Anderson v. Spirit AeroSystems Holdings

FILED
United States Court of Appeals
UNITED STATES COURT OF APPEALS Tenth Circuit
FOR THE TENTH CIRCUIT July 6, 2016
_________________________________
Elisabeth A. Shumaker
Clerk of Court
WAYNE E. ANDERSON, individually
and on behalf of all others similarly
situated,
Plaintiff,
and
INTERNATIONAL ASSOCIATION OF
MACHINISTS AND AEROSPACE
WORKERS, DISTRICT 9 PENSION AND
WELFARE TRUSTS; ARKANSAS
TEACHERS RETIREMENT SYSTEM,
Lead Plaintiffs - Appellants,
v. No. 15-3142
(D.C. No. 2:13-CV-02261-EFM-TJJ)
SPIRIT AEROSYSTEMS HOLDINGS, (D. Kan.)
INC.; JEFFREY L. TURNER; PHILIP D.
ANDERSON; ALEXANDER K.
KUMMANT; TERRY J. GEORGE,
Defendants - Appellees.
_________________________________
ORDER
_________________________________
Before TYMKOVICH, Chief Judge, LUCERO, and BACHARACH, Circuit Judges.
_________________________________
This matter is before the court, sua sponte, to amend the decision issued in this
appeal on July 5th. A copy of the amended version, with changes made to page 8, is
attached to this order. The clerk is directed to file the amended opinion forthwith.
Entered for the Court
ELISABETH A. SHUMAKER, Clerk
2
FILED
United States Court of
Appeals
Tenth Circuit
PUBLISH
UNITED STATES COURT OF APPEALS
July 6, 2016
Elisabeth A. Shumaker
FOR THE TENTH CIRCUIT Clerk of Court
_________________________________
WAYNE E. ANDERSON,
individually and on behalf of all
others similarly situated,
Plaintiff,
and
INTERNATIONAL ASSOCIATION
OF MACHINISTS AND
AEROSPACE WORKERS,
DISTRICT 9 PENSION AND
WELFARE TRUSTS; ARKANSAS
TEACHERS RETIREMENT
SYSTEM,
Lead Plaintiffs-Appellants,
v. No. 15-3142
SPIRIT AEROSYSTEMS
HOLDINGS, INC.; JEFFREY L.
TURNER; PHILIP D. ANDERSON;
ALEXANDER K. KUMMANT;
TERRY J. GEORGE,
Defendants-Appellees.
_________________________________
Appeal from the United States District Court
for the District of Kansas
(D.C. No. 2:13-CV-02261-EFM-TJJ)
_________________________________
Steven F. Hubachek, Robbins Geller Rudman & Dowd, San Diego,
California (Brian O. O’Mara, Phong L. Tran, Austin P. Brane, Robbins
Geller Rudman & Dowd LLP, San Diego, California, Norman Siegel and
Steve Six, Stueve Siegel Hanson LLP, Kansas City, Missouri, Blair A.
Nicholas and Benjamin Galdston, Bernstein Litowitz Berger & Grossmann
LLP, San Diego, California, with him on the briefs) for Plaintiffs-
Appellants.
Phillip A. Geraci, Kaye Scholer, New York, New York (Jeffrey A. Fuisz,
Aaron F. Miner, and Lindsay Moilanen, Kaye Scholer LLP, New York,
New York, James D. Oliver and Toby Crouse, Foulston Siefkin LLP,
Overland Park, Kansas, with him on the brief) for Defendants-Appellees.
_________________________________
Before TYMKOVICH, Chief Judge, LUCERO, and BACHARACH,
Circuit Judges.
_________________________________
BACHARACH, Circuit Judge.
_________________________________
Spirit AeroSystems, Inc. agreed to supply parts for three types of
aircraft manufactured by Gulfstream Aerospace Corporation and The
Boeing Company. These aircraft were the Gulfstream G280 and G650 and
the Boeing 787. For these aircraft, Spirit managed production of the parts
through three projects. Each project encountered production delays and
cost overruns, and Spirit periodically reported to the public about the
projects’ progress. In these reports, Spirit acknowledged risks but
expressed confidence about its ability to meet production deadlines and
ultimately break even on the projects. Eventually, however, Spirit
announced on October 25, 2012, that it expected to lose hundreds of
2
millions of dollars on the three projects. Spirit’s stock price fell roughly
30 percent following the announcement.
The plaintiffs brought this action on behalf of a class of individuals
and organizations that had owned or obtained Spirit stock between
November 3, 2011, and October 24, 2012. (We refer to this period as the
“class period.”) The named defendants are Spirit and four of its executives:
1. Mr. Jeffrey Turner, the chief executive officer, the president,
and a director 1
2. Mr. Philip Anderson, the chief financial officer
3. Mr. Alexander Kummant, the senior vice president of
Oklahoma operations
4. Mr. Terry George, the vice president overseeing the Boeing 787
project
According to the plaintiffs, Spirit and these executives misrepresented and
failed to disclose the projects’ cost overruns and production delays,
violating § 10(b) of the Securities Exchange Act of 1934 and the Securities
and Exchange Commission’s Rule 10b-5. 15 U.S.C. § 78j(b); 17 C.F.R.
§ 240.10b-5. 2
1
Mr. Turner has since resigned from his employment at Spirit.
2
The plaintiffs also alleged that the four executives had violated
§ 20(a) of the Securities Exchange Act of 1934, which creates liability for
“control persons.” 15 U.S.C. § 78t(a). The district court dismissed the
control-person claims, and the plaintiffs did not challenge this ruling in
their opening brief in the appeal. Instead, the plaintiffs waited until their
reply brief to challenge dismissal of the § 20(a) claims. This was too late.
3
The defendants moved to dismiss the complaint, arguing that the
plaintiffs had failed to allege facts showing
 misrepresentations or omissions that were (1) false or
misleading and (2) material and
 the defendants’ scienter.
The district court granted the motion to dismiss, concluding in part that the
plaintiffs had failed to allege facts showing scienter. 3
The plaintiffs appeal. We affirm because the plaintiffs have not
alleged facts creating a cogent and compelling inference of scienter.
I. The Plaintiffs’ Pleading Burden on Scienter
For the plaintiffs’ claims under § 10(b) and Rule 10b-5, scienter is an
essential element. In re Zagg, Inc. Sec. Litig., 797 F.3d 1194, 1200 (10th
Cir. 2015). 4 Scienter consists of “‘a mental state embracing intent to
The plaintiffs waived this challenge by waiting to make it in their reply
brief. Reedy v. Werholtz, 660 F.3d 1270, 1274 (10th Cir. 2011). Therefore,
we do not consider the plaintiffs’ § 20(a) claims.
3
The district court assumed that the plaintiffs had pleaded false and
misleading statements, but the court concluded that the defendants had not
made any material misrepresentations or omissions. We need not address
these assumptions or conclusions.
4
The plaintiffs must also show that
1. the defendants made material misrepresentations or omissions,
2. a connection existed between the defendants’
misrepresentations or omissions and the purchase or sale of a
security,
4
deceive, manipulate, or defraud,’ or recklessness.” Adams v. Kinder-
Morgan, Inc., 340 F.3d 1083, 1105 (10th Cir. 2003) (quoting City of
Philadelphia v. Fleming Cos., 264 F.3d 1245, 1259 (10th Cir. 2001)).
Conduct is considered reckless only if the defendants (1) acted in “an
extreme departure from the standards of ordinary care” and (2) presented
“a danger of misleading buyers or sellers” that was
 known to the defendants or
 so obvious that the defendants must have been aware of the
danger.
In re Level 3 Commc’ns, Inc. Sec. Litig., 667 F.3d 1331, 1343 n.12 (10th
Cir. 2012) (quoting City of Philadelphia v. Fleming Cos., 264 F.3d 1245,
1260 (10th Cir. 2001)).
