device or
contrivance in contravention of such rules and regulations as the Commission may
prescribe . . . .” 15 U.S.C. § 78j(b). Rule 10b-5 quantifies the conduct proscribed by
section 10(b), making it illegal
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of material fact or to omit to state a
material fact necessary in order to make the statement made, in the light of
the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5. Section 20 imposes liability on a person who controls an entity
that engages in the practices proscribed by section 10(b) and rule 10b-5. Plaintiffs have
named several individual Defendants in addition to corporate Defendant Polaris.
Defendant Scott W. Wine is the company’s Chairman and Chief Executive Officer. (Am.
Compl. ¶ 14.) Defendant Michael T. Speetzen is Polaris’s Chief Financial Officer. (Id.
¶ 15.) Defendant Kenneth J. Pucel was Polaris’s Executive Vice President of Operations,
Engineering, and Lean. (Id. ¶ 16.) Defendant Matthew J. Homan is Polaris’s President
of Off-Road Vehicles. (Id. ¶ 17.) Defendant Bennett J. Morgan was Polaris’s President
and Chief Operating Officer from 2005 until May 2016. (Id. ¶ 18.) Defendant David C.
Longren was Polaris’s Senior Vice President of Enterprise Cost from January 2016 until
September 2016. (Id. ¶ 19.) Plaintiffs claim both individual liability and “control
person” liability against the individual Defendants.
Plaintiffs’ 114-page Amended Complaint takes issue with nearly every statement
Polaris and the individual Defendants made during the class period. These statements
can be divided generally into five categories.
First are the generic warnings Polaris included in its submissions to the Securities
Exchange Commission (“SEC”). In its annual Form 10K, issued in February 2015,
Polaris stated that product repairs and replacement due to warranty claims or product
recalls “could have a material adverse impact on our results of operations” and that
“product recalls could harm our reputation and cause us to lose customers, particularly if
recalls cause consumers to question the safety or reliability of our products.” (Id. ¶ 104.)
In all of its quarterly reports during the class period, however, Polaris stated that there
were “no material changes or additions to our risk factors” from the Form 10-K. (E.g.,
id. ¶¶ 108. 122.) According to Plaintiffs, these statements were false and misleading
because Polaris did not disclose in these statements the manufacturing defects in its
ORVs or the risks those defects posed to Polaris’s business.
The second category of allegedly false and misleading statements are those Polaris
made in its earnings reports, including the timing of those statements. For example,
during a conference call to discuss Polaris’s second-quarter 2015 earnings report,
Defendants Morgan and Wine talked about the coming week’s launch of the 2016 model
year, stating that Polaris would have “excellent product news” and that they were “very
comfortable with [Polaris’s] product pipeline.” (Id. ¶ 117.) The next day, however,
Polaris announced the recall of 4,300 Youth RZR 2015 models because of a fire risk from
a faulty fuel pump retaining ring. (Id. ¶ 118.) In addition, at the dealer show the
following week at which Polaris unveiled its 2016 ORV models, Defendant Longren told
investors and analysts that Polaris’s products were in “great shape,” that a new model had
“industry-leading performance.” (Id. ¶¶ 127-28.) Plaintiffs assert that these statements
were false and misleading because in fact the new 2016 products “had been rushed to the
market without adequate testing” and contained defects that would cause the vehicles to
suddenly catch fire, thus jeopardizing Polaris’s financial condition. (Id. ¶ 129.) Plaintiffs
also argue that the timing of the statements was intentional, to obscure bad news with
new product releases and the like, allegedly further misleading investors.
Next, Plaintiffs contend that Polaris’s warranty reserve disclosures were false and
misleading. According to Plaintiffs, the disclosures “failed to reflect the true extent of
the financial risks facing the Company as a result of the defects in Polaris’s
products . . . .” (Id. ¶ 121.)
