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KBC Asset Management NV v. 3D Systems Corp.

United States District Court, D. South Carolina, Rock Hill Division

July 25, 2016

KBC ASSET MANAGEMENT NV, Individually and on Behalf of All Others Similarly Situated, Plaintiff,
v.
3D SYSTEMS CORPORATION, ABRAHAM N. REICHENTAL, DAMON J. GREGOIRE, and TED HULL, Defendants.

          MEMORANDUM OPINION AND ORDER DENYING DEFENDANTS’ MOTION TO DISMISS THE AMENDED CONSOLIDATED COMPLAINT

          MARY G. LEWIS UNITED STATES DISTRICT JUDGE.

         I. INTRODUCTION

         Plaintiff filed this case as a federal securities class action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. §§ 78j(b) and 78t(a), and Security Exchange Commission (SEC) Rule 10b-5, promulgated thereunder. See 17 C.F.R. § 240.10b-5. The Court has jurisdiction over the matter under 28 U.S.C. § 1331 and Section 26 of the Exchange Act, 15 U.S.C. § 78aa. Pending before this Court is Defendant 3D Systems Corporation (3D Systems or the Company) and Defendants Abraham N. Reichental, Damon J. Gregoire, and Ted Hull’s (collectively Individual Defendants) motion to dismiss Plaintiffs amended consolidated complaint brought pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. ECF No. 80. Having considered the motion, the response, the reply, the record, and the relevant law, it is the judgment of the Court that Defendants’ motion to dismiss will be denied.

         II. FACTUAL AND PROCEDRUAL BACKGROUND

         This case arises out of allegations by Plaintiff against 3D Systems and Individual Defendants regarding the manner in which they represented the state of the Company to investors during a rapid acquisition strategy undertaken by the management of 3D Systems. ECF No. 78 at 1; ECF No. 90 at 1. The Company is a 3D printer manufacturer with its principal place of business in Rock Hill, South Carolina. ECF No. 78 at 8. Starting in 2008, 3D Systems embarked on a plan to make several acquisitions of other 3D printing companies so it could expand its product line and maintain its position as the leader in the market. ECF No. 90 at 4. During this time, and specifically during the Class Period, October 29, 2013, through May 5, 2015, Individual Defendants made several statements to investors and analysts about the progress of the strategy and the strength of 3D Systems. See generally ECF No. 78 at 41-107. Although the specific comments are numerous, and elaborated on further below, the complaint’s main focus is statements Individual Defendants made to the market. These statements allegedly misrepresented or withheld the effects that 3D System’s acquisition strategy had on the strength and revenues of the Company. Id. at 4-5. According to Plaintiff, the reports made prior to July 31, 2014, painted an optimistic picture of 3D Systems-record-breaking profits, successful acquisition of multiple new companies, and high organic growth rates, which is company growth not resulting from mergers and acquisitions. See Id. 41-67. Plaintiff claims that behind the scenes, though, 3D Systems experienced significant problems with the integration process, manufacturing capacity, product quality, sales and revenue growth projections, inventory control, and booking and shipping practices. Plaintiff contends that these are all core operations of 3D Systems that Individual Defendants failed to disclose or misrepresented to the market. See e.g. id., at 47-50.

         Plaintiff avers that statements Defendants made from July 31, 2014, until May 5, 2015, the end of the Class Period, incrementally revealed the problems plaguing 3D Systems in these core operations. Plaintiff avows that these issues ultimately resulted in 3D Systems reporting underwhelming profits, failing to meet previously stated financial projections, a stunting of its organic growth rate, and an ending of 3D Systems’ acquisition strategy so that the Company could focus on cost reduction. Id. at 67-108. According to Plaintiff, by the end of the Class Period, 3D System’s stock price had dropped from its high of $96.42 on January 3, 2014, down to $22.90 per share on May 6, 2015, a decrease of over seventy-six percent. ECF No. 90 at 7.

