Knurr v. Orbital ATK Inc. et al
MEMORANDUM OPINION I. Signed by District Judge T. S. Ellis, III on 09/26/2017. (dvanm, )
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF VIRGINIA
STEVEN KNURR, et al.,
ORBITAL ATK INC., et al.,
Case No. 1:16-cv-1031
MEMORANDUM OPINION I
Plaintiffs in this federal securities class action allege claims under (i) § 10(b) and Rule
10b-5; (ii) § 14(a) and Rule 14a-9; and (iii) § 20(a) of the Securities Exchange Act of 1934
(“Exchange Act”). Defendants seek threshold dismissal of claims under all three provisions, and
a separate memorandum opinion addresses the § 14(a) and related § 20(a) claims. This
memorandum opinion addresses the questions presented under § 10(b) and the related § 20(a)
claims, which are as follows:
(1) whether plaintiffs have alleged facts in the Complaint1 that warrant, as the Private
Securities Litigation Reform Act (“PSLRA”) requires, a “strong inference” of scienter
with respect to their claim under § 10(b) of the Exchange Act that defendants, a publicly
traded aerospace and defense company and four of its high-level officers, intentionally
concealed or recklessly ignored significant losses on a government contract; and
(2) whether under § 20(a) of the Exchange Act, the Complaint adequately alleges that the
defendants had control over any person liable under § 10(b) of the Exchange Act.
On August 12, 2016, named plaintiff Steven Knurr filed this action against Orbital ATK, Thompson, and Pierce
individually and on behalf of other Orbital ATK stockholders. Thereafter, the Construction Laborers Pension Trust
of Greater St. Louis (“St. Louis Laborers”), the Arkansas Teacher Retirement System, and two institutional investors
filed motions for appointment as lead plaintiff and approval of the proposed lead plaintiff’s choice of counsel.
Following briefing and oral argument on these motions, a memorandum opinion and order issued on November 10,
2016 appointing (i) St. Louis Laborers as lead plaintiff, (ii) Robbins Geller Rudman & Dowd LLP as lead counsel,
and (iii) Craig C. Reilly as liaison counsel. See Knurr v. Orbital ATK, Inc., 220 F. Supp. 3d 653 (E.D. Va. 2016).
St. Louis Laborers was then granted leave to file its own complaint, which it did on April 24, 2017. This complaint
names Orbital ATK, Thompson, Pierce, DeYoung, and Larson and is the sole operative complaint in this action
Parties have fully briefed and argued these questions, and they are ripe for disposition.
Before reciting the pertinent facts, it is important to identify the proper source of those
facts. First, as the parties agree and as settled precedent requires, the facts recited here are taken
chiefly from the Complaint’s factual allegations, which must be accepted as true at this stage.
Cozzarelli v. Inspire Pharm. Inc., 549 F.3d 618, 625 (4th Cir. 2008) (noting that at the motion to
dismiss stage, “we must accept plaintiffs’ factual allegations as true”). Defendants have also
sought to have additional facts considered by attaching various exhibits to the motion to
dismiss.2 Only certain of these documents are appropriately considered at this stage.
Settled circuit authority permits courts to consider external documents in a motion to
dismiss when they “are integral to and explicitly relied on in the complaint, and when the
plaintiffs do not challenge the document’s authenticity.” Zak v. Chelsea Therapeutics Int’l, Ltd.,
780 F.3d 597, 606–07 (4th Cir. 2015) (quotation marks and brackets omitted). The SEC filings
attached to defendants’ dismissal motion, the transcripts of the August 10, 2016, November 8,
2016, and March 8, 2017 Orbital ATK conference calls, and the Wells Fargo and Barclays
analyst reports are integral to or explicitly referenced in the Complaint, and plaintiffs do not
challenge their authenticity. Accordingly, these documents are appropriately considered at this
stage. Similarly, because the Fourth Circuit permits courts to take “judicial notice of published
Defendants’ additional documents include: (1) Excerpts from a number of Orbital ATK’s and Alliant’s forms filed
with the U.S. Securities and Exchange Commission (“SEC”), such as forms 10-K and 8-K; (2) Orbital Sciences’
Schedule 14A form and Alliant’s Form 424B3; (3) Form 4s for defendants Thompson and DeYoung for the period
of May 28, 2015 to August 9, 2016 (the class period), which were filed with the SEC; (4) A chart summarizing
Orbital ATK’s historical stock prices; (5) Transcripts from Orbital ATK’s earning conference calls held on (i)
August 10, 2016, (ii) November 8, 2016, and (iii) March 8, 2017; (6) A transcript of Alliant’s earnings conference
call held on August 1, 2013; and (7) Analyst reports from (i) Barclays, dated August 10, 2016, (ii) KeyBanc Capital
Markets, dated August 11, 2016, and (iii) Wells Fargo, dated August 23, 2016.
stock prices without converting a motion to dismiss into a motion for summary judgment,” it is
also appropriate to consider the chart summarizing Orbital ATK’s historical stock prices.
Greenhouse v. MCG Capital Corp., 392 F.3d 650, 655 (4th Cir. 2004). By contrast, Alliant’s
August 1, 2013 conference call is not referenced in the Complaint, nor does the Complaint cite
the KeyBank analyst report, so it is inappropriate to consider these documents at the motion to
Corporate defendant, Orbital ATK, is an aerospace and defense company headquartered
in Dulles, Virginia. The company’s stock trades on the New York Stock Exchange under the
ticker symbol “OA.” Orbital ATK was formed out of the February 2015 merger between two
companies—Orbital Sciences Corporation (“Orbital Sciences”) and Alliant Techsystems, Inc.
In addition to the corporate defendant, the Complaint names the following four individual
(1) David D. Thompson;
(2) Garrett E. Pierce;
(3) Blake E. Larson; and
(4) Mark DeYoung.
Defendant Thompson has been the Chief Executive Officer and President of Orbital ATK
since the merger; before the merger, he was the Chairman of the Board, CEO, and President of
Orbital Sciences. Defendant Pierce is currently Orbital ATK’s Chief Financial Officer; before
the merger he was Vice Chairman of the Board and CFO of Orbital Sciences. Defendant Larson
is the Chief Operating Officer of Orbital ATK; before the merger he was the Senior Vice
President of Alliant and President of Alliant’s Aerospace Group. Finally, defendant DeYoung
was a Director of Orbital ATK from the merger until March 2016; before the merger he served
as the CEO and President of Alliant.
Plaintiffs allege that Thompson, Pierce, and Larson made a number of false and
misleading statements with respect to the financial success of Orbital ATK after the merger of
Orbital ATK’s predecessor companies, Orbital Sciences and Alliant. In particular, plaintiffs
focus on Thompson, Pierce, DeYoung and Larson’s failure to disclose for over a year that a
major ammunition contract with the United States Army—the Lake City Contract—was costing
Orbital ATK hundreds of millions of dollars. Under Orbital ATK’s own accounting policy and
Generally Accepted Principles of Accounting (“GAAP”), gross estimated losses on long-term
contracts such as the Lake City Contract must be disclosed and recorded as soon as such losses
become evident. On August 10, 2016, Thompson, Pierce, and Larson announced that they would
be restating several of Orbital ATK’s financial statements to reflect nearly $400 million in losses
on the Army ammunition contract, and also announced that the losses from this contract should
have been recorded earlier pursuant to the accounting policy and GAAP. Defendants’ alleged
cover-up of the losses on the ammunition contract form the basis of plaintiffs’ claims under
§ 10(b) of the Exchange Act.
Prior to their merger, Orbital Sciences and Alliant were both publicly traded aerospace
and defense companies headquartered in Virginia and both sold products such as rockets and
satellites to NASA and the United States military. Alliant was also a leading ammunition
producer for the United States military; Orbital Sciences did not manufacture or sell ammunition.
Both companies relied heavily on government contracts, which were 70% of Alliant’s sales and
80% of Orbital Sciences’ sales. At the same time, the Complaint alleges that heading into the
merger, Alliant was under pressure to renew a major ammunition contract, and Orbital Sciences
was dealing with a series of financial missteps. The Complaint alleges that these pressures set
the stage for defendants’ fraudulent and misleading statements with respect to Orbital ATK’s
post-merger financial performance.
With respect to Alliant, plaintiffs’ claims focus on the Lake City Contract between
Alliant and the United States Army, which Alliant originally entered into in 2000. Alliant
manufactured billions of rounds of small caliber ammunition under this contract at the Lake City
Plant in Independence, Missouri, and the contract accounted for 13% of Alliant’s total revenues
in fiscal year 2010; no other contract contributed more than 10% of the company’s sales. In
fiscal year 2010, Alliant received a four-year renewal on the Lake City Contract. In August
2012, Alliant submitted a bid to the Army to retain the Lake City Contract beyond 2013. The
Complaint alleges that Alliant, at this time, was under pressure to retain the Lake City Contract
because Alliant had recently lost a bid to renew another major multi-year ammunition Army
contract to Alliant’s competitor, BAE Systems PLC. To make matters worse for Alliant, BAE
Systems was also seeking the Lake City Contract. Accordingly, plaintiffs allege that Alliant and
DeYoung “aggressively bid” on the Lake City Contract renewal with a “low-ball bid.” (Compl.
¶¶ 47, 38). Alliant and DeYoung’s plan apparently worked, as Alliant won the renewal of the
Lake City Contract on September 28, 2012; the contract had a seven-year term with a three-year
extension option, and production under the contract would begin on October 1, 2013.
Plaintiffs allege that making a profit on the new Lake City Contract would be more
difficult compared to the old contract owing to the lower production volume, given that overhead
costs had to be spread over the total cost of production. Alliant assured investors that it would
monitor costs carefully to account for these reductions in volume, but also made clear that
Alliant would face some pressure with respect to the profit margins on the Lake City Contract.