For scienter, the Private Securities Litigation Reform Act of 1995
creates a heightened duty for the plaintiffs to “state with particularity facts
giving rise to a strong inference that the defendant[s] acted with the
3. the plaintiffs relied on the defendants’ misrepresentations or
omissions,
4. the plaintiffs suffered economic loss, and
5. the defendants’ misrepresentations or omissions caused the
plaintiffs’ loss.
Halliburton Co. v. Erica P. John Fund, Inc., __ U.S. __, 134 S. Ct. 2398,
2407 (2014). We address only the element of scienter.
5
required state of mind.” 15 U.S.C. § 78u-4(b)(2)(A); see also In re Zagg,
797 F.3d at 1201-02 (discussing the heightened duty).
We consider this statutory duty through de novo review of the
dismissal. In re Gold Res. Corp. Sec. Litig., 776 F.3d 1103, 1108 (10th Cir.
2015). In conducting de novo review, we accept the complaint’s factual
allegations as true. Dronsejko v. Thornton, 632 F.3d 658, 666 (10th Cir.
2011). We then assess these allegations holistically and consider “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.” In re Zagg, 797 F.3d at 1201-02 (emphasis in
original) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S.
308, 323 (2007)).
To assess the strength of an inference of scienter, we compare the
“inferences urged by the plaintiff[s]” with “competing inferences
rationally drawn from the facts alleged.” Tellabs, 551 U.S. at 314. An
inference of fraudulent intent must be more than “‘reasonable’ or
‘permissible’—it must be cogent and compelling.” Id. at 324. Thus, the
complaint suffices “only if a reasonable person would deem the inference
of scienter cogent and at least as compelling as any opposing inference one
could draw from the facts alleged.” Id.With this standard in mind, we consider whether the plaintiffs
adequately pleaded scienter. We conclude that they did not.
6
II. The Existence of Conflicting Inferences of Innocence and Scienter
The plaintiffs urge the following inference of the defendants’
scienter:
The defendants knew throughout the class period that the three
projects were behind schedule and were generating so much in
additional costs that a loss would be inevitable. Accordingly,
the defendants knew throughout the class period that Spirit
would need to announce a forward loss 5 on the projects.
Nonetheless, the defendants waited to announce the forward
loss until October 2012.
The defendants argue that an innocent inference is more compelling even if
we credit the allegations in the complaint:
Despite scheduling setbacks and cost overruns, the defendants
were optimistic that the three projects would meet the original
cost forecasts. Near-term cost forecasts were not met, but the
defendants expected revenues to exceed the total costs,
avoiding the need for a forward loss. Spirit eventually realized
that a future loss was likely and promptly announced a forward
loss on the three projects.
Our task is to determine whether the inference arising from the
plaintiffs’ scienter allegations is cogent and compelling when compared to
the defendants’ suggested inference. In our view, the plaintiffs’ scienter
inference is not cogent and compelling.
Spirit’s executives knew that Spirit had encountered problems in
containing costs and meeting production deadlines. And we can assume
5
The plaintiffs allege that a “forward-loss charge” is an accounting
term meaning that past production costs plus estimated future production
costs will exceed the total revenues estimated on a given contract.
Appellants’ App’x, vol. I at 27, 91-92.
7
(without deciding) that Spirit did not adequately communicate these
problems to the public.
But why didn’t Spirit adequately communicate these problems? The
plaintiffs allege that the Spirit executives intentionally misrepresented or
recklessly ignored economic realities. That is possible, but it is more
probable that the Spirit executives were overly optimistic and failed to
give adequate weight to financial red flags, for the plaintiffs supply little
reason to suspect malevolence rather than benign optimism. See In re Level
3 Commc’ns, Inc. Sec. Litig., 667 F.3d 1331, 1345 (10th Cir. 2012)
(holding that the plaintiffs’ scienter allegations, which were based on
inconsistency between the defendants’ progress reports and internal
reports, were inadequate because “the strongest inference we can draw is
that defendants were negligent in failing to put together the pieces”); see
also Plumbers & Pipefitters Local Union 719 Pension Fund v. Zimmer
Holdings, Inc., 679 F.3d 952, 955 (7th Cir. 2012) (“Knowing of
‘problems,’ which are common, differs from [specifically] knowing that a
facility must be closed and some of its products recalled.”).
To establish scienter, the plaintiffs rely on
 the Spirit executives’ motive to lie,
 information supplied by corroborating witnesses,
 the Spirit executives’ alleged involvement in the three
projects as part of the company’s “core operations,”
8
 a duty to disclose production delays and cost overruns,
 Spirit’s implementation of a recovery plan,
 admissions by the chief executive officer,
 Spirit’s disclosures of risk,
 Spirit’s purported accounting violations, and
 the size of the announced forward loss.
Together, these allegations do not create a cogent, compelling inference of
scienter.
III. The Existence of a Potential Motive to Lie
The plaintiffs do not argue that the defendants had a particularized
motive for committing securities fraud. The district court viewed the
absence of a particularized motive as a factor mitigating against an
inference of scienter. The court’s consideration of this factor was proper.
The plaintiffs need not show that the defendants acted with a
particular motive. See Nakkhumpun v. Taylor, 782 F.3d 1142, 1152 (10th
Cir. 2015) (“[S]cienter allegations may suffice even without a motive.”).
But “[t]he absence of a motive allegation . . . is ‘relevant.’” In re Level 3
Commc’ns, Inc. Sec. Litig., 667 F.3d 1331, 1347 (10th Cir. 2012).
On appeal, the plaintiffs argue that the defendants were “motivated
to mislead in order to buy time in the hope that a difficult financial
situation ‘would right itself.’” Appellants’ Opening Br. at 69. This
argument was not preserved and is invalid.
9
The plaintiffs did not raise this argument in district court, so this
argument is forfeited. See Richison v. Ernest Grp., Inc., 634 F.3d 1123,
1128 (10th Cir. 2011) (“[I]f [a] theory . . . wasn’t raised before the district
court, we usually hold it forfeited.”). Ordinarily we can consider forfeited
arguments under the plain-error standard. Id. But the plaintiffs do not
argue plain error in the appeal. As a result, this argument has been waived.
Id.Even if this argument had been preserved, it would not have cured
the plaintiffs’ failure to adequately plead scienter. At most, the plaintiffs’
argument suggests a generalized corporate motive; but that would not
contribute to an inference of scienter. See Level 3 Commc’ns, 667 F.3d at
1346 (“[G]eneral motives for management to further the interests of the
corporation fail to raise an inference of scienter.”); City of Philadelphia v.
Fleming Cos., 264 F.3d 1245, 1269 (10th Cir. 2001) (“[G]eneralized
motives shared by all companies and which are not specifically and
uniquely related to [the defendants] in particular, are unavailing.”). Thus,
the plaintiffs failed to allege facts indicating a motive for securities fraud,
which mitigates an inference of scienter from the plaintiffs’ other factual
allegations.
IV. Information Furnished by Corroborating Witnesses
The plaintiffs contend that corroborating witness accounts show that
the defendants knew long before October 2012 that the projects’ costs
10
would surpass revenues. We accept the truth of the witnesses’ accounts as
pleaded in the complaint and do not assess the witnesses’ credibility. See
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007) (we
accept factual allegations in the complaint as true); Nakkhumpun v. Taylor,
782 F.3d 1142, 1152 (10th Cir. 2015) (in reviewing the grant of a motion
to dismiss, we do not assess witness credibility).
To raise an inference of scienter, the plaintiffs point to two types of
information supplied by corroborating witnesses:
1. generalized descriptions of internal meetings, cost reports,
delays, and mismanagement and
2. statements indicating that one of the defendants, Mr. George,
personally directed unrealistic cost projections.
