Indiana Public Retirement System v. SAIC, Inc.
818 F.3d 85
| 2d Cir. | 2016Background
- SAIC was prime contractor on NYC’s CityTime project; a kickback scheme led by SAIC employees inflated billings, producing ~ $635M billed through May 2011.
- By late 2010–March 2011 SAIC had internal indications of fraud: investigation opened, employees removed/placed on leave, legal fees advanced, subpoenas and interviews occurred, and an internal audit memorandum dated March 9, 2011 reported improper timekeeping.
- SAIC filed a certified Form 10-K on March 25, 2011 that did not disclose potential liability from CityTime; its public Annual Report concurrently touted SAIC’s ethics.
- SAIC disclosed the Government/DOI criminal investigation and potential exposure in an 8-K on June 2, 2011; later disclosures and a deferred prosecution agreement (March 2012) resulted in roughly $500M reimbursement and $40M forfeiture.
- Plaintiffs sued under Section 10(b), Rule 10b-5, and Section 20(a), alleging violations of FAS 5 (loss contingency disclosure), Item 303 (MD&A disclosure of known trends/uncertainties), and scienter; district court dismissed most claims and denied post-judgment leave to amend as futile.
- The Second Circuit vacated the denial of leave to amend as to the FAS 5 and Item 303 claims based on the March 2011 Form 10-K, finding the PSAC pleaded plausibly those claims and scienter; affirmed dismissal of other claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether SAIC violated FAS 5 by failing to disclose a loss contingency in the March 2011 Form 10-K | SAIC knew by March 9, 2011 of City awareness and internal findings creating a "reasonable possibility" of loss and thus should have disclosed under FAS 5 | FAS 5 requires disclosure only when claim is "probable"; no actual liability then | Vacated denial of amendment: PSAC plausibly alleges FAS 5 violation because City had manifested possible claim and "reasonable possibility" standard applied |
| Whether SAIC violated Item 303 by failing to disclose known trends/uncertainties affecting future revenues | SAIC actually knew of uncertainties (criminal investigation, lost contract awards, debarment risk, large market opportunity at risk) and failed to disclose their reasonably expected material impact | Item 303 requires actual knowledge and, even if known, loss of single contract was not material given SAIC’s size | Vacated denial of amendment: Item 303 requires actual knowledge; PSAC plausibly alleges actual knowledge and materiality (qualitative + quantitative) |
| Whether plaintiffs pleaded scienter (strong inference of conscious misbehavior or recklessness) for March 2011 10-K omissions | Timing of internal investigation, subpoenas, advancing attorneys’ fees, and internal memos shows knowledge/recklessness | It is implausible SAIC would conceal misconduct for only ~2 months; benefits of concealment would be minimal | PSAC alleges strong inference of at least recklessness; scienter plausibly pleaded for March 2011 10-K claims |
| Whether leave to amend was futile as to other disclosures (June 2011 8-K, annual report puffery, internal control and individual defendant claims) | Plaintiffs sought to amend those claims too | SAIC: June 8-K and later disclosures were adequate; annual report statements are nonactionable puffery; plaintiffs failed to timely amend internal-control and individual claims | Affirmed: amendment futile for June 2011 8-K, annual report (puffery), internal-control and individual-defendant claims (procedural waiver/abandonment) |
Key Cases Cited
- In re Advanced Battery Techs., Inc., 781 F.3d 638 (2d Cir. 2015) (standard for accepting allegations when reviewing denial of leave to amend)
- Williams v. Citigroup Inc., 659 F.3d 208 (2d Cir. 2011) (Rule 60(b) and leave to amend context)
- City of Pontiac Policemen’s & Firemen’s Ret. Sys. v. UBS AG, 752 F.3d 173 (2d Cir. 2014) (pleading standards and abandonment issues)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard)
- ECA, Local 134 IBEW Joint Pension Tr. of Chi. v. JP Morgan Chase Co., 553 F.3d 187 (2d Cir. 2009) (PSLRA/Rule 9(b) heightened scienter pleading)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) (GAAP violations alone insufficient absent evidence of fraudulent intent)
- Panther Partners Inc. v. Ikanos Commc’ns, Inc., 681 F.3d 114 (2d Cir. 2012) (Item 303 discussion and materiality assessment)
- Litwin v. Blackstone Grp., L.P., 634 F.3d 706 (2d Cir. 2011) (Item 303 obligations and materiality)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (standards for weighing competing inferences on scienter)