Eaton Corp. Urges Second Circuit to Affirm Dismissal of Class Action

James E. Brandt
Counsel of Record
Jeff G. Hammel
LATHAM & WATKINS LLP
885 Third Avenue
New York, NY 10022
Tel: (212) 906-1200
Fax: (212) 751-4864

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STATUTES

15 U.S.C. § 78u-4(a)(2)(A)(iv)

15 U.S.C. § 78u-4(a)(3)(A)(i)

15 U.S.C. § 78u-4(a)(3)(B)

15 U.S.C. § 78u-4(a)(3)(B)(iii)(I)(bb)

15 U.S.C. § 78u-4(b)(2)

15 U.S.C. § 78u-4(b)(2)(A)

26 U.S.C. § 355(b)

26 U.S.C. § 355(d)

RULES

Fed. R. Civ. P. 15(c)(1)(C)(ii)

REGULATIONS

17 C.F.R. § 229.303(a)(3)(ii)

26 C.F.R. § 1.355-3(b)

26 C.F.R. § 1.355-6(b)(2)

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STATEMENT OF ISSUES

INTRODUCTION

Plaintiffs claim that Defendants — Eaton Corporation plc and two of its officers — are liable for failing to fully disclose to the markets the potential tax treatment of a transaction that Eaton never planned to undertake, never did undertake, and never told anyone it was going to undertake. The District Court correctly recognized that the theory is as baseless as it sounds, and dismissed it with prejudice. This Court should affirm.

This case stems from Eaton's 2012 acquisition of Cooper Industries plc, an Irish company, in a transaction in which Eaton and Cooper were combined under a new Irish holding company. Under the tax laws, that transaction meant that if Eaton decided to “spin off” lines of business to its shareholders over the next five years, the spin-off would not be exempt from ordinary tax treatment under the Internal Revenue Code. See 26 U.S.C. § 355(b), (d). Eaton was unconcerned with that implication, however, because — for reasons wholly apart from the tax issue — it had no plans to engage in such a spin-off.

After the Cooper transaction, some stock analysts inquired whether Eaton might be considering a spin-off of its vehicles business. Defendants consistently and forcefully responded by emphasizing that Eaton had no such plans and that it viewed the vehicles business as an integral part of its portfolio with importance for the company's revenue stream and development of management talent. Eaton even tried to quash the rumors by issuing a press release entitled “Eaton Not in Discussions to Sell its Automotive Business.” When the speculation continued, Eaton provided additional disclosures, explaining not only the strategic reasons behind management's decision but also that the tax treatment would not be as favorable as some analysts pushing the possibility apparently believed.

For nearly two years, that looked like the end of story. A week before the statute of limitations expired, though, Plaintiffs filed this suit, claiming that Defendants had misled investors (and violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5) by failing to explain sooner how the tax laws would have applied to a spin-off. In a pair of well-reasoned decisions, the District Court rejected their claims, concluding that they had failed to plead three crucial elements of any Section 10(b) case: a misleading statement or omission, materiality, and scienter.

Nothing in Plaintiffs' appellate brief calls any of those three independent bases for the District Court's decision into question.

First, as to the absence of any misleading statement or omission, the District Court correctly noted that Defendants never claimed that a spin-off would be tax-free or opined on its tax effects. Instead, Defendants just focused on the fact that they had no plans to undertake such a spin-off (making its tax treatment irrelevant). Plaintiffs complain that Defendants should have said more about why they had no plans for a spin-off (explaining the applicable tax provisions, not just the company's strategic considerations). It is well-settled, however, that a company has no freestanding duty to provide information just because some investors might like to have it. Nor is a company required to provide investors with every reason that it is pursuing a particular course of action.

Second, as to materiality, the District Court correctly held that the tax treatment of a spin-off would be material only if a spin-off were actually in the offing. But it wasn't: Defendants told analysts again and again that they had no plans for a spin-off. Plaintiffs insist that some analysts disbelieved them, but the Supreme Court has held that when assessing a potential future event, what matters is whether there are “indicia of interest in the transaction at the highest corporate levels,” Basic Inc. v. Levinson, 485 U.S. 224, 239 (1988), not whether some analysts are subjectively interested in the possibility. Plaintiffs identified no such indicia of interest here. And today, well over five years since the Cooper transaction closed, the vehicles business remains a valuable part of Eaton's portfolio and the tax issue is entirely moot.

Third, the District Court rightly held that Plaintiffs' allegations could not establish the strong inference of scienter required by the Private Securities Litigation Reform Act. Defendants repeatedly and publicly disclaimed interest in a spin-off — which would make no sense if they were deliberately trying to trick the market into expecting one. Moreover, although Plaintiffs suggest that the individual Defendants were motivated by a desire to increase Eaton's stock price so they could profit from strategically timed sales, that theory is flatly inconsistent with their actual transactions in Eaton stock during the relevant period.

Finally, the decision below is also correct for an additional reason, beyond those embraced by the District Court: This Court has repeatedly held that a defendant “is liable only for those statements made during the class period.” Kowal v. Int'l Bus. Machs. Corp., 163 F.3d 102, 107 (2d Cir. 1998) (emphasis added). But here, nine of the ten statements Plaintiffs have targeted come from before the Class Period identified in their complaint (and the tenth is plainly unobjectionable for other reasons). Plaintiffs seek to avoid Kowal's holding by playing word games with their definition of the “Class Period,” but their efforts have no legal support and should be rejected.

For all of those reasons — or any of them — this Court should affirm.

STATEMENT OF THE CASE

A. Factual Background

Eaton is a diversified power management company that makes energy-efficient products “in the industrial, agricultural, construction, aerospace, and vehicle markets.” JA307:¶2.¹ Alexander Cutler served as Eaton's Chief Executive Officer from August 2000 until his retirement in May 2016. JA321:¶40. Richard Fearon served (and continues to serve) as Eaton's Chief Financial and Planning Officer from 2002 until the present. Id. ¶41. Eaton, Cutler, and Fearon are Defendants-Appellants here.

1. The Cooper Transaction And Its Tax Implications

On May 21, 2012, Eaton announced an agreement to merge with Cooper Industries plc, an Irish company with a significant electrical products manufacturing business. JA325-27:¶53. As part of the transaction, a new Irish holding company was formed that acquired both Eaton and Cooper. JA327:¶60.

The deal's structure had certain tax implications. Because the new company would be incorporated and headquartered in Ireland, Eaton's corporate tax rate would be lower, “resulting in tax benefits of $160 million a year to shareholders.” Id. Changing the company's domicile in this manner also meant that if Eaton engaged in certain transactions in the future, those transactions might be taxed differently than they would have been had Eaton not been acquired by an Irish company.

One such transaction is known as a “spin-off,” which occurs when a company takes an existing business, establishes it as an independent entity, and then distributes the shares of that new entity to its shareholders. As relevant here, federal tax law generally provides that if a business was “acquired within five years in a transaction in which gain or loss was recognized,” then a spin-off of that business is not eligible for certain tax exemptions that might otherwise apply if additional criteria are met. McLaulin v. Commissioner, 276 F.3d 1269, 1273-74 (11th Cir. 2001); see also 26 U.S.C. § 355(b), (d); 26 C.F.R. §§ 1.355-3(b), 1.355-6(b)(2).

2. Eaton's Repeated Denials Of A Hypothetical Spin-Off Of The Vehicles Business

After Eaton announced the Cooper transaction, analysts speculated about “a potential, future spin-off or other divestiture of Eaton's vehicle businesses.” JA337:¶90. Eaton repeatedly denied this speculation, telling investors time after time that it was not contemplating a spin-off and that it intended to continue to grow its vehicles business through internal investment.

For example, on May 21, 2012, an analyst observed that Eaton was “looking a lot more like an electrical company,” and asked Cutler if “[we] [s]hould . . . expect more portfolio evolution over time [i.e., whether certain business units would be sold]?” JA338:¶92; see also JA34 (full transcript of question and response). Cutler answered, “[w]e have continued and will continue to grow our two vehicle businesses, primarily through internal investment. . . . '[W]e are not anticipating — it's not in our active planning, any substantial additional change in the portfolio as a result of this transaction.'” JA338:¶92 (emphasis in original). Later on the same analyst call, another analyst asked, “[a]re you precluded by any element of the tax structure of the deal to spin off the truck and automotive part at any time?” JA339:¶94. Cutler responded, “There is nothing in the deal per se that would prevent us from taking portfolio moves. . . . [But we] have no such plans.” Id. (emphasis in original); see also JA35.²

Several months later, Cutler was asked at a November 13, 2012 analyst conference about Eaton's “ability to divest businesses.” JA383:¶204. Cutler responded that while “there is nothing structural in our deal structure or any of our covenants that . . . prevents us from making changes in our portfolio[,] that is not our plan at this point.” JA384:¶204 (emphasis in original). He further explained that “[w]e really like the balance of the businesses as we have and we've never been more bullish on the prospects in our automotive and our truck businesses.” Id.

