United States District Court, D. Nevada
CHARLES BRENDON and DANIEL CHECKMAN, Individually and on Behalf of All Others Similarly Situated, Plaintiffs
ALLEGIANT TRAVEL COMPANY, et al., Defendants
ORDER GRANTING IN PART AND DENYING IN PART
DEFENDANTS' MOTION TO DISMISS [ECF NO. 45]
P. GORDON, UNITED STATES DISTRICT JUDGE.
a securities fraud class action lawsuit against Allegiant
Travel Company, the owner of Allegiant Air (collectively,
Allegiant). The First Amended Complaint (FAC) alleges that
Allegiant used second-hand aircraft to fly travelers.
Beginning in 2015, Allegiant experienced numerous aircraft
maintenance and repair issues with its second-hand aircraft,
resulting in cancellations, delays, emergency landings, and
aborted takeoffs. During this time, Allegiant and its
officers assured investors and the public that the airline
and its fleet were safe and reliable. In April 2018, the CBS
television network broadcast a story on Allegiant's
maintenance and repair issues, and Allegiant's stock
price dropped precipitously.
Charles Brendon and Daniel Checkman sued Allegiant and its
officers (Maurice J. Gallagher, Jr., Scott Sheldon, Steven E.
Harfst, and Jude I. Bricker) on behalf of all persons who
traded in Allegiant securities between June 8, 2015 and May
9, 2018. The plaintiffs allege that the defendants violated
section 10(b) of the Securities Exchange Act of 1934 (the
Exchange Act), 15 U.S.C. § 78j(b), and Securities and
Exchange Commission (SEC) Rule 10b-5, 17 C.F.R. §
240.10b-5. The plaintiffs also assert control person
liability against the individual defendants under section
20(b) of the Exchange Act. The defendants move to dismiss the
FAC, challenging falsity, scienter, and loss causation. I
grant the motion with respect to some of the allegedly
fraudulent statements because the plaintiffs fail to plead
falsity or scienter. However, I deny the motion with respect
to other statements, and I grant plaintiffs leave to amend.
used second-hand aircraft to transport passengers from
under-served airports to leisure destinations like Las
Vegas. ECF No. 34 at 17. Allegiant was profitable
because it served airports with lower fees, faced little
competition, and flew second-hand aircraft that cost a
fraction of new models. Id. at 17-21. These aircraft
required “far greater maintenance than newer planes,
” however, so maintenance expenses were a
“material component of Allegiant's operating
costs.” Id. at 20. The plaintiffs allege that
Allegiant understaffed its maintenance department, hired
inexperienced and unqualified maintenance personnel, failed
to adequately train its maintenance employees, and had a
culture that “compromised maintenance . . . for
profits.” Id. at 3, 21-39. In support of their
allegations, the plaintiffs include statements from former
Allegiant maintenance personnel. Id. at 11-14,
and early 2016, local news sources across the country
reported “horror stories of Allegiant aircraft
experiencing flight delays, emergency landings, aborted
takeoffs, and smoke in the cabin, ” which
“intensified as Allegiant's maintenance issues
seemed to become more prevalent.” Id. at 39.
On January 8, 2016, the Tampa Bay Times reported
that an Allegiant maintenance employee quit after two weeks
because Allegiant had a “worrisome culture, ”
failed to follow procedures, and misused FAA rules.
Id. at 43. Allegiant denied the allegations,
claiming that its maintenance personnel were
“highly-trained.” Id. The following day,
Allegiant announced Harfst's resignation as the
airline's Chief Operating Officer (COO), explaining that
“the Company will use this leadership change as an
opportunity to refocus on operational needs and areas for
improvement.” Id. at 44.
that month, Gallagher (Allegiant's CEO) and Bricker (the
new COO), participated in a conference call about
Allegiant's fourth quarter 2015 financial results.
Id. During the call, an analyst asked about recent
“operational challenges” reflected in news
stories, Allegiant's plan to correct the challenges, and
whether the challenges were overhyped by the media or
represented “safety issues.” Id. Bricker
responded, in relevant part, “[i]t's a safe
operation. Last year, it was a safe operation, and this year
as well.” Id. at 45. Gallagher pointed to
ongoing union negotiations as a potential reason for the
stories, stressed the airline's safety programs, and
emphasized that “as [Bricker] said, we are safe.”
Id. The plaintiffs allege that Bricker and
Gallagher's statements that Allegiant was safe were false
or misleading due to Allegiant's maintenance practices.
Id. at 54.
next month, Allegiant issued its 10-K annual report for 2015.
