United States District Court, W.D. Pennsylvania
R. Hornak, Chief United States District Judge.
2017, a tragic fire at Grenfell Tower in London, England,
claimed 71 lives and injured 70 more. One of Arconic's
architectural products, Reynobond PE paneling, formed part of
the Tower's exterior cladding system, and some news
outlets reported that the panels contributed to the
fire's rapid spread. Plaintiffs allege, on behalf of
themselves and a securities class, that a UK-based sales
employee had reason to know that the Reynobond PE that
Arconic's subsidiary supplied would be improperly used by
a third party on that high-rise tower. But this is not a
products liability case. Plaintiffs claim that 81 of
Arconic's statements in prior SEC filings, customer
brochures, and presentations to investors violated federal
securities laws by failing to disclose alleged sales of
Reynobond PE for unsafe uses. However, Plaintiffs have failed
to adequately, plausibly plead that Defendants had knowledge
of the facts they allegedly failed to disclose, or that
Defendants made materially false or misleading statements or
failed to disclose facts they had a duty to disclose, so as
to make out a violation of the federal securities laws they
invoke. For these and the other following reasons, the Court
will grant Defendants' Motion to Dismiss.
purposes of ruling on the pending Motion to Dismiss, the
Court will accept the facts as alleged in the First Amended
Complaint as true and review it in its entirety. The Court
also may review and consider "documents incorporated
into the complaint by reference, and matters of which a court
may take judicial notice," including documents required
by law to be filed with the Securities and Exchange
Commission and press releases. Winer Family Tr. v.
Queen, 503 F.3d 319, 327 (3d Cir. 2007) (quoting
Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 308, 323 (2007)). In reviewing the First Amended
Complaint, the Court notes that, for their claims under the
Securities Exchange Act of 1934, Plaintiffs must satisfy the
heightened pleading requirements established by the Private
Securities Litigation Reform Act as discussed in Section III,
Inc. ("Arconic" or the "Company") is a
global company engaged in "the engineering and
manufacturing of aluminum and other lightweight metals into
products used worldwide in the aerospace, automotive,
commercial transportation, packaging, building and
construction, oil and gas, defense, consumer electronics, and
industrial industries." (First Amended Complaint, ECF
No. 61 ("FAC" or "Complaint") ¶ 19.)
Arconic is incorporated in Delaware and its common stock was
listed on the New York Stock Exchange at all relevant times.
(Ex. 1, ECF No. 72-3 (certificate of incorporation); FAC
¶ 2.) In September 2014, shares of Arconic's Class B
Mandatory Convertible Preferred Stock were sold to the public
("Preferred Offering"), pursuant to a registration
statement filed with the SEC ("Registration
Statement"). (FAC ¶ 74-76.)
product Arconic manufactures and sells is Reynobond wall
cladding. (Id. ¶ 40.) Reynobond is the
Company's brand of aluminum composite material
("ACM"), and consists of two thin sheets of
aluminum bonded to either side of a non-aluminum core.
(Id. ¶ 40.) Arconic manufactured two Reynobond
products: Reynobond PE, which featured a polyethylene core,
and Reynobond FR, which featured a fire-resistant material at
the core. (Id.) Combined with insulation, panels of
Reynobond can be used to form a cladding system affixed to a
building's exterior. (Id.) Reynobond was sold by
Arconic's Engineered Products and Solutions business
segment until the third quarter of 2015, and then by its
Transportation and Construction Solutions segment.
(Id. ¶ 214.) Plaintiffs allege that
Arconic's sales personnel pushed Reynobond PE, which was
cheaper than Reynobond FR, to customers, particularly when
engaged in competitive bidding. (Id. ¶ 40.)
to Arconic's 10-Ks, sales for Arconic's product
grouping of "architectural aluminum systems," of
which Reynobond PE formed part, accounted for approximately 4
percent of the Company's overall sales in 2013 through
2015, and approximately 8 percent in 2017. (See Ex.
2, ECF No. 72-4 (2013 10-K), at 132 ($977 million out of $23
billion in total sales); Ex. 3, ECF No. 72-5 (2014 10-K), at
134 ($1, 002 billion out of just under $24 billion); Ex. 4,
ECF No. 72-6 (2015 10-K), at 140 ($951 million out of $22.5
billion); Ex. 6, ECF No. 72-8 (2017 10-K), at 91 ($1, 065
billion out of $12.9 billion).)
May 8, 2010, until April 17, 2017, Defendant Klaus Kleinfeld
was the Company's Chief Executive Officer
("CEO") and Chairman of its Board of Directors.
(FAC ¶ 20.) In addition to Defendant Arconic, the
remaining Defendants are current and former officers and
directors of Arconic who signed the Registration for the
Preferred Offering (those individuals, together with
Kleinfeld, the "Individual Defendants"), and
investment banking firms that acted as underwriters for the
Preferred Offering (together, the "Underwriter
Defendants"). (Id. ¶¶ 25-26.)
14, 2017, a fire broke out at Grenfell Tower in North
Kensington, London, England, a 24-story, 67-meter-high tower
block of public housing apartments. (Id. ¶ 43.)
Seventy-one (71) people died, and over seventy (70) people
were injured. (Id. ¶ 45.)
Tower had been recently renovated, and in connection with
that renovation, Reynobond PE was installed by Harley Facades
as part of the building's cladding system in 2015- 2016.
(Id. ¶ 47.) A French subsidiary of Arconic,
Alcoa Architectural Products SAS (later known as Arconic
Architectural Products SAS) ("AAP SAS"), sold the
panels to Omnis Exteriors, a fabricator, who cut the panels
into shape and supplied them to the Grenfell contractors.
(Id. ¶¶ 47, 50.) Approximately 3, 125
square meters of Reynobond PE were used to clad the Tower.