The fourth category comprises statements Polaris made regarding the safety of its
products. For example, Defendant Wine stated that the “safety of our customers [is] at
the highest priority,” while Defendant Pucel told investors that Polaris would “continue
to be at world class safety levels.” (Id. ¶¶ 131-32.) In a press release, Polaris stated that
it was “committed to the safety and quality of its products.” (Id. ¶ 136.) Plaintiffs assert
that these statements were false and misleading because Polaris was allegedly not
committed to safety, and the statements did not disclose the risks to Polaris’s finances
from the defects in Polaris’s products. (Id. ¶ 134.)
Finally, Plaintiffs take issue with statements Polaris made in its product recalls. In
an October 5, 2015, recall announcement, Polaris told customers that “very few units are
believed to be affected” and that dealers would be able to address the issue easily. (Id.
In another recall announcement in April 2016, Polaris stated that it had
conducted a “thorough investigation” and had a “comprehensive solution” to fix the
problems in its ORVs. (Id. ¶ 165.) According to Plaintiffs, these statements were false
because the issue giving rise to the October 2015 recall did not affect only a few vehicles,
and in April 2016 Polaris had not thoroughly investigated the “systemic thermal risks”
affecting its products and did not have a solution to fix the issues.
To support their allegations, Plaintiffs rely in part on the statements of five former
Polaris employees, identified as confidential witnesses, or CWs, in the Amended
Complaint. These employees were a buyer, a project engineer, two quality engineers,
and a customer experience manager. (Id. ¶ 37 nn. 3-5; ¶ 42 nn. 6,-7.) The witnesses,
however, offer only very general allegations, such as one witness’s statement that Polaris
did not always follow its own internal parts approval process which required that parts be
reviewed for compliance with Polaris’s design specifications. (Id. ¶ 39.) According to
this witness, shipment of non-conforming or defective parts “could cause problems with
parts that did not fit, leading to assembly errors or other problems.” (Id. ¶ 40.) The
witness does not say that any of the problems Polaris experienced could be tied to these
problems. And none of the witnesses offers a specific allegations regarding a cover-up,
for example, or indeed any evidence that the company knew that its ORVs were
fundamentally defective in the same way and yet continued to market and sell those
Plaintiffs’ overarching theory of the case is that Polaris rushed its products through
research, development, and manufacturing in order to retain market share, overlooking
manufacturing or design defects in the pursuit of profits. Plaintiffs insist that the same or
similar problem plagued all Polaris vehicles, and thus that all of the recalls and incidents
arose out of the same defect. But Plaintiffs’ own allegations are that the fire hazard
resulted from different mechanical or design issues in different ORV models. In one
model, a fuel pump might leak. In another, fuel tank vent lines were faulty. In still
another, the engine’s heat shield was ineffective, and so on. (Id. ¶ 46.) The fundamental
differences in the problems various ORVs faced during the class period makes Plaintiffs’
theory of a company-wide blindness to similar defects implausible.
Standard of Review
Generally, a Rule 12(b)(6) motion requires the court to assume all factual
allegations in the complaint as true, and grant plaintiffs all reasonable inferences that may
be drawn from the complaint. Fed. R. Civ. P. 12(b)(6); In re Navarre Corp. Sec. Litig.,
299 F.3d 735, 741 (8th Cir. 2002).
However, when Congress adopted the Private
Securities Litigation Reform Act (“PSLRA”), it heightened the pleading standards for
securities fraud class action claims. Navarre, 299 F.3d at 741; see 15. U.S.C. §§ 78j,
78t(a); 17 C.F.R. § 240.10b-5. The PSLRA was designed to encompass at the very least
the heightened pleading standards under Rule 9(b). Kushner v. Beverly Enters., Inc., 317
F.3d 820, 826 (8th Cir. 2003).
In order to proceed on claims brought under 10(b) and Rule 10b-5, Plaintiffs are
required to allege four elements:
(1) misrepresentations or omissions of material fact or acts that operated as
fraud or deceit in violation of the rule; (2) causation, often analyzed in
terms of materiality and reliance; (3) scienter; and (4) economic harm
caused by the fraudulent activity occurring in connection with the purchase
and sale of a security.
