Fiat Chrysler Automobiles (FCA) is facing claims from a putative class of investors alleging the automaker concealed an ongoing investigation into its compliance with safety and recall regulations, which caused a nearly $2 billion stock drop. U.S. District Judge Jesse M. Furman dismissed some of the claims. The proposed class action alleges FCA and a trio of its executives made false and misleading statements about the company’s compliance with regulations, and made false estimates about quarterly provisions for warranty and recall reserves. FCA moved to dismiss the complaint, saying the investors didn’t bring enough specificity in their complaint.
Judge Furman kept alive claims based on FCA’s statements about compliance with applicable regulations. But he dismissed the claims that were centered on FCA’s reserve estimates and related statements. Judge Furman, saying the investors didn’t bring forward enough facts, wrote:
Lacking internal analyses, confidential witnesses or other particularized allegations, plaintiffs fail to adequately allege scienter with respect to defendants’ reserve estimates and related statements.
The opinion also dismissed Robert Palmer, chief financial officer for FCA, as a Defendant, because the claims against him were only related to reserve estimates and related statements.
The Plaintiffs filed the suit in September 2015. A second amended complaint alleges the automaker effectively defrauded shareholders by telling them in reports and statements that it was in compliance with safety and recall regulations, when FCA was actually being investigated by the National Highway Traffic Safety Administration (NHTSA) for noncompliance. The suit claimed that Defendants CEO Sergio Marchionne, CFO Palmer and former head of American Safety and Regulation Compliance Officer Scott Kunselman made the false and misleading statements, specifically in reports with the U.S. Securities and Exchange Commission (SEC).
The NHTSA investigation ultimately led to a pair of consent orders and $175 million in fines over FCA’s failure to timely notify the NHTSA and vehicle owners about recalls and safety issues. In the days after each of the consent orders was announced, the stock price of Fiat Chrysler fell a combined 9 percent, losing $1.8 billion in market capitalization. The shareholders say that was directly caused by the compliance failures.
Judge Furman said in his opinion that the investors adequately alleged actionable material misrepresentations. That’s because FCA made statements that it was in compliance with relevant global safety laws from November 2014 through June 2015, even though at the time it was allegedly not in compliance with certain laws, Judge Furman wrote. During that time period, FCA said it was “substantially in compliance with the relevant global regulatory requirements affecting [the company’s] facilities and products.” Judge Furman wrote:
A reasonable investor could, and likely would, read FCA’s statement to mean that the company was substantially in compliance with all applicable regulations, including the [National Traffic and Motor Vehicle Safety Act of 1996] and vehicle safety regulations in the United States.
But when it came to the allegations of statements relating to FCA’s recall reserves, Judge Furman ruled that the investors failed to bring forward enough facts, and couldn’t show that FCA’s determinations of its funds were false. Judge Furman wrote, citing Fait v. Regions Fin. Corp. from 2011:
The Second Circuit has held that ‘determining the adequacy of loan loss reserves is not a matter of objective fact’ but a matter of opinion. As a result, such reserve estimates are actionable only if they are ‘both false and not honestly believed when they were made.’
The case is Pirnik v. Fiat Chrysler Automobile NV et al. in the U.S. District Court for the Southern District of New York.
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