Frank v. Dana Corp.

Citation:
Frank v. Dana Corp., 2011 WL 2020717 (6th Cir. May 25, 2011)
Tag(s):
Ruling:
Plaintiffs adequately plead scienter as to the defendants with respect to their claims under section 10(b) of the Securities Exchange Act of 1934 and, thus, the district court erred in dismissing that claim. Because plaintiffs' pleadings were adequate with respect to the 10(b) cause of action, dismissal of plaintiff's "controlling person" claim under section 20(a) of the Securities Exchange Action was likewise erroneous. Moreover, because good faith is an affirmative defense to a section 20(a) cause of action (and not part of the plaintiffs' burden), the district court erred in requiring plaintiffs to plead with specificity that defendants did not act in good faith.
Procedural context:
The United States District Court for the Northern District of Ohio dismissed the lawsuit finding that the plaintiffs failed to sufficiently plead their claims. Plaintiffs appealed the decision and the Sixth Circuit Court of Appeals remanded to the district court to apply recent Supreme Court case law. Applying that case law, the district court again dismissed plaintiffs' lawsuit. On appeal, the Sixth Circuit Court of Appeals reversed.
Facts:
Former shareholders of Dana Corporation, an automotive supplier, brought a class-action lawsuit asserting that the company's former Chief Executive Officer and Chief Financial Officer violated sections 10(b) and 20(c) of the Securities Exchange Act of 1934 by making false or misleading statements regarding Dana's financial health during the months leading to its downward spiral into bankruptcy. The primary issue before the Court was whether plaintiffs sufficiently alleged that the defendants made material mistatements or omissions with scienter upon which the plaintfiff-shareholders justifiably relied and which proximately caused their injury. Plaintiffs argued that sufficient scienter was plead because, among other reasons, they alleged that (i) the officers received internal reports and information showing Dana's financial distress and yet continually made false, posivite statements regarding the company's well-being, (ii) such statements were materially false, (iii) such statements were made shortly before Dana negatively restated its financial statements, (iv) the officers were motivated to make significant bonuses if the company appeared healthy, (v) the officers signed false Sarbanes-Oxley certifications, and (vi) the SEC was investigating Dana's accounting practices.

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