For instance, on various conference calls, DeYoung acknowledged that Alliant won the Lake
City Contract on an “aggressive bid” and that winning that bid would require “price reductions
which could impact margins in the early years of winning the recompete.” (Compl. ¶ 43). After
Alliant won the contract, DeYoung reiterated that it was an “aggressive contract” and that the
company would experience an “initial period of margin pressure” and “some reduced revenue”
as a result. Id. ¶ 44. DeYoung also informed investors on October 30, 2014 that Alliant was
taking a number of steps to reduce costs and boost profitability on the Lake City Contract,
including (i) reducing staff and work force; and (ii) offering commercial ammunition out of the
Lake City Plant.
As for Orbital Sciences, the Complaint also alleges that this company was facing its own
problems in the year before the merger, namely: (i) lower than expected revenues for each
quarter of 2014; (ii) two reductions in revenue guidance for 2014; and (iii) a failed rocket launch
in October 2014, which jeopardized a multi-year contract with NASA. The Complaint alleges
that these failures raised the stakes for a successful proposed merger between Orbital Sciences
On April 29, 2014, Orbital Sciences and Alliant announced that they planned to merge to
form Orbital ATK. Orbital Sciences shareholders would receive .449 shares of Orbital ATK
stock in exchange for each share of Orbital Sciences stock held, Alliant shareholders would
retain their Alliant stock, and Alliant would be renamed Orbital ATK. Thompson would serve as
CEO of Orbital ATK, while Pierce would serve as the CFO. DeYoung would become CEO and
Chairman of a new company, Vista, which would be a spin-off of Alliant’s sporting segment.
Even though Vista would manufacture ammunition, Vista and DeYoung did not take the Lake
City Contract; that contract remained with Orbital ATK.
After conducting due diligence, Alliant and Orbital Sciences, on December 17, 2014,
filed a joint proxy statement (“Joint Proxy Statement”) with the SEC concerning the merger.
Shortly thereafter, both companies held special stockholders meetings on January 27, 2015 to
vote on the merger. The shareholders from each company approved the merger, which was
announced on February 9, 2015.
Following the merger, Orbital ATK transitioned from Alliant’s fiscal year, which ended
March 31, 2015, to a fiscal year ending on December 31. The Class Period begins on May 28,
2015, when Orbital ATK reported its first financial results after the merger. The Complaint
alleges that defendants began making a series of statements on May 28, 2015 about Orbital
ATK’s post-merger financial performance. In particular, the Complaint identifies four categories
of false and misleading statements as the basis for the § 10(b) claim:
(1) statements regarding merger synergies;
(2) statements regarding the Lake City Contract’s performance;
(3) statements regarding financial results; and
(4) statements regarding internal controls.
Because defendants, at this stage, do not contest the materiality or falsity of the statements, a
brief summary of the statements suffices.
Statements Regarding Merger Synergies
On May 28, 2015, the beginning of the Class Period, Orbital ATK announced its
financial results from the first transition period quarter ending on March 31, 2015. Orbital ATK
also filed these results with the SEC on Form 8-K. Between May 28, 2015 and May 11, 2016,
Thompson, Larson, and Pierce made a number of public statements in financial releases,3
conference calls,4 and investor meetings5 concerning Orbital ATK’s success in achieving merger
synergies. Specifically, defendants touted the benefits of and synergies associated with the
merger and described the related cost savings and improved profit margins.
The Complaint alleges all of these statements were false and misleading for the following
reasons: (i) the positive statements regarding the benefits, cost reductions, and synergies omitted
to disclose that such savings and synergies were outweighed by the $375 million loss on the
Lake City Contract; (ii) the various statements regarding the benefits of the merger, cost savings,
and improved profit margins did not disclose that the Lake City Contract losses negatively
impacted Orbital ATK’s profit margins; (iii) the Lake City Contract was priced millions of
dollars below cost, and, in violation of GAAP and Orbital ATK’s accounting policy, defendants
failed to record the $375 million loss on the contract when it became evident; and (iv) defendants
did not disclose that their efforts to reduce the costs on the Lake City Contract had failed to make
the contract profitable.
For example, a February 2016 release for Orbital ATK’s fourth transition period quarter 2015 and full calendar
year 2015 financial results quoted Larson as stating that Orbital ATK had “met production demand in our small
caliber ammunition business for commercial and government customers” and that the company had “exceeded [its]
cost synergy targets for 2015.” Id. ¶ 68. Pierce stated in that same release that Orbital ATK expected to see further
“benefits from the merger in terms of additional cost and revenue strategies that will propel margin expansion.” Id.
On May 5, 2016, for example, Thompson, Larson, and Pierce held a conference call to discuss the first quarter
2016 financial results. Larson stated that Orbital ATK was delivering on its merger-related synergies and the
company’s profit margins had improved. He stated that the company had achieved $85 million in cost reductions in
2015 and was on track to achieve more than $100 million in savings in 2016. He stated that the company’s
performance and synergy savings were resulting in “improved competitiveness and profit margins in our
operations.” Id. ¶ 73. Thompson added that Orbital ATK’s profit margins were benefiting from the cost efficiencies
achieved following the merger, and that revenue and cost synergies were on or ahead of schedule.
On March 8, 2016, Pierce spoke at an institutional investors conference on behalf of Orbital ATK. Pierce stated
that the merger had gone very well from both a cost and revenue standpoint and stated that Orbital ATK had
achieved $80 million in cost reductions in the first nine months following the merger and would add another $20
million in savings.
Statements Regarding the Lake City Contract’s Performance
The next category of allegedly false and misleading statements ranges from May 28,
2015 to May 11, 2016 and involves the financial performance of the Lake City Contract. Again,
these statements appeared in financial releases6 and SEC forms.7 Moreover, defendants made
various statements on conference calls8 and at conferences.9 Generally, these statements
described the continued success of the Lake City Contract and its high rates of production.
The Complaint alleges that these statements were false and misleading because, in fact,
the company was losing money on the Lake City Contract by selling the bullets at a significant
loss. In particular, the statements concerning the Lake City Contract’s profit margins were false
because the contract was in fact operating at negative margins, which resulted in substantial
losses. Likewise, statements concerning the profit rate of the Lake City Contract were also false
because Orbital ATK was, in fact, losing money on the contract.
Statements Regarding Financial Results
For example, on October 27, 2015, Orbital ATK issued a release announcing its third quarter 2015 financial
results, which were filed with the SEC on Form 8-K. The release stated that the Defense Systems Group had
delivered 300 million rounds of ammunition in the third quarter. Larson stated in the release that the company had
continued its progress in ramping up several programs and also had “a higher production rate of commercial smallcaliber ammunition.” Id. ¶ 83.
On June 1, 2015, Orbital ATK filed its annual report on Form 10-K for the fiscal year ending on March 31, 2015.
Thompson, Pierce, and DeYoung signed the form, which contained several statements concerning the Lake City
Contract. Specifically, the Form 10-K stated that the company produced approximately 1.4 billion rounds of smallcaliber ammunition in the Lake City Plant in the first fiscal quarter of 2015, and that the Lake City Contract
contributed to 13% of Orbital ATK’s sales in fiscal 2015, 9% in fiscal year 2014, and 19% in fiscal year 2013. The
Form 10-K also stated that because of the significant competition for the Lake City Contract, Orbital ATK had
“experienced a lower profit rate in the Small-Caliber Systems division following the implementation of [the] new
contract.” Id. ¶ 78. Finally, the Form 10-K warned that an increase in ammunition costs could have an adverse
effect on the company’s “operating results and profit margin.” Id.
As an example, on May 5, 2016, Thompson, Larson, and Pierce held a conference call to discuss the first quarter
2016 results. When asked about the outlook for the Lake City Contract, Thompson stated (i) that the “outlook in the
small caliber ammo business is pretty good this year” and was “stronger overall than last year”; (ii) that Orbital ATK
was seeing a “significant bounce back in demand” in 2016; (iii) that the company produced approximately 400
million rounds of ammunition in the first quarter of 2016, most of which was from the Lake City Plant; and (iv) that
the company predicted a “reasonable increase in total small [cal] ammo sales this year.” Id. ¶ 92.
On March 8, 2016, Pierce spoke at an institutional investors conference on Orbital ATK’s behalf and stated that the
company’s ammunitions business was “coming back” and that the company had driven the cost out of that business.
Id. ¶ 88.
The Complaint alleges that between June 1, 2015 and May 9, 2016, defendants made a
number of false and misleading statements concerning Orbital ATK’s financial results in
releases10 and SEC filings.11 The Complaint alleges that these figures and statements concerning
Orbital ATK’s financial condition were false and misleading for the same reason—the Lake City
Contract had been priced hundreds of millions of dollars below cost, and defendants, in violation
of GAAP and the company’s accounting policy, did not record this $375 million forward loss on
the contract. As a result of defendants’ failure to record the loss properly, all of the financial
figures reported in these releases and statements were erroneous. For instance, the Complaint
alleges that with respect to the figures stated in the 2016 release and Form 10-Q, the total current
liabilities were understated by $264 million (22%), the retained earnings were overstated by
$255 million (23%), the net receivables were overstated by $119 million (6%), and total equity
reported was overstated by $255 million (15%).
Statements Regarding Internal Controls
Finally, between May 28, 2015 and May 9, 2016, the Complaint alleges that defendants
made a number of false statements in SEC forms12 and conference calls13 concerning Orbital
ATK’s internal financial controls.
For example, on May 5, 2016, Orbital ATK issued its release for the first quarter of 2016, which reported total
current liabilities of $954 million and total equity of $1.99 billion. Id. ¶ 106.
On May 9, 2016, Orbital ATK filed its first quarter 2016 Form 10-Q, which was signed by Thompson and Pierce
and included the following statement concerning Orbital ATK’s financial condition: total current liabilities of $954
million, retained earnings of $1.36 billion, and net receivables of $1.97 billion.
On June 1, 2015, Orbital ATK filed its 2015 Form 10-K, which was signed by Thompson, Pierce, and DeYoung.