Cutler made similar comments during a February 5, 2013 earnings call, responding to an analyst who noted “speculat[ion] on what the future might hold” and asked “what's next for the Eaton portfolio?” JA385:¶207.Cutler answered, “Nothing different . . . than I've said in numerous forums really since we announced the Cooper transaction. . . . We like the portfolio we're with. We like the products that we've got and the capabilities, and we're really quite enthused about some of the new products and earning capability. . . .” Id. (emphasis altered).

Despite Eaton's repeated insistence that it “like[d] the portfolio” and “the balance of businesses as we have,” JA385:¶207, JA384:¶204, analysts continued to speculate about whether Eaton might perform a spin-off or sale. On May 21, 2013, Cutler was asked at an investor conference whether there was “[a]nything about the way the tax structure has formed over time [that] would constrain things you might do strategically, whether that were a larger-scale divestiture or anything else?” JA386:¶ 209. Having previously made clear that Eaton was not contemplating a spin-off of the vehicles business, Cutler responded with general comments emphasizing that the reincorporation in Ireland had protected Eaton's ability to adapt to an ever-evolving business environment, answering, “On the tax issue, no, we are domiciled outside the US. We've got great flexibility in terms of how we are able to move cash around the world, and that really is the issue that gives us our great strategic flexibility. So I would say no on that one.” JA387:¶209.

A few weeks later, on June 10, 2013, Bloomberg reported — based on unnamed “people with knowledge of the matter” — that “Eaton Corp. is weighing a sale of its auto parts unit.” Id. ¶212. Eaton swiftly denied the rumor, publishing a press release entitled “Eaton Not in Discussions to Sell its Automotive Business.” Id. ¶ 213. The press release stated that there was “no basis for published reports involving speculation on the sale of Eaton's automotive business,” and quoted Cutler's remarks earlier that same day telling an analyst conference that “[w]e are not, and have not been, in the process of discussions to sell our automotive business.” JA387-88:¶213 (emphasis in original). Cutler had elaborated at the conference, saying that “I've answered this question repeatedly since we did the acquisition of Cooper. Our vehicle business is a very important part of Eaton, it is a very strong franchise. It's an important part of our Company, and a very strong profit-producing portion of our Company as well.” JA388:¶213.

The issue came up yet again at an investor conference on November 13, 2013, when Fearon was asked whether Eaton viewed its vehicle business as a “sacred cow.” JA388-89:¶215. Fearon responded, “Well, first of all, I'd say nothing is a sacred cow. . . . If we believe that a business is better owned by somebody else, we will not be afraid to act on that, but at this juncture we really think that the structure of the portfolio works.” JA389:¶215 (emphasis altered). He then explained why Eaton did not believe a divestiture of the vehicles business would make sense: It “is a very high return business and throws off a lot of cash and a lot of management, talent and management, as well and we really don't see a strong case to be made for changing right now, but we will continue to follow that.” Id. (emphasis in original).

Nevertheless, some analysts continued to speculate that divesting the vehicles business would be economically beneficial. Cutler once again sought to put the issue to rest during Eaton's second quarter 2014 analyst call on July 29, 2014. There, he reiterated that Eaton had no plan or desire to sell its automotive business and further detailed the company's thinking:

[T]here has been a lot of speculation about whether it would make sense [for] Eaton to spinoff any of our businesses in light of the transformation that we've been undergoing over the past 14 years. And as I have commented in many different forums that each of our businesses remain really . . . key contributors to our results and we continue to see real benefits from being able to apply our multiple power management technologies to meet our customers' needs and these different verticals. But we also want to clarify that we are not able to do a tax-free spin of any business for five years post the acquisition date of the Cooper transaction and that limitation means that any spin would result in very significant tax liability. So for the two reasons we think of our power management strategy and obviously this five year kind of prohibition that any form of kind of economic benefit means that there is not really a compelling economic rationale for further portfolio transformation.

JA105 (emphasis added); see also JA368:¶¶164-65.

Cutler and Fearon then opened the call to questions from analysts. The first 25 questions related to Eaton's disclosures of financial results from the past quarter and projections for the future, including its decision to “move[ ] [its] guidance down for the balance of the year” because of (among other things) reductions on margins in Eaton's electrical systems and services segment. JA107; see also JA106-13. A single analyst then asked about Cutler's comments on Eaton's continued disinterest in a spin-off. See JA113.

In response, Cutler explained that “[b]ecause of the legal steps we had to do to complete the Transaction for Cooper, there are a couple of code sections that make it not possible to do a tax free spin for five years.” Id. He also noted that this was “not new knowledge,” and that Eaton had “tried to indicate that[] we had no intent to do any such actions, we're just trying to help make it clear for people that it's not simply an issue of will, it's also an issue of some very technical issues.” JA114 (emphasis added). After a brief follow-up exchange with the same analyst, no analysts returned to the issue for the remainder of the call. See JA114-16.

Eaton never divested its automotive business unit, which it continues to own more than six years after closing the Cooper transaction.

B. Procedural History

1. Plaintiffs Sue After Nearly Two Years

No lawsuit concerning these issues was filed for nearly two years. Then, on July 22, 2016, Plaintiffs filed the first complaint in this case, asserting violations of Section 10(b) and Rule 10b-5. ECF No. 1. That complaint alleged that Fearon had made a single misleading statement or omission, on November 13, 2013, when he told analysts that “[i]f we believe that a business is better owned by somebody else, we will not be afraid to act on that,” id. ¶ 26, and that the company's subsequent annual report (on February 26, 2014) and quarterly report (on May 5, 2014) “were materially false and/or misleading when made because Defendants failed to disclose or indicate that the Company could not feasibly execute a tax-free spin-off of its vehicle business,” id. ¶¶ 27-29. Accordingly, the complaint identified a Class Period from November 13, 2013 to July 28, 2014 (the date when Eaton had provided additional detail about the tax implications of the Cooper transaction). Id. ¶ 1.

The case was assigned to the Hon. John G. Koeltl, who appointed the South Carolina Retirement Systems Group Trust as Lead Plaintiff pursuant to the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u-4(a)(3)(B). See Order for Consolidation, ECF No. 45. The Lead Plaintiff then filed an Amended Consolidated Class Action Complaint on January 13, 2017 (hereinafter, the “First Amended Complaint”). See ECF No. 51. Notably, this First Amended Complaint attempted to expand the eight-month Class Period identified in the initial filing into a 26-month Class Period, reaching back to comments made as early as May 21, 2012 (more than four-and-a-half years before the amended complaint was filed). See id. ¶ 1.

2. The District Court Dismisses The First Amended Complaint

Defendants moved to dismiss the First Amended Complaint, and the District Court granted their motion, identifying four separate deficiencies in the complaint.

The District Court first addressed the timeliness of the First Amended Complaint's allegations in light of the applicable two-year statute of limitations. Because Plaintiffs claimed the alleged fraud had been disclosed on July 29, 2014, the limitations period expired on July 29, 2016. JA243. The original complaint had been filed shortly before the close of that period (on July 22, 2016), but the Class Period it identified had reached back only to November 13, 2013. Id. The First Amended Complaint sought to “expand[ ] the class period to encompass claims by purchasers of Eaton securities from May 21, 2012 through July 28, 2014.” Id.

The District Court concluded that this was inappropriate. It held that in order to add the new plaintiffs who had purchased shares between May 21, 2012 and November 13, 2013, Plaintiffs needed to comply with Federal Rule of Civil Procedure 15(c)(1)(C). JA244. That provision requires that where an amendment changes the identity of a party or parties, it will relate back to the original pleading only where there was a “mistake concerning the proper party's identity.” Fed. R. Civ. P. 15(c)(1)(C)(ii). Because Plaintiffs did not argue that the failure to include purported class members who had purchased Eaton securities prior to November 13, 2013 was the result of a mistake in identity, the District Court held that the claims asserted based on a Class Period prior to that date were untimely. JA249. Moreover, because “'[a] defendant . . . is liable only for those statements made during the class period,'” it followed that the “claims based upon alleged misstatements or omissions . . . prior to November 13, 2013 . . . are time-barred.” Id. (citation omitted).