The generalized descriptions of internal meetings, cost reports,
delays, and mismanagement do not contribute to a cogent, compelling
inference of scienter. The factual allegations regarding Mr. George suggest
that he had a culpable intent, but the plaintiffs do not tie Mr. George’s
potentially culpable state of mind to any public disclosures.
A. Generalized Descriptions of Internal Meetings, Cost
Reports, Delays, and Mismanagement
The plaintiffs contend that Spirit’s chief executive officer and chief
financial officer must have known long before October 2012 that Spirit
would lose hundreds of millions of dollars on the three projects. For this
11
contention, the plaintiffs point to information supplied by corroborating
witnesses about
 internal meetings,
 cost reports,
 production delays, and
 mismanagement.
The witnesses’ accounts do not support a scienter inference.
First, the plaintiffs point to an internal meeting that Spirit’s chief
executive officer and chief financial officer led in mid-2011, when they
allegedly admitted that one of the Gulfstream projects was “behind
schedule and over budget.” Appellants’ Opening Br. at 55.
This admission indicates that the two executives knew in mid-2011
that production was behind schedule and that costs exceeded projections
for one of the projects. But this meeting had taken place months before the
class period began, as well as before the executives’ public disclosures.
The plaintiffs do not identify any particularized account showing that the
two executives knew during the class period that their progress reports
were inaccurate. 6 See Wolfe v. Aspenbio Pharma, Inc., 587 F. App’x 493,
6
The corroborating witness’s account of the mid-2011 meeting
pertained to only one of the three projects. Thus, even if this statement had
shown that the two executives knew about cost overruns and production
difficulties for this project, the statement would not have shown knowledge
of problems on the other two projects.
12
498 (10th Cir. 2014) (unpublished) (concluding that a defendant’s remarks
about a company’s problems, made months before a class period, would not
establish scienter during the class period). 7
Second, the plaintiffs point to the collective accounts of ten
corroborating witnesses who furnished information about
1. an internal business group that monitored the three projects’
losses, as well as a 2011 cost-study report prepared by this
group,
2. quarterly reports comparing the projects’ actual costs to
forecasted costs, and
3. Spirit’s ongoing production delays and mismanagement.
But these accounts do not contribute to a cogent and compelling inference
of scienter for three reasons:
1. The witnesses’ accounts do not allege that the four Spirit
executives actually received the internal business group’s cost-
study report or the group’s regular reports regarding the
projects’ losses.
2. The witness accounts do not adequately describe the contents
of the quarterly reports allegedly sent to the Spirit executives.
3. General accounts of mismanagement and delay do not imply
that the four Spirit executives knew that the projects would fall
short of long-term cost forecasts.
7
Although Wolfe is not binding, we may consider it for its persuasive
value. See United States v. Austin, 426 F.3d 1266, 1274 (10th Cir. 2005)
(stating that an unpublished opinion “ha[d] some persuasive value”).
13
First, Corroborating Witness #5 referred to a 2011 cost-study report
prepared by an internal business group. This report had stated that Spirit
could not meet cost-reduction goals. Appellants’ App’x, vol. I at 122. In
addition, Corroborating Witness #5 stated that the business group had
regularly reported losses on the Gulfstream projects. Id. at 121-22. But the
account by Corroborating Witness #5 does not establish the executives’
knowledge because
 four levels of management hierarchy separated Corroborating
Witness #5 from the chief executive officer 8 and
 the witness’s allegations do not establish that the four Spirit
executives actually had seen the 2011 cost-study report or were
aware of the regularly reported losses on the Gulfstream
projects.
Second, Corroborating Witness #10 contributed to the preparation of
quarterly cost reports on the three projects that were ultimately furnished
to Mr. Anderson and Mr. Turner. Id. at 134-35. To create an inference of
scienter based on these quarterly cost reports, the plaintiffs must
adequately describe the content of the reports provided to Mr. Anderson
and Mr. Turner. See Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1036
(9th Cir. 2002) (“[N]egative characterizations of reports relied on by
8
Corroborating Witness #5 reported to the director of supply chain
management, Tulsa contracts and sourcing, who reported to an individual
that “oversaw operations,” who reported to the vice president of operations
for Spirit’s Tulsa facility, who reported to the chief executive officer.
Appellants’ App’x, vol. I at 40 n.9; id. at 110-11.
14
insiders, without specific reference to the contents of those reports, are
insufficient to meet the heightened pleading requirements of the [Private
Securities Litigation Reform Act].”). The plaintiffs have not identified the
content of the quarterly cost reports. Instead, the plaintiffs rely on
Corroborating Witness #10’s role in contributing data on procurement costs
used to generate these reports. But the content of the resulting quarterly
cost reports is unknown because (1) they went through numerous layers of
revision before reaching Mr. Turner and Mr. Anderson, and (2)
Corroborating Witness #10 did not purport to know how the procurement
costs affected the cost forecasts for the Boeing 787 project.
Corroborating Witness #10 participated in the reporting of
procurement costs, but these reports went through numerous layers of
revision before any of the data would have been seen by Mr. Turner or Mr.
Anderson. For example, Corroborating Witness #10 furnished reports on
procurement costs to Supply Chain Management, which approved or
disapproved the report and submitted a report on procurement costs to a
Supply Chain Director. If approved, the report was sent to the Controller
of Spirit’s Tulsa Facility, who reported to vice presidents in the Tulsa
Facility. The vice presidents provided the eventual report on procurement
costs to the Finance Group, which incorporated forecasts on internal costs
such as labor and processing. The Finance Group then provided the
consolidated report to Tulsa’s Vice President of Operations (Mr. Chris
15
Collins). If approved, the report was forwarded to Wichita Management,
which would “provide feedback” and in “some circumstances” request
Corroborating Witness #10’s group to provide supporting documentation
for particular costs. Appellants’ App’x, vol. I at 136. Once Wichita
Management agreed with the report, it would be sent to Mr. Turner and Mr.
Anderson.
16
17
Corroborating Witness #10 was able to see only a part of the cost
reports’ data, which purportedly showed “cost overruns” and “changes
after changes” to engineering designs on the Boeing 787 project. See
Appellants’ App’x, vol. I at 136-37. This data involved procurement costs.
But the quarterly cost reports contained another important set of data that
Corroborating Witness #10 does not allege to have seen: Spirit’s forecasts
on internal costs. Id. at 135.
Spirit’s Finance Group consolidated the information supplied by
Corroborating Witness #10’s group with forecasts on internal costs. There
is nothing in the complaint to indicate that Corroborating Witness #10
would have had information about the consolidation process. Id.; see also
id. at 135 (alleging that Corroborating Witness #10’s group was
“responsible for preparing the procurement costs”). Thus, the complaint
sheds little light on what Mr. Turner and Mr. Anderson would have seen if
they had read the quarterly cost reports. 9
9
Through requests for feedback, Corroborating Witness #10 may have
learned about some questions involving specific costs, but this witness did
not
 say whether the requests for feedback were ever accompanied
by information about forecasts or internal costs,
 purport to know the contents of the eventual reports submitted
to Wichita Management, or
18
But even if we assume that Mr. Turner and Mr. Anderson were aware
of overruns on procurement costs, we have no information from
Corroborating Witness #10 on what the internal costs were or how the
overruns on procurement costs would have affected the total project costs.
In these circumstances, Corroborating Witness #10’s alleged knowledge of
overruns on procurement costs would not contribute to an inference of
scienter.
Third, the plaintiffs rely on general reports of delay and
mismanagement of the Gulfstream projects. Appellants’ Opening Br. at 55-
56. To the plaintiffs, these reports suggest that the Spirit executives must
have long known that Spirit would need to take a substantial forward loss
on the projects. But this inference does not follow from anything that the
corroborating witnesses alleged.