The Form 10-K contained three statements concerning Orbital ATK’s financial disclosures and control procedures:
(i) the “Disclosure Controls Statement,” which assured investors that Orbital ATK’s CEO and CFO “evaluated the
effectiveness of the design and operation of the Company’s disclosure controls and procedures” and had “concluded
that the Company’s disclosure controls and procedures are effective”; (ii) the “Internal Controls Statement,” which
contained management’s conclusion that “the Company’s internal control over financial reporting is effective”; and
(iii) a Sarbanes Oxley Certification (“SOX Certification”), which stated that Orbital ATK’s 2015 Form 10-K
complied with the Exchange Act, that the information in the Form fairly presented, “in all material respects,” Orbital
The Complaint alleges that these statements were false and misleading because, in fact,
Orbital ATK had not integrated the accounting systems of its predecessor companies, and as
such, Orbital ATK could not generate accurate financial reporting. Furthermore, the Complaint
alleges that Orbital ATK’s financial controls at the time suffered from several material
weaknesses, particularly with respect to the failure to maintain an effective financial control
environment at the company’s Defense Systems Group and Small Caliber Systems Division.
These statements were false according to the Complaint because defendants continued to conceal
the large losses stemming from the Lake City Contract.
After more than a year of positive statements concerning the merger and analysts’
corresponding expectations for Orbital ATK,14 events took a turn for the worse on August 10,
2016. Before the market opened that day, Orbital ATK made the following announcements: (i)
that the company would not be able to file its quarterly report for second quarter 2016 on time;
(ii) that the company’s previously issued quarterly and annual financial statements in fiscal year
2015, transition period 2015, and first quarter 2016 were no longer reliable; (iii) that the
company would have to restate its financial statements because of material misstatements related
ATK’s financial conditions, and that Orbital ATK had such internal financial reporting controls to provide
reasonable assurance of the reliability of the company’s financial reports. Id. ¶ 110.
On May 28, 2015, Thompson, Larson, and Pierce held a conference call to discuss Orbital ATK’s first quarter
2015 financial results. Pierce stated that Orbital ATK employees working on financial operational control had
“done a superb job . . . integrating [the company’s] control systems to run this merged business” and that merging
the financial reporting had “turned out to be very, very positive.” Id. ¶ 109.
Analysts reacted positively to defendants’ allegedly false and misleading statements, beginning with a June 1,
2015 analysis from Jefferies, which rated Orbital ATK’s stock as a “BUY” and commented on the increasing
ammunition volumes from the Lake City Contract. On August 6, 2015 analysts from Credit Suisse and Wells Fargo
also positively reviewed Orbital ATK, with Credit Suisse stating that the company was well-positioned in the
defense market and Wells Fargo rating the stock as a “market outperform.” Id. ¶ 123. Next, on October 27, 2015,
Credit Suisse and Jefferies both increased their twelve-month price targets for Orbital ATK. And analysts continued
to respond positively to the allegedly false and misleading statements made in 2016. On March 1, 2016, Credit
Suisse rated the stock as one that would outperform expectations and commented on the growth in the Defense
Systems Group. Finally, on May 6, 2016, Barclays and Wells Fargo analysts positively rated the company, and
analysts from both firms specifically noted that Orbital ATK’s growth forecasts for small-caliber ammunition were
to the Lake City Contract; and (iv) that the company’s internal financial controls were ineffective
Also on August 10, 2016, Orbital ATK filed a Form 8-K report, which provided further
detail about the misstatements relating to the Lake City Contract. Specifically, the Form 8-K
Under generally accepted accounting principles, the Company is required to record the
entire anticipated forward loss provision for a contract in the period in which the loss
becomes evidence. The Company believes that a forward loss provision should have
been recorded for the Contract in fiscal 2015, which was the first year of large-scale
production under the Contract.
With respect to the cause of these misstatements, the Form 8-K stated that there were
“one or more material weaknesses in [the company’s] internal control over financial reporting
and disclosure controls and procedures during the Restated Periods.” As for the losses caused by
the misstatements, Orbital ATK estimated that the forward loss charge would reduce previously
reported pre-tax operating income by about $400 million to $450 million and after-tax net
income by about $250 million to $280 million. Orbital ATK also estimated that the
misstatements resulted in revenues being overstated by $100 million to $150 million, primarily
for fiscal year 2015. Finally, the Form 8-K stated that Orbital ATK expected to file an amended
Form 10-K for the 2015 transition period, and its quarterly report on Form 10-Q for the quarter
ending April 3, 2006 “as soon as reasonably practicable,” but that the company had obtained an
extension from its lenders to file the reports by November 14, 2016.
Thompson, Pierce, and Larson also held a conference call that day to discuss Orbital
ATK’s announcement that Orbital ATK’s earnings would have to be restated. The transcript
from the August 10, 2016 conference call shows that Thompson stated that Orbital ATK’s
review of its financial processes and controls “ultimately determined that [the Lake City
Contract] had in fact been in a substantial loss position since 2014, rather than the roughly
breakeven profit level that had been previously recorded.” Pierce stated that the Lake City
Contract “moved into high-rate production” in fiscal year 2015, and that “[d]espite vigorous and
sustained efforts to achieve productivity improvements, and despite realizing substantial cost
efficiencies, [the] Lake City team was unable to reduce the production costs far enough for the
contract to be profitable.” The Complaint also notes Pierce’s statement that the Lake City
Contract involved a simple product with fixed material costs, so “the latitude that [the company
has] is labor costs and overheads and the like, so there’s not a lot of room to move on that.”
Finally, Larson stated that the Lake City Contract team had “achieved more than one-half, to
one-half to two-thirds of the objective cost reduction that the bid anticipated.”
After these disclosures, Orbital ATK’s stock price dropped more than 20%, from a close
of $89 per share on August 9, 2016 to a close of $71 per share on August 10, 2016. Analysts
from Wells Fargo, Barclays, and Jefferies all lowered their ratings for Orbital ATK, and Wells
Fargo analysts noted the surprising magnitude of the revision. In another report issued on
August 23, 2016, Wells Fargo reiterated its opinion concerning the substantial size of the
Three months later, Orbital ATK filed another Form 8-K with the SEC on November 1,
2016. The Form 8-K stated that the company had preliminarily determined, after a multi-month
review, that “the majority of the [Lake City Contract] loss provision should be recorded at the
inception of the Contract which occurred in fiscal 2013,” instead of the August position that the
loss should have been recorded in fiscal 2015.15 Orbital ATK also stated, however, that the
preliminary estimate of the loss amount was lower than previously announced, as the estimated
Pierce confirmed in a conference call held on November 8, 2016 that the company had verified that the issues
related to the Lake City Contract dated back to fiscal year 2013.
reduction in pre-tax operating income would be $350 million, instead of the original estimate of
$400 to $450 million, and the estimated reduction in after-tax net income would be about $220
million, instead of the original estimate of $250 million to $280 million.
Orbital ATK ultimately filed its Amended Form 10-K for the nine-month transition
period ending December 31, 2015 on February 24, 2017. The Amended Form 10-K restated the
company’s financial statements for the first quarter of 2016, the transition period ending on
December 31, 2015, fiscal year 2015, fiscal year 2014, and fiscal year 2013 (except for the first
quarter); the Amended Form 10-K also confirmed that the previous financial statements for these
fiscal years, as well as the associated quarterly reports, should no longer be relied on due to the
misstatements concerning the Lake City Contract. With respect to the Lake City Contract, the
Amended Form 10-K confirmed that Alliant had submitted a significantly low bid for the
contract on the basis that it would reduce operating costs substantially over the life of the
contract. Although the Amended Form 10-K noted that Orbital ATK achieved “significant cost
reductions,” those reductions “were not sufficient to achieve profitability over the life of the
Lake City Contract.” As for the misstatements, the Amended Form 10-K confirmed that senior
management identified the misstatements in 2016 as part of a company-wide effort to enhance
accounting controls and oversight. Once the misstatements were corrected, it became clear that
the costs of the Lake City Contract would exceed its revenues over the life of the contract, which
meant that the entire anticipated forward loss should have been recorded in 2013 when the loss
became evident. Specifically, the Complaint notes that Orbital ATK determined that $32 million
of the loss should have been evident when the contract was signed in the second quarter of fiscal
2013, and $342 million should have been evident in the second quarter of fiscal 2014.
The Amended Form 10-K also provided information as to the reasons the misstatements
occurred in the first place. The internal investigation revealed that certain personnel in the Small
Caliber Systems Division and the Defense Systems Group failed to adhere to company standards
with respect to the Lake City Contract. In particular, (i) there was likely a “bias toward
maintaining a targeted profit rate;” (ii) there was, in some cases, apparently an “inappropriate use
of management reserves to maintain the targeted profit rate;” (iii) “some members of the Small
Caliber Systems Division finance staff failed to follow up and inquire further into indications
that cost overruns were occurring;” and (iv) “negative information was suppressed, and concerns
at the Small Caliber Systems Division about cost overruns were not escalated appropriately” to
higher-level company management and finance staff, the Audit Committee, the Board of
Directors, or the independent accounting firm.
Finally, Orbital ATK also revealed in the Amended Form 10-K that Orbital ATK was the
subject of a non-public SEC investigation, and noted that the restatement could result in
government enforcement actions or adverse litigation.
After Orbital ATK filed its Amended Form 10-K, plaintiffs filed the operative Complaint
in this matter on April 24, 2017, asserting claims against the defendants. Plaintiffs bring four
claims against defendants based on the post-merger statements, as well as defendants’ alleged
negligence in preparing, reviewing, and disseminating the Joint Proxy Statement issued before
the merger: (i) a violation of § 10(b) of the Exchange Act and Rule 10b-5 against all defendants,
(ii) a violation of § 20(a) of the Exchange Act against Thompson, Pierce, and Larson, (iii) a
violation of § 14(a) of the Exchange Act and Rule 14a-9 against Thompson, Pierce, DeYoung,
and Orbital ATK (the “Joint Proxy Defendants”), and (iv) a violation of § 20(a) of the Exchange
Act against DeYoung, Thompson, and Pierce.