Despite concluding that most of Plaintiffs' claims were time-barred, the District Court addressed Defendants' substantive arguments as to all eight of the alleged misstatements or omissions pleaded in the First Amended Complaint — including the seven from before November 13, 2013. See JA250. It concluded that “none of them are actionable.” Id.

The first substantive basis the District Court identified was that Plaintiffs had failed to plead any misleading statements or omissions. Rejecting Plaintiffs' argument that “Cutler's own statements establish falsity,” the District Court observed that Plaintiffs could not “point to any statement made by any of the defendants to the effect that Eaton would in fact be able to spin off its automotive business on a tax-free basis.” JA258. It emphasized that the only “affirmative misstatement” Plaintiffs had alleged was Cutler's May 21, 2013 answer to a question about whether “[a]nything about the way the tax structure has formed over time would constrain things you might do strategically, whether that were a large-scale divestiture or anything else?” JA259 n.9 (alteration in original) (citation omitted). Cutler had responded, “On the tax issue, no, we are domiciled outside the US. We've got great flexibility in terms of how we are able to move cash around the world, and that really is the issue that gives us great strategic flexibility. So I would say no on that one.” Id. (citation omitted). In their brief, Plaintiffs had misleadingly characterized this statement as “touting Eaton's 'great strategic flexibility' to do such spin-offs.” Opp. Mot. Dismiss 12, ECF No. 56 (emphasis altered) (citation omitted). But the District Court noted that “[w]hile the plaintiff elides the quote into promoting the flexibility 'to do such spin-offs', the flexibility that was discussed [in Cutler's statement] was the flexibility to move cash and there are no facts alleged to indicate that the statement was false.” JA259 n.9 (quoting Plaintiffs' brief).

Nor had Plaintiffs identified any actionable omission. The District Court explained that “an omission is actionable under the securities laws only when the corporation is subject to a duty to disclose the omitted facts.” JA252 (quoting Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 101 (2d Cir. 2015)). The Court held that no such duty existed here. The Court further explained that, in any event, “while '[a] company has no duty to correct or verify rumors in the marketplace unless those rumors can be attributed to the company,'” JA255 (quoting State Teachers Ret. Bd. v. Fluor Corp., 654 F.2d 843, 850 (2d Cir. 1981)), “[Eaton] attempted to do so when it issued a press release on June 12, 2013 unequivocally titled 'Eaton Not in Discussions to Sell Its Automotive Business,'” id. (citation omitted).

The District Court also explained that any misleading statements or omissions would not have been actionable because “the hypothetical tax consequences of a potential spin-off of Eaton's automotive business” were not material. JA253. Pointing to this Court's precedents holding that the materiality of information about future possibilities “depends on a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event,” the District Court observed that “the defendants themselves repeatedly made clear that the 'indicated probability' of such a spin-off was zero.” JA252-53 (quoting Castellano v. Young Rubicam, Inc., 257 F.3d 171, 180 (2d Cir. 2001)). The numerous disavowals of any intended divestiture had “made clear from the day the merger was announced that there were no plans to spin off Eaton's automotive business.” JA254-55.

Finally, the District Court also held that Plaintiffs had failed to satisfy the PSLRA's scienter requirement, which obligates a plaintiff to “state with particularity facts giving rise to a strong inference” that the defendant intended to deceive investors or did so recklessly. JA260 (quoting 15 U.S.C. § 78u-4(b)(2)). It held that Plaintiffs had identified no “strong circumstantial evidence of conscious misbehavior or recklessness,” JA260 (citation omitted), and that “there was no reason for any executive to be dishonest about the tax consequences of a hypothetical merger that the Company repeatedly and explicitly stated it had no plans to do,” JA261.

The District Court also emphasized that although the Plaintiffs had identified stock sales by Fearon and Cutler during the Class Period, they had failed to allege facts showing that those sales were “unusual.” JA262 (quoting In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 74-75 (2d Cir. 2001)). Indeed, Cutler sold nearly three times as many shares in the 799 days before the proposed Class Period as he did during the 799-day Class Period itself. JA263. Fearon, meanwhile, actually expanded his holdings in Eaton stock during the Class Period and sold more “stock in the 799-day period after the alleged fraud was revealed and the stock price declined” than he had during the proposed Class Period. JA264. The District Court found the stock sales were insufficient to “support an 'inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged,'” especially given “the compelling opposing inference . . . that neither Cutler nor Fearon thought that they had any obligation to discuss the possible tax consequences of a theoretical spin-off that Eaton had no plans to make.” JA265 (quoting Tellabs, Inc. v Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007)).

3. The District Court Dismisses The Second Amended Complaint

In October 2017, Plaintiffs filed a Second Amended Consolidated Class Action Complaint. See JA299-413. (This is the operative pleading on appeal, so this brief often refers to it simply as “the Complaint.”) The Complaint again identified a purported “Class Period” reaching back to May 21, 2012, but this time it included the proviso that only those persons and entities that had “purchased at least one share or option from November 13, 2013 through July 28, 2014” would be included in the suit. JA306:¶1. In other words, the actual Class Period used to define the class of plaintiffs in the suit reaches back only to November 13, 2013. The Complaint also added two new allegedly material misstatements or omissions (bringing to ten the total number identified), as well as “references to, and quotes from, additional analyst reports discussing a potential spin-off of the automotive business.” SPA8.

Defendants again moved to dismiss, and the District Court again granted the motion. At the outset, the Court held that it would treat the allegations in the Complaint as relating back to the initial filing in the case, because Plaintiffs were no longer seeking to add new parties. See SPA12-13. Indeed, Plaintiffs' ostensible revisions to the “Class Period” did not change the identity of the class at all, even though they revised the category of allegedly misleading statements or omissions to include comments made approximately 18 months before the original Class Period. See id. The District Court concluded that the newly added allegations about those earlier comments could “relate back” to the original complaint. See id. (citing Stevelman v. Alias Research Inc., 174 F.3d 79 (2d Cir. 1999)).

Nevertheless, the District Court concluded that its relation-back determination “does not affect the rationale for the dismissal of this action” set out in its earlier decision. SPA15. For one thing, the Complaint still did not identify any misleading statement or omission. Indeed, the newly added materials just confirmed the District Court's prior conclusion that “'while a company has no duty to correct or verify rumors in the marketplace unless those rumors can be attributed to the company, [Eaton] attempted to do so.'” SPA21 (alteration in original) (quoting JA255). And the Court rejected Plaintiffs' argument “that the defendants' statements . . . were false,” emphasizing that “the defendants never commented on the economic viability of a taxable sale . . . or whether such a sale would be value creating,” instead saying only that while “such a spin-off would be possible . . . they were not contemplating such a spin-off.” Id.

Plaintiffs had not solved their materiality problem, either. Although Plaintiffs argued in the Complaint that materiality was evident from the fact that “Eaton's stock price dropped more than 8% on July 29, 2014,” the day after the end of the Class Period, the District Court held that “[w]hile a stock drop is relevant to the question of materiality, it is not determinative and cannot serve as the sole basis for finding materiality.” SPA22. “Moreover, in this case, there is reason to discount the relevance of the stock drop to the materiality of the defendants' statements because the drop occurred on a day when other negative news regarding the Company's finances was published.” Id.

Finally, the District Court reaffirmed its earlier determination that Plaintiffs had failed to allege scienter adequately. It noted that Plaintiffs no longer “attempt[ed] to argue that any stock sales supported an inference of scienter,” SPA24, and rejected their new argument — that Defendants must have intended to mislead investors because additional analysts “'had the . . . incorrect belief during the class period[] that Eaton had the ability to do a tax-free spin-off after the Merger,'” SPA25-26 (alteration in original) (quoting Plaintiffs' opposition brief)). The District Court held that “allegations regarding the analysts' perceptions cannot substitute for allegations regarding actual misstatements by the defendants and the defendants' state of mind while making those statements.” SPA26.

STANDARD OF REVIEW

This Court reviews a district court's dismissal of a complaint for failure to state a claim de novo. See, e.g., Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 99-100 (2d Cir. 2015).

SUMMARY OF ARGUMENT

The District Court correctly identified three independent ways in which Plaintiffs' Complaint is deficient. Each is sufficient, by itself, to warrant affirmance of the decision below.