In re K-Tel Int’l, Inc. Sec. Litig., 300 F.3d 881, 888 (8th Cir. 2002) (citations omitted).
The Complaint must specify each misleading statement or omission and specify why the
statement or omission was misleading. 15 U.S.C. ' 78u-4(b)(1); Kushner, 317 F.3d at
826. It 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); Navarre,
299 F.3d at 741 (“[I]nferences of scienter survive a motion to dismiss only if they are
both reasonable and ‘strong’ inferences.”). The ultimate issue before the Court is not
whether Plaintiffs will prevail at trial, but rather whether Plaintiffs are entitled to proceed
with their claim. In re Digi Int’l, Inc. Sec. Litig., 6 F. Supp. 2d 1089, 1095 (D. Minn.
1998) (Tunheim, J.).
Section 10(b) and Rule 10b-5 Claims
Defendants claim that Plaintiffs have failed to comply with the PSLRA in several
ways. First, they contend that Plaintiffs’ allegations regarding the alleged misleading
statements are insufficient.
Second, they assert that Plaintiffs have not sufficiently
alleged scienter. Finally, they contend that Plaintiffs’ loss causation allegations are
The Complaint must specify each false statement or misleading omission and
explain why the statement was misleading. 15 U.S.C. § 78u-4(b)(1). Moreover, any
misleading statement or omission must be material, that is, there must be “a substantial
likelihood that the disclosure of the . . . fact would have been viewed by the reasonable
investor as having significantly altered the ‘total mix’ of information made available.”
TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). A statement or omission is
not material if it “present[s] or conceal[s] such insignificant data that, in the total mix of
information, it simply would not matter to a reasonable investor.” Parnes v. Gateway
2000, Inc., 122 F.3d 539, 547 (8th Cir. 1997).
As Polaris argues, Plaintiffs’ allegations with respect to the company’s
commitment to safety are not actionable. At most, these statements are mere puffery, and
in any event they are not verifiable and thus are not representations within the purview of
§ 10(b). See id. (“[S]ome statements are so vague and such obvious hyperbole that no
reasonable investor would rely upon them.”). Plaintiffs cannot plausibly allege that they
relied on Polaris’s statements that it was committed to safety when deciding to purchase
or retain Polaris stock, and this aspect of their claim fails.
Nor are the statements in Polaris’s SEC filings actionable.
misconstrue the generic warning in Polaris’s quarterly reports; that warning is not that
Polaris faced no new risks, but that there were no new risk factors. Polaris had disclosed
risks posed by recalls and warranty repairs; what eventually came to pass with Polaris
ORVs is one of those risks. And even if Polaris was bound specifically to disclose the
ORV defects in an SEC filing, Plaintiffs have no evidence or even allegation that the
statements in the 2014 10K were false when they were made. It is just as likely that
Polaris was not aware of the widespread nature of the ORV defects when the 10K issued
in February 2015, as it is that Polaris was aware; this is not sufficient to overcome the
PSLRA’s heightened pleading requirements.
Plaintiffs’ allegations regarding Polaris’s alleged failure to increase its warranty
reserves are nonsensical. Plaintiffs contend that that Polaris should have set aside more
money earlier for warranty repairs, and its failure to do so amounted to an intentional
cover-up of the fire issue. But if Polaris knew that it would be forced to pay millions of
dollars in warranty claims that it did not account for in its warranty reserves, then its
officers are bad businesspeople, not fraudsters. Moreover, there is no dispute that Polaris
increased its warranty reserves during the class period, thus establishing that the company
was attempting to account for recalls. Plaintiffs’ claim on this point fails.
Nor are the statements Polaris made when recalling its vehicles actionable. There
is no evidence that the October 2015 recall’s statement that the issue was limited to a
very few vehicles was false when it was made or that Polaris knew it was false at the time
it was made. Hindsight is 20/20, and is not an appropriate basis for securities fraud
liability. Nor are Polaris’s claims to have conducted a “thorough investigation” and to
have developed a “comprehensive solution” actionable misrepresentations. Plaintiffs
have no evidence regarding any investigation, and they do not allege that Polaris knew at
the time these statements were made that Polaris did not believe it was able to solve the
problems with its vehicles.