Defendants then filed a joint motion to dismiss all claims in the Complaint pursuant to
Rule 12(b)(6), Fed. R. Civ. P and under the PSLRA. With respect to the § 10(b) and related §
20(a) claims, defendants argue that the Complaint does not allege facts that warrant a strong
inference of scienter, and plaintiffs contend that the Complaint satisfies the PSLRA standard.
Defendants’ dismissal motion has been fully briefed and argued and is ripe for disposition.
Section 10(b) of the Exchange Act prohibits the use of “any manipulative or deceptive
device or contrivance” in connection with the sale of securities “in contravention of [the] rules
and regulations” prescribed by the SEC. 15 U.S.C. § 78j(b). Pursuant to that prohibition, Rule
10b–5 provides that:
It shall be unlawful for any person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce, or of the mails or of any facility of any national
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact
necessary in order to make the statements 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. The elements of a § 10(b) claim are well-established: “(1) a material
misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the
misrepresentation or omission and the purchase of a sale or security; (4) reliance upon the
misrepresentation or omission; (5) economic loss; and (6) loss causation.” Stoneridge Inv.
Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 157 (2008).
Defendants’ motion to dismiss with respect to plaintiffs’ § 10(b) claim focuses solely on
the second element—whether plaintiffs have alleged sufficient facts to warrant a strong inference
that defendants acted with the requisite scienter of “either intentional or severely reckless
conduct.” Yates v. Mun. Mortg. & Equity, LLC, 744 F.3d 874, 884 (4th Cir. 2014).16 Because
the PSLRA “imposes a heightened pleading standard on fraud allegations in private securities
complaints,”17 the complaint must “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)(1)(B), (2)(A)
(emphasis added). Critically, the Supreme Court established that “in determining whether the
pleaded facts give rise to a ‘strong’ inference of scienter, the court must take into account
plausible opposing inferences.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 323
(2007). And a complaint survives a dismissal motion “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. at 324.
The Complaint alleges numerous facts and indicia in an attempt to establish a strong
inference that defendants Thompson, Larson, DeYoung, and Pierce, and by extension Orbital
ATK, acted with the requisite scienter in making the misleading statements described above,
(1) defendants’ senior positions with Orbital ATK and corresponding awareness of,
responsibility for and control over the Lake City Contract and other subjects of the
(2) multiple “red flags” indicating that the Lake City Contract was operating at a loss;
A “reckless act is one that is so highly unreasonable and such an extreme departure from the standard of ordinary
care as to present a danger of misleading the plaintiff to the extent that the danger was either known to the defendant
or so obvious that the defendant must have been aware of it.” Id. (quotation marks omitted).
Id. at 885.
(3) the simplicity of the “percentage-of-completion” accounting method for the Lake City
Contract and defendants’ years of experience in using this method for long-term
(4) the sheer magnitude of the restatement;
(5) the departure of key employees, particularly DeYoung, government investigations,
and defendants’ false SOX certifications; and
(6) defendants’ motives, namely defendants’ profit from incentive compensation or stock
sales and desire to complete the merger and make it appear successful.
Defendants argue these allegations are insufficient both individually and as a whole to
support a strong inference of scienter. The only proper inference, defendants contend, is that
defendants acted in good faith, and thus neither the individual defendants nor the corporate
defendant can be liable.
In accordance with Fourth Circuit precedent, each of plaintiffs’ individual facts and
indicia, and defendants’ opposing arguments, will be addressed first to determine whether the
allegations give “rise to an inference of scienter and, if so, the strength of that inference.” Yates,
744 F.3d at 885. Then, the complaint will be “evaluate[d] . . . holistically, recognizing that
allegations of scienter that would not independently create a strong inference of scienter might
[complement] each other to create an inference of sufficient strength to satisfy the PSLRA.” Id.
at 893 (quotation marks omitted).
Defendants’ Senior Positions with Orbital ATK and Responsibility for the Lake City Contract
The Complaint’s first set of allegations focuses on defendants’ roles as senior executives
at Orbital ATK. These roles, plaintiffs contend, gave defendants the ability to and responsibility
for monitoring the Lake City Contract, the merger synergies, and the company’s internal
controls—the precise topics of the misstatements. Specifically, the Complaint alleges that
defendants had access to confidential information about the company’s finances and internal
controls and were responsible for signing off on the company’s public statements, SEC filings,
and SOX certifications. These allegations, however, rest on little more than the individual
defendants’ positions as high-level corporate executives and as such, are not adequate to support
a strong inference of scienter.
The Fourth Circuit has rejected the contention that individual corporate officers must
“have acted intentionally or recklessly” with respect to a company’s accounting problem “merely
because . . . they [are] senior executives” of the company. Id. at 890. Accordingly, general
allegations based on corporate positions are insufficient to satisfy the PSLRA’s particularity
requirement. Instead, plaintiffs must allege “additional detailed allegations establishing the
defendants’ actual exposure to the accounting problem.” Id. (emphasis added).18 In this regard,
district courts have found that complaints support a strong inference of scienter with respect to
senior executives where those complaints allege facts demonstrating defendants’ awareness of
the specific problems about which those defendants made false statements.19
See also South Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 785 (9th Cir. 2008) (“Allegations regarding
management’s role in a corporate structure and the importance of the corporate information about which
management made false or misleading statements may also create a strong inference of scienter when made in
conjunction with detailed and specific allegations about management’s exposure to factual information within the
company.”); In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 282 (3d Cir. 2006) (“A pleading of scienter
sufficient to satisfy Rule 9(b) may not rest on a bare inference that a defendant must have had knowledge of the facts
or must have known of the fraud given his or her position in the company.” (quotation marks omitted)).
In In re Genworth Financial Inc. Securities Litigation, 103 F. Supp. 3d 759, 767 (E.D. Va. 2015), for example,
plaintiffs alleged (i) that defendants admitted to making misstatements about when they last conducted a review; (ii)
that defendants knew that “industry experts had identified adverse trends in claim data between 2010 and 2013 that
were not accounted for in” the company’s reserves and (iii) that defendants knew that the average length for the
company’s claims was actually longer than the figure used internally to calculate the reserves. Id. at 783–84.
Similarly, in Kiken v. Lumber Liquidators Holdings, Inc., 155 F. Supp. 3d 593 (E.D. Va. 2015), plaintiffs alleged
that defendants misrepresented that their high profit margins were due to the use of legitimate, low-cost wood
sourcing initiatives when, in reality, the company had high profit margins because of cheap, illegally harvested
wood that violated safety standards. Id. at 598. In concluding that plaintiffs satisfied the scienter requirement, the
court relied on multiple allegations that defendants were more intimately involved in importing the cheap wood than
merely overseeing it, namely (i) the company hired two of the individual defendants specifically for the purpose of
importing the Chinese wood; (ii) the defendants publicly bragged about inspecting the Chinese mills; (iii) defendants
repeatedly assured investors that they had employees at the mills to control quality; and (iv) the company conducted
“stringent testing” of the wood to ensure quality and safety. Id. at 607.
Here, the Complaint relies chiefly on defendants’ positions as corporate executives to
support a strong inference of scienter without alleging any facts about defendants’ awareness of
the Lake City Contract accounting problem. Monitoring company operations, discussing
company business on conference calls, and signing off on financial statements are all part and
parcel of the role of a senior executive and do not, without more, support an inference of actual
exposure to a problem as required to establish scienter. Yates, 744 F.3d at 890. 20
Plaintiffs attempt to provide these more detailed allegations by discussing the importance
of the Lake City Contract, defendants’ acknowledged monitoring of the contract, and defendants’
frequent public statements about the contract. These attempts are unsuccessful.
First, plaintiffs contend that because the Lake City Contract was the company’s largest
contract, in its largest division, for its largest customer, the contract was one of Orbital ATK’s
“core operations,” all of which, plaintiffs argue, warrant a strong inference of scienter. 21 This
contention fails for as the Fourth Circuit has recognized scienter cannot be established simply
because a program or contract represents a core business unless, again, plaintiffs can provide
“additional detailed allegations establishing the defendants’ actual exposure to the accounting
problem.” Yates, 744 F.3d at 890 (emphasis added).22 Here too, plaintiffs have failed to provide
See also In re Criimi Mae, Inc. Sec. Litig., 94 F. Supp. 2d 652, 661 (D. Md. 2000) (concluding that allegations
that defendants signed the company’s public filings with the SEC, held executive positions in the company, were
responsible for the company’s operations, had “extensive experience in and knowledge of the real estate finance
industry,” and “their access to information about the company’s financial dealings” were insufficient to “raise a
strong inference of scienter”).
Accepting plaintiffs’ allegations as true that the Lake City Contract was the company’s largest and most important
contract, it is not even clear if these allegations are enough to establish that the contract was one of the company’s
core operations. Cf. In re Genworth, 103 F. Supp. 3d at 784 (stating that the long-term insurance division of a
company was a core operation where a director declared that the division was one of the company’s two “core sets
of businesses” and that long-term care was the company’s “core business”).