I. Plaintiffs failed to allege any misleading statement or omission — the most basic element of any Section 10(b) claim. Although Plaintiffs take statements out of context in an attempt to argue that Eaton misled the markets about its ability to spin off its vehicles business, the reality is that Eaton never commented on whether it could perform a tax-free spin-off or said that a spin-off would be economically advantageous. To the contrary, Eaton repeatedly told analysts that it had no interest in performing such a transaction, which it said would be contrary to its strategic interests. Plaintiffs emphasize that some analysts were skeptical of Eaton's repeated expressions of disinterest, and assert that Eaton should have provided more information that might have persuaded those analysts that what it was saying was true. But a company has no freestanding obligation to provide all of the information that analysts might find useful. That is especially true here, where that information consists not of undisclosed company-specific facts but instead just of how tax statutes and regulations will apply to previously disclosed facts.

II. The alleged misstatements and omissions here were also immaterial, because they concerned a transaction that Eaton never said it would undertake, had no interest in undertaking, and never did undertake. The Supreme Court has said that information about corporate transactions that are unlikely to come to pass generally is not material, and that in deciding whether such transactions are likely to come to pass, courts should look to the “indicia of interest in the transaction at the highest corporate levels.” Basic Inc. v. Levinson, 485 U.S. 224, 239 (1988). Here, there were zero such indicia. Instead, the company repeatedly and forcefully explained that it had no interest in a spin-off.

III. Plaintiffs also failed to plead any facts establishing that the alleged misstatements or omissions were intentionally (or even recklessly) misleading — let alone facts supporting a strong inference of such culpable intent. They point to stock sales, but the District Court rightly recognized that Defendants' sales actually undermine any inference of intent: They show that Cutler increased his stock holdings during the period (inconsistent with any inference that the stock was overvalued during that time), while Fearon sold less stock during the 799-day period at issue in Plaintiffs' complaint than he did during the 799-day periods before and after. Moreover, Defendants' repeated statements expressly disclaiming any interest in pursuing the spin-off transaction directly undermine Plaintiffs' assertion that they were actively trying to mislead the market.

IV. Finally, the District Court's decision can also be affirmed for a fourth reason. This Court has repeatedly held that a defendant “is liable only for those statements made during the class period.” Kowal v. Int'l Bus. Machs. Corp., 163 F.3d 102, 107 (2d Cir. 1998) (emphasis added). Here, the Class consists only of individuals and entities who purchased Eaton stock after November 13, 2013. Nine of the ten statements on which Plaintiffs assert claims, however, occurred prior to that date, and are therefore not actionable under Kowal. And the only remaining claim is clearly insufficient to support liability for the reasons discussed above.

ARGUMENT

To state an actionable claim under Section 10(b) and Rule 10b-5, Plaintiffs were required to allege that Defendants made (1) a misleading statement or culpable omission, (2) regarding a material fact, (3) with scienter, (4) upon which plaintiffs relied in connection with the purchase or sale of securities, and that (5) the misleading statement or omission caused Plaintiffs' loss. See, e.g., Lentell v. Merrill Lynch & Co., 396 F.3d 161, 172 (2d Cir. 2005). The District Court correctly found that the Complaint lacks sufficient allegations as to at least three of these required elements — a misleading statement or omission, materiality, and scienter. See supra at 15-21.

I. THE DISTRICT COURT CORRECTLY HELD THAT PLAINTIFFS FAILED TO IDENTIFY ANY MISLEADING STATEMENTS OR OMISSIONS

Although Plaintiffs devote the first 25 pages of their argument section to a discussion of materiality (an issue Defendants address below, see infra at 38-41), the first element of any claim under Section 10(b) and Rule 10b-5 requires the plaintiff to identify a misleading statement or omission. See, e.g., Lentell, 396 F.3d at 172. As the District Court recognized, Plaintiffs failed to do that here.³

A. The District Court Correctly Concluded That Defendants Made No Misleading Statements About The Tax Treatment Of A Spin-Off

Plaintiffs' core argument is that Defendants misled investors about whether Eaton could perform a spin-off of its vehicles business without generating any tax liability.So it bears emphasis that — as the District Court put it — “The defendants never spoke to the economic feasibility of a potential spin-off of the vehicle business, and they never stated that the transaction could be completed in an economically feasible way or as a tax free spin-off.”SPA25; see also JA258-59 (rejecting assertion that Defendants made false statements); SPA28 (incorporating analysis from September 20, 2017 opinion dismissing the First Amended Complaint).

Instead, when faced with questions about a spin-off of the vehicle business, Defendants consistently and forcefully answered that they had no interest in a spin-off, had not been planning for a spin-off, and did not believe that investors should anticipate a spin-off. See supra at 7-12. From the very first day the Cooper transaction was announced, Defendants repeatedly addressed questions about a possible spin-off by forthrightly explaining that Eaton “ha[d] no such plans.” JA339:¶94.

Defendants also provided the reasons why management had never been interested in a spin-off. Specifically, they noted that even as Eaton expanded its electrical business, the vehicles business remained a strategically important part of its portfolio, maintaining a diversified revenue stream for the company as well as a valuable source for management talent that could move into leadership roles in the company's other lines of business. See, e.g., JA384:¶204 (“We really like the balance of the businesses as we have and we've never been more bullish on the prospects in our automotive and our truck businesses.”); JA385:¶207 (“We like the portfolio we're with. We like the products that we've got and the capabilities, and we're really quite enthused about some of the new products and earning capability . . .”); JA389:¶215 (The vehicles business “is a very high return business and throws off a lot of cash and a lot of management, talent and management, as well.”).

In arguing otherwise, Plaintiffs rely almost entirely on Cutler's response to a question on May 21, 2013, about whether there was “[a]nything about the way the tax structure has formed over time [that] would constrain things you might do strategically.” JA359:¶145. Cutler answered, “On the tax issue, no, we are domiciled outside the US. We've got great flexibility in terms of how we are able to move cash around the world, and that really is the issue that gives our great strategic flexibility. So I would say no on that one.” Id. In this Court, Plaintiffs argue — as they did below — that this “statement was untrue because Eaton was 'constrain[ed]' in its 'flexibility' to do any spin-offs for five years because of the Merger's 'tax structure.'” Appellants' Br. 49 (alteration in original).

But Cutler's statement was true. As the District Court explained, Plaintiffs have misleadingly sliced and diced the quotation in order to make it appear that Cutler was specifically claiming Eaton had flexibility to execute a tax-free spin-off: “While [Plaintiffs] elide[ ] the quote into promoting the flexibility 'to do such spin-offs', the flexibility that was discussed [by Cutler] was the flexibility to move cash and there are no facts alleged to indicate that the statement was false.” JA259 n.9 (citation omitted). Plaintiffs are deliberately trying to twist Cutler's words.

Nor are Plaintiffs right to assert that Cutler was being misleading in the concluding sentence of his answer (“So I would say no on that one.”). The question was not about whether there were any constraints imposed by the “tax structure” — of course there were, because taxes always impose constraints. Rather, the question specifically asked whether there were constraints on “things you might do strategically” — i.e., constraints on strategic business decisions that Eaton might actually consider taking. JA359 (emphasis altered). And Eaton had already made clear that it was not “strategically” interested in a divestiture of its vehicles business, because “[w]e really like the balance of the businesses as we have and we've never been more bullish on the prospects in our automotive and our truck businesses,” JA384. That a spin-off of the vehicles business would not be exempt from tax under Section 355 of the Internal Revenue Code thus did not constrain anything Eaton might otherwise have done “strategically.”⁴

Plaintiffs' other allegations concern statements that they concede were “literally true” but characterize as misleading “half-truths.”Appellants' Br. 51 (quoting In re Vivendi, S.A. Sec. Litig., 838 F.3d 223, 240 (2d Cir. 2016)).⁵ But this argument once again depends on replacing Defendants' actual communications with alternative statements of Plaintiffs' own construction: Plaintiffs build a single super-question by combining their favorite snippets from five separate questions, asked months apart, and then characterize Defendants as having answered that (never-asked) question “in the negative.” Id. (“[S]even of Defendants' misstatements came as answers to analyst or investor questions about whether anything, including 'tax' issues, 'preclude[]', 'prevent or 'constrain' Eaton's 'ability to divest businesses' such as through 'a spin out.'” (alteration in original) (citations omitted)).

Looking to Defendants' full statements in full context, there were no misleading “half-truths.” In re Vivendi, S.A. Sec. Litig., 838 F.3d at 240. As the District Court recognized, “when [these] selectively edited statements were read in context, the statements were not actionable.” JA 254 (internal quotation marks omitted)).