Only one of the corroborating witnesses worked closely with any of
the four Spirit executives, and this witness spoke only of general corporate
mismanagement; the witness did not address whether the executives could
 say whether any requests for feedback had been received during
the class period.
In these circumstances, Corroborating Witness #10’s allegations add little
to an inference of scienter. See Lipton v. Pathogenesis Corp., 284 F.3d
1027, 1036 (9th Cir. 2002) (holding that a plaintiff alleging securities
fraud by relying on a company’s internal reporting must do more than
identify certain “negative” reports).
19
have known that Spirit would be unable to meet long-term cost forecasts.
See Appellants’ App’x, vol. I at 112 (observing a general “lack of cohesive
team environment, [lack of] consistent quality control standards and [lack
of] updated technology”); id. (noting broad concerns that contractors
would steal tools, “creat[ing] tool shortages” that lead to delays and
additional costs); id. at 113 (“Because the Gulfstream program became so
delayed, Spirit had to use a special Russian aircraft to fly the parts to the
customer’s destination at a cost of almost $1 million each time . . . .”). 10
The other corroborating witnesses were further removed from the
defendants. See, e.g., id. at 113, 116-17, 123, 127 (four corroborating
witnesses who had no alleged reporting relationship to the defendants); id.
at 129, 132 (two corroborating witnesses who were separated from the
chief executive officer by at least four levels of management within
Spirit’s hierarchy). 11 As relatively low-level employees, these witnesses
could not provide evidence bearing on the executives’ mental states. See
Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 998 (9th Cir. 2009)
(“[G]eneralized claims about corporate knowledge are not sufficient to
10
These accounts are from Corroborating Witness #1, who reported to
the vice president of operations for Spirit’s Tulsa facility, who in turn
reported to the chief executive officer. Appellants’ App’x, vol. I at 111.
11
The factual allegations of the remaining witness, Corroborating
Witness #3, are addressed in Part IV(B) below.
20
create a strong inference of scienter, since they fail to establish that the
witness reporting them has reliable personal knowledge of the defendants’
mental state.”); see also In re Cabletron Sys., Inc., 311 F.3d 11, 31 (1st
Cir. 2002) (requiring a corroborating witness to provide a “level of
specific detail” about what the defendants must have known to create an
inference of scienter).
The accounts by corroborating witnesses do not contribute to an
inference of scienter. These witnesses were too far removed from the four
Spirit executives and did not provide sufficiently particularized accounts
of what the Spirit executives must have known.
B. Information Furnished by Corroborating Witness #3 about
Mr. George’s Culpability on the Boeing 787 Project
For scienter, the plaintiffs rely in part on Corroborating Witness #3’s
account to establish that Mr. George (the vice president overseeing Spirit’s
Boeing 787 project) “personally directed the reporting of inaccurate
projected costs [for the Boeing 787 project]. . . , rejecting cost figures
generated by Spirit’s functional managers.” Appellants’ Opening Br. at 56.
This account creates a potentially plausible inference of Mr. George’s
scienter, but one could also infer from Corroborating Witness #3’s account
that Mr. George was simply too optimistic about Spirit’s ability to control
costs on the Boeing 787 project. This inference of innocence is more
compelling than an inference of Mr. George’s scienter.
21
The plaintiffs point to five public statements that Mr. George made
about the Boeing 787 project at an investor conference in March 2012:
1. Over a fifteen-month period, Mr. George periodically met with
Boeing to ensure that Spirit’s production was on track.
2. In these periodic meetings, Boeing held Spirit accountable to
ensure a reduction in costs.
3. Spirit would likely be able to reduce marginal costs for
additional units on the Boeing 787 project.
4. Spirit was on plan, and Mr. George expected a profit on the
project’s “first [b]lock” of units.
5. Mr. George was not concerned with Spirit’s ability to obtain
parts for the project.
Id. at 51, 55 (emphasis omitted). According to the plaintiffs, these
statements were knowingly false and misleading based on Corroborating
Witness #3’s interactions with Mr. George.
Corroborating Witness #3 worked in Spirit’s finance department and
consulted with Mr. George about cost forecasts for the Boeing 787 project.
Id. at 38 n.5. Mr. George relied on Corroborating Witness #3 to forecast
costs by collecting projections from various “Functional Managers.” Id. at
115. After reviewing these forecasts, Mr. George allegedly said that the
cost projections were too high and ordered Corroborating Witness #3 to
predict the project’s future costs at a level that Corroborating Witness #3
regarded as unachievable. Id. at 115-16. When Corroborating Witness #3
balked, Mr. George allegedly threatened to find managers who “could
22
achieve the forecasts.” Id. at 116. Later, as Spirit was about to fall short of
Mr. George’s required forecast, Spirit allegedly tried to “off-load some of
the work to an offshore vendor.” Id.From Corroborating Witness #3’s account, we can reasonably infer
that Mr. George was too optimistic about Spirit’s ability to reduce costs on
the Boeing 787 project. But there is nothing in Corroborating Witness #3’s
account to suggest that Mr. George knew that his statements at the March
2012 investor conference were false or misleading.
Corroborating Witness #3’s account has two fundamental gaps:
1. This account does not suggest that Mr. George believed his
cost-control efforts were unrealistic or that he wished to
intentionally mislead investors.
2. Corroborating Witness #3 does not say when the confrontation
with Mr. George took place; we can only guess that the
confrontation might have preceded Mr. George’s remarks at the
investor conference. 12
12
The plaintiffs do not argue that any inference as to Mr. George’s
scienter must be imputed to the other Spirit executives—Mr. Turner, Mr.
Anderson, or Mr. Kummant. For example, the plaintiffs do not allege any
particularized facts to establish a relationship between Mr. George and the
other executives. According to the complaint, Mr. George was Spirit’s vice
president for the 787 Boeing project. And the complaint alleges that Mr.
George directed use of certain cost figures over the protests of
Corroborating Witness #3. But we do not know if Mr. George acted at the
direction of another Spirit executive or if Mr. George told other executives
that he had authorized use of “inaccurate” cost figures. Thus, even if we
inferred scienter as to Mr. George, we could not impute Mr. George’s
scienter to Mr. Turner, Mr. Anderson, or Mr. Kummant.
23
In light of these gaps, we cannot plausibly infer from Corroborating
Witness #3’s account that Mr. George knowingly or recklessly misled
attendees at the March 2012 investor conference. 13
V. The Executives’ Alleged Involvement in Spirit’s “Core
Operations”
The plaintiffs allege that Mr. Turner, Mr. Anderson, Mr. Kummant,
and Mr. George were “top executives” who “personally monitored” the
progress of the three projects. 14 Appellants’ Opening Br. at 61. Based on
this involvement, the plaintiffs ask us to infer that the four Spirit
executives must have known that the projects would not meet long-run cost
forecasts. The allegations in the complaint do not support this inference.
We cannot infer scienter based only on a defendant’s position in a
company or involvement with a particular project. See, e.g., City of
Philadelphia v. Fleming Cos., 264 F.3d 1245, 1264 (10th Cir. 2001)
13
This analysis assumes, without deciding, that Mr. George’s
statements were material. The district court concluded that the statements
were not material, characterizing them as commercial puffery. See
Grossman v. Novell, Inc., 120 F.3d 1112, 1121-22 (10th Cir. 1997). We do
not address that conclusion.
14
The parties dispute whether the three projects represented the “core”
of Spirit’s business. Compare Appellants’ Opening Br. at 61
(characterizing the three projects as “crucial” to Spirit’s business), with
Appellees’ Resp. Br. at 54 n.23 (downplaying the importance of the three
projects, stating that they “account[ed] for less than 20% of Spirit’s
revenue”). We assume, without deciding, that the three projects involved a
core part of Spirit’s business.
24
(concluding that “the mere fact” that defendants “occupied senior positions
in the company” was inadequate for an inference of scienter).