See also Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051, 1062 (9th Cir. 2014) (“Proof under
this theory is not easy. A plaintiff must produce either specific admissions by one or more corporate executives of
detailed involvement in the minutia of a company’s operations, such as data monitoring, or witness accounts
demonstrating that executives had actual involvement in creating false reports.”) (citations omitted); In re NVIDIA
Corp. Sec. Litig., 768 F.3d 1046, 1063 (9th Cir. 2014) (“[A]bsent some additional allegation of specific information
the required detailed allegations, as plaintiffs’ allegations do not show that defendants actually
received information that the Lake City Contract was operating at a loss owing to the failure to
Next, plaintiffs focus on defendants’ monitoring of the Lake City Contract. Specifically,
the Complaint notes that DeYoung admitted that Alliant knew the Lake City Plant very well, that
DeYoung monitored the Lake City Contract with monthly meetings, and that the other
defendants received regular reports about the contract. Contrary to plaintiffs’ position, rather
than supporting an inference of scienter, this regular monitoring of the Lake City Contract
suggests diligence. Yates, 744 F.3d at 889 (“We view the frequency of accounting meetings as a
sign of diligence rather than evidence of a nefarious purpose.”).23 And where, as here, there is
no suggestion that management had access to underlying accounting data or knew that data was
being manipulated, management’s review of monthly reports and discussion of contract
performance lends itself less to an inference of scienter and more to a benign interpretation as
there are no facts alleged that would alert these executives to errors or flaws in the reports they
reviewed. See Zucco Partners, LLC v. Digimarc Corp. 552 F.3d 981, 1000–01 (9th Cir. 2009).24
Finally, plaintiffs point to defendants’ frequent public statements about the Lake City
Contract and the merger synergies as evidence of scienter. For example, plaintiffs focus on a
series of statements on the 2015 Form 10-K concerning the production volumes under the Lake
conveyed to management and related to the fraud or other allegations supporting scienter, the core operations
inference will generally fall short of a strong inference of scienter.” (quotation marks omitted)).
See also Anderson v. Spirit Aerosystems Holdings, Inc., 827 F.3d 1229, 1246 (10th Cir. 2016) (assuming that
“plaintiffs’ allegations create an inference that the four executives were briefed on the underlying cost data while
attending meetings where the three projects were discussed,” but concluding that “mere attendance at meetings does
not contribute to an inference of scienter”).
Zucco Partners found allegations that (i) “senior management . . . closely reviewed the [quarterly] accounting
numbers;” (ii) that “top executives had several meetings in which they discussed quarterly inventory numbers;” (iii)
that the company’s “management had access to the purportedly manipulated quarterly accounting numbers;” and
(iv) that “management analyzed the investor numbers closely” were insufficient to establish scienter. Id.
City Contract, the contract’s contribution to the company’s sales, and a warning that rising costs
could have an adverse effect on profit margin. These facts also fall short of warranting a strong
inference of scienter because the Complaint does not allege facts that suggest a level of direct
involvement by any of the executives and thus establishes at most a very weak inference of
scienter. Cf. Kiken, 155 F. Supp. 3d at 606 (finding plaintiffs satisfied scienter requirement
based on numerous facts indicating direct, personal involvement in the subject of the
misstatements). As described above, plaintiffs have failed to allege with particularity that the
individual defendants were privy to information concerning cost overruns at the Lake City Plant
but concealed this information from the public.25 Compare Zak, 780 F.3d at 609 (concluding
that plaintiffs satisfied scienter requirement where they alleged that “defendants knew that the
FDA expected two successful . . . studies . . . [but] none of the defendants’ statements to
investors addressed this critical expectation”).
In sum, plaintiffs’ arguments that the individual defendants were intimately involved in
the Lake City Contract and the merger synergies rest on little more than the nature of the
defendants’ executive positions with Alliant (for DeYoung) and Orbital ATK (for the other
defendants), their review of monthly reports, and their signing of financial statements—facts
which, without more detailed allegations, simply fall short of supporting a strong inference of
Multiple “Red Flags” About Lake City Contract
Plaintiffs’ next set of scienter indicia are various so-called “red flags” that allegedly
served to warn the individual defendants that the Lake City Contract was operating at a
On the other hand, it appears from the Complaint that other individuals within Orbital ATK did know about the
cost overruns but failed to report them up the chain of command.
significant loss and that Orbital ATK was experiencing problems with its internal controls.26
These red flags also fall short of warranting a strong inference of scienter.
The Fourth Circuit has recognized that the “presence of red flags, coupled with the
breadth and gravity of a company’s problems, may provide substantial weight to an inference
that high level corporate agents must have been aware of the problems.” Yates, 744 F.3d at 888
(quotation marks omitted).27 Those red flags, however, must be “sufficient . . . to alert senior
officers to the unreliability of statements about internal controls and financial information.”
Matrix Capital Mgmt. Fund, LP v. BearingPoint, Inc., 576 F.3d 172, 188 (4th Cir. 2009).28
Moreover, when red flags are public knowledge, it substantially waters down any inference of
scienter. See Owens v. Jastrow, 789 F.3d 529, 540 (5th Cir. 2015).29 The red flags at issue in
this case were either public knowledge or insufficient to alert defendants to the unreliability of
the Lake City Contract accounting. Accordingly, none of them support a strong inference of
The red flags include: (1) the twelve years of experience that Alliant had with manufacturing ammunition at Lake
City under earlier contracts, including history of costs and supporting documentation; (2) the aggressive bid for the
Lake City Contract, which was below historical costs; (3) the decision not to send the Lake City Contract to Vista,
which was a more natural fit for the contract; (4) Orbital ATK’s statements that the Lake City Contract had lower
profit rates; (5) the SEC rules demanding close scrutiny of the contract, which required acknowledging the
materiality of any amount that changed gains to losses; (6) the need to issue two restatements, one in March 2016
concerning long-term contracts and the other in February 2017 to correct the errors related to the Lake City
Contract; (7) the fact that Orbital ATK needed several tries to identify correctly the magnitude of the loss on the
Lake City Contract and in which fiscal year the loss should have been identified; (8) the high volume and low
margin nature of manufacturing ammunition; (9) the fixed nature of production costs, which did not leave a lot of
room for cuts in costs; (10) the fact that pricing would decline over the life of the contract; and (11) the failure to
achieve the required cost savings over the many months of production before the Class Period.
For instance, “[d]rastic overstatement of accounts, or other red flags, combined with alleged violations of [GAAP]
may be enough to establish the requisite level of scienter.” Garfield v. NDC Health Corp., 466 F.3d 1255, 1267–68
(11th Cir. 2006).
See also In re Suprema Specialties, 438 F.3d at 279 (“[C]ourts have recognized that allegations of [GAAP]
violations, coupled with allegations that significant ‘red flags’ were ignored, can suffice to withstand a motion to
dismiss.” (emphasis added)).
See also Fire & Police Pension Ass’n of Colorado v. Abiomed, Inc., 778 F.3d 228, 244 (1st Cir. 2015) (concluding
that a company’s disclosures of its correspondence with the FDA “undercut any inference of scienter”); Ziemba v.
Cascade Int’l, Inc., 256 F.3d 1194, 1211 (11th Cir. 2001) (concluding that disclosures of red flags “significantly
undermine[d] any hint of fraud”).
To begin with, as noted, many of Complaint’s alleged red flags were public knowledge,
diluting any significant inference of scienter that can be drawn therefrom. For example, Alliant’s
twelve years of experience with manufacturing ammunition at the Lake City Plant, Alliant’s
aggressive bid for the Lake City Contract, the fact that the Lake City Contract remained with
Orbital ATK instead of going to Vista, and Orbital ATK’s statements about lower profit margins
all were public knowledge. Those red flags consequently do not support a strong inference of
scienter. The remaining red flags fail to establish a strong inference of scienter because plaintiffs
have not demonstrated that those red flags would have necessarily alerted the defendants’ to the
Lake City Contract accounting errors or Orbital’s internal control issues.
To start with, the fact that SEC rules generally acknowledge the materiality of even small
amounts of money when those amounts shift gains to losses is simply too generic to qualify as a
significant red flag, as there is nothing in the SEC’s requirement that should have alerted the
individual defendants to the particular accounting problems with the Lake City Contract.
Further, plaintiffs make much of the fact that Orbital ATK issued two restatements—one in
March 2016 to correct errors in long-term contracts and the other in February 2017 (the
Amended Form 10-K) to correct the errors concerning the Lake City Contract. According to
plaintiffs, the first restatement should have alerted the individual defendants to potential
weaknesses in their cost estimates for the Lake City Contract. This argument fails because the
two restatements addressed different problems, and the need for a restatement related to one
problem would not automatically signal the existence of other problems to directors. The first
restatement addressed the proper application of the percentage-of-completion accounting method
to long-term contracts, whereas the problem with the Lake City Contract concerned the inability
to cut costs sufficiently. This difference negates any inference of scienter because the existence
of one problem does not necessarily alert managers to the existence of another, different
problem. See In re Stonepath Grp., Inc. Sec. Litig., 397 F. Supp. 2d 575, 588 (E.D. Pa. 2005)
(concluding that the “mere fact that there were three restatements [did not] show defendants
acted recklessly” where the restatements addressed different problems).30 Accordingly, this set
of red flags was not sufficient to alert the defendants to the Lake City Contract problems and
accounting errors and does not support an inference of scienter.
Similarly, plaintiffs use another group of red flags—(i) the high volume and low margin
nature of manufacturing ammunition; (ii) the fixed nature of production costs; (iii) the fact that
pricing would decline over the life of the Lake City Contract; and (iv) the failure to achieve the
required cost savings over the many months of production before the Class Period—to argue that
the losses on the Lake City Contract were so obvious from the beginning that defendants either
knowingly concealed or recklessly disregarded them. In support of this argument, plaintiffs cite
Pierce’s acknowledgment in an August 10, 2016 conference call that the metal costs for
ammunition are “pretty much fixed,” which means that the “latitude that we have is labor costs
and overheads and the like, so there’s not a lot of room to move on that” as further evidence that
the individual defendants were aware from the start of the difficulty of cutting costs on the
contract. Plaintiffs also point to the statements in the Amended Form 10-K that (i) a $31.5
million loss was “evident” from the contract signing; and (ii) that $342 million in losses “became
evidence at the time of initial production” in the second quarter of fiscal year 2014 as evidence
that defendants belatedly admitted their awareness of the losses.