Specifically, Defendants repeatedly told analysts and investors that while nothing in the Cooper transaction prohibited Eaton from divesting its vehicles business, Defendants believed such a move would be strategically unwise and thus were not contemplating making it. See, e.g., JA389:¶215 (“[A]t this juncture we really think that the structure of the portfolio works. . . . [The vehicles business] is a very high return business and throws off a lot of cash and a lot of management, talent and management, as well and we really don't see a strong case to be made for changing right now, but we will continue to follow that.”); JA339:¶94 (“'There is nothing in the deal per se that would prevent us from taking portfolio moves.'. . . [But we] have no such plans.”); JA384:¶204 (“[T]here is nothing structural in our deal structure or any of our covenants that . . . prevents us from making changes in our portfolio[, but] that is not our plan at this point” because “[w]e really like the balance of the businesses as we have and we've never been more bullish on the prospects in our automotive and our truck businesses.” (emphasis altered)). That was the complete truth. The fact that some analysts disagreed with Eaton management's business judgment about the strategic wisdom of a spin-off, but would have been more convinced if Eaton had offered a different (tax-based) rationale, does not render Defendants' statements misleading or false.⁶

B. The District Court Correctly Recognized That Eaton Had No Duty To Advise About The Hypothetical Tax Treatment Of Transactions It Did Not Plan To Undertake

Unable to identify any misleading statements by Defendants, Plaintiffs try to frame this case around “Defendants' decision not to tell investors, during the Class Period, that Eaton was prohibited from using tax-free spin-offs for five years.” Appellants' Br. 1 (emphasis added). But the securities laws do not require any such disclosures.Defendants did not mislead investors by failing to address the  hypothetical tax consequences of a hypothetical transaction that they repeatedly made clear Eaton was not considering.

“Silence, absent a duty to disclose, is not misleading under Rule 10b-5.” Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988). Instead, “[f]or an omission to be actionable, the securities laws must impose a duty to disclose the omitted information.” Resnik v. Swartz, 303 F.3d 147, 154 (2d Cir. 2002). And it is settled law that “a corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact.” In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 267 (2d Cir. 1993).

Those principles make this a straightforward case. Companies sometimes have a duty to disclose factual “trends or uncertainties . . . that the registrant reasonably expects will have a material unfavorable impact on . . . revenues or income from continuing operations.” Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 101 (2d Cir. 2015) (citing SEC Item 303, 17 C.F.R. § 229.303(a)(3)(ii)). But Plaintiffs identify no statute, regulation, or precedent that requires companies to spell out all of the legal implications (tax or otherwise) of a given transaction — still less to identify the implications for future transactions that the company has no intention of undertaking. No such duty exists.

Plaintiffs respond to this crucial hole in their theory in a grand total of four sentences appearing on page 48 of their brief. Declaring that “once a company speaks on an issue or topic, there is a duty to tell the whole truth,” Meyer v. JinkoSolar Holdings Co., 761 F.3d 245, 250 (2d Cir. 2014), Plaintiffs claim that once “Defendants chose to speak on the subjects of divesting its Vehicle businesses, 'tax consequences' of the Merger, and constraints on divestitures by Eaton generally,” it had a duty to provide advice to analysts about the tax treatment that a spin-off would receive, because such analysis would have been “material to these subjects.” Appellants' Br. 48 (citation omitted). This argument is wrong twice over.

First, Plaintiffs frame the “subjects” on which Eaton “chose to speak” at a level of generality so broad as to be useless. Id. The Supreme Court has emphasized that “companies can control what they have to disclose under [Section 10(b) and Rule 10b-5] by controlling what they say to the market.” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 45 (2011). But if plaintiffs can lump together huge categories and insist that once a company says something about that “subject,” it must say everything about that “subject,” that “control” would be illusory.

Here, for example, Plaintiffs say that because Eaton spoke about the “'tax consequences' of the Merger” as a general matter, it also had to explain that if Eaton were to engage in a hypothetical transaction in the future that it had no intention of engaging in, that hypothetical transaction would be subject to tax. Appellants' Br. 48. But the statements about “tax consequences” that Plaintiffs highlight addressed only the actual tax consequences of the Cooper transaction, which is to say the taxes that the restructured company actually expected to pay as a result of the Cooper transaction itself or in its planned, ongoing operations following that transaction. See JA379:¶194; JA381:¶199. Defendants made no statements about how hypothetical, unplanned future corporate transactions would be taxed, and they had no independent duty to address that issue. Cf. In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501, 514 (2d Cir. 2010) (“Firms are not required by the securities laws to speculate about distant, ambiguous, and perhaps idiosyncratic reactions by the press or even by directors.”).

Similarly, Eaton's statements on the “subjects of divesting its Vehicle business” and “constraints on divestitures by Eaton generally” were to the effect that, while nothing in the deal prohibited Eaton from making “portfolio moves, . . . we have no such plans.” JA377:¶190 (emphasis altered); see also, e.g., JA385:¶207; JA389:¶215. As the District Court explained, “defendants never spoke to the economic feasibility of a potential spin-off of the vehicle business, and they never stated that the transaction could be completed in an economically feasible way or as a tax free spin-off.” SPA25. If Defendants had addressed those subjects, then of course they would have been obliged not to employ “half-truths” that “misle[d] investors by saying one thing and holding back another.” Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 135 S. Ct. 1318, 1331 (2015).⁷ But Plaintiffs point to nothing like that here.

Second, Plaintiffs' invocation of the “duty to tell the whole truth” does not extend to the sort of legal and tax advice that Plaintiffs argue Defendants should have advanced here. Appellants' Br. 48 (citation omitted). This Court has recognized that “[w]hat is required is the disclosure of material objective factual matters.” Wilson v. Merrill Lynch & Co., 671 F.3d 120, 131 (2d Cir. 2011) (emphasis added) (citation omitted). Because the “[f]ederal securities laws are designed to promote the disclosure of facts,” a company need only “suppl[y] investors with financial information from which investors could draw their own conclusions.” Silsby v. Icahn, 17 F. Supp. 3d 348, 361-62 (S.D.N.Y. 2014), aff'd, 616 F. App'x 448 (2d Cir. 2015).⁸ As Judge Easterbrook once put it, “Securities laws require issuers to disclose firm-specific information,” but it is up to “investors and analysts [to] combine that information with knowledge about the competition, regulatory conditions, and the economy as a whole to produce a value for stock.” Wielgos v. Commonwealth Edison Co., 892 F.2d 509, 515 (7th Cir. 1989) (emphasis in original). “Issuers needn't print the Code of Federal Regulations,” and indeed, it would be “pointless and costly to compel firms to reprint information already in the public domain.” Id. at 517; see also, e.g., Acme Propane, Inc. v. Tenexco, Inc., 844 F.2d 1317, 1323 (7th Cir. 1988) (“The securities laws require the disclosure of information that is otherwise not in the public domain,” but “[s]ellers of securities need not 'disclose' the statutes at large of the states in which they operate. . . .”).

That principle applies with full force to the tax laws. In Heliotrope General Inc. v. Ford Motor Co., 189 F.3d 971 (9th Cir. 1999), for example, the Ninth Circuit confronted claims that bore a striking resemblance to the ones at issue here. Ford had pursued certain tax benefits by transferring some of its insurance and financial services assets to a distinct entity, Ford Holdings, Inc. (FHI), that issued shares to the investing public. Id. at 973-74. In order to receive the tax benefits, Ford had to “own less than eighty percent of FHI” and “Ford and FHI could not file a consolidated tax return for five years.” Id. at 974. One of FHI's shareholders sued, claiming that the price it paid for shares in FHI was artificially inflated by Ford's “fail[ure] to disclose that Ford and FHI were required to maintain a 'separate existence' for five years” and failure to disclose “the relative costs and benefits of maintaining the tax strategy.” Id. at 976, 980. The district court rejected the claim, and the Ninth Circuit affirmed, holding that “[t]he Tax Code is publicly available information,” and that “Ford was not required to disclose the dollar amount of the tax benefits or the relative costs and benefits of maintaining the tax strategy.” Id. at 977, 980. Nor, for that matter, did Ford have any “duty to disclose internal financial projections regarding the expected dollar values of tax costs and benefits.” Id. at 980.

