205 F.Supp.3d 527
S.D.N.Y.2016Background
- IBM announced in October 2014 it would pay GlobalFoundries $1.5 billion to take its Microelectronics business and record a $2.4 billion write-down; stock fell ~17% after the announcement and weak quarter results.
- Plaintiffs (putative class of IBM investors, Jan 22–Oct 17, 2014) allege IBM should have recorded an earlier impairment of Microelectronics under GAAP and that defendants’ statements concealed that risk.
- Microelectronics operated two fabs (East Fishkill and Essex Junction) and incurred substantial losses (aggregate losses alleged: ~$1.358 billion in 2012–2013; large losses in 2013 and 2014 quarter-to-date), prompting IBM to seek a sale beginning in 2014.
- Plaintiffs rely on confidential witnesses and IBM disclosures showing Microelectronics’ results were tracked separately and that IBM later reported it as a discontinued operation, arguing it could be a standalone GAAP “asset group.”
- Defendants argued (and the Court considered) that Microelectronics could have been grouped within the larger STG reporting unit, GAAP permits judgment in grouping and timing of impairments, and plaintiffs failed to plead scienter and loss causation sufficiently.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Microelectronics was an "asset group" under ASC 360 | Microelectronics had identifiable, largely independent cash flows (IBM tracked/reporting its losses; later called it a component/discontinued operation) | Microelectronics was vertically integrated into STG; cash flows not independent, grouping within STG was reasonable judgment under GAAP | Court: plausible allegation that Microelectronics could be an asset group (pleading survives on this point) |
| Whether impairment indicators existed requiring earlier testing under ASC 360 | Large recurring operating losses, alleged underinvestment/obsolescence, and sale efforts were indicators triggering impairment tests | Losses reflect internal use value to STG; allegations about underinvestment are business judgments, not GAAP impairment indicators; plaintiffs do not allege when sale became "more likely than not" | Court: plaintiffs plausibly alleged some indicators (losses + depreciation allegations) but failed to plead that a sale was more likely than not before 2014 |
| Whether plaintiffs pleaded scienter for accounting misstatements | Certifications, magnitude of write-down, roadmap motive, and CWs imply knowledge/recklessness about valuation timing | Certifications and size of charge insufficient; GAAP allows reasonable choices; no particularized allegations of internal reports or conscious misbehavior | Court: scienter not plausibly alleged; allegations insufficient to show recklessness or knowing falsity |
| Whether forward-looking EPS statements are actionable | EPS statements misled investors about financial trajectory given Microelectronics problems | EPS projections are forward-looking and protected by PSLRA safe harbor absent actual knowledge of falsity; plaintiffs did not plead actual knowledge | Court: EPS claims dismissed—plaintiffs failed to show actual knowledge of falsity |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (standards for pleading plausibility)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (plausibility pleading standard)
- ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (documents properly considered on motion to dismiss)
- Employees’ Ret. Sys. of Gov’t of the Virgin Islands v. Blanford, 794 F.3d 297 (heightened particularity for securities fraud under Rule 9(b))
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (holistic inquiry for strong inference of scienter)
- Chill v. Gen. Elec. Co., 101 F.3d 263 (GAAP violation alone insufficient to show fraudulent intent)
- Slayton v. Am. Exp. Co., 604 F.3d 758 (PSLRA safe harbor and scienter standard for forward-looking statements)
- Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (SOX certifications do not, by themselves, establish scienter)
- City of Omaha v. CBS Corp., 679 F.3d 64 (deference to reasonable GAAP interpretations)
- Plumbers & Steamfitters Local 773 Pension Fund v. Canadian Imperial Bank of Commerce, 694 F. Supp. 2d 287 (size of write-down insufficient alone to plead scienter)