On March 8, 2019, King & Spalding partners Rich Marooney and Paul Straus and senior associate Evan Ennis won the dismissal with prejudice of a Section 10(b) securities fraud complaint against automotive transportation and logistics provider Jack Cooper Holdings Corp. (“Jack Cooper”) and two of its officers.
RIVER BIRCH'S PURCHASES OF SECURITIES FROM JACK COOPER
River Birch Capital LLC (“River Birch”), a hedge fund that allegedly purchased $28 million in Jack Cooper’s senior secured notes, claimed that Jack Cooper, its CEO and President T. Michael Riggs, and former CFO Michael Testman, misstated certain risks of Jack Cooper’s business and failed to disclose details regarding its customer relationships in Jack Cooper’s 2013 notes offering documents, as well as in certain SEC filings and on a June 2016 investor call. Specifically, River Birch alleged that Jack Cooper repeatedly touted its strong and long-term relationships with its three largest customers but failed to disclose that it was experiencing actual and impending customer flight or that a key customer contract would have permitted the customer to terminate if Jack Cooper’s debt-to-earnings ratio rose above a certain level, even though, plaintiff alleged, the breach of that contract was imminent.
In a November 2016 8-K, Jack Cooper disclosed that a customer might terminate its contract at the end of the year unless Jack Cooper reduced its debt-to-equity ratio from 10.66 to 3.3, as well as that it had already lost some business due to its high levels of debt. Jack Cooper simultaneously announced an unregistered exchange offer in which its parent company would exchange notes for warrants to purchase Jack Cooper common stock, warning that the offering might not reduce Jack Cooper’s debt levels by enough to avoid the contract being terminated. Following the November 2016 disclosure, River Birch alleges, the value of Jack Cooper’s notes dropped from 67.5 to 47 cents on the dollar. River Birch claims it sold its notes at a $5 million net loss.
THE SDNY DECISION ON JACK COOPER'S MOTION TO DISMISS
In his March 8 decision, U.S. District Judge William H. Pauley III held that River Birch failed to allege an actionable misstatement or omission. The supposed misstatements it identified were not actionable because they were either present or historical statements of fact that were not alleged to be false, puffery, or opinions. In addition, River Birch’s contention that defendants should have disclosed the existence of the debt-to-equity covenant, the potentially large loss of business resulting from its imminent breach, and deteriorating relationships with its other customers failed to allege an actionable omission, as River Birch was unable to say when this information should have been disclosed or to allege facts demonstrating that termination and customer flight were more than a possibility prior to the November 2016 8-K. The complaint also failed to adequately allege scienter, as it contained no facts demonstrating that Jack Cooper or its executives were aware of a firm likelihood of termination or customer flight before November 2016. Furthermore, the simpler, nonculpable explanation was that defendants believed that they could reduce their debt-to-EBITDA ratio, and that if they failed to do so, existing pressures in their industry and Jack Cooper’s positive attributes might allow them to work out a deal with the customer. When the risks that this was not the case became more than a mere possibility, the company timely disclosed them to investors. At a pre-motion conference on River Birch’s original complaint, Judge Pauley had given River Birch the option of amending its complaint but advised that he would not grant leave to replead again. Because River Birch chose to amend, the dismissal was with prejudice.
The case is River Birch Capital LLC v. Jack Cooper Holdings Corp. et al, No. 17-cv-09193, in the U.S. District Court for the Southern District of New York