The executives’ positions at Spirit would help establish whether they
should have known that particular cost projections were unrealistic. But
additional particularized facts are necessary for an inference of scienter.
See S. Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 784 (9th Cir. 2008)
(“Where a complaint relies on allegations that management had an
important role in the company but does not contain additional detailed
allegations about the defendants’ actual exposure to information, it will
usually fall short of the [securities laws’ pleading] standard.”).
The plaintiffs do not allege additional particularized facts. According
to the plaintiffs, the four Spirit executives
 “were intimately involved in Spirit’s key [Boeing] and
Gulfstream projects,”
 “were intensely focused on productivity and efficiency
improvements,”
 were “proactive,”
 provided assurances of personal “vigilance” regarding the
three projects,
 made on-site visits to Spirit’s factory floors, and
 reviewed detailed cost analyses.
Appellants’ Opening Br. at 61. For these characterizations, the plaintiffs
rely on Paragraphs 54, 69, 70, 75, 76, 79, 80, 92, and 107 of the complaint.
Id.; Appellants’ Reply Br. at 21. Of these paragraphs, only Paragraph 69
25
refers to an executive’s direct involvement in the projects: the chief
financial officer, Mr. Anderson, said that he had spent a lot of time in
Spirit’s Tulsa facility, “making sure the changes [to production processes
were] taking hold.” Appellants’ App’x, vol. I at 45-46. The plaintiffs do
not cite any allegations in the complaint stating that one of the four Spirit
executives actually reviewed the underlying cost data for the Gulfstream
and Boeing projects.
We assume, for the sake of argument, that the plaintiffs’ allegations
create an inference that the four executives were briefed on the underlying
cost data while attending meetings where the three projects were discussed.
But mere attendance at meetings does not contribute to an inference of
scienter. See MHC Mut. Conversion Fund, L.P. v. Sandler O’Neill &
Partners, L.P., 761 F.3d 1109, 1122 (10th Cir. 2014) (“[N]othing in the
defendants’ routine attendance at . . . meetings serves to suggest a ‘cogent’
and ‘compelling’ inference of scienter.”); In re Level 3 Commc’ns, Inc.
Sec. Litig., 667 F.3d 1331, 1344 (10th Cir. 2012) (concluding that the fact
that the defendants “monitored [a contested program] through regular
meetings and reports” was insufficient to draw a “strong inference” of the
defendants’ scienter).
Based on the plaintiffs’ allegations of the defendants’ involvement in
Spirit’s core operations, we can infer only that the four executives were
overly optimistic about Spirit’s ability to achieve the forecasted production
26
schedules and cost reductions. The plaintiffs have not provided a good
reason to believe that the executives knew that the projects were unlikely
to meet forecasts.
VI. A Duty to Disclose Production Delays and Cost Overruns
The plaintiffs also allege scienter based on the defendants’ purported
duty to disclose production delays and cost overruns. In our view,
however, this duty would not support an inference of scienter here.
Liability for securities fraud requires the making of a material
misrepresentation. Geman v. SEC, 334 F.3d 1183, 1192 (10th Cir. 2003).
This requirement may be satisfied when the defendant remains silent while
owing a duty to investors to correct their misperceptions. Id. But even if a
defendant incurs a duty to speak, liability under the securities laws
requires scienter. Id. To establish scienter, the plaintiffs must establish
that a scienter inference is more cogent and compelling than an inference
that the defendants had “not believe[d] they had a continuing duty to
disclose information.” Minneapolis Firefighters’ Relief Ass’n v. MEMC
Elec. Materials, Inc., 641 F.3d 1023, 1030 (8th Cir. 2011); see also Dirks
v. SEC, 463 U.S. 646, 663 n.23 (1983) (distinguishing fraudulent intent
from fraudulent conduct).
The plaintiffs do not explain why the existence of a duty to disclose
supports an inference that the defendants (1) knew that they needed to
disclose more or (2) were reckless in failing to disclose more. As a result,
27
the defendants’ alleged duty to disclose does not support an inference of
scienter in this case.
VII. The Plaintiffs’ Remaining Factual Allegations
The plaintiffs also point to
 Spirit’s recovery plan for the Boeing 787 project,
 statements by the chief executive officer after Spirit
announced the forward loss,
 Spirit’s disclosures about risks,
 Spirit’s purported accounting violations, and
 the magnitude of the forward-loss announcement on the
three projects.
The plaintiffs argue that in light of the magnitude of the loss that Spirit
ultimately sustained, Spirit must have had scienter when each of these
occurrences took place. These arguments amount to allegations of “fraud
by hindsight,” which does not constitute securities fraud. See In re Level 3
Commc’ns, Inc. Sec. Litig., 667 F.3d 1331, 1347 (10th Cir. 2012) (“[The]
defendants’ hindsight review . . . . contributes nothing to an inference of
scienter.”).
A. Spirit’s July 2012 Recovery Plan
According to the plaintiffs, Spirit adopted a “recovery plan” in July
2012 to put the Boeing 787 project back on schedule. The plaintiffs argue
that the existence of this plan shows that Spirit executives knew that their
28
subsequent representations about the Boeing 787 project were false or
misleading.
Between implementing the recovery plan in July 2012 and
announcing a forward loss on the Boeing 787 project in October 2012,
Spirit executives issued multiple public statements on the status on the
project. The plaintiffs argue that these statements in August and September
2012, summarized below, materially misrepresented the project’s progress:
August 2, 2012
 Spirit is “focused on continued reliability, capability, and
teamwork to align the business for long-term value
creation.”
 Spirit continues to see progress as the Boeing and Spirit
teams are focused on identifying and implementing
improvements on cost and production for the Boeing 787
project.
 Spirit continues to improve its unit-cost performance as
planned.
Appellants’ App’x, vol. I at 70-71.
August 7, 2012
 Spirit anticipates that it will continue to make efficiency
gains on the Boeing 787 project. Id. at 73-74.
September 12, 2012
 Spirit is doing reasonably well in meeting the Boeing 787
plan.
 The project plan for the Boeing 787 “looks okay.”
Id. at 74.
29
September 13, 2012
 Spirit is seeing improvement on all of the component
parts for the Boeing 787 project.
 Spirit continues to be optimistic that it can reduce
marginal costs for the Boeing 787 project.
Id. at 75.
The plaintiffs argue that the Spirit executives knew that these
statements were false or misleading because a recovery plan was already
underway to bring the delivery schedule up to date with initial forecasts
for the Boeing 787 project. Id. at 79. Spirit later reported that it had
learned, when implementing the recovery plan, that future costs would
increase dramatically if Spirit were to adhere to the required delivery
schedule.
We may assume, without deciding, that the statements in August and
September 2012 were materially false or misleading. To infer scienter,
however, we must compare the parties’ dual explanations for Spirit’s
overly optimistic reports on the status of the Boeing 787 project. The
plaintiffs attribute the statements to the executives’ recklessness or intent
to mislead investors; the defendants attribute the statements to an honest
belief that Spirit’s recovery plan would reduce costs and accelerate
production. The plaintiffs provide little reason to question the executives’
explanation.
30
The eventual announcement of a forward loss suggests that Spirit had
placed too much confidence in the recovery plan. But the same can always
be said when a company delays announcement of a forward loss based on
remedial efforts to increase profitability or production.
We addressed an analogous issue in In re Zagg, Inc. Sec. Litig., 797
F.3d 1194 (10th Cir. 2015). There, a corporation allegedly failed to
disclose that a chief executive officer had pledged approximately half of
his shares in the corporation as collateral in a personal margin account.
797 F.3d at 1198-99. The chief executive officer was eventually forced to
resign, and the corporation adopted a corrective policy restricting
executives’ pledges of corporate shares. Id. at 1199. The plaintiffs argued
that adoption of the policy showed that the corporation had a fraudulent
intent. Id. at 1203, 1205. We rejected this argument, concluding that the
new policy showed only that the corporation had “identified a better way
of doing things moving forward.” Id. at 1205.