Even had the first restatement of earnings triggered by accounting errors alerted Thompson, Pierce, and Larson to
the fact that there was another problem with the Lake City Contract, their failure to disclose that problem for several
months does not support a strong inference of scienter. As the Seventh Circuit has stated, “[t]aking the time
necessary to get things right is both proper and lawful. Managers cannot tell lies but are entitled to investigate for a
reasonable time, until they have a full story to reveal.” Higginbotham v. Baxter Int’l, Inc., 495 F.3d 753, 761 (7th
Cir. 2007) . Precisely this occurred here; an investigation for a reasonable time disclosed the additional problems
with the Lake City Contract.
These red flags also fail to support a strong inference of scienter for the same reason
noted above, namely that the Complaint contains no particularized factual allegations that
connect the red flags with a specific problem with the Lake City Contract accounting.
Specifically, the Complaint fails to provide any particularized facts showing that defendants had
contemporaneous information indicating that their cost-cutting estimates were unrealistic. See
Anderson, 827 F.3d at 1251 (concluding that plaintiffs failed to establish scienter partly because
they did “not identify particularized facts showing that the  executives had known, before [the
company] publicly announced the forward loss, that the three projects would fall behind
forecasts on cost or production).31 Indeed, plaintiffs acknowledge that Orbital ATK managed to
cut approximately $400 million in costs, one-half to two-thirds of defendants’ goal, indicating
that defendants’ cost-cutting goals were not so quixotic as to amount to recklessness. (Compl. ¶¶
134, 172). And the fact that Orbital ATK’s management itself eventually disclosed the losses on
the Lake City Contract further reduces an inference of scienter, for as the Fourth Circuit has
noted, management’s disclosure of an accounting problem “supports a strong inference that
defendants were not acting with scienter but rather were endeavoring in good faith to inform the
investing public.” Yates, 744 F.3d at 888 (quotation marks omitted).
Finally, neither Pierce’s statements on the August 10, 2016 conference call nor the
statements in the Amended Form 10-K establish that defendants knew about the Lake City
Plaintiffs argue that Anderson is inapposite because the projects in that case “encountered production delays and
cost overruns” that resulted in hundreds of millions of dollars in losses, whereas in this case the individual
defendants simply failed to estimate accurately how much costs could be reduced on the Lake City Contract.
Anderson, 827 F.3d at 1235–36. Although plaintiffs are correct that this case does not involve unexpected delays or
cost overruns in the production of ammunition, Anderson is nevertheless on point insofar as the executives’ failure
in that case, as here, to make accurate predictions concerning future events (whether in terms of delays or cost
reduction estimates) does not in and of itself establish the requisite strong inference of scienter. Instead, as the
Anderson court stated, plaintiffs must allege particularized facts showing that the executives were aware of the
losses at the time of the public statement. Compare In re Genworth, 103 F. Supp. 3d at 767, 783–84 (concluding
that plaintiffs satisfied scienter requirement where they alleged multiple facts showing that defendants had
contemporaneous knowledge of relevant company problems, but failed to disclose those problems). This, plaintiffs
here have not yet done.
Contract problems. Viewed in context, Pierce was explaining that the estimate for projected
losses provided on August 10, 2016 was a conservative one which took into account the
difficulty in cutting labor and overhead costs. And the statements in the Amended Form 10-K
were not confessions about the executives’ wrongdoing and knowledge with respect to the
losses, but explanations that, under the percentage-of-completion method, the losses were
evident at earlier dates and should have been recorded on those dates. See In re Wet Seal, Inc.
Sec. Litig., 518 F. Supp. 2d 1148, 1174 (C.D. Cal. 2007) (concluding that an executive’s
“attempt to explain what had gone wrong” was not a “confession”). Defendants’ statement
concerning when the loss should have been reported was simply an admission that Orbital ATK
violated GAAP with respect to the Lake City Contract, but it does not serve to establish a strong
inference of scienter. See Yates, 744 F.3d at 887 (“The mere publication of inaccurate
accounting figures, or a failure to follow GAAP, without more, does not establish scienter.”
(quotation marks and brackets omitted)).
In sum, each of the red flags alleged in the Complaint was either public knowledge or
insufficient to alert defendants to the problems with the Lake City Contract estimates and Orbital
ATK’s internal controls, and thus, none of those red flags can be the basis for the requisite strong
inference of scienter.
Magnitude of the Restatement
Plaintiffs next concentrate on the sheer magnitude of the loss on the Lake City Contract,
asserting that the large amount alone establishes scienter. Although the Fourth Circuit has stated
that “[i]nferential weight may be attributed to the magnitude of [accounting] errors,” courts
should do so “only in the context of [the company’s] financial position.” Matrix, 576 F.3d at
184. When placed in the context of Orbital ATK’s overall financial position, the magnitude of
the losses here are diminished and accordingly, do not support a strong inference of scienter.
In absolute terms, it is clear the $375 million loss on the Lake City Contract is significant
and probative of scienter,32 but to assess its full weight, the loss must be placed in context. As
noted in the March 8, 2017 and August 10, 2016 Orbital ATK conference calls, the Lake City
Contract represented just 5% of the company’s total sales as of August 10, 2016 (when the losses
were first announced), and full-year revenue for 2016 was approximately $4.46 billion.
Moreover, plaintiffs identify no other contracts that suffered from the same error as the Lake
City Contract. Compare Matrix, 576 F.3d at 184 (attributing weight to errors where defendant
“had to pay more than $100 million (and review nearly 6,500 contracts) to identify and correct
[accounting] errors—an enterprise that resulted in approximately 35,000 lines of adjustments to
previous financial statements). The Lake City Contract’s relatively low contribution to Orbital
ATK’s total sales and the fact that no other contracts were similarly affected serve to diminish
the weight these losses carry in establishing scienter.
For these reasons too, plaintiffs’ reliance on the Microstrategy decision is unpersuasive.
That case involved a company which reported a net income of $18.9 million over three years,
when, in fact, the company lost $36 million during that time and also overstated its revenue by
$66 million. As the Microstrategy Court stated, the GAAP violations “and subsequent
restatements [were] of such a great magnitude—amounting to a night-and-day difference with
regard to [the company’s] representation of profitability—as to compel an inference that fraud or
recklessness was afoot.” In re Microstrategy, Inc. Sec. Litig., 115 F. Supp. 2d 620, 637 (E.D.
Va. 2000). This case does not present such a night-and-day scenario, as Orbital ATK’s
See Anderson, 827 F.3d at 1251 (“The loss of $434.6 million was undoubtedly significant.”); Matrix, 576 F.3d at
184 (concluding that “[i]nferential weight” could be attributed to a $97 million loss).
restatement affected only a single contract amounting to 5% of the company’s revenues, which
reduces the inference of scienter that can be drawn from the $375 million loss.
In short, $375 million may be a significant amount of money in absolute terms but placed
in the context of Orbital ATK’s overall sales and other contracts, that amount of loss alone
cannot establish a strong inference of scienter.
Simplicity of the Accounting
Plaintiffs also contend that the simplicity of the percentage-of-completion accounting
method establishes a strong inference of scienter. This argument is unpersuasive because
plaintiffs do not actually show the simplicity of the method at issue, and courts have not
explicitly recognized the percentage-of-completion method as giving rise to § 10(b) liability.
In some cases, the simplicity of an accounting method can serve as a basis for finding
that individual defendants acted with the requisite level of scienter. See In re Microstrategy, 115
F. Supp. 2d at 638 (noting that an inference of scienter “takes on added significance if . . . the
violated GAAP rules and Company accounting policies are, in fact, relatively simple.”). For
instance, the Fourth Circuit has noted that premature recognition of revenue, in some
circumstances, can give rise to liability under § 10(b). See Malone v. Microdyne Corp., 26 F.3d
471, 478 (4th Cir. 1994).33 By contrast, in a more recent, post-PSLRA case, the Fourth Circuit
rejected the argument that an alleged violation of the percentage-of-completion accounting
method, among other indicia, established a strong inference of scienter. Svezzese v. Duratek,
Inc., 67 F. App’x 169, 173 (4th Cir. 2003) (per curiam) (unpublished).
In this case, plaintiffs’ argument concerning the simplicity of the percentage-ofcompletion method is flawed in two respects. First, plaintiffs cite no authority indicating that the
See also In re Microstrategy, 115 F. Supp. 2d at 638 (stating that a company’s “premature or inappropriate
recognition of revenue” can support a strong inference of scienter).
percentage-of-completion method—which requires companies to “first estimate the total costs of
performing the contract and then compare or reconcile that estimate with accrued actual costs at
regular intervals . . . over the life of the contract”34—is as simple as plaintiffs suggest. Indeed,
the Fourth Circuit in Svezzese rejected plaintiffs’ attempt to establish a strong inference of
scienter on the basis of the simplicity of the percentage-of-completion method. Id. at 173. And,
critically, unlike Malone, defendants did not prematurely recognize revenue on the Lake City
Contract; the problem was caused by errant cost reduction estimates leading to significant
contract losses. Stated another way, this is not a case where defendants counted their chickens
before they hatched. Instead, defendants failed to estimate correctly how much the chickens
would cost to produce, forcing defendants to correct their misstatements after discovering the
true costs of the Lake City Contract. Plaintiffs’ argument about the simplicity of the percentageof-completion accounting method therefore does not establish a strong inference of scienter.
Departures, Firings, SEC Investigation, and SOX Certifications
Plaintiffs’ fifth set of scienter allegations focuses on (i) DeYoung’s departure from the
Orbital ATK Board as well as firings in the company; (ii) an SEC investigation against Orbital
ATK; and (iii) Thompson and Pierce’s signing of false SOX certifications. As explained below,
none of these allegations support a strong inference of scienter.
Plaintiffs first argue that the timing of DeYoung’s departure and the firing of other
employees raise a strong inference of scienter. Plaintiffs focus on DeYoung’s announcement
that he would not seek re-election to Orbital ATK’s Board of Directors on March 8, 2016—a
week after Orbital ATK issued the first restatement relating to long-term contracts. Beyond the
timing of his departure, however, plaintiffs provide no other allegations showing that his
Id. at 171.
decision not to seek re-election had anything to do with the Lake City Contract. See Zucco
Partners, 552 F.3d at 1002 (concluding that plaintiffs’ allegation about timing of CFO’s
retirement did not support scienter allegations because the complaint did “not indicate whether
[the CFO] was nearing retirement age, whether he left to pursue other opportunities, or even the
length of his tenure”). Without more, this allegation cannot support an inference of scienter.