Id. at 51. Gallagher and Sheldon (Allegiant's
CFO) signed the report, which stated that “[w]e believe
our aircraft are, and will continue to be, mechanically
reliable.” Id. at 51-52. The form also
included a section on aircraft maintenance. Id. In
relevant part, this section of the 10-K stated that
Allegiant's “technicians . . . have appropriate
experience, ” Allegiant “provide[d] them with
comprehensive training[, ]” and that Allegiant could
hire “sufficient qualified alternative providers of
maintenance services . . . to satisfy . . . maintenance
needs.” Id. Allegiant repeated this statement
in its 2016 and 2017 10-Ks. Id. at 55, 57-58. The
plaintiffs allege that these statements were false or
misleading due to Allegiant's maintenance practices.
Id. at 54, 56-58.
sent letters to Allegiant's shareholders in 2016 and
2017. Id. at 53-56. In those letters, he assured
investors that Allegiant placed its “focus on safety
and reliability, ” had a “proven, seasoned model,
” and that safety was its “core
fundamental.” Id. Similarly, Allegiant's
Code of Ethics stated that the company was required to: (i)
remain “honest, fair and accountable in all business
dealings”; (ii) “provide safe working
conditions” to employees; (iii) “be a responsible
and responsive corporate citizen in a moral, ethical and
beneficial manner” to society and the local community;
and (iv) “pursue growth and earnings objectives while
adhering to ethical standards.” Id. at 53. The
plaintiffs allege that these statements were false or
misleading due to Allegiant's maintenance practices.
Id. at 54, 56-57.
2017, the CBS television network submitted Freedom of
Information Act (FOIA) requests to the Federal Aviation
Administration (FAA) for Allegiant's maintenance records.
Id. at 59. The FAA released the records over
Allegiant's objection. Id. at 60. On April 13,
2018, CBS announced that it would air a report criticizing
Allegiant's safety and maintenance record on 60
Minutes that weekend. Id. Allegiant shares fell
8.59% on “unusually heavy volume.” Id.
at 7, 60. The CBS report claimed that “(i) Allegiant
aircraft had a high number of serious mechanical incidents
from mid-2015 through October 2017; (ii) Allegiant lack[ed]
the infrastructure and personnel to adequately maintain their
aircraft; (iii) Allegiant discouraged employees from
reporting safety and maintenance issues; and (iv) Allegiant
had a poor safety culture.” Id. Following the
broadcast on April 15, 2018, Allegiant shares fell more than
3% on “unusually heavy volume.” Id. at
8, 69. On May 9, 2018, the U.S. Department of Transportation
(DOT) announced that it would audit FAA oversight of
Allegiant's maintenance practices. Id. Allegiant
shares fell over 2% on the news. Id. at 70.
did not pay Gallagher a salary during the relevant time
period. ECF No. 53-5 at 5. Instead, 82.4% of Gallagher's 2015
total compensation was comprised of a nearly $3 million cash
bonus tied to Allegiant's operating margin. Id.;
ECF No. 34 at 4. The 2015 bonus was “far above
[Gallagher's] usual payout” as Allegiant's
profits increased from $87 million to $220 million. ECF No.
34 at 4.
also traded in Allegiant stock throughout the plaintiffs'
proposed class period. On March 9, 2016, Gallagher sold $47,
774, 700 of Allegiant stock. Id. at 59. In January
2018, Allegiant “announced that Gallagher had set up a
10b5-1 stock trading plan, which it became aware [of] as of
December 30, 2017.” Id. Between December 28,
2017 and January 17, 2018, Gallagher sold $33, 232, 408.01 of
Allegiant shares through the plan. Id. Gallagher
then exercised stock options to sell an additional $2, 066,
137.15 in Allegiant stock on March 6, 2018. Id.
10(b) of the Exchange Act prohibits the use of “any
manipulative or deceptive device or contrivance”
related to the purchase or sale of securities when the use
violates the regulations promulgated by the SEC. 15 U.S.C.
§ 78j(b). Under SEC Rule 10b-5, it is unlawful for any
person “[t]o make any untrue statement of 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.” 17 C.F.R. §
240.10b-5(b). “To recover damages for violations of
section 10(b) and Rule 10b-5, a plaintiff must prove (1) a
material misrepresentation or omission by the defendant; (2)
scienter; (3) a connection between the misrepresentation or
omission and the purchase or sale of a security; (4) reliance
upon the misrepresentation or omission; (5) economic loss;
and (6) loss causation.” In re Quality Sys., Inc.
Sec. Litig., 865 F.3d 1130, 1140 (9th Cir. 2017).
pleading stage, a complaint alleging violations of Section
10(b) of the Exchange Act and SEC Rule 10b-5 must meet both
the heightened pleading requirements for fraud claims under
Federal Rule of Civil Procedure 9(b) and the “exacting
pleading requirements of the Private Securities Litigation
Reform Act” (PSLRA), 15 U.S.C. § 78u-4(b)(2)(A).