In re Zagg is instructive. Spirit’s July 2012 recovery plan shows that
Spirit identified an interim step to reduce costs and expedite production on
the Boeing 787 project. The plaintiffs suggest that Spirit executives wanted
to mislead investors. That is possible, but the plaintiffs’ theory
presupposes that Spirit executives knew that the recovery plan could not
accomplish the plan’s stated objectives. There is nothing in the complaint
to support that logical leap. The stronger inference is that the Spirit
31
executives thought that they had “identified a better way of doing things.”
Id. As a result, we regard the defendants’ “innocent inference” as more
cogent and compelling than the plaintiffs’ “scienter inference.”
B. The Chief Executive Officer’s Statements Explaining the
Forward Loss
After Spirit announced the forward loss, Spirit’s chief executive
officer explained the forward loss on the three projects by stating that
 the projects had progressed too slowly to meet initial cost
targets,
 project costs had exceeded initial forecasts, “particularly
in [the] supply chain,”
 the complexity in growth at Spirit’s Tulsa facility had
contributed to increased costs,
 Spirit had delayed implementation of some measures
designed to reduce costs for the Boeing 787 project, and
 cost-reduction efforts for the three projects had not met
projections.
Appellants’ App’x, vol. I at 81-82. The chief executive officer added that
 he had underestimated the “organizational learning”
necessary for Spirit to meet initial projections of the
projects’ learning curves,
 Spirit could not meet cost projections for some of the
projects, and
 Spirit had incurred extra costs because of production
delays for required component parts on the Boeing 787
project.
Id. at 81-83.
32
The plaintiffs argue that these statements show that Spirit recklessly
ignored production delays and cost overruns. This argument is not
supported by what the chief executive officer said. He acknowledged that
Spirit had mistakenly projected Spirit’s ability to improve efficiency and
that Spirit ultimately learned that it could not meet projections. But the
chief executive officer did not suggest that Spirit executives had
knowingly or recklessly misevaluated earlier data. His statements simply
show that Spirit ultimately learned that it could not meet the company’s
forecasts.
The plaintiffs allege that
 a disconnect existed between the chief executive officer’s
statements on August 7, 2012, and Spirit’s forward-loss
announcement on October 25, 2012, and
 this disconnect showed an intent to deceive investors.
On August 7, 2012, the chief executive officer stated that Spirit was
meeting its cost estimates for the Boeing 787 project and would continue to
do so. Id. at 73-74. Over two months later, Spirit announced a forward loss
on the Boeing 787 project, and the chief executive officer acknowledged
that (1) Spirit could no longer meet its cost estimates and (2) Spirit had
recently fallen behind on production for the wing components on the
Boeing 787 project. Id. at 80-82.
The plaintiffs argue that the October acknowledgments prove that the
August prediction had been designed to mislead investors. We disagree:
33
The statements were made over two months apart, and the complaint does
not allege that the chief executive officer was aware in August 2012 that
Spirit was not meeting its cost estimates. See La. Sch. Emps.’ Ret. Sys. v.
Ernst & Young, LLP, 622 F.3d 471, 484-85 (6th Cir. 2010) (holding that
statements made after the end of the class period, recognizing that “there
was a problem,” did not contribute to an inference of scienter because the
statements did not provide a sufficient basis to assume that the defendant
had known that events would turn out badly simply because they eventually
did).
In our view, the chief executive officer’s statements suggest an
honest mistake in predicting Spirit’s future production and costs, not an
inference of scienter.
C. Spirit’s Disclosures of Risks
Throughout the class period, Spirit warned investors about risks from
the three projects:
November 2011
 Spirit’s 10-Q for the quarter ending September 29, 2011,
stated that the three projects posed a significant risk of
forward-loss charges based on cost pressures throughout
2011. Spirit explained that the next twelve to eighteen
months would be critical, with a significant risk of
forward-loss charges.
February 2012
 Spirit’s 10-K for the fiscal year ending December 31,
2011, acknowledged a significant risk of forward-loss
34
charges, which depended on Spirit’s market forecast,
ability to perform, achievement of forecasted cost
reductions, and ability to successfully resolve claims.
 Spirit’s chief executive officer reported that the
“production side” of one Gulfstream project was
“disturbed” and “over the cost forecast.”
May 2012
 Spirit’s 10-Q for the quarter ending on March 29, 2012,
stated that the three projects posed a risk of forward-loss
charges based on existing cost pressures. Spirit explained
that the next year would again be critical, with a
significant risk that Spirit would need to recognize
forward-losses.
August 2012
 Spirit’s 10-Q for the quarter ending on June 28, 2012,
stated that the three projects “continue[d] to pose a risk
of additional charges [or] forward-loss.”
 Spirit’s chief executive officer stated that the Gulfstream
projects were “risky.”
The plaintiffs argue that these warnings suggest a culpable mental state
because the four executives must have known that the risks had already
materialized: “the more a defendant speaks about a topic, the likelier it is
that [the defendant] knows about the topic.” Appellants’ Opening Br. at 65.
We disagree.
Ordinarily, a defendant’s warnings weaken an inference of scienter.
Ezra Charitable Tr. v. Tyco Int’l, Ltd., 466 F.3d 1, 8 (1st Cir. 2006). The
plaintiffs argue the opposite, relying solely on Reese v. Malone, 747 F.3d
557 (9th Cir. 2014). In Reese, a group of shareholders sued BP for
35
securities fraud after one of BP’s pipelines leaked 200,000 gallons of oil
onto the Alaskan tundra. Id. at 563. The plaintiffs alleged that BP had
made false and misleading statements about company practices in an
annual report post-dating the spill. Id. The Ninth Circuit Court of Appeals
held that the plaintiffs’ allegations of scienter were sufficient, in part
because the attention given to the spill in the annual report underscored the
importance of the oil spill to BP management. Id. at 579-80. But the court
did not suggest that the mere existence of warnings established knowledge
by BP management that the statements were untrue. Instead, the court
inferred that the company knew that the statements were untrue because (1)
BP was not in compliance when publishing the false report and (2) the spill
had been prominently discussed in the report. Id.Throughout the class period, Spirit was working on multiple projects
and warned of the risks that many of them posed. For example, during the
class period, Spirit warned about a significant risk of additional forward-
loss charges on the Sikorsky CH-53K helicopter project and a possibility
of significant cost growth and technical problems for the Airbus A350
XWB project. These warnings would not have suggested that the Sikorsky
or Airbus projects were particularly important to Spirit executives or that
Spirit executives knew that the risks on these programs were certain to
result in a forward loss. Instead, the warnings simply reflected an
awareness of risks that led Spirit to discuss the risks in its public filings.
36
The same is true of the filings expressing potential risks for the Gulfstream
and Boeing projects involved here.
D. Alleged Accounting Violations
The plaintiffs argue that Spirit violated generally accepted
accounting principles and internal accounting policies by delaying
announcement of the forward loss. We disagree, for this argument is
simply another variation of “fraud by hindsight.”
Even if we assume that Spirit had violated established accounting
principles or internal policies, these violations would not have been
enough to state a valid cause of action. City of Philadelphia v. Fleming
Cos., 264 F.3d 1245, 1261 (10th Cir. 2001). “Only where such allegations
are coupled with evidence that the violations or irregularities were the
result of the defendant’s fraudulent intent to mislead investors may they be
sufficient to state a claim.” Id.No such evidence exists here, and the plaintiffs do not identify
particularized facts showing that the Spirit executives had known, before
Spirit publicly announced the forward loss, that the three projects would
fall behind forecasts on cost or production.
The defendants’ purported accounting violations are based on “fraud
by hindsight”; and even if we assume the existence of accounting
violations, the plaintiffs have not alleged facts indicating the executives’
knowledge, fraudulent intent, or recklessness.
