INDIANA PUBLIC RETIREMENT SYSTEM, Indiana State Teachers' Retirement Fund, Indiana Public Employees' Retirement Fund, Plaintiffs-Appellants, City of Westland Police and Fire Retirement System, on Behalf of Itself and All Others Similarly Situated, Locals 302 and 612 of the International Union of Operating Engineers-Employers Construction Industry Retirement Fund, on Behalf of Themselves and All Others Similarly Situated, IBEW Local Union No. 58 Annuity Fund and the Electrical Workers Pension Trust Fund of IBEW Local Union No. 58, Plaintiffs,
v.
SAIC, INC., Mark W. Sopp, Walter P. Havenstein, Defendants-Appellees, Gerard Denault, Kenneth C. Dahlberg, Deborah H. Alderson, Defendants
Argued
October 6, 2015
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[Copyrighted Material Omitted]
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Plaintiffs-appellants
Indiana Public Retirement System, on behalf of themselves and
a class of other similarly situated investors, appeal from an
order of the District Court (Batts, J.) denying their motions
to vacate the judgment and to amend their complaint.
Plaintiffs brought a securities fraud suit pursuant to
Section 10(b), 15 U.S.C. § 78j(b), and Section 20(a), 15
U.S.C. § 78t(a), of the Securities Exchange Act of 1934
against SAIC, Inc., Walter P. Havenstein, Mark W. Sopp, and
others, alleging material misstatements and omissions in
SAIC's public filings regarding its exposure to liability
for employee fraud in connection with SAIC's contract
work for New York City's CityTime project. Because
amendment of Plaintiffs' FAS 5 and Item 303 claims based
on SAIC's March 2011 Form 10-K would not be futile, we
VACATE the order denying the postjudgment motion with respect
to those claims and REMAND for further proceedings consistent
with this opinion. We AFFIRM the decision of the District
Court with respect to Plaintiffs' other claims.
DOUGLAS
WILENS, Robbins Geller, Rudman & Dowd LLP, Boca Raton, FL;
Samuel H. Rudman, Joseph Russello, Sean T. Masson, Robbins
Geller, Rudman & Dowd LLP, Melville, NY, for
Plaintiffs-Appellants.
ANDREW
S. TULUMELLO (Jason J. Mendro, on the brief), Gibson, Dunn &
Crutcher LLP, Washington, DC; Eric Robert Delinsky, Zuckerman
Spaeder LLP, Washington, DC for Defendants-Appellees SAIC,
Inc. and Mark W. Sopp.
Mark
Filip, P.C., Vikas Didwania, Kirkland & Ellis LLP, Chicago,
IL; Beth A. Williams, Emily P. Hughes, Kirkland & Ellis LLP,
Washington, DC for Defendant-Appellee Walter P. Havenstein.
Before:
LYNCH, LOHIER, and CARNEY, Circuit Judges.
OPINION
Page 88
LOHIER, Circuit Judge.
The
Indiana Public Retirement System, the Indiana State
Teachers' Retirement Fund, and the Indiana State Public
Employees' Retirement Fund, on behalf of themselves and a
class of other similarly situated investors ("
Plaintiffs" ), appeal from an order of the United States
District Court for the Southern District of New York (Batts,
J.) denying their motions to vacate the judgment and to amend
their complaint. Plaintiffs sued SAIC, Inc.; [1] Walter P.
Havenstein, its Chief Executive Officer; Mark W. Sopp, its
Chief Financial Officer; and others (collectively, "
Defendants" ) for securities fraud in violation of
Section 10(b) of the Securities Exchange Act of 1934 (the
" Exchange Act" ), 15 U.S.C. § 78j(b), Section
20(a) of the Exchange Act, 15 U.S.C. § 78t(a), and
Securities and Exchange Commission (" SEC" ) Rule
10b-5, 17 C.F.R. § 240.10b-5. Their lawsuit arose from a
series of alleged material misstatements and omissions in
SAIC's public filings regarding its exposure to liability
for employee fraud in connection with SAIC's contract
work for New York City's CityTime project. On appeal, we
address principally four issues arising from Plaintiffs'
motion to file a Proposed Second Amended Complaint ("
PSAC" ): (1) SAIC's alleged failure to comply with
Generally Accepted Accounting Principles (" GAAP" )
by failing to disclose appropriate loss contingencies
associated with the CityTime project, in violation of
Financial Accounting Standard No. 5 (" FAS 5" );
(2) SAIC's alleged failure to disclose a known trend or
uncertainty reasonably expected to have a material impact on
its financial condition, in violation of Item 303 of SEC
Regulation S--K, 17 C.F.R. § 229.303(a)(3)(ii) ("
Item 303" ); [2] (3) SAIC's scienter; and (4) among
other remaining issues, SAIC's allegedly misleading
statements regarding its commitment to ethics and integrity
contained in its 2011 Annual Report to shareholders.
