Frank v. Dana Corp.
2011 U.S. App. LEXIS 10437
| 6th Cir. | 2011Background
- Dana Corp. executives Burns (CEO) and Richter (CFO) led Dana’s public filings during 2004–2005 and signed quarterly/annual reports, press releases, and Sarbanes-Oxley certifications.
- Dana reported positive actual and projected earnings during the class period, while certain divisions (drive shaft and light axle) were underperforming and steel costs rose sharply.
- Internal reports (tracker, production, SAD reports) and monthly/quarterly financial reviews suggested distress and variances from forecasts.
- Dana later reduced earnings projections by 50% on September 15, 2005, signaling material weakens; subsequent disclosures revealed accounting weaknesses.
- December 30, 2005 restated first two quarters of 2005 with a $44 million net income reduction and January 17, 2006 loss of $1.27 billion with a large tax-deferred asset write-down.
- February 2006 SEC investigation and Dana’s bankruptcy filing on March 3, 2006 occurred after the restatements and disclosures.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the complaint adequately pleads scienter under Tellabs. | Frank asserts a holistic strong inference of scienter. | Burns/Richter contend no strong inference from facts. | Yes; strong inference pleaded. |
| Whether the court should apply a holistic approach to scienter after Matrixx. | Holistic view supported by Tellabs and Matrixx. | Holistic approach not required previously. | Holistic review adopted; not parse-each-allegation. |
| Whether plaintiffs adequately plead a section 20(a) controlling-person claim. | Burns/Richter controlled Dana’s misstatements; scienter imputable. | Need not plead bad faith; underlying violation suffices. | Yes; 20(a) claim adequately pleaded. |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (strong inference standard for scienter; holistic view required)
- In re Comshare Inc. Sec. Litig., 183 F.3d 542 (6th Cir. 1999) (pleading for scienter under §10(b))
- PR Diamonds, Inc. v. Chandler, 364 F.3d 671 (6th Cir. 2004) (recklessness standard for scienter)
- Ley v. Visteon Corp., 543 F.3d 801 (6th Cir. 2008) (holistic scienter considerations; imputation of knowledge)
- City of Monroe Emps. Ret. Sys. v. Bridgestone Corp., 399 F.3d 651 (6th Cir. 2005) (corporate knowledge imputations; agency discipline)
- Miss. Pub. Emps.' Ret. Sys. v. Boston Scientific Corp., 523 F.3d 75 (1st Cir. 2008) (holistic approach; multiple factors supporting scienter)
- Helwig v. Vencor, Inc., 251 F.3d 540 (6th Cir. 2001) (enumerated non-exhaustive factors not dispositive of scienter)