Plaintiffs’ allegations that Orbital ATK fired employees in the Small Caliber Systems
Division and the Defense Subgroup for improper accounting practices, and replaced the
company’s principal accounting officer since the merger, also fail to establish a strong inference
of scienter. Orbital ATK disclosed in its Amended Form 10-K that an internal investigation
determined that lower level individuals engaged in improper accounting behavior. Firing those
individuals and the person responsible for the company’s accounting suggests only that Orbital
ATK sensibly sought to fix the problem that prevented full disclosure of the accounting problem
with the Lake City Contract in the first place. It does not show that defendants knew about or
recklessly disregarded the problem at the time the statements were made.
With respect to the SEC investigation and the SOX certifications, plaintiffs’ arguments
fare no better. The Fourth Circuit has stated that the allegation that the SEC is conducting an
investigation “is too speculative to add much, if anything, to an inference of scienter.”
Cozzarelli, 549 F.3d at 628 n.2.35 Likewise, plaintiffs’ allegation concerning the false SOX
certifications also adds nothing to the scienter analysis. See Cozzarelli, 549 F.3d at 628 n.2.36
See also Brophy v. Jiango Pharm., Inc., 781 F.3d 1296, 1304 (11th Cir. 2015) (“The mere existence of an SEC
investigation . . . does not equip a reviewing court to explain which inferences might be available beyond a general
suspicion of wrongdoing.” (quotation marks omitted)).
See Zucco Partners, 552 F.3d at 1003–04 (“Boilerplate language in a corporation’s 10–K form, or required
certifications under Sarbanes–Oxley . . . add nothing substantial to the scienter calculus.”); see also Garfield, 466
F.3d at 1266 (“If we were to accept DeKalb’s proffered interpretation of Sarbanes–Oxley, scienter would be
established in every case where there was an accounting error or auditing mistake made by a publicly traded
company, thereby eviscerating the pleading requirements for scienter set forth in the PSLRA. We decline to adopt
Because these factors add nothing to scienter analysis, the SEC investigation and SOX
certifications cannot support a strong inference of scienter.
In sum, the firings and departures from Orbital ATK, the SEC investigation and the false
SOX certifications suggest, at most, innocent inferences—not the nefarious ones required for a
showing of scienter.
Plaintiffs conclude with a series of arguments related to defendants’ motives—namely, (i)
that Thompson, Pierce and Larson profited from their alleged fraud through incentive
compensation; (ii) that Thompson and DeYoung profited through insider trading; and (iii) that
Thompson and Pierce, in particular, faced pressure to make the merger successful. None of these
financial motives, which are shared by most corporate executives, establish a strong inference of
With respect to the incentive compensation argument, the Fourth Circuit has made clear,
“financial motivations common to every” officer are not a basis for inferring fraud. Yates, 744
F.3d at 891. In this regard, because “motivations to . . . increase one’s own compensation are
common to every company,” these motivations “add little to an inference of fraud.” Cozzarelli,
549 F.3d at 627.37 But increasing the defendants’ own compensation is precisely the motive
plaintiffs allege here. Specifically, plaintiffs allege that Thompson, Pierce, and Larson received
increases in their base salary and incentive compensation after the merger as well as incentive
such an interpretation.”). The Garfield court held that a false SOX certification could be probative of scienter “if the
person signing the certification was severely reckless” in doing so by having reason to know or suspect due to red
flags that the financial statements contained material misstatements or omissions. Garfield, 466 F.3d at 1266. For
the reasons stated above, plaintiffs’ purported red flags are not sufficient to establish scienter, even in conjunction
with the SOX certifications.
See also Phillips v. LCI Int’l, Inc., 190 F.3d 609, 623 (4th Cir. 1999) (“[A]llowing a plaintiff to prove a motive to
defraud by simply alleging a corporate defendant’s desire to retain his position with its attendant salary, or realize
gains on company stock, would force the directors of virtually every company to defend securities fraud actions
every time that company effected a merger or acquisition.”).
compensation for their success in achieving certain integration milestones. Plaintiffs contend
that the fact that the defendants’ compensation was tied to the success of the merger supports a
strong inference of scienter. This contention is unpersuasive, as the Fourth Circuit has made
clear that a motive to increase one’s own compensation “add[s] little to an inference of fraud.”
Cozzarelli, 549 F.3d at 627. Moreover, the Complaint fails to provide comparisons to prior
years’ bonuses, and as such, there is no evidence to suggest these bonuses were in any way
unusual. See Zucco Partners, 552 F.3d at 1005. As a result, any inference of scienter that can be
drawn from the incentive compensation is modest at best.
Beyond mere incentive compensation, plaintiffs contend that DeYoung and Thompson
profited from their fraud through insider trading. In particular, plaintiffs allege that from March
to June 2015, DeYoung sold nearly $14 million of Orbital ATK stock, which was nearly fourteen
times his annual salary. These sales allegedly involved options that were not set to expire for
several years, and DeYoung had not reported a sale of Alliant or Orbital ATK stock since
December 2009. As for Thompson, plaintiffs allege that he sold 5,000 shares of Orbital ATK
stock for $435,000 on May 17, 2016, several months before the disclosure of the Lake City
Contract losses when the stock was trading for nearly $90 per share. Plaintiffs argue that
DeYoung and Thompson’s sales establish an inference of scienter, but neither argument is
To be sure, the Fourth Circuit has stated that “[a]llegations of personal financial gain may
weigh heavily in favor of a scienter inference,” but the “inferential weight that may be attributed
to any claim of motive must be evaluated in context.” Yates, 744 F.3d at 890 (quotation marks
omitted). As such, “[i]nsider trading allegations will only support an inference of scienter if the
timing and amount of a defendant’s trading were unusual or suspicious.” Id. (quotation marks
omitted). The Fourth Circuit considers factors such as “the amount of profit made, the amount of
stock traded, the portion of stockholdings sold, or the number of insiders involved” to determine
“whether an insider’s stock sales were unusual in scope.” Id. (quotation marks omitted).
These factors applied to Thompson and DeYoung’s sales suggest the sales can carry only
minimal weight in a scienter calculus. To begin with, the number of insiders involved was
small—only Thompson and DeYoung made allegedly suspicious sales while the plaintiffs allege
nothing with respect to Pierce and Larson, the other two defendant insiders. With respect to
Thompson, the amount of his sales is not suspicious; he sold 5,000 shares out of over 100,000
outstanding shares, amounting to less than 5% of his holdings. See Cozzarelli, 549 F.3d at 628
(concluding that sales of 13%, 12%, and 5% were “modest to de minimis”).38 And although
DeYoung sold more shares, he did so after leaving his CEO role at Alliant due to the merger (as
plaintiffs point out, however, he did remain on the board of Orbital ATK). Had DeYoung
remained in his CEO role, the fact of his sales might support an inference of scienter, but it does
not here as DeYoung’s departure, rather than an intent to defraud, could have caused him to sell
his stock. See Cozzarelli, 549 F.3d at 628 (noting that two executives resigned from the
company “around the time of their sales, indicating that their departures, rather than an intent to
defraud, may have prompted them to sell their stock”). Furthermore, DeYoung’s Form 4 and the
chart of Orbital ATK stock prices reveal that DeYoung sold his shares when the stock was
trading below $80 per share, which was below the Class Period high of $94.55 per share.
Plaintiffs argue that the 5% figure is significant based on the Microstrategy decision, in which the court concluded
that selling 5% of a company’s shares was significant. In re Microstrategy, 115 F. Supp. 2d at 646. In that case,
however, the 5% figure represented the aggregate sales as a percentage of the executives’ holdings; in reality, the
executives each sold between 10.3% and 51.8% of their total individual holdings. Id. Furthermore, the court’s
conclusion that a defendant’s sales of 2.2% of his shares was significant was based on the fact that the entire sale
occurred in an 8-day period after the company prematurely announced a “watershed” deal in the company’s history.
Id. Here, Thompson sold his shares several months before Orbital ATK announced the losses on the Lake City
Contract. See City of Brockton Ret. Sys. v. Shaw Grp. Inc., 540 F. Supp. 2d 464, 475 (S.D.N.Y. 2008) (“[Defendant]
sold his shares during April, more than ten weeks before the end of the putative class period. The 10–plus week gap
between the defendants’ sales and the Company’s disclosure of accounting problems is not strongly suspicious.”).
Although an executive need not be “perfectly prescient”39 in predicting when a company’s stock
might reach a high point, when defendants’ sales occur at prices that were not especially high for
the class period, any inference of scienter is reduced.
In sum, although Thompson and DeYoung’s sales are relevant to the scienter analysis,
the fact that other insiders did not also sell stock, combined with the flaws in plaintiffs’
allegations with respect to DeYoung and Thompson, suggests these facts warrant at most a weak,
and certainly not a strong, inference of scienter.
Finally, plaintiffs argue that Thompson and Pierce had a strong motive to commit fraud
because they needed the merger to proceed and to appear successful in light of Orbital Sciences’
performance issues leading up to the merger. This argument fails to persuade, for as the Fourth
Circuit has noted, “assertions that a corporate officer or director committed fraud in order to
retain an executive position, or retain such a position with the merged company, simply do not,
in themselves, adequately plead motive.” Phillips, 190 F.3d at 622–23. In this respect, the
Second Circuit noted cogently that “[a]chieving a superior agreement with [the acquiring
company] does not demonstrate defendants’ intent to benefit themselves at the expense of the
shareholders because the shareholders themselves would benefit from a superior transaction.”