37
E. The Magnitude of the Forward Loss
In October 2012, Spirit announced a forward loss of $434.6 million
on the three projects. 15 The plaintiffs argue that because the forward loss
was so large, the executives must have known long before October 2012
that Spirit would incur a loss. But this argument relies on hindsight review
based on the size of Spirit’s eventual loss and does not include
particularized allegations that the four executives knew before October
2012 that Spirit would lose money on the three projects.
The loss of $434.6 million was undoubtedly significant. And the
three projects were presumably large enough to capture the attention of the
four Spirit executives. No one suggests otherwise. For scienter, however,
the question is whether these executives (1) had known that their public
disclosures were too encouraging or (2) had recklessly failed to heed red
flags from potentially problematic reports. The size of the loss does not
suggest that the four executives knew or recklessly disregarded the risks
that Spirit was eventually going to lose money on the three projects.
* * *
To create a cogent, compelling inference of scienter, the plaintiffs
point to a motive to lie, corroborating witnesses’ accounts, the defendants’
15
Spirit announced a total forward loss of $590 million. But that figure
included expected losses on other Spirit projects not involved in this
appeal.
38
involvement in Spirit’s “core operations,” a duty to disclose, the adoption
of a recovery plan, statements by the chief executive officer, disclosures of
risks, accounting violations, and the size of the eventual forward loss. But
even when these allegations are considered together, they do not create a
cogent, compelling inference of scienter.
As a result, we affirm the dismissal.
39
15-3142, Anderson v. Spirit Aerosystems Holdings, Inc.
LUCERO, J. concurring in part and dissenting in part.
The majority analyzes whether defendants recklessly made false statements
regarding Spirit’s projected ability to meet cost targets. However, plaintiffs’ argument
does not rest solely on future-looking statements. Rather, they contend that the
defendants made false statements about then-present facts. In my view, plaintiffs have
adequately alleged scienter and materiality as to statements made by Jeffrey Turner and
Philip Anderson regarding the existing performance of Spirit’s 787 program.
Accordingly, I concur in part and respectfully dissent in part.
To plead a claim for violation of the Securities Exchange Act of 1934 § 10(b),
plaintiffs must allege five elements, of which the parties focus only on the first and third:
(1) the defendant made an untrue or misleading statement of material fact,
or failed to state a material fact necessary to make statements not
misleading; (2) the statement complained of was made in connection with
the purchase or sale of securities; (3) the defendant acted with scienter, that
is, with intent to defraud or recklessness; (4) the plaintiff relied on the
misleading statements; and (5) the plaintiff suffered damages as a result of
his reliance.
In re Zagg, Inc. Sec. Litig., 797 F.3d 1194, 1200 (10th Cir. 2015) (quotation and
emphasis omitted). To apply these factors, I think it helpful to first determine which
statements plaintiffs have adequately alleged were false before analyzing whether the
defendants acted with scienter as to those statements.
To demonstrate that the defendant made an untrue or misleading statement of
material fact, a plaintiff must allege specific facts that contradict the defendant’s
statements. See Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1097 (10th Cir. 2003).
Moreover, the statement must be shown to be false when it was made. See Grossman v.
Novell, Inc., 120 F.3d 1112, 1124 (10th Cir. 1997). Plaintiffs may not rely on a
subsequent event triggering a drop in stock price “to say that the later, sobering
revelations make the earlier, cheerier statement a falsehood.” Id. (quotation omitted).
Relatedly, forward-looking statements coupled with meaningful cautionary statements
are not actionable because a reasonable investor simply cannot suppose that the future is
settled or is not subject to multiple possible outcomes. Id. at 1120.
The matter before us concerns two distinct categories of statements—those
projecting future performance, and those reflecting past performance. Plaintiffs argue, in
essence, that the defendants stated both “we will be on budget” and “we are on budget.”
These two statements differ markedly for purposes of a securities fraud claim. Yet the
majority opinion focuses its scienter analysis exclusively on the former. For example, the
majority agrees with defendants that their public statements reflected “an honest belief
that Spirit’s recovery plan would reduce costs and accelerate production.” (Majority Op.
30.) The majority thus attributes the executives’ statements to “benign optimism,” (id. at
8), and “mistaken[] project[ions],” (id. at 33), about future performance. Therefore, the
majority concludes the fact that the company “ultimately learned that it could not meet
the company’s forecasts” did not demonstrate that the optimistic statements regarding
those forecasts were recklessly false at the time they were made. (Id.)
I agree in large measure. To the extent the plaintiffs argue that the company knew
or should have known it would be unable to meet future cost forecasts, these forward
looking statements—although later proven overly optimistic—are not actionable because
2
they reflected opinion rather than fact, and were not demonstrably false. See In re Level
3 Commc’ns, Inc. Sec. Litig., 667 F.3d 1331, 1340 (10th Cir. 2012). I also agree with the
majority that plaintiffs have not stated a claim as to defendants Alexander Kummant and
Terry George. Further, I concur in the majority’s dismissal of the claims based on
defendants’ statements regarding two of the Spirit programs at issue: the Gulfstream
G280 and G650.
But I must part ways with the majority with respect to the portion of plaintiffs’
claim based on false statements made by Turner and Anderson regarding the then-current
performance of Spirit’s 787 project. Plaintiffs have alleged specific statements by these
two individuals indicating that the 787 program was on budget, and alleged particular
facts showing they knew such claims to be false at the time they were made. These
contentions do not rely on any prediction as to future costs. Rather, they show that
executives inaccurately depicted the project’s performance in meeting cost forecasts up to
the time the statements were made. I would hold that these statements are actionable.
As the complaint explains, Spirit adopted a contract accounting method with
respect to the 787 program. It reported a profit rate for the program based on actual
historical costs plus future estimated costs. Because the company predicted it would
benefit from a “learning curve” as the project progressed, the average cost per unit was
expected to decrease as the total number of units produced increased. Thus, a downward-
sloping “cost curve” was used to describe the average cost per unit over the course of the
program.
3
According to confidential witness number ten (“CW10”), project leaders prepared
Estimate at Completion (“EAC”) reports each quarter. The EAC reports compared
procurement costs actually incurred against forecast procurement costs. In other words,
these reports showed whether the project’s external expenses were on the cost curve and
thus meeting expectations to that point or above the cost curve and thus over budget.
CW10 was responsible for the EAC reports for every product delivered from Spirit’s
Tulsa facility, including the 787. He described that the EACs he prepared for the 787
program during 2011 and 2012 showed cost overruns relative to forecasts because “costs
were much higher than expected.” CW10 also stated that the EAC reports were
distributed to Anderson and Turner.1 At the pleading stage, CW10’s statements are
sufficient to demonstrate that: (1) Spirit reviewed actual versus forecast costs on a
quarter-by-quarter basis; (2) the 787 program was not meeting quarterly forecasts; and (3)
Turner and Anderson received the quarterly reports indicating the 787 program was not
tracking the forecast cost curve.
Despite receiving this information, Turner and Anderson repeatedly informed
investors that 787 program costs were declining as planned. On a November 3, 2011
conference call, Turner stated that Spirit was “tracking per plan to identify and implement
cost improvements” on the 787 project. On the same call, Anderson stated that “the
1
The majority suggests that CW10 lacked knowledge of the details of the final
reports delivered to Turner and Anderson, in part because the EACs went through
“numerous layers of revision” before landing on Turner’s and Anderson’s desks.
(Majority Op. 15.) But if objections to the EACs’ contents arose during review, CW10’s
team was called upon to provide evidence to support the reported costs. Thus, CW10
was aware of changes requested at higher levels, including Wichita management, the
final layer before Turner and Anderson received the reports.