(Id. ¶ 44.) The cladding was combined with
Celotex RS50000 PIR Thermal insulation. (Id. ¶
47.) Studio E Architects, of Ryton Ltd., oversaw the project.
(Id. ¶ 13.) Ryton, who had outbid another
bidder, called for the installation of Reynobond PE.
(Id. ¶ 48.) Although the initial building plans
from 2012 specified zinc cladding, the Kensington and Chelsea
Tenant Management Organisation ("KCTMO"), who
managed Grenfell Tower, pressured the project manager on the
Grenfell renovation to cut costs, and suggested swapping the
panels of zinc cladding for panels of Reynobond PE.
(Id. ¶ 49.)
days after the fire, on June 24, 2017, The New York
Times and Reuters published articles suggesting
a link between the fire's rapid spread and Grenfell
Tower's cladding system, including Reynobond PE.
(Id. ¶¶ 67-68.) These reports also
detailed emails from mid-2014 between Deborah French,
Arconic's UK sales manager for Reynobond, and executives
at the contractors involved in the bidding process for the
renovation at Grenfell Tower. (Id. ¶ 68;
see Id. ¶ 50.) In those emails, French
responded to requests from the companies on the availability
of samples of five different types of Reynobond panels, all
of which were available in the PE and FR versions.
(Id. ¶ 68.) Those emails did not refer to how
tall Grenfell Tower was, but did refer to other high-rise
projects where paneling had been used when discussing the
desired appearance for Grenfell Tower. (Id.)
these news reports, the price of the Preferred Shares
decreased when trading resumed on Monday, June 26th, 2017,
trading down as low as $36.50 per share in intraday
trading-down nearly $4 per share, or 9.5%, from their close
of $40.11 on the evening of Friday, June 23rd, 2017, on the
high volume of more than 1.4 million shares trading.
(Id. ¶ 70.)
26, 2017, the same day as the stock price drop, Arconic
announced that it was discontinuing global sales of Reynobond
PE for use on high-rise buildings. (Id. ¶¶
61, 109.) In that announcement, Arconic stated:
The loss of lives, injuries and destruction following the
Grenfell Tower fire are devastating, and our deepest
condolences are with everyone affected by this tragedy. We
have offered our full support to the authorities as they
conduct their investigations.
While the official inquiry is continuing and all the facts
concerning the causes of the fire are not yet known, we want
to make sure that certain information is clear:
• Arconic supplied one of our products, Reynobond PE, to
our customer, a fabricator, which used the product as one
component of the overall cladding system on Grenfell Tower.
The fabricator supplied its portion of the cladding system to
the facade installer, who delivered it to the general
contractor. The other parts of the cladding system, including
the insulation, were supplied by other parties. We were not
involved in the installation of the system, nor did we have a
role in any other aspect of the building's refurbishment
or original design.
• While we provided general parameters for potential
usage universally, we sold our products with the expectation
that they would be used in compliance with the various and
different local building codes and regulations. Current
regulations within the United States, Europe and the UK
permit the use of aluminum composite material in various
architectural applications, including in high-rise buildings
depending on the cladding system and overall building design.
Our product is one component in the overall cladding system;
we don't control the overall system or its compliance.
Nevertheless, in light of this tragedy, we have taken the
decision to no longer provide this product in any high-rise
applications, regardless of local codes and regulations.
(Id. ¶ 109.)
AAP SAS brochure represented that cladding products
containing polyethylene (PE) should not be used in buildings
over a height often (10) meters, and stated that "it is
crucial to choose the adapted products in order to avoid the
fire spreading to the whole building. Especially when it
comes to facades and roofs, the fire can spread extremely
rapidly." (Id. ¶ 101.) The brochure also
warned that "[b]uildings are also classified according
to their height, which will define which materials are safer
to use. Another important rule when it comes to the height of
buildings concerns the accessibility of the fire brigade-as
soon as the building is higher than the firefighters'
ladders, it has to be conceived with an incombustible
brochure also contained a visual height guidance table,
noting that PE can be used on buildings up to ten (10) meters
tall, fire-retardant (FR) materials should be used on
buildings up to thirty (30) meters tall, and only cladding
panels with non-combustible material (the A2 model) should be
used above that height. (Id. ¶ 102.) That table
is displayed below:
the fire, the British government established an independent
expert advisory panel to advise on immediate measures to
implement to secure the safety of the buildings.
(Id. ¶ 64.) That panel conducted a test to
evaluate a cladding system that mimicked the one used on
Grenfell Tower. (Id. ¶ 65.) The panel concluded
that the PE system did not meet UK building regulation
guidance. (Id. ¶ 66.) According to the test
report, a classification was impossible because the cladding
testing had been terminated early, after eight (8) minutes
rather than the minimum forty (40), "due to flame spread
above the test apparatus." (Id.)
BBC report also stated that the fire rating for Reynobond PE
had been downgraded, after "fire tests carried out as
early as 2014" (around the time of the Grenfell Tower
sale), to a rating that did not comply with UK building code
requirements for high-rise use. (Id. ¶¶
101, 120, 186, 281.) According to the BBC report,
"Arconic knew the test rating had been downgraded, but
the UK body that certifies building products said it was not
told about the change." (Id. ¶ 120.)
Reynobond PE had a certificate based on a B rating issued in
2008, on a scale from A to F with A being the top rating.
(Id.). The BBC report stated that a series of
reports commissioned by Arconic in 2014 and 2015, which
tested two configurations of the cladding, were given a
classification of C and E. (Id.)
also obtained Arconic correspondence with clients from late
2015, after the Grenfell Tower sale, in which the Company
confirmed that some of the panels were rated class E, and
addressed "concerns about the product's fire
reaction class in the UK." (Id.)
first of four related complaints in this litigation was filed
on July 13, 2017, in the Southern District of New York as
Brave v. Arconic Inc. et al, No. 1:17-cv-05312
(S.D.N.Y.). (ECF No. 38, at 2.) Shortly after the first
notice was published on July 13, 2017, two additional
complaints were filed in the Southern District of New York:
Tripson v. Arconic, No. 17-cv-05369 (filed July 14,
2017), and Sullivan v. Arconic, No. 17-cv-05457
(filed July 18, 2017). (ECF No. 38, at 2.) On August 11,
2017, the instant action-the Howard Complaint-was
filed in this District. Id. Ultimately, Brave,
Tripson, and Sullivan were each voluntarily
dismissed in the Southern District of New York before the
September 11, 2017, lead plaintiff motion deadline.