         Plaintiff advances that, throughout the entire Class Period, Individual Defendants all held executive roles in 3D Systems, giving them access to confidential internal information. ECF No. 78 at 8-9. Plaintiff avers that they were also involved in numerous aspects of 3D Systems, including actively participating in quarter-end meetings regarding shipping, determining what the Company could recognize as revenue, and visiting production areas. Id. at 30-31. Plaintiffs state that Individual Defendants also drafted and delivered many of the statements alleged by Plaintiff to be misleading and discussed at least one of the core operations of 3D Systems during each quarter. Id. at 31-34. In addition, during this Class Period, Defendants Reichental and Gregoire made several stock sales. ECF No. 90 at 28-32.

         Because of these alleged misrepresentations and the subsequent stock price drop, several investors filed securities fraud claims against 3D Systems. On October 1, 2015, the Court consolidated the cases and appointed KBC Asset Management as the lead Plaintiff. ECF No. 65. Plaintiff filed an amended class action complaint on November 30, 2015, alleging that during the Class Period, 3D Systems, as well as Individual Defendants as agents of the Company, participated in a fraudulent scheme that artificially inflated 3D Systems’ stock price by misrepresenting and concealing information about its business practices. ECF No. 78.

         Defendants filed this motion to dismiss the amended complaint on January 14, 2016. ECF No. 80. Plaintiff filed a response in opposition to Defendants’ motion to dismiss on February 29, 2016, ECF No. 90, and Defendants filed their reply to that response on March 25, 2016, ECF No. 91. The Court has considered the motions, memoranda, and arguments of the parties, and now turns to discussing the merits of Defendants’ motion.

         III. STANDARD OF REVIEW

         Defendants move to dismiss this putative securities fraud class action lawsuit under Federal Rule of Civil Procedure 12(b)(6) on the grounds that the amended complaint fails to satisfy the heightened pleading standards of the Private Securities Litigation Reform Act (PSLRA) and Federal Rule of Civil Procedure 9(b). Therefore, according to Defendants, Plaintiff fails to state a claim for which relief may be granted. To survive a motion to dismiss, a complaint must contain factual allegations sufficient to provide the defendant with “notice of what the . . . claim is and the grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). In considering the motion, a court accepts all of a plaintiff’s well-pled allegations as true and liberally construes all reasonable inferences in the plaintiff’s favor. Mylan Labs., Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir. 1993). The court may consider only the facts alleged in the complaint, which may include any documents referenced, and matters of which the court may take judicial notice. Tellabs, Inc. v. Make Issues & Rights, Ltd., 551 U.S. 308, 322 (2007).

         To establish liability under Section 10(b) of the Exchange Act and under Rule 10b-5, a plaintiff must allege: “(1) a material misrepresentation (or omission); (2) scienter, i.e., a wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance… (5) economic loss; and (6) ‘loss causation, ’ i.e., a causal connection between the material misrepresentation and the loss.” Teachers’ Ret. Sys. of La. v. Hunter, 477 F.3d 162, 172 n.2 (4th Cir. 2007) (citing Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005)). Section 20(a) of the Exchange Act assigns joint and several liability to one in control of another who violates a security regulation under § 10(b).

         In a securities fraud case, a plaintiff must also satisfy the heightened pleading standards of Rule 9(b) and the PSLRA. See Pub. Emps.’ Ret. Ass’n of Colo. v. Deloitte & Touche LLP, 551 F.3d 305, 311 (4th Cir. 2009). Rule 9(b), which governs all actions alleging fraud, requires the plaintiff to “state with particularity the circumstances constituting fraud.” Fed.R.Civ.P. 9(b). In addition, the PSLRA requires that a securities fraud plaintiff “state with particularity both the facts constituting the alleged violation, and the facts evidencing scienter, i.e., the defendants intention to deceive, manipulate, or defraud.” Tellabs, 551 U.S. at 213 (internal citations and quotations omitted). The Fourth Circuit has noted that the PSLRA modifies the traditional Rule 12(b)(6) analysis: “(1) by requiring a plaintiff to plead facts to state a claim and (2) by authorizing the court to assume that the plaintiff has indeed stated all of the facts upon which he bases his allegations of a misrepresentation or omission.” Hunter, 477 F.3d at 172 (emphasis omitted). The PSLRA also requires a plaintiff to plead sufficient facts to raise a “strong inference” of scienter. Id. A district court must dismiss a complaint on motion of any defendant if the plaintiff fails to meet the pleading requirements of the PSLRA. 15 U.S.C. §78u-4(b)(3)(A).