4
curves” for the project were “on plan.” In March 2012, Anderson stated at an investor
conference that the program was “very much on plan and where we expected to be.”
After releasing the company’s first quarter 2012 results, Turner again told investors that
the company “continue[s] to track per plan to identify and implement cost improvements”
on the 787 project, and Anderson stated that the project was “on plan as of the end of the
first quarter here in 2012.” On August 2, 2012, Turner publicly stated that “we continue
to improve our unit cost performance, as planned.” And on August 7, 2012, Turner
discussed with investors the 787’s cost curve, stating that the company expected to
“continue to track that curve” and the 787 project was “going to keep coming down the
curve.”
Plaintiffs have alleged specific facts demonstrating that these statements were
false at the time they were made. Turner’s final statement, in particular, cannot be
dismissed as mere optimism. He specifically identified the 787 cost curve and stated that
company expected to “continue” to track it. Thus, he assured investors that Spirit had
been and was presently on the curve. Spirit’s internal reports indicated that the 787
program was not in fact on the planned cost curve.2 And as revealed in subsequent
2
The majority concludes that the complaint lacks sufficient detail about the EACs’
contents and CW10’s knowledge of, and the final reports’ descriptions of, total costs.
(Majority Op. 19.) As described infra, because Turner and Anderson stated that the 787
project was proceeding in line with the projected cost curve, the question before us is
whether a reasonable person would deem the inference of scienter as to actual cost
overruns “at least as compelling as any opposing inference.” Tellabs, Inc. v. Makor
Issues & Rights, Ltd., 551 U.S. 308, 324 (2007). To conclude that the final reports
delivered to Turner and Anderson did not show overruns in total costs requires an
inference that the internal costs were under budget by an amount equal to or greater than
the overruns in procurement costs, and that in the third quarter of 2012 internal costs
5
Securities and Exchange Commission filings, Spirit implemented a cost recovery plan in
late July 2012 to attempt to bring the 787 program back in line with forecasts. That the
company had just implemented a program to attempt to regain the curve renders the
statement that it was going to “continue to track that curve” demonstrably false.
Having established falsity, the plaintiffs must demonstrate materiality. A
statement is material “if a reasonable investor would consider it important in determining
whether to buy or sell stock.” Level 3, 667 F.3d at 1339 (quotation omitted). We
distinguish between statements that are “material and those that are mere puffing not
capable of objective verification.” Id. (quotation and ellipses omitted). Defendants do
not contest that statements as to a project’s progress along cost projections would have
been considered important by traders. However, the district court determined that none
of the statements alleged in the complaint are capable of objective verification. I
disagree.
Through its EAC process, Spirit internally measured whether the projects were
meeting quarter-by-quarter cost forecasts. Whether the projects were “on track” or “on
plan” was objectively verifiable each quarter. And Spirit’s argument that executives’
statements did not communicate anything about timing, costs, or other objective metrics
is unconvincing. Unlike the “broad claims . . . regarding integration efforts and the
customer experience” identified in Level 3 as immaterial, 667 F.3d at 1340, Turner and
spiked causing projected forward losses. That inference would not be compelling. Far
more compelling is the proposition that the final reports indicated overruns in both
internal and procurement costs. Thus, the EACs sufficiently compel the inference that
Turner and Anderson knew actual costs exceeded forecast costs on the 787 project.
6
Anderson specifically identified the 787’s cost curve and unit costs as being presently in
line with projections. And analysts understood the statements to mean that the company
was operating with costs “at or below projected levels.” Read in context, this inference is
even more compelling. In August 2012 Turner stated both that the 787 program would
“continue to track that curve,” and that the Gulfstream G280 and G650 projects were
“very close to meeting the curves that we placed but are not quite meeting them yet.”
These statements are not vague assurances about probable performance, they are
objectively verifiable claims about a very specific internal measurement. Accord id.(statements that a project was “ahead of plan” and “under budget” had a “basis in
objective and verifiable fact”).
Finally, the plaintiffs must show that “the defendant acted with scienter, that is,
with intent to defraud or recklessness.” In re Zagg, 797 F.3d at 1200 (quotation and
emphasis omitted). To plead scienter, plaintiffs must allege particularized facts that give
rise to a strong inference that defendants acted intentionally or recklessly to mislead
investors. 15 U.S.C. § 78u-4(b)(2); Kinder-Morgan, 340 F.3d at 1105. Recklessness is
“conduct that is an extreme departure from the standards of ordinary care, and which
presents a danger of misleading buyers or sellers that is either known to the defendant or
is so obvious that the actor must have been aware of it.” City of Philadelphia v. Fleming
Cos., 264 F.3d 1245, 1260 (10th Cir. 2001) (quotations omitted). “[D]ivergence between
internal reports and external statements on the same subject and disregard of the most
current factual information before making statements can be factors supporting scienter.”
Level 3, 667 F.3d at 1345 (quotations omitted). And plaintiffs must show that “a
7
reasonable person would deem the inference of scienter cogent and at least as compelling
as any opposing inference.” Tellabs, 551 U.S. at 324 (2007). But the inference that the
defendant acted with scienter does not need to be irrefutable. Level 3, 667 F.3d at 1343.
CW10 stated that the quarterly cost reports for each project—which incorporated
the EACs during 2011 and 2012 showing cost overruns for the 787 program—were
distributed to Turner and Anderson. Thus, taking the facts in the complaint as true, these
defendants received quarterly reports demonstrating that the 787 project was not meeting
the forecast cost curve. They nevertheless repeatedly informed investors that the project
was proceeding along the cost curve as planned. Even assuming Turner and Anderson
failed to read those reports and did not have actual knowledge of the cost overruns, it
would be an extreme departure from the standards of ordinary care to leave project
reports unopened while simultaneously assuring investors that the projects were on plan.
The far more likely inference is that Turner and Anderson did review the reports before
making the relevant statements. In that case, they intentionally lied to investors about the
status of the 787 project.
This inference is further bolstered by the fact that the 787 program was important
to Spirit’s overall bottom line. See Reese v. Malone, 747 F.3d 557, 575 (9th Cir. 2014)
(alleged false statements concerning core operations contribute to an inference of
scienter). Although Spirit maintains that the core of its business was its manufacturing
operations for existing Boeing models, the company acknowledged in February of 2012
that a “significant” portion of future revenues would be derived from new development
8
programs, “most notably the [Boeing] 787.” That project was expected to provide twenty
percent of total revenue by 2014.
Although not dispositive, several other factors contribute to the inference of
scienter as well. We have previously explained that the “magnitude of the alleged
falsity” strengthens the inference of scienter. Kinder-Morgan, 340 F.3d at 1106. Spirit’s
cost overruns on the 787 project resulted in forward-losses of $184 million,
approximately one quarter of reported earnings across 2010-2011. Although the “desire
to protect one’s own position” is not alone a sufficient basis to infer scienter, it was
certainly present here. See Pirraglia v. Novell, Inc., 339 F.3d 1182, 1191 (10th Cir.
2003). By misleading investors about the status of the 787 project, Anderson and Turner
sought to obtain additional time to correct their failures on that project. Individuals
frequently attempt to “conceal[] bad news in the hope that it will be overtaken by good
news . . . like embezzling in the hope that winning at the track will enable the embezzled
funds to be replaced before they are discovered to be missing.” Makor Issues & Rights,
Ltd. v. Tellabs Inc., 513 F.3d 702, 710 (7th Cir. 2008).
Considering “all the allegations holistically,” Tellabs, 551 U.S. at 326, I conclude
the plaintiffs have demonstrated falsity, materiality, and scienter as to statements made by
Turner and Anderson regarding the progress of the 787 project. The parties do not argue
the remaining prongs of the § 10(b) test, and the district court did not consider them.
Thus, I would reverse in part the district court’s dismissal for failure to state a claim, and
remand for further proceedings.
9