Indiana Public Retirement System v. SAIC, Inc.
818 F.3d 85 (2016)
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Rule of Law:
A company's failure to disclose a known trend or uncertainty, such as a major fraud investigation that is reasonably expected to have a material impact on its finances, can serve as the basis for a securities fraud claim under Section 10(b) if the company had actual knowledge of the uncertainty and acted with scienter.
Facts:
- In 2000, SAIC, Inc. became the prime contractor for New York City's 'CityTime' automated timekeeping project.
- In 2003, Gerard Denault, SAIC's Deputy Program Manager for the project, and another employee, Carl Bell, initiated a kickback scheme with a subcontractor, Technodyne.
- The scheme inflated costs, and by 2011, SAIC had billed the City approximately $635 million on a project initially budgeted for $63 million.
- By late 2010, the scheme unraveled, prompting a criminal investigation and an announcement by NYC's mayor that he was reevaluating SAIC's role and seeking to recover payments.
- SAIC launched an internal investigation and, on March 9, 2011, its audit team reported findings of improper timekeeping practices by Denault.
- On March 25, 2011, SAIC filed its annual Form 10-K, which did not disclose its potential liability related to the CityTime fraud.
- In May 2011, federal authorities brought criminal charges against Denault and others involved in the scheme.
- In March 2012, SAIC entered into a deferred prosecution agreement, agreeing to reimburse the City approximately $500.4 million.
Procedural Posture:
- Investors (Plaintiffs) filed a class action lawsuit against SAIC, Inc. and its officers in the U.S. District Court for the Southern District of New York for securities fraud.
- The district court granted in part and denied in part Defendants' motion to dismiss, allowing claims related to the March 2011 Form 10-K to proceed.
- Upon a motion for reconsideration by SAIC, the district court reversed its prior decision and entered a final judgment dismissing all of the Plaintiffs' claims with prejudice.
- Plaintiffs filed a motion to vacate the judgment and for leave to file a Proposed Second Amended Complaint (PSAC).
- The district court denied the Plaintiffs' post-judgment motions, holding that any amendment would be futile.
- Plaintiffs (Appellants) appealed the denial of their motion to amend to the U.S. Court of Appeals for the Second Circuit, with SAIC, Inc. as the Appellee.
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Issue:
Does a securities fraud complaint plausibly state a claim when it alleges a company, with actual knowledge of an ongoing criminal investigation and the results of its own internal probe into massive employee fraud, failed to disclose the potential for significant liability in its annual financial filing, in violation of FAS 5 and Item 303?
Opinions:
Majority - Lohier, J.
Yes, the complaint plausibly states a claim for securities fraud. A company's failure to disclose a material, known uncertainty can violate federal securities laws. Regarding the FAS 5 claim, the district court applied the wrong standard; the 'reasonable possibility' of loss standard applied because the City had already manifested an awareness of a possible claim against SAIC. Given the criminal investigation, the mayor's statements, and SAIC's own internal audit results, a material loss was a reasonable possibility that required disclosure in the March 2011 10-K. Regarding the Item 303 claim, the court held that the rule requires a plaintiff to plead the company's actual knowledge of the known trend or uncertainty. The complaint plausibly alleged that SAIC had actual knowledge of the CityTime fraud and its potential multi-million dollar repercussions, which included reputational damage and the loss of significant future government contracts. This known uncertainty was material and SAIC had a duty to disclose it. The complaint also adequately pleaded scienter, as the facts support a strong inference that SAIC acted with at least a reckless disregard of its duty to disclose the material information it possessed before filing its 10-K.
Analysis:
This decision clarifies the pleading standards for securities fraud claims based on Item 303 omissions, establishing that a plaintiff must allege the defendant had actual knowledge of the undisclosed trend or uncertainty. The ruling reinforces that materiality is a mixed question of law and fact that considers both quantitative and qualitative factors, making dismissal on the pleadings difficult when significant reputational harm or loss of future business is credibly alleged. The case also provides a clear example of how plaintiffs can plead scienter by demonstrating a company was aware of specific, damaging facts (from internal investigations, government inquiries) yet chose not to disclose them in public filings.
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