Metropolitan News-Enterprise


Friday, February 14, 2003


Page 3


Ninth Circuit Reinstates Securities Fraud Suit Against America West


By a MetNews Staff Writer


A securities fraud suit brought by investors against America West Airlines was reinstated yesterday by the Ninth U.S. Circuit Court of Appeals, which rejected a lower court’s ruling that misrepresentations about deferred maintenance and other issues were immaterial.

The fact that there was no immediate stock market reaction when the truth finally came out about the company’s slack practices did not necessarily mean that any misrepresentations or omissions in statements to investors were immaterial under securities laws, the court said.

“The market is subject to distortions that prevent the ideal of a ‘free and open public market’ from occurring,” Judge Warren J. Ferguson wrote. “As recognized by the Supreme Court, these distortions may not be corrected immediately. Because of these distortions, adoption of a bright-line rule assuming that the stock price will instantly react would fail to address the realities of the market. Thus, we decline to adopt a bright-line

rule, and, instead, engage in [a] ‘fact-specific inquiry’….”

The case will be sent back to the U.S. District Court in Arizona for further proceedings on claims by some shareholders—-primarily a pension fund that purchased a certain class of stock in 1997 and 1998-—that the company and some of its officers, directors and controlling shareholders artificially inflated the stock price for their own benefit.

The controlling shareholders included defendant Continental Airlines.

The plaintiffs alleged insider trading in violation of Sec. 10(b) of the Securities Exchange Act of 1934 and securities Rule 10b-5.

The dispute arose in the midst of the company’s post-bankruptcy reorganization. In 1994, William A. Franke took over as the airline’s chief executive officer and began a program of maintenance outsourcing to control costs. The Teamster union pension fund alleged that maintenance deteriorated and that the company began to conceal the true state of its craft from the Federal Aviation Administration and from its investors.

Continental and other large stockholders then allegedly decided to raise the stock price as soon as they could sell their publicly-traded stock under a stockholder’s agreement. The plaintiffs said they issued false statements about the company’s outlook, misinformed analysts about their operational problems, and explained that efficient management—and not lax maintenance—were the reason for improved financial returns.

They also allegedly misinformed investors about the financial effect of a settlement with the FAA.

Senior U.S. District Judge Owen M. Panner of the District of Arizona granted dismissal under Rule 12(b)(6) of the Federal Rules of Civil Procedure. He said the plaintiffs failed to meet the high pleading standards of the Private Securities Litigation Reform Act of 1995 because they didn’t sufficiently support their allegations of false and misleading statements with great detail and all relevant circumstances and failed to state with particularity “facts that gave rise to a strong inference of deliberate recklessness or actual intent.”

Panner also ruled that the pleadings did not include allegations that any misrepresentations were material.

The three-judge Ninth Circuit panel disagreed. Ferguson noted that the plaintiffs cited company press releases and reports, statements by its officials, financial statements, correspondence with FAA workers, internal email messages between FAA employees discussing the maintenance issues at America West, financial analyst reports, portions of the settlement agreement, and other statements and documents.

“A reasonable investor would find significant the information regarding a company’s deferred maintenance costs, unsafe maintenance practices, and possible sanction,” Ferguson said.

“Moreover,” he added, “although America West’s disclosures of the settlement agreement had no immediate effect on the market price, its stock price dropped 31% on September 3, 1998 when the full economic effects of the settlement agreement and the ongoing maintenance problems were finally disclosed to the market. This reaction, even if slightly delayed, further supports a finding of materiality.”

The case is No. 84 Employer-Teamster v. America West, 01-16725.


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