Kalnit v. Eichler, 264 F.3d 131, 136, 140 (2d Cir. 2001). Accordingly, no strong inference of
scienter can be drawn from Thompson and Pierce’s widely-shared and understandable motive to
make the merger successful.
To summarize, none of the motives plaintiffs allege—incentive compensation, insider
trading or merger success—establish the requisite strong inference of scienter.
In re Microstrategy, 115 F. Supp. 2d at 647.
Given none of these scienter indicia individually supports a strong inference of scienter,
the next step is to consider the indications as a whole to ascertain whether together they warrant
the requisite strong inference. As the Fourth Circuit has noted, this step requires courts to
“evaluate plaintiffs’ allegations of scienter holistically,” giving the allegations only “the
inferential weight warranted by context and common sense.” Yates, 744 F.3d at 885 (quotation
marks omitted). Importantly, “allegations of scienter that would not independently create a
strong inference of scienter might [complement] each other to create an inference of sufficient
strength to satisfy the PSLRA.” Id. at 893.40 With that said, plaintiffs’ inference of scienter
must still be weighed “against the opposing inferences that may be drawn from the facts in their
entirety.” Id. (quotation marks omitted). After “compar[ing] the malicious and innocent
inferences cognizable from the facts pled in the complaint,” the complaint survives only “if the
malicious inference is at least as compelling as any opposing innocent inference.” Id. (quotation
marks omitted). Plaintiffs’ allegations, considered holistically as required, fail to establish a
strong inference of scienter, suggesting instead, at most, that defendants were negligent in their
cost reduction estimates for the Lake City Contract and also negligent in failing to detect the
losses as they occurred.41
Before conducting the holistic analysis, it is important to summarize the indicia
established thus far. Plaintiffs’ allegations that the individual defendants are high-level corporate
officers who monitored the Lake City Contract through meetings and reports must be accepted.
Some courts argue that this is not so, reasoning that zero plus zero plus zero plus zero cannot add up to an
inference of scienter. See, e.g., City of Brockton, 540 F. Supp. at 475. The flaw in this argument is the assumption
that the individual indicia of scienter each amount to zero, not simply to a weak inference of scienter. Contrary to
these courts’ and defendants’ reasoning, Fourth Circuit precedent dictates that allegations that are insufficient by
themselves to create a strong inference of scienter can nevertheless add up to more than “zero” when considered
together with all of plaintiffs’ allegations. See Yates, 744 F.3d at 893.
The failure to detect the losses as they occurred was the result chiefly of the actions of lower-level individuals
who failed to report the losses and were later discharged as a result.
Furthermore, there is no question that the Lake City Contract was important to Orbital ATK’s
overall business, even if the contract did not rise to the level of a “core operation.” The
allegations in the Complaint also make clear that Alliant had significant experience in
manufacturing ammunition, that Alliant won the Lake City Contract through an aggressive bid,
and that the contract’s profitability hinged on ambitious cuts to production costs. And the
allegations also show that Orbital ATK’s internal financial controls suffered from weaknesses,
which necessitated the first restatement in March 2016 for several long-term contracts. Finally,
there is no question from the allegations that Orbital ATK’s corporate officers wanted the merger
to be a success, and that DeYoung and Thompson also sold some of their stock before the
August 10, 2016 announcement concerning the losses on the Lake City Contract.
The innocent inferences from these allegations taken as a whole are ultimately more
compelling than the malicious ones. In Svezzese v. Duratek, the Fourth Circuit considered a
complaint arising out of a similar factual background42 and alleging almost exactly the same
indicia of scienter.43 The Svezzese Court determined that even holistically, plaintiffs’ allegations
failed to meet the requisite standard of scienter, noting that “these allegations [were] in essence,
allegations of accounting irregularities and violations.” Id. As the Fourth Circuit concluded,
“plaintiffs’ efforts to bootstrap their allegations into a strong inference of scienter through the
additive effect of the individual allegations” failed because “missing from the complaint [was]
Like the contracts at issue in Svezzese, the Lake City Contract was a long-term contract subject to the percentageof-completion method and was important to Orbital ATK’s overall revenue. Like the defendant in Svezzese, Orbital
ATK had to track costs closely on the Lake City Contract to ensure its profitability, and like the Svezzese defendant
Orbital ATK and the individual defendants allegedly failed to estimate the costs of the Lake City Contract due to
weaknesses in accounting problems. Orbital ATK also had to issue a significant restatement of its earnings due to
the company’s accounting failures. See 67 F. App’x at 170-71.
In Svezzese, as in this case, plaintiffs alleged that defendant acted with the requisite scienter because (i) the
company “lacked internal controls;” (ii) the company “violated simple accounting rules;” (iii) the company “violated
its own internal revenue recognition policy;” (iv) the company issued a large restatement; (v) the company’s
“accounting ‘fraud’ occurred at its principal division;” and (vi) the company “routinely understated expenses in a
number of ways.” Id. at 173.
the one essential ingredient necessary to establish the strong inference—some indication that
defendants acted with fraudulent intent or recklessness.” Id. at 174.
The Complaint here is missing that same essential ingredient—some indication that
defendants intentionally concealed the losses on the Lake City Contract or recklessly failed to
recognize the losses. Instead, the allegations point more compellingly in the opposite direction;
Thompson, Pierce, Larson, and DeYoung were simply too optimistic with respect to their cost
reduction estimates for the Lake City Contract, and the loss was obscured because lower-level
employees concealed the accurate figures and full production on the contract did not begin until
fiscal year 2014. Indeed, the Fourth Circuit has recognized that simply because corporate
executives are “in over [their] head[s]” with respect to an accounting problem does not mean that
they commit fraud. Yates, 744 F.3d at 893.
In sum, the facts alleged in the Complaint tell the following story:
Alliant bid aggressively to win the Lake City Contract.
The individual defendants knew the bid was aggressive and understood that cost
reductions would be necessary to achieve a profit.
Orbital ATK was successful in making some cost reductions but was not able to achieve
the magnitude of cost reductions necessary for the contract to be profitable.
At the same time, individuals below the top executive level did not adhere to company
accounting policies and inappropriately concealed from top management information
about the Lake City Contract’s cost overruns.
Roughly two years later, the executives discovered the Lake City Contract accounting
errors in a company-wide effort to enhance internal controls and restated Orbital ATK’s
earnings to account for the errors.
These facts fall short both individually and holistically of establishing a strong inference of
scienter. As the Supreme Court has made clear, a § 10(b) claim survives a motion to dismiss
“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.” Tellabs, Inc., 551
U.S. at 324. The facts alleged here may very well reflect an absence of care on the part of the
defendants, but the facts do not warrant an inference that the defendants knew about or recklessly
disregarded the errors in the Lake City Contract cost-reduction estimates. Put simply, the
negligent or innocent inference is more compelling than the inference of scienter. Accordingly,
plaintiffs’ § 10(b) claims against Thompson, Pierce, Larson, and DeYoung must be dismissed,
but plaintiffs should be given leave to amend if plaintiffs can state additional particularized facts
that warrant a strong inference of scienter.
The final issue with respect to plaintiffs’ § 10(b) claims is whether Orbital ATK itself can
be liable despite the dismissal of plaintiffs’ claims against the individual defendants. As the
Fourth Circuit stated in Yates, where a plaintiff “alleges corporate fraud, the plaintiff must allege
facts that support a strong inference of scienter with respect to at least one authorized agent of
the corporation.” Yates, 744 F.3d at 885. Under this rule, plaintiffs fail to state a claim against
Orbital ATK because plaintiffs’ claims against the authorized agents—Thompson, Larson, and
Pierce—must all be dismissed.
The fact that some lower-level employees may have acted with the requisite scienter in
failing to disclose problems with the Lake City Contract does not alter this conclusion because
plaintiffs do not allege that any of these employees made false or misleading statements. See
Mizzaro v. Home Depot, 544 F.3d 1230, 1254–55 (11th Cir. 2008) (concluding that complaint
failed to establish a strong inference of scienter with respect to a corporate defendant because
there were no allegations that unnamed officials “were both responsible for issuing the allegedly
false public statements and were aware of the alleged fraud”).44
Leave to amend, however, is appropriate. Plaintiffs allege that Orbital ATK fired Hollis
M. Thompson, the company’s Vice President of Financial Reporting and the principal
accounting officer, on February 27, 2017, and that he signed several of the forms Orbital ATK
submitted to the SEC. Hollis Thompson is not a defendant in this action, and it is not clear from
plaintiffs’ complaint that Thompson can be liable for all the allegedly false and misleading
statements. Because Hollis Thompson appears to qualify as the kind of authorized agent whose
statements could permit corporate liability, however, leave to amend is appropriate so that
plaintiffs may have another chance to establish whether Orbital ATK itself is liable. See In re
Comput. Sci. Sec. Litig., 890 F. Supp. 2d 650, 665 (E.D. Va. 2012) (giving leave to amend to
allow plaintiffs another chance to plead facts that would establish corporate liability where the
“pleading deficiencies . . . might be remedied by the allegation of additional or more detailed
Plaintiffs also bring claims under § 20(a) of the Exchange Act against Thompson, Pierce,
and Larson based on their positions as controlling persons of Orbital ATK. Section 20(a)
provides that “[e]very person who, directly or indirectly, controls any person liable under any
provision of this chapter or of any rule or regulation thereunder shall also be liable.” 15
Corporate scienter can be established even where plaintiffs cannot name individual defendants where the company
makes so dramatic a statement that the statement must have been “approved by corporate officials sufficiently
knowledgeable about the company to know that the announcement was false.” Matrix, 576 F.3d at 190 (quotation
marks omitted). For instance, if “General Motors announced that it had sold one million SUVs in 2006, and the
actual number was zero,” that allegation would be sufficient to establish corporate scienter without naming the
individuals “who concocted and disseminated the fraud.” Id. (quotation marks omitted). Orbital ATK’s statements
concerning the company’s post-merger performance and the Lake City Contract are not so dramatic as to permit a
strong inference of corporate scienter under this rule.
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