Similarly, in In re Progress Energy, Inc. Securities Litigation, the plaintiffs argued that the defendants had failed to advise investors of the impact that the alternative minimum tax imposed by 26 U.S.C. § 55 would have on certain “Contingent Value Options” distributed as part of a merger. 371 F. Supp. 2d 548, 551 (S.D.N.Y. 2005). After the company publicly commented on the effects of the alternative minimum tax on the income stream that would fund those Options, the Options declined in price from $0.42 to $0.15. Id. But the court rejected the plaintiffs' claims under Section 10(b) and Rule 10b-5 based on the company's failure to discuss those effects earlier, concluding that “the information allegedly omitted here is not of the type which defendants had a duty to disclose.” Id. at 552. The court explained that “[i]t is well-established law that the securities laws do not require disclosure of information that is publicly known, or which constitutes generally applicable laws and regulations.” Id. at 552-53 (collecting cases). “In this case, the allegedly omitted information was a generally applicable tax provision that applies to all corporations.” Id. at 553. And “[t]he federal securities laws simply do not require the excruciatingly lengthy and complicated disclosure that would result if every indicia of the modern regulatory state needed to be compiled, catalogued, and explained to potential investors.” Id. (citing Wielgos, 892 F.2d at 517).

The same rationale applies here. Eaton fully disclosed all relevant “firm-specific information,” and it was up to “investors and analysts [to] combine that information with knowledge about . . . regulatory conditions . . . to produce a value for [its] stock.” Wielgos, 892 F.2d at 515. Even if some analysts would have “very much like[d] to know” what tax implications the company had concluded would flow from those facts, In re Time Warner Inc. Sec. Litig., 9 F.3d at 267, Eaton was under no obligation to provide that sort of detail.⁹ And without such a duty, Defendants' decision not to comment on whether a hypothetical “transaction could be completed in an economically feasible way or as a tax free spin-off,” SPA25, provides no basis for liability.

II. THE DISTRICT COURT CORRECTLY HELD THAT PLAINTIFFS FAILED TO PLEAD MATERIALITY

Even if Defendants had made a misleading statement or omission, moreover, the District Court correctly recognized that “the theoretical tax consequences of a hypothetical transaction that was never planned and never occurred is not material.” SPA18 (citation omitted). That materiality holding independently dooms Plaintiffs' Complaint.

“The question of materiality . . . is an objective one, involving the significance of an omitted or misrepresented fact to a reasonable investor.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 445 (1976). Courts have been “'careful not to set too low a standard of materiality,' for fear that management would 'bury the shareholders in an avalanche of trivial information.'” Matrixx Initiatives, Inc., 563 U.S. at 38 (citation omitted). Accordingly, “[w]hen contingent or speculative events are at issue, the materiality of those events depends on 'a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity.'” Castellano v. Young & Rubicam, Inc., 257 F.3d 171, 180 (2d Cir. 2001) (quoting Basic, 485 U.S. at 239). “The mere fact that . . . some discussion [of a potential corporate transaction] has occurred” does not make information about that potential transaction “material.” Glazer v. Formica Corp., 964 F.2d 149, 155 (2d Cir. 1992). Instead, courts must “assess the probability of an event by looking at the 'indicia of interest in the transaction at the highest corporate levels' and by considering, inter alia, 'board resolutions, instructions to investment bankers, and actual negotiations . . . as indicia of interest.'” Id. (quoting Basic, 485 U.S. at 239).

Here, Plaintiffs focus exclusively on speculation about a potential spin-off by analysts outside the company. But the relevant point under Basic is that there were zero “indicia of interest in the transaction at the highest corporate levels.” Basic, 485 U.S. at 239.¹⁰ Quite the contrary: Defendants repeatedly disavowed any such interest, even going so far as to issue a press release titled “Eaton Not in Discussions to Sell its Automotive Business” and stating that “there was no basis for published reports involving speculation on the sale of Eaton's automotive business.” JA387-88:¶213; see generally supra at 7-12.

Plaintiffs do not argue otherwise. The most they offer is that “Defendants' denials . . . were 'equivocal.'” Appellants' Br. 35 (citation omitted). But under Basic and the heightened pleading requirements of Rule 9(b) and the PSLRA, it is not enough for Plaintiffs to simply rest on the fact that Defendants “never said never.” Eaton actively disavowed any interest in the transaction in question. As a result, Plaintiffs needed to point to particularized indicia from within the company that there was some reasonable possibility of a divestment occurring in order to establish that information about the tax treatment of such a divestment would be material. Plaintiffs did not, and cannot, do that.

Instead, Plaintiffs just insist that “the Basic test is not applicable” because “the valuable option of a tax-free spin-off was neither contingent nor speculative.” Appellants' Br. 44-45. But that argument is a roadmap for circumventing Basic in virtually every case. Basic indicates that where a company is exceedingly unlikely to take a given action, information about that action will generally not be material. See 485 U.S. at 238. That is every bit as true for the exercise of a “valuable option” as it is for a merger, acquisition, or divestment, and merely re-phrasing the possibility of a divestment as an “option” cannot make Basic disappear. Given the company's steadfast view that a divestment would have been strategically unwise for reasons that had nothing to do with taxes, a decision that made such an undesirable “option” more expensive to exercise simply was not material — as the District Court correctly concluded. See SPA16-23.

III. THE DISTRICT COURT CORRECTLY HELD THAT PLAINTIFFS FAILED TO PLEAD SCIENTER

The third and final independently sufficient basis for the District Court's decision was Plaintiffs' failure to plead facts establishing the “strong inference” of scienter that the PSLRA requires. See 15 U.S.C. § 78u-4(b)(2)(A). In this context, scienter means an “intent to deceive, manipulate or defraud” as to each alleged misstatement, Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319 (2007) (citation omitted), or recklessness representing such an “extreme departure from the standards of ordinary care” as to “approximat[e] actual intent” to mislead investors, S. Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98, 109 (2d Cir. 2009) (emphasis omitted) (citations omitted); see also Stratte-McClure, 776 F.3d at 106. Scienter can be established by facts showing “(1) that defendants had the motive and opportunity to commit fraud, or (2) strong circumstantial evidence of conscious misbehavior or recklessness.” ECA & Local 134 IBEW Jt. Pension Tr. of Chi. v. JP Morgan Chase Co., 553 F.3d 187, 198 (2d Cir. 2009).

To make the required showing, it is not enough for a plaintiff to allege “'facts from which . . . a reasonable person could infer that the defendant acted with the required intent,' for that gauge 'does not capture the stricter demand Congress sought to convey.'” S. Cherry St., LLC, 573 F.3d at 110-11 (quoting Tellabs, 551 U.S. at 314). Instead, the inference must be “more than merely plausible or reasonable — it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs, 551 U.S. at 314. “Where motive is not apparent,” moreover, “the strength of the circumstantial allegations must be correspondingly greater.” Kalnit v. Eichler, 264 F.3d 131, 142 (2d Cir. 2001) (citation omitted).

Here, the District Court correctly held that Plaintiffs failed to plead scienter adequately. Indeed, Defendants repeatedly told analysts that they had no plans for a spin-off because doing a spin-off would be strategically unwise for Eaton. Even if, in hindsight, Defendants' disavowal of any such plans could have been more emphatic, Plaintiffs have not pleaded anything close to the intentional wrongdoing or “extreme departure from the standards of ordinary care” that their claims require. S. Cherry St., LLC, 573 F.3d at 109 (citation omitted).

A. Plaintiffs Did Not Establish Motive And Opportunity

To adequately plead “motive and opportunity,” “it is not sufficient to allege goals that are 'possessed by virtually all corporate insiders,' such as the desire to maintain a high credit rating for the corporation or otherwise . . . maintain a high stock price in order to increase executive compensation.” Id. (citation omitted); see also, e.g., Ganino v. Citizens Utils. Co., 228 F.3d 154, 170 (2d Cir. 2000) (“General allegations that the defendants acted in their economic self-interest are not enough.”); Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1130 (2d Cir. 1994).

Here, Plaintiffs sought to establish motive by alleging that Fearon and Cutler sold stock during the Class Period. See JA391-93:¶¶221-26. But such sales cannot support an inference of bad faith and scienter unless the “stock sales were 'unusual.'” Acito v. IMCERA Grp., Inc., 47 F.3d 47, 54 (2d Cir. 1995); see also, e.g., Wyche v. Advanced Drainage Sys., Inc., 710 F. App'x 471, 473 (2d Cir. 2017) (“[T]he defendant's stock sales must be 'unusual' to support such an allegation.” (citing Acito, 47 F.3d at 54)); In re Gildan Activewear, Inc. Sec. Litig., 636 F. Supp. 2d 261, 270 (S.D.N.Y. 2009) (collecting cases for the proposition that the plaintiff “must establish that the sales were 'unusual' or 'suspicious'”).