Id. at 3. Sullivan was refiled in the
Western District of Pennsylvania (Docket Number 2:17-cv-1213)
on September 15, 2017.
Court then granted a Motion to Consolidate the cases into
Howard v. Arconic, No. 2:17-cv-1057, and to appoint
Iron Workers Local 580 - Joint Funds and Ironworkers Locals
40, 361 & 417 - Union Security Funds (collectively,
"Ironworkers") as the Lead Plaintiff for purchasers
of all Arconic securities except purchasers of Arconic
Depositary shares sold pursuant and/or traceable to
Arconic's September 18, 2014, initial public offering
("Preferred IPO Purchasers"), and to appoint Janet
L. Sullivan as the Lead Plaintiff for purchasers of Preferred
IPO Purchasers. (ECF No. 56). The Court also appointed
Plaintiffs' chosen counsel. (Id.) The remaining
defendants are Arconic, the Individual Defendants, and the
April 9, 2018, Plaintiffs filed the First Amended Complaint
(Consolidated), at ECF No. 61. Pending before the Court is
Defendants' Motion to Dismiss for Failure to State a
Claim, ECF No. 71. The Court has reviewed the Motion, the
brief in support therein ("Defs.' Br.," ECF No.
72), Plaintiffs' Brief in Opposition ("Pl.'s
Br.," ECF No. 75), and Defendants' Reply Brief
("Defs.' Reply," ECF No. 80). The Court held
oral argument on the Motion on November 27, 2018. (ECF No.
87.) At the Court's request, the parties submitted
supplemental briefing at ECF Nos. 90, 91, 98, and 99. The
parties also submitted supplemental letters to the Court at
ECF Nos. 101 and 103. The Court has reviewed this record and
the applicable law, and the matter is ripe for disposition.
LEGAL STANDARD FOR MOTIONS TO DISMISS
considering a motion to dismiss pursuant to Rule 12(b)(6),
the court is to "accept all factual allegations as true,
construe the complaint in the light most favorable to the
plaintiff, and determine whether, under any reasonable
reading of the complaint, the plaintiff may be entitled to
relief." Phillips v. Cty. of Allegheny, 515
F.3d 224, 233 (3d Cir. 2008) (quoting Pinker v. Roche
Holdings Ltd., 292 F.3d 361, 374 n.7 (3d Cir. 2002)).
Ordinarily, to survive a motion to dismiss, a complaint must
plead "enough facts to state a claim to relief that is
plausible on its face." Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007). "A claim has
facial plausibility when the plaintiff pleads factual content
that allows the court to draw the reasonable inference that
the defendant is liable for the misconduct alleged."
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
Complaint, Plaintiffs allege that Arconic and Kleinfeld
violated § 10(b) of the Securities Exchange Act of 1934
('"34 Act") and the rules and regulations
promulgated thereunder, that all Defendants violated §
11 of the Securities Act of 1933 ('"33 Act")
and the rules and regulations promulgated thereunder, that
Kleinfeld violated § 20(a) of the '34 Act, and that
Arconic and the Individual Defendants violated § 15 of
the '33 Act.
outset, the Court observes that Plaintiffs' Complaint
suffers from three related and fundamental flaws. These flaws
pervade Plaintiffs' claims under both the '33 and
'34 Acts, and (in addition to the other deficiencies
explained in this Opinion) pretermit any potential for their
pleadings to establish a violation of federal securities
laws. The Complaint's three hundred and twenty-three
(323) paragraphs do not cure these basic defects.
Plaintiffs have not adequately and plausibly alleged that
Reynobond PE was being or had been sold for inappropriate end
uses other than on the Grenfell Tower. At most, Plaintiffs
allege that one of Arconic's foreign subsidiary's
employees was responsible for the single Grenfell Tower sale
and that she had reason to know that Reynobond PE would
ultimately be used for that high-rise project. That is not
nearly enough. Plaintiffs seek an inference that more
improper sales had occurred, or were occurring, based on the
fact that Arconic said in a press release that it would
discontinue global sales of Reynobond PE for use in high-rise
buildings. But Plaintiffs seek to create an inference that is
not plausibly supported by either that logic or any facts
actually pleaded in the Complaint. And they ignore the more
compelling inference: that in the wake of damaging news
stories suggesting a connection between Reynobond PE and the
tragic fire's spread, Arconic sought to bring to zero any
chance that Reynobond PE would be sold in the future for
any high-rise building use, and to assure the public
of the same. Plaintiffs' assertions do not plausibly
connect the dots to provide a basis for a plausible inference
that, in doing so, Arconic was somehow admitting to a
practice of prior sales of Reynobond PE for improper end
uses. Beyond that, although Plaintiffs refer to highly
flammable cladding used on other buildings in the UK, they do
not plead, plausibly or otherwise, that such cladding was
Reynobond PE (or, for that matter, FR), nor do they refer to
Reynobond PE being used on any building other than Grenfell
Tower. (See FAC ¶¶ 294, 300.) This
unsupported suggestion permeates the Complaint, and the Court
cannot credit any of its iterations.
Plaintiffs have failed to adequately and plausibly allege
that Kleinfeld or any other Arconic executive knew that
Reynobond PE was allegedly being sold for improper end uses.