         IV. CONTENTIONS OF THE PARTIES

         In their motion to dismiss, Defendants contend that the complaint fails to meet the heightened pleading standards of the PSLRA as to both the misrepresentation or omission and the scienter elements. ECF No. 80 at 4. Regarding the misrepresentation factor, Defendants advance that the alleged misrepresentations in the complaint relate only to corporate mismanagement, which Plaintiff is unable to bring under federal securities law. Id. Further, Defendants avouch that, even assuming that Defendants’ alleged mismanagement is actionable if Defendants were cognizant of the Company’s problems, the complaint shows no evidence that they were actually aware. ECF No. 91 at 2-3. In addition, Defendants advocate that all of the allegedly misleading statements are forward-looking statements accompanied by meaningful cautionary language warning of the specific problems experienced by 3D Systems. ECF No. 80 at 16 (citing 15 U.S.C. § 78u-5(c)(1)(A)(i)). Defendants, therefore, declare that the PSLRA’s Safe Harbor Provision protects these forward-looking statements. Id. Defendants reject any claim that these declarations contain current or historical facts or that the cautionary language fails to meet the standard for meaningfulness simply because it appears to be boilerplate. ECF No. 91 at 6-9.

         Defendants further allege that the complaint insufficiently pleads the scienter element. Id. They asseverate that Plaintiff improperly relied upon group pleading, i.e., that Defendants had a collective intent to defraud instead of pointing out each Defendant’s individual intent. Id. at 4-5. In addition, Defendants maintain that the complaint improperly points to the sale of stocks by Defendants Reichental and Gregoire to support their inference of scienter. According to Defendants, merely claiming that executives sold stock during the Class Period unaccompanied by evidence that these sales were unusual or suspicious fails to meet the heightened pleading requirements of the PSLRA. Id. at 5. Further, Defendants maintain that Plaintiff is unable to meet the scienter requirement based on any of the reasons alleged as evidence, even if viewed holistically. ECF No. 91 at 10-14. Defendants also avow that the Court should, at a minimum, disregard any statements after July 31, 2014, under an on-the-market theory. In other words, according to Defendants, 3D Systems’ problems were public knowledge after that date, and therefore the market was capable of being informed given the information then available, eliminating any possibility of fraud. Id. Finally, Defendants claim that because the § 10(b) charges of the Exchange Act fail, the § 20(a) claim must fail as well.

         Plaintiff responds to these arguments by contending it has sufficiently met the pleading standards of both elements laid out in the PSLRA. ECF No. 90 at 2-3. It counters Defendants’ assertions regarding mismanagement, claiming that the label of mismanagement is inconsequential because Defendants were nevertheless aware of the problems taking place and failed to disclose them. Id. Plaintiff further maintains that Defendants receive no protection under the PSLRA’s Safe Harbor Provision because the statements Plaintiff identified as misleading related to current or historical facts instead of being entirely forward-looking. Plaintiff also posits that any statements that were forward-looking lacked meaningful cautionary language, but rather boilerplate risk warnings that failed to convey substantive information regarding the specific problems alleged in the complaint. Id.

         For the scienter claims, Plaintiff propounds that the group pleading claim by Defendants is unfounded and points to multiple paragraphs in the complaint alleging scienter of each Individual Defendant. Plaintiff claims that these particularized facts, considered holistically, support a strong inference of scienter. Id. at 22-23. Plaintiff avouches that, because it properly pled its § 10(b) claim, their § 20(a) claim also meets the proper pleading standard. Id. at 35.

         V. ...


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