As the District Court recognized, the sales identified in this case “were not unusual or suspicious, and do not establish a motive to commit fraud that would lead to a strong inference of scienter.” JA263. Indeed, as the chart below illustrates, Cutler sold nearly three times as much stock during the 799 days before the Plaintiffs' revised “Class Period” as he did during the 799 days that the “Class Period” lasted. Id. Cutler likewise sold more stock during the 799 days after the period than he did during the period. Id.

See Ex. 10 to J. Hammel Declaration in Supp. Mot. Dismiss (“Hammel Decl.”), ECF No. 54; see also id. at Exs. 11-16, 21-22; JA127-38 (Exs. 17-20).

Far from supporting an inference of intent, this pattern of sales affirmatively undermines any suggestion that Cutler was acting to prop up the stock price to maximize his gains. See, e.g., Malin v. XL Capital Ltd., 499 F. Supp. 2d 117, 151, 153 (D. Conn. 2007) (no inference of scienter where defendants “sold significantly more stock in the twenty-two month period prior to the twenty-three-month Class Period than they did during it”), aff'd, 312 F. App'x 400 (2d Cir. 2009); In re Glenayre Techs., Inc. Sec. Litig., No. 96 CIV. 8252(HB), 1998 WL 915907, at *4 (S.D.N.Y. Dec. 30, 1998) (no inference of scienter where “the individual defendants engaged in comparable cumulative sales in 1994, and in fact sold more stock in 1995,” the year before the Class Period), aff'd, 201 F.3d 431 (2d Cir. 1999).¹¹ And while Plaintiffs emphasize that Cutler's sales were significant in absolute dollar figures even if not in comparison to his earlier sales, the most compelling explanation is that Cutler was planning to (and did) retire in May 2016 under Eaton's mandatory retirement age.See JA371-72:¶¶176-77 (July 2014 analyst report referring to “CEO Sandy Cutler's expected retirement in less than 2 years”); JA321:¶40 (referring to Cutler's May 2016 retirement). Courts have repeatedly held that increased sales in advance of retirement are not unusual or suspicious. See City of Taylor Gen. Emps. Ret. Sys. v. Magna Int'l Inc., 967 F. Supp. 2d 771, 799 (S.D.N.Y. 2013); In re Avon Prods., Inc. Sec. Litig., No. 05 Civ. 6803(LAK)(MHD), 2009 WL 848017, at *21 (S.D.N.Y. Feb. 23, 2009).

Fearon's sales were likewise unsuspicious. As the chart below shows, Fearon sold more stock in the period after the alleged fraud than during it:

See Hammel Decl. Ex. 23; see also id. at Exs. 24-27, 29, 31-32, 34-39; JA139-46 (Exs. 28, 30, 33).

Further undermining any inference of scienter is the fact that Fearon's Eaton holdings increased during the revised “Class Period,” growing from 285,069 shares in May 2012, to 289,309 shares in July 2014. See id. at Ex. 23. As Judge Preska has observed, the fact that a defendant “increased [his] . . . holdings during the Class Period” is “wholly inconsistent with fraudulent intent.” In re Bristol-Meyers Squibb Sec. Litig., 312 F. Supp. 2d 549, 561 (S.D.N.Y. 2004); see also id. at 561 n.7 (noting that “[i]n light of these now uncontested facts” — that the defendants' holdings increased during the Class Period — “it appears that it is Plaintiffs' allegations of insider trading that were reckless”). After all, while corporate managers might plausibly “misrepresent[ ] corporate performance to inflate stock prices while they sold their own shares,” Kalnit, 264 F.3d at 139, it is implausible that they would commit fraud to keep share prices artificially high while they are buying more shares. Remarkably, Plaintiffs' brief never even mentions that Fearon's holdings increased during this period.¹²

In short, as the District Court found, Plaintiffs identified “no reason for any executive to be dishonest about the tax consequences of a hypothetical merger that the Company repeatedly and explicitly stated it had no plans to do.” SPA23 (citation omitted).

B. Plaintiffs Did Not Establish Conscious Misbehavior Or Recklessness

Having failed to identify any motive for Defendants to engage in fraud, Plaintiffs insist that “a securities plaintiff is not required to plead motive.” Appellants' Br. 59. That is true as far as it goes — but when, as here, a plaintiff fails to identify a likely motive, “the strength of the circumstantial allegations must be correspondingly greater.” Kalnit, 264 F.3d at 142 (citation omitted). And that is particularly true in cases like this one, where plaintiffs' claims rest primarily on “allege[dly] fraudulent omissions, rather than false statements.” In re Bank of Am. AIG Disclosure Sec. Litig., 980 F. Supp. 2d 564, 586 (S.D.N.Y. 2013), aff'd, 566 F. App'x 93 (2d Cir. 2014). In such cases, “'it is especially important to rigorously apply the standard for pleading intent,'” because “[i]t is entirely possible for a defendant to make an honest but negligent mistake in judging how much detail needs to be included in public statements in order to avoid misleading the market,” and “[t]he purpose of section 10(b) and Rule 10b-5 is to punish knowing fraud or reckless behavior, not mistakes that arise from negligent or even grossly negligent behavior.” In re GeoPharma, Inc. Sec. Litig., 411 F. Supp. 2d 434, 436-37 (S.D.N.Y. 2006). Indeed, “defendants should not be required to incur litigation expenses every time an aggrieved investor claims that an accurate statement was rendered misleading based on the absence of additional information.” Id. at 437.

Plaintiffs come nowhere close to clearing the high bar established by these decisions. After all, if Defendants had wanted to mislead analysts and encourage speculation about the possibility of divestment, they would hardly have chosen to issue a press release titled “Eaton Not in Discussions to Sell its Automotive Business.” JA387:¶213. They would have just stayed silent. Nor would they have made the many statements discussed above, which repeatedly emphasized Eaton's lack of interest in a spin-off. Supra at 7-12.

At most, Plaintiffs' claim is that in hindsight, Defendants would have been more effective at stamping out speculation if they had definitively ruled out any possibility of divesting the vehicles business within five years and provided a more extended discussion of management's rationale (covering not just the strategic considerations that they repeatedly mentioned, but also the tax issues). Plaintiffs try to support this post hoc criticism by pointing out (at 57-58) that some analysts refused to accept Defendants' statements of non-interest at face value and continued to insist that a spin-off might be forthcoming. But as the District Court explained, “allegations regarding the analysts' perceptions cannot substitute for allegations regarding actual misstatements by the defendants and the defendants' state of mind while making those statements.” SPA26. Even if, in retrospect, Defendants could have been more convincing to analysts by giving them additional reasons for their lack of interest in a spin-off, their communications do not reflect such an “extreme departure from the standards of ordinary care” as to establish a “strong inference” of intentional deception or recklessness in a fraud case. S. Cherry St., LLC, 573 F.3d at 108-09 (citations omitted).

Lacking a motive or evidence of an extreme departure from ordinary practices, Plaintiffs argue that “[t]he most compelling inference is that Defendants knew about the omitted tax limitations because they admitted it.” Appellants' Br. 53. But that is just obfuscation. The question is not whether Defendants “knew about” the tax limitations. Rather, it is whether Defendants intentionally (or with gross recklessness) misled investors when they did not “tell investors, during the Class Period, that Eaton was prohibited from using tax-free spin-offs for five years.” Id. at 1.¹³

Framed that (correct) way, Defendants certainly never “admitted” anything. Appellants' Br. 53 (emphasis omitted). Plaintiffs thus cannot rely on Sirota v. Solitron Devices, Inc., 673 F.2d 566, 573 (2d Cir. 1982), Yourish v. Cal. Amplifier, 191 F.3d 983, 996 (9th Cir. 1999), and other “admission” cases to which they point (at 54-55). In Sirota, for example, the defendants admitted that they had affirmatively misrepresented the defendant company's inventory, despite their “intimate knowledge of company affairs.” 673 F.2d at 573. Here, meanwhile, Defendants have always maintained that their disclosures were appropriate. And that is precisely what the District Court found. See, e.g., SPA16-23; JA252-59.

IV. PLAINTIFFS CANNOT BASE THEIR CLAIMS ON STATEMENTS MADE PRIOR TO THE ORIGINAL CLASS PERIOD

This Court can affirm the District Court based on any one of the foregoing issues — lack of a misleading omission or statement, lack of materiality, or lack of scienter. But the District Court's judgment can also be upheld for an additional and alternative reason: Nine of the ten statements on which Plaintiffs base their claims pre-date the period appropriately covered by this case (and the final statement cannot support liability on its own).