Id. Rule 9(b) requires that the complaint
“state with particularity the circumstances
constituting fraud.” Fed.R.Civ.P. 9(b). The PSLRA
requires that the complaint “state with particularity
facts giving rise to a strong inference that the defendant
acted with the required state of mind.” 15 U.S.C.
defendants argue that the FAC should be dismissed because the
plaintiffs failed to adequately allege material
misrepresentation, scienter, and loss causation.
defendants argue that the plaintiffs failed to plead an
actionable false statement because: (1) under In re Merck
& Co. Securities Litigation, 432 F.3d 261 (3d Cir.
2005), an actionable false statement cannot be based upon
previously disclosed public information, and (2) the alleged
misrepresentations consist of inactionable puffery or
mismanagement claims. The plaintiffs respond that defendants
improperly rely on a fact-intensive affirmative defense to
support dismissal and that their alleged misstatements are
Merck, the Third Circuit held that a Wall Street
Journal article analyzing Merck's opaquely disclosed
accounting practices could not form the basis of a false
statement because the efficient market hypothesis suggests
the market would have already incorporated the information
into Merck's share price. 432 F.3d at 270-71. Similarly,
the truth-on-the-market defense excuses a “failure to
disclose material information . . . where that information
has been made credibly available to the market by other
sources.” In re Apple Computer Securities
Litigation, 886 F.2d 1109, 1115 (9th Cir. 1989).
However, “any material information which insiders fail
to disclose must be transmitted to the public with a degree
of intensity and credibility sufficient to effectively
counter-balance any misleading impression created by the
insiders' one-sided representations.” Id.
at 1116. Accordingly, “the truth-on-the-market defense
is intensely fact-specific, so courts rarely dismiss a
complaint on this basis.” In re Amgen Inc. Sec.
Litig., 544 F.Supp.2d 1009, 1025 (C.D. Cal. 2008).
defendants argue that the facts underlying the 60
Minutes report had already been reported by local news
sources, thus requiring dismissal under Merck. Even
assuming that Merck is the law in the Ninth Circuit,
however, the plaintiffs allege a key fact distinguishing this
case from Merck: the CBS broadcast reported
undisclosed Allegiant maintenance records obtained by the
FOIA request. To the extent that the defendants raise a
truth-on-the market defense, the plaintiffs plead facts
showing that the local news reports that emerged before the
60 Minutes report were not comprehensive or credible
enough to counterbalance Allegiant's alleged
misrepresentations. I therefore deny the defendants'
motion to dismiss on this ground.
False or Misleading Statements
plaintiffs must “specify each statement alleged to have
been misleading, [and] the reason or reasons why the
statement is misleading” to adequately plead material
misrepresentation. 15 U.S.C. § 78u-4(b)(1). “A
litany of alleged false statements, unaccompanied by the
pleading of specific facts indicating why those statements
were false, does not meet this standard.” Metzler
Inv. GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049,
1070 (9th Cir. 2008).
respect to opinion statements, “when a plaintiff relies
on a theory of material misrepresentation, the plaintiff must
allege both that the speaker did not hold the belief she
professed and that the belief is objectively untrue.”
City of Dearborn Heights Act 345 Police & Fire Ret.
Sys. v. Align Tech., Inc., 856 F.3d 605, 615-16 (9th
Cir. 2017) (quotation omitted). “[W]hen a plaintiff
relies on a theory that a statement of fact contained within
an opinion statement is materially misleading, the plaintiff
must allege that the supporting fact [the speaker] supplied
[is] untrue.” Id. (quotation omitted)
(alterations in original).
a “mildly optimistic, subjective assessment hardly
amounts to a securities violation, ” so I must
distinguish material misrepresentations from
“puffery.” Oregon Pub. Employees Ret. Fund v.
Apollo Grp. Inc., 774 F.3d 598, 606 (9th Cir. 2014).
“Statements by a company that are capable of objective
verification are not puffery and can constitute material
misrepresentations.” Id. (quotation omitted).
And, “general statements of optimism, when taken in
context, may form a basis for a securities fraud claim when
those statements address specific aspects of a company's
operation that the speaker knows to be performing
poorly.” In re Quality Sys., 865 F.3d at 1143
(quotation omitted). “For example, reassuring investors
that ‘everything [was] going fine' with FDA
approval when the company knew FDA approval would never come
was materially misleading.” Id. (quoting
Warshaw v. Xoma Corp., 74 F.3d 955, 959 (9th Cir.
Section 10(b) is not a cause of action for corporate
mismanagement. Santa Fe Indus., Inc. v. Green, 430
U.S. 462, 479 (1977). But the plaintiffs can plead a
cognizable claim if they allege both corporate mismanagement
and false or misleading public statements. See Reese v.
Malone, 747 F.3d 557, 581 ...