We
conclude that the District Court improperly denied
Plaintiffs' postjudgment motion to amend their FAS 5 and
Item 303 claims based on SAIC's March 2011 Form 10-K. We
therefore vacate the District Court's order denying the
motion with respect to those claims and remand for further
proceedings consistent with this opinion. We affirm the
judgment of the District Court with respect to
Plaintiffs' remaining claims.
BACKGROUND
We
accept as true the facts alleged in the PSAC because
Plaintiffs appeal from the denial of leave to amend on the
ground of futility. See In re Advanced Battery Techs.,
Inc., 781 F.3d 638, 641-42 (2d Cir. 2015).
Page 89
1. Facts
SAIC
provided defense, intelligence, homeland security, logistics,
and other services primarily to government agencies. In 2000
SAIC became the prime government contractor on a project with
New York City to develop and implement an automated
timekeeping program known as CityTime for employees of
various City agencies. SAIC anticipated that the project, if
successful, would attract business from municipalities across
the United States with similar timekeeping requirements and
would lead to contracts unrelated to timekeeping in the City.
As a result, SAIC kept a close eye on the project's
progress.
In 2002
SAIC hired Gerard Denault as Deputy Program Manager in charge
of the CityTime project. In 2003 Denault enlisted Technodyne,
a small, relatively unknown company, to provide staffing
services on the project, but the relationship soon gave rise
to an elaborate kickback scheme in which Technodyne illegally
paid Denault and Carl Bell (SAIC's Chief Systems
Engineer) for each hour a Technodyne consultant or
subcontractor worked on CityTime. The scheme encouraged
Denault and Bell to hire more Technodyne workers than the
project required and to inflate billable hours and hourly
rates.
Although
SAIC initially suffered large losses under the CityTime
contract, the contract became profitable in 2006 after
Denault negotiated an amendment to the contract that
transferred the risk of any cost overruns to the City. As a
result of the amendment and the cost overruns associated with
the kickback scheme, SAIC billed the City approximately $635
million for CityTime through May 2011, well over the $63
million that the City initially budgeted for the contract.
By late
2010, when the scheme began to unravel, SAIC had removed
Denault from the CityTime project, placed him on
administrative leave, and hired an outside law firm to
conduct an internal investigation of possible fraud with the
help of SAIC's internal auditors, who were tasked with
reviewing Denault's timekeeping practices. At the same
time, then-Mayor Michael Bloomberg announced that he was
reevaluating SAIC's role in the CityTime project and
reviewing whether to seek recovery of the City's payments
to SAIC in connection with that project. On March 9, 2011,
SAIC's audit team reported the results of its findings
regarding Denault's improper timekeeping practices to
SAIC.
Notwithstanding
the audit team's findings, SAIC's Form 10-K, filed on
March 25, 2011, and certified by Sopp and Havenstein, did not
disclose SAIC's potential liability related to the
CityTime project. To the contrary, in a separate Annual
Report to shareholders that same month, SAIC touted its
commitment to high standards of " ethical performance
and integrity." Joint App'x 252. By the end of May
2011, though, Denault, Bell, the Technodyne principals, and
others were charged in a federal criminal complaint with
defrauding the City.[3] The charges, together with the results
of the internal investigation from March 2011, prompted SAIC
to fire Denault in May 2011 and offer to repay the City the
amount he had billed after the 2006 amendment of the CityTime
contract--a total of $2.5 million.
Thereafter,
in a Form 8-K filed with the SEC on June 2, 2011, SAIC
finally disclosed
Page 90
that the United States Attorney's Office for the Southern
District of New York (the " Government" ) and the
New York City Department of Investigation (" DOI" )
were conducting a joint criminal investigation into the
CityTime contract. The 8-K further disclosed that SAIC had
billed a total of $635 million for the CityTime project, that
it had $40 million in outstanding receivables, that Denault
had been arrested for fraud, and that SAIC had offered to
refund the City the $2.5 million that Denault billed as part
of the kickback scheme with Technodyne. Finally, the 8-K
explained that Mayor Bloomberg had
indicated that the City intends to pursue the recovery of
costs associated with the CityTime program that the
City's investigation reveals were improperly charged to
the City. The City has not filed any claim against the
Company or otherwise requested reimbursement or return of
payments previously made to the Company and the Company has
not recorded any liabilities relating to this contract other
than the approximately $2.5 million it offered to refund.
However, there is a reasonable possibility of additional
exposure to loss that is not currently estimable if there is
an adverse outcome. An adverse outcome of any of these
investigations may result in non-payment of amounts owed to
the Company, a demand for reimbursement of other amounts
previously received by the Company under the contract, ...