Under the PSLRA and Federal Rule of Civil Procedure 23, every securities class action must identify a purported “class period” that determines which potential plaintiffs will be members of the asserted class. 15 U.S.C. § 78u-4(a)(3)(A)(i). Because identification of this Class Period plays an important role in providing notice to courts, class members, and defendants about who may be involved in the case, the PSLRA requires a securities plaintiff to publish a notice describing “the purported class period” and inviting “any member of the purported class [to] move the court to serve as lead plaintiff of the purported class.” Id. The district court must select the “most adequate plaintiff” to represent the class by looking to each movant's financial transactions “during the class period specified in the complaint.” Id. § 78u-4(a)(2)(A)(iv), (3)(B)(iii)(I)(bb).

Once established, the Class Period has important ramifications that extend beyond the identity of the parties to the case and the selection of the lead plaintiff. In particular, and as relevant here, this Court has repeatedly held that “[a] defendant . . . is liable only for those statements made during the class period.” Kowal v. Int'l Bus. Machs. Corp., 163 F.3d 102, 107 (2d Cir. 1998) (emphasis added). In Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147 (2d Cir. 2007), for example, the plaintiffs alleged that Deloitte was responsible for misstatements in the Forms 10-K filed by one of its accounting clients. Id. at 153. This Court recognized that the plaintiffs could “easily satisfy the standard” of showing that the misstatements were attributable to Deloitte, but it nevertheless refused to find Deloitte liable because “the latest 1999 10-K was filed on May 16, 2000 — three months before the start of the Class Period.” Id. It therefore affirmed the dismissal of the plaintiffs' claims under Kowal.

In this case, the original complaint identified a Class Period from November 13, 2013 through July 28, 2014. ECF No. 1 ¶ 1. That complaint asserted claims based on just one of the ten statements for which Plaintiffs now seek to hold Defendants liable: Fearon's statement on November 13, 2013 disclaiming any interest in the spin-off and noting that “nothing is a sacred cow.” JA389:¶215 (emphasis omitted); see ECF No. 1 ¶¶ 1, 26. Months later, Plaintiffs sought to expand the case by tripling the length of the Class Period (from a period of eight months to a period of 26 months, stretching all the way back to May 21, 2012), thereby expanding both the number of potential plaintiffs and the number of alleged misstatements or omissions at issue. See First Amended Complaint ¶ 1, ECF No. 51.

In its decision dismissing their First Amended Complaint, however, the District Court held that the class would be limited to persons who purchased stock between November 13, 2013 and July 28, 2014 and that Plaintiffs' attempt to expand the class to purchasers from before that period was untimely. See JA248. Plaintiffs did not challenge that decision, either below or on appeal. Indeed, they acquiesced in the District Court's decision on that point, requesting in the Second Amended Complaint “that the class include all persons or entities that . . . purchased at least one share or option from November 13, 2013 through July 28, 2014.” SPA11 n.1; see JA306:¶1.

With the plaintiff class limited to those who purchased shares between November 13, 2013 and July 28, 2014, Kowal and Lattanzio squarely bar Plaintiffs from asserting claims based on alleged misstatements or omissions that occurred before that period. See Kowal, 163 F.3d at 107 (“A defendant . . . is liable only for those statements made during the class period.” (emphasis added)); Lattanzio, 476 F.3d at 153 (same).

Plaintiffs try to avoid that conclusion by playing word games. Although the Complaint limits their putative “Class” to “persons and entities that . . . purchased at least one share or option from November 13, 2013 through July 28, 2014, inclusive,” it uses the term “Class Period” to describe “the period from May 21, 2012 through July 28, 2014, inclusive.” JA306:¶1. In other words, the Complaint purports to decouple the identified “Class Period” from the members of the putative class — that “Class Period” is far broader than, and disconnected from, the “Class.” On Plaintiffs' theory, individuals who bought Eaton stock during two-thirds of the ostensible “Class Period” would not be members of the Class.

This non-class-member definition of “Class Period” is wholly foreign to the securities laws, and would completely vitiate Kowal and Lattanzio. As Judge Gardephe put it in rejecting an identical attempt at circumvention, “'[a] class period is delimited in order to identify the individuals who claim membership in the class,'” and there is no basis for “proceed[ing] with a new class period that does not expand the class, but is merely intended to assist Plaintiffs in salvaging their claims.” Wilder v. News Corp., 11 Civ. 4947 (PGG), 2016 WL 5231819, at *6 (S.D.N.Y. Sept. 21, 2016) (first alteration in original) (citation omitted). That is why (until now) the prospect that plaintiffs could “expand a class period without in fact expanding the class” was “both novel and entirely unsupported.” Id.; see also, e.g., Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1217 n.31 (1st Cir. 1996) (“The Class Period . . . constitutes the time period during which members of the putative plaintiff class purchased shares. . . . We limit our analysis . . . to the statements allegedly made by defendants within the Class Period.”). For purposes of the Kowal rule limiting liability to “statements made during the class period,” 163 F.3d at 107 (emphasis added), the only “Class Period” that matters is the one defining the members of the proposed class.

The District Court believed that Stevelman v. Alias Research Inc., 174 F.3d 79 (2d Cir. 1999), required otherwise, but it simply misread Stevelman. There, the plaintiff filed an initial complaint alleging that the defendant company's “'internal controls' had been inadequate and that the defendants knew or should have known . . . about the accounts receivable problem when they made false and misleading statements.” Id. at 86. The plaintiff later filed an amended complaint “with added specificity,” which the defendants argued was untimely in its entirety (including all of the added specificity about the existing claims) because it “introduced sufficiently new conduct, transactions, and occurrences that it violated the strictures of Fed.R.Civ.P. 15(c)” governing relation back. Id. The district court disagreed, but dismissed the amended complaint on other grounds. Id. On appeal, this Court held that the basis for the district court's dismissal had been incorrect, and refused to affirm on the alternative ground that the entire complaint was untimely. Id. at 86-87. Without addressing the individual statements alleged to have been false or misleading, it held that the amended complaint offered “substantially the same allegations” as the original complaint, and could therefore relate back. Id. at 86.

At Plaintiffs' urging, the District Court here observed that “the [Stevelman] defendants' brief in opposition makes clear that the misstatements were from a different time period that extended beyond the time period described in the original complaint.” SPA12 n.2. Based on that, it reasoned that Stevelman had held that “an amended complaint which alleged additional misstatements from an expanded period related back to the original complaint.” SPA12 (footnote omitted). But with due respect to the District Court, the relevant question under Kowal is not whether the “amended complaint . . . related back to the original complaint.” Id. Defendants have never disputed that the Complaint here relates back to the original complaint inasmuch as it asserts a claim based on the November 13, 2013 alleged misstatement identified in the original complaint and occurring within the original Class Period.

Instead, the question is whether the new allegedly misleading statements or omissions are actionable notwithstanding the fact that they pre-date the true Class Period in the case — i.e., the period “delimited in order to identify the individuals who claim membership in the class,” Wilder, 2016 WL 5231819, at *6 (citation omitted). Stevelman had no need to resolve, and did not resolve, that issue, because the question on appeal there was whether the amended complaint was untimely in its entirety. See 174 F.3d at 86-87. Since at least some of the allegedly false statements in the amended complaint occurred within the class period identified in Stevelman's original complaint, Kowal did not help resolve that question. That is presumably why neither the defendants nor this Court ever raised it. See Br. for Defendants-Appellees, Stevelman v. Alias Research Inc., No. 97-9544, 1998 WL 35155442 (2d Cir. Apr. 8, 1998); SPA12 n.2 (noting that “it is not clear from the decision of the Second Circuit Court of Appeals [in Stevelman] that the newly alleged misstatements were from an expanded class period”).¹⁴

Here, by contrast, the question of whether Plaintiffs can assert claims based on the nine allegedly misleading omissions or statements that predated the true Class Period is squarely presented, and Kowal provides an unambiguous answer: No. And the only other allegedly misleading statement — Fearon's November 13, 2013 comment that “nothing is a sacred cow,” JA363:¶153 — does not come close to triggering a valid securities claim under the PSLRA on its own, for all of the reasons discussed at length above. Supra at 24-50. Plaintiffs' improper attempt to rely on statements outside the Class Period thus provides an independent basis for affirming the decision below.¹⁵

Roman Martinez
Benjamin W. Snyder
LATHAM & WATKINS LLP
555 Eleventh Street, NW
Suite 1000
Washington, DC 20004
Tel: (202) 637-2200
Fax: (202) 637-2201

Attorneys for Defendants-Appellees