Board of Trustees of Ft. Lauderdale v. Mechel Oao
811 F. Supp. 2d 853
S.D.N.Y.2011Background
- Lead plaintiffs are four retirement plans that purchased Mechel ADRs on the NYSE during the Class Period (Oct 3, 2007–Jul 28, 2008).
- Mechel OAO is a Russian mining/metals company with subsidiaries and two main sales units, Mechel Trading and Mechel International, operating internationally.
- Individual Defendants Zyuzin (CEO/Chairman), Ploschenko (CFO), and Polin (CEO of a Mechel subsidiary) are alleged to have participated in or overseen Mechel’s day-to-day operations during the Class Period.
- Plaintiffs allege violations of Section 10(b) and Rule 10b-5 and Section 20(a) of the Exchange Act, based on alleged undisclosed Russian anti-competitive conduct and Russian transfer-pricing/tax issues.
- Russian authorities (FAS) conducted anti-monopoly investigations in 2008, culminating in a July–August 2008 period of scrutiny and a formal August 14, 2008 judgment finding some Mechel subsidiaries liable for FLPC violations.
- Putin publicly criticized Mechel in July 2008 for domestic pricing practices, triggering substantial stock declines; Mechel admitted liability in August 2008, but the SEC-related fraud claims remained contested.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the complaint pleads a strong inference of scienter | SAC shows motive, access to information, and conscious recklessness. | Mechel contends allegations are insufficient to show a strong inference of scienter under PSLRA. | No strong inference of scienter; Section 10(b) claim fails. |
| Whether anti-competitive conduct/tax evasion allegations establish knowledge or recklessness | Defendants knew or should have known about illegal schemes via core operations and directives. | Allegations fail to show contemporaneous knowledge or clear foreseeability of illegality. | Insufficient to establish recklessness; scienter not pleaded. |
| Whether FAS directives/non-routine investigation disclosures support scienter | Directives and a non-routine investigation signaled contemporaneous awareness of issues. | Directives were generic, did not indicate a specific investigation of Mechel; disclosure timing was not deceptive. | Directives do not establish a strong inference of scienter. |
| Whether the tax evasion/transfer pricing allegations support a 10(b) claim | Putin's statements and Russian data show violations and misstatements. | Public statements and data do not prove that defendants knew of violations or concealed them. | Allegations insufficient to plead scienter; loss causation/GAAP issues not addressed here. |
| Whether Section 20(a) claims survive a lack of primary Section 10(b) violation | Control liability arises from the alleged primary fraud by Mechel. | No primary violation pled; Section 20(a) fails as a result. | Section 20(a) claims dismissed. |
| Whether leave to replead should be granted | Amendment could cure scienter deficiencies. | Amendment would be futile given fundamental scienter gaps. | Leave to amend denied as futile. |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (strong inference of intent must be more than plausible)
- Dura Pharms., Inc. v. Broudo, 544 U.S. 336 (U.S. 2005) (pleading heightened for loss causation)
- ECA, Local 134 IBEW Joint Pension Trust of Chi. v. JP Morgan Chase Co., 553 F.3d 187 (2d Cir. 2009) (two-pronged scienter standard; motive or conscious misconduct)
- Kalnit v. Eichler, 264 F.3d 131 (2d Cir. 2001) (motive/insider-like inference for scienter)
- South Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98 (2d Cir. 2009) (recklessness standard; extreme departure from ordinary care)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) (conscious misbehavior and knowledge standards in scienter)
- In re Yukos Oil Co. Sec. Litig., 2006 WL 3026024 (S.D.N.Y. 2006) (relevance of Russian law foreseeability in scienter; dismissal analysis)
- In re VimpelCom Ltd. Sec. Litig., No. 04 Civ. 9742(NRB) (S.D.N.Y. 2006) (foreseeability of regulatory actions under ambiguous law)
- Take-Two Interactive Sec. Litig., 551 F. Supp. 2d 247 (S.D.N.Y. 2008) (foreseeability and ambiguity in regulatory actions)
- Sotheby's Holdings, Inc., 2000 WL 1234601 (S.D.N.Y. 2000) (reliance on documents and knowledge to plead scienter)