The Complaint contains no averments that Kleinfeld knew that
Reynobond PE had been used on Grenfell Tower or any other
high rise. Any suggestion that Kleinfeld "should have
known" does not bear examination. At best,
Plaintiffs' allegations as to Kleinfeld add up to the
inference that he knew that there was a difference between
Reynobond PE and Arconic's other Reynobond product,
"FR," whose name denotes its fire
resistance. This does not suffice to establish his
culpable knowledge of sales leading up to an improper end use
of Reynobond PE.
Plaintiffs repeatedly point to Arconic's alleged failure
to inform investors that Reynobond PE had been sold for use
on Grenfell Tower, and that the end use on a high-rise
building was unsafe. The Complaint sets forth in exacting
detail the tragic events of the fire. The Grenfell Tower sale
may well form the basis of a products liability claim under
UK law-an issue most certainly not before this Court. But for
the reasons that follow, as pleaded, the Complaint does not
plausibly show that a failure to inform investors of this
single sale to an end user who wound up using the product
unsafely provides a basis for a securities law
of these basic deficiencies, and for the reasons that follow,
Defendants' Motion to Dismiss will be granted, and
Plaintiffs' Complaint will be dismissed without
Section 10(b) '34 Act Claims
10(b) of the Exchange Act makes it unlawful for any person
"[t]o use or employ, in connection with the purchase or
sale of any security . . . any manipulative or deceptive
device or contrivance in contravention of such rules and
regulations" prescribed by the SEC. 15 U.S.C. §
78j(b). To implement § 10(b), the SEC promulgated Rule
10b-5, which makes it unlawful "[t]o make any untrue
statement of a material fact or to omit to state a material
fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not
misleading ... in connection with the purchase or sale of any
security." 17 C.F.R. § 240.10b-5(b).
Supreme Court has implied a private cause of action from the
text and purpose of § 10(b) to investors who have been
injured by its violation. See Tellabs, Inc. v. Makor
Issues & Rights, Ltd, 551 U.S. 308, 318 (2007). To
state a securities fraud claim under § 10(b), a
plaintiff must allege the following elements: (1) a material
misrepresentation or omission, (2) scienter, (3) a connection
between the misrepresentation or omission and the purchase or
sale of a security, (4) reliance upon the misrepresentation
or omission, (5) economic loss, and (6) loss causation.
Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42
(2005); City of Edinburgh Council v. Pfizer, Inc.,
754F.3dl59, 167 (3d Cir. 2014).
addition to pleading the foregoing elements, the Private
Securities Litigation Reform Act ("PSLRA") imposes
two distinct, heightened pleading requirements that must be
satisfied for a complaint alleging § 10(b) claims to
survive a motion to dismiss. See Inst'l Inv'rs
Group v. Avaya, Inc., 564 F.3d 242, 252 (3d Cir. 2009).
First, the PSLRA requires that "the complaint shall
specify each statement alleged to have been misleading, the
reason or reasons why the statement is misleading, and, if an
allegation regarding the statement or omission is made on
information and belief, the complaint shall state with
particularity all facts on which that belief is formed."
15 U.S.C. § 78u-4(b)(1). Second, the complaint must,
"with respect to each act or omission alleged to violate
this chapter, state with particularity facts giving rise to a
strong inference that the defendant acted with the required
state of mind." 15 U.S.C. § 78u-4(b)(2)(A). That
state of mind is "scienter," which is defined as a
"mental state embracing intent to deceive, manipulate,
or defraud" and it requires knowledge or recklessness.
Avaya, 564 F.3d at 252 (quoting Ernst &
Ernst v. Hochfelder, 425 U.S. 185, 194 n.12 (1976)).
Both provisions require that facts be pleaded with
particularity. This standard "requires plaintiffs to
plead the who, what, when, where and how: the first paragraph
of any newspaper story." Id. at 253 (quoting
In re Advanta Corp. Sec. Litig., 180 F.3d 525, 534
(3d Cir. 1999)).
addition to the traditional Rule 12(b)(6) standard, the
Supreme Court has prescribed a three-step process for
considering a motion to dismiss in a § 10(b) case.
See Tellabs, 551 U.S. at 322-23. First, as with any
motion to dismiss, the court must "accept all factual
allegations in the complaint as true." Id. at
322. Second, the court must "consider the complaint in
its entirety, as well as other sources courts ordinarily
examine when ruling on Rule 12(b)(6) motions to dismiss, in
particular, documents incorporated into the complaint by
reference, and matters of which a court may take judicial
notice." Id. On this point, the inquiry is
"whether all of the facts alleged, taken
collectively, give rise to a strong inference of scienter,
not whether any individual allegation, scrutinized in
isolation, meets that standard." Id. at 323.
Third, "in determining whether the pleaded facts give
rise to a 'strong' inference of scienter, the court
must take into account plausible opposing inferences."
aver in Count III of the Complaint that Arconic and Kleinfeld
violated § 10(b) of the '34 Act and Rule 10b-5 by
making false statements of material fact and/or omitting
material facts, which deceived the investing public,
artificially inflated Arconic's securities' prices,
and caused Plaintiffs and members of the Class to purchase
Arconic's securities at artificially inflated
prices. (See FAC ¶¶ 306-16.)
contend that Plaintiffs' § 10(b) claim must be
dismissed because: (1) Plaintiffs fail to allege materially
false or misleading statements; (2) Plaintiffs fail to plead
facts raising a strong inference of scienter; and (3) any
claims based on purchases of Arconic securities before the
sale of Reynobond PE for use on Grenfell Tower must be
dismissed. The Court will address each of these arguments in
first element of a securities fraud claim under § 10(b)
is a material misrepresentation or omission. Under the
PSLRA's heightened pleading standard, a plaintiff first
must specify each allegedly misleading statement, why the
statement was misleading, and, if an allegation is made on
information and belief, all facts supporting that belief with
particularity. 15 U.S.C. § 78u- 4(b)(1).
identify the allegedly misleading statements made by
Defendants. (See FAC ¶¶ 141-43, 145, 147,
151-54, 156-69, 171-82, 188-89, 190-95, 197-205, 207-16,
222-46, 248-49, 251-62, 264, 271-85.) Plaintiffs also aver
why they are alleged to be misleading. (See FAC
¶¶ 148-50, 183-87, 217-21, 265-70, 286-90).