Finally, Plaintiffs’ allegations that Polaris’s statements in earnings reports and
analyst phone calls were securities fraud is similarly unsupported. But these statements
are not the sort of concrete misrepresentation that can support a securities fraud claim.
For example, Plaintiffs contend that Morgan’s statements in an October 25, 2015 analyst
call that the 2016 new models “are bolstering our broad and growing ORV armada” and
that he was “very comfortable” that Polaris would hit or even exceed its earnings
guidance for ORVs in the last quarter of 2015 were false and misleading. But there is no
evidence that Polaris knew, even after the recall of 53,000 RZR vehicles earlier that
month, that there was any systemic defect in all RZR models that would severely impact
Polaris’s business. A statement is actionable only if it is false or materially misleading
when it was made; Plaintiffs ask the Court to infer knowledge from the few publicized
fire incidents. But especially in light of the differences in the problems each model
experienced, those inferences are simply not warranted.
To plausibly allege scienter, Plaintiffs must set forth facts that give a strong reason
to believe that there was reckless or intentional wrongdoing. Navarre, 299 F.3d at 745.
Scienter may be established by: (1) facts demonstrating a conscious intent to deceive,
manipulate, or defraud; (2) allegations of severe recklessness; or (3) allegations of
opportunity or motive. In re Pemstar, Inc. Sec. Litig., No. 02-1821, 2003 WL 21975563,
at *6 (D. Minn. Aug. 15, 2003) (Frank, J.); K-Tel, 300 F.3d at 893. Allegations of
motivation or opportunity alone are insufficient to establish scienter, but coupled with
actual knowledge or recklessness, such allegations bolster a plaintiff=s showing of
scienter. See Pemstar, 2003 WL 21975563, at *6-7.
Plaintiffs allege throughout the Amended Complaint that Defendants knew about
the defects in the various ORVs long before those defects resulted in recalls, or that
Defendants knew about recalls long before those recalls were announced. (E.g., Am.
Compl. ¶ 41.) But a company cannot recall a product merely because a few customers
have experienced issues with that product. Plaintiffs themselves agree that a recall must
be coordinated with the Consumer Product Safety Commission (CPSC).
importantly, though, there is no indication that the defects in Polaris’s ORVs were either
so widespread as to make imputing knowledge of the seriousness of the defects
appropriate, or so immediate and urgent to warrant a recall without some investigation.
Polaris issued six recalls in the 18-month-long class period. Plaintiffs’ allegations do not
establish that Defendants knew about the serious safety issues and concealed that
knowledge from investors. Thus, even if Plaintiffs have alleged any actionable false and
misleading representations, they have failed to establish scienter and their claims fail.
Having determined that Plaintiffs have failed to sufficiently allege false or
misleading representations and scienter, the Court need not address Plaintiffs’ allegations
with respect to loss causation.
To prevail on a claim for control-person liability under section 20, Plaintiffs “must
first establish a separate underlying violation of the [Securities and Exchange] Act.” In
re Stratasys Ltd. S’holder Sec. Litig., No. 15cv455, 2016 WL 3636992, at *6 (D. Minn.
June 30, 2016) (Schiltz, J.). Because Plaintiffs have failed to allege any actionable
statements and have no evidence regarding scienter, Plaintiffs cannot establish controlperson liability.
Plaintiffs’ allegations fail to meet the high standard for success under the PSLRA.
Accordingly, IT IS HEREBY ORDERED that Defendants’ Motion to Dismiss (Docket
No. 73) is GRANTED and the Amended Complaint (Docket No. 64) is DISMISSED
LET JUDGMENT BE ENTERED ACCORDINGLY.
Dated: October 13, 2017
s/ Paul A. Magnuson
Paul A. Magnuson
United States District Court Judge
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