Defendants argue that the allegedly misleading statements and
omissions are not actionable because they are immaterial, not
false or misleading, and/or non-actionable puffery or as
forward-looking statements protected by the PSLRA's safe
harbor provision. See 15 U.S.C. §78u-5(c)(1).
prevail on a § 10(b) claim, a plaintiff must show that
the defendant made a misleading statement or omission as to a
material fact. Matrixx Initiatives, Inc. v.
Siracusano, 563 U.S. 27, 38 (2011) (citing Basic
Inc. v. Levinson, 485 U.S. 224, 238 (1988)). A
misrepresentation or omission "is material if there is a
substantial likelihood that a reasonable shareholder would
consider it important in deciding how to [act]." TSC
Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449
(1976). The Supreme Court has held that to satisfy the
materiality requirement "there must be a substantial
likelihood that the disclosure of the omitted fact would have
been viewed by the reasonable investor as having
significantly altered the 'total mix' of information
made available." Basic Inc., 485 U.S. at 231-32
(quoting TSC Indus., 426 U.S. at 449).
Third Circuit has held that the question of materiality
"typically presents a mixed question of law and
fact," which traditionally has been viewed as
appropriate for the trier of fact. Semerenko v. Cendant
Corp., 223 F.3d 165, 178 (3d Cir. 2000). However,
"complaints alleging securities fraud often contain
claims of omissions or misstatements that are obviously so
unimportant that courts can rule them immaterial as a matter
of law at the pleading stage." In re Burlington Coat
Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997).
The Court determines materiality as of the date of the
alleged misstatement or omission, not with the benefit of
hindsight. See In re NAHC, Inc. Sec. Litig., 306
F.3d 1314, 1330 (3d Cir. 2002).
have identified five categories of statements that they contend
violated § 10(b) of the '34 Act: (1) statements in
product brochures about Reynobond; (2) statements about
Arconic's values, commitment to safety, and
safety-related policies and goals; (3) financial disclosues;
(4) risk disclosures; and (5) statements highlighting
Reynobond and other Arconic products. The Court concludes
that Plaintiffs have not adequately alleged that any of these
were materially misleading, and Plaintiffs' § 10(b)
claims will be dismissed.
Statements in Brochures
allege that throughout the class period, Defendants
misrepresented statements about Arconic's products in
product brochures on Arconic's official website. The
brochures stated, in relevant part,  that:
• Arconic's PE products were "safe and
• Reynobond PE was "designed and tested to meet
safety and environmental building codes around the
• Reynobond PE "was a fully tested product, with
building-code approvals around the world."
(FAC¶¶ 167-69; 199-200.)
principal question for the Court is whether these statements
were material; that is, whether the statements in customer
brochures concerning Reynobond PE plausibly would have made a
"significant difference" to an investor's
choice to buy or sell Arconic securities?
allege that these statements were materially misleading, if
not demonstrably false, because at the time they were made,
Arconic had commissioned reports showing that its Reynobond
PE products had failed to meet UK fire-safety standards, and
had been downgraded from Class B to Class C and E grades.
Moreover, Plaintiffs point to the UK's post-Grenfell ban
on Reynobond PE's use (no matter what local codes
permitted) on high-rise buildings to illustrate that a
reasonable investor could not have known that Arconic was
engaging in reckless sales of Reynobond PE which would in
turn increase the risk of civil and criminal liability. Also,
Plaintiffs point out that Defendants' assurances that
Reynobond PE was "fully tested" are in tension with
reports that testing on the product could not be fully
"In connection with" element
first, threshold question for the Court to decide is whether
the brochure statements can even give rise to liability to
investors-that is, were they made "in connection
with" the sale of securities? Plaintiffs aver that the
statements, disseminated through Arconic's website, were
part of the "total mix" of information relied upon
by investors, under a fraud-on-the-market theory. Plaintiffs
claim they are actionable because a reasonable investor could
have read and relied on these publicly available statements,
even if they were not geared toward investors. Defendants
argue that the statements could not, as a matter of law, be
relied upon by investors because they were customer-facing
publications, and it is implausible that such publications
would have made a significant difference to any reasonable
10b-5's "in connection with" requirement will
be satisfied if a statement "is material to a decision
by one or more individuals ... to buy or sell" a
security. Chadbourne & Parke LLP v. Twice, 571
U.S. 377, 387 (2014) (interpreting the Securities Litigation
Uniform Standards Act of 1998 ("SLUSA")'s
identical language). The statement must "make a
significant difference to someone's decision to
purchase or sell" a security. Id. The Supreme
Court has outlined some broad parameters for evaluating the
"in connection with" requirement. First, Rule 10b-5
must be "flexibly" construed to "effectuate
its remedial purposes." SEC v. Zandford, 535
U.S. 813, 819 (2002). Second, although 10b-5 protects the
integrity of the securities markets, its remedial purposes
are not limited to that goal. Id. at 821-22.
Therefore, the "in connection with" requirement can
be met even if a "transaction is not conducted through a
securities exchange or an organized over-the-counter
market." Superintendent of Ins. of State of N.Y.v.
Bankers Life & Cas. Co., 404 U.S. 6, 10 (1971).
Third, the fraud can be "in connection with" the
purchase or sale of securities even if an identifiable
purchaser or seller is not the individual who is deceived.
United States v. O'Hagan, 521 U.S. 642, 658
appear to argue that by virtue of their publication on
Arconic's website, a reasonable investor would rely on
the statements in the product brochures. This assertion does
not find support in caselaw. That is because "[a]lthough
an investor might read these promotional materials, the
brochure and pamphlet are geared to consumers of a product,
not investors in a corporation. It would distort the meaning
of rule 10(b)(5) to allow such materials to serve as a basis
for liability." Hemming v. Alfin Fragrances,
Inc., 690 F.Supp. 239, 244-45 (S.D.N.Y. 1988). The goal
of the brochures is to persuade a customer to purchase
Arconic's products, not its stocks. The brochures are not
directed at the financial community. Even assuming the
brochures were inaccurate, Arconic could be a wise investment
for a whole host of other reasons. By the same token, if the
brochures were entirely accurate, Arconic could still be too
risky an investment for other reasons. The Court therefore
declines to adopt a per se rule that any publication
on a website will be considered "in connection
with" a purchase or sale of securities.
the Supreme Court embraced a "broad reading" of
Rule 10b-5 in Zandford, that reading is "not
boundless," Rowinski v. Salomon Smith Barney
Inc., 398 F.3d 294, 301-02 (3d Cir. 2005). Rather,
"the 'in connection' criteria is satisfied where
material misrepresentations are 'disseminated to the
public in a medium upon which a reasonable investor would
rely.'" Rowinski, 398 F.3d at 301 (quoting
Semerenko v. Cendant Corp., 223 F.3d 165, 176 (3d
Cir. 2000)). The Court must therefore determine whether
consumer product brochures on Arconic's website are a
medium upon which a reasonable investor would rely.
market can absorb technical information." In re
Carter-Wallace, Inc. Sec. Litig., 150 F.3d 153, 156-67
(2d Cir. 1998). But that information must be something that
an analyst would use to study the financial prospects of a
company. For example, in Carter-Wallace, the
plaintiffs alleged that the defendant company had violated
Rule 10b-5 by making false statements about its
anti-epileptic drug in advertisements in two medical
journals. Id. The Court concluded that "false
advertisements in technical journals may be 'in
connection with' a securities transaction if the proof at
trial establishes that the advertisements were used by market
professionals in evaluating the stock of the company."
Id. at 156-57.
Third Circuit also concluded in Rowinski that
publicly disseminated investment research reports may form
the basis for liability. There, retail brokerage customers of
Salomon Smith Barney sued the company, alleging that, to
"reap hundreds of millions of dollars in investment
banking fees," Salomon Smith Barney had produced
investment research reports reflecting excessively favorable
views of its investment banking clients. Rowinski,
398 F.3d at 296-97. The Court determined that the securities
transactions coincided with the alleged fraud because the
transactions were "necessary" to the fraud's
success. Id. at 302. The Court explained that
without the transactions, the share prices of the investment
banking clients would not have increased, and without that
share price increase, the clients would not have given
Salomon Smith Barney the investment banking business it
considering whether a customer-facing product brochure may
similarly give rise to liability, the Court will consider
whether Plaintiffs have adequately alleged that market
professionals, in evaluating Arconic's stock, plausibly
would have used the brochures as they would an advertisement
in a technical journal or an investment research report.
Plaintiffs cite empirical research that product advertising
may affect investor decisions, and that managers may use
advertising in order to affect such decisionmaking.
(Pl.'s Br., at 33.) However, these studies analyzed the
effects of increased overall advertising spending on stock
prices, not whether investors typically consider specific
customer-facing material in making investment decisions. It
may well be that investors would view, say, a Super Bowl ad
campaign for a well-known tech company's new phone or
tablet, and decide that said company was a wise investment.
But Plaintiffs have not alleged anything of the sort happened
here. That Arconic advertised its products in brochures or on
its website does not, without more, drive a plausible
inference that investors would rely on them.
cited authority regarding whether statements appearing on
Arconic's website were "publicly
disseminated"-and therefore part of the mix of
information on which a reasonable investor would rely-does
not counsel a different result. For instance, in SEC v.
Stinson, although the Court concluded that the "in
connection element" was satisfied, that was because the
defendants communicated material misstatements and omissions
in direct email solicitations, a webinar sponsored by an IRA
custodian, and websites. No. 10-3130, 2011 U.S.
Dist. LEXIS 65723, at *12 (E.D. Pa. June 20, 2011). And in
Last Atlantis Capital LLC v. AGS Specialist
Partners, the Court concluded that "it is
reasonable for members of the public who trade in options to
rely on statements made by options specialists on
their public websites, just as it is reasonable for companies
maintaining websites to anticipate that current or potential
investors might read and rely on website statements."
749 F.Supp.2d 828, 834 (N.D. 111. 2010) (emphasis added). In
these cases, information was either communicated directly to
investors or was designed to interface with investors. The
information in Arconic's brochures was neither directly
communicated to nor designed to communicate with investors.
And Plaintiffs have not provided any examples from caselaw
where a purely customer-facing brochure published on a
website, on its own, gave rise to Rule 10b-5 liability.
Court therefore concludes that Plaintiffs have not plausibly
pleaded that the statements made in Arconic's product
brochures were made "in connection with" the sale
of securities on a fraud-on-the-market theory. On this basis
alone, these statements cannot form the basis for 10b-5
liability. The Court will nevertheless also consider whether
these alleged misstatements could be plausibly found to be
materially false or misleading.
argue that Plaintiffs' claims pertaining to Reynobond
product brochures should be dismissed for another reason:
that the statements in the brochures were not materially
misleading. The Court will first address Plaintiffs'
quantitative materiality argument, and then address whether
Plaintiffs have adequately alleged that the statements were
parties agree that quantitative measurement is not enough to
establish materiality, though it can be persuasive.
Throughout their pleadings, Plaintiffs refer to the
Arconic's precipitous stock price drop after the Grenfell
fire as evidence of materiality. (See, e.g., FAC
¶ 296; 300-01 (describing stock price declines of
anywhere between 8-11% allegedly flowing from the damaging
news stories in the fire's wake stating that Arconic was
no longer selling Reynobond PE and that Arconic had known the
panels would be used on Grenfell Tower).) Defendants do not
squarely address whether the downturn in stock prices alone
suffices to establish materiality. However, they do they
point to the relatively small share of business Reynobond PE
sales in the UK represented, to suggest that any statements
in Reynobond PE product brochures were immaterial.
Third Circuit has established that, in an efficient
securities market such as the New York Stock Exchange,
"information important to reasonable investors ... is
immediately incorporated into the stock price."
Burlington, 114 F.3d at 1425. Thus, when stock is
traded in an efficient market, materiality may be measured
post hoc by considering the movement of a firm's
stock price immediately after the pertinent disclosure.
Oran v. Stafford, 226 F.3d 275, 285 (3d Cir. 2000).
"Because in an efficient market 'the concept of
materiality translates into information that alters the price
of the firm's stock,' if a company's disclosure
of information has no effect on stock prices, 'it follows
that the information disclosed . . . was immaterial as a
matter of law.'" (Id. (quoting
Burlington, 114 F.3d at 1425)).
argue that the drop in Arconic's prices evinces
materiality because "the risk of fire, and the attendant
exposures to significant civil and criminal liabilities,
materialized." (Pl.'s Br., at 34.) However, although
Plaintiffs have alleged that Arconic's prices dropped as
a result of the negative press coverage, the precise
relationship between those publications and the price drop
does not map on to the relationship between the post-fire
disclosure (which is the specific disclosure
Plaintiffs allege should have occurred years earlier) and the
price drop. Plaintiffs allege that Arconic should have
disclosed earlier in time that it was selling Reynobond PE to
end users that were using the panels in ways that, at
minimum, violated local regulations.
it would be one thing if Arconic's disclosure that it
knew Reynobond PE was being sold for use on the Grenfell
Tower was the sole piece of information the market received,
in a vacuum, before markets reopened on June 26, 2017, and
Arconic's stock price dropped. That would specifically
tie a price drop to that single disclosure, conceivably
creating an inference that the same disclosure made earlier
would itself cause the price drop. But the information that
the market received was not only the disclosure of a sale for
an improper purpose. The market had also learned, for the
first time, that the panels shared the blame for a horrific
fire with a large number of injuries and deaths. Plaintiffs
have not alleged facts pointing to any disclosure earlier
than ten (10) days after the fire that Arconic's product
was involved in the fire. It is therefore impossible to
logically disentangle the stock drop attributable to the
disclosure of the Grenfell Tower sale from that attributable
to the disclosure that the product sold may have contributed
to a high-fatality fire at the property. This distinction is
critical, because the crux of Plaintiffs' case is an
alleged failure to make a public disclosure at or near the
time of the sale in which Ms. French was involved. To point
to a stock price drop on the heels of the actual fire in an
effort to demonstrate that that very price drop would
likewise be attributable Xo just the disclosure of
the sale involved years before (e.g., made at or near the
time of that sale) seeks to conflate at least two potentially
causative events to generate an implausible inference. The
Court thus declines to reach a conclusion about materiality
on the basis of the stock price drop alone.
their part, Defendants argue the flip side of the coin-that
because Reynobond PE contributed only a small fraction of
Arconic's overall business, any statements in its product
brochures cannot be considered material. Plaintiffs dispute
the percentage of the business that Reynobond should be
considered to represent, and also allege that due to the high
risk from Reynobond PE panels, their relatively small share
of Arconic's business should not doom the materiality
analysis, because risky sales of a highly dangerous product
representing a small segment of a business would still be
material to a reasonable investor.
Supreme Court has noted that "[statistical
significance" is not dispositive in every case.
Matrixx Initiatives, Inc., 563 U.S. at 44. The
inquiry is "contextual." Id. The SEC's
internal guidance in Staff Accounting Bulletin (SAB) No. 99
provides that both quantitative and qualitative factors
should be considered in assessing a statement's
materiality. SEC Staff Accounting Bulletin No. 99, 64 Fed.
Reg. 45150, 45150-52 (August 19, 1999). SAB No. 99 suggests
that a numerical threshold, as a "rule of thumb"
for registrants, "may provide the basis for a
preliminary assumption that ... a deviation of less than the
specified percentage with respect to a particular item on the
registrant's financial statements is unlikely to be
material." Id. at 45151. But it emphasizes that
"quantifying ... the magnitude of a misstatement is only
the beginning of an analysis of materiality."
Id. The Third Circuit has not yet discussed SAB 99,
but the Second Circuit has adopted it as persuasive
authority. See ECA, Local 134 IBEW Joint Pension Tr. of
Chi. v. JP Morgan Chase Co., 553 F.3d 187, 197-98 (2d
Complaint alleges that aluminum products formed an important
segment of the Company, and contributed significantly to
Arconic's revenues. (FAC ¶ 296.) Plaintiffs allege
that sales of Reynobond PE are quantitatively material
because Architectural Systems accounted for 50% of the
Transportation and Construction Solutions ("TCS")
segment. However, TCS's annual revenues were only 15% of
the Company's total, and so it follows that Architectural
Systems accounted for about 7.5% of Arconic's total
revenues. Public documents also establish that Reynobond was
not part of the Aluminum Architectural Systems product
grouping. (See Ex. 7, ECF No. 72-9 at 7
(distinguishing between "Arconic Architectural
Products," which included the "Reynobond"
brand, and "Arconic Architectural Systems," which
included Arconic's "Kawneer" brand and
"framing" product).) The Court therefore does not
conclude that statements pertaining to Reynobond were
material simply because of their proportionality to the
Company's overall revenues. In sum, the Court will not
draw any inferences on materiality in either direction based
on quantitative measures.
customer brochures could give rise to § 10(b) liability,
for Plaintiffs' claims to survive, the Court would have
to conclude that the statements they identify were false and
misleading for failing to disclose risks posed by alleged
sales of Reynobond PE for unsafe end uses. Plaintiffs allege
that at the time the statements were made, Arconic was
supplying Reynobond PE for use in high-rise buildings, in
contravention of its statements in the brochures. Defendants
contend that Plaintiffs' claims must be dismissed because
no reasonable investor would take the statements in
Arconic's brochures to mean that Reynobond PE would never
be or had never been misused.
sustain their brochure-related claims, Plaintiffs must allege
facts indicating that Defendants were under a duty to
disclose Reynobond PE's UK rating downgrade and that
Arconic had allegedly sold the product for use on high-rise
buildings. The Court notes that a company does not have a
freestanding responsibility to disclose all good or bad news
that might influence its stock price. Basic, Inc. v.
Levinson, 485 U.S. 224, 239 n.17 (1988). "No matter
how detailed and accurate disclosure statements are, there
are likely to be additional details that could have been
disclosed but were not." Brody v. Transitional
Hosps. Corp., 280 F.3d 997, 1006 (9th Cir. 2002).
"[N]either Rule 10b-5 nor Section 14(e) contains a
freestanding completeness requirement. . . ."
of a system of continuous disclosure, an issuer may keep
silent unless there is a duty to disclose. Id.
"Such a duty to disclose may arise when there is insider
trading, a statute requiring disclosure, or an inaccurate,
incomplete or misleading prior disclosure." Oran v.
Stafford, 226 F.3d 275, 285-86 (3d Cir. 2000).
explained below, the Court concludes that Plaintiffs have not
plausibly alleged that the brochure statements give the false
or misleading impression that Reynobond PE is always safe for
all uses, or that no customer had ever used Reynobond PE
unsafely, that it had the highest rating on every test, or
that Reynobond PE complied with all building codes wherever
it was sold. Arconic's statements did not provide
absolute guarantees to its customer audience. That Reynobond
PE was used in Grenfell Tower's cladding does not
contradict the statements in Arconic's product brochures.
Therefore, Arconic was not required to disclose any further
information about Reynobond PE.
begin, Arconic's statements that Reynobond is
"designed and tested to meet safety and environmental
building codes," is "fully tested" and is
"of the highest quality" (FAC ¶¶ 142,
167, 199, 222, ) would not plausibly mislead investors into
thinking that Reynobond PE in particular will be or is always
safely used by end users, or that there are no unsafe uses of
it. Also, many of the statements in these brochures refer to
Reynobond products in general, and expressly clarify that
Reynobond "is available with either a polyethylene (PE)
core or a fire-resistant (FR) core." (FAC
¶¶ 142, 167, 199, 222.) An investor could not
plausibly have been misled into thinking that the PE product
was always fire-safe given that there was a specifically
designated fire-resistant Reynobond product available and
referred to in those same sales materials.
although Plaintiffs argue that Defendants' statement that
Reynobond PE was "fully tested" was contradicted by
media reports showing that the product had been downgraded
after testing two different configurations of the cladding,
(see Id. ¶ 120, ) the fact that the product was
downgraded in the UK and that some configuration testing was
not completed as part of that evaluation does not render the
statement that Reynobond PE was "fully tested"
misleading. It is not plausible that the statement
represented to Arconic's customers (let alone its
investors) that Reynobond PE received the highest rating on
every test to which it was subject in every country, or that
every test performed by anybody on Reynobond PE was
completed. And Plaintiffs have not plausibly alleged that a
reasonable investor would read "fully tested" to
mean that. "Fully tested" does not comment on
Reynobond PE's quality of manufacture, whether every
potential end use of it is safe, or whether it would comply
with regulatory codes anywhere and everywhere no matter its
end use. Plaintiffs do not adequately support an inference
that "fully tested" means anything other than
exactly what it says-that at some point, Reynobond PE had
been "fully tested."
Plaintiffs' averments that in 2018, a test of PE panels
commissioned by the BBC could not be completed because the
plastic burst into flames give rise to an inference that the
product was not "fully tested." Post-hoc
investigative testing does not inform what Arconic would have
been aware of, or what investors would have understood from
its brochures, in 2014.
Plaintiffs' allegations that the ACM cladding system
(combining Reynobond PE with insulation materials) had never
been tested before the installation on Grenfell Tower do not
render misleading Arconic's statement that Reynobond
PE was "fully tested." (See FAC
¶ 115.) The Complaint does not allege that Arconic was
responsible for any such testing in the first instance, or
that it was responsible for ensuring that an overall cladding
system including its product complied with local regulations.
In fact, the brochure in which the "fully tested"
language appears specifically tells customers that
"[t]esting is advisable to determine the performance of
any fastening system" for Reynobond. (Ex. 17, ECF No.
72-19, at 9.) If "fully tested" meant that no
future testing would ever be (or need to be) done, or that
the full ACM cladding system had already been tested in every
instance, it would make no sense to expressly advise
customers to test the completed cladding system to determine
its suitability and performance.
Defendants' statement that Reynobond PE met building
codes "throughout the world" is not contradicted by
the allegation that the product failed to meet UK fire safety
standards, because standards "throughout the world"
plainly vary. Additionally, the brochure on which Plaintiffs
rely notes that "[a] variety of fasteners are used to
fabricate and install Reynobond panels. Fastener selection is
the construction project engineer's responsibility. You
may successfully use specific fasteners for panel
load-testing purposes in obtaining building-code recognition.
We can provide this information upon request." (Ex. 17,
72-19, at 9.) It would contravene logic to state that a
customer might need to "obtain building-code
recognition" for use of Reynobond PE if the brochure
were also guaranteeing that the product in every use met
every building code standard in the world. Plaintiffs